United Parcel Service Inc Q4 FY2024 Earnings Call

Good morning, my name is Greg Alexander, and I will be your facilitator today. I would like to welcome everyone to the UPS Fourth Quarter 2024 Earnings Conference Call. All lines have been muted to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer.

Good morning, and welcome to the UPS fourth quarter 2024 earnings call. Joining me today are Carol Tomé, 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 within the Federal Securities Laws 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 2023 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. Now let me share a reporting change we have made between business segments. Effective with the fourth quarter of 2024, USPS Air Cargo results have been moved from supply chain solutions to the U.S. domestic segment. This change is visible in the web schedules that have been posted on the UPS Investor Relations website. Note that U.S. domestic revenue per piece and cost per piece metrics are not impacted by this change as USPS transacts with us on a weight basis, not on a per piece basis. Unless stated otherwise, our discussion today refers to non-GAAP adjusted results. For the fourth quarter of 2024, GAAP results include a non-cash after-tax mark-to-market pension charge of $506 million. Total after-tax transformation strategy costs of $73 million, after-tax asset impairment charges of $46 million, and an after-tax cost related to the withdrawal from a multi-employer pension plan of $14 million. The after-tax total for these items is $639 million or $0.74 per diluted share. Additional details regarding year-end pension charges are included in the appendix of our fourth quarter 2024 earnings presentation that is posted to the UPS Investor Relations website. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. Following our prepared remarks, we will take questions from those joining us via the teleconference. 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. We have a lot to cover today. I'll begin with a review of our fourth quarter and full year results. Then I'll provide an overview of the moves we are taking in 2025 to drive our performance. Brian will wrap up our prepared remarks with more detail about our financial performance and our 2025 outlook. I'll start by thanking UPSers for their hard work and efforts as we executed another outstanding peak. For the seventh year in a row, we were the industry leader in on-time service during peak season, the most important time of the year for our customers. In the face of a compressed holiday period, our people, enabled by the agility of our integrated network, delivered for our customers. Moving to our results, the positive momentum we saw in the third quarter continued into the fourth quarter. Compared to last year, consolidated fourth quarter revenue increased 1.5% to $25.3 billion. Operating profit was $3.1 billion, an increase of 11.2% from last year, better than we expected, and consolidated operating margin was 12.3%. Importantly, our U.S. domestic operating margin was over 10% for the quarter, reflecting improved revenue quality and strong expense control. Looking at the full year, our consolidated revenue was $91.1 billion, slightly above last year. Consolidated operating profit totaled $8.9 billion, and consolidated operating margin was 9.8%. We generated $10.1 billion in cash from operations in 2024 and returned $5.9 billion to shareholders in the form of dividends and share repurchases. Before I discuss our plans for 2025, let me share a few operational and financial highlights. In 2024, we continued to grow our U.S. SMB penetration, finishing the year with SMBs making up 28.9% of our total U.S. volume, an increase of 30 basis points from last year. DAP, our digital access program, was a big driver of the increase, and in 2024, we generated $3.3 billion in global DAP revenue, a 17% increase year-over-year. As we discussed, we are moving from a scanning network to a sensing network through our smart package, smart facility, and RFID initiative. In 2024, we equipped nearly 60,000 U.S. package cars with sensors, representing 66% of our fleet, eliminating 12 million manual scans per day and enhancing package visibility for our customers. Within the network of the future, in 2024, we accelerated operational closures and completed nine more than planned, resulting in 49 operational closures, including permanently closing 11 buildings, while continuing to deliver outstanding customer service. Currently, about 63% of our U.S. volume flows through our automated facilities, compared to 60% in 2023. Lastly, we took actions in our healthcare logistics business to further support our growth plans. Earlier this month, we completed the acquisition of Frigo-Trans, a European healthcare logistics company specializing in cold chain, and in December, we opened two state-of-the-art healthcare cross-dock facilities in Italy and Germany. These moves further expand our cold chain capabilities to serve a growing European market. Before I talk about 2025, I'd like to take a short look back at the last five years. In June of 2020, in the face of the COVID-19 pandemic, we launched our better-not-bigger strategy hinged on three elements: customer first, people led, and innovation driven. For the first few years, we focused on growing select markets and optimizing financially attractive volume, including volume from SMBs and healthcare customers. Further, we focused on making productivity a virtuous cycle by launching transformation 2.0 and began a portfolio optimization program, including selling our LTL freight business and making a few strategically important acquisitions. From 2020 through 2022, we delivered solid financial results in line with our strategy at a time when much of the world was struggling due to the challenges presented by the pandemic. In 2023, our financial results faced unexpected challenges due to an unfavorable economic environment and a prolonged payment negotiation with the teamsters. While the labor negotiation caused volume and earnings disruption, we gained certainty regarding our labor costs for the next several years. After wrapping up the first year of our new labor contract in the third quarter of 2024, positive momentum began to build, and we returned to volume, revenue, and operating profit growth. We continued to drive productivity through several programs, focused on revenue quality, and took further actions to optimize our portfolio by selling our truckload brokerage business known as Coyote and entered into agreements to acquire Estafeta, a leading Mexican logistics integrator, and Frigo-Trans. We closed out 2024 with outstanding peak delivery, investing in class service and financial results ahead of our target. But as we wrapped up 2024, it became clear that if we didn't address three specific challenges facing us in the U.S., we could lose momentum. The first challenge relates to the dynamics of the U.S. small package market. Today it is a slow growth market with changing package characteristics. The second challenge comes from the concentration of volume and revenue we have with our largest customer. Looking ahead, we project this business, if we take no action, will drive diminishing returns. The third challenge is the reliance we have had with the USPS for our SurePost product. In this case, the USPS is changing its operating model, which we believe puts service at risk. So we've taken actions to address all three of these challenges head-on, including doubling down on revenue quality and serving the customer segments we want to serve best. First, we've reached an agreement in principle with our largest customer for a significant reduction in volume, lowering their volume with us by more than 50% by the second half of 2026. With this, we will right-size our network and retain the volume that is nutritious for us and for our customer. Second, effective this year on January 1st, we no longer use the USPS for our SurePost product. Service is fundamental to our value proposition, and by insourcing this product, we can be certain we deliver great service with no material impact on our financial performance. In connection with these changes, while I'm incredibly proud of the productivity actions taken by our leaders, we realized we are not done. We are reconfiguring our U.S. network and have launched multi-year initiatives we're calling Efficiency Reimagined, which tackle our processes from end to end, from peak hiring practices to processing payments and more. Efficiency Reimagined should drive approximately $1 billion in savings. These significant business and operational changes, coupled with the foundational changes we've already made, will put us further down the path to becoming a more profitable, agile, and differentiated UPS that is growing in the best parts of the market, namely healthcare, B2B, SMB, and international. We've got some work to do to make this all happen, but there's no better team than the UPS team. We will deliver. As Brian will detail, in 2025 these actions are expected to result in expanded operating margins and an improvement in return on invested capital. By taking these actions, we expect by the fourth quarter of 2026 to have a U.S. domestic operating margin of at least 12%. With that, thank you for listening, and I'll now turn the call over to Brian.

