Earnings Call Transcript - UPS Q1 2025

Operator, Operator

It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours.

PJ Guido, Investor Relations Officer

Good morning, and welcome to the UPS first quarter 2025 earnings call. Joining me today are Carol Tome, our CEO; Brian Dykes, our CFO; and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2024 Form 10-K and other reports we file with or furnish to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results.

Operator, Operator

And now, I'll turn the call over to Carol.

Carol Tome, CEO

Thank you, PJ, and good morning. In the face of a very dynamic environment, I'm pleased with our first quarter performance. To begin, I want to thank all UPSers for delivering outstanding service to our customers. I also want to recognize the excellent progress our teams have made in executing the strategies we announced on our last earnings call. There is a lot going on at UPS and in the world. So, let's move to our results. In the first quarter, our consolidated revenue was $21.5 billion, a decrease of 0.7% versus last year and in line with our expectations. Consolidated operating profit was $1.8 billion, an increase of 0.9% compared to last year. Consolidated operating margin was 8.2%, up 20 basis points versus last year, and diluted earnings per share were $1.49, up 4.2% from last year. Consolidated operating profit, operating margin, and diluted earnings per share were slightly ahead of our expectations. Of note, our U.S. domestic segment increased operating profit by $164 million year-over-year and expanded operating margin by 110 basis points. While our revenue and volume in the first quarter were in line with our expectations, results by month were not. Starting with the U.S., while we expected negative ADV growth given our Amazon glide-down plan, January's ADV decline was less than expected, marked by positive average daily volume or ADV growth in certain B2B, SMB, and healthcare customers. Then, as we moved into February and March, uncertainty surrounding global trade policies and other matters led to a drop in consumer confidence and muted demand from some enterprise and SMB customers. As a result, the decline in U.S. ADV for the months of February and March was higher than we expected. Looking outside the U.S., demand for U.S. inbound services surged as customers pulled forward inventory purchases ahead of expected tariff changes. In response, we leveraged the flexibility of our global portfolio with the power of our next-gen brokerage technology, which helped our customers avoid border disruptions and kept their supply chains moving. As a result, in the International segment, our U.S. outbound volume increased 9.5% in the first quarter. In January, we announced three strategic actions to drive our business to a more profitable, agile, and differentiated UPS. Let me provide a high-level update on our progress. Let's start with our plan to accelerate the glide down of Amazon's volume. You'll recall that we reached agreement with Amazon to reduce their volume in our network by more than 50% by June of 2026. Note that the volume we are transitioning out is Amazon's fulfillment center outbound volume. This volume is not profitable for us, nor a healthy fit for our network. The Amazon volume we plan to keep is profitable and it is healthy volume. In other words, volume where we can add value like returns and seller fulfilled outbound volume. In the first quarter, Amazon's ADV decline ran slightly ahead of plan, but is expected to be on plan by the end of the first half of this year. The Amazon glide-down plans have been integrated into our network of the future initiatives. We are executing the largest network reconfiguration in our history. We will optimize the capacity of our network with expected volume levels, as well as increased productivity through additional automation. With this reconfiguration, we will also lessen our dependency on labor, reduce the capital requirements needed to run the network, and will drive structural operating margin and return on invested capital improvements. While this may be the largest network reconfiguration in our history, we've got experience that gives us confidence that we will be able to complete our plans with very little customer disruption and at the right cost to serve. Over the last couple of years, we've demonstrated our ability to manage hours and labor in line with changes in volume, all while staying within the confines of our labor agreement. In 2024, we successfully closed 11 buildings, and the learnings from those closings became the blueprint for our network reconfiguration approach. We are moving very quickly. In this first phase, we will complete 164 operational closures, including 73 building closures by the end of June. And there's more to come. While our building footprint is changing, our pickup and delivery footprint is not. We remain committed to providing industry-leading reliability to all customers across the country. We'll just do it with fewer buildings. For our larger customers, we are working with them to update their operating plan. And for our SMBs, in the areas where we're closing buildings, UPS will still be accessible and convenient for customer drop-offs and pickups due to our network of 5,300 UPS stores and 29,000 Drop Boxes and UPS Access Point. 