UPS (United Parcel Service) Aktie

Good morning. My name is Matthew, and I'll be your facilitator today. I'd like to welcome everyone to the UPS Second Quarter 2026 Earnings Conference Call.

[Operator Instructions]

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

Good morning, and welcome to the UPS Second Quarter 2026 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 and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2025 Form 10-K and other reports we file with or furnished to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC.

Unless stated otherwise, our discussion refers to adjusted results. For the second quarter of 2026, GAAP results included after-tax transformation charges of $891 million or $1.05 per diluted share consisting primarily of employee separation costs associated with workforce reduction initiatives from our recently completed Driver Choice program. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website.

Following our prepared remarks, we will take questions from those joining us via the teleconference.

[Operator Instructions]

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

Thank you, PJ, and good morning. 18 months ago, we announced our Amazon glide down and network reconfiguration plan. Today, I'm pleased to say we executed that plan exactly as designed while continuing to deliver the industry-leading service that sets UPS apart. I want to thank our UPSers for their extraordinary work throughout this period. And I also want to thank our partners at Amazon for collaborating with us on what was truly a complex undertaking. Over that period, we executed a deliberate structural reset of our U.S. business.

Specifically, we eliminated approximately 2 million pieces per day of lower-quality Amazon volume. We reconfigured and further automated our U.S. network for higher return opportunities. And we removed approximately $4.5 billion of related expense with more to come as we finish out 2026. I'm incredibly proud of what we have [ uplift ].

But this reconfiguration was never the destination. It was the foundation. We now have a leaner, more automated, more agile network that will deliver operating leverage as volume grows. And importantly, incremental volume today carries materially better economics than before because of the structural changes we've made.

Our second quarter financial results demonstrate the successful execution of key initiatives and the strength of our underlying business. Consolidated revenue was $22.8 billion, an increase of 7.6% versus last year. Consolidated operating profit was $2.1 billion, an increase of 12% versus last year. And consolidated operating margin was 9.2%, a year-over-year increase of 40 basis points and up 300 basis points from the first quarter of this year. While fuel price volatility in the second quarter drove higher fuel revenue and corresponding fuel costs. Our fuel surcharge mechanisms functioned as designed, covering the increase in fuel expense.

All 3 segments contributed to our strong second quarter revenue performance and underscoring the strength of the quarter, U.S. Domestic delivered meaningful operating profit growth of over 20% versus last year. As part of our transformation, we continue to invest in RFID and artificial intelligence or AI. We view these technologies as the intersection of the physical and digital world, helping us gain efficiencies and will also win and retaining customers.

Think of RFID as the eyes and ears within our network and AI as the brain. RFID generates data from billions of package movements. Our AI transforms that data into decisions, predictions and actions. In fact, we believe RFID is the most significant package visibility advancement in a decade. We're using it to move from a scanning-based network to a sensing network, eliminating hundreds of millions of manual scans every year. We've completed deployment of RFID sensing technology across all of our U.S. delivery facilities and packaged cars. And now we're moving internationally. We're also enabling our customers with RFID label printers, and every package shipped at our 5,500 UPS stores is RFID-enabled.

These capabilities are generating rich real-time data about the packages in our network. Now pair that data with the AI-powered digital twin of our network, including [ almost ] facilities, vehicles, aircraft and package flow data. This strengthens our ability to dynamically adapt to changing conditions like weather delays or volume forecast. Our AI is constantly tracking network performance, so it can optimize planning, routing and execution in near real time. The result is an integrated network that is even more efficient and reliable with enhanced end-to-end visibility and an unmatched premium experience for our customers.

As we move ahead, the next phase of our strategy is straightforward. We're fully focused on capturing premium volume, like from SMB, health care and B2B customers with a clear emphasis on revenue quality and margin expansion. [indiscernible] quarter was broad-based across nearly all industry sectors, delivering SMB average daily volume growth of 4.3%. The SMBs continue to value the reliability of our integrated network and the capabilities we provide, including end-to-end visibility solutions, our digital access program, or DAP, our UPS stores, and box free label-free returns.

Speaking of DAP, it is not just for B2C e-commerce shippers. B2B e-commerce shippers also value the convenience and customer experience our DAP platform delivers. In fact, in the second quarter, we saw B2B DAP average daily volume increased 34% year-over-year. And in the second quarter, we generated $1.4 billion in global DAP revenue marking the third quarter in a row of delivering GAAP revenue of over $1 billion.

Moving to health care. In the second quarter, we generated over $3 billion in health care revenue, achieving that milestone for the second consecutive quarter. We're already the #1 provider of complex health care logistics solutions in the world. And we're not stopping there. Demand for cold chain logistics is accelerating and to further strengthen our global cold chain capabilities, we have added [ 27 ] temperature-controlled, cross-dock facilities to our network. These facilities are designed specifically for fast, precise transfers of complex health care products between air and ground services while maintaining strict temperature control. We are the only carrier that provides end-to-end solutions for complex health care with our own assets, ensuring complete control, visibility and best-in-class service.

Looking at our industrial and automotive customers, they continue to operate in a complex environment shaped by shifting trade patterns, evolving regulations and ongoing supply chain disruption. We're helping them navigate these complexities by combining the strength of our integrated network and RFID-enabled visibility with additional new capabilities. Here, we're expanding North American air freight services between the U.S. and Mexico, and we've launched a dedicated team of over 300 specialists with deep expertise in the supply chain needs of automotive and industrial manufacturing customers.

These enhancements allow us to bring customers the right solutions, whether it's for a time-critical part, a cross-border shipment or to assist when they are making a broader supply chain shift.

The second quarter marks the fourth straight quarter of delivering results that exceeded our expectations. Going forward, our #1 priority remains moving the right packages and the right mix of volume through our network. This is as true for the U.S. as it is for the rest of our businesses. I'm pleased with the growth we've seen in our forwarding business as they have been focused on driving premium volume. And outside the U.S., our team has done a magnificent job of managing through trade lane ships. As trade policy changes and volume and trade moves, UPS has been there to support. Encouragingly, we are seeing momentum on the China to U.S. lane which returned to year-over-year growth beginning in May.

As we enter the second half of the year, we've got momentum. Even in the face of external factors that could influence our results like war and fuel price volatility. Based on our year-to-date results, today, we are raising our full year 2026 consolidated revenue outlook to approximately $91.2 billion. We are raising our consolidated operating profit expectation to approximately $8.65 billion and lifting our diluted earnings per share guidance to approximately $7.22. Brian will provide more details in a moment.

With the foundational groundwork now in place, we are excited about the opportunities that lie ahead. So with that, thank you for listening. And now I'll turn the call over to Brian.

Thank you, Carol, and good morning, everyone. This morning, I'll cover our second quarter results, then I'll give an update on our Amazon glide down and network reconfiguration efforts, Finally, I'll wrap up with our financial outlook for the remainder of 2026.

Turning to our results. Our performance in the second quarter reflected excellent execution across our businesses. Especially in U.S. domestic, where we completed our Amazon glide down and related network reconfiguration efforts as planned. Further, and as Carol mentioned, our results reflected fuel price volatility during the second quarter, stemming from the conflict in the Middle East, which drove an outsized increase in both revenue and expense relative to our expectations.

While higher fuel prices were positive to revenue, the corresponding increase in expense meant that the net impact to consolidated operating profit dollars was modest. In the second quarter, consolidated revenue was $22.8 billion, and operating profit was $2.1 billion. Consolidated operating margin was 9.2% and diluted earnings per share were $1.76.

Moving to our segment performance. In the U.S., we continued our focus on revenue quality and growth in the premium parts of the market as we concluded our Amazon glide down in the second quarter. For the quarter, Total U.S. average daily volume was down 3.3% versus the second quarter of last year. Total air average daily volume was down 2.3% year-over-year. Excluding Amazon, total Air ADV increased 1.2% year-over-year, driven by F&B and health care customers. Ground average daily volume was down 3.5% compared to the second quarter of 2025 with most of the decline attributable to our planned Amazon glide down.

Notably, when adjusting for Amazon and actions taken on other lower yielding volume, average daily volume grew year-over-year in the second quarter, underscoring the improvements we're making through the execution of our strategy. That improvement was also reflected in our customer mix. SMB average daily volume increased 4.3% year-over-year with growth from nearly all industries, led by high-tech and health care.

In the second quarter, SMBs made up 34.5% of total U.S. volume, an increase of 250 basis points compared to the second quarter of last year. And looking at B2B, while average daily volume was down 3.2% year-over-year, the rate of decline was 190 basis points better compared to the first quarter with bright spots in the high-tech and automotive sectors. In the second quarter, B2B represented 43.8% of our total U.S. volume.

Moving to revenue. In the second quarter, U.S. domestic generated $14.9 billion, an increase of 6% year-over-year, with both SMB and enterprise customers contributing to the increase. Growth in revenue per piece was strong and increased 9.3% compared to the second quarter of last year. More than half of the growth in revenue per piece was driven by healthy base rates and customer mix improvement, with fuel contributing the remainder of the increase.

Turning to costs. In the second quarter, total expense in U.S. domestic increased 4.9%, with more than half of the increase coming from fuel and purchase transportation. Strong base rate growth and increased productivity in our reconfigured network contributed to revenue per piece growing 130 basis points faster than the cost per piece growth rate, demonstrating the operating leverage we expected from our network reconfiguration. The U.S. Domestic segment delivered $1.2 billion in operating profit, a 21% increase year-over-year and more than double the operating profit delivered in the first quarter of this year. Operating margin was 8%, which was an increase of 100 basis points compared to the second quarter of last year and a 400 basis point increase from the first quarter of this year.

Moving to our International segment. In the second quarter, we delivered strong top line growth with all regions generating year-over-year expansion, driven by strong revenue quality. In the second quarter, total international average daily volume declined 5.8%, led by domestic declines in Europe. On the export side, average daily volume in the second quarter decreased 4.2% year-over-year. However, and importantly, we returned to volume growth on the China-U.S. trade lane as we lap the elimination of de minimis exemption for Chinese imports in May. Additionally, Asia to Asia export volume increased 13.6% compared to last year, enabled by our recent investments in the region.

Turning to revenue. We saw an improvement in geographic mix during the second quarter as trade lanes began to rebalance, particularly in Asia. As a result, International generated $5 billion in revenue, an increase of 12.5% year-over-year. Revenue growth was driven by an 18.9% year-over-year increase in revenue per piece with a little more than half coming from fuel. Operating profit in the International segment was $623 million, down $59 million year-over-year. International operating margin in the second quarter was 12.4%, which includes a 120 basis point year-over-year negative impact from fuel.

Looking at Supply Chain Solutions. For the second quarter in a row, Supply Chain Solutions delivered strong operating profit growth year-over-year driven by improvements across multiple business units. In the second quarter, revenue was $2.9 billion, an increase of $207 million versus last year. Forwarding increased revenue 8.1% year-over-year, driven by higher rates in international airfreight. Logistics revenue increased 4.3% year-over-year, driven by strong growth in health care logistics, partially offset by our Mail Innovations business.

And UPS Digital, which includes Roadie and Happy Returns, delivered revenue growth of over 30% compared to the second quarter of 2025. In the second quarter, Supply Chain Solutions generated operating profit of $291 million, an increase of $79 million year-over-year. Operating margin was 10.2%, up 220 basis points compared to last year and the third quarter in a row of year-over-year operating margin expansion.

Lastly, looking at cash and liquidity. Year-to-date, we generated $3.1 billion in cash from operations and free cash flow of $1.6 billion, which includes the onetime payments made in the second quarter for the Driver Choice program. We ended the second quarter with $4.7 billion in cash on the balance sheet and no outstanding commercial paper. And so far this year, UPS has paid $2.7 billion in dividends.

Now before moving to our outlook, let me share the progress we made in the first half of the year from our Amazon glide down and related network reconfiguration efforts. Starting with variable costs. Total operational hours moved down with volume in the first half of the year. Looking at semi variable costs, we finished down nearly 30,000 operational positions compared to the first half of last year. This includes reductions from our Driver Choice program with approximately 80% of participants departing the company in the second quarter. And our fixed cost bucket, we closed 45 buildings in the first half of the year. with several additional closures planned in the back half of the year.

Our engineering and operations teams executed the Amazon glide down exceptionally well, and we're pleased to have successfully completed this part of our strategy. We are seeing significant value from these efforts as well as from our broader network reconfiguration and efficiency reimagined initiatives. As a result, we still expect to deliver approximately $3 billion in related benefits in 2026.

Moving to our 2026 financial outlook. As we discussed, we entered the year expecting a clear distinction between the first and second half. Given our strong first half results, which exceeded our expectations, we are increasing our full year 2026 outlook. We now expect consolidated revenue of approximately $91.2 billion. and consolidated operating profit of approximately $8.65 billion. This implies full year diluted earnings per share of approximately $7.22. As a reminder, third quarter 2025 diluted earnings per share included a $0.30 benefit from sale-leaseback transactions.

Now let me add some color on the segments. Starting with domestic, we expect full year 2026 revenue of approximately $60 billion, up 1% year-over-year and an operating margin of approximately 7.5%. Looking at the third quarter, we expect average daily volume to decline mid-single digits, reflecting a seasonal decline as well as the impact of this year's Amazon glide down, which completed in June. We expect revenue to be approximately flat year-over-year and a third quarter operating margin of approximately [ 7% ]. Lastly, in the back half of the year, we expect the U.S. domestic operating margin of approximately 8.8%. And reflecting year-over-year margin expansion in both the third and fourth quarters.

Turning to the International segment. And starting with the full year, we anticipate revenue growth in the mid-single digits year-over-year, driven by strong revenue per piece growth. Operating margin in the International segment is expected to be in the mid-teens. We expect a similar performance in the third quarter with revenue up mid-single digits, driven by strong revenue per piece. And we expect the operating margin to be between 13% and 14%.

Lastly, in Supply Chain Solutions, we expect full year 2026 revenue growth in the high single digits, driven by growth in forwarding and health care logistics. We expect full year operating margin to be between 10% and 11%. In the third quarter, we expect Supply Chain Solutions revenue growth in the low double digits year-over-year. and operating margin between 10% and 11%.

Turning to our expectations for cash in the balance sheet. For the full year 2026, capital expenditures are still expected to be about $3 billion, and we plan to complete our pension contribution of $1.3 billion. We expect free cash flow to be approximately $5.5 billion, which includes the payments for the Driver Choice program I mentioned earlier. Lastly, we are still planning to pay out around $5.4 billion in dividends in 2026 and subject to Board approval. The successful completion of the Amazon glide down and related network reconfiguration marks an important inflection point for UPS. Setting us up to deliver consolidated revenue and operating profit growth and expand operating margin.

As we move into the next chapter of growth, our focus is on growing premium, high-quality volume around the world, leveraging the full strength of our portfolio solutions. With the power of our integrated global network, enabling us, we are well positioned to deliver sustainable profitable growth and create long-term shareowner value.

With that, operator, please open the lines for questions.

[Operator Instructions]

Your first question is coming from Jordan Alliger from Goldman Sachs.

With the Amazon drawdown done, you've given some good color for the third quarter and for the full year 2026. Just sort of curious, can you maybe go into a little bit more on your confidence level around the structural change on domestic margin? And what that could mean from a longer-term domestic margin perspective? Is there a bogey you'd like to see over the next couple of years?

Well, let's start, Jordan. Thank you very much for the question. Let's just start with automation in our U.S. business. By the end of the second quarter, [ 68.5 ] of the volume in our U.S. business was flowing through an automated building compared to 64% 1 year ago. We know that the cost per piece in the automated building is about 28% lower than nonautomated building. So that gives us confidence in the productivity that we should continue to deliver going forward.

Brian, maybe you want to talk about the algorithm.

I will. And I think, Carol, in addition to the automation you mentioned, I think it's important that we recognize that we've also brought down the capacity as we've been declining the Amazon volume. So if you go and you look at where we started at the beginning of 2024, Carol mentioned, we've removed 2 million pieces a day of lower-yielding volume from the network. We've also -- we will have eliminated 50 million hours through the course of last year and this year, nearly 78,000 operational [ positions ] that were associated with that volume, and we'll close nearly 150 building. That brings down the structural cost of the network that you're starting to see show up in the margin and gives us a lot of confidence that we can pull that through in the second half.

So as you think about -- as we go forward, look, we continue to see really strong pricing in our U.S. business. And we think about base pricing in this kind of 250 to 350 basis points range, which is about where we are this quarter. And we also see cost per piece coming down as we rightsize the network with the new structural target. So Jordan, I think the way to think about it is about 50 basis -- 50 to 100 basis point spread between RPP and CPP will help us drive margin accretion in our U.S. business as we go forward. We do have by leaning in to premium segments of the market to maintain that base pricing and RPP benefit and leveraging a now more efficient network in the U.S. to drive operating leverage.

Your next question is coming from Scott Group from Wolfe Research.

So it seems like domestic margin improvement moderates a little bit in Q3, then reaccelerates again in Q4. Maybe just give a little more color to sort of talk about that? And then, Carol, just bigger picture, in your opening comments, you talked about gaining going after SMB and B2B share. I think FedEx would probably say the same thing in terms of what they're trying to do. So how do you see the share dynamic, the competitive dynamic evolving if that's what both of us are not going to do.

Sure. So first, Scott, if you think about the sequentials between Q2 to Q3, it's really normal seasonality, right? So we're still in that point -- 50 to 100 basis point RPP to CPP spread. It is consistent with where we set out at the beginning of the year. And look, if you take a step back and think about our original guide, we had anticipated an earnings decline in the first half and an earnings increase in the second half when you normalize for the sale-leaseback transactions in the third quarter of last year, now in mid-teens EPS growth in both the third quarter and the fourth quarter.

So it was a robust guide to begin with. The first half performance gives us a lot of confidence that we can hit that and domestic is just going to perform under normal seasonality as we go into Q3 and Q4.

As it relates to how we're going to gain share, our focus on growing our company is to retain the customers we have and then bring new customers into our network by differentiating with new enabling capabilities. And those capabilities include things like, well, owning the end-to-end solution for health care customers. We are the only carrier that owns our assets along that health care, that complex health care supply chain. That gives us control and visibility and separates us from the competition. But it's not just in complex health care logistics, which by the way is pretty growthy for us. It's another areas too.

So if you think about RFID and the initiatives that we launched now a few years ago, Scott, it's really starting to take traction. We now have RFID-enabled capabilities at the customer location. In other words, the point of origin covering, over 2.2 million feet per day. And let me tell you what that means for the customer. I'm going to give you a story to make it real for you.

We recently converted a high-end jeweler from a competitor into our network because of RFID as a labeling -- as the origin. Why? Because at the previous carrier's location, they had to have security guards watch every scan occur. The packages were really being loaded on to the package carrier vehicle. At our location, don't need security guards any longer, and we have visibility from the point of origin to the point of destination. That allowed us to win that high-end jeweler.

These enabling capabilities are differentiating. They're sticky. Where we have RFID at the point of origin, we have seen no churn. That's a really powerful way to grow, but it doesn't stop with RFID. It also is our returns approach. Leveraging our 5,500 UPS store, our Box list label return capability with Happy Returns, which, as we said in our prepared remarks, we've seen rate growth. Our focus on B2B and defined in plans for that customer and more. So these enabling capabilities are differentiating and will allow us to grow.

Your next question is coming from Tom Wadewitz from UBS.

Yes. So I wanted to ask Brian, if you could offer some thoughts on cost per piece trend in second half in 2027. So you've had strong execution on resizing the network. Just want to get your sense on kind of how you think that plays out.

And then how should we think about mix as a factor when we look at, let's say, 2027? You kind of talk about 250 to 300 basis points of price. Is that -- do you put a point or 2 of mix on top of that, just given your focus on the kind of premium verticals and packages, SMB that are probably generating higher revenue per piece.

Yes. Thanks, Tom, for the question. So first, let me hit -- I think what's really important is to think about the RPP, CPP spread. So let me talk a little bit about that as we transition from the first half to the second half because we will be -- as we go from first half to second half, we are wrapping some pretty material changes that we made in pricing last year. So we're actually going to see both numbers come down a little bit, right? So we were at 9.3% in second quarter for RPP in the U.S., about half of that was fuel and about half of it was base pricing and mix. That will come down closer to 4% -- 4% to 4.5% as we wrap some of those impacts from last year. On a 2-year stack, it still shows really strong pricing.

The same dynamic happens in CPP, right? So as we brought down the cost of the network, we expect CPP to come down as well. So we'll maintain that kind of 50 to 100 basis point spread. As we roll forward, like we said, look, that unit cost differential to drive operating leverage is our focus as we go into 2027. We will still continue to have an impact of Amazon as we wrap into the first half of 2027 and comp that volume out. But we do expect some product mix benefit, as you say. So yes, the base pricing plus 50 to 100 basis points of product mix is a reasonable expectation as we go forward. And we'll really be focusing on maintaining that unit cost spread to drive operating leverage.

Your next question is coming from Chris Wetherbee from Wells Fargo.

