United Parcel Service Inc Q1 FY2026 Earnings Call

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.

Capitalized on trade lane shifts resulting from last year $2 billion of $1.3 billion from seasonal norms duration in our company history by targeting a 50% reduction in the volume we deliver for Amazon by June of 2026. Months to go, we are comfortably in the homestretch of this initiative. 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. The 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. Our locations, end-to-end cold chain solutions, deliveries, stimulus returns, the second quarter-productive and a capacity we need, commercial volume, Incheon Airport Hub in South Korea, our largest and most advanced logistics center in the region. We're speeding up our services across Asia Pacific and global supply chains, manufacturing high-tech and health care, growth engine for UPS, sensitive healthcare products. And these capabilities are enabling us to win. Our global healthcare portfolio has gained market share every year since 2021. And in the first quarter, we generated our first $3 billion healthcare revenue quarter ever, with all three of our segments delivering year-over-year revenue growth. We 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. In 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%.

72.5% ADV declined from Europe to the U.S. to reach our 2026 reduction target of 25 million hours versus savings in 2020 continue to fluctuate.

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 UDS. 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. um 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 uh to that ramp a month ago or two months ago um so i you know i don't know if that you know kind of a little lower margin in one q reduces visibility uh 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 the 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 on the impacts on the first quarter. So first, if you think 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 and where we were in March that was about 70 basis points which gets us you know kind of towards the higher end of that 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 uplift right that 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 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 occurred in the first quarter now comes out and so that that helps you bridge from from first quarter to second quarter on fuel look are 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 impact to profit right now there could be revenue impact to that but there will also be offsetting expense what we don't know is how long the the high prices could persist and then what happens which 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 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 in a higher fuel price environment where you guys are also raising the surcharge schedules, should we assume that there is some sort of profit benefit from the higher fuel environment? And then maybe just, Carol, let's just take a step back, big picture, we're going to end up in the 7%, 8% range on US margin this year. Help us think about where that can go over the next couple of years. As we get through the Amazon glide down, maybe we start to see a little bit of wage inflation start to kick in again next year. But where do you think margins can start to go over the next couple of years here?

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 it's gotten 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 B and B2B in health care. 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 the 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, couples with great productivity. You know, our hub productivity is the best it's been in 20 years, just to put a point on it. We now have automated 67.5% of our buildings, so it's on our way to 68%, and we know the cost per piece in an automated building is 28% lower than the cost of 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 by Kate and her team, who also are leaning into the premium segments of the market. Brian called out that we grew S&B 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 health care ever, because health care is such an important part of our growth engine, it is in every segment of our business with double-digit operating margins, and 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.

Maybe it's a quick clarification question, then maybe 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. 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 driver's 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, I think 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. And so with our great reverse network and the capabilities that we have for boxless, labeless 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 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're 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 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, you know, margin and revenue be extrapolated going Thanks.

And, yeah, we were, I think, when you mentioned, you know, we mentioned the decline in the China-U.S. trade lane. One thing we're not is we are starting to see some recovery in certain trade lanes. Second quarter, remember, May will be the lap of the Liberation Day and the China Dominimus Elimination, which will provide some improvement and step-up, and then we'll have another lap in September of the full Dominimus 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 and 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. 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 will be disruptive or not, but it's a change. We saw the disruption that happened last year with the elimination of de minimis 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.

So I'd like to kind of maybe understand the pace of cost takeout. has there been any shift in timing caused by the discussions that 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 I give you credit for the 350 and internationals, 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. 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 S&B grew in the first quarter. We expect that to continue. We'll lap 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 for 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're 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.

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

Great. So 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.

And the actions that I articulated earlier are how we're going to get there.

And you might say, well, why don't you take more in? Well, we have to run the business. So 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. I wanted to come back to international. I mean, obviously, with all the trade lane shifts and everything that's gone on, you know, margins, you know, are below what had historically been the long-term trend. So I'm just sort of wondering, over time, you know, can we push back into a high-teens margin level? What will it take to get that margin uplift again coming from international?

Well, if you look at the international business, there's been a China-U.S. 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.

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 heard from a few companies this quarter that, you know, 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, you know, maybe any pockets of emerging strength by, you know, segment or geography or end market or whatever.

Sure. Good morning, Bruce. GDP ticked down a little bit. Industrial production ticked up a little bit. But 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 haven't seen a material shift in what we would expect for the addressable market growth in small package in the U.S., so low single digits. But we are winning where it matters to us as Carol mentioned health care in particular we we grew across all segments of the business and we continue to see strong uptake in there which is which is higher than the average market growth rate on the international side Carol hit on it right where I would say that while we're still down on certain trade lanes they are moving in the right direction right and then particularly are seeing you know international to international origin destinations that don't touch the US 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 is up 14% year on year. It's a small portion of our business, but that's an encouraging sign to see that effect.

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? Well, I'll let Brian take that. Sure, and I'll start our business. The 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 in our ability to get the capacity lined up in the back half. On the revenue side, we 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, health care, and that's where we're really leaning in and that's where we're winning. So, I mean, 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, moved out of the network, we've offered that volume to the market so that we can focus on the premium side.

Very helpful. Your next question is coming from Ken Hoekster from Bank of America. Your line is live.

Hey, Craig. 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. You're seeing favorable mix improvements here, especially on the target audience, SMB, B2B. You know, it sounded like you're, 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? 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, 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's 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, Mark.

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 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 and 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 wanted to clarify one thing. And, 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 the minimus and it should return to where it was prior in terms of overall volume? Or, you know, how do you get back to high teens? I'm just trying to understand.

Trade lanes normalize and weak the China-U.S. trade lanes are traded in Europe.

First, which is low margins into premium opportunities.

CPP potential. Brian, I'll let you take that.

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 point 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.

To outsource 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.

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

Well, I'll tell you one thing. We have a lot fewer employees than we had when we started.

Yeah, thank you so much.

Thank you. Your next question is coming from Brian Ozenbeck from JPMorgan. 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 mix for SMB and B2B, But it 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, it 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. You know, 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 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 through the second quarter, we'll be tendering around a million and a half, something like that. So that's moving the way we – 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 Pulse Assistant tends to set the floor for the economy product, which is actually pretty good for the whole industry.

If there's a 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 returned 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 capabilities.

And that may sound a little curious that a retailer would be at 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.

Time for one more question.

Certainly. Our final question comes from the line of Ravi Shanker 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, kind 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?

Thanks for the question, Ravi. This is a complicated matter for sure. talk about 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 U.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 customers.

Thank you. So we don't expect that this will have an impact on our financial statement.

Understood.

Thank you, Brian.

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

Thank you, Matthew.