Q3 2025 United Parcel Service Inc Earnings Call
<unk> mute to prevent any background noise and after the Speakers' remarks, there'll be a question and answer period.
Any analysts that want to ask a question now was the time to press Star then one on your telephone keypad.
It is now my pleasure to turn the floor over to your host Mr. P. J <unk> Investor Relations officer, Sir the floor is yours.
Good morning, and welcome to the UBS third quarter 2025 earnings call.
Joining me today are Carol <unk>, our CEO, Brian <unk>, 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 2020 for our Form 10-K, and other reports, we filed with or furnished to the securities and Exchange Commission.
These reports when filed are available on the UBS Investor Relations website and from the SEC.
Unless stated otherwise are discussion refers to adjusted results for the third quarter of 2025 GAAP results include a net charge of $164 million or <unk> 19 per diluted share comprised of after tax transformation strategy cost of $250 million, which were partially offset by an 86.
Benefit from a 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 UBS Investor Relations Web site.
Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question press Star and then one on your phone to enter the queue.
Please ask only one question so that we may allow as many as possible to participate.
You may rejoin the queue for the opportunity to ask an additional question.
And now I'll turn the call over to Carol.
Thank you P J and good morning.
I want to extend my sincere gratitude to all of <unk> for their dedication and hard work.
The third quarter brought a wave of tariff changes some expected other than foreseen and our team navigated these complexities with exceptional scale and resilience.
At the same time, we continued advancing our network reconfiguration.
Critical step in shaping the future of our U S business.
Amid the significant transformation I remain deeply impressed by the determination of <unk> and our steadfast commitment to serving our customers and building a stronger more agile EPS.
Turning to our results in the third quarter consolidated revenue was $21 4 billion.
Consolidated operating profit was $2 9 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.
Speaker #1: We continued advancing our network reconfiguration . A critical step in shaping the future of our US business . Amid this significant transformation , I remain deeply impressed by the determination of upstairs and their steadfast commitment to serving our customers and building a stronger , more agile ups .
Carol Tome: 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 UPSers 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.
In a targeted reduction and lower yielding e-commerce volume.
Our focus on revenue quality yielded solid results as U S revenue per piece grew by nine 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.
Speaker #1: 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%.
On an <unk> decline of $2 3 million or 12, 3%.
In our international business total Adv grew four 8%.
Speaker #1: 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 priority is to our customers and during the quarter, we ran our international network with agility rerouting capacity to where our customers needed it.
Speaker #1: Our focus on revenue quality continued , and as expected , our U.S. average daily volume or ABV , declined from last year . The largest drivers of the U.S.
Looking at export Adv increased five 9%.
Marking the fifth quarter in a row of growth.
Speaker #1: Volume declines were driven by the 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.
But due to the changes in trade policy X.
Volume fell in our higher margin lanes and grew and our lower margin Lane.
This volume mix change pressured our international operating margin.
Carol Tome: 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. 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.
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 solution.
Speaker #1: By coupling solid revenue per piece growth with outstanding expense control , we were able to grow our U.S. operating margin by ten basis points to what we reported last year on an ADB decline of 2.3 million , or 12.3% .
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 chain has intensified and.
Speaker #1: In our international business . Total , ADB 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 .
And in 2025, we are witnessing the most profound shift in trade policy and a century.
At UBS. This is our domain every.
Every day, we connect businesses and customers across more than 200 countries and territories, ensuring goods move seamlessly across borders.
Speaker #1: 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 and our higher margin lanes and grew in our lower margin lanes .
That includes navigating the complexities of customs brokerage, where we're one of the world's largest customs brokers managing millions accustomed entries annually.
Speaker #1: 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 planned the third quarter year over year , driven by our portfolio of health care logistics solutions .
Our success is powered by deep expertise exceptional talent and cutting edge technology.
Carol Tome: On a positive note, we continue to see strength in healthcare, with strong revenue growth in the third quarter year over year, driven by our portfolio of healthcare 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. 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 Nextgen brokerage capabilities, we harness AI to digitally process over 90% of our cross border transactions delivering speed accuracy and reliability at a global scale.
Speaker #1: 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 .
Following the elimination of the de minimus exemption for U S imports UBS experienced a tenfold surge in daily customer entries. We responded swiftly upgrading our shipping systems to capture the expanded data requirements mandated by U S customs and border protection.