Thank you, Carol, and good morning, everyone. Our financial performance in the fourth quarter was better than we expected due to our focus on revenue quality and excellent cost management. The positive momentum that we began in the third quarter continued throughout our busiest time of the year. This morning, I'll cover four areas, starting with our fourth quarter results, followed by a review of our full year 2024 results including cash and shareholder returns, then I'll provide more detail on the business and operational changes we are making, and I'll close with our expectations for the market and our financial outlook for 2025. Starting with our consolidated performance. In the fourth quarter, we delivered revenue and operating profit growth and margin expansion. This is a continuation of the momentum that we showed in the third quarter and the first time in three years that we've shown growth in the fourth quarter on all three of these financial metrics. In the fourth quarter, we generated $25.3 billion in consolidated revenue, an increase of 1.5% compared to the fourth quarter of last year. Consolidated operating profit was $3.1 billion, an increase of 11.2% versus the fourth quarter of 2023, and consolidated operating margin was 12.3%, an increase of 110 basis points compared to the fourth quarter of last year. Diluted earnings per share was $2.75, up 11.3% from the fourth quarter of 2023. Now moving to our segment performance. U.S. domestic delivered strong fourth quarter results driven by gains in revenue quality and outstanding cost management. During the compressed 2024 peak season, our average on-time service led the industry by 470 basis points over our closest competitor, driving high demand for our services, allowing us to continue winning new customers throughout peak. For the quarter, U.S. average daily volume or ADV was flat to last year, ground average daily volume increased 2.1% year-over-year, while total air average daily volume was down 12.9%. Excluding the volume decline from our largest customer, total air ADV grew driven by demand from healthcare and high-tech customers. Within ground, SurePost ADV as a percentage of total ADV increased slightly compared to the third quarter of 2024. Through our matching algorithm, we increased SurePost redirects by 660 basis points sequentially from the third quarter, resulting in half of the SurePost volume being delivered by UPS drivers. For the quarter, total B2B average daily volume was down 1% year-over-year. However, we saw B2B growth from healthcare customers, including healthcare SMBs. On the B2C side, average daily volume was up slightly year-over-year and made up 64.7% of our volume. In terms of customer mix, we saw strong ADV growth from SMB customers, which grew 4.5% in the fourth quarter, driven by double-digit growth in December. In the fourth quarter, SMBs made up 27.8% of total U.S. volume, the highest fourth quarter concentration we've seen in 10 years. For the quarter, U.S. domestic generated revenue of $17.3 billion, up 2.2% compared to last year, due to the strength of small packages in December and increases in air cargo. In the fourth quarter, the revenue per piece growth rate flipped positive for the first time this year and was up 2.4% year-over-year, a sequential improvement of 460 basis points from the third quarter of this year. Breaking down the 2.4% revenue per piece improvement, base rates increased the revenue per piece growth rate around 250 basis points. Strong keep rates on our holiday demand surcharge increased the revenue per piece growth rate by 110 basis points. The net impact of customer mix combined with product mix and lighter weights decreased the revenue per piece growth rate by 80 basis points. Lastly, fuel drove a 40 basis point decline in the revenue per piece growth rate. Turning to cost, total expense increased 1.3%. Since the first year of our labor contract at the end of July, this was the first full quarter at a lower contractual union wage growth rate. In fact, the average increase over the previous four quarters was 10.5%, and the fourth quarter this year union wage rates increased by only 3%. Through our network of the future initiative, we exceeded our initial target by completing 49 operational closures this year, including 11 buildings. By leveraging our technology and increasing automation, we've processed and delivered the same amount of volume in the fourth quarter as last year, but we did it with 3 million fewer hours while delivering excellent service. We lowered small package block hours within our air network in response to changing volume levels, and purchase transportation and other expenses declined as we insourced 50% of SurePost volume during the fourth quarter. Lastly, our safety performance was better than we expected and drove a benefit in casual peak spending. Looking at cost per piece, throughout the fourth quarter in the peak period, we leveraged technology and our proven practices to hold the increase to just 0.9%. The U.S. domestic segment delivered $1.8 billion in operating profit, an 11% increase compared to the fourth quarter of 2023, and the operating margin was 10.1%, a year-over-year increase of 80 basis points. Moving to our international segment, for