90% of the U.S. population lives within 5 miles of these locations, and about two-thirds of them are open on Sundays for added convenience. In a moment, Brian will provide more details on our cost-out and network reconfiguration progress. Our second strategic action was the insourcing of SurePost final mile delivery. We smoothly absorbed that volume into our network and adjusted operating plans to address the additional stops associated with the final mile. Earlier this month, we replaced the SurePost product with Ground Saver. This is a new and differentiated domestic economy service that balances speed and reliability for our customers while allowing significant operational flexibility for UPS. The third strategic action we announced was our Efficiency Reimagined initiative, which is designed to deliver $1 billion in savings by improving many of the ways we do business, including the elimination of manual tasks and enhancing our purchasing processes. We've made good progress here. And as planned, we expect to accelerate the benefits beginning in the second quarter. Moving to our strategic growth updates. We are focused on improving revenue quality and growing in the best parts of the market like Healthcare, International, B2Bs, and SMBs. Last week, we entered into an agreement to acquire Andlauer Healthcare Group, a move that will bolster our healthcare capabilities in Canada by adding 39 dedicated healthcare facilities across the country, along with cold chain packaging and specialized transportation solutions. The acquisition of Andlauer supports our goal of becoming the number one complex healthcare logistics provider in the world. We expect this acquisition to close in the second half of 2025. Touching on SMBs. In the first quarter, SMBs, including platforms, made up 31.2% of our total U.S. volume. And looking at DAP, our Digital Access Program, in the first quarter, global DAP revenue grew by 24% year-over-year. Finally, during the quarter, we reintroduced UPS Ground with freight pricing, which provides exceptional value for shipments weighing more than 150 pounds. This positions us to be the only small package carrier that offers parcel-like pricing for less-than-truckload shipment, which is a true differentiator. Let's turn to a discussion about tariffs and our approach to managing through what is turning out to be a very complex and ever-changing topic. From an exposure perspective, our U.S. import volume is roughly 400,000 pieces per day, which, from a volume perspective, is less than 2% of our total global ADV. From a revenue perspective, last year revenue on our China to U.S. trade lanes represented 11% of our total international revenue, and revenue from other trade lanes to the U.S. represented roughly 17% of our total international revenue. Our China to U.S. trade lanes are our most profitable trade lanes. In the U.S., we've talked with our top 100 customers to understand how their business is being impacted, both directly and indirectly by changes in trade policy. These customers have told us that they are exploring various options to address the tariff, from absorbing the cost to pushing them into retail prices to asking suppliers to help defray the expense. At this point, it remains an open question as to what path they will choose and what the potential impact could be on consumer demand and our business. For the rest of the world, through the middle of April, we have interviewed nearly 45,000 international and freight forwarding customers to ascertain their shipping plans. For small package shippers, over 95% of those customers have told us that they expect to maintain their current business models, while the rest are considering several options, including trade shifts, transportation mode shifts, or exiting the business. Most of these customers are also telling us that they are letting inventory levels sell off, which will lead to lower shipping activity, at least for now. Freight forwarding customers are telling us that, where they can, they are looking to move from air freight to ocean freight. From an internal exposure perspective, we've looked at our purchasing and capital plans to estimate any potential tariff-related cost increases that may come our way. Roughly $2.7 billion of our annual direct purchases are sourced outside of the U.S., with little exposure to China. From a service perspective, we are focused on making it easier for our customers to do business. Our next-gen brokerage capabilities makes it easier for our customers to reclassify goods under Harmonized Tariff Schedule Codes and clear customs easily. Our new Global Checkout Product makes it known what customers will pay for duties, taxes, and fees. Using artificial intelligence, Global Checkout enables our customers to display to their customers a guaranteed landed cost, covering all duties, taxes, and fees during online checkout. This eliminates surprise import visa delivery and provides a much better customer experience. Global Checkout is available in 43 origin countries, and UPS is the only global carrier that offers a guaranteed landed cost that's integrated into shipping and billing technology. Finally, for customers who need it, UPS provides bonded warehousing and foreign trade zone-enabled solutions. Moving to our outlook, given the uncertainty in the market, there is a wide range of possible outcomes. We continue to model different scenarios, but these are just scenarios. The world hasn't faced such enormous potential impacts to trade in more than 100 years. So, the only thing we're certain of is we don't know which, if any of our scenarios will play out. But by modeling different scenarios, we'll be able to adjust to rapid shifts in the business. Regarding our expectations for the full year, should market and economic conditions stabilize to be more in line with the assumptions we used to build our 2025 plan, we would be confident in the full year outlook we provided in January. Given today's level of uncertainty, however, we are not providing any updates to our consolidated full year outlook at this time. We think instead, it's prudent to focus on what we can control and continue to execute against our strategic and financial goals. Today, we're providing second quarter guidance based on April results and our expectations for the balance of the quarter. Once we are through the second quarter, we will hopefully have more clarity about tariffs and trade and the implications for demand dynamics, and we'll provide an update at that point. In the face of uncertainty, there are some knows. We are confident in our position as a trusted leader in global logistics, and with the agility of our integrated network, our broad reach, our portfolio of services, and our proven trade expertise, we are well-positioned to enable our customers to navigate a changing trade environment. Further, the strategic actions we launched in January to reconfigure our network and reduce costs across the business cannot be timelier. The environment may be uncertain, but with our actions, we will emerge as an even stronger, more nimble UPS. So, with that, thank you for listening. And now, I'll turn the call over to Brian.