Speaker #1: And in 2025, we're witnessing the most profound shift in trade policy in a century. At UPS, this is our domain.
To manage the increased volume and complexity when half our customs brokerage capabilities by integrating agenda gay I. This advanced technology streamlined formal entry processes.
Speaker #1: 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 .
UBS, we don't just move goods, we removed friction <unk>.
By absorbing regulatory complexity, we help our customers minimize disruptions and keep global commerce flowing.
Speaker #1: 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 .
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.
Carol Tome: 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. 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 number one complex health care logistics provider in the world to that end, we are making great progress towards our acquisition of Canadian based and lower health care group.
Speaker #1: Following the elimination of the de minimis exemption for U.S. imports , ups experienced a ten fold surge in daily customs entries . We responded swiftly , upgrading our shipping systems to capture the expanded data requirements mandated by U.S.
The addition of Anne Lawrence capabilities will further strengthen our solutions and 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 GAAP and in the first nine months of the year, we generated over $2 $8 billion in global DAP revenue, an increase of 20% year over year.
Speaker #1: 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 , a UPS .
Speaker #1: We don't just move goods , we remove friction by absorbing regulatory complexity . We help our customers minimize disruptions and keep global commerce flowing .
That continues to be an important to F N b growth engine and for the full year, we expect to deliver over $3 5 billion and global DAP revenue.
Speaker #1: 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 .
Before we move on let me provide updates on our Amazon glide down efforts and our ground safer product.
Our Amazon glide down efforts are proceeding as planned.
Speaker #1: As you know , we have a goal to become the number one complex health care logistics provider in the world . To that end , we are making great progress towards our acquisition of Canadian based and healthcare group .
Carol Tome: As you know, we have a goal to become the number one complex healthcare logistics provider in the world. To that end, we are making great progress towards our acquisition of Canadian-based Ann Lauer Healthcare Group. The addition of Ann Lauer's capabilities will further strengthen our solutions in global healthcare 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. In the first nine 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. 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 efforts and our GroundSaver product.
As expected in the third quarter, we experienced a stepped up volume decline with Amazon.
Last year Amazon's total volume decline in the third quarter was 21, 2% compared to 13% for the first half of the year.
Speaker #1: The addition of an Lowres capabilities will further strengthen our solutions in global healthcare logistics , particularly in North America . We expect to close this transaction in early November .
Tandem with this change we are continuing to reconfigure our U S network we.
We closed an additional 19 buildings, bringing our total so far this year to 93 building.
Speaker #1: Now touching on our digital access program, we have more than 8 million SMBs on DAB, and in the first nine months of the year, we generated over $2.8 billion in global DAP revenue, an increase of 20% year over year.
Further during the quarter, we completed a successful voluntary retirement program for many long term drivers who welcome the opportunity to retire from UBS.
Speaker #1: 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 .
For a decade 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 initiative is on plan.
Speaker #1: Before we move on , let me provide updates on our Amazon glide down efforts and our ground saver product , our Amazon glide down efforts are proceeding as planned .
In a few minutes, Brian will provide more details about our progress here.
Carol Tome: 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 favor in the third quarter, our ground favor average daily volume declined 32, 7% year over year due primarily to the actions, we've taken with Amazon and to trim lower yielding ecommerce volume.
Speaker #1: As expected , in the third quarter , we experienced a stepped up volume decline with Amazon versus last year . Amazon's total volume declined in the third quarter was 21.2% , compared to 13% for the first half of the year .
We recently reached a preliminary understanding on revenue and rates with the United States Postal service to support last mile delivery for our ground favorite product Theres 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.
Speaker #1: 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 .
Speaker #1: 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 .
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 forecast on these customers suggest they are planning for a good peak that will result in a considerable surge in volume from our current volume levels.
Speaker #1: 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 initiative is on plan.
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.
Speaker #1: In a few minutes , Brian will provide more details about our progress here . Moving to Ground Saber in the third quarter , our ground saber 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 .
Operationally, we're poised to deliver a strong peak season, driven by several key factors.
Carol Tome: Moving to GroundSaver, in the third quarter, our GroundSaver 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 GroundSaver 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.
First thanks to strategic enhancements made through 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 year.
Speaker #1: We recently reached a preliminary understanding on revenue and rates with the United States Postal Service to support last-mile delivery for our Ground Saber product.