the second quarter in a row, our international business grew revenue and operating profit, expanding operating margins. Total international average daily volume growth was positive for the first time in three years and was up 8.8% year-over-year. International domestic average daily volume increased 5.8% compared to last year, driven by strong performance in Canada. On the export side, average daily volume increased 11.7% year-over-year, with all regions delivering ADV growth. Asia export average daily volume was up 15.4%, delivering growth for the third consecutive quarter. At the country level, 17 of our top 20 export countries grew export ADV led by Mexico and Germany. In the fourth quarter, international revenue was $4.9 billion, up 6.9% from last year, with all regions growing revenue year-over-year. International generated positive operating leverage, driven by our ongoing network optimization and cost management efforts. Operating profit in the international segment was $1.1 billion, an increase of 18.1% year-over-year. Operating margin in the fourth quarter was 21.6%, an increase of 210 basis points from a year ago. Moving to supply chain solutions, in the fourth quarter, revenue was $3.1 billion, a decrease of $306 million, impacted by $588 million in revenue from Coyote in the 2023 period. Revenue within our forwarding and logistics businesses increased by $282 million. Key drivers included air and ocean forwarding revenue up 10.3%, led by continued strong market demand out of Asia, and logistics revenue grew by 16.2%. In the fourth quarter, Supply Chain Solutions generated operating profit of $284 million, down $24 million year-over-year, including an impact of $13.5 million of operating profit from Coyote in the same period in 2023. Operating margin in the fourth quarter was 9.3%, an increase of 20 basis points compared to last year. Walking through the rest of the income statement, we had $229 million in interest expense, our other pension income was $67 million, and our effective tax rate for the fourth quarter was approximately 20.5%, lower than our expectations due to discrete items. Regarding our full-year 2024 results, revenue was $91.1 billion, a slight increase over 2023. We delivered operating profit of $8.9 billion and a consolidated operating margin of 9.8%. We generated $10.1 billion in cash from operations and continued to adhere to our capital allocation priorities. We invested $3.9 billion in CAPEX, distributed $5.4 billion in dividends, repaid $3.8 billion in debt that matured during the year, and at the end of the year, our debt to EBITDA ratio was 2.25 turns. Lastly, we completed $500 million in share buybacks in 2024. For U.S. domestic, operating profit was $4.5 billion with an operating margin of 7.5%. The international segment generated $3.4 billion in operating profit with an operating margin of 18.7%. Supply Chain Solutions delivered $1 billion in operating profit with an operating margin of 8%. Looking ahead to 2025, as Carol described, we are taking a set of strategic actions to address the challenges facing our U.S. business head-on. Execution is well underway, and these actions will create a more agile and profitable UPS. I’ll start with the agreement in principle we've reached with our largest customer to significantly reduce the volume we deliver for them. The accelerated decline has already begun and will step up meaningfully, so by the second half of 2026, their volume will be down by more than 50% from what it was at the beginning of the year. The speed of the glide down is five times faster than our initial glide down efforts between 2021 and 2024. The results of this change will be lower overall volume levels but an improved customer mix at a significantly higher revenue per piece. We are deliberately shifting our business and increasing our focus on growing higher yielding volume and value share. Lower overall volume levels from this customer will lead to lower revenue dollars in the near term. However, we expect to grow revenue per piece through shifting our customer mix and by leveraging our pricing technology. This will enable us to continue the strong base rate improvements in 2025 that we delivered from our enterprise and SMB customers in the second half of 2024. Additionally, we will focus on growing volume and revenue in the best parts of the market for us, including SMB, healthcare, and B2B. In terms of SMB, we expect to take the SMB percentage of our U.S. volume to 32% this year, with momentum continuing long term. As we bring volume down, we will not only reduce the hours and miles associated with this volume, but we will also take out fixed costs to match our capacity to our new expected volume levels. All factors to the network are included in the reconfiguration, and we anticipate closing up to 10% of our buildings, cutting back our vehicle and aircraft leads, and reducing labor. The right-sizing of our U.S. capacity allows us to accelerate our network of the future initiative. We will bring down less efficient capacity quicker while continuing to invest in automation across the network, which will lead to a more efficient U.S. network sooner. The capital requirements to run our reconfigured network will also decrease. We