In the last quarter, you gave the Amazon revenue. I know it wasn't a year-end number. But I was wondering if you could maybe offer that considering we're kind of at the end of the glide down. And then maybe zooming out a little bit sort of with what you have left of that of your portfolio. How do we think about the growth profile of that versus maybe the rest of the opportunity for top line growth for you as you think out beyond '26, maybe '27, '28.

Look, as Amazon is and will continue to be an important customer to UPS as a percent of our total revenue, Amazon made up 9%. And that's down about 100 basis points from a year ago and certainly down from the which was over 13% during the COVID year. As we think about going forward, it's all about optimizing the volume that comes into our network, and we are working together as partners to make that happen.

Your next question is coming from Ken Hoexter from Bank of America.

And Carol, just to maybe follow up on that a little bit. Just what do you think -- or Brian, I guess, what are the thoughts on ground growth underlying now, now that you're into the program? Do you reassess with Amazon on your future in terms of where you stand now in that 9%? And if international is normalizing now with Asia volume, should we see the margins return to upper teens, mid-teens -- where do you think international pans out as well?

Well, as I mentioned, Ken, we're going to optimize the volume with Amazon, and that will be across the various modes that we serve them today. From a margin perspective outside the United States, we're very encouraged by what we're -- the trends that we're seeing aren't we, Brian?

That's right. When you look at -- we do start to see momentum in some really important trade lanes in international. And that momentum is going to carry through as we get into the back half. Look, we're seeing volume recover as trade lanes settle Also, in the back half of this year, we have the wrap of the elimination of global de minimis in September that drives a pretty big year-over-year comp benefit.

I would also say, look, our international business is going to perform a little bit better than seasonality because of the volume momentum we have going into the fourth quarter, especially with surge fees and fees that we typically see in the market. So we're positive there. And I would say, just to add to Carol's point on the U.S., Ken, we're going to see volume growth ex Amazon in the back half of this year across all segments, right? So we talked about SMB, but we will see volume growth in the back half of this year.

Your next question is coming from David Vernon from Bernstein.

So Carol, I wanted to ask you about the competition issues around Amazon, we continue to hear both for investors and some of the conversations in the industry about Amazon being a little bit more aggressive from an enterprise shipping perspective and wanting to kind of go after directly some of your customers. I'm just wondering if you guys are seeing that in the day-to-day. And then more broadly, as you think about dealing with that potential inevitability or occurrence if it's going to happen. How do you think of responding to that?

Well, well, David, we look at the competitive landscape broadly because candidly, there are a lot of competitors out there. And we look at the offerings that all competitors are presenting to customers and then focusing on how we are differentiating the offer that we provide. And those points of differentiation, which I mentioned earlier include our cold chain logistics capabilities, our reverse logistics capabilities, our RFID labeling capabilities and that visibility end-to-end, of course, time-definite delivery and special operating plans. So we create relationships and partnerships with our customers to ensure that we are meeting them where we want -- they want us to be. That's a point -- important point of differentiation -- it's also about relationship building.

We have over 300 high-impact executives who have relationships with our customers. Relationships at the CEO level and at the CFO level. It's not no longer just at the chief procurement officer level or the Chief Supply Chain Officer level. And these relationships create an element of trust, and trust matters as competition comes knocking on the door -- because it does. So when competition comes knocking on the door, we're there to meet that competition with our enabling capabilities. I am not aware of any volume that we've lost to that competitor that you mentioned. But we're going to stay focused on this leaning into what we're best at. By the way, did I mentioned service? I should have. We continue to lead the pack in terms of on-time delivery, best-in-class.

Your next question is coming from Jonathan Chappell from Evercore ISI.

Brian, you've obviously done a lot of heavy lifting, getting the costs aligned with the Amazon glide down. If you look to the demand environment today relative to where it was 18 months ago, obviously, a ton has changed with tariffs and de minimis and fuel and more, et cetera. How do you feel about the capacity on the go forward? Do you think that you're in a situation where you're rightsized on the 2H '26, '27 kind of demand outlook? Or is there more domain or even growth that needs to be done on the capacity side, just given the ebbs and flows of demand over the last 18 months?

Thanks, Jonathan, for the question. And first, I'd be remiss if I didn't say there are 1,000 UPSers that delivered those benefits. So it wasn't just myself or the executive team. We've got a lot of people who have worked really hard to get the network to where it is. And I do think that with your question, the capacity is in a really good place, right? I mentioned some of the stats of the Amazon drawdown. This is what we've been targeting. We've been targeting trying to get to an optimal capacity for the delivery volume that we anticipate having in the U.S. So that's kind of step one check we've gotten there.

Now the second piece, as Carol mentioned, the automation that we put in now gives us more flexibility to scale that capacity, right? The automated hubs give us the ability to add throughput much faster than what we used to have to do with conventional hubs and our network is getting much smarter about how we can scale down not just from month-to-month or peak to nonpeak, but even day to day and week to week. So we feel really good about that. And we think that it aligns really well with the demand environment and what we think we'll see a peak seasons now that we've got a much more manageable peak with a more stable set of customers.

I feel very good about the capacity just to put the automation percentage into perspective because what is [ 68 ] mean? It's the equivalent year-on-year of 337 million more packages going through automation than we had a year ago. That creates a tremendous amount of capacity to pull more volume through. And we're ready for it. We're ready for it. And as you heard, if you ignore Amazon and the volume that we intentionally made available to the market, we actually grew our volume in the second quarter.

Your next question is coming from Ari Rosa from Citigroup.

Carol and Brian, maybe the automation piece is actually a good thing to continue on. I wanted to ask about something a little bit further out. It seems to me next year, people are going to start talking about the team source contract renegotiation. You've obviously done a lot of work to drive efficiency. Thinking about the last Teamsters contract. Obviously, that was the start of a number of problems that obviously resulted in having to drive efficiency and other things. How do investors get comfortable that we're not going to have similar challenges? And how are you thinking about approaching that negotiation?

I know it's still a ways out, but just talk to us about how you're thinking about that and kind of the relationship with the teams at this point. Such that investors can get comfortable with that risk?

Well, you're right, the contract renewal is 2 years out. We are today renewing contracts with our customers that go long past 2028. So it's the relationship that we formed with our customers, the trust that we've built with our customers, the confidence in our ability to manage through contract negotiations that are a long ways out gives us the ability to continue to drive our business. And that's what we're focused on is continuing to drive our business.

Your next question is coming from Brian Ossenbeck from JPMorgan.

Maybe 2 quick follow-ups for Brian here. Just thinking about the 2Q to 3Q bridge for U.S. domestic. I was thinking maybe it might be a little bit better than seasonal, and you got the driver of choice. Most of that was done in 2Q. The USPS SmartPost transition, the network reconfiguration, MD-11 leases. So just want to see why we wouldn't see more of a pickup into 3Q and all those things are fully baked in. And if you can provide a little bit of color in terms of -- it sounds like the international margins may be impacted a bit by fuel, which to me, it sounded like the only margin impact from fuel this quarter across the segment. So I just wanted to clarify that as well.

Yes, yes. So let me address your second point first. So if you think about fuel on a consolidated basis, we saw fuel surcharge revenue increase. We also saw expense increase. So it really had a minimal impact on profit. I would say in the U.S., we were able to overcome that and still get to the 8% margin. On the international side, it's more impacted by fuel because you more air volume, you got longer fly distances, it's a bigger proportion of the total cost base. And so while we got there on total profit dollars, you have more revenue. So you see a margin impact.

I would also say, look, we also had to add some block hours associated with the Middle East war, right? There's some cost to redirect the network some lease aircraft costs because of -- we can't fly into the region, things like that. So that kind of explains the international piece.

When we think about the second quarter to third quarter bridge, well, we laid out our initial guide at the beginning of the year. Adjusted for the sale leaseback, it's going to be a mid-teens EPS growth. I would say the first half of the year performance, gives us a lot of confidence in the momentum that we're seeing that's going to help us deliver the second half of the year, and we want to make sure that we hit the numbers that we laid out. So I think it's pretty close to normal seasonality, and we feel really confident in our ability to deliver.

Think the spread narrows a bit between RPP and CPP because there were some pricing actions that we took a year ago in the third quarter. That are repeating. So there's a little bit of a year-over-year comp, but we're very excited that we're going to be expanding margin in both Q3 and Q4 in our domestic business.

Your next question is coming from Brandon Oglenski from Barclays.

Maybe we can talk a little bit about international volume trends. Because it does look like your domestic business has been down quite a bit. Was there any sort of like focused reorienting of the business there? Or is this just a follow-through on tariffs. And I guess you guys talked about volume trends moving positive in Asia. So how does the current tariff situation play into that outlook?

So if you look at our international volume, first on the export side, as Brian mentioned and I mentioned in my prepared remarks, we saw a return to volume growth in the China, U.S. trade lane, which is great as well as Asia-to-Asia trade lanes, which is wonderful because we've made investments there. We have seen, though, tariffs impact volume in certain areas. Tariffs have certainly impacted volume Canada to the United States, and that's actually our largest partner. So we are just working through the tariff noise, if you will.

And then because of the disruption in the Middle East, we've seen some volume declines in Europe exports as well. Some of that's tariff, but mostly because of the disruption in the Middle East. Domestically, we have been working on this same pivot as we have in the United States to lean into revenue quality. And we're really pleased with that because it's going to position us for good things to come.

Your next question is coming from Bascome Majors from Stephens.

Brian, I don't want to beat a dead horse on seasonality. But even if we add back the $350 million in onetime costs that you talked about in the first quarter, it still looks like the consolidated operating profit in the second half versus first half is a bit more than you've done in recent years. Could you just broad strokes high level kind of [indiscernible] to what we're missing on the cost side or the revenue side that gets you comfortable with that maybe slightly more than typical momentum there?

Yes. So Bascome, if you look across the segments, Domestic and SES are kind of following oral seasonality. Where you're seeing the improvement is in the international business. And it's really about the 2 things. This momentum that we talked about right, that we see volume performing well in Asia, right, and we see that carrying through. And then remember, we're wrapping the elimination of the global de minimis exemption in September that shows a big year-over-year improvement as we get into the fourth quarter as well as our normal kind of seasonal uplift.

So domestic and SES will be kind of normal. International, you're going to see steady improvement as we go through the back half that makes it look a little bit better in total.

Your next question is coming from Bruce Chan from Stifel.

Just going back to some of the competitive dynamics here. We understand that FedEx is spinning up a similar program to DAP. I just wanted to get your comments on what kind of threat that poses and how you think that influences your GAAP growth outlook?

We keep adding new DAP partners to our program. It's been in place now over 6 years. We've had 2 quarters in a row of over $1 billion of growth on the platform. We've got strong relationships there. We feel very good about our offering. We've got a simple API that can help us to get stand up a platform in less than a day. So we always look at the competition. I don't mean to put any competition, but I feel very good about where we are and the strong relationships that we have with the various e-commerce platforms that are using our program.

Thank you. Your next question is coming from Ravi Shanker from Morgan Stanley.

Just a couple here. Brian, can you confirm that whether you had any real estate gains in 2Q and either run rate for the rest of the year.

And Carol, can you follow up to your response on Amazon. Just to confirm the messaging there, are you saying that they're going after volumes that you guys don't necessarily want? Or are you saying there's enough room for everybody to grow in this industry?

Ravi, thanks for the question. On the real estate gain, so we didn't have anything that was out of ordinary course in the quarter. Look, as part of the Amazon drawdown plan, right, that we included in our guide that we've been executing over the last couple of years, there's buy and sale of real estate.

There's also the offset of asset write-offs, accelerated depreciation, elopidations. And so we had kind of planned all those in our guide and they kind of wash -- the only material transaction, and that we were very clear about calling out were the sale-leaseback transactions that we did in the third quarter last year.

On the competitive question, I expect you should take your question to Amazon to ask on what volume they're going after. But if we do a side-by-side comparison, where they have strengths would be on lightweight short zone, urban. Where we have strength is every other place. We're going to lean into the parts of the market that we want to grow with enabling capabilities that we will do better than anybody else.

Your next question is coming from Jeff Kauffman from Citizens Bank.

Congratulations on getting past some of these big drains on the system. I want to take a longer-term view, Carol, with some of the capacity changes you've made. I know we're spending about $3 billion right now, and that's been the case for the last year too. But if I go back time, spend in the $4.5 billion to $5 billion range has kind of been more normal for the business. If we look out 3 to 5 years, where do you think capital spend should settle? And with the new structure in your organization? Is that going to be permanently $1 billion less than we're used to? Or are we going to have to get up to that $4.5 billion to $5 billion range at some point in time.

So remember, we were spending those dollars to build out a network. That now we have. So we are optimizing the network that we have. From a run rate, Brian...

About 3.5% of revenue, Jeff, I think it's about the right level to think about.

So as revenue grows, our capital dollars will increase, but that 3.5% is a good number [indiscernible] for you.

And that is a little structurally lower than it has been in the past. So whether it says [indiscernible] or not Yes.

It is. But I remember, we built out a network. We built out a global network. But where we have opportunities, trust us, we'll be investing in those. For example, we just announced that we opened up 27 cold chain cross-stock facilities that cements our leadership position around the world for complex health care logistics.

We just announced that we invested $50 million and North American air freight to support automotive and industrial customers and their growth and some of the challenges that they're facing with given today's supply chain. We can help them. So where we see opportunities to invest for growth, we will.

Your next question is coming from Stephanie Moore from Jefferies.

I wanted to touch on peak season, maybe how peak season is shaping up so far this year, we're also seeing pretty active import activity. So I would love to get your thoughts on how it's trending since maybe prior years.

Steph, it's a little bit early. We're just starting to get peak season forecast from our customers. But as we build our financial plan that supports the guidance that we just gave, we expect the volume sequentially in the United States to lift about 24% from Q3 to Q4, much like it did last year.

And I would just add, Carol, I think what we see from a pricing environment standpoint is that the pricing remains rational and we think that we'll be able to price accordingly for the demand as well.

As you know, the carriers tend to issue a holiday demand surcharge [indiscernible]. And so that certainly supports the guidance that we've given.

And Matthew, we have time for one more question.

Certainly. Our final question comes from the line of Jason Seidl from TD Cowen.

This is Elliot Alper on for Jason. Just within Healthcare Logistics, you discussed the investment in cross-dock facilities to further build out that business. Can you talk about the new capabilities, some of these type controlled cross-docks offer to customers that maybe you could do before? And maybe how these investments are impacting your health care growth pipeline?

Well, I'd be happy to be a story because I think this showcases the power of our network. We work with the manufacturer of vaccines who manufacture those vaccines in [indiscernible]. Where the supply chain works is that when the vaccine is ready for pickup, we will pick up vaccine in a refrigerated truck and carry it to our cold chain cross-dock facility, at which that vaccine will be prepared for shipment. We then put that vaccine on a refrigerated truck and truck it over to our main European air hub in Cologne, Germany. We put the vaccine on our brown [indiscernible] and we fly it to our main air hub in Louisville, Kentucky, which we call [indiscernible].

That vaccine is then put on a refrigerated truck and trucked over to our cold chain warehousing in Shepherdsville, Kentucky. We do that in less than 24 outlets. We own every asset that, that vaccine travels against. We have complete visibility of that vaccine because of our RFID labeling. Oh, by the way, which also means temperature control so we make sure there's no excursion. This allows us then the capability that we can take to our health care logistics companies and meet them where they need us to be.

Now with that, Kate, would you like to add anything?

Yes, absolutely. I mean it is a differentiated solution. All of those pallets of betting that Carol talked about are riding on our assets, right? That is a big differentiation. We're not doing handoffs with other carriers that lead to excursions or failure or impact of life. Right now, the cold chain new investment, growing double digits. -- and revenue per kilo is as well. So really great strength. Our customers are recognizing it.

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

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

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.

[Operator Instructions]

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

Good morning, and welcome to the UPS First Quarter 2026 Earnings Call. Joining me today are Carol 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 2025 Form 10-K and other reports we file with or furnished to the Securities and Exchange Commission.

These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results. For the first quarter of 2026, GAAP results include after-tax transformation charges of $42 million or $0.05 per diluted share. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference.

[Operator Instructions]

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

Thank you, PJ, and good morning. Let me start by saying how incredibly proud I am of UPSers around the world. This past quarter brought significant external challenges from volatile global markets to rising fuel costs. Even so, our team stayed focused, pushed our transformation forward, and upheld the exceptional service our customers rely on. The first quarter of 2026 marked a critical transition period for our company, one in which we needed to flawlessly execute several major strategic actions, and we delivered.

First, we further reduced nonnutritive Amazon volume by an average of 500,000 pieces per day and closed 23 additional buildings. Second, under our new agreement, we shifted a portion of our Ground Saver volume back to the USPS for last mile delivery. Third, we launched a voluntary driver buyout program we called Driver Choice, through which we will reduce roughly 7,500 full-time driver positions. Interest in the program was extremely strong and ultimately exceeded our expectations. Based on these actions and more, we are firmly on track to achieve our $3 billion cost-out target for the year. Further, we began scaling back leased aircraft as we retired our MD11 fleet and took delivery of new 767s, and we continue to capitalize on trade lane ships resulting from last year's trade policy changes. It's a dynamic environment. But even against that backdrop, our underlying business performed exceptionally well.

In the first quarter, consolidated revenue reached $21.2 billion, with consolidated operating profit of $1.3 billion and an operating margin of 6.2%. Across our segments, performance was strong. In the U.S., revenue quality remained high with revenue per piece up 6.5% compared to the same period last year. Our international business delivered solid top line momentum, growing revenue by $167 million or 3.8% year-over-year and our Supply Chain Solutions businesses more than doubled operating profit versus last year. Our results were considerably better than our financial plan and targets. But it's worthwhile calling out that while we planned for it, our first quarter performance deviated from seasonal norms due to certain cost pressures that Brian will detail. These pressures are largely behind us. We expect to return to consolidated revenue and operating profit growth and expand operating margin in the second quarter of this year.

Last year, we launched the most extensive U.S. network reconfiguration in our company history by targeting a 50% reduction in the volume we deliver for Amazon by June of 2026. With roughly 2 months to go, we are comfortably in the home stretch of this initiative. Our actions are moving us toward a more profitable U.S. small package business with the back half of 2026 expected to be the inflection point. With that as context, let me outline our priorities and how we intend to deliver revenue growth and margin improvement going forward. Our #1 priority is to move the right packages and the right mix of volume through our network. The market has changed, and we're adapting to it. We're overturning the old industry assumption that scale alone drives profitability. Instead, we're focused on premium segments like SMB, B2B and complex health care. Our strategy is working. We're seeing favorable mix improvements with SMB and B2B volume, representing a larger share of total U.S. volume and premium customer wins are driving meaningful revenue per piece growth. How are we winning? We're winning through innovative and differentiated capabilities like RFID labeling at customer locations, end-to-end cold chain solutions, RoTE for same-day and big and bulky deliveries, happy returns for boxless labelless returns and much more. And that's only a part of our growth story because we're also doing a better job of retaining and growing our existing customers.

In the U.S., we saw a meaningful reduction in churn through the first quarter. Our customer-first strategy focuses on what matters most and that speed, ease and reliability. And while we're discussing capabilities, let me say like that, our digital access program. DAP gives us access to over 8 million SMBs and in the first quarter, we generated $1.2 billion in global DAP revenue, marking the second quarter in a row of delivering GAAP revenue over $1 billion. As we drive revenue growth, we'll also drive profit growth with margin improvement coming from higher productivity. We already run the industry's most efficient integrated network and with expanded automation and robotic deployments, we will make the network even more productive and adaptable. That added agility will create the strategic capacity we need to fuel premium volume growth over the long term. Growing premium volume is not just a U.S. strategy. It's a global strategy.

In International, we're speeding up our ground network in Europe to win premium commercial volume. And in Asia, we recently opened a major expansion of our Incheon airport hub in South Korea. And in Taiwan, we opened our largest and most advanced logistics center in the region. We're speeding up our services across Asia Pacific as well as to, and from Europe further enabling global supply chains, particularly in the manufacturing, high tech and health care sectors, all premium sectors. Speaking of health care, it remains a top priority growth engine for UPS. We built a world-class, end-to-end logistics network to handle the most complex time- and temperature-sensitive health care products. And these capabilities are enabling us to win. In fact, our global health care portfolio has gained market share every year since 2021. And in the first quarter of this year, we generated our first $3 billion health care revenue quarter ever, with all 3 of our segments delivering year-over-year revenue growth.

As I wrap up, we've now had 3 quarters in a row of performance exceeding our expectations. As we look to the balance of the year, there are a few external factors that we are watching that could impact demand especially higher fuel costs stemming from the conflict in the Middle East and U.S. consumer confidence, which is at historic lows. But these external pressures won't deter us. As we reach the finish line on our Amazon glide down and complete our network reconfiguration, costs will continue to come out. Premium volume will continue to strengthen and we will return to revenue and profit growth with higher operating margins and stronger returns on invested capital. Today, we are reaffirming 2026 consolidated financial goals. For the year, we expect to generate consolidated revenue of approximately $89.7 billion, and a consolidated operating margin of approximately 9.6%.