Brian Dykes, CFO

Thank you, Carol, and good morning, everyone. This morning, I'll cover three areas. Starting with our first quarter results including cash and shareowner returns, then I'll provide more detail on our cost-out and network reconfiguration progress as we reduce the volume we deliver for Amazon. Lastly, I'll touch on tariffs and trade policy changes and comment on our outlook for 2025. Starting with our consolidated performance. In the first quarter, we generated $21.5 billion in revenue, a decline of 0.7% compared to the first quarter of last year. Consolidated operating profit was $1.8 billion, an increase of 0.9% versus the first quarter of 2024, and consolidated operating margin was 8.2%, an increase of 20 basis points compared to the first quarter of last year. Diluted earnings per share was $1.49, up 4.2% from the first quarter of 2024. Now moving to our segment performance. As Carol mentioned, while volume and revenue performance in the quarter were in line with our expectations, our monthly performance was not. In U.S. Domestic, following a strong January relative to our expectations, uncertainty in the market began impacting consumer behavior. Demand shifted down in February, falling further than our expectations and normal shipping patterns and remained at that level in March. For the quarter, total U.S. ADV was down 3.5%, ground average daily volume decreased 2.5% year-over-year, and total air average daily volume was down 9.6%. Excluding the volume decline from Amazon, total air ADV grew 6.2%, driven by demand from healthcare and high-tech customers. Within ground, our new economy product called Ground Saver, which replaced SurePost, had an ADV decline of 8.4%, primarily due to pricing actions we took to grow yields on e-commerce volume. This is the first ADV decline we've seen in this product in five quarters as we have leaned into revenue quality. For the quarter, B2B average daily volume was up 1.5% compared to last year. Growth was driven by returns, which increased 8.8% year-over-year. We also saw ADV strength from healthcare and high-tech customers. B2C average daily volume decreased 7% year-over-year, driven by our managed decline in volume from Amazon, our focus on revenue quality, and some demand softness. In terms of customer mix, we saw strong ADV growth from SMB customers of 4%. In the first quarter, SMBs made up 31.2% of total U.S. volume. This is the highest SMB concentration we've seen in 10 years, and it is driving meaningful change in overall volume and revenue quality. Moving to revenue. For the first quarter, U.S. Domestic generated revenue of $14.5 billion, up 1.4% compared to last year, driven by increases in air cargo. In the first quarter, revenue per piece increased 4.5% year-over-year, which was the strongest revenue per piece growth rate we've seen in eight quarters, and it partially offset declines in volume. Breaking down the components of the 4.5% revenue per piece improvement, the combination of base rates and package characteristics increased the revenue per piece growth rate by 240 basis points. The net impact of customer mix and product mix increased the revenue per piece growth rate by 170 basis points. Lastly, fuel drove a 40 basis point increase in the revenue per piece growth rate. Turning to cost. Total expense increased 0.2%, including an increase in air cargo. We continued to drive efficiency in the quarter as we reduced purchase transportation costs from insourcing 100% of Ground Saver volume for final mile delivery, partially offsetting the increase in delivery costs, and we lowered small package block hours within our air network in response to the changing volume levels. These cost reductions were partially offset by expenses related to challenging weather. In the first quarter, cost per piece increased 3.7%. The U.S. Domestic segment delivered $1 billion in operating profit, a 19.4% increase compared to the first quarter of 2024. Operating margin was 7%, a year-over-year increase of 110 basis points. Moving to our International segment. We leveraged the agility of our integrated global network to navigate this period of uncertainty and grew International average daily volume for the second consecutive quarter. Total international ADV increased 7.1%, with all regions growing average daily volume versus last year. International domestic average daily volume increased 4.8% compared to last year, led by Canada. On the export side, average daily volume increased 9.3% year-over-year. Asia and Europe delivered double-digit export growth throughout the quarter, and at a country level, 15 of our top 20 export countries grew export ADV. In the first quarter, International revenue was $4.4 billion, up 2.7% from last year, as we expected. Revenue per piece declined year-over-year due to a stronger U.S. dollar and lower demand-related surcharges. Operating profit in the International segment was $654 million, down 4.1% year-over-year due to a mix shift to more economy services in Europe, lower demand-related surcharges, and investments we are making to expand weekend services in Europe. International operating margin in the first quarter was 15%. Moving to Supply Chain Solutions. In the first quarter, revenue was $2.7 billion. Revenue decreased $471 million, driven by a reduction of $563 million in revenue from Coyote due to our divestiture of this business in 2024. Within Supply Chain Solutions, Air and Ocean Forwarding revenue was flat to last year. Air freight revenue was slightly lower year-over-year due to lower volume, which was more than offset by higher market rates in Ocean. Core logistics grew revenue by 5.1%, and UPS Digital, including ROE and Happy Returns, grew revenue 32.5% year-over-year. In the first quarter, Supply Chain Solutions generated operating profit of $98 million. Operating margin was 3.6%, a decline of 320 basis points compared to last year, primarily driven by cost pressure in our Mail Innovations business. This is a postal injection product, and our contract with USPS expired at the end of 2024. The new rates from the USPS are causing short-term cost pressure, which we expect to address as we make adjustments to that business. Walking through the rest of the income statement, we had $222 million of interest expense, our other pension income was $37 million, which was higher than we anticipated due to updated expected return on asset assumptions, and our effective tax rate for the first quarter was approximately 22.5%. Turning to cash and shareowner returns. In the first quarter, we generated $2.3 billion in cash from operations. Free cash flow for the period was $1.5 billion. Also, in the first quarter, UPS