will share more details on our execution plan on our first quarter earnings call in April. Now, concerning the changes we made with SurePost, as of January 1st, we began delivering 100% of our SurePost volume, and in mid-January we implemented a 9.9% average rate increase on SurePost. Offering a reliable economy service is an important part of our product portfolio and overall value proposition. The changes we made give us greater point-to-point operational control and the ability to provide better service to our customers, which leads me to our Efficiency Reimagined initiatives. Lower overall volume and a reconfigured U.S. network create an opportunity for us to increase efficiency by redesigning processes from end to end. Through Efficiency Reimagined, we expect to deliver approximately $1 billion in savings. Pulling it all together, even while we're undergoing the largest network reconfiguration in our history, we expect to expand U.S. domestic operating margin in every quarter of 2025, with a full year operating margin approaching 9%. As the impact of our cost-out efforts increases over the next 18 months, we expect to pace operating margin improvement to accelerate into 2026, with a goal of generating a 12% U.S. operating margin by the fourth quarter. Now for our guidance for 2025, starting with the macro, S&P Global forecasts global GDP growth of 2.5% compared to 2024. Real exports and global industrial production are both expected to increase by about 2% year-over-year. In the U.S., manufacturing is anticipated to turn positive for the first quarter of 2025 after seven quarters of negative year-over-year growth, with the consumer expected to remain resilient. Moving on to our 2025 financial outlook, for the full year 2025 on a consolidated basis, revenue is expected to be approximately $89 billion, and operating margin is expected to be around 10.8%. Our guidance for 2025 does not reflect any significant potential global trade implications due to changes in tariffs. Now, for the segment outlook, full-year revenue for U.S. domestic is expected to decline 2.3% year-over-year driven by an ADV reduction of about 8.5%, partially offset by strong expected revenue per piece growth of approximately 6%, and we will wrap the newly on-boarded USPS air cargo business. We expect the intended volume and revenue declines to accelerate as we progress throughout the year. Full-year operating margin is expected to be about 8.8%, an increase of 130 basis points compared to 2024. To provide a little shape for the first quarter, with one fewer operating day compared to the first quarter of 2024, we expect revenue to increase nearly 1% year-over-year, despite ADV being down approximately 4%, and we expect to expand operating margin by approximately 140 basis points year-over-year. Moving to the international segment, we anticipate mid-single-digit ADV growth throughout the year, though with lower demand-related surcharges than in prior years. For the year, we expect 2025 revenues to increase by approximately 2.5% year-over-year, with an operating margin around 18.6%. In the first quarter, we expect revenue to be flat compared to the same period last year, with operating margin to be moderately down year-over-year due to lower demand-related surcharges. In Supply Chain Solutions for full-year 2025, revenue is expected to be approximately $11 billion with an operating margin of around 8.5%. In SCS in the first quarter, revenue is projected to decline about $500 million due to the reduction in revenue associated with Coyote in the same period last year. Operating margin in SCS in the first quarter is anticipated to be low to mid-single digits due to pressure from purchase transportation costs related to our mail innovations business. We expect the first quarter to be the lowest SCS operating margin in 2025. For modeling purposes, below the line, we expect approximately $780 million in expense, with a little more than half in the back half of the year. For pensions, we anticipate an expense of around $37 million for the full year 2025, which is $306 million higher than in 2024, primarily due to the market shifts and interest rates on our pension assets last year. We've included a slide in the appendix of today's webcast to provide more detail on pensions. Now let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be around $5.7 billion including our annual pension contribution of $1.4 billion. Capital expenditures are expected to be about $3.5 billion. While we are accelerating our network of the future initiative, our reconfigured U.S. network should require less investment in vehicles and aircraft as we right-size the capital base. We plan to pay out about $5.5 billion in dividends in 2025, subject to Board approval. We expect to buy back around $1 billion of our shares. Lastly, we expect the tax rate for the full year to be approximately 23.5% as we foresee the current U.S. corporate tax regime to remain. We've covered a lot today. We're moving quickly to continue our momentum. The results of our actions will be an even stronger, more agile, and more profitable UPS that's growing in the best parts of the market that value our integrated network. With that, Operator, please open the lines for questions.