So with that, thank you for listening. And now I'll turn the call over to Brian.

Thank you, Carol, and good morning, everyone. This morning, I'll cover our first quarter results. Then I'll give an update on the Amazon glide down and our network reconfiguration and cost-out efforts. I'll wrap up with our financial outlook for the remainder of 2026.

Moving to our results. Execution across our business was strong with results coming in above our expectations. Starting with our consolidated performance. In the first quarter, revenue was $21.2 billion, and operating profit was $1.3 billion. Consolidated operating margin was 6.2% and diluted earnings per share were $1.07. Now moving to our segment performance. U.S. domestic remained focused on revenue quality while executing our Amazon glide down and network reconfiguration initiatives. These strategic actions drove SMB average daily volume growth and strong year-over-year revenue per piece growth. For the quarter, total U.S. average daily volume was down 8% versus the first quarter of last year. Nearly 2/3 of the decline came from the glidedown of Amazon volume and our deliberate actions to remove lower-yielding e-commerce volume from our network. Total air average daily volume was down 8.9% year-over-year including the guide down of Amazon volume. Ground average daily volume was down 7.9% compared to the first quarter of 2025. Moving to customer mix. SMB average daily volume increased 1.6% year-over-year, driven by high-tech, health care and automotive customers.

In the first quarter, SMBs made up 34.5% of total U.S. volume marking the highest SMB penetration in our history. Looking at B2B, while average daily volume was down 5.1% year-over-year, it represented 45.2% of our total U.S. volume which was a 140 basis point improvement versus the first quarter of last year and was our highest first quarter B2B penetration in 6 years. Our continued focus on revenue quality and a more premium U.S. volume mix has delivered several consecutive quarters of product and customer mix improvement, reinforcing that our strategy is working. Moving to revenue. For the first quarter, U.S. domestic generated revenue of $14.1 billion. This was a decrease of 2.3% year-over-year against an ADV decline of 8% with strong revenue per piece growth of 6.5%, largely offsetting lower volume. Breaking down the components of the 6.5% revenue per piece improvement. Base rates and package characteristics increased the revenue per piece growth rate by 340 basis points. Customer and product mix improvements increased the revenue per piece growth rate by 200 basis points. The remaining 110 basis point increase was due to changes in fuel price.

Turning to cost. In the first quarter, total expense in U.S. domestic was nearly flat. While we delivered higher productivity and continue to make progress on the Amazon glidedown, those benefits were partially offset by short-term cost pressures in the first quarter. As Carol mentioned, these included temporary third-party lease expense to cover capacity constraints from retiring our fleet of MD11 aircraft, transition costs and excess operational staffing related to ground saver, and the combination of inclement weather costs and higher casualty expense. Combined, these pressures totaled about $350 million in additional expense for the first quarter. Cost per piece in the first quarter increased 9.5% year-over-year. The U.S. Domestic segment delivered $565 million in operating profit and operating margin was 4%, including a 250 basis point negative impact from the short-term cost pressures. These cost pressures are largely behind us as we move into the final months of the execution of our Amazon glidedown and network reconfiguration initiatives.

Moving to our International segment. In the first quarter, revenue grew across all regions, driven by strong revenue quality and our focus on premium markets. Plus, we saw signs of recovery in trade length shifts stemming from the 2025 trade policy changes. Additionally, with the onset of the conflict in the Middle East, we adjusted our network and continue to serve our global customers throughout the first quarter. In the first quarter, total international average daily volume declined 6%. International domestic ADV decreased 6.6% compared to last year, led by a decline in Europe, that was partially offset by growth in Canada. Like in the U.S., we saw improvement in customer mix with SMB penetration reaching over 60%. On the export side, average daily volume in the first quarter decreased 5.5% year-over-year led by declines on U.S. destination lanes resulting from the pull forward of purchases in the first quarter of last year, spurred by changes in trade policy.

U.S. imports in total were down 16.4% year-over-year led by a 22.5% ADV decline from Europe to the U.S. The China to the U.S. Lane, which is our most profitable trade lane was lower by 18.3% compared to last year. But as we have said before, with changes in trade policies, we see that trade doesn't stop, it moves somewhere else, and we continue to see volume growth in other parts of the world. Turning to revenue. In the first quarter, International generated revenue of $4.5 billion, up 3.8% from last year, driven by strong revenue per piece growth Operating profit in the International segment was $551 million, down $103 million year-over-year, primarily due to trade policy changes. International operating margin in the first quarter was 12.1%. Looking at Supply Chain Solutions. Supply Chain Solutions made strong progress during the first quarter, highlighted by the doubling of operating profit year-over-year, driven by improvements across business units. In the first quarter, revenue was $2.5 billion, lower than last year by $176 million.

Logistics revenue was down year-over-year, driven by lower revenue in Mail Innovations. This was partially offset by revenue growth in Healthcare Logistics, reflecting market conditions, air and ocean forwarding revenue was down year-over-year. And UPS Digital, which includes Roadie and Happy Returns, delivered another consecutive quarter of revenue growth, with revenue up 19.9% compared to the first quarter of 2025. In the first quarter, Supply Chain Solutions generated operating profit of $206 million, an increase of $108 million year-over-year. Operating margin was 8.1%, up 450 basis points compared to last year. Lastly, looking at cash. In the first quarter, we generated $2.2 billion in cash from operations. Now let me provide an update on our Amazon glidedown, cost out and network reconfiguration efforts from the first quarter. Starting with variable cost. Total operational hours paced down with volume in the first quarter, and we're on track to reach our 2026 reduction target of 25 million hours versus last year. Looking at semi variable costs. By the end of the quarter, we reduced operational positions by nearly 25,000 compared to the first quarter of last year. In addition, the Driver Choice program that we initiated during the quarter is expected to reduce full-time driver positions by approximately 7,500 over time, putting us firmly on target to reach our reduction goal of 30,000 operational positions this year.

And moving to our fixed cost bucket, we completed the closure of 23 buildings during the first quarter. We are planning to close an additional 27 buildings this year, most of which will be closed in the second quarter. We are pleased with the progress that we are making on our Amazon glidedown and network reconfiguration initiatives and are on track to achieve our targeted $3 billion in savings in 2026. Moving to our 2026 financial outlook. While the macroeconomic environment is different now compared to our expectations at the beginning of the year, we have been quick to adjust to the changing conditions and we're continuing to closely monitor the broader impacts across the global economy. As Carol stated, we are reaffirming our full year 2026 consolidated financial target. We are on track to generate revenue of approximately $89.7 billion with an operating margin of approximately 9.6% and diluted earnings per share expected to be about flat to 2025. The conflict in the Middle East in March drove an immediate spike in fuel costs. Our fuel surcharges are linked to published fuel benchmarks and adjust with fuel prices on a weekly basis. And we expect these surcharges to provide coverage as fuel prices continue to fluctuate.

Now let me add color on the segment. Looking at U.S. domestic, full year 2026 revenue is still expected to be approximately flat year-over-year. We expect ADV to be down mid-single digits year-over-year due to our actions with Amazon which will be offset by a strong revenue per piece growth rate in the mid-single digits. Full year operating margin is still expected to be flat to 2025. Looking at the second quarter of this year compared to the first quarter, the USPS transition has been completed. The Amazon glidedown and network reconfiguration will wrap up by the end of June. We are leasing fewer replacement aircraft to 767 deliveries continue, and premium volume is expected to further improve mix. As a result, we expect revenue to be up low single digits and operating margin to be between 7.5% and 8.5%. Moving to the International segment and starting with the full year. We still anticipate revenue growth in the low single digits year-over-year, driven by a solid increase in revenue per piece. Operating margin in the International segment is expected to be in the mid-teens. Looking specifically at International in the second quarter, we will lap tough comparisons from changes in trade policy, benefit from normal seasonal uplift and continue to realize savings from our air network cost actions. As a result, we expect low single-digit revenue growth and an operating margin between 13% and 14%.

And in Supply Chain Solutions for the full year 2026, we still expect revenue to be up high single digits, which includes revenue from our Andlauer acquisition and operating margin in SCS is expected to be in the low double digits. Looking at the second quarter, we expect momentum from the first quarter to continue, and we expect revenue in SES to be up low single digits year-over-year and operating margin between 9.5% and 10.5%. Now let's turn to our expectations for cash and the balance sheet. Capital expenditures are still expected to be about $3 billion, and we plan to make our annual pension contribution of $1.3 billion. We expect free cash flow to be approximately $5.5 billion, including onetime payments for the Driver Choice program. Lastly, we are still planning to pay out around $5.4 billion in dividends in 2026, subject to Board approval. As we near completion of our Amazon glidedown and network reconfiguration initiative, we will enter the second half of this year with a more agile and more automated network.

Our focus is on premium volume and revenue quality and will grow in the best parts of the market. Taken together, these actions set us up for operating margin expansion and greater operational agility. With that, operator, please open the lines for questions.

[Operator Instructions]

Our first question comes from the line of Tom Wadewitz from UBS.

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, I think, kind of $350 million total transitional costs. How do you think about that like the key pieces of that ramp and just visibility to that versus what you might have had in terms of visibility to that ramp a month ago or 2 months ago? So I don't know if that kind of a little lower 1Q margin reduces visibility or if you say, hey, that was just kind of transitional.

And then how does fuel factor into the kind of 2Q versus 1Q? Is there some tailwind that you consider? Or is that something you don't factor in but could give you a little support? So really just to kind of how do we think about the key levers, 2Q versus 1Q.

Sure. Thanks for the question. So yes, let me make a couple of points on the impacts on the first quarter. So first, if you think inside the quarter, right, relative to the 4% margin, we incurred incremental weather and casualty costs that was more than what we had initially expected when we were setting the guide in and where we were in March. That was about 70 basis points, which gets us 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 2 components, right? We have normal seasonal uplift, right, from first quarter to second quarter. The other part is if you think about that weather and casualty, those are behind us, right? The aircraft leases, as Carol and I have both mentioned, we continue to take deliveries. So the incremental costs associated with those is coming down. And we've now completed the ground saver outsourcing. So a lot of that transitional costs that we incurred in the first quarter now comes out. And so that helps you bridge from first quarter to second quarter.

On fuel, look, we reaffirmed our guide. We are not updating for fuel at this point. Fuel didn't have a material impact in the first quarter because really the ramp in 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 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 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.

Our next question is coming from Scott Group from Wolfe Research.

So just following up there, I get we don't know where fuel is going to end up, but in a higher fuel price environment where you guys are also raising the surcharge schedules, like should we assume that there is some sort of profit benefit from the higher fuel environment? And then maybe just, Carol, let's just take a step back, like big picture, like we're going to end up in the 7% and 8% range on U.S. margin this year. Help us think about where that can go over the next couple of years? We get through the Amazon glidedown, 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?

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

And Scott, we brought you all through a lot over the past almost 18 months, but we did it deliberately because it frees us to focus in on the market that we want to serve and serve them better than anybody else. And that includes SMB and B2B and 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 that 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 in 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 with the right revenue quality coupled, with great productivity. Our hub productivity is the best has been in 20 years, just to put a point on it. We now have automated 67.5 points our teams almost on our way to 68%. And we know that cost per piece on an automated building is 28% lower than the cost and piece of nonautomated buildings. So there's some really good underlying trends here in the domestic business.

And then outside the United States, we can't ignore that because our business performed better than we thought in the first quarter due to the great work of Kate and her team who also are leaning into the premium segments of the market. Brian called out that we grew SMB penetration in the international business, we did. It's now 62%. We also grew our B2B penetration outside the United States, now about 71%. So Kate and team are going to continue to lean into the premium part of our international small package business and we won't forget 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, just 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 an opportunity for us and proud to say that we lead the market in that area.

Our next question comes from Chris Wetherbee from Wells Fargo.

Maybe just a quick clarification question and 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 zooming out a little bit. We're about a quarter away or maybe a couple of months away from the end of the Amazon glidedown, 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.

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

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

And as it relates to the Amazon question, at the end of the first quarter, Amazon made up 8.8% of our total revenue. That's down from, it was north of 13%, not very long ago. So really pleased with how we've partnered with Amazon on this glidedown. 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 are -- we have a great return network.

And as you know, returns are the nemesis of anybody who's in the e-commerce. In fact, 19% of all e-commerce sales are returned. And so with our great reverse net work. And the capabilities that we have for Box's labelless returns, that relationship with Amazon is just going to continue to grow. And it's not just returns, 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 we want to continue our relationship in the nutritive way that is turning out to be.

Your next question is coming from Jonathan Chappell from Evercore ISI.

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 beat by so much relative to what you were expecting in the first week of March? And why wouldn't that upside across both margin and revenue be extrapolated going forward?

And yes, we were very pleased with the performance in international. I think when you -- there's a couple of things that drove it in the first quarter. As Carol mentioned, leaning into premium segments in Europe are helping us to drive revenue quality as well as, I would say that we mentioned the decline in the China to U.S. trade lane while it's down, it's not as bad as what it has been, right? And so I would say things were not as bad as what we expected or what they could have been. And so we are starting to see some recovery in certain trade lanes.

As we roll into the second quarter, remember, we're still lapping the -- May will be the lap of the liberation Day and the China de minimis elimination which will provide some improvement in step up. And then we'll have another lap in September of the full de minimis elimination. So we do expect the improvement to persist. The other thing that's going on in international is we are seeing some incremental costs associated with the network reconfiguration around the Middle East conflict. It has impacted flight and block hours 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 #1 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 aerospace because we can't fly over the aerospace that is putting cost into the network. 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 and we saw the disruption that happened last year with the elimination of the minutes 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.

Your next question is coming from David Vernon from Bernstein.

So I'd like to kind of maybe understand the pace of cost takeout. Has there been any shift in timing caused by discussions you have the unions around the driver buyout? And then Brian, when you're thinking about the overall message you're trying to give us with guidance here, it does seem like first quarter domestic, if you give you credit for the 350 and international is performing really, really well, but we're not changing the full year. Like is this just, well, while 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 to raise as a beat and maybe core worse for the last half of the year. I'm just wondering if you could help me kind of understand what the messaging is here.

Well, maybe I'll start and then Brian, you can come in. It is early in the year to raise. The underlying business is better than we thought. If I look at the results in April, we're going to exceed the plan that we put in place. If I look at the results outside the United States, have moved from red and 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 plans, 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.

Yes. And David, I would just add to that. On the guide, Carol is absolutely right. We feel very good about the health of the underlying business. If you remember, we said SMB grew in the first quarter. We expect that to continue. We'll lap some of the actions that we took on the enterprise customers as we go through the second quarter and see growth back to 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. Rev per piece is strong, base pricing is strong. So we feel really good about that.

And Carol hit on international. On the pace of cost takeout, nothing's changed, right? I think if you look at the actions that we took in the first quarter, they actually set us up to do exactly what we said we were going to do, right? We transitioned ground favor. We executed on the DCP. As Carol said, nearly 80% of those positions will be eliminated by the end of this month. We are replacing the MD11 capacity as we take delivery of the 767. 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.

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 had to do the back.

Your next question is coming from Stephanie Moore from Jefferies.

Great. 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 side. So it would be helpful if you can maybe separate fact from fiction, what you're seeing, help line expectations? Any clarification there would be helpful.

Yes. Happy to. So when we laid out our internal plans for the driver buyout, we wanted to land on 7,500 physicians. Our program was oversubscribed. So perhaps that's the basis for some of the articles. So we had more drivers applying than we could accept. We accepted the 7500, we couldn't be more happy.

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

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

Your next question is coming from Jordan Alliger from Goldman Sachs.

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

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

Your next question comes from Bruce Chan from Stifel.

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

Sure. So as I mentioned in my earlier remarks, look, we see the puts and takes on the macros, right? 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 really leading in, right? So we mentioned automotive, high tech, health care, industrial, where we are seeing our ability to win more and take share. We don't expect -- we haven't seen a material shift in what we would expect for the addressable market growth in small package in the U.S. to low single digits, but we are winning where it matters to us.

As Carol mentioned, health care, in particular, we grew across all segments of the business, and we continue to see strong uptake in there, which is higher than the average market growth rate. On the international side, Carol hit on it, right? We're I would say that while we're still down on certain trade lanes, they are moving in the right direction, right? And in particular, we are seeing international to international origin destinations growing, right? So trade is moving in places that don't touch the U.S., and it's improving in places that do touch the U.S. So overall, I would say not a robust improvement but incremental progress.

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

Your next question is coming from Ari Rosa from Citigroup.

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 how much is the pricing environment helping you versus the mix benefit that you might be realizing from the shift towards higher-yielding packages?

Well, I'll let Brian take that.

Sure and I'll start. And so thanks. So look, I think getting back to this, call it, 50 to 100 basis point spread is healthy, right, for our business. And we'll be back there by the end of this year, right, is the way the year kind of sits out. When you think about what's going to drive that, one, we're taking actions to bring the network capacity in the U.S. back in line with the volume level that's DCP, that's Amazon building consolidation. That's all the things that we've outlined. And those, for the most part, now are done or are in progress. So we feel really comfortable with our ability to get the capacity lined up in the back half.

On the revenue side, look, we talked about this $250 to $350 kind of range of base pricing improvement. And we've been in that range, right? And as we've been very clear about what's mix 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 that where we can deliver value to our customers, right? SMB, B2B, health care, and that's where we're really leaning in and that's where we're winning. So I think we do have the ability to get there in the near term and then manage that and grow in a more a more accretive manner more efficient network as we go into the fourth quarter of this year in '27.

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 segment, leaning into SMBs and leaning away from, well, volume that was related to China e-commerce retailers, mostly ground favor. So that's been moved out of the network. We've offered that volume to the market so that we can focus on the premium side.

Your next question is coming from Ken Hoexter from Bank of America.

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 B2B. It sounded like your -- or Brian's answer to Bruce earlier that there's not that underlying strength that you're kind of really seeing kind of runaway 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 from e-commerce, Chinese retailers. If we ignore that volume, we actually gained 1.2% market share growth. So we have made volume available to the market that has gone to other carriers, including our largest competitor. It has. Because we deliberately moved -- 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...

Yes. 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 into us. We -- and like I said, I would say we see incremental momentum in our B2B business in the industrial business, part of that through capabilities, right, that we've been investing in. But part of it is through momentum. I would just say it has not been runway growth that would cause us to fundamentally change our market growth assumption for the year yet.

Your next question is coming from Richa Harden from Deutsche Bank.

It's Richa here. So yes, trying to get a longer -- a sense of longer-term cost per package potential. Obviously, CPP pressure has been high recently influenced by your Amazon glidedown. 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 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 in the spirit of longer-term potential, I just want to clarify one thing. Carol, I think you said you think margins will be back to high teens in international? Are you assuming U.S.-China business that wasn't structurally impaired from de minimis and it should return to where it was prior in terms of overall volume? Or how do you get back to high teens. I'm just trying to understand.

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

Sure. And I think even if you look into the back half of this year, our CPP gets down into the low single digits, right? And that's -- as Carol said, we have -- 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 CCP 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.

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

Okay. Just in the offset from the contract with the changes and how is that going to inflow nth back half of '27?

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

Your next question is coming from Brian Osenbeck from JPMorgan.

Maybe just 2 sort of quick follow-ups. Just on mix shift, I understand the increasing percentage of mix for SMB and B2B, but it looks like B2B volume in absolute was down 5%. I don't know if you can provide some color as 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. 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.

So in the first quarter, we tendered about 977,000 ADV to the USPS, which was about 44% of our ground paper product. It was a wrap because we had to get -- work through dual labeling and some work that we had to do to transition. So it was a ramp up, really pleased with how we exited. And as we look to the second quarter, we'll be tendering around $1.5 million, something like that. So that's moving the way we thought it would. In terms of interesting surcharge that they put in, which appears to be a temporary surcharge, not entirely sure. It's not appropriate for us to talk about how we manage pricing by customer, but I will say the Pulse system tends to set the floor for the economy product, which is actually pretty good for the whole industry if they're raising prices.

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

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

Matthew, we have time for one more question.

Our final question comes from the line of Ravi Shanker from Morgan Stanley.

Carol, the 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?

Well, thanks for the question, Ravi. This is a complicated matter for sure. I'm going to zoom out just to talk about the EPA tariffs in total. So last year, since the tariffs have been initiated, the Customs Border Protection processed $53 million IPA-related entries and collected $166 billion in tariffs. For us, we processed $16 million EPA-related entries and remitted over $5 billion to the US. Treasury. Ravi, 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 Border 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 Border 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 20. We are making those applications today. We think it's going to take some time before the treasury remits money to us. But as soon as we get that money, we're going to remit it right back to our customer.

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

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

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

Let's go ahead and get started with the next presentation. This is my caboose, not really, not trains, but I'm very excited to have UPS with us. But for those who don't know me, I'm Tyler Brown, senior analyst here at Raymond James. I do quite a few things, Brian. I do transportation. We've had some waste companies. We've had some heavy construction materials companies.