Speaker #1: 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 .
Much of the sufficiency is powered by automation.
Over the past year, we've deployed new automated systems and 35 facilities.
Speaker #1: 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 .
In the fourth quarter, we anticipate 66% of our volume will move through automated processes up from 63% during the same period last year.
Speaker #1: 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 .
Second as we approach the peak shipping window will continue to leverage our proven technologies.
Scale, the network where needed.
Speaker #1: But remember that given the Amazon glide down plan , we expect total peak average daily volume in the US to be down year over year .
Carol Tome: 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 through 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.
All while maintaining a sharp focus on service quality.
These advancements position us to run the most efficient peak in our history.
Speaker #1: Operationally , we're poised to deliver a strong peak season driven by several key factors . First , thanks to strategic enhancements made through our network of the future initiative , we're operating more efficiently than ever .
We've set the standard for holiday shipping.
Seven consecutive years of industry, leading service and.
And we're confident that our operational strategy and commitment to excellence will make it right.
With the uncertainty around tariffs now somewhat resolved and clearer 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.
Speaker #1: These changes will allow us to reduce reliance on seasonal hires and significantly cut back on leased trailers , vehicles and aircraft compared to previous years .
Speaker #1: 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 .
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%.
Speaker #1: 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 .
Brian will walk you through the details of our fourth quarter outlook shortly.
Carol Tome: 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, seven consecutive years of industry-leading service, and we're confident that our operational strategy and commitment to excellence will make it eight. With the uncertainty around tariffs now somewhat resolved and clear peak forecasts 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.
Yeah.
Amid a rapidly evolving global landscape UBS is executing the most significant strategic shift in our company's history. We are focused on winning where it matters most capturing high value parts of the market and onboarding customers with increasingly complex logistics needs.
Speaker #1: These advancements position us to run the most efficient peak in our history . We've set the standard for holiday shipping seven consecutive years of industry leading service , and we're confident that our operational strategy and commitment to excellence will make it eight .
Our company is rock solid strong with more than sufficient liquidity to deliver upon our transformation and return capital to shareowners.
Speaker #1: With the uncertainty around now somewhat resolved and clear peak forecasts from our largest customers , we're in a stronger position to offer guidance than we were at the end of the second quarter .
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.
Speaker #1: 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% .
Thank you Carol and good morning, everyone.
This morning, I'll cover three areas, starting with our third quarter results next I will discuss progress with the Amazon volume glide down and our network reconfiguration and cost out efforts.
And I'll close with our expectations for the fourth quarter and capital allocation for the full year.
Speaker #1: 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 .
Moving to our results.
Starting with our consolidated performance in the third quarter revenue was $21 4 billion in.
Carol Tome: Amid a rapidly evolving global landscape, United Parcel Service Inc. 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 share owners. The changes we're implementing are designed to deliver long-term value for all stakeholders. Thank you for listening, and now I'll turn the call over to Brian.
And operating profit was $2 1 billion.
Consolidated operating margin was 10%.
Speaker #1: We're focused on winning where it matters most , capturing high value parts of the market and onboarding customers with increasingly complex logistics needs .
Diluted earnings per share were $1 74.
<unk> <unk> of EPS came from a sale leaseback transaction involving five properties completed in the third quarter, which resulted in a $330 million pre tax gain on sale.
Speaker #1: Our company is rock solid , strong , with more than sufficient liquidity to deliver upon our transformation and return capital to shareholders . The changes were implementing are designed to deliver long term value for all stakeholders .
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 and our non-GAAP presentation.
Speaker #1: So with that , thank you for listening . And now I'll turn the call over to Brian .
Now moving to our segment performance starting with U S domestic.
Speaker #2: Thank you Carol and good morning everyone . This morning I'll cover three areas starting with our third quarter results . Next I'll discuss progress with the Amazon volume .
Brian Newman: Thank you, Carol, and good morning, everyone. This morning, I'll cover three 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. 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 lease-back transaction involving five properties completed in the third quarter, which resulted in a $330 million pre-tax gain on sale. This transaction was part of a broader strategy aimed at freeing up capital for reinvestment as we reconfigure our network.
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 of 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.
Speaker #2: 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 .
Speaker #2: 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 .
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.
Speaker #2: Consolidated operating margin was 10% . Diluted earnings per share were $1 . $0.74 . $0.30 of EPs came from a sale leaseback transaction involving five properties completed in the third quarter , which resulted in a $330 million pre-tax gain on sale .