Yeah, good morning. You got a lot of big things going on. One, wanted to see if you could talk a little bit more about how can we build confidence that, against a pretty meaningful drop in revenue from the Amazon change that you're able to, I guess, quickly enough get out the fixed costs, so that as opposed to seeing deleveraging and margin pressure that you're seeing the margin improvement that you're talking about, so yeah, I think just a bit more of kind of how that equation can play out, recognizing that we think of the network as having a fair bit of fixed cost to start with? Thank you.

Tom, happy to do that, but maybe I'll just start by talking about the Amazon announcement. We've been a partner to Amazon for nearly 30 years, and we hold that company in high regard. Amazon is our largest customer, but it’s not our most profitable customer. Its margin is very dilutive to the U.S. domestic business. Our contract with Amazon came up this year, and so we said it's time to step back for a moment and reassess our relationship, because if we take no action, it will likely result in diminishing returns. We considered a number of options and landed on what we think is the best choice for our company: to accelerate the glide down of their volume with us, as we commented in our prepared remarks, by more than 50% by June of 2026. As you pointed out, Tom, there are a lot of assets and resources that support that Amazon volume, but as we glide down the volume, we will also be gliding out those assets and resources, which gives us the margin expansion that we've explained. Now I'll turn it over to Brian so he can explain how the cost will come out.

