UPS's Q3 2025: Contradictions Emerge on Amazon Glide Down, USPS Partnership, and Global Trade Flows

Date of Call: None provided

Financials Results

• Revenue: $21.4 billion, consolidated operating profit $2.1 billion
• EPS: $1.74 diluted EPS (GAAP); $0.30 of EPS from a sale-leaseback gain; GAAP net charge of $0.19 per diluted share related to transformation strategy costs offset by tax valuation allowance reversal
• Operating Margin: 10% consolidated operating margin

Guidance:

• Consolidated revenue ~ $24.0B; consolidated operating margin ~ 11–11.5%.
• U.S. Domestic revenue ~ $16.2B; operating margin ~ 9.5–10%.
• International revenue ~ $5.0B; operating margin ~ 17–18%.
• Supply Chain Solutions revenue ~ $2.7B; operating margin ~ 9%.
• FY capex ~ $3.5B; planned dividends ~ $5.5B (subject to board); completed ~$1B of repurchases.
• Full‑year tax rate ~ 23.75%; expect ~ $5B year‑end cash after Andlauer close.

Business Commentary:

• Revenue and Operating Margin Trends:
• UPS reported consolidated revenue of $21.4 billion for the third quarter of 2025, with a consolidated operating margin of 10%.

• Despite a decline in average daily volume (ADV) from the previous year, UPS maintained its operating margin through a focus on revenue quality and expense control.

• Amazon Glide Down and Network Reconfiguration:

• UPS experienced a 21.2% decline in total Amazon volume compared to the third quarter of the previous year.

• The company executed cost-out efforts, resulting in a reduction of approximately $3.5 billion in related costs.

• Cost Management and Automation Investments:

• UPS achieved a 16 million hour reduction in operational hours and closed 195 operations, including 93 buildings.

• Investment in automation expanded, with 66% of volume expected to move through automated processes in the fourth quarter, up from 63% the previous year.

• International Trade Flows and Margin Impact:

• UPS's total international ADV grew 4.8%, with export ADV increasing 5.9%, despite a 27.1% decline in U.S. imports from China.
• The company's international operating margin was 14.8%, reflecting pressures from trade lane shifts and demand-related surcharges.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described the company as "rock solid strong," said the Amazon glide down and network reconfiguration are "on plan," highlighted $2.2B of expense reductions YTD with a $3.5B target for 2025, and provided upward Q4 guidance and concrete segment outlooks indicating confidence in execution and peak readiness.

Q&A:

• Question from Chris Weatherby (Wells Fargo): Maybe we can start on domestic margins. I know you’ve given ranges for 4Q, but generally where do you think you are in the glide down and what should we start to think about for 2026 from a domestic margin perspective?
  Response: Management: On track with the Amazon glide down; will update 2026 targets on the January call — expect continued drawdown into H1 2026 with cost takeout and GroundSaver actions contributing to margin improvement in the back half of 2026.

• Question from David Vernon (Bernstein): Can you talk about the exit rate on cost per piece coming out of Q3 and whether that will accelerate into Q4, and can you be more specific on the USPS arrangement and how it changes cost per piece?
  Response: Management: Automation and driver voluntary separation are improving cost per piece; driver buyout payback is <1 year; reached a preliminary agreement with USPS on GroundSaver final‑mile pricing — details by end of Q4 and benefits expected to begin early next year (no Q4 benefit assumed).

• Question from Todd Wadewitz (UBS): How did SMBs perform versus 2Q concerns given the global elimination of de minimis, and how did that change international impacts versus when it was China/Hong Kong only?
  Response: Management: SMB declines were less severe than feared and UPS took share; brokerage tech scaled to clear ~90% automatically amid a 10x surge in entries, Q3 direct impact ~ $60M and estimated Q4 impact $75–100M, with continued trade‑lane shifts (notably China→US declines).