Total error 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.
Speaker #2: 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 and our non-GAAP presentation .
Within ground ground favor Adv declined 32, 7% due primarily to the actions, we've taken with Amazon and to trim lower yielding ecommerce volume.
Brian Newman: 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.
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.
Speaker #2: 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.
That's the highest percentage we've seen in more than five years.
Now moving to customer mix SMB average daily volume was down two 2% versus last year.
Speaker #2: Additionally, the team did an excellent job managing expenses throughout the quarter, resulting in an improvement in U.S. domestic operating margin for the quarter.
However, we continue to see bright spots in F&B healthcare and automotive as well as growth from depth, our digital access program.
Speaker #2: 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.
In the third quarter Smb's made up 32, 8% of total U S volume, which is about a 340 basis point improvement compared to last year.
Speaker #2: Total air average daily volume was down 13.9% , mainly due to Amazon Health care and high tech customers . Both showed growth in air .
In the third quarter <unk>.
<unk> average daily volume finished down four 8% compared to last year due to softness in retail and in manufacturing activity.
Brian Newman: Healthcare 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, GroundSaver 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 five 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 healthcare 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.
Speaker #2: 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 .
<unk> represented 45, 2% of our U S volume, which was a 350 basis point improvement versus last year.
Average daily volume was down 17, 6% year over year.
Speaker #2: Within ground . Ground savor ADV declined 32.7% due primarily to the actions we've taken with Amazon and to trim lower yielding e-commerce volume .
Moving to revenue for the third quarter U S. Domestic generated revenue of $14 2 billion, which was down just two 6% year over year against an Adv decline of 12, 3%.
Speaker #2: 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 .
Our revenue performance reflects strong growth in revenue per piece and air cargo.
Speaker #2: That's the highest percentage we've seen in more than five years . Now , moving to customer mix . SMB average daily volume was down 2.2% versus last year .
In the third quarter revenue per piece increased nine 8% year over year, which was the strongest revenue per piece growth rate, we've seen in three years.
Looking down the components of the nine 8% revenue per piece improvement.
Speaker #2: However , we continue to see bright spots in SMB , healthcare and automotive , as well as growth from DAP , our digital access program in the third quarter .
Base rates and package characteristics increase the revenue per piece growth rate by 350 basis points.
Speaker #2: SMBs made up 32.8% of total US 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 manufacturing activity .
Customer and product mix improvements increase the revenue per piece grocery by 400 basis points.
Brian Newman: 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 three years.
The remaining 230 basis point increase was from fuel.
Turning to costs in the third quarter total expense in U S. Domestic was down two 7%.
The decline in total expense was primarily driven by our actions to reduce hours and operational positions with volume.
Speaker #2: B2B represented 45.2% of our US volume , which was a 350 basis point improvement versus last year . B2C average daily volume was down 17.6% year over year .
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 favor volume and the contractual union wage increase that went into effect on August one.
Speaker #2: Moving to revenue for the third quarter . US domestic generated revenue of $14.2 billion , which was down just 2.6% year over year against an ATV decline of 12.3% .
It resulted in our cost per piece increase of 10, 4%.
The U S domestic segment delivered $905 million in operating profit and operating margin was six 4%.
Speaker #2: 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 three years .
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.
Speaker #2: 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 .
Brian Newman: 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 cost, 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 GroundSaver 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%.
As a result in the third quarter International delivered its fourth consecutive quarter of growth in average daily volume and revenue.
Speaker #2: 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 .
In the third quarter total international Adv increased four 8% led by Europe, and the Americas regions.
International domestic average daily volume increased three 6% compared to last year led by Canada.
Speaker #2: 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.
On the export side average daily volume increased five 9% year over year, driven by the agility of our network to adjust to changing trade lanes and led by strength between European countries.
Speaker #2: 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 , savor volume and the contractual union wage increase that went into effect on August 1st , resulted in a cost per piece increase of 10.4% .
As the third quarter played out we saw a decline in U S. Imports led by an Adv declined on the China to U S Lane of 27, 1%.
Turning to revenue in the third quarter International revenue was $4 7 billion of five 9% from last year.
Speaker #2: The US 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 US trade policy , we are continuing to operate our global network with agility to serve our customers .