paid $1.3 billion in dividends to shareowners and we repurchased $1 billion of our shares, completing our share repurchase target for the year. Now, let me provide an update on our cost-out and network reconfiguration efforts. As we've discussed, we are reducing the amount of volume we deliver for Amazon by more than 50% by June of 2026. Associated with this volume reduction, we are undertaking the largest network reconfiguration in our history. This effort has been combined with our Network of the Future initiative, as both will help drive us to a more efficient network. The first phase of our network reconfiguration includes 164 operational closures, including 73 building closures by the end of June of this year, and there's more to come. These actions will enable us to expand our U.S. Domestic operating margin and increase profitability. Our reconfiguration plan is comprehensive and includes everything from closing buildings, reducing positions, and cutting support costs through Efficiency Reimagined. To help you track along with our progress, we've grouped associated costs into three buckets. First is variable cost, which captures operational hours and flexes down quickly with volumes. Second is semi-variable cost, which is represented by operational positions and will also be adjusted to match volume levels. And third is fixed cost, which includes closing buildings and reducing expense from support functions, both of which have specific completion dates assigned. Our network reconfiguration and Efficiency Reimagined program is aligned with our anticipated Amazon volume reduction in 2025 and is expected to remove $3.5 billion in expense this year. Splitting the savings between our three cost buckets, approximately 35% of our cost reduction will come from variable cost, about 35% will come from semi-variable, and about 30% will come from savings and fixed costs. Now, let me walk you through some of the details of how progress accelerates through the year, starting with the pace of Amazon's volume decline. In the first quarter, Amazon ADV was down 16% year-over-year, which was more than we originally planned. Second quarter Amazon ADV is also anticipated to be down 16%, which is less than we originally planned. And looking at the first and second quarters together, our total expected Amazon decline for the first half of 2025 is on track. Then in the back half of this year, the ADV decline is expected to be approximately 30% in each of the third and fourth quarters. Looking at variable costs, this year associated with the Amazon volume decline, we plan to reduce total operational hours by approximately 25 million hours. Our reduction in hours was on track through the first quarter. Moving to semi-variable costs, our operational reduction target for 2025 is around 20,000 positions. Position changes are not only connected to the buildings we are closing, but will also be made across the entire U.S. network. Our planned reductions are in line with the total Amazon volume decline, and our semi-variable cost-out efforts were on track through the first quarter. In our fixed cost bucket, we expect to close 73 buildings by the end of June. About two-thirds of the buildings we are closing are in the Eastern part of the country, with the remainder in the West. As an engineering-driven company, we've developed a detailed checklist for each building closure to ensure that we continue to provide industry-leading service to our customers, assist our employees through these changes, and leverage our network planning tools and other technology to efficiently process volume in our network. And lastly, as Carol mentioned, our Efficiency Reimagined initiatives that are redesigning many end-to-end processes like procurement and customer onboarding are underway, and we expect to accelerate these savings starting in the second quarter. We are pleased with the progress we made in the first quarter with our cost-out and network reconfiguration efforts related to the accelerated glide-down of Amazon volume. And we are on track to achieve our 2025 cost reduction target of $3.5 billion. Now, turning to guidance for 2025. The macro-environment is highly uncertain due to changing trade policy and tariff uncertainty. As a global carrier, the eventual outcomes could result in pressure in some parts of our business and create new opportunities in others. We modeled several different scenarios for how the balance of the year might play out so that we can quickly pivot, continue supporting our customers, and lean into growth. And as Carol mentioned, we're also closely monitoring our direct exposure related to our purchasing and capital plan. Today, I'll provide you with our outlook for the second quarter. We are not providing any updates to our consolidated full year outlook until there's more certainty in the macro-environment. Let's start with our assumptions for the second quarter. In our International business, we have factored in announced tariffs and changes to de minimis exemption. We also expect weakening demand on the China-to-U.S. trade lane will be partially offset by two factors. First is growth on China to non-U.S. lanes, and second is growth from the rest of the world inbound to the U.S. In our U.S. Domestic business, we have included our expectations. Margin is expected to be approximately 9.3%. In the U.S., in the second quarter, we expect ADV to be down about 9% and revenue to be down low single digits compared to last year. SMBs will be disproportionately impacted by the uncertain environment, which will add some pressure to operating margins. We expect the U.S. Domestic operating margin to expand by approximately 30 basis points compared to last year. Turning to International, we expect revenue to be down approximately 2% to last year and operating margin to be in the mid-teens due to lower demand-related surcharges and trade uncertainty. And in Supply Chain Solutions in the second quarter, revenue is expected to decline approximately $500 million due to the reduction in revenue associated with Coyote in the same period last year. Operating margin is anticipated to be in the high single digits. And finally, in the second quarter, in total below the line, we expect approximately $160 million in expense, and we expect a tax rate to be between 23% and 23.5%. In closing, I'll note that this uncertain environment reinforces why we've taken action to reshape our volume mix, pull cost-out, and reconfigure our U.S. network. We are focusing on controlling what we can control and executing our strategy to improve the long-term profitability of our U.S. business, drive cash generation, and deliver shareowner value.