Sure. Thank you. And Tom, as we said before, clearly there are a lot of stakeholders involved here, and we needed to make this announcement so we can engage with those stakeholders. But you're absolutely right in your intuition that this is going to require a reconfiguration of the network so that we align the fixed asset base—building, vehicles, aircraft—with the new volume levels. We'll share a lot more color on how we're going to roll that schedule out on the first quarter earnings call, once we have a chance to engage all the stakeholders involved. But I do think that is the key here, that is the mission, and quite frankly, it's already underway with our team.

And one reason for a glide down over 18 months, rather than six months, is because we wanted to ensure that we didn't strand costs. Our labor costs will flex with volume. As volume goes up, we have more hours, as volume comes down, we have fewer hours. That's just part of the DNA of how we operate our business. But we have proven in 2024 that we can close buildings because with the network of the future, we did just that. We closed down 11 buildings with improved service. Nando, would you like to comment on that?

Sure, thanks. And this question, Tom, just to give you comfort here, you’ll know that five facilities already in January have been partially or completely closed, and this year we’ll have 140 active network of the future projects; 61 of them will go live this year. Of course, this is just driving up the number of shipments that run through our automated facility. So that gives me a lot of confidence, gives our people a lot of confidence. So we feel good about these moves, and we’re ahead of schedule.

Yeah. Hi, just to follow up on the SurePost side of things, maybe give some sense for how much volume sort of is going to be pulled into the network. Can the network, as it’s currently constituted today, be ready from day one to move all the volume that the post office had done? And then maybe along with that, can you touch a little bit—is this—some of this bringing SurePost in-house designed in part at least to replace or fill some of the Amazon business going out in terms of network density? Thanks.

Well, Jordan, thanks for the question. Let’s step back for a moment on SurePost. All SurePost products are sorted through our buildings. We had used the USPS for last mile delivery for a portion of that, and through our Engineering and IT matching algorithms, we've been able to redirect a lot of the SurePost volume back into the network. In fact, in the fourth quarter, 50% of the SurePost volume was delivered in the ground network. So as we came to the decision to insource all of it and have it all delivered by our network, it was simply a matter of both service. Up until this year, we had been injecting into the last mile network of the USPS, and the service there was good. But as I think you know, the USPS is changing their operating model, and as a result of those changes, we were going to have to insert upstream into their sorting facilities, and we were very concerned about service deterioration. At the same time, they were going to increase their cost to us, and that value proposition of an increased cost as well as deteriorating service—that didn’t work for us. So in the middle of December, we determined that we would insource 100% of the SurePost volume, which we have done. And I’m pleased to say that it’s gone very well. Yes, we have a few more delivery stops per car, but interestingly, we aren’t driving more miles. So when we review the financial impact of insourcing SurePost, we feel very good that it’s not going to have a material impact on our business at all. Now, we did implement a GRI increase, I will admit, but from an operating perspective, it’s going swimmingly well. Nando, would you like to add?