Operating profit in the international segment was $691 million down $101 million year over year, reflecting pressures from trade lane shifts.
Brian Newman: 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%.
They trade down and lower demand related surcharges.
International operating margin in the third quarter was 14, 8%.
Speaker #2: 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 .
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.
Speaker #2: 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 .
Within supply chain solutions.
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 health care logistics.
Speaker #2: As the third quarter played out , we saw a decline in US imports led by an ATV decline on the China . To US lane of 27.1% .
And EPS digital which includes Roedean happy returns grew revenue by nine 5% year over year.
Speaker #2: 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 .
Brian Newman: 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 Logistics 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.
In the third quarter supply chain solutions generated operating profit of $536 million operating margin was 21, 3% our.
Our results in supply chain solutions. This quarter include the impact of the sale leaseback transaction, which generated $330 million, one time gain that I mentioned earlier.
Speaker #2: 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 2020 .
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.
We finished the quarter with strong liquidity and no outstanding commercial paper and so far this year ups's paid $4 billion in dividend.
Now, let me provide an update on our cost out and network reconfiguration efforts.
Speaker #2: For 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.
In conjunction with our actions to significantly reduce the amount of Amazon volume in our network. We are executing the largest network reconfiguration of our history and will remove approximately $3 5 billion and related costs. This year.
Speaker #2: 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 .
We've made a lot of progress since our last earnings call. Let me walk you through the details.
Brian Newman: UPS Digital, which includes Rhodion 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 lease-back transaction, which generated the $330 million one-time gain that I mentioned earlier. Turning to cash and shareowner returns, year to date, we've 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. 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.
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.
Speaker #2: 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 .
Now, let's look at the savings we generated so far this year.
As a reminder, we are tracking our savings within three cost bucket.
Speaker #2: Turning to cash and share . Returns . Year to date , we generated $5.1 billion in cash from operations and free cash flow of $2.7 billion .
They are variable costs, which primarily captures operational hours semi.
Semi variable costs, which reflects operational positions and.
In fixed costs, which includes closing buildings in reducing expense from support functions through our efficiency re imagined and initiatives.
Speaker #2: We finished the quarter with strong liquidity and no outstanding commercial paper . And so far this year , UPS has paid $4 billion in dividends .
Looking at variable cost total operational hours continued to move down with volume.
Speaker #2: 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 .
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.
Brian Newman: 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 three cost buckets.
Moving to a semi variable cost attrition and operational positions accelerated each month during the quarter and we finished down nearly 34000 positions year over year, which includes the reduction from our driver voluntary separation program.
Speaker #2: 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.
Nearly a third of the reductions occurred in September.
Speaker #2: 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 .
And our fixed cost bucket year to date, we have completed the closure of 195 operations, including closing 93 building.
As we were closing buildings. We are also investing through our network of the future efforts and as Carol mentioned, we deployed additional automation in 35 facilities.
Speaker #2: Now let's look at the savings we generated so far this year . As a reminder , we are tracking our savings within three cost buckets .
And while we expect to be busy processing volume during peak, we also plan to deploy automation projects in seven additional buildings in December.
Speaker #2: 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 initiatives .
Brian Newman: 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 reimagining initiatives. Looking at variable costs, total operational hours continued 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 the reduction from our driver voluntary separation program. Nearly a third 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.
Lastly.
Savings from our efficiency re imagine initiatives continued to accelerate in the third quarter.
Pulling it altogether, we are making meaningful progress executing our strategy. So far this year, we've reduced expense by $2 2 billion and we are on track to achieve our 2025 expense reduction target of approximately $3 5 billion.
Speaker #2: Looking at variable costs , total operational hours continued to move down with volume so far this year , we are down more than 16,000,000 hours and we are on track to reach our reduction target of approximately 25,000,000 hours for the year .
Now moving to our outlook.
Speaker #2: 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 the reduction from our driver , voluntary separation program .
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.
Speaker #2: Nearly a third 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 .
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.
Speaker #2: 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 .
Brian Newman: As we are closing buildings, we are also investing through our Network of the Future efforts. As Carol Tomé mentioned, we've deployed additional automation in 35 facilities. While we expect to be busy processing volume during peak, we also plan to deploy automation projects in seven additional buildings in December. Lastly, savings from our efficiency reimagining 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.
And we expect an operating margin of approximately nine 5% to 10%.