• Question from Ari Rosa (Citigroup): With the Q3 free cash flow step-up, how do you think about sustainable free cash flow after cost cuts and revenue‑mix shifts?
  Response: Management: By shifting mix toward higher‑margin B2B/SMB and continuing cost takeout and automation, the business should generate materially more sustainable free cash flow over time alongside planned dividends and capital allocation.

• Question from Jonathan Chaplin (Evercore ISI): You said Amazon glide down is on track (down 21%); can you help with exit rate, 4Q, and whether ex‑Amazon cost alignment is on track?
  Response: Management: Glide down is proceeding as planned with targeted exits and retention of desired Amazon volumes; cost alignment across the network is tracking via automation and consolidations, and further detail will be provided in January when 2026 is updated.

• Question from Scott Group (Wolff Research): Is the plan to cut Amazon volume in half by mid‑next year changing, and what should we think about 2026 cost reduction magnitude?
  Response: Management: The lane‑by‑lane, building‑by‑building glide down remains scheduled and on track; Amazon will still be a large customer in select services and the same three cost buckets (variable, semi‑variable, fixed) will drive cost reductions into next year, with specifics to be reset in January.

• Question from Jordan Aliger (Goldman Sachs): With the global de minimis elimination, are trade‑flow changes permanent or temporary and what does it take to sustain international margins in the high‑teens into 2026?
  Response: Management: Some shifts may be permanent until a new equilibrium forms; international can target mid–high‑teens margins but needs settled trade flows; investments (esp. in Asia) and operational changes are unlocking growth outside U.S. lanes.

• Question from Bruce Chan (Stifel): Has a potential U.S. government shutdown been contemplated in guidance and could it impact demand or operations (airline crews, payrolls, etc.)?
  Response: Management: No material shutdown impact is assumed in guidance; to date no service disruption has been seen but UPS is monitoring closely and will react if conditions change.

• Question from Ken Hoekster (Bank of America): Given sequential domestic improvement, can cost cutting accelerate benefits into Q4/2026, and thoughts on Supreme Court de minimis outcome risk?
  Response: Management: Sequential margin gains are driven by automation and reduced variable capacity (fewer leased assets and seasonal workers); the Supreme Court outcome is uncertain and UPS will monitor implications.

• Question from Brian Ozenbeck (JP Morgan): Clarify GroundSaver density headwinds and how revenue per piece should track into 4Q (base rates, mix, fuel)?
  Response: Management: Density headwinds persist (estimated ~$100M drag in Q3); rev per piece expected to be a bit above 6% in Q4 driven by base rates and holiday demand surcharges, with some mix effects moderating.

• Question from Ravi Shankar (Morgan Stanley): With headcount reductions and a union commitment to net job increases over the contract, will you need to rehire in the remaining contract term?
  Response: Management: UPS is in compliance with the contract; offering full‑time conversion opportunities to part‑time employees provides career paths without changing net headcount dynamics.

• Question from Stephanie Moore (Jefferies): Break down the Q3 non‑GAAP addbacks (delta from $66M to $302M) and major components?
  Response: Management: The bulk (~80%) of Q3 addbacks related to the driver voluntary separation (≈$166M recorded in Q3 against a $175M buyout); the program remains within the previously disclosed $400–650M range for the network reconfiguration.

• Question from Connor Cunningham (Melius Research): You reduced 195 operations and closed 93 buildings YTD — will that continue into 2026 and where are further efficiencies?
  Response: Management: Network consolidation will continue as the six‑quarter Amazon glide down completes, expecting additional building closures and NOF automation deployments; UPS will provide a more specific 2026 outlook at Q4 results.

Contradiction Point 1

Amazon Glide Down Progress and Cost Alignment

It involves the progress of the Amazon glide down and cost alignment, which are critical for the company's financial performance and strategic partnerships.