Tom Wadewitz, Analyst

Good morning, and thank you for your question. I'm interested in understanding the composition of the $3.5 billion cost for the full year and how it progresses throughout the year. Additionally, does this cost fully offset the reduction in Amazon's revenue, or is it a lesser impact? It would also be helpful to hear your thoughts on how this might carry into 2026, including whether you anticipate a similar financial figure for that year. Any further details on the Amazon cost reduction within the $3.5 billion would be appreciated. Thank you.

Brian Dykes, CFO

Sure. Thanks, Tom. Regarding the $3.5 billion, if you consider it in the categories we discussed, the variable costs will align with the Amazon volume as we've outlined. The semi-variable costs will generally follow the same trend. As for fixed costs, we mentioned that we will be closing 73 buildings in the second quarter. The majority of these fixed costs, roughly 60%, will be concentrated in the second half of the year. The Efficiency Reimagined initiative will also account for about 60% in the latter half. Overall, the first two categories will generally align with Amazon's volume, while the remaining will be more heavily weighted towards the second half of the year.

Carol Tome, CEO

And the Amazon volume decline is higher in the back half of the year than it is in the first half.

Brian Dykes, CFO

Correct. As we laid out, it's about 16% in the first half and 30% in the second half.

Tom Wadewitz, Analyst

So, do we think of it as kind of an exact match, or do you take out more cost than the revenue you loose?

Brian Dykes, CFO

Well, I think if you look at what we talk about with the revenue and the costs that we're taking out, we are making structural changes to the business to improve the margin. Tom, I think we talked about the revenue that we're losing was not nutritive to the business. And so, we are taking out more costs.

Carol Tome, CEO

And the one thing I would add is on Efficiency Reimagined. That's really not tied to the Amazon volume decline. That's about making our business more productive, and how does that play out Brian?

Brian Dykes, CFO

Yes. So, Efficiency Reimagined is all about making processes more efficient within the business. And so, as we do that, we will also be taking out about $500 million this year, rolling to $1 billion into 2026, that is going to be back-half weighted in 2025, but will be incremental to the piece that's just directly related to the Amazon volume. It is included in the fixed cost bucket that we laid out, but it's a rough process redesign around restructuring of the business.

Tom Wadewitz, Analyst

Great. Thanks for the time.

Operator, Operator

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

Ariel Rosa, Analyst

Hi, good morning. Carol, you mentioned the goal of reducing reliance on labor in the future. I recently saw a headline about your experiments with robotics and increased warehouse automation. Could you please elaborate on these efforts and how they relate to the Efficiency Reimagined initiative? What kind of cost savings do you anticipate achieving from this in the long term? Thanks.

Carol Tome, CEO

As part of our network of the future initiative, we are focused on automating our buildings by improving the sorting process. However, automation extends beyond just sorting. We are exploring the use of robotics for various applications, including automatic label application, and other automated processes like loading and unloading trailers, as well as package sorting in some of our operations. I'll let Nando provide further insights on this.

Nando Cesarone, Executive

Yes, sure. So, what you're going to see at the end of this is 400 facilities that are either partially or fully automated. On top of that, we're working ahead of ourselves as new automation technology, the application of AI in certain areas to help us with labor is introduced into these operations and that allows us to really take cost out of the network and also the end state is 200 facilities that will be closed in our network. And, of course, as we work through this, we're creating capacity for ourselves through the productivity improvements. And again, as we look at this, we've developed really good muscle here, and we're moving at a speed that we're all really happy with. But the end result will be a much more efficient operation with less dependency on labor. And as we grow and scale up, that's going to continue to provide benefits for UPS.

Carol Tome, CEO

And so, that activity, coupled with our Amazon activity, gives us confidence that we'll reach that 12% U.S. operating margin by the end of 2026.

Brian Dykes, CFO

That's correct. As Carol and Nando have explained, we are not halting our efforts. While reducing less efficient capacity, we are simultaneously increasing automation. In the fourth quarter, we reported that 63% of our volume went through automated hubs, and that has now risen to 64%, reflecting approximately a 4.5% year-over-year increase. Therefore, we are progressing towards a more efficient and scalable network more quickly.

Ariel Rosa, Analyst

Great. Thank you.

Operator, Operator

Thank you. Your next question is coming from Scott Group from Wolfe Research. Your line is live.

Scott Group, Analyst

Good morning. I would like to clarify how much of the $3.5 billion has been realized so far in Q1. Additionally, I noticed that domestic margins improved by 110 basis points in Q1, while you mentioned that in the second quarter, the improvement is only 30 basis points. Is this due to worsening macroeconomic conditions, or can you explain why there is a slowdown in margin improvement in Q2, given that I would expect cost savings to be increasing?

Brian Dykes, CFO

Sure. To address your first point, approximately $500 million of the $3.5 billion is accounted for in Q1. As I mentioned, that amount will increase as both the Amazon volume comes in and our initiatives progress through Q2. Several factors are at play in Q2. Firstly, we have incorporated into our guidance the anticipated impact of the announced tariffs. This will result in some volume slowdown for both enterprise and SMB segments, especially among SMBs that lack the resources to adapt as our enterprise customers do. This situation will exert pressure on revenue per package and margins. Additionally, we are closing 7% of our U.S. buildings this quarter, which means we have factored in some costs related to this transition to manage volume and ensure service continuity during this period.

Carol Tome, CEO

And maybe just a little bit more color on the SMBs. Many of our SMBs, as we talk to them, are 100% single-sourced from China. And this is causing so much uncertainty in the marketplace because the administration has announced, as 145% tariff on China goods starting May 2, and the elimination of the de minimis exception. So, our SMBs, who don't have the working capital capabilities to pull forward inventory, are saying, 'Wow! how are we going to handle this cost increase that's coming our way?' It doesn't mean that they're not trying to look for alternate forms of supply. They're working with original equipment manufacturers, trying to move to other countries, but as you can appreciate, the large companies get to take the first phone call and they're the ones that are willing to work on changing supply chain. So, we just want to factor that into our forecast for Q2, understanding candidly, there's so much uncertainty around the China tariffs. We know it's been announced. We don't know actually if it will happen. We don't know if it will stick. There are many things we don't know, but we thought it was prudent to factor that into our view.