In terms of peak in the U S. We expect heavier volume earlier in the peak period, and we have one additional delivery day compared to last year, which gives us more flexibility.
Speaker #2: And while we expect to be busy processing volume during peak , we also plan to deploy automation projects in seven additional buildings in December .
The network reconfiguration and additional automation, we deploy through network of the future set us up to deliver a more efficient Pete and another year of industry, leading service for our customers in short we're ready for peak.
Speaker #2: 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 .
Speaker #2: 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 .
Turning to international we expect the dynamic environment, we've experienced throughout the year, we will continue.
With this in mind, we expect fourth quarter revenue to be approximately $5 billion.
Speaker #2: 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% .
And we expect an operating margin of between 17 and 18%.
And supply chain solutions, we expect revenue in the fourth quarter of around $2 $7 billion and an operating margin of approximately 9%.
Speaker #2: Looking at the segments in the fourth quarter , starting with us 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 .
Looking at capital allocation for the full year, we expect capital expenditures to be approximately $3 5 billion.
Brian Newman: 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. 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 one additional delivery day compared to last year, which gives us more flexibility. The network reconfiguration and additional automation we've 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%.
We are planning to pay out around $5 5 billion in dividends subject to board approval.
Speaker #2: And we expect an operating margin of approximately 9.5 to 10% . In terms of peak in the US , we expect heavier volume earlier in the peak period , and we have one additional delivery day compared to last year , which gives us more flexibility .
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.
Speaker #2: 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 .
Ups's rock solid strong and we have plenty of liquidity to continue executing our strategy and return value to our shareowners.
Speaker #2: In short , we're ready for peak . Turning to international , we expect the dynamic environment we've experienced throughout the year will continue .
And following the completion of our acquisition of Ann lower we expect to end the year with around $5 billion in cash.
So with that operator, please open the lines for questions.
Speaker #2: 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% .
Thank you we will now conduct a question and answer session.
Do you have any questions or comments. Please press star one on your phone at this time.
Speaker #2: And supply chain solutions , we expect revenue in the fourth quarter of around $2.7 billion . And an operating margin of approximately 9% .
Brian Newman: 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 of 2025. Before I close, let me comment on our financial condition. United Parcel Service Inc. is rock-solid strong, and we have plenty of liquidity to continue executing our strategy and return value to our share owners. Following the completion of our acquisition of Ann Lauer Healthcare Group, we expect to end the year with around $5 billion in cash. Operator, please open the lines for questions.
We ask that will posing your question. Please pickup your handset if you're listening on speaker phone to provide optimal sound quality.
Speaker #2: 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 .
Once again, if you have any questions or comments. Please press star one on your phone.
Your first question is coming from Chris Wetherbee from Wells Fargo. Your line is live.
Yeah, Hey, thanks, good morning, guys.
Maybe we can start on domestic margins. So obviously.
Speaker #2: 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 .
Some improvement, but we had a lot of RPT gross in the quarter. So I guess as we think forward I know there is a mixture 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 on the glide down can you give us a little sense of maybe what we can start to think about for 2026 for domestic.
Speaker #2: UPS is rock solid , strong , and we have plenty of liquidity to continue executing our strategy and return value to our shareholders .
Speaker #2: 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 .
Margin perspective.
Thanks, Chris I appreciate it and look I think we're very pleased with US both the revenue the revenue quality, we saw in the third quarter as well as the progress, we're making with the Amazon glide down and we laid out the activity metrics around that on 2026 look overall update 2026 on the January call. When we report fourth quarter, but there are a few.
Speaker #3: Thank you . We will now conduct a question and answer session . If you have any questions or comments , please press star one on your phone at this time .
Operator: Thank you. We will now conduct a question and answer session. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Chris Byrnes from Wells Fargo Securities LLC. Your line is live.
Speaker #3: We ask that while posing your question , please pick up your handset . If you're listening on speakerphone to provide optimum sound quality .
Things that I think are worth keeping in mind remember, we're three quarters into a six quarter drawdown. So as we lap the year, we kind of come through the first three quarters of this year, we will see a sequential increase in Amazon volume as we go into because everybody and then we will continue to draw down as we go through the first half of next year and the cost takeout will continue as.
Speaker #3: Once again, if you have any questions or comments, please press star one on your phone. Your first question is coming from Chris Wetherbee from Wells Fargo.