Can you update on the progress of the Amazon glide down and cost alignment with reduced Amazon volume? - Jonathan Chaplin (Evercore ISI)

2025Q3: We are right on track with Amazon glide down, growing desired volume while reducing costs. The cost-out program is on track, and we are continuing to drive operational efficiencies. Our production metrics are the best in years, which will help maintain cost alignment. - Carol B. Tomé(CEO)

Can you clarify what's not going as planned with the Amazon glide down? - Ravi Shanker (Morgan Stanley)

2025Q2: We are in compliance with the Amazon glide down. We expect that volume glide down to about complete by second half of this year. - Carol B. Tome(CEO)

Contradiction Point 2

Impact of United States Postal Service Agreement on GroundSaver

It involves the potential benefits and timeline of the agreement with the United States Postal Service, which could impact operational costs and strategic partnerships.

How has the USPS agreement affected GroundSaver's cost per piece and exit rate? - David Vernon (Bernstein)

2025Q3: We reached a preliminary agreement with the United States Postal Service for a win-win-win relationship, leveraging their final mile strengths. We expect benefits to materialize by the beginning of 2027. - Carol B. Tomé(CEO)

Are Amazon volumes on target and is Ground Saver achieving double-digit margins? - Kenneth Scott Hoexter (BofA Securities, Research Division)

2025Q2: We're working on operational changes. We have a team working with USPS to try to reengage. It's not just a GroundSaver problem. It's a national problem, and we're trying to get our arms around how to solve it. - Carol B. Tome(CEO)

Contradiction Point 3

International Trade Flows and Margin Performance

It involves the impact of international trade flows on margins, which are crucial for the company's financial health and global strategy.

Is the potential government shutdown factored into guidance and how could it affect operations? - Bruce Chan (Stifel)

2025Q3: International trade is flowing outside the U.S., and we are positioned to benefit from growth in Asia and other regions. We are adapting operations to meet trade flow changes and anticipate mid- to high-teens margin performance. - Carol B. Tomé(CEO)

How did international package margins trend, and what is the Q3 outlook? - Robert Hudson Salmon (Wells Fargo)

2025Q2: International margins were impacted by trade lane shifts and lower demand surcharges. We made operational adjustments to handle shifting trade patterns. We expect Q3 margins to be similar to Q2, with potential for improvement later. - Brian Dykes(CFO)

Contradiction Point 4

Amazon Glide Down and Cost Management

It involves expectations regarding the Amazon volume reduction and the impact on cost management, which directly affects profitability and operational efficiency.

Where are we with domestic margins in 2026, given progress in revenue per unit and cost management? - Chris Weatherby(Wells Fargo)

2025Q3: We are pleased with revenue and revenue quality. We are three-quarters into a six-quarter Amazon glide down. We expect the drawdown to continue as we go through the first half of 2026. Strategic actions around GroundSaver will bring economic benefits in the back half of 2026. - Matthew(Call Facilitator)

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2025Q1: The $3.5 billion savings are split across variable, semi-variable, and fixed costs. The variable and semi-variable costs will align with Amazon's volume decline. Most of the fixed costs are back-half weighted. The savings are designed to structurally improve profitability and are not fully offset by Amazon revenue loss. - Brian Dykes(CFO)

Contradiction Point 5

Supply Chain Shifts and Trade Lanes

It discusses the impact of supply chain shifts and trade lane changes, which are crucial for understanding the company's strategic positioning and revenue growth.

How might global trade and changes in de minimis thresholds impact margins? - Jordan Aliger(Goldman Sachs)

2025Q3: International trade is flowing outside the U.S., and we are positioned to benefit from growth in Asia and other regions. We are adapting operations to meet trade flow changes and anticipate mid- to high-teens margin performance. - Carol Tome(CEO)

How quickly can you transition supply chains to the China Plus One strategy, and what are your capital allocation priorities? - Brian Ossenbeck(J.P. Morgan)

2025Q1: Supply chains are already shifting, with significant growth outside China. We're seeing double-digit growth in other countries. Capital allocation remains unchanged, with a strong focus on liquidity and balance sheet management. - Carol Tome(CEO)