UPS's Q3 2025: Contradictions in Amazon Glide-Down, De Minimis Impact, Cost Efforts, Trade Flow, and SMB Strategy

Date of Call: October 28, 2025

Financials Results

• Revenue: $21.4B consolidated revenue; U.S. Domestic $14.2B, down 2.6% YOY; International $4.7B, up 5.9% YOY; Supply Chain Solutions $2.5B, down $715M vs prior year
• EPS: $1.74 diluted EPS; GAAP included a net charge of $164M ( $0.19 per diluted share) from transformation strategy costs partially offset by an $86M tax valuation allowance benefit
• Operating Margin: Consolidated operating margin 10%; U.S. Domestic operating margin 6.4% (U.S. margin up ~10 bps vs prior year per management); International operating margin 14.8%; Supply Chain Solutions operating margin 21.3%

Guidance:

• Q4 consolidated revenue ~ $24.0B and consolidated operating margin ~ 11%–11.5%
• Q4 U.S. Domestic revenue ~ $16.2B; U.S. operating margin ~ 9.5%–10%
• Q4 International revenue ~ $5.0B; International margin ~ 17%–18%
• Q4 Supply Chain Solutions revenue ~ $2.7B; margin ~ 9%
• Full-year capex ~ $3.5B; tax rate ~ 23.75%
• Planned dividends ~ $5.5B (subject to Board approval); targeted ~$1B share repurchase completed

Business Commentary:

* Revenue and Profitability Trends: - UPS reported consolidated revenue of $21.4 billion for Q3, with consolidated operating profit of $2.1 billion. - The growth in revenue per piece was 9.8%, driven by strong base rates and product mix improvements, offsetting a 12.3% decline in U.S. average daily volume due to strategic changes like the Amazon glide-down.

• International Operations and Trade Shifts:
• UPS experienced a 4.8% increase in international average daily volume, but this also pressured international operating margin due to shifting trade policies.

• The decline in higher-margin lanes and growth in lower-margin lanes was attributed to changes in U.S. trade policy, impacting revenue and profitability.

• Cost Reduction and Network Reconfiguration:

• UPS is on track to remove approximately $3.5 billion in costs related to their Amazon volume reduction and network reconfiguration this year.

• The progress is attributed to operational actions such as closing buildings, reducing operational positions, and deploying automation through the Network of the Future initiative.

• Strategic Acquisitions and Partnerships:

• UPS plans to acquire Canadian-based Andlauer Healthcare Group, aiming to strengthen its global health care logistics capabilities, particularly in North America.
• The acquisition aligns with UPS's strategy to enhance its complex health care logistics offerings and drive revenue growth in high-value market segments.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described progress and strength: "UPS is rock solid strong," "on track to achieve our 2025 expense reduction target of approximately $3.5 billion," and provided concrete Q4 guidance ($24B revenue; 11%–11.5% operating margin). They highlighted automation gains, improved revenue-per-piece (+9.8% in Q3) and restored free cash flow ($2.7B YTD).

Q&A:

• Question from Christian Wetherbee (Wells Fargo Securities, LLC): Maybe we can start on domestic margins... 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?
  Response: Management: We're mid‑glide (3 of 6 quarters); expect a sequential Amazon volume bump into peak, continued drawdown into H1'26, network and Ground Saver actions plus Andlauer acquisition should drive higher revenue-per-piece and improved margins into back half of 2026.

• Question from David Vernon (Sanford C. Bernstein & Co.): Can you talk about the exit rate on cost per piece coming out of the third quarter and details on USPS arrangement impact on cost per piece?
  Response: Management: Q3 production metrics are the best in years and driver voluntary exits (90% exited Aug 31) will reduce costs in Q4; preliminary USPS agreement (middle‑mile to USPS final‑mile) is in place—details being finalized and expected to deliver cost benefit starting early next year.