But like I said, this morning, I am very excited to have UPS with us. Now I think most of you know what UPS does, and you might even be having UPS pay you a visit today, whether you like that or not. But obviously, UPS is the largest parcel company in the U.S. for sure, globally, obviously, a huge player. But I think you move about 6% of the United States GDP to put that in perspective. So UPS plays a very critical role, obviously, in e-commerce, and there's a lot of things going on.

So this morning, Brian Dykes, the company's CFO, we're going to do a couple of slides, and then we're going to kind of jump into a Q&A. So if anybody has any questions, please just raise your hand, let us know. But Brian, I'm going to go ahead and turn it over to you, and then I will be back up here for a lively fireside chat.

Perfect. Thank you, Tyler. And thank you all for taking the time. I know it's been a good couple of days. I hope you guys have enjoyed it. Just real quick, I've got some forward-looking statements in the presentation that obviously, results may differ.

But I thought real quick, let me start. You can see the stats on UPS. Everybody is very familiar with UPS as a U.S. last mile provider. I'm sure all of our families see the UPS man frequently coming to their house or their place of work. But I do think it's also important that besides just the U.S. small package business, which is our leader, we also run a global small package business backed by one of the largest airlines in the world with an integrated ground network, not only in the U.S., but in Europe, Latin America, Asia and Middle East and Africa.

We also have a global freight forwarding business. We're the leader in customs brokerage. We're the largest health care logistics provider in the world, really focusing on complex health care supply chains. And we have a portfolio of digital solutions that power things like returns and insurance and fraud detection and things like that for our customers. This portfolio of assets allows us not just to deliver final mile in the U.S., but really solve complex logistics problems for our customers.

Just real quick to hit on where we are in 2025, and we'll talk more about where that takes us in 2026. Look, we went through on our fourth quarter call that we're building off the progress that we saw in 2025 going into 2026. There's really 3 big things that we're doing, right? Last year, we reduced about 1 million pieces a day of a portion of our relationship with Amazon. In the first half of 2026, we'll reduce another 1 million pieces a day. That's really meant to drive better network efficiency, improved profitability over the long run.

At the same time, we're undergoing the largest network reconfiguration in our company's history, 118 years, right? That involves not just rightsizing the capacity in our U.S. network, but we're also investing heavily in automation to ultimately get to a smaller, more productive network that we can grow off of into the future. And the third pillar, I would say, is around the outsourcing of a portion of our Ground Saver economy product back to the USPS.

In 2024, we had a negotiation with the USPS where we decided to in-source it. That was driven by service, right? That was really driven by a change in their operating model that was going to reduce the ability for us to provide the service to our customers that we want. In 2025, with the new management team at the USPS, they decided to change course on how they were treating service. And so we're now going through the process of outsourcing a portion of those stops back to them.

Look, with that being said, leading into 2026, all of that is going to translate into slightly up revenue and EPS about flat, right? So we're just reiterating our guidance here that we put out in the fourth quarter. But it's very much a first half, second half story, right? Those 3 items on the left really drive some incremental costs that we're going to face in the first half as we bring this volume down, we rightsize the network. There's tariff and de minimis wrap that we've got to do in our International business.

Then leading into the second half, we're going to see revenue up, right, in the low single digits. We'll see our operating margin recover. We'll be back to the business that we've been transforming into, which is focused on top line growth and margin expansion, right? But that does build into what does the first half look like, right? And why is the first half behaving so differently than what we've seen in the past, right?

So again, we're not changing our guidance, but I think it's important to illustrate why is it different than what's happened before because we are behaving different than our normal seasonality. What you see on the left in the U.S. business, we've got several headwinds that are hitting us in the first quarter, right? The timing of the costs coming out with the Amazon drawdown, which I'm sure we'll hit on more, but we're taking out variable, semi-variable and fixed costs associated with that capacity rightsizing.

We've got headwinds from replacing the MD-11 capacity in the first half of this year from the write-off of the MD-11 fleet that we did in the fourth quarter. We also have some transitional costs with moving that USPS volume or stops back to the postal service out of our network. Those start to abate as we go into the second quarter. And you can see on the domestic business, we start to see revenue growth and margin recovery as we go into the second quarter.

On our International business, we have a tough comp from the pull forward of the China tariffs in the first quarter of last year as well as some network costs that are carrying over from the fourth quarter de minimis change that we saw. Those start to wrap as we get into the second quarter. You can see our margin starts to step up in the International business. In SES, we continue to see progress. We saw the margin improve as we went through 2025, and we'll continue to progress that as we go through 2026.

So you can see there's a number of really unique factors going from first quarter to second quarter that then carry us into that second half margin trajectory that we've been looking for.

So we talked about the Amazon drawdown. I think it's important to just reiterate as well because this is one of the big levers. This is where UPS is behaving very differently than what we've done in the past. And when I say in the past, I mean for like 118 years, right? Never before have we really reduced the fixed cost infrastructure as we've drawn down volume like we've done with this Amazon volume.

Last year, in 2025, we set out targets to reduce 25 million hours, operational hours, reduce 73 buildings and cut 30,000 positions. We actually overachieved all of those metrics in 2025, and we set similar metrics for 2026. So we'll be pulling down another 1 million pieces a day of Amazon volume. We expect to remove another 25 million hours -- operational hours from our U.S. network, another 30,000 positions, including what we're doing with the driver choice program that I know we'll hit on shortly. And we've announced the closure of another 24 buildings in the first half of this year. We're evaluating more so we can rightsize capacity.

So as we come out of the second quarter, as I talked about before, we'll have a more agile, more profitable network that we can grow off of with the right type of volume, right? Less e-commerce, more SMB, more B2B, more health care. And so that really sets us up for the growth trajectory as we go forward into the back half of '26 and into '27.

And the last thing I'll end with, look, through this, we've been very focused on maintaining cash flow, a strong balance sheet, right, and making sure that we're protecting our return to shareholders.

Just to start from the left, so we've given guidance of $6.5 billion of free cash flow. That's about $1 billion increase from 2025. That's before the Driver Choice program, but we've got plenty of cash flow to fund what we need to there. You can see we've got great liquidity and a strong balance sheet, right?

Even with what we do with leases, with incremental debt, we maintain this 2.5x debt-to-EBITDA target right around there, which gives us a lot of strength, plenty of firepower in order to do what we want. Dividend, we're holding flat. Look, our dividend payout ratio is 50% of prior year net income. We're way above that right now as we've gone through this transition of our U.S. network. So we don't expect the dividend to increase, and we're not going to increase it in 2026. But we are going to work ourselves back toward that target.

Our 10-year average payout is about 60%. We're running in the 80% to 90% range right now. So we'll grow back into that. But overall, we feel great about where the balance sheet is. It gives us plenty of strategic flexibility. We're very focused on cash flow generation and making sure that we maintain the payout to our shareholders.

Great. Excellent. Thank you so much for the shaping. That is extremely helpful. So clearly, there's a lot changing. I mean we've got tariffs. We've got Driver Choice Program, Amazon glide-down, SurePost outsourced resource. But one thing that hasn't really changed is service. And I want to kind of actually take a step back and talk about peak season because despite everything that's been going on, I know that this is really important to you, to Carol, to really the whole team. So can you just talk about service and how you performed through peak?

Sure. So we had our eighth straight year of being industry leader in service during peak. This is really meaningful, right? Because remember, we closed 93 buildings. So a little less than 10% of the buildings in our network were closed last year, and we had no issues with service, right? And that's -- let me tell you why that's important. That's important because when you want to go have a conversation with a customer about a 5.9% general rate increase, you better hit your service metrics. You better be better than your competition.

And so good service translates into good revenue per piece the next year. It's something that we know we're the premium provider. We want to be the premium provider. So we expect to deliver premium service, and we've done it now 8 years in a row. We're super proud of that.

Perfect. So let's talk Amazon glide-down real quick. So what exactly does that mean for the good people out in the audience? I mean, you guys, I think, prior to what the change, it was as much as 10% of your revenue. So talk about what exactly the Amazon glide-down. And again, if you can just kind of give us some size of how much Amazon is kind of coming out of UPS?

Yes. So look, over a 2-year period, we'll shed about $5 billion of Amazon revenue, about 2 million pieces a day of Amazon volume. That's about half of what Amazon was for us in 2024. But it's important to realize what we're doing, right? So there's -- Amazon is a big animal. We talk about it like it's all one thing, but it's actually a very big thing.

The portion of the volume that we're exiting is really the -- what they call their SC outbound, but it's the vertically integrated retailer, the stuff that's really in a warehouse, probably 50 miles from your house that's delivered in gray vans to your door. You don't need an integrated end-to-end network in order to move that kind of volume, right? And that's where Amazon has invested tremendously in their own supply chain. They can do that really, really well. And so we've decided that they can -- they're going to in-source that piece of the business, and we'll focus on other pieces of the business. They're still going to be one of our largest customers.

We do a lot of returns from them through our UPS store network. We do things for small businesses that sell on the Amazon platform. So we work really well with them on the places where we can add value and the places where they can in-source it and do it themselves, that's what they're going to take.

So look, I think this is still a very collaborative relationship. We've got multiyear contracts on the other pieces of the business. But this on the whole now will allow us to really focus our business on the places where we want to invest and we want to drive growth.

Perfect. So if UPS is, call it, [indiscernible] $100 billion roughly of revenue is maybe a $10 billion-ish pool. So we're talking about $5 billion. Clearly, there's going to be optics. So there's optics, but there's more than just Amazon, right? So we had also a development with the USPS. And maybe you can -- let's talk about that first because exactly what happened with the SurePost product, I think it maybe helps give some people some perspective?

Sure. So in 2024, our economy product was called SurePost. And it was a product where we delivered a portion of the volume and we injected a portion of the volume into the USPS at what they call the destination delivery unit or the DDU, effectively the post office post your house, and then they would deliver it the final mile. And when you do that, it's a day longer time in transit than if you ship it through UPS. But the service levels were really good if you delivered it to the post office and then let them do it the rest of the way.

At the end of 2024, they decided to change their operating model, which was going to change that service component where we can no longer inject it at the DDU, but we were going to have to move further upstream into their network the service degrades considerably when you do that. And so we decided that we would in-source that volume, right? As we in-source that volume, we obviously had to change rates. We also had to shed some unprofitable customers, which a large portion of that was some Chinese e-commerce customers that were injecting very low-value goods into our network. And so that also created a headwind that we're wrapping as we went through the back half of '25 and first quarter of '26.

Right. So when I see ADV down, call it, circa 11%.

That's right.

There's a lot to that number.

There's a lot to it.

So how would you just kind of talk about the current environment? And maybe we could even bridge that into some changes in tariffs and how that's been impacting the business and how we should think about it even in relation to the guide?

Yes. So when you think about our guide, look, we'll be wrapping this -- let me talk about the U.S. first. And think about -- when we talk about core volume, that's our core enterprise and SMB volume, right? We'll wrap that Chinese e-commerce piece that was in our Enterprise segment in the first quarter. And then we're showing enterprise and SMB growth as we go through the course of the year. Not robust growth, mid-single-digit growth, but good solid growth with an increasing base rate, which drives good revenue growth.

From the International side, look, International went through a lot of changes last year, a lot of, I would call it, volatility, right? First, we had China tariffs, which caused a big pull forward in the first quarter of '25. Then we had a pullback in the second quarter. Then we had the de minimis change, which was hugely impactful, not just to our International business, but also to our Brokerage business, which I'm sure we'll hit on later on because the technology kind of saved us there. So our International business had considerable headwinds in the comps that they had to overcome in 2026.

Look, overall, I think we see the U.S. environment is pretty good, right? Our core business is performing. Internationally, we've seen a lot of trade lane shifts. But what I would say is trade has not stopped. Trade has just moved, right? So while our China to U.S. volume may be down 30%, our China to rest of world volume is up. The problem is we've got a margin issue on those lanes that we've got to address. But overall, look, I think we see okay growth going into 2026.

Pretty good. I'm going to take pretty good in this environment.

I'll take pretty good after 2025.

Okay. So again, there's a lot of optics around ADV. And I just want to reiterate, I mean, your goal is not to just retrench. I mean your goal is to grow, but your goal is to grow in the right place. So maybe talk just a little bit about that.

Sure. Look, and absolutely, it's not a shrink the company strategy, right? It's a growth strategy. But it's a growth strategy in the places where we can drive accretive growth, right? So our focus is really on how do you -- growing our enterprise customers, particularly in B2B and health care and industrial verticals where we can drive higher rev per piece and better characteristics for our network.

SMB growth, which is huge for us. We started about 6 years ago, we started a program called Digital Access Program, our DAP program that is really about connecting to marketplaces that SMBs use to move online. This is not just Etsy stuff. This is also industrial retailers that are selling products online. That program has grown from $150 million 6 years ago to over $4 billion last year. It's about being where SMB customers need us to be, integrating with their technology stack and helping enable them to punch above their weight, right? And on the international side, our International business is 55% SMB, right? It's a much more distributed, better mix business that allows us to drive structurally better margin.

Okay. Perfect. So we're focused on the right parts of the market, absolutely. We're going to come back to RPP, but I want to talk about and you have some good info on slides. So obviously, there's a lot changing. The network is fundamentally -- obviously, some volume is moving out, but you're not sitting still. So talk a little bit about, again, each one of those, call it, variable, semi-variable and fixed cost because, again, I think it's pretty profound what UPS has really done, something that's not really been historically in your DNA.

That's right. Yes. And I mentioned before, this is not something that we've ever done. But when you pull this amount of volume down look in a relatively fixed-cost network, you have to take the cost out, you have to rightsize the capacity. And so in 2025 and again, in 2026, we laid out kind of how we were going to reduce the cost. So again, remember, we're getting rid of roughly $2.5 billion of Amazon revenue. We said we're going to save $3 billion in cost. The way that you do that is, first, on the variable side, as volume comes down, we have to plan less operational hours, right? That's just take out the variable pay. It means you need fewer drivers on road. It means you need fewer people in the buildings to sort packages, so you bring out the hours.

The second piece is the semi-variable cost, which is really around those positions, right? So if I need fewer drivers, I can pull the cost out. But ultimately, I have to eliminate the position so I can eliminate the benefits, right? And then the third is then the fixed portion, the buildings and the actual physical capacity. Last year, we closed 93 buildings. This year, we've announced 24 in the first half. We're evaluating additional capacity reductions. All that enables us to now rightsize the capacity for the network. So as we're growing back into it, well, I'm sure we'll hit on automation soon. But as we're growing back into it, you're growing back into a smaller, leaner, more productive network than what we left.

Let's talk a little bit about the Driver Choice Program. So there's been obviously some court rulings on that side. Can you just talk about where we are and maybe the quantum? And how exactly is that going to work? So will there be charges as that goes on? And then there'll be ultimately a cash payment. So we need to consider that. But maybe just work through some of the mechanics.

So let me just explain a little bit about because we ran a driver -- a similar program last year that we called the driver voluntary separation package. The driver choice program that we're running now is an opportunity for UPS drivers to take a lump sum payout in order to leave the company and move on. This is important because UPS, like all union employers has a seniority-based system, right? Meaning if you've been there longer, you're basically guaranteed a job and you take out the less -- as you reduce positions, the less tenured people leave first, right, which means if I'm a long-tenured driver, even though I may not be able to drive, I can still take my wage rate and benefits and work on the inside. It's very hard to remove those positions. This gives us a way to accelerate it, right?

So rather than wait for attrition, we can accelerate it. We did a similar program last year. And yes, there'll be a charge once we know the numbers. This one is structured a little bit differently. We've offered it to a little over 100,000 drivers between tractor trailer drivers and packaged car drivers and other full-timers. It's really early. We're seeing good take rates so far. We'll continue to update everybody on what the numbers look like as we go through the first quarter. Our expectation is that we'll close the program out in the second quarter, take the charge and then this start to drive benefits in the back half.

Excellent. So that really addresses a lot of that variable, semi-variable piece, the fixed cost piece. And this is where it gets really interesting because maybe UPS had an infamous slide one day at an Analyst Day once upon a time. But they felt like maybe there was a little bit of excess capacity in parcel U.S. domestic. It seems like there's been some calling of capacity. So maybe again, kind of talk about the fixed piece and some of the building closures. And even maybe talk a little bit about automation, but really talk about the closures, that would be helpful.

Sure. So we absolutely have been reducing capacity in line with what our expectation for the volume levels are coming out of the second quarter of this year. That's really the baseline. And so we've done it through closing buildings. We've also been eliminating sorts, right, which brings down your hub capacity and then investing in ways that the automation will make us more efficient as we grow back into it. We're not the only ones. This is going on around the industry. You've seen networks consolidating with some of our competitors. You've seen the USPS doing the same thing. So there has been a rationalization of capacity, and I think it's good structurally for the industry.

Right. So most of us, I think, went to business school, and we kind of understand simple supply and demand. So maybe there's a change in capacity and maybe just maybe it's a little bit better on the demand side. So can you talk about core RPP? And when I say RPP, I mean revenue per piece. So maybe just like talk a little bit about the core pricing. And then not only at the core level, but also what we talked about earlier is that mix should also help that number optically.

Yes. And let me maybe use the fourth quarter to illustrate because in the fourth quarter, our revenue per piece or our unit per package revenue growth rate was 8.3%. About 340 basis points of that is what we call base rate. That's really how much of your pricing increase are you able to put through and get improved just base pricing on a unit cost basis -- on a unit basis. Then there was another 320 basis points that was mix driven, which means less low-yielding volume, more high-yielding volume, right? And then there's a component that was fuel, right, to tie back to the total. What we see over time is that kind of 250 to 350 basis point base price increase, that's good, right? It's good over a very long period of time. And we've been achieving that a couple of ways. One is, obviously, we're leaning into the parts of the market where we can drive more value, which means you have better pricing power, right?

Health care, high-value goods, complex supply chains, really sticky. When you're 99.99% on clinical trials drugs, they don't care if you put a 5% price increase through, right? It's a whole different ball game than if you're talking about a T-shirt, right, going to a residence. SMBs, where we can provide a lot of value by giving them distributed capabilities, B2B, where we can provide really good density characteristics and do some things in our network because we have employee drivers that some other providers can't do.

So those allow us to get better base rate increase. The mix, right, the less low yielding, more high yielding, that will abate over time. And so when we look at 2026, we'll have about 6.5% full year rev per piece growth. It will be a little bit higher because of the mix in the first half and then that abates in the second half. And then we'll look for this 2.5% to 3.5% base rate improvement over time.

Okay. So RPP, hopefully moving in the right direction, CPP, maybe moving in the right direction. I think you guided to something like mid-single-digit domestic margins in Q1, but I don't think that's where you want to be. So when we kind of put it all together, I mean, how should we think about U.S. domestic margins not only shape-wise this year, but as we think out into '27, '28, '29 and beyond?

Yes. So look, we'll continue first half is going to be under pressure as you saw. You saw on the slide, particularly in the first quarter. Full year, we laid out our guide that will be about up 1% on revenue, about flat on EPS, pressure in the first quarter, recovering in the second quarter. Second half, you're back to about 100 basis point margin improvement overall. We'll start to see further improvement as we go into '27. More importantly, we've got the unit cost fixed, right? Because even though we'll see rev per piece normalize in this 2.5% to 3.5% cost per piece does as well. And we're back to driving revenue growth and margin expansion as we go into '27 and '28, and we'll move back toward double-digit margin over time.

U.S. domestic.

U.S. domestic.

Okay. On the International piece, it also and you alluded to this earlier, it has been under a little bit of margin pressure. Mix has certainly not helped. I believe the China lane is...

Very profitable...

Profitable lane. So can we just talk a little bit about where International could maybe go or where you would like to see it go, I should say, maybe over the next couple of years?

Sure. Look, on International, if you go back 3 years ago during COVID, when there was high demand surcharges, our margins were as high as 20%. Those were -- I think those were a unique situation because the air freight rates in the market shot up so much. Right now, we're going to see a lot of pressure in the first half of this year, particularly in the first quarter in International because we're wrapping the China impact tariffs.

And as Tyler alluded to, we've seen a tremendous amount of lane shift, right? So China to the U.S. was our most profitable lane. We see a tremendous amount of growth in China to the rest of the world. The problem is it's about half as profitable, right, as China to the U.S. And so we've got this mix shift that's weighing on margin. So we expect it to be in mid-teens. I think it can get a little bit higher than mid-teens back over time because as that trade starts to normalize, two things happen. One is it gives us time to -- what I call harden off the network, right, to reallocate capacity to the places where we can drive higher returns.

So one of the reasons China to the U.S. was our most profitable lane is our network was really built to consolidate volume in Shenzhen in order to get it back to the U.S., right? Once we figure out where those trade lanes are going to be, whether it's India to Cologne or China to Cologne, we'll reengineer the network, and we've got people that are really, really good at this in order to drive better profitability on the lanes where we see the most growth. But we need things to stabilize a little bit. And unfortunately, we thought we were almost there and then maybe not this week.