Yeah, sure. So Jordan, there are multiple opportunities for us to match shipments now, as we control that volume over multiple days. We've also adjusted our algorithm to really target stops or stop matching to within 100 feet of a regular stop. This helps us smooth the daily dispatch for our employees. So resources in terms of spiking one day versus another, we're able to flatten that and keep the staffing picture very linear for the company. In addition to that, of course, we're exploring different ways on how we can move the volume through slower networks because it is an economy service as we look at rail and how we leverage rail across the country, as well as ground movements to ensure that we're hitting our service portfolio. Early days show, as Carol had said, mileage index looks good, packages per car look good, and overall performance right now is strong. I'm really proud of the team, and they continue to optimize this service as we go forward.

And Nando, if I could just add one thing, because I think it relates to the prior question as well; the investments we've made in the network and technology allowed us to insource almost 1.5 million stops within a matter of weeks. I think it’s a testament to the operators, but also our agility in the network, and that will help us as we move forward with the reconfiguration we're undertaking. The other crucial point is that we’ve included some expectations that there could be some churn with the GRI and changing service. Some customers might not see this as suitable, and we've taken that into account in our forecast.

Hey, good morning. So a couple of questions for you on the guidance and growth outlook. When you think about the 10.8% margin that we're going to have for full year 2025, Brian, is there any way to think about what that number would look like if you had adjusted the network at the beginning of the year? I'm just trying to get a sense for what the run rate level of margin would be if you didn't have the deleveraging that would ultimately come with lower volume? And then Carol, can you talk about what the growth picture looks like X the glide down. There’s a lot of concern in the market from investors around the organic—or lack of organic growth in the small package business, and I'm just trying to gauge how you’re thinking about growth outside the glide down in the next two years. Thank you.

Happy to.

Sure. So regarding the margin question, and David, I think what we've built into our forecast is we will be taking the fixed costs out commensurate with the volume drawdown as we go throughout the year. Now, that will also accelerate as we go into 2026, and you will see improved margins. As we mentioned earlier, we expect to hit the 12% target as we progress through 2026. What’s really important is to step back and look at what's occurring; even though volume is going to decline in the U.S., revenue per piece is set to go up 6%, combined with customer mix, product mix, and good pricing discipline. By taking this relatively non-nutritional volume, we can control our margin profile moving forward and push it not just to the 12% but beyond.

David, on the growth algorithm, the small package market excluding Amazon is projected to grow in the low single digits in 2025, and we project to take share. One area of share will be with SMBs. We're proud of our SMB growth, nearly 29% of total business in the U.S. in 2024. We're aiming to reach 32% in 2025, and ROA to 35% in 2026 and beyond. This is just one aspect of growth. We can also assess growth through customer segments or capabilities. We aim to focus on complex logistics that distinguish us from our competition. How did we grow the SMBs? By investing in our digital access platform and pricing architecture, which is moving from the art of pricing to a science, allowing more bids through Deal Manager and winning more with less discounting while providing better service for that customer. We’re also advancing in healthcare and B2B through store replenishment, helping retailers with time-definite delivery. We will take share in this slower growth market, but won't cap our margin. Had we not accelerated the Amazon volume down, we would have capped our margin in a slow growth market. Now we have the opportunity to expand and grow margin, so put the map together for David.

David, you're correct that there are many moving parts in transitioning from 2024 to 2025. If you look at the change in revenue, the drop from $91 billion to $89 billion, if we take SCS out due to Coyote, you’ve got about a $1.5 billion revenue drop. Regarding the domestic business, we are drawing revenue down around $2.5 billion. We also expect growth to fill over $1 billion in that gap focused on SMB enterprise and differentiated capabilities that allow us to grow and take share.

Can you quantify what Amazon revenues were for the full year, I know this was the first time you gave a mid-year at 11.5%. I don't know if you gave a final year, but as Amazon takes back those volumes, can you maybe talk about competition now in different segments, I guess you've always said, the reason why they stick with you is you do different things for them, such as returns, pickups, things that they rely on you. Does this mean we should expect an increasing amount of competition in areas that you had kind of moat around as your specialty versus the market, and how should we think about that from a competitive standpoint?