Scott Group, Analyst

Okay. Thank you.

Carol Tome, CEO

Yes.

Operator, Operator

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

Jordan Alliger, Analyst

Yes. Hi. Realizing the tariff stuff and supply chains are a bit of a moving target right now, any updates on sort of your secular viewpoint for domestic and international volume growth, sort of factoring out Amazon now that you're reducing it and maybe contemplating, I don't know, shifts in supply chains moving away from China, rest of the world. I know you'd given some thoughts on that at your Investor Day a while back. Any updates given all the noise that's going on right now? Thank you.

Carol Tome, CEO

Well, Jordan, you're right. It's a very uncertain market. But if we go back to the beginning of the year, the small package industry in the United States was expected to be very low single digit growing from a volume perspective, and if you look at value, including GRI increases, again, low single digit. Outside of the U.S., it's a big addressable market. We size the market outside the United States as $99 billion. And it was expected to be growing in the mid-single digits. Including in that $99 billion is about $18 billion of healthcare, which was expected to grow in the high single digits. And all of those growth projections were as of the beginning of the year. Healthcare continues to be a bit isolated from this. We had good healthcare growth. Healthcare is reflected in all three of our operating segments. We had good healthcare growth in the first quarter. If you look at average daily net revenue, which adjusts for one less operating day, it was up nearly 5% year-on-year. So, we were pleased with that performance. And what I'm happy about from a UPS perspective is, because of our presence in over 200 countries and territories around the world, we can move where supply chain moves and they're going to move. We know they're going to move, and we can move where they move. We've got a proof point. If we go back to 2018, when China tariffs were imposed, we saw trade move. China to U.S. declined, but China to rest of the world increased, and it all leveled out, and our international business actually grew. So, because of our integrated network and our presence, we'll be able to manage through this.

Jordan Alliger, Analyst

Thank you.

Operator, Operator

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

David Vernon, Analyst

Good morning, and thank you for the question. Brian, could you clarify the $3.5 billion in cost savings we're expecting this year? What would that translate to in an annualized figure for 2026? Additionally, regarding the domestic aspect of the business and the SurePost insourcing, you've implemented a notable price increase. Are you observing any decrease in volume or a shift away from the services we aimed to retain through this insourcing, or are the pricing increases holding steady? Thank you.

Brian Dykes, CFO

Yes. So, Dave, on the first point, the $3.5 billion is an in-year 2025 number. I would expect a similar number as we do a kind of a similar type drawdown into 2026, but we'll clarify that as we go later into the year. On the Ground Saver volume, so we have seen Ground Saver decline. It's down about 8.5% in the quarter. But I will say the majority of that has been intentional decline with specific customers as we both adjust the cost structure to now an in-source model and the new product as well as we lean into revenue quality. So, there has been some intentional decline of less nutritive business.

Carol Tome, CEO

And we would expect to see that in Q2 as well.

Brian Dykes, CFO

Yes.

Carol Tome, CEO

But you're not seeing any sort of additional churn or turnover from the competition with the post office.

Brian Dykes, CFO

We're not.

Carol Tome, CEO

And maybe just a little more color there. That's one reason why we insourced it, because of the liability that we provide to our customers. Our on-time in the delivery was almost 97% in the first quarter.

Brian Dykes, CFO

Yes.

Operator, Operator

Thank you. Your next question is coming from Chris Wetherbee from Wells Fargo. Your line is live.

Chris Wetherbee, Analyst

Hey, thanks. Good morning, guys. Maybe a question on International. I think you noted for the second quarter mid-teens margins. I guess also that the China-U.S. lane was the most profitable. Just wanted to get a sense, is this sort of the right profitability level for the business going forward, assuming things don't change materially on the tariff side with China? Just trying to get a sense of maybe, is there specific items impacting the second quarter or is this more of a run rate just given what the trade looks like in the second quarter?

Brian Dykes, CFO

In the second quarter, there are several factors at play because trade flows are changing, as Carol mentioned. Based on my earlier comments, we anticipate a decline of just under 25% in the China to U.S. trade. However, this will be balanced by significant improvements in trade from China to the rest of the world and from the rest of the world to the U.S. We expect to see these shifting trade routes reflected in our second quarter guidance. It's important to note that the China-to-U.S. lane is our most profitable, but we will experience a slight reduction in profit. Looking ahead, we expect International margins to return to the mid to high teens in the long term.

Carol Tome, CEO

And I think the first quarter margin was suppressed a bit because of the investments we're making in Europe for weekend delivery. We will lap those investments later in the year, so that will give us margin expansion at that point. We really like the volume that we're seeing as we provide that weekend service for our customers. So, this is a good investment that we made.

Brian Dykes, CFO

Absolutely.

Operator, Operator

Thank you. Your next question is coming from Ken Hoexter from Bank of America. Your line is live.

Ken Hoexter, Analyst

Hey, great. So, I’d like to explore the International aspect, especially regarding the minimal impact and the flow-through. Carol, you mentioned the delay in shipments from smaller shippers. Do you believe we are reducing inventories, and that we should anticipate some kind of recovery once these tariffs are resolved? Is that how you perceive the pace of goods? I’m trying to grasp this considering you shared your thoughts for the second quarter, but pulled back the full year. How quickly can we expect to see a turnaround, especially as policies are established?