Yes, not this week. Working on it. So again, we've got a couple of minutes, but I want to come back to your last slide because I think the capital allocation and cash generation is a really important part of the story. So just again, kind of talk about the cash generative ability of the business today. And again, if margins do improve, there should be some upside to that. And we're going to talk about CapEx, but let's just talk about from a base operating cash flow perspective.

Sure. So we were just under $9 billion in operating cash flow. The business is incredibly cash generative. And we've been focused on making sure that we maintain dividend coverage as we've gone through this transition. It has high leverage to the upside as we start to get the U.S. margin recovering to 8%, 8.5%, 9%. We have really good cash flow through to the bottom line, and we're focused on getting there.

And so yes, I think from a capital allocation standpoint, we always invest in the business first and foremost. And we'll talk about CapEx because our CapEx levels are down, but they're down for a reason. Then we want to maintain a strong balance sheet. And you saw our metrics, 2.5x debt to EBITDA, where we've got a really strong credit rating that gives us the financial flexibility to do any strategic actions that we want to do, and we'll continue to improve cash flow and protect the dividend.

Okay. I had to check my notes. So I think you guided to $3 billion in CapEx. But that's a 10-year dollar low if I'm not mistaken. There had been a moment in time if we go back, I think UPS invested heavily in the airline in the '80s. And then there was kind of this moment where you guys also really dipped down in CapEx. And then there was this whole CapEx I don't want to call it a bubble, but this resurgence.

So I do get questions time to time, is $3 billion the right -- is that the right number at the current $100 billion, call it, roughly or I forget exactly on the revenues. Sorry if I got that wrong, but $90 billion on the revenue run rate.

Yes. So look, I think 3% to 3.5% of revenue is kind of the way we think about it. We have been pulling CapEx down, but the volume has been coming down as well. We've been consolidating the network. So when you're bringing down 2 million pieces a day, you don't need to buy vehicles. We closed 93 buildings. Those were, to be honest, some of our highest maintenance buildings, right? We're investing in automation that allows us to take out some of the older stuff, right, that requires less upkeep.

To your point, we've got -- our air network has stabilized. We're still funding investments, right, in automation. We'll have 24 new facilities this year that will open up that are -- that will be automated. We're building new air hubs in Hong Kong and the Philippines that are going to allow us to expand and intra-Asia. And so we're still investing in the areas we need to invest. But the reality is the total CapEx requirement for the company is coming down.

Okay. So just to kind of finish it up, strong operating cash flow, CapEx stays relatively low. That leads to capital allocation opportunities. You have done some M&A, the dividend is a big deal.

Yes.

And maybe you could talk to everybody about the commitment to the dividend and then maybe some on the additional -- should we think buybacks, should we think M&A? Also what we should think?

Sure. So first and foremost, the actions that we're taking are about getting the margin moving in the right way. That will give us the cash flow flexibility that we want to have. From a dividend perspective, we recognize we were an employee-owned company until 1999. We still have a huge A shareholder base. When we look across our shareholder base, we recognize that the dividend is important, right? And so we will protect the dividend. But we will grow back into the dividend to get back to our long-term payout ratio of 50%, 60%.

From a capital allocation standpoint, we want to invest in the business. You saw us close our second largest acquisition ever. Now for UPS, there's not -- it's a little over $1 billion acquisition. Those are tuck-ins, right, for most people for us, it's a meaningful expansion of our health care capabilities. We'll continue to look to do things like that where we think it makes sense and we can leverage the network to drive value for the business. But yes.

Okay. Perfect. We are on time. Thank you guys so much for joining us. Thank you, Brian. Thank you, UPS. Thank you.

Thanks.

Good morning. My name is Matthew, and I will be your facilitator today. I would like to welcome everyone to the UPS Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]

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

Good morning, and welcome to the UPS Fourth Quarter 2025 Earnings Call. Joining me today are Carol 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 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 furnished to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results.

For the fourth quarter of 2025, GAAP results include total charges of $238 million or $0.28 per diluted share, comprised of a noncash after-tax charge of $137 million due to a write-off of the company's MD-11 aircraft fleet and after-tax transformation charges of $101 million. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website.

Following our prepared remarks, we will take questions from those joining us via the teleconference. [Operator Instructions]

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

Thank you, PJ, and good morning. Before I discuss our results, I'd like to start by remembering those who lost their lives in the tragic crash of UPS Flight 2976. Our thoughts and prayers remain with their families and everyone affected. I am incredibly proud of our team at Worldport and how they responded to this accident. And I would like to thank the Louisville community as well as our business and industry partners for their outpouring of support.

I also want to express my deep appreciation to UPSers around the globe for their exceptional dedication and tireless commitment to serving our customers. For the eighth year in a row, we were the industry leader in on-time service during peak.

Looking at the fourth quarter, our results exceeded our expectations driven by strong revenue quality, solid cost management and overall great execution. All 3 of our business segments contributed to our outperformance, with U.S. Domestic and Supply Chain Solutions delivering year-over-year operating margin expansion, and International Small Package reporting record revenue with the highest fourth quarter revenue in 4 years.

In the fourth quarter, consolidated revenue was $24.5 billion, consolidated operating profit was $2.9 billion, and consolidated operating margin was 11.8%. Looking at the full year, consolidated revenue was $88.7 billion, consolidated operating profit totaled $8.7 billion and consolidated operating margin was 9.8%. Brian will provide more detail about our financial results in a moment.

In 2025, we operated through a very dynamic macro environment, including significant change in global trade policies and increasing geopolitical concerns. But at the same time, 2025 was a year of considerable progress for UPS as we took action to strengthen our revenue quality and build a network that's designed to deliver differentiated logistics capabilities. To that end, here's some of what we accomplished in 2025.

By the end of the year, we reached our volume reduction target and reduced Amazon's volume in our network by approximately 1 million pieces per day. As planned, we delivered $3.5 billion in savings from our network reconfiguration and Efficiency Reimagined initiatives. We closed 93 buildings in the U.S. and deployed automation in 57 buildings, while maintaining the high level of service our customers expect.

We were disciplined on revenue quality and product mix and grew U.S. revenue per piece by 7.1% year-over-year. We increased small and medium-sized business or SMB penetration to 31.8% of total U.S. volume, driven by DAP, our Digital Access Program, which grew revenue 25% year-over-year, and delivered $4.1 billion in global revenue. As a percentage of total U.S. volume, we grew B2B to 42.3%, a 250 basis point improvement versus 2024. And importantly, we expanded our U.S. operating margin in 2025 on an average daily volume or ADV decline of 8.6% for the full year.

We leveraged artificial intelligence and our next-gen brokerage capabilities to process nearly 90% of all cross-border transactions digitally, including in the U.S. where we saw more than a 300% increase and daily customs entries compared to last year. We completed our acquisitions of Frigo-Trans and Andlauer Healthcare Group, further expanding our health care cold-chain capabilities. In 2025, our global health care portfolio generated $11.2 billion in revenue, putting us well on our way to achieving our goal to become the #1 complex health care logistics provider in the world.

Our UPS Digital business, which includes Roadie and Happy Returns, saw revenue grow by 24% compared to 2024. We deployed Smart Package Smart facilities, our RFID labeling solution, to 5,500 UPS store locations and completed installing RFID readers in all U.S. packaged [ carts ], and we maintained a disciplined and balanced approach to capital allocation by generating $8.5 billion in cash from operations and returning $6.4 billion to shareowners in the form of dividends and share repurchases.

While we made great progress in 2025, we have more work to do. Let's start with our network reconfiguration. One year ago, we announced our Amazon Accelerated Glide-Down Plan for the actions we plan to take that would drive future operating margin expansion and greater operational agility. Specifically, we set out to reduce the Amazon volume in our network by 50% over an 18-month period, while at the same time reconfiguring our network in line with our new volume levels.

We're in the final 6 months of our Amazon Accelerated Glide-Down Plan. And for the full year 2026, we intend to drive down another 1 million pieces per day while continuing to reconfigure our network. Given the success of our glide-down and cost-out efforts in 2025, we are confident that we will be able to complete our network reconfiguration plans without impeding our ability to grow in targeted markets. Brian will provide the details of our Amazon glide-down plans in a moment, which remain anchored on reducing hours, labor and fixed costs in line with new volume levels.

Deliberately shrinking a network is a daunting task, and our success was driven by disciplined planning and effective execution as well as the added flexibility and efficiency that's coming from deploying state-of-the-art technology and automation across a smaller and nimbler network. This year, we plan to further automate our network. And as a result, we expect to increase the percentage of U.S. volume we process through automated facilities to 68% by the end of the year, up from 66.5% at the end of 2025.

Our airline is a key part of our network. And over the past several years, we've taken a systematic, programmatic approach to modernizing our global air fleet. To that end, we made the decision to accelerate our plans and retire all MD-11 aircraft in our fleet. Over the next year or so, we will replace much of that capacity with new, more efficient Boeing 767 aircraft.

Now let's move to our economy product we call Ground Saver. At the end of the fourth quarter, we formalized a new relationship with the United States Postal Service to support last mile delivery of this product. Our new agreement improves the economics associated with this product while ensuring our service expectations are met. Ramp-up has already begun, and over the next several weeks and months, we will continue to increase the flow of Ground Saver volume to the USPS. As in the past, we will use density matching technology to determine which economy packages will be delivered by UPS versus USPS.

And touching on our activities outside the U.S., our new air hub in the Philippines is slated to open towards the end of 2026, and our expansion in Hong Kong is on track to open in 2028. Both gateways give us broader access and faster time in transit in the trade lanes that are growing in Asia.

Now let me move to our 2026 outlook. In 2026, growth in the U.S. package market, excluding Amazon, is expected to be up low single digits. Outside the U.S., export volume growth is expected to be subdued partly due to the tough comparisons coming from the boost of tariff front-running in 2025.

Now looking at UPS in 2026. Two important framing comments. First, for the first 6 months of the year, we will be working through the revenue and operating margin impacts of completing the Amazon glide-down, the outsourcing of Ground Saver to the USPS and adjustments to our International business in response to trade policy changes. Second, for the back half of the year, we will be operating a more efficient U.S. network and lapping trade lane [ infrastructures ].

For the full year 2026, we expect to generate consolidated revenue of approximately $89.7 billion and consolidated operating margin of approximately 9.6%. Brian will provide more details, but let me touch a bit more on the shape of the year, focusing specifically on the U.S.

In the U.S., we expect revenue to be flattish year-over-year, with revenue declining in the first half of the year due to the Amazon glide-down plan and then sequentially increasing in the second half as the Amazon glide-down efforts will have concluded. While we expect overall U.S. Domestic revenue to be flat, we are planning to grow SMB and enterprise revenue in the low single digits in the first half of the year and then accelerate that growth to mid-single digits in the second half of the year.

From an operating profit perspective, higher expenses are expected to weigh on operating profit early in the year. These higher expenses are mostly related to when we will recognize benefits in the Ground Saver transition to the USPS to our network reconfiguration. We know that variable costs come out as volume exits the network, but have learned that reductions in fixed and semi-variable costs lag. We expect to return to operating profit growth in the second half of the year.

The way I think about the year is like a back [indiscernible] effect. The house will look different, first half down, second half up. But for the year, the U.S. revenue and operating margin will be flat. And we will exit 2026 with a leaner, more agile U.S. network, one that's built for growth and sustained margin expansion.

As I wrap up, I'm extremely proud of our team and the progress we've made in executing our strategy. June of 2026 will be the inflection point. Our strategy is not a "shrink the company" strategy, but rather one where we grow in the best parts of the market, including enterprise, SMB, B2B, healthcare and international. Our strategy is about delivering differentiated value to our customers, improving the long-term profitability of our company and delivering value for our shareowners through effective capital allocation.

So with that, thank you for listening. And now I'll turn the call over to Brian.

Thank you, Carol, and good morning, everyone. Before I begin, I would also like to recognize and remember those affected by the crash of UPS Flight 2976. And I'd like to thank the team at Worldport for their steadfast commitment to the community, their teammates and our customers.

Now let's move to our performance. This morning, I'll cover 4 areas. Starting with our fourth quarter results, then I'll review our full year 2025 results, including cash and shareowner returns. Next, I'll discuss the Amazon write-down and our network reconfiguration and cost-out efforts. Lastly, I'll close with our financial outlook for 2026.

Moving to our results, starting with our consolidated performance. In the fourth quarter, revenue was $24.5 billion and operating profit was $2.9 billion. Consolidated operating margin was 11.8% and diluted earnings per share were $2.38. As noted in our earnings press release and financials, in the fourth quarter, we took a $137 million after-tax charge to write off our MD-11 fleet. During the fourth quarter, we proactively grounded our fleet of MD-11 aircraft and leveraged the flexibility of our integrated network to seamlessly operate through peak season.

Specifically, we repositioned some aircraft from other parts of the world to the U.S. We increased the amount of volume we moved on the ground. And we leased additional aircraft to meet capacity demands. With the learnings from operating during peak season, we made the decision to accelerate the retirement of our MD-11 fleet, which was completed in the fourth quarter.

Over the next 15 months, we expect to take delivery of 18 new Boeing 767 aircraft, with 15 expected to deliver this year. As new aircraft [ are on ] our fleet, we will step down the leased aircraft and associated expenses. We believe these actions are consistent with building a more efficient global network positioned for growth, flexibility and profitability.

Now moving to our segment performance. U.S. Domestic demonstrated strong performance in the fourth quarter driven by the combination of revenue quality and great execution. We delivered a very efficient peak, which is a testament to the transformational effects from the additional automation and network reconfiguration we made throughout the year. And importantly, we continued to take care of our customers during their busiest time of the year and provide an industry-leading service during peak for the eighth consecutive year.

For the quarter, total U.S. average daily volume was down 2.4 million pieces or 10.8%. More than half of the decline is from the glide-down of Amazon volume and our deliberate actions to remove lower-yielding e-commerce volume from our network. Total air average daily volume was down 11.9% driven by the glide-down of Amazon. Ground average daily volume was down 10.6% compared to the fourth quarter of 2024. Within Ground, Ground Saver ADV declined 27.7%, mainly due to our revenue quality actions.

Moving to customer mix. SMB average daily volume was flat to last year. However, in the fourth quarter, SMBs made up 31.2% of total U.S. volume, an increase of 340 basis points compared to last year. This is the highest fourth quarter SMB penetration in our history. B2B average daily volume finished down 5.2% in the fourth quarter compared to last year, but returns was a bright spot and increased 1.6% year-over-year. B2B represented 37.5% of our U.S. volume, which was a 220 basis point improvement versus the fourth quarter of 2024 and was the highest fourth quarter B2B penetration we've seen in 6 years. B2C average daily volume was down 13.8% compared to the fourth quarter of 2024. The product and customer mix improvement we saw in the fourth quarter demonstrate the progress we are making as we shift our U.S. mix to more premium volume with a focus on revenue quality.

Moving to revenue. For the fourth quarter, U.S. Domestic generated revenue of $16.8 billion. This was a decrease of 3.2% year-over-year against an ADV decline of 10.8%, the strong revenue per piece growth largely offsetting the lower volume. In the fourth quarter, revenue per piece increased 8.3% year-over-year, which was the strongest fourth quarter revenue per piece growth rate we've seen in 4 years.

Breaking down the components of the 8.3% revenue per piece improvement. Base rates and package characteristics increased the revenue per piece growth rate by 340 basis points. Customer and product mix improvement increased the revenue per piece growth rate by 320 basis points. The remaining 170 basis point increase was from fuel.

Turning to costs. In the fourth quarter, total expense in U.S. Domestic was down 3.3%. The decline in total expense was primarily driven by our actions to remove hours and operational positions to align volume. Cost per piece increased 8.9% year-over-year, primarily due to costs associated with the in-sourcing of Ground Saver as well as additional costs to secure air capacity after we grounded our MD-11 fleet. Even in the face of unexpected challenges, the U.S. Domestic segment delivered $1.7 billion in operating profit, and operating margin was 10.2%, a 10 basis point improvement compared to last year.

Moving to our International segment. We continue to adjust the network to support our customers through evolving trade policies and delivered strong top line growth driven by revenue quality efforts in all regions. In the fourth quarter, total international average daily volume declined 4.7%. International domestic ADV decreased 3.5% compared to last year, led by a decline in Europe that was partially offset by growth in Canada.

On the export side, average daily volume in the fourth quarter decreased 5.8% versus last year, led by declines on U.S. destination lanes resulting from the change in the de minimis exemption. U.S. imports in total were down 24.4% year-over-year, led by an ADV decline from Canada and Mexico of 30.5%, and the China to U.S. lane was lower by 20.9% compared to last year.

Turning to revenue. In the fourth quarter, International generated revenue of $5 billion, up 2.5% from last year despite the decline in volume. Operating profit in the International segment was $908 million, down $154 million year-over-year, with more than half of the decline related to trade policy changes, which resulted in a shift away from more profitable U.S. import lane. As a result, International operating margin in the fourth quarter was 18%.

Looking at Supply Chain Solutions. In the fourth quarter, revenue was $2.7 billion, lower than last year by $388 million. Looking at the key drivers, within air and ocean forwarding, demand softness resulted in lower market rates, which drove a decline in revenue year-over-year. Logistics revenue was down year-over-year driven by a decline in Mail Innovations. This was partially offset by revenue growth in healthcare logistics. And UPS Digital, which includes Roadie and Happy Returns, grew revenue 27% compared to the fourth quarter of 2024. In the fourth quarter, Supply Chain Solutions generated operating profit of $276 million. Operating margin was 10.3%, up 100 basis points compared to last year.

Now let's move to our full year 2025 results. For the full year 2025, on a consolidated basis, revenue was $88.7 billion, operating profit was $8.7 billion and operating margin was 9.8%. We generated $8.5 billion in cash from operations and continue to follow our capital allocation priorities.

We invested $3.7 billion in CapEx and spent $2 billion on acquisitions. We distributed $5.4 billion in dividends. Lastly, we completed $1 billion in share repurchases.

And in the segments for the full year, in U.S. Domestic, operating profit was $4.6 billion and operating margin was 7.7%. The International segment generated $2.9 billion in operating profit and operating margin was 15.8%. And Supply Chain Solutions delivered operating profit of $1.1 billion and operating margin was 16%.

Now let me provide an update on our Amazon glide-down, cost out and network reconfiguration efforts in 2025. We are pleased with the progress we've made after 4 quarters of a 6-quarter glide down, and we remain on track to achieve our targeted volume reductions. As Carol mentioned, we delivered $3.5 billion in savings from our network reconfiguration and Efficiency Reimagined initiatives.

The savings came from 3 buckets. Starting with variable costs. In line with the declines in volume, we removed 26.9 million labor hours in 2025. Looking at semi-variable costs, which reflects operational positions, we finished down 48,000 positions, including 15,000 fewer seasonal positions compared to 2024. And moving to our fixed cost bucket, we completed the closure of 195 operations, including closing 93 buildings. And we saw savings from our Efficiency Reimagined initiatives continue to accelerate in the fourth quarter. As we've discussed, offsetting some of these savings was the incremental costs associated with in-sourcing Ground Saver, which we expect to moderate in 2026.

Which brings us to 2026 and the last 2 quarters of our 6 -- quarter glide-down of Amazon volume. In total for the full year, we intend to glide down another 1 million pieces per day of Amazon volume. Along with this reduction in volume, we will continue to reconfigure our U.S. network and take out variable, semi-variable and fixed costs.

Looking at the variable costs associated with the Amazon volume decline, in 2026, we plan to reduce total operational hours by approximately 25 million hours. In terms of semi-variable costs, we expect to reduce operational positions by up to 30,000. This will be accomplished through attrition and we expect to offer second voluntary separation program for full-time drivers. And in the fixed cost bucket, we have identified 24 buildings for closure in the first half of the year and we're evaluating additional buildings to be closed later in the year. Plus, we plan to further deploy automation across the network. Putting it all together, we are targeting $3 billion in savings related to the Amazon glide-down.

Moving to our 2026 financial outlook. For the full year 2026, on a consolidated basis, we expect revenue to be approximately $89.7 billion. Operating margin is expected to be approximately 9.6% and diluted earnings per share are expected to be about flat to 2025. As a reminder, 2025 EPS included a $0.30 benefit from sale leaseback transaction. And lastly, our guidance for 2026 does not reflect any significant changes to the current tariff landscape.

Now let me add color on the segment. Looking at U.S. Domestic, we are going through significant structural changes and 2026 marks the inflection point of our strategy. Full year 2026 revenue is expected to be approximately flat year-over-year. We expect ADV to be down mid-single digits year-over-year due to our actions with Amazon, which will be offset by a strong revenue per piece growth rate in the mid-single digits.

Full year operating margin is expected to be flat to 2025. Looking at the shape of the year, revenue, our cost structure in the back half of the year will be meaningfully different than in the beginning of the year. In the first half of the year, we expect a decline in revenue compared to the first half of 2025 driven by volume decline.