• Question from Thomas Wadewitz (UBS Investment Bank): How did SMB perform versus Q2 concerns after de minimis elimination and how did the global change affect international in September?
  Response: Management: SMB volume down slightly but UPS gained share; technology cleared ~90% of increased formal entries (up from 21% in March), the surge required manual intervention for ~10% initially; impact was ~$60M in Q3 and estimated $75M–$100M in Q4 driven by demand/trade‑lane shifts.

• Question from Ariel Rosa (Citigroup): How should we think about sustainable free cash flow after cost cuts and mix shifts?
  Response: Management: Q3 free cash flow recovery reflects timing normalization; with mix shift to B2B/SMB penetration gains and ongoing cost takeout plus automation, the business should generate materially more FCF over time while maintaining dividend policy.

• Question from Jonathan Chappell (Evercore ISI): Clarify Amazon glide-down progress (down 21% vs expected ~30%) and cost alignment ex‑Amazon?
  Response: Management: Glide-down is on plan—we're exiting unwanted Amazon volume while growing desired Amazon business (returns, sellers); cost takeout is tracking and productivity gains plus NOF automation will continue to align costs across the network into next year.

• Question from Scott Group (Wolfe Research): Is the target to halve Amazon volume by mid‑next year changing and what cost reduction should we expect in 2026?
  Response: Management: Schedule-driven in‑sourcing of specific Amazon volumes remains on track; remaining Amazon volume transitions follow the same variable/semi‑variable/fixed cost buckets and cost reductions will continue—company will provide updated 2026 targets in January.

• Question from Jordan Alliger (Goldman Sachs): Will international trade flows revert to prior trajectories after lapsing de minimis changes, and what to sustain high‑teen international margins?
  Response: Management: Some trade‑flow shifts may be permanent until a new equilibrium; international can return to mid‑to‑high‑teens margins but it depends on trade flows settling; operational agility and investments in Asia are already driving growth in many lanes.

• Question from J. Bruce Chan (Stifel): Was the government shutdown contemplated in guidance and could it impact peak service/operations?
  Response: Management: No significant shutdown impact was assumed; so far no operational disruption observed but they are monitoring airline and workforce risks closely and have not baked material downside into peak guidance.

• Question from Ken Hoexter (BofA Securities): Potential to accelerate domestic cost benefits into Q4/'26 and any comment on Supreme Court de minimis proceedings?
  Response: Management: Automation (42 projects live by peak) and lower network water‑level should deliver efficiency and better peaks; on Supreme Court de minimis matter, they will monitor but won't speculate on outcomes.

• Question from Brian Ossenbeck (JPMorgan): Clarify density headwinds for Ground Saver and rev per piece cadence into Q4?
  Response: Management: Ground Saver suffers low density (cost drag ~ $100M in Q3); rev per piece continues strong—expect Q4 rev‑per‑piece to be a bit above 6%, benefiting from base rates, fuel and holiday surcharges.

• Question from Ravi Shanker (Morgan Stanley): You reduced headcount substantially; does contract language require net job increases during the remaining contract term?
  Response: Management: They remain in compliance with the labor agreement; the contract facilitates offering full‑time roles to part‑time employees for career pathing and does not materially change net headcount trajectory.

• Question from Stephanie Benjamin Moore (Jefferies): Explain the jump in U.S. non‑GAAP add‑backs from $66M to $302M in the quarter.
  Response: Management: Majority related to driver voluntary separation charges (about $166M recorded in Q3 of $175M buyout) and other network reconfiguration/efficiency program costs; still within previously disclosed $400M–$650M range.

• Question from Conor Cunningham (Melius Research): You reduced 195 operations and closed 93 buildings—will consolidation continue into 2026?
  Response: Management: Yes; the Amazon glide‑down continues (3 of 6 quarters complete) so further consolidation is expected and the company will provide 2026 outlook at year‑end.