Yes, for the full year, Amazon made up 11.8% of our total company revenue. From a competitive perspective, it is important to note that Amazon will remain a customer of UPS. When we finish our accelerated glide down in areas where it's beneficial for us and them. They are a vertically integrated retailer, needing assistance in some functions, and we will provide that help for them in a more nutritious way once the glide down is implemented. This was not their request; this was UPS taking control of our destiny. We'll be engaging with them throughout this glide down, as they need to figure out how to manage some of this volume. However, we are not anticipating changes in the competitive environment due to this adjustment.

Regarding peak, we stretch our network with variable costs. We will rent equipment and set up temporary sort facilities. Much of that won't be needed. We'll lease aircraft that we haven't done in the past. We have the capacity to not rent those pieces of equipment this peak season, which secures a safety net for us with variable costs.

We will do nothing different with peak than we have historically. We aren’t likely to have as many leases, but we will function similarly to previous years.

I think we've seen more change in the parcel space in the last two years than the prior 15. Can we talk about another big picture question here, when we roll out to 2027-2028, number one, do you think we've seen the last of the big shoes to drop on some of the changes to the competitive landscape, cost structures, etc., with you and your competitor or could there be more seismic shifts? And you already discussed where you think UPS wins in that long term landscape, can you analyze your competitors, like, where do FedEx ground, Ground Economy win and advantages exist? Where do USPS ground advantages win, and where do regional or gig economy players think they might fit in the competitive landscape more holistically, over the long term?

There’s a lot to that question. We’ve focused our comments today primarily on the next two years, but I am happy to consider the larger picture for 2027 and 2028. It's difficult to predict major shifts in landscape anymore. I don't believe we fully comprehend the impact of generative AI and what that could mean for productivity across various industries. Certainly, it is a chance for us to enhance productivity and improve customer experience. It won't put us at a competitive disadvantage. In fact, I believe we have the upper hand over most companies in this space, but we must acknowledge that this landscape is rapidly evolving. We must remain aware that trade follows policy, and tariffs aren’t typically beneficial for trade; this could lead to changing trade lanes. However, we recognize that the largest trade lanes are in Asia, and we're expanding our operations in those regions accordingly.

It’s great to see proactive changes here, and I will zoom in on SPSF because it seems the RFID initiative is proving beneficial in optimizing your assets to these substantial market developments. Are you on track for the rollout across the entire package car fleet, and could you comment on the timeline for Phase 3?

Nando, would you like to take that?

We have a plan in place and a dedicated team to execute changes, as we mentioned concerning the changes related to Amazon and SurePost. That schedule is interlinked with our financial plan, and we have confidence that we can execute those changes. Our RFID tagging not only improves the delivery efficiencies, but also creates value for our customers. It enables us to pull customers in where the retention becomes significant. We’re excited about this opportunity.

We should finish the rollout this year, and regarding customer loyalty, Matt, you can provide a few examples.

We obtain productivity and efficiency benefits from RFID, but more importantly, we provide immense value to our customers. By addressing their inbound visibility, our clients can better manage their operations. Our focus is on large-scale enterprises, and we've proceeded to onboard many significant retailers in the U.S. and continuously grow double digits with this capability.

And Greg, we have time for one more question.

Thank you. Just a quick market one. I understand you implemented the GRI for SurePost; Brian, you talked about strong RPP growth of 6% for U.S. domestic, which drives a considerable mix impact as well. But we hear market reports citing challenges in core volumes, with potential price pressures in the organic business. Are you experiencing any of this, and do you see elevated competitive spirits to retain or grow shares given the core market challenges?

I think our fourth quarter results are solid proof of our strong pricing strategy. We recorded remarkable keep rates on base rates, along with our holiday demand surge charge. Our GRI on the core business is 5.9% for 2025, and we anticipate retaining roughly 50% of that. The 6% RPP growth is attributed to about a third from strong base rates, a third from customer mix, and a third from premium product lines.

That’s accurate; it’s a grind. Matt and I monitor market performance every week and apply disciplined pricing practices which has led to rational pricing, allowing us to maintain our key metrics, that encourages growth and efficiency.

Thank you, everyone, for joining our call today. This concludes our session, and we hope you have a wonderful day.