And looking at the first quarter of 2026, we expect to generate an operating margin in the mid-single digits. This is due to short-term transition expenses related to Ground Saver, the timing of removing Amazon-related costs, including the execution of a voluntary driver separation program and additional expense associated with the aircraft leases related to the retirement of our MD-11 fleet.

In the second half of the year, we expect high single-digit operating profit growth, reflecting the completion of our strategic actions. We will still be comping year-over-year declines from Amazon, but we expect enterprise and SMB revenue growth. First half cost pressures are expected to be behind us and we'll be running a more agile U.S. network. The USPS will be delivering some of our Ground Saver product and our driver staffing will align with our new delivery volume level.

Our results in the second half of the year will be more indicative of our go-forward financial algorithm with an emphasis on both top line growth and operating margin expansion.

Moving to the International segment. We expect the dynamic environment we experienced in 2025 will continue in 2026, primarily due to the tariff and de minimis policy changes that will continue to drive changes in trade lane mix. With that in mind, we anticipate revenue growth to be in the low single digits year-over-year driven by a solid increase in revenue per piece. Operating margin in the International segment is expected to be in the mid-teens.

Looking at the first quarter, we expect revenue to be approximately flat with the year-over-year decline in operating profit due to changes in trade lanes and tough comps from the front-running of tariff and de minimis changes in 2025.

And in Supply Chain Solutions, for the full year 2026, we expect revenue to be up high single digits, which includes revenue from our Andlauer acquisition. Operating margin in SCS is expected to be in the low double digits.

For modeling purposes, in total below the line, we expect approximately $760 million in expense, which includes pension income of approximately $250 million. And we expect the tax rate for the full year to be approximately 23%.

Now let's turn to our expectation for cash and the balance sheet. We expect free cash flow to be approximately $6.5 billion, including our annual pension contribution of $1.3 billion, but before we factor in the financial impact of a voluntary driver separation program. Capital expenditures are expected to be about $3 billion. We are planning to pay out around $5.4 billion in dividends in 2026, subject to Board approval.

To close, I'd like to echo Carol's comments and express how proud I am of our teams for executing the strategy while continuing to take care of our customers. Our efforts today are setting our business up for future margin expansion and greater operational agility. And we're focused on growing in the best parts of the market to deliver long-term value for our shareowners.

With that, operator, please open the lines for questions.

[Operator Instructions] Our first question comes from the line of David Vernon from Bernstein.

So I guess, Brian, maybe just a big picture question in terms of what's embedded in the guidance and sort of the exit rate as we're [ leaving 2026 ]. I think you mentioned full year domestic margin is expected to be flat. Can you kind of give us a sense for what the second half or the exit rate margin should be? And then as far as kind of what's embedded in the domestic cost outlook, is there any sort of numbers you can put around costs from the retirement of MD-11s or additional stuff maybe that we didn't know before the earnings release today?

Yes. Great. Thank you, Dave. So let me first just address the MD-11. I think in the fourth quarter, including our results, was about $50 million of incremental lease costs that we incurred to replace the capacity. It will be about double that in 2026. It's included in the guidance. About 90% of that in the first half. The 767s are scheduled to come in through the course of the year with 5 in the first half and 10 in the second half and then we'll have 3 in 2027. So that hits the first part.

I think when we think about the shape of the year, there's a couple of really important things to think about. First, as we saw, as we went through 2025, and Carol mentioned in her remarks, there's a timing lag between us taking the cost out and realizing the benefits in the P&L along with volume. So as we go through the first quarter, we're going to have a step-down in the Amazon volume in the first quarter. We're taking actions in order to rightsize the variable cost, semi-variable cost and fixed cost, but there will be a lag that will hit the second quarter.

So you do see pressure from 3 things in the first quarter: the drawdown of the Amazon volume and the timing of the cost out; the transition cost of moving Ground Saver back to the USPS that will go through the first half of the year, we'll see benefit come through in the second half of the year; and then as I mentioned before, this incremental MD-11 cost. That's going to put margin pressure on domestic in the first half.

The way to think about it is really about 100 basis points of pressure in the first half, that relieves in the second half. Most of that pressure coming in the first quarter, right?

In our International business, you have a similar dynamic, right, where we've got pressure from de minimis in the third quarter and fourth quarter that's going to roll into Q1. Additionally, as I mentioned in my prepared remarks, we had a lot of pull forward in the first quarter of 2025, so we've got a really tough comp. So that's not only going to put pressure on the margin, as we saw in the fourth quarter, but also push down profit in International, where we expect profit to be down about 30% in the first quarter and then recover as we go throughout the year.

And then look, I think in the second half, we will look like a very different business, as I articulated. SMB and enterprise will be growing mid-single digits. We'll be in a much more efficient cost structure. We'll still be driving good mid-single-digit rev per piece improvement through our pricing. And our cost per piece will normalize as we rightsize the driver staffing, realize the benefits of automation. And we'll be exiting at a healthy double-digit margin that will take us into 2027.

Your next question is coming from Tom Wadewitz from UBS.

I wanted to see if you could give some thoughts on just kind of like the algorithm post the glide-down with Amazon. Do we think about it as -- for domestic package? So do we think about it as kind of low single digits revenue growth? Would that be kind of what you would aim for? And what kind of pace of margin improvement can you consider? I know, obviously, macro matters, so there are a lot of things you don't necessarily know, but maybe high level, how you think about that?

And then I guess within that, if we look into '26-'27, I think you've talked about maybe like $400 million to $500 million of EBIT headwind in '25 from the in-sourcing of SurePost. So now that you're handing that back to Postal, I don't know if you get that fully back and if that's kind of like half of a benefit in second half of this year and then half of it in '27. So just some -- I guess some thoughts on kind of that overall domestic pack margin and how to look at it.

Sure. Yes. Thanks, Tom. So as we think about the kind of go-forward algorithm, as I mentioned, look, we expect to see kind of mid-single-digit enterprise and SMB volume growth in the back half. Our rev per piece will normalize because some of the mix benefits that we've seen as the Amazon volume has come down -- also come down. But we've had healthy base rate increases that have been continuing. So I would think about a couple of percent on the base rate.

From the cost side, our cost per piece will normalize as well, right? And we expect to see cost per piece come down below rev per piece. So we're driving unit cost improvement as we have prior to the Amazon glide-down. And that will drive kind of structural long-term margin improvement as we go forward. So look, I think what we'll see in the back half of the year as we're exiting with non-Amazon volume and revenue growth and margin improvement will be the go-forward algorithm.

On the USPS costs, so the -- we will be transitioning a part of our Ground Saver delivery back to the USPS through the first half of this year. We do expect that we'll see benefits start to materialize in the second half. It will look slightly different than what we have before because, obviously, we're going back at a different rate than what we had for with the USPS, but that will translate into savings in the second half of this year and going forward. It also helps us with aligning our product strategy with how we want to think about an economy product as a holistic part of our product portfolio.

Do you think you get back to full $400 million to $500 million that you gave up in '25 or maybe not?

As we rightsize the driver staffing levels and moving forward, then yes, over time, I think we'll get that back. It will take time though because we've got to migrate the [indiscernible] and we have to rightsize the position levels commensurate with the new delivery stock levels.

Yes. I wouldn't expect to see that full benefit until 2027.

Correct.

Your next question is coming from Ken Hoexter from Bank of America.

You did throw out some costs pretty quickly there. Brian, I just want to clarify, did you throw out the cost in the first quarter on the [ tram ] route and the Postal Service cost impact to that margin? But my question is just on the rate increases for both Domestic and International. I think you threw out there that it was going to be low single digit for Domestic. Your thought on how this should trend for core rate both Domestic and International.

Yes. So if you think about rev per piece for the year, Ken, it's about 4.5%, right, rev per piece growth. But you're going to be higher than that in the first half and then normalize to about 3% in the second half, right, as some of the mix benefit comes out. Look, in the fourth quarter, we saw a 340 basis point improvement in base rates. We've been seeing kind of around this 300 basis point improvement in base rates. I would expect that as you think about going forward.

Related to the driver, we didn't give a number because we have not -- yet to launch the program. It's too early to make an estimate. Look, this is a tactical move that we did something similar last year in order to help us to rightsize the position levels and the network infrastructure with the new volume and delivery levels, right, because it includes the change in the Ground Saver stocks as well. We'll keep you updated with that as we go through the course of this year.

Your next question is coming from Ari Rosa from Citigroup.

So I wanted to dig a little bit further into the cost per piece trends. Obviously, it was elevated a bit in the fourth quarter. But you talked, Brian, about that normalizing on a go-forward basis. Maybe you could separate those things out. Just like if we think about normalized CPP run rate, how we should think about that? And then as we think about the improvement in revenue quality and the kind of shift in mix, does that assume kind of a higher cost per piece to handle that business? Or can we get that back to kind of that low single-digit run rate more in line with inflation?

Yes. So Ari, I think as you think about the cost per piece profile, again, it's going to trend down as we go through the year, right? It will look similar in the first quarter as it did to last year. But by the time we get through the year, we transition Ground Saver, we've finalized the execution of the network reconfiguration and our cost outs, we're deploying additional automation that will go online through a network of the future, yes, we will see the cost per piece normalize to that kind of normal inflation level, right? And with a 3% rev per piece growth rate and a lower cost per piece, right, we'll be able to get back to that kind of 100 basis point separation that we see to drive unit cost and margin improvement as we grow.

And perhaps we just comment on how are we driving this productivity. One way is through automation. We have 127 buildings that are automated. We are adding another 24 in 2026. The cost per piece in these automated buildings is 28% less than the cost per piece in our conventional buildings. So automation is one way that we will continue to drive productivity.

And then was getting better from a capacity perspective and a production perspective. And Nando, maybe you want to comment on that.

Yes, sure. So I think first 6 months next year will be -- or this year, I'm sorry, will be very similar to last year. In fact, we've all started optimizing some of the closures of sorts and buildings, because we didn't stop automating until December 31. We did take a day off, but we're right at it, right back at it.

And just for some proof points as we work through the month of December, the activity was up 4.4%. By activity, I mean, a lot more stops out there to serve our customers when, in fact, the volume was soft and negative. That is going to flip on us. So I'm very confident that the cost per piece will be in a much better position as we align to the driver buyout proposals that we're discussing, network of the future implementations, our building closures, sort closures and, of course, the outsourcing of the USPS line.

Your next question is coming from Chris Wetherbee from Wells Fargo.

Maybe if we could touch a little bit on the International segment, make sure we just sort of move through the -- run through the moving pieces there. Obviously, we talked a lot about the domestic side. But just get a sense of some of the pressure there. Maybe we can sort of break out some of the individual costs or de minimis pressures as we go through first quarter specifically, but all the first half.

Yes. Thanks, Chris. So in the International segment, what you saw in the third quarter is we did see export volume decline for the first quarter in 2025. That was really there was a lot of pressure both from Canada and Mexico as well as continued decline in our China-to-U.S. lanes and really all of our U.S. inbound lanes. That's going to roll over into the first quarter as well.

Look, I think what we expect to see evolve in the International business is we are going to see extreme weakness in the first quarter that kind of gradually recovers. There's 2 dynamics going on. One is -- the first is volume, right? So volume, we will lap the tariff impact in May and start to see positive growth from that. And then we'll lap the de minimis impact in September.

So the second dynamic is the trade lanes are shifting, right? And that's driving a margin headwind. Look, we make double-digit margin on our -- all of our U.S. inbound lanes. But the ones that are growing, right, are, call it, mid-teens versus the high double-digit margins that we've got in 20%, 30% margins that we have in the China-to-U.S. lanes. So while we're seeing some offsetting volume growth, we are seeing margin pressure as a result of that.

That also will abate as we go through the year. And what we expect to see, not only volume normalize, but also margin improve as we go through the year. And look, I think the revenue quality actions that we're taking in International helped to offset the volume declines in the third quarter and will continue to help drive revenue growth as we go through Q2, 3 and 4 in the year.

Okay. But the EBIT decline, that's year-over-year or sequential that you noted before?

Year-over-year.

The way I would do it just simply is we were down 360 basis points in the fourth quarter. It's going to be like that in the first.

Yes.

Because nothing is changing. And so we actually anniversary Liberation Day and then the move of the de minimis exception. So just got some tough comparisons. But we'll manage through it. And Kate's doing a really nice job of managing the network so that we can serve our customers, because there is growth in parts of the world. Maybe you want to talk, Kate, about where you're seeing growth.

Yes, absolutely. We mentioned before years ago when we first saw the China lockdown, we invested heavily in Asia diversification. And it has really unlocked growth. We are in Vietnam in the new air hub and it's already 80% full for a 5-year plan. So we've actually got double-digit growth going out of a lot of the Asian countries, but they're going to Europe and India. And so we shifted with the trade.

So while we do that, you have to pull down the block hours, and we have shown that over the last couple of years that that is what we do. So we are seeing good growth and we're helping our customers to understand the shift as well, whether it be by lane or by mode, package to forwarding or the reverse. So proud of the team. Last year with the tariff and de minimis, haven't seen anything like it in 36 years, and proud to say that we delivered, for instance, in the fourth quarter to 18% margin.

Your next question is coming from Jordan Alliger from Goldman Sachs.

A question for you. Can you maybe talk a little bit more what underpins, I think you said mid-single-digit type of package growth in the second half, is it inventories in better shape so that we could see business-to-business grow again? Is there some expectation that the tax benefits or refunds, which [indiscernible] year will help the consumer and demand? And assuming that type of volume happens, I mean, talk about your confidence level in the revised network and head count moving the goods?

Well, just from a macro perspective, the U.S. small package market appears to be stabilizing. The market, excluding Amazon, is projected to grow in the low single digits, so we should grow along with that. And fiscal and monetary policy changes should support this growth. Further, the outlook for manufacturing is better, if not robust, but it's better, which gives us confidence that we can grow into that space as well.

And the one thing I would ask you to remember, candidly, growth is a reflection of year-over-year comparisons, and we are going to anniversary the decisions that we made to exit not just some of the Amazon volume, but also Chinese e-commerce volume, so you just naturally get some growth from a year-over-year comparison. Brian, what would you like to add to that?

I think also, Jordan, the places where we have been investing, we are seeing wins, right? Health care, even in the Domestic small package business, SMB health care is a robust growth area for us, automotive, the air products. So we're seeing the quality volume that we've been shifting to show up in the network, right? In the fourth quarter, we saw heavier weights, we saw longer zones. We saw the highest SMB penetration we've ever had, the highest penetration we've had in 4 years. So the mix shift is happening and we can see that. That enables us to lean in in the places where we've invested, we've got differentiated capabilities, and we want to grow. And that helps support, as Carol said, growth in excess of the market.

And on differentiating capabilities, perhaps I'll just take a moment to talk about our RFID capability. As you know, we've been talking to you about RFID or our Smart Package Smart facility initiatives for a few years, and it's really starting to crystallize into 3 big pillars. The first is what we call Smart Facility, but it's really a smart car, where we've enabled now all of our cars with RFID sensors. So we're moving from a scanning to a sensing network. And what this does, well, it makes us more productive on the car, but also improves the level of misloads. Then by using the RFID labeling, our packages become smarter, which reduces defects.

The more interesting development, which drives commercial business, is what we call Smart Fulfillment. And what Smart Fulfillment is, is putting the RFID labeling at the point of origin, which gives better transparency order to cash, some of these customers are desperately seeking. It gives them better control. And so we launched the [ RFI distillment ], if you will, in the fourth quarter by putting RFID labeling at the origin of all of our UPS stores. We have 5,500 UPS stores, as you know. They're processing now 1.3 million packages day with RFID labeling. And this is allowing us to earn new commercial business.

So it's not just the fact that the market is growing and we've got some easier compares. It's we're investing in capabilities that are turning into wins. In fact, the win for Domestic business in the fourth quarter, and we sold during peak, the win during the fourth quarter was 25% higher than a year ago.

Your next question is coming from Ravi Shanker from Morgan Stanley.

Carol, you gave us long-term targets for 2026 at your Investor Day in 2024. And obviously, a lot has happened since then. I'm sure you'll have Investor Day early next year. But in the meanwhile, how do you think we should think about that long-term earnings growth trajectory and where kind of normalized EPS is at this time kind of in your view?

Well, I think it's a fair question to ask us. But clearly, things have changed a lot since 2024. Because back then, we haven't planned the Amazon glide-down. So what I'd ask, Ravi, is that you let us get through this year. 2026 is the pivotal year for UPS. And once we get through this year, we'll come back out and give our view on long-range targets.

Our next question comes from Bruce Chan from Stifel.

Yes. I don't know if you've discussed it in the past, but I'm just curious if maybe you can talk about the selection process for which facilities were automated in '25 versus what's ahead in '26. And I guess what I'm trying to get to is whether there's anything to read from the complexity of the operations that you attacked last year versus what you've got ahead this year.

So Nando, talk about our process.

Yes. So look, we've got -- we have reviewed this I think a couple of calls ago, where we look at each individual site, 1,100 checkpoints of things that we need to make sure that we are absolutely sure. Because once we close, we're not going back to those facilities. And then we think a very, very detailed exercise to make sure we're pointing that volume to the automation.

And so what's happening is you're seeing a cascading effect of sites being closed that our legacy conventional facilities, a lot of labor required to run those facilities to a much more nimble, quicker, automated, consolidated facility. And as we bring in all of those peripheral centers, we start to see the efficiencies of [ feeds ], [ cube ] utilization, and of course, any service disconnector can be rationalized right there in 1 facility. So that's also helping from a customer perspective.

The next set of buildings, of course, we wanted to accelerate and we went after the more complex, bigger facilities in the middle of our project last year. They will be just as challenging, but we don't see any concerns whatsoever in the complexity and closing these centers, and making sure they map back to the automation so we can help ourselves financially.

And while staying on service, and that's really still important to not trade off productivity or cost out for service, and I'm proud that we have 8 years in a row now of leading service, one other observation about how the team is performing in this regard because I'm super proud of them, the beginning of last year, we targeted 73 buildings to be closed related to our Amazon glide-down, we actually closed 93. This year, you've targeted 24 buildings. My guess is there'll be a few more closures than the 24 you've identified.

Yes. So that's just the first half. We continually put all of those facilities through a process to make sure that we're not missing anything. We suspect in the range of 24 for sure first half, that we've got another 60 or 70 we're assessing, and then we'll have a number that comes out of that.

And we'll update you as we go.

Your next question is coming from Richa Harnain from Deutsche Bank.

So just piggybacking off of that question. Great stat on the cost per piece being 28% lower in these automated facilities then your conventional ones, Carol. And you talked about the runway now you have for that to continue. But how does that play into maybe your ability to do more with less? So how can we think about your CapEx plans? Your 2026 CapEx outlook is below 2025 and that's despite replacement plans for fleet, which you spoke to. So maybe talk a little bit more about what's underpinning that? And as you adjust to maybe a smaller footprint, a more efficient footprint, how should we think about the long-term CapEx outlook?

Sure. I'll start and then, Brian, you can jump in. When you think about our network, Nando mentioned 1,100 points in the U.S., some of those buildings are really old. A lot of maintenance expense. And as we're closing those buildings, that maintenance expense goes away. So that's part of the year-over-year change.

On the fleet additions, we're actually financing the aircraft through a [ burn-and-lease ] structure, that, Brian, you might want to [indiscernible].

Yes, sure. Yes. And Richa, as Carol mentioned, yes, we do have financing structures around the aircraft. But I think, importantly, look, if you think about the CapEx profile, look, our volumes continue to come down, right? And as Carol mentioned, we closed facilities. When we look at the asset categories we're really [indiscernible] back, we're not buying as many vehicles, right? Because we don't need them as we rightsize the U.S. network. We continue to invest in our international network through both air hubs, aircraft and vehicles. But it's bringing down our maintenance expense, it's bring down our vehicle expense.

And look, I think as we as we turn and we continue to grow, we'll be kind of around 3% to 3.5% of revenue as a normalized CapEx. But we're creating more efficiency. We're creating more flexibility, so you don't have to spend CapEx on variable capacity like we used to. And that's going to allow us to run a more capital-efficient network going forward.

Your next question is coming from Jason Seidl from TD Cowen.

Carol, I think you talked a little bit about the technology that's going to redirect parcels to the USPS versus sort of in-house. Can you maybe give us some more color on that in terms of how much of your network is going to be equipped with that by the end of the year and sort of how we should think about the helping margins over the long term? Because I'm assuming that will help with cost as well as productivity.

Well, happy to talk about [ maths ] but the technology part of it, I'll throw it back over to Nando.

So just on the [indiscernible] we will have that network up and running by end of this month. And so it's really a matter of some of the conversions we did last year with our customers, making sure that the labels are readable by both UPS and the USPS as we tender through the automation to the SPS for last mile delivery.