Carol Tome, CEO

Yes. So, the real point of uncertainty is this China tariff matter. And so, we're hoping to have that clearer by the end of the second quarter. The de minimis implications means that for China imports, they will be charged duties and tariffs for $800 or less, but hadn't been the case before. So, we have factored that into our outlook for our SMBs because they could be impacted by this. We think they will be impacted by this. But in terms of clearing goods across the borders, we are well-positioned to do that. In fact, we clear goods without manual intervention about 85% of the time. So, we're in great shape to be able to clear these goods if more items are coming through with tariffs identified on them. What else would you want to add to that, Brian?

Brian Dykes, CFO

I believe you are highlighting some of the scenarios we have been considering.

Carol Tome, CEO

Yes.

Brian Dykes, CFO

Time is a big factor here on when this gets resolved. The final levels is a big factor here and, ultimately, how our customers end up dealing with it from a price or a margin standpoint. And so those are a lot of the things that we're looking at. That's why there's so much uncertainty in the back half because all those will ultimately impact the U.S. consumer, and we're trying to help our customers deal with it.

Carol Tome, CEO

It's because while current consumer sentiment is lower than it was at the beginning of the year, the consumer remains relatively healthy. In response to your question about whether inventory levels will snap back as they are drawn down, commerce needs to continue. One might assume it will return, possibly from a different country as importers adjust their sources. However, we are ready to manage that due to our wide-ranging capabilities and presence.

Brian Dykes, CFO

That's right.

Operator, Operator

Thank you. Your next question is coming from Jason Seidl from TD Cowen. Your line is live.

Jason Seidl, Analyst

Thank you, Operator. Hello, Carol. Hello, Brian and team. I appreciate the insightful data points and feedback you've shared today. I wanted to focus on what you mentioned about 95% of your customers indicating they are maintaining their outlook but are temporarily drawing down inventories. This leads to a two-part question. First, how does this inventory drawdown impact volumes for your customers? Second, how long do you anticipate this inventory drawdown will last so we can properly set expectations?

Carol Tome, CEO

Well, it depends on the importer. Some importers were buying ahead 30 days, 60 days, 90 days. And you can imagine that the larger importers, which would be the larger retailers, were doing that, 30, 60, 90 days. Don't think it goes much beyond that because there's no capacity to hold the inventory. And when we say 95% have started to change or not change their business model, it means they're not changing how they ship their products to the United States. So that, I think, is encouraging to us because they're not thinking about exiting the business, they're going to stay in the business. They're going to let inventory levels roll down. They're going to hope to have certainty on China, and then they'll decide what they do going forward.

Jason Seidl, Analyst

And so, on a roll-down in inventory, that would put pressure on your volumes at least in the near term?

Carol Tome, CEO

Trade lanes are shifting, which means that trade from other countries to the U.S. will move to different lanes. As Brian mentioned, we are not expecting a significant change in our international business in the second quarter.

Brian Dykes, CFO

No. As I mentioned before, we expect just under a 25% decline in China-to-U.S. shipments, which is offset by a 40% increase in China-to-rest of world shipments. We're seeing these shifts because manufacturers in China are not slowing down; they are changing the destinations of their goods.

Carol Tome, CEO

And they're providing incentive to make that happen for the Chinese company.

Brian Dykes, CFO

That's right.

Carol Tome, CEO

And as air volume comes down in the United States, it frees up lift for outside the United States.

Brian Dykes, CFO

That's right.

Operator, Operator

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

Stephanie Moore, Analyst

Hi, good morning. Thank you. Actually, maybe a continuation on that last question and conversation. And normally, I would never ask this at the end of April, but maybe as you speak to your customers and they think about peak season, have you had any conversations with how they would look to prepare, especially in the light of kind of what we just discussed and the drawing down of inventory and taking a bit of a wait-and-see approach, but at some point, do we get to the point where there could be a bit of a squeeze here into the summer months as we start to prepare for kind of peak season shipments and what could still be a pretty disruptive supply chain environment? So, any color there would be helpful. Thank you.

Carol Tome, CEO

I think your question is actually quite timely because most retailers would have to put orders in now for peak. And so, we are starting to talk to our customers to understand what their plans are. Remember, we deal with very large enterprise retailers who have the financial wherewithal to manage through tariffs. Smaller retailers, we've heard anecdotally that some of them are rethinking their peak holiday orders, but those are smaller retailers. For us from an exposure perspective, I think we're in a pretty good place. But we will continue to have those ongoing discussions given the uncertainty we have with the China tariffs. That's why it will be so helpful to have that resolved, however, it gets resolved. Brian, any thoughts?

Brian Dykes, CFO

Stephanie, I believe this highlights the uncertainty and various scenarios we are facing. There are situations where the issues get resolved and orders come in, and then there are cases where delays occur, leading to a shift from ocean to air freight, which benefits us. We have been able to adapt our network to assist customers with their peak orders. However, in other scenarios, the situation might worsen and we could experience supply chain disruptions. We are assessing all these different scenarios so we can act quickly and adjust our business as needed.

Carol Tome, CEO

Our peak planning has already begun. And right now, it's about scenarios, isn't it, Nando?

Nando Cesarone, Executive

Yes.

Carol Tome, CEO

We're thinking about various scenarios on how we will be prepared to deliver another great peak.