Contradiction Point 1

Amazon Glide-Down Timeline and Impact

It involves differing statements about the progress and impact of the Amazon glide-down on UPS's operations, which are crucial for strategic planning and investor confidence.

Can you explain the improvement in domestic margins, specifically the Amazon glide-down, and your outlook for 2026? - Christian Wetherbee(Wells Fargo)

2025Q3: We're 3 quarters into a 6-quarter glide-down, and we'll continue with strategic actions like Ground Saver and the Andlauer acquisition. - Brian Dykes(CFO)

How will the $3.5 billion in cost savings from Amazon volume declines be realized in Q1 and across the year? Will this fully offset revenue losses from Amazon? - Tom Wadewitz(UBS)

2025Q1: We expect to exit the first 90 days of Q2 approximately 10% below the same period last year. - Brian Dykes(CFO)

Contradiction Point 2

De Minimis Elimination Impact on Revenue

It involves differing perspectives on the impact of the global de minimis elimination on UPS's financial performance, which affects revenue forecasts and investor expectations.

How did the SMB segment perform, and how does the impact differ between global de minimis elimination and China-Hong Kong? - Thomas Wadewitz (UBS Investment Bank, Research Division)

2025Q3: The global de minimis elimination impacted higher-margin lanes, leading to a $60 million impact. - Kathleen Gutmann(Executive VP)

Are ground margins still on target for double-digit margins? - Joseph Lawrence Hafling (Jefferies LLC, Research Division)

2025Q2: The early impact of de minimis has been less significant than we initially estimated. - Carol B. Tome(CEO)

Contradiction Point 3

Cost Reduction and Network Efficiency

It involves differing statements about the pace and extent of cost reduction and operational efficiency improvements, which are crucial for UPS's financial performance and competitive positioning.

Can you explain the Q3 exit rate on cost per piece and discuss the USPS final-mile delivery agreement? - David Vernon (Sanford C. Bernstein & Co., LLC., Research Division)

2025Q3: Cost per piece is tough to compare due to e-commerce volume. We're seeing the best production metrics in 12 years. - Brian Dykes(CFO)

What is the outlook for facility closures and automation in H2 2025? Will these actions improve margins in 2026? - Conor T. Cunningham (Melius Research LLC)

2025Q2: The algorithm for Ground Saver delivery density did not hold true, resulting in higher costs. - Carol B. Tome(CEO)

Contradiction Point 4

International Trade Flow and Margin Targets

It involves differing expectations for international trade flow and margin targets, which are critical for strategic planning and investor expectations.

How will global trade flow analysis change post-de minimis, and what are the 2026 margin targets? - Jordan Alliger(Goldman Sachs)

2025Q3: International trade is shifting, with growth outside the U.S. Margin target is mid- to high-teens, awaiting trade flow stabilization. - Brian Dykes(CFO)

How do you view secular growth in domestic and international volumes amid uncertainty and potential supply chain shifts? - Jordan Alliger(Goldman Sachs)

2025Q1: In regard to the U.S. Export Index, we saw a sequentially declining trend in Q1 and expect this trend will continue throughout the year. International operating margin will be in the mid-teens. - Brian Dykes(CFO)

Contradiction Point 5

SMB Segment Growth Strategy

It involves differing strategic focus and expectations for the SMB segment, which is crucial for future revenue growth and market positioning.

How did the SMB segment perform, and how does the impact differ between global de minimis elimination versus China-Hong Kong? - Thomas Wadewitz (UBS Investment Bank, Research Division)

2025Q3: SMBs took share in volume and value, despite a decline. We're helping clients navigate changes, with a focus on SMB health care and automotive. - Carol Tomé(CEO)

What are UPS's growth opportunities in healthcare and SMBs? - Ariel Rosa (Citigroup Inc., Research Division)

2024Q4: We expect our SMB customer base, which is now receiving over 70% of our U.S. domestic package volume, to increase in share across the market, while our Amazon business declines. - Carol B. Tomé(CEO)