The magic algorithms are within our control, so we can expand those. In fact, the peak season, I think we expanded those proximity stops up to 500 feet in some cases down to 100 feet, or an exact match to the address. It really depends on the mix of volume that's in our network. But as far as delivering the service, physically, we can move the packages. We need to enable the packages so they can be read through the network, and then through the USPS to our end customers.

And Matt, you're responsible for this relationship, so is there any color you want to add in terms of volume going to the [indiscernible] service?

No, I think just a couple of points. One is, look, we continue, to Nando's point, we continue to ramp the volume up in the month of January. And it also gives us an opportunity that Brian highlighted earlier, it's really to differentiate our product portfolio. Because our customers are asking us, one, they want the reliability of the UPS network, but we -- and the service that we can provide and we've demonstrated we can provide, but they also want to make sure they have economical option. So this really gives us an opportunity, to both Nando and Carol's point, to, one, bring our customers online and get these [ dual labels ] so that we can have -- they can have visibility, but also giving them the right experience along the way with that economic option.

And it's not just the economics. We're going into the DDUs. And that opportunity was not presented to us a year ago. So we're very excited to be able to use the DDUs because that will ensure our service levels stay high.

Your next question is coming from Bascome Majors from Susquehanna.

If we go back to the 2023 deal, [ the Teamsters ], you had to absorb a lot of inflation really quick, and then you had 3 years of fairly moderate labor inflation in the U.S. and then that was scheduled to tick up in the fifth year of the contract. Can you talk a little bit about what the initial plan was to deal with that cadence of high labor inflation, low and then some moderate increase in the back half? How the Amazon glide-down in the network reconfiguration has maybe changed that plan? And ultimately, how do you feel about dealing with that uptick in labor inflation in the U.S. in the second half of next year?

Well, at that time, we also were looking at network of the future, as you can recall, which was the rationalization of our network, the automation with -- inside of our network. And that work has progressed quite nicely. We are ahead of where we thought we would be. You couple that with the Amazon glide-down and the number of employees in our workforce was down considerably. As Brian pointed out, we're down over 40,000 people. That's going to impact the cost of any contractual increase on wage, of course. So we're managing through this, I think, very well. And Brian, is there anything you want to add?

Sure. And I think Carol hit on the right point, right? When we started out with the labor contract, we knew that we were going to be investing in order to create a lower labor-intensive network, right, with more flexibility that have the ability to scale, right, particularly for peak, because we're seeing peak increasingly important, without the need for so much labor. You're seeing that, right? We saw it with and without the Amazon drawdown in -- without in 2024, with and without in 2025. We've set out targets for incremental physician eliminations that will drive efficiency in 2026.

And so as we approach that point, we will be driving down total expense. At the same time, remember, we will have a different characteristic of revenue in the network so that the incremental costs will not turn customer ORs upside down, right? And so we will have a less labor intensive, more nimble, more profitable network that will minimize the impact of the increase.

And Matthew, we have time for one more question.

Certainly. Our final question comes from Brandon Oglenski from Barclays.

I guess can we maybe summarize all this? Because it sounds like you guys are really protecting service even though the network is getting smaller. Does that create any market share opportunities or challenges, especially with where pricing is going for the industry as well? I appreciate it.

Service is paramount to winning new business. It's almost table stakes. Without it, how do you win? It's not just service though. It's capabilities. And the capabilities that we've been investing in, and I talked a little bit about RFID, but there are a lot of other capabilities that we've been investing in, that's allowing us to take share.

I'll focus us right on our Digital Access Platform. When I joined the company, the revenue in that platform was $139 million. Fast forward to the end of 2025, $4.1 billion. We continue to add more partners to the platform. We're growing it globally, not just in the United States. And that platform is something that's small and medium-sized businesses enjoy using for delivery as they're selling through partners like eBay and Shopify and others.

So we're going to continue to invest in capabilities that allow us to win new business, but service is paramount.

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

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

Good morning. My name is Matthew, and I'll be your facilitator today. I'd like to welcome everyone to the UPS Third Quarter 2025 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Mr. PJ Guido, Investor Relations Officer. Sir, the floor is yours.

Good morning, and welcome to the UPS Third 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.

For the third quarter of 2025, GAAP results include a net charge of $164 million or $0.19 per diluted share, comprised of after-tax transformation strategy costs of $250 million, which were partially offset by an $86 million benefit from the reversal of an income tax valuation allowance. A reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials are also available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. And now I'll turn the call over to Carol.

Thank you, PJ, and good morning. To start, I want to extend my sincere gratitude to all UPSers for their dedication and hard work. The third quarter brought a wave of tariff changes, some expected, others unforeseen, and our team navigated these complexities with exceptional skills and resilience. At the same time, we continued advancing our network reconfiguration, a critical step in shaping the future of our U.S. business. Amid this significant transformation, I remain deeply impressed by the determination of UPS and their steadfast commitment to serving our customers and building a stronger, more agile UPS.

Turning to our results. In the third quarter, consolidated revenue was $21.4 billion. Consolidated operating profit was $2.1 billion and consolidated operating margin was 10%. The cash flow pressures we saw in the second quarter eased during the third quarter. As a result, our year-to-date free cash flow reached $2.7 billion. In the third quarter, our focus on revenue quality continued. And as expected, our U.S. average daily volume, or ADV, declined from last year. The largest drivers of the U.S. volume decline were the planned glide down of Amazon volume and a targeted reduction in lower-yielding e-commerce volume. Our focus on revenue quality yielded solid results as U.S. revenue per piece grew by 9.8% in the third quarter. By coupling solid revenue per piece growth with outstanding expense control, we were able to grow our U.S. operating margin by 10 basis points to what we reported last year on an ADV decline of $2.3 million or 12.3% -- in our international business, total ADV grew 4.8%.

Our priority is to our customers. And during the quarter, we ran our international network with agility, rerouting capacity to where our customers needed it. Looking at export ADV, it increased 5.9%, marking the fifth quarter in a row of growth. But due to the changes in trade policy, export volume fell in our higher-margin lanes and grew in our lower-margin lanes. This volume mix change pressured our international operating margin and also pressured our forwarding business. On a positive note, we continue to see strength in health care with strong revenue growth in the third quarter year-over-year, driven by our portfolio of health care logistics solutions.

As Brian will provide more details on our financial performance, let me provide some operational updates. In recent years, the spotlight on international commerce and the intricacies of supply chains has intensified. And in 2025, we're witnessing the most profound shift in trade policy in a century. At UPS, this is our domain. Every day, we connect businesses and customers across more than 200 countries and territories, ensuring goods move seamlessly across borders. That includes navigating the complexities of customs brokerage, where we're one of the world's largest customs brokers, managing millions of customs entries annually. Our success is powered by deep expertise, exceptional talent and cutting-edge technology.

With our next-gen brokerage capabilities, we harness AI to digitally process over 90% of our cross-border transactions, delivering speed, accuracy and reliability at a global scale. Following the elimination of the de minimis exemption for U.S. imports, UPS experienced a tenfold surge in daily customs entries. We responded swiftly, upgrading our shipping systems to capture the expanded data requirements mandated by U.S. customs and border protection. To manage the increased volume and complexity, we enhanced our customs brokerage capabilities by integrating Agentic AI. This advanced technology streamlined formal entry processes. At UPS, we don't just move goods, we remove friction. By absorbing regulatory complexity, we help our customers minimize disruptions and keep global commerce flowing. And due to the investments we've made in our brokerage business, we can absorb this complexity without adding cost that isn't offset by revenue.

As you know, we have a goal to become the #1 complex health care logistics provider in the world. To that end, we are making great progress towards our acquisition of Canadian-based Andlauer Healthcare Group. The addition of Andlauer's capabilities will further strengthen our solutions in global health care logistics, particularly in North America. We expect to close this transaction in early November.

Now touching on DAP, our digital access program. We have more than 8 million SMBs on DAP. And in the first 9 months of the year, we generated over $2.8 billion in global DAP revenue, an increase of 20% year-over-year. DAP continues to be an important SMB growth engine. And for the full year, we expect to deliver over $3.5 billion in global DAP revenue.

Before we move on, let me provide updates on our Amazon glide down effort and our Ground Saver product. Our Amazon glide down efforts are proceeding as planned. As expected, in the third quarter, we experienced a stepped-up volume decline with Amazon. Versus last year, Amazon's total volume decline in the third quarter was 21.2% compared to 13% for the first half of the year. In tandem with this change, we are continuing to reconfigure our U.S. network. We closed an additional 19 buildings, bringing our total so far this year to 93 buildings. Further during the quarter, we completed a successful voluntary retirement program for many long-term drivers who welcome the opportunity to retire from UPS after decades of dedicated service. In total, our network reconfiguration and cost-out efforts are on schedule and the profit improvement we expect to see from the Amazon glide down initiatives is on plan. In a few minutes, Brian will provide more details about our progress here.

Moving to Ground Saver. In the third quarter, our Ground Saver average daily volume declined 32.7% year-over-year due primarily to the actions we've taken with Amazon and to trim lower-yielding e-commerce volume. We recently reached a preliminary understanding on revenue and rates with the United States Postal Service to support last-mile delivery for our Ground Saver product. There's still more work to do, but we are confident we will come to an agreement that ensures our service levels will remain best-in-class, which brings me to peak. As we've discussed, our top 100 customers drive about 80% of our peak surge each year, and we expect that to be the case again this year. Early forecasts from these customers suggest they are planning for a good peak that will result in a considerable surge in volume from our current volume levels. But remember that given the Amazon glide down plan, we expect total peak average daily volume in the U.S. to be down year-over-year.

Operationally, we're poised to deliver a strong peak season driven by several key factors. First, thanks to strategic enhancements made to our Network of the Future initiative, we're operating more efficiently than ever. These changes will allow us to reduce reliance on seasonal hires and significantly cut back on lease trailers, vehicles and aircraft compared to previous years. Much of this efficiency is powered by automation. Over the past year, we've deployed new automated systems in 35 facilities. In the fourth quarter, we anticipate 66% of our volume will move through automated processes, up from 63% during the same period last year. Second, as we approach the peak shipping window, we'll continue to leverage our proven technologies and scale the network where needed, all while maintaining a sharp focus on service quality. These advancements position us to run the most efficient peak in our history. We've set the standard for holiday shipping, 7 consecutive years of industry-leading service, and we're confident that our operational strategy and commitment to excellence will make it.

With the uncertainty around tariffs now somewhat resolved and clear peak forecast from our largest customers, we're in a stronger position to offer guidance than we were at the end of the second quarter. As I wrap up, let me share our financial expectations for the fourth quarter. We anticipate consolidated revenue of approximately $24 billion and consolidated operating margin of approximately 11% to 11.5%. Brian will walk you through the details of our fourth quarter outlook shortly. Amid a rapidly evolving global landscape, UPS is executing the most significant strategic shift in our company's history. We're focused on winning where it matters most, capturing high-value parts of the market and onboarding customers with increasingly complex logistics needs. Our company is rock solid strong with more than sufficient liquidity to deliver upon our transformation and return capital to shareowners. The changes we're implementing are designed to deliver long-term value for all stakeholders. So with that, thank you for listening. And now I'll turn the call over to Brian.

Thank you, Carol, and good morning, everyone. This morning, I'll cover 3 areas, starting with our third quarter results. Next, I'll discuss progress with the Amazon volume glide down and our network reconfiguration and cost-out efforts. Then I'll close with our expectations for the fourth quarter and capital allocation for the full year.

Moving to our results. Starting with our consolidated performance. In the third quarter, revenue was $21.4 billion and operating profit was $2.1 billion. Consolidated operating margin was 10%. Diluted earnings per share were $1.74. $0.30 of EPS came from a sale-leaseback transaction involving 5 properties completed in the third quarter, which resulted in a $330 million pretax gain on sale. This transaction was part of a broader strategy aimed at freeing up capital for reinvestment as we reconfigure our network. The leases are structured to maintain operational continuity for our business. And as a result, we have not adjusted this gain on sale in our non-GAAP presentation.

Now moving to our segment performance, starting with U.S. Domestic. In the third quarter, we continued to improve the mix of volume in our network and our disciplined approach to revenue quality meaningfully offset the impact lower volume had on revenue. Additionally, the team did an excellent job managing expense throughout the quarter, resulting in an improvement in U.S. domestic operating margin. For the quarter, total U.S. average daily volume was down 12.3%, primarily due to the glide down of Amazon volume and our focus on improving revenue quality. Total air average daily volume was down 13.9%, mainly due to Amazon. Health care and high-tech customers both showed growth in air average daily volume in the third quarter, which was the third consecutive quarter of positive momentum from these key industries. Ground average daily volume was down 12% year-over-year. Within Ground, Ground Saver ADV declined 32.7% due primarily to the actions we've taken with Amazon and to trim lower-yielding e-commerce volume. As a result, our more premium ground commercial and residential services made up over 84% of our total ground average daily volume in the third quarter. That's the highest percentage we've seen in more than 5 years.

Now moving to customer mix. SMB average daily volume was down 2.2% versus last year. However, we continue to see bright spots in SMB health care and automotive as well as growth from DAP, our digital access program. In the third quarter, SMBs made up 32.8% of total U.S. volume, which is about a 340 basis point improvement compared to last year. In the third quarter, B2B average daily volume finished down 4.8% compared to last year due to softness in retail and in manufacturing activity. B2B represented 45.2% of our U.S. volume, which was a 350 basis point improvement versus last year. B2C average daily volume was down 17.6% year-over-year.

Moving to revenue. For the third quarter, U.S. domestic generated revenue of $14.2 billion, which was down just 2.6% year-over-year against an ADV decline of 12.3%. Our revenue performance reflects strong growth in revenue per piece and air cargo. In the third quarter, revenue per piece increased 9.8% year-over-year, which was the strongest revenue per piece growth rate we've seen in 3 years. Breaking down the components of the 9.8% revenue per piece improvement, base rates and package characteristics increased the revenue per piece growth rate by 350 basis points. Customer and product mix improvements increased the revenue per piece growth rate by 400 basis points. The remaining 230 basis point increase was from fuel.

Turning to costs. In the third quarter, total expense in U.S. domestic was down 2.7%. The decline in total expense was primarily driven by our actions to reduce hours and operational positions with volume. Looking at cost per piece, we were up against a tough comparison from last year. This comparison, together with the costs associated with delivering Ground Saver volume and the contractual union wage increase that went into effect on August 1, resulted in a cost per piece increase of 10.4%. The U.S. Domestic segment delivered $905 million in operating profit and operating margin was 6.4%.

Moving to our International segment. Through ongoing shifts in trade patterns spurred by changes in U.S. trade policy, we are continuing to operate our global network with agility to serve our customers. As a result, in the third quarter, International delivered its fourth consecutive quarter of growth in average daily volume and revenue. In the third quarter, total international ADV increased 4.8%, led by Europe and the Americas regions. International domestic average daily volume increased 3.6% compared to last year, led by Canada. On the export side, average daily volume increased 5.9% year-over-year, driven by the agility of our network to adjust to changing trade lanes and led by strength between European countries. As the third quarter played out, we saw a decline in U.S. imports, led by an ADV decline on the China to U.S. lane of 27.1%.

Turning to revenue. In the third quarter, international revenue was $4.7 billion, up 5.9% from last year. Operating profit in the International segment was $691 million, down $101 million year-over-year, reflecting pressures from trade lane shifts, product trade down and lower demand-related surcharges. International operating margin in the third quarter was 14.8%.

Moving to Supply Chain Solutions. In the third quarter, revenue was $2.5 billion, lower than last year by $715 million, of which $465 million was due to our divestiture of Coyote in the third quarter of 2024. Within Supply Chain Solutions, demand softness in Air and Ocean Forwarding resulted in lower market rates, which drove a decline in revenue year-over-year. Logistics revenue was down year-over-year, driven by a decline in Mail Innovation. This was partially offset by revenue growth in Healthcare Logistics. And UPS Digital, which includes Roadie and Happy Returns, grew revenue by 9.5% year-over-year. In the third quarter, Supply Chain Solutions generated operating profit of $536 million. Operating margin was 21.3%. Our results in Supply Chain Solutions this quarter include the impact of the sale-leaseback transaction, which generated the $330 million one-time gain that I mentioned earlier.

Turning to cash and shareowner returns. Year-to-date, we generated $5.1 billion in cash from operations and free cash flow of $2.7 billion. We finished the quarter with strong liquidity and no outstanding commercial paper. And so far this year, UPS has paid $4 billion in dividends.

Now let me provide an update on our cost out and network reconfiguration efforts. In conjunction with our actions to significantly reduce the amount of Amazon volume in our network, we are executing the largest network reconfiguration in our history and will remove approximately $3.5 billion in related costs this year. We've made a lot of progress since our last earnings call. Let me walk you through the details. Total Amazon volume was down 21.2% compared to the third quarter of last year. We achieved our reduction target in the portions of the Amazon volume we are exiting, and we grew the portions of Amazon volume that we are continuing to serve.

Now let's look at the savings we've generated so far this year. As a reminder, we are tracking our savings within 3 cost buckets. They are variable costs, which primarily captures operational hours, semi-variable costs, which reflects operational positions and fixed costs, which includes closing buildings and reducing expense from support functions through our efficiency reimagined initiative. Looking at variable costs. Total operational hours continue to move down with volume. So far this year, we are down more than 16 million hours, and we are on track to reach our reduction target of approximately 25 million hours for the year.

Moving to semi-variable costs. Attrition and operational positions accelerated each month during the quarter, and we finished down nearly 34,000 positions year-over-year, which includes a reduction from our driver voluntary separation program. Nearly 1/3 of the reductions occurred in September. In our fixed cost bucket, year-to-date, we have completed the closure of 195 operations, including closing 93 buildings. As we are closing buildings, we are also investing through our Network of the Future efforts. And as Carol mentioned, we've deployed additional automation in 35 facilities. And while we expect to be busy processing volume during peak, we also plan to deploy automation projects in 7 additional buildings in December. Lastly, savings from our efficiency reimagined initiatives continued to accelerate in the third quarter.

Pulling it all together, we are making meaningful progress executing our strategy. So far this year, we've reduced expense by $2.2 billion, and we're on track to achieve our 2025 expense reduction target of approximately $3.5 billion.

Now moving to our outlook. At the consolidated level, we expect fourth quarter revenue of approximately $24 billion and an operating margin of approximately 11% to 11.5%. Looking at the segments in the fourth quarter. Starting with U.S. Domestic, we expect revenue to be around $16.2 billion in the fourth quarter, driven by the continued volume reduction with Amazon and strong revenue per piece growth. And we expect an operating margin of approximately 9.5% to 10%. In terms of peak, in the U.S., we expect heavier volume earlier in the peak period, and we have 1 additional delivery day compared to last year, which gives us more flexibility. The network reconfiguration and additional automation we deployed through Network of the Future set us up to deliver a more efficient peak and another year of industry-leading service for our customers. In short, we're ready for peak.

Turning to International. We expect the dynamic environment we've experienced throughout the year will continue. With this in mind, we expect fourth quarter revenue to be approximately $5 billion, and we expect an operating margin of between 17% and 18%. In Supply Chain Solutions, we expect revenue in the fourth quarter of around $2.7 billion and an operating margin of approximately 9%.

Looking at capital allocation for the full year, we expect capital expenditures to be approximately $3.5 billion. We are planning to pay out around $5.5 billion in dividends, subject to Board approval, and we have completed the targeted share repurchase of about $1 billion of our shares. Lastly, we expect the tax rate to be approximately 23.75% for the full year 2025.

Before I close, let me comment on our financial condition. UPS is rock solid strong, and we have plenty of liquidity to continue executing our strategy and return value to our shareowners. And following the completion of our acquisition of Andlauer, we expect to end the year with around $5 billion in cash. So with that, operator, please open the lines for questions.

[Operator Instructions] Your first question is coming from Chris Wetherbee from Wells Fargo.

Maybe we can start on domestic margins. So obviously, some improvement, but we had a lot of RPP growth in the quarter. So I guess as we think forward, I know there's a mix of cost as well as yield management that we're going to see. And I know you've given us some ranges for the fourth quarter. But generally speaking, where you think you are in the glide down, can you give us a little sense of maybe what we can start to think about for 2026 from a domestic margin perspective?

Thanks, Chris. I appreciate it. And look, I think we're very pleased with both the revenue quality we saw in the third quarter as well as the progress that we're making with the Amazon glide down, and we laid out the activity metrics around that. On 2026, look, we'll update 2026 on the January call when we report fourth quarter. But there are a few things that I think are worth kind of keeping in mind. Remember, we're 3 quarters into a 6-quarter drawdown. So as we lap the year, we kind of come through the first 3 quarters of this year, we will see a sequential increase in Amazon volume as we go into peak because everybody peaks. And then we'll continue to draw down as we go through the first half of next year and the cost takeout will continue as we go through that.

The second is, as Carol mentioned, we're taking strategic actions around Ground Saver that will start to take hold next year, and we'll see economic benefit in the back half of next year for that as well. We do anticipate closing Andlauer in November of this year, and we'll update you on the financials as we wrap that into next year, but that's an exciting acquisition to accelerate our health care strategy. And look, we're continuing to focus on growing in the parts of the market that will help us continue to drive revenue per piece growth as well as higher margins as we go into the back half of '26 and complete the Amazon glide down.