Nando Cesarone, Executive

Yes, it actually will work out in the end. When you think about peak season, we put out a lot of variable costs. It's not cost that goes on forever in terms of hiring helpers, temporary employees. We charter aircraft or lease aircraft during peak season. Those would be considerations we make as we see the volume unfold, whether we need those resources or not.

Stephanie Moore, Analyst

Great. Well, I appreciate the time. Thank you.

Carol Tome, CEO

Thank you.

Operator, Operator

Thank you. Your next question is coming from Brian Ossenbeck from JPMorgan. Your line is live.

Brian Ossenbeck, Analyst

Good morning. Thank you for taking my question. I have a follow-up and a question regarding capital allocation. Concerning the shift to the China Plus One strategy, how quickly do you think the supply chain can adapt to that, particularly with some of the small and medium-sized businesses? Are you noticing a significant shift compared to what Brian mentioned about moving from China to other parts of the world? Additionally, Brian, could you outline the capital allocation priorities and maybe the cash costs associated with restructuring as we implement this plan? Thank you.

Carol Tome, CEO

So, rest of the world to U.S., remember 17% of our international revenue, 3% of our total revenue. So, from an exposure perspective, this is manageable exposure. Kate, what are you seeing rest of the world to the U.S.?

Kate Gutmann, Executive

Yes. We are experiencing growth from Europe to the U.S., with exports increasing at a healthy single-digit rate. In Asia, countries like Vietnam and Thailand are also exporting to the U.S. at nearly double-digit rates. This transition is already happening. Regarding manufacturing and the pace of change, there is planning in progress. Small and medium-sized businesses are exploring how to source from manufacturers. Large companies typically secure the initial opportunities with manufacturers, while small and medium-sized businesses are evaluating nearshoring options. The analogy of "China Plus" effectively represents this trend but in a more pronounced manner. The shift is already taking place, and I want to emphasize that the double-digit growth we are seeing underscores that point. It's also crucial to consider that the rest of the world faces a 10% universal tariff, which is manageable, whereas the significant uncertainty lies with China, impacting the economy.

Brian Dykes, CFO

That's correct. Before I discuss capital structure, I want to highlight the investments we've made that support our efforts, like expanding air operations in Quark in Taiwan and our ongoing investments in nearshoring. These initiatives will help us navigate tariffs now and provide improvements in the future, setting us up for long-term benefits. Regarding capital allocation, we have not changed our policies and feel confident about our balance sheet. Our debt-to-EBITDA ratio is 2.26 times, which is below our 2.5% target, and we ended the year with $5 billion in cash. None of our commercial paper from our $3 billion program has been issued, giving us ample liquidity. We are optimistic about cash generation for the upcoming year, our balance sheet strength, and liquidity. As for the restructuring plan charges, approximately 60% will be cash and 40% will be non-cash. Keep in mind that this figure will be updated as we progress through the year and address additional assets that will be phased out, especially as we move into the first half of 2026 with the second phase.

PJ Guido, Investor Relations Officer

Matthew, we have time for one more question.

Operator, Operator

Thanks for covering all that.

Carol Tome, CEO

Thank you.

Brian Dykes, CFO

No worries.

Operator, Operator

Certainly. Our final question comes from Bruce Chan from Stifel. Please go ahead with your question.

Bruce Chan, Analyst

Good morning, everyone, and thank you for the insights. I have a broader question; not to sound pessimistic, but as I consider potential recession scenarios, we've experienced decelerating volumes and an uncertain macro environment in the past. Given that you are currently undergoing a significant network realignment, does this impact your ability to respond to decreased macro demand? For instance, could you reduce Transat flights or further adjust labor within the limits of your labor agreement? Thank you.

Carol Tome, CEO

I believe we are introducing more agility and flexibility to our business than ever before. Considering the volume we are reducing from Amazon, 60% of that volume is unprofitable for us. By reducing that volume, we gain financial flexibility to tackle other challenges that may arise. While there's still much work to do, we are creating flexibility and agility that we have not experienced before, given our previous reliance on a single customer for volume and growth. We are exploring various scenarios together, aren't we, Brian?

Brian Dykes, CFO

We are.

Carol Tome, CEO

We're going as dark as we can and as optimistic as we can. And through all the scenarios, I've seen nothing but ways that we can manage through. Brian, you'd like to add?

Brian Dykes, CFO

We have outlined our plan to exit 164 operations in 73 facilities by the end of June, with around 50 additional locations under evaluation afterward. It is essential to recognize that we are developing capabilities that will enable us to adapt our network in new ways. As we move toward a more automated network, we can enhance our efficiency in managing volume fluctuations. Even in situations where volumes may decrease further, we anticipate operating within a more efficient network, allowing us to better manage costs to counter any downturns.

Carol Tome, CEO

One reason we are so focused on complex healthcare is that it is resistant to economic downturns and is expected to grow. This sets us apart from simply delivering a sweater in a box. It involves intricate logistics and represents the future of our company. Therefore, we are committed to seeking out inorganic growth opportunities, such as acquisitions like the Andlauer announcement, as well as enhancing our core business to position UPS for the future.

Bruce Chan, Analyst

Great. Really helpful. Thank you.

Carol Tome, CEO

Thank you.

Operator, Operator

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

PJ Guido, Investor Relations Officer

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