Speaker #3: Your line is live .
Speaker #4: Hey , thanks . Good morning guys . Maybe we can start on domestic margins so obviously some improvement . But we had a lot of growth in the quarter .
[Analyst 1]: Hey, thanks. Good morning, guys. Maybe we can start on domestic margins. Obviously, some improvement, but we had a lot of RTP growth in the quarter. As we think forward, I know there's a mix of cost as well as yield management that we're going to see. 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?
We go through that.
Second as Carol mentioned, we're taking strategic actions around ground saver.
Speaker #4: 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 .
That will we will start to take hold next year. It will see economic benefit in the back half of next year for that as well we.
Speaker #4: And I know you've given us some ranges for the fourth quarter , but generally speaking where do you think you are in the glide down .
We do anticipate closing and lower in November of this year and we'll update you on the financials as we wrap that into next year, but thats, an exciting acquisition to accelerate our health care strategy and looking 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 as higher margins as we go.
Speaker #4: Can you give us a little sense of maybe what we can start to think about for 2026 from a domestic margin perspective ?
Speaker #2: Thanks , Chris . I appreciate it . And and look , I think we're very pleased with both the revenue , the revenue quality we saw in the third quarter , as well as the progress that we're making with the Amazon glide down .
Brian Newman: Thanks, Chris. I appreciate it. 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. We laid out the activity metrics around that. On 2026, 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 three quarters into a six-quarter drawdown. As we lap the year, you know, we kind of come through the first three quarters of this year. We will see a sequential increase in Amazon volume as we go into peak because everybody peaks, and we'll continue the drawdown as we go through the first half of next year, and the cost takeout will continue as we go through that.
Into the back half of 'twenty, six and complete the Amazon glide down.
Speaker #2: And we laid out the the activity metrics around that on 2026 . Look , we'll update 2026 on the January call when we report fourth quarter .
Got it thank you.
[laughter].
Speaker #2: But there are a few things that I think are worth kind of keeping in mind . Remember , we're three quarters into a six quarter drawdown .
Thank you. Our next question comes from the line of David Vernon from Bernstein. Please go ahead with your question.
Speaker #2: So as we left the year , you know , we kind of comb through the first three quarters of this year , we will see a sequential increase in Amazon volume as we go into peak , because everybody peaks .
Hey, good morning, guys and thanks for taking the time here so.
Ian can you talk a little bit about the exit rate on cost per piece come into the third quarter. It seems like this was kind of an inflection quarter, where with the buyout and everything else.
Speaker #2: And then we'll continue the drawdown as we go through the first first half of next year . And the cost takeout will continue as we go through that .
You probably came out a little bit better than you started.
Speaker #2: The second , as Carol mentioned , we're taking strategic actions around Ground Saver that that will will start to take hold next year .
Brian Newman: The second is, as Carol Tomé mentioned, we're taking strategic actions around GroundSaver 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 Ann Lauer Healthcare Group 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 healthcare strategy. 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 2026 and complete the Amazon glide down.
And whether we should expect that to accelerate into <unk>.
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.
Speaker #2: And we'll see economic benefit in the in the back half of next year for that as well . We do anticipate closing and in November this year , and we'll update you on the financials as we wrap that into next year .
Lower rate ecommerce type of stuff can you cannot be more specific in terms of what that looks like and how that changes with these things.
Speaker #2: But that's an exciting acquisition to accelerate our healthcare strategy and look , and 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 as higher margins as we go into the back half of 26 and complete the Amazon glide down .
Sure.
Let me talk about exit rate on Q3 cost of fees and I'll, let Carol comment on USPS and Theres a couple of things on cost per piece look the cost per pieces 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 adds a big it makes it a retrofit and cost of fees.
Speaker #4: Got it . Thank you .
[Analyst 1]: Don, thank you.
Speaker #3: Thank you . Our next question comes from the line of David Vernon from Bernstein . Please go ahead with your question .
Operator: Thank you. Our next question comes from the line of David Vernon from Sanford C. Bernstein & Co. LLC. Please go ahead with your question.
We've gone through the quarter, though we're seeing some of the best production metrics that we've seen certainly on our inside I think it's been 12 years on a preload in 20 years the investments that we're making at automation that we're deploying through network of the future are certainly showing benefits and we're seeing that come through the cost of <unk>. The other thing that I'll point out and I'm sure you saw it in the non-GAAP.