Our next question comes from the line of David Vernon from Bernstein.

So Brian, can you talk a little bit about the exit rate on cost per piece coming out of the third quarter? It seems like this was kind of an inflection quarter where with the buyout and everything else, you probably came out a little bit better than you started and whether we should expect that to accelerate into 4Q? And then it sounds like you guys are saying you found a way to work with the USPS on Final Mile for some of the residential lower rate e-commerce type of stuff. Can you kind of be more specific in terms of what that looks like and how that changes cost per piece?

Sure. Well, first, let me talk about exit rate on Q3 cost per piece, and I'll let Carol comment on the USPS. And there's a couple of things on cost per piece. Look, the cost per piece is on a tough comp year-over-year because this is probably the largest year-over-year comp related to the e-commerce volume that we're exiting. So it has a big mix impact both on rev per piece and cost per piece. As we've gone through the quarter, though, we are seeing some of the best production metrics that we've seen certainly on our inside, I think it's in 12 years, on a preload in 20 years. The investments that we're making in automation that we're deploying through Network of the Future are certainly showing benefits, and we're seeing that come through the cost per piece. The other thing that I'll point out, and I'm sure you saw it in the non-GAAP reconciliation is that we executed on our driver voluntary severance program in the quarter. About 90% of those drivers exited on August 31. And so those savings will start to materialize in the fourth quarter as well. Carol, do you want to comment on Ground Saver?

I'm happy to. And David, nice to hear from you. Just maybe going back on the driver piece. The total cost of the buyout is $175 million. the payback -- annual payback is $179 million. So the payback is less than 1 year. So that's a good thing for our cost per piece, isn't it? Yes. Now let's talk about the USPS. As you know, David, the Postal Service has a new Postmaster General. And when Mr. Steiner joined, immediately started having a conversation with him about how could we create a win-win-win relationship, a win for the postal system, a win for UPS and a win for our customers. And the way to do that is to leverage what they're best at, which is final mile and what we're best at is middle mile. And so I'm happy to tell you that we've reached preliminary agreement on what that looks like from a volume and rates perspective. We're working through the details and look at those details all ironed out over the next weeks and months. And by the end of the fourth quarter, we'll be able to give you more details. But I'm very, very pleased with where we are today and this new -- renewed relationship with USPS.

Is there any way to kind of talk a little bit more about timing and how that kind of affects the domestic margin for 2026? Or is it still too early?

It's too early. We don't expect any benefit in the fourth quarter. It will start, we hope, knock on wood, we can knock it all down by the beginning of the year. And it's not just for our Ground Saver product, which is in our U.S. small package business, but also for Mail Innovations. And we're excited about what that's going to mean to our Mail Innovations margin looking forward. So at the end of the year, we'll give you more color.

Our next question comes from the line of Todd Wadewitz from UBS.

So I wanted to ask, let's see, I mean, I think on your comments in 2Q, you talked about concern on SMB stepping down. I think this was the impact of the elimination of the de minimis exemption that, that would have a meaningful impact and then it became a global elimination, not just China and Hong Kong. So can you give us a bit more perspective on how SMB played out versus what seemed to be a lot of concern in 2Q? And then also, when we look at September, how is the impact different in the international business when it became a global elimination versus China, Hong Kong? So yes, on those 2 things.

Sure. If you look at our SMB results for the quarter, we were down slightly year-on-year. But as we look at our performance relative to the market, we took share both in volume and value. So we were pleased with our performance relative to the market and the decline year-on-year wasn't as dramatic as we thought it could be. We are watching the SMBs very closely, though, Todd. Some are doing just fine and managing through the changes in trade policy and some of them candidly are challenged. So we've got a close attention to these to these customers. And let me just give you some data, which is amazing how many shippers are looking for help. In the third quarter, we had 12 trade webinars with more than 8,300 participants. And we've reached out and had conversations with 61,000 customers trying to help them navigate through these changes in trade policy. It's complicated. It's super complicated. And to your point about the elimination of the de minimis exemption. Well, it certainly played some havoc on some of these shippers, and I'll just make that real for you, too, just some data. Back in March, we had 13,000 packages that came into the United States every day that required some sort of a dutiable clearance. And we handled that about 21% was handled with technology, so cleared without any manual intervention. If you fast forward to September, when now it's a global elimination, 112,000 packages a day required some sort of dutiable clearance. And thank goodness, we invested in technology. So we were able to clear 90% of those packages without any manual intervention, which is great, but 10% needed some help. And where they needed some help, they really needed some help because when the global exemption went into place, you might have seen that some mail systems like Royal Mail or Deutsche Post really stopped shipping into the United States, which meant shippers, predominantly consumers who used to use those mail carriers as a way to get packages in the United States came into carriers like UPS or FedEx or others. And many of those shippers, consumer to consumer were naive, and you wouldn't expect them to understand the intricacies of trade policies and they shipped in packages that didn't have the information necessary to clear. And so Kate, you might want to talk about how we worked with those shippers because it was a lot of hard work and effort to work with those shippers. Yes, sure was. And so to help especially these C2C consumer-to-consumer shippers, multiple calls with them, helping -- trying to get them to understand the missing information that they are required to provide. And a good portion was on food. And if you think about a family shipping food to family members, and that tended to be the pinch in that 3-week, I'll call it, initial surge from the international post. The post then got the exception and that food and low -- very low-end value of goods consumer to consumer moved back to the post. And so since that point, we have been clearing now up to 97% within the last 1.5 weeks same-day clearance on our goods. So helping our very valued shippers ensure that they meet the requirements of the U.S. government.

And Todd, if I could just maybe dimensionalize the impact of that. In the third quarter, that had about a $60 million impact for us. And we estimate in the fourth quarter, the direct impact will be $75 million to $100 million. A lot of this is demand related, right, because the technology allows us to scale our brokerage operations, but there is a demand impact.

And let's be clear on what that cost is. It's really not the cost of clearing. It's the change in trade lanes because as you know, our most profitable trade lane is that between China and the United States. And we saw an over 20% decline in that in the third quarter and expect that will continue into the fourth quarter. Now there's a big meeting coming up this week. So maybe we'll have a little bit more certainty about trade between our 2 countries, but we're right now forecasting a decline in those trade lanes in the fourth quarter.

And -- just quick circling back on SMB. Do you think you're at stability now, like now we shouldn't have as much concern about a drop-off going forward as maybe you had in 2Q?

So as we look at the peak forecast, that's the best way to tell you where we are. As we look at our -- as you know, 100 of our customers, most of them are enterprise customers make up 80% of our peak surge. And what those large customers have told us that they expect a good peak that the surge should be about 60% from where their volume is today. That's the same surge that we've seen over the past 3 years. So they've got the inventory, they're ready for peak. On the SMB side, they're a little short of where they were a year ago. So if you think about effectiveness being 100% effective, our enterprise customers are at the 100% mark. The SMB customers that give us forecast are at the 99% mark. So has it stabilized a bit, but it's still something, I think, to watch out for, particularly as we head into next year because next year is when you're going to feel the full brunt of some of these tariffs hitting some of these SMBs. Now -- we're working with them to try to help them think about how do they change where they source their goods, how do they think about the mode of transportation that you saw and so forth. So we're working with them, but I think it's prudent to be a bit cautious on the outlook here because it's still early days.

Our next question comes from the line of Ari Rosa from Citigroup.

So it was really nice to see the step-up in free cash flow. Carol or Brian, I was hoping you could talk about how you think about kind of the sustainable level of free cash flow after some of these cost-cutting initiatives occur and kind of as you work through some of these shifts in revenue mix?

Yes. Great. Thanks, Ari. It's great to hear from you. Yes, look, we saw the Q3 free cash flow bounce back. There were some timing issues in our Q2 versus Q3 that have kind of worked themselves out, and we expect Q4 to look similar to Q3. Now on your question, though, I think you're exactly right. This is why we're leaning into the parts of the market that we're leaning into is because you'll see that our penetration in B2B was up 350 basis points. Our penetration in SMB was up 340 basis points. We're seeing growth in the areas of the markets where we want to grow. That allows us to drive better returns and better margins. And with the cost takeout and the network efficiency that we're creating through our automation investments, we do expect the business to generate significantly more free cash flow over time. Clearly, we've got a dividend of around $5.4 billion to $5.5 billion, and we expect it to be above that in the very near future.

Our next question comes from the line of Jonathan Chaplin from Evercore ISI.

Just kind of a 2-parter. I'm sorry to do 2pers here. But Amazon glide down, I said you're kind of running on track here. You said down 21%. I thought we're supposed to be around 30% at this point. So maybe just help us understand where you are as we think about exit rate in 4Q? And then secondly, it really looks like you're on track with the cost takeout associated with that volume glide down. Can you speak to the cost alignment with the rest of the business ex Amazon? Just given all these changes that you've spoken about already with Rest of World de minimis, maybe some of the SMBs being a little bit lighter in the peak, do you feel like you're on track there as well? Or is there a little bit more catch-up to do on ex-Amazon cost alignment?

Well, on the Amazon glide down, we're winding down the volume that we don't want, and we're right on our plan. But we're growing the volume that we do want. And so that's why the year-over-year decline wasn't as much as we had anticipated at the end of the second quarter. So we're really pleased with that, growing the volume that we want, like returns is good for our business. On the question about cost out, I would say excellent job managing through the Amazon glide down, but we're also driving a heck of a good business. And Abbott, you might want to talk about your production numbers, the best that we've seen in 20 years, 10 years, talk a little bit about that.

Yes, sure. And I think it's really exciting as we look at our network. We're not looking at everything exclusively or uniquely, but as one big network. And of course, we keep finding opportunities for us to bring costs down. So if you think about the buildings we've closed, the operations we've closed, also the 34,000 positions that we've eliminated, that's part and parcel, of course, driven by some Amazon, but also our productivity. So if you think about production across the network, Brian mentioned that our inside operations are demonstrating the best process rates in 12 years. Our hub process rates in 20 years, and then we can go down the list with safety in the decade and other items related to cost. I guess what should give everybody comfort is what we've displayed in the first 9 months, we've also started the stage next year in 2026. So this continues, and we will hit our Amazon targets and our drawdown in terms of cost and productivity just gets enhanced as we first, introduce more NOF projects, but also all the peripheral buildings that we had supporting those upgrades will start to fall off as well as we start to implement NOF. A great example of that is Mesquite, 48,000 hub per hour for us, just opened up 2 weeks ago and prior to that, a similar hub in Texas in SweetWater. So really excited about those additions to the network and of course, more to come.

And Jonathan, just to put a number to that because I think the third quarter really shows a testament. We started the year saying that we were going to focus on getting the right volume in the network and drive efficiency and volume was down 12.3%, and we expanded operating margin, and we'll look to continue that trend...

Our next question comes from the line of Scott Group from Wolfe Research.

So just a follow-up on the Amazon piece. So I think when you first talked about this, it was -- it would be down -- be cut in about half by the middle of next year. Is that number changing at all, bigger or smaller? And as we think about like the next wave of Amazon volume to come out, is it any different in terms of mix, any harder or easier to manage from like a decremental standpoint? And then it's all part of like the same question. Like I know there's $3.5 billion of cost reduction this year. What's the right number to think about for next year in terms of cost reduction?

Sure, Scott. Thank you, and good to speak to you. So on the Amazon, look, think about it as there's a portion of the Amazon volume that we're exiting that they're going to in-source that that's the outbound. That's a pretty consistent glide. It's all scheduled, right? So this is where e-commerce gets very physical, right? We have to hand over a building, they catch a building. There has to be tax cars and drivers and sorters that all transition in kind of the same week. Lane by lane. Lane by lane, building by building, city by city. So that's all scheduled out. It's on track. We're working very collaboratively with them. And I think it shows in our service numbers, both for ourselves and for them that this has been a great relationship. Separate to that, right, we -- Amazon is still going to be a large customer, right? And there's a lot of places where we can add value to their supply chain like returns, their inbound, the small business sellers that sell on the platform. That part of the business is growing. But when you think about the decrementals going into next year, it's the same type of volume. It's just over a period of time. On the cost takeout, we'll reset that in January as we roll forward. But Nando's team has been doing a great job that as these buildings transition, we move to work, we consolidate, we're investing in NOF, and we'll drive a similar level of efficiency next year.

And the same cost buckets, right? It will still be the variable, the semi-variable and the fixed cost. You should expect that to continue into next year. And we'll dimensionalize that at the end of the quarter -- end of the fourth quarter.

Our next question comes from the line of Jordan Alliger from Goldman Sachs.

Just wanted to come back to international. Maybe some additional thoughts around your international trade flow analysis. Now that the rest of de minimis has gone, when we sort of lap Liberation Day next year, could we get back to more normal sort of trajectories or patterns? Or is it permanent shifts? And then just along with that, what does it take to keep international margin more sustainably in that high-teen level you guys had been used to? And that's with an eye towards 2026 as well.

Sure. Thanks, Jordan, and good to hear from you. On international trade flows, look, as Carol mentioned, as we went through the third quarter and particularly into September with de minimis, we did see things slow down. Now look, there's still a lot of flux going on in the world where things are moving around. What we are seeing is a lot of growth outside the U.S., right? So trade is continuing to flow, but it's not touching the U.S. as much as it was before. As we look into next year and we think about the margin, look, there will be some permanent change until things -- until the system settles and the new equilibrium on trade flows settles. I do think that this mid- to high teens margin for international is absolutely the target, but we need kind of trade flows to settle in order to get there.

Well, what Kate and her team have done is really operationalize the change in trade flows. In the third quarter alone, you did 100 different operational changes to make sure that we could meet the needs of our customers as trade trade flows are changing. And we're investing ahead of some of this. You might talk, Kate, about what you're doing in Asia. We've mentioned this before, but just remind everyone what we're doing in Hong Kong and in the Philippines.

Yes, absolutely. And so to unlock that growth, we're a global network with a global portfolio, and we're seeing the return on the investments we made in Asia, expanding our service, fastening our time in transit. So if you look at, say, the top 20 export lanes, non-U.S., 16 of them are growing and growing very nicely. A lot of them are Asia to either Asia, Asia or Asia to Europe and reverse. So that's really the expansion. Customers have needs. They are shifting trade. And within there, I will tell you, we see the small and medium-sized businesses in international growing 9% in many regions of the world. So that also will help us with momentum for next year.

Your next question is coming from the line of Bruce Chan from Stifel.

Nice to see the results in the guidance here. And maybe just on that last point, I'm guessing that since the books closed and since you built your guidance in fourth quarter budget, we've got yet another variable with the government shutdown. Wondering if that is contemplated in the guidance? And if not, is there any downside to the range in terms of demand or service or operations, especially with regard to ATC and payrolls and consumption?

Yes. So we don't have a real crystal ball here. We're watching this closely, obviously, particularly as it relates to the airlines. So far, we've seen no disruption of service, but we're watching this very closely because we all are reading the stories about what's happening with people not showing up to work. From a volume perspective in the United States, here we are at the end of October, and we're right on where we thought we would be, if not a little bit better. So we haven't factored in any significant impact to the peak season because we rely on what our customers are telling us and our customers are telling us those from peak that they're going to have a good peak. So we haven't factored any of that in. But of course, it's smart to always think about what could happen. Hopefully, there will be a resolution soon as we should hope for.

Our next question is coming from Ken Hoexter from Bank of America.

So it seems like your 300 basis points in improvement in domestic is maybe a bit more -- sorry, sequential improvement is a bit more than normal in terms of your target of getting to 9.5% to 10%. Just trying to understand your view on maybe the potential for accelerating that cost-cutting benefits above normal trend as we not only enter fourth quarter, but your thoughts on as we go into '26. And then next -- I guess, next week, we're going to start the Supreme Court hearings on tariffs. Thoughts on -- initial thoughts on the potential impact to de minimis. Could that get reversed and we start seeing that for the rest of the world, if not China, Hong Kong Lane? Maybe any thoughts on the Supreme Court process?

Sure. Well, let me talk about the sequential impact first. So Ken, if you go from Q3 to Q4, remember, as Carol said, we have been working closely with our customers, and we expect peak to be in similar shape as it has in the last 4 years, right? So we'll see about a 20% step-up in sequential ADV in the U.S., about 10% in international. Now also, there will be holiday demand surcharges that have been announced. Our take rate on those has been good. Even though there's one incremental day in the peak season, we're still balancing demand and expect to see good take on the holiday demand surcharges. On the cost side, remember, we've been investing in deploying automation throughout the year, the Network of the Future. There's been -- there will be 42 new automation projects live by the time we start peak. And part of the function of bringing down the water level in the total U.S. network is it allows us to run more efficiently. So you need less variable capacity, fewer leased aircraft, fewer rented vehicles, fewer seasonal workers that allows you to run a much more efficient network. And we're excited. We think it's going to be one of our best service and production peaks that we've had in a long time. Carol...

On the Supreme Court question, obviously, we'll be watching it very closely. But Ken, we don't -- we're not in a position to speculate on what the outcome will be.

Your next question is coming from Brian Ossenbeck from JPMorgan.

Just one quick follow-up on -- first on the USPS. In the last quarter, Carol, you called out some density headwinds. It sounds like those were probably still present here in 3Q, and I would expect in 4Q. So if you could clarify that. And then, Brian, can you give us a little bit more color on how you think rev per piece will track into the fourth quarter and sort of exit the year? There's a lot going on with the mix dynamics, some of the product service changes, but clearly, it looks like there's still some base rate momentum and also a bit of a help from fuel. So if you can give us a little bit more thoughts on those 3 parts of that trend would be helpful.

On the Ground Saver product, density is -- continues to be a challenge. We just can't seem to get more packages per stop on these residential deliveries. And this is one reason why we're so very excited about our renewed relationship with USPS. We estimate that the cost drag in the third quarter was about $100 million...

Which is another cost that we overcame as we came down to drive margin expansion. And Brian, on your point on rev per piece, look, we continue to see strong base rate improvement in rev per piece. We expect the fourth quarter to be a little bit above 6%. And if you look at that with where we set out originally at the full year to be 6%, we're coming in higher than that. And so we expect that to come through both in base rate, slightly less mix improvement in the third quarter as we start to lap some of the Chinese e-commerce shipper actions that we took last year and then holiday demand -- strong holiday demand surcharge.

Our next question is coming from Ravi Shanker from Morgan Stanley.

So you obviously had a lot of traction with headcount reduction in both the building side and the driver side. The union is saying that kind of you guys have committed to net job increases through the course of the contract. So how do you see that playing out in the remaining 2.5 years of the contract? And would you have to start hiring again to make up for that difference?

We are in compliance with the terms of our contract. And Brian, you might want to give a little bit more color there.

Sure. And Ravi, part of the terms of the contract allow us to offer full-time positions to part-time employees in order to give them the ability to go part time to full time, which look is, quite frankly, that's the best outcome from us, right? We want to create lifetime jobs and good careers with people who can earn a solid income with benefits at UPS. So the way the contract works is we offer full-time positions to part-time employees. From a net headcount standpoint, it doesn't really change things, but it's a way for us to create career pathing. It's good for the union. It's good for our people. It's good for us. It helps us have more trained workers that are committed to UPS.

And sometimes there's messaging that's confusing on this point. So if you read something that's confusing, just call us, and we'll clarify it.

Your next question is coming from Stephanie Moore from Jefferies.

I wanted to touch on the add-backs, specifically in the U.S. domestic segment for the quarter. If you could just break down maybe the delta between the add-backs going from $66 million to the $302 million in the quarter, really what the components of those -- the major components of the add-backs were for the quarter?

And Stephanie, just to clarify, you're talking about the non-GAAP adjustments.

That is correct.

Right. Yes. So as Carol mentioned, so we executed on our driver voluntary separation plan in the quarter. About 90% of the drivers exited on August 31. 80% of that charge is associated with the severance included in that. It be -- in the second quarter, we laid out a range of kind of $400 million to $650 million associated with the total network reconfiguration and efficiency reimagine program. We're still within that range.

And I think just to make it real, real, we had $166 million of cost in the third quarter for the driver buyout against a total cost of $175 million. So we won't see that same amount in Q4.

That's right.

And Matthew, we have time for one more question.

Our final question comes from the line of Conor Cunningham from Melius Research.

So I think you said you had 195 operations that have been reduced and then 93 buildings that have been closed. I was hoping you could talk about how that may trend into 2026. Like are we expecting that to continue to ramp up? Or it seems like there's further opportunities. So if you could just talk about the opportunity just in terms of getting more efficient on the network.

Sure. Well, the Amazon glide down continues. We're 3 quarters in a 6-quarter glide down. So the Amazon glide down continues, which means there will be further consolidation of buildings. At the end of the fourth quarter, we'll provide guidance for 2026 or our outlook for 2026, where we can be more specific on what that looks like.

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

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