UNITED PARCEL SERVICE INC Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Strategic Actions:
  • Accelerated glide-down of Amazon volume: Amazon ADV decline ran slightly ahead of plan in Q1, with 164 operational closures (73 building closures by end of June) as part of network reconfiguration.
  • In-sourcing of SurePost final mile delivery: Replaced with Ground Saver, a new domestic economy service.
  • Efficiency Reimagined initiative: Expected to deliver $1 billion in savings by improving processes, with progress made and acceleration in Q2.
• Acquisitions: Acquired Andlauer Healthcare Group to bolster Canada healthcare logistics, with acquisition closing in H2 2025.
• Tariffs and Trade: U.S. import volume ~400k pieces/day (less than 2% of total global ADV). China-to-U.S. trade lanes are most profitable. SMBs impacted by inventory drawdowns, but 95% of small package shippers maintain business models.
• Network Reconfiguration: Focus on automating buildings, with 64% of volume through automated hubs, aiming for 12% U.S. operating margin by end of 2026.

Segment Performance

• U.S. Domestic: Generated revenue of $14.5 billion, up 1.4% year-over-year. Operating profit was $1 billion, a 19.4% increase compared to the first quarter of 2024. Operating margin was 7%, a year-over-year increase of 110 basis points. Total U.S. ADV was down 3.5%, with B2B average daily volume up 1.5% (driven by returns +8.8% y-o-y), SMBs making up 31.2% of total U.S. volume (highest in 10 years) with 4% ADV growth.
• International: Average daily volume increased 7.1% for the second consecutive quarter. International revenue was $4.4 billion, up 2.7% from last year. Operating profit in the International segment was $654 million, down 4.1% year-over-year due to a mix shift to more economy services in Europe, lower demand-related surcharges, and investments in weekend services in Europe. International operating margin in the first quarter was 15%.
• Supply Chain Solutions: Revenue was $2.7 billion, down due to a reduction of $563 million in revenue from Coyote (divestiture in 2024). Operating profit was $98 million, with an operating margin of 3.6%, a decline of 320 basis points compared to last year, primarily driven by cost pressure in the Mail Innovations business.

Guidance

• Full year outlook not updated due to market uncertainty. Second quarter guidance provided:
  • U.S. Domestic: Margin expected to be approximately 9.3%, ADV down about 9%, revenue down low single digits y-o-y. SMBs disproportionately impacted, adding pressure to operating margins.
  • International: Revenue expected to be down approximately 2% y-o-y, operating margin in mid-teens due to lower demand-related surcharges and trade uncertainty.
  • Supply Chain Solutions: Revenue expected to decline approximately $500 million due to reduction in Coyote revenue, operating margin anticipated in high single digits.

Risks

• Trade Policy Uncertainty: Impact on consumer demand, SMBs affected by inventory drawdowns and tariff impacts.
• Labor Dependence: Need for automation to reduce dependency on labor, with ongoing efforts in network reconfiguration and efficiency initiatives.
• Market Volatility: Uncertainty in trade policies and tariffs creating pressure in some parts of the business and affecting revenue and margin projections.

Question and Answer

• Q: Tom Wadewitz asks about the $3.5B cost savings and Amazon volume decline.

A: Brian Dykes explains cost buckets (variable, semi-variable, fixed) with timing, and Carol Tome mentions Amazon volume decline higher in back half of year.

• Q: Ariel Rosa inquires about robotics and automation.

A: Carol Tome and Nando Cesarone discuss automation in facilities, aiming for 400 partially/fully automated facilities and 200 closed facilities, with productivity improvements.

• Q: Scott Group asks about Q1 cost savings realization and Q2 margin deceleration.

A: Brian Dykes states ~$500M of $3.5B saved in Q1, and Q2 margin deceleration due to SMB uncertainty and building closures.