Speaker #5: Hey , good morning guys . Thanks for taking the time here . So , Brian , can you talk a little bit about the exit rate on cost per piece coming out of third quarter ?
[Analyst 2]: Hey, good morning, guys, and thanks for taking the time here. 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 Q4. It sounds like you guys are saying you found a way to work with the United States Postal Service 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? Thanks.
Speaker #5: 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.
<unk> is that we executed on our driver a voluntary severance program in the quarter about 90% of those drivers exited on.
Speaker #5: And whether we should expect that to accelerate into four . Q and then it sounds like you guys are saying you found a way to work with the USPS on Final Mile for some of .
On August 30, <unk> and so so those those savings will start to materialize in the fourth quarter as well.
Speaker #5: The residential lower rate e-commerce type of stuff . Can you kind of be more specific in terms of what what what that looks like and how that changes cost per piece ?
You want to comment on <unk> I am happy to David Nice nice to hear from you just maybe going back on the driver piece. The total cost of the balance of $175 million to payback annual payback is $179 million. So the payback is less than one year. So that's a good thing for our customer base is not yet now lets talk.
Speaker #5: Thanks .
Speaker #2: Sure . Well , first let me talk about exit rate on Q3 , cost per piece . And I'll let Carol comment on the USPS .
Brian Newman: Sure. First, let me talk about exit rate on Q3 cost per piece, and I'll let Carol comment on the USPS. There are 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. It has a big mix of impact both on rep per piece and cost per piece. As we've gone through the quarter, 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 our 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.
Speaker #2: And there's a 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 the largest year over year comp related to the e-commerce volume that we're exiting .
The USPS as you know David.
Speaker #2: So it has a big impact both on rep per piece and cost per piece . As we've gone through the quarter , though , we are , we are seeing some of the best production metrics that we've seen .
The postal service's, new Postmaster General and Lin Mr. Steiner joined immediately starting the conversation with him.
Speaker #2: Certainly on our insight, I think it's in 12 years on our preload. In 20 years, the investments that we're making in automation that we're deploying through our network and the future are certainly showing benefits.
How could we create a win win win relationship a win for the postal system win for UBS and a win for our customers.
The way to do that is to leverage but they are best at which is final mile and what we're best at Middle Island. So I'm happy to tell you that we have 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.
Speaker #2: 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 31st .
Brian Newman: 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. Those savings will start to materialize in the fourth quarter as well. Carol, do you want to comment on GroundSaver?
Speaker #2: And so, those savings will start to materialize in the fourth quarter as well. Do you want to comment on this?
I'm very very pleased with where we are today and in this new renewed relationship with the USPS.
Speaker #1: I'm happy to . And David , nice to hear from you . Just maybe going back on the driver piece , the total cost of the buyouts , 175 million .
Carol Tome: 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. The payback is less than one year. That's a good thing for our cost per piece, isn't it?
Is there any way to kind of talk a little bit more about timing and how that kind of on the domestic margin for 2026 is it still too early.
Speaker #1: The payback annual payback is 179 million . So the payback is less than one year . So that's a good thing for our cost per piece , isn't it ?
It's too early we don't expect any benefit in the fourth quarter.
It'll start we hope knock on literally knock it all down at the beginning of the year and it's not just for our ground saver product, which is in our <unk>.
Speaker #1: Yeah . 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 U.P.S.
Brian Newman: Absolutely.
Carol Tome: Yeah. Now, let's talk about the USPS. As you know, David, the Postal Service has a new Postmaster General. When Mr. Steiner joined, I 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. 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. I'm happy to tell you that we've reached a preliminary agreement on what that looks like from a volume and rates perspective. We're working through the details, and we'll get those details all ironed out over the next weeks and months. By the end of the fourth quarter, we'll be able to give you more details.
Small package business, but also from mill innovations and we're excited about what that's going to mean to our mill innovations margin looking forward. So at the end of the year, we'll give you more color.
Alright, Thank you for the time.
Speaker #1: , 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 .
Thank you. Our next question comes from the line of Todd <unk> from UBS. Please go ahead with your question.
Speaker #1: 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 we'll get those details all ironed out over the next weeks and months .
Yeah. Good morning so.
Wanted to ask.
Let's see.
On your comments on <unk>, you talked about concern on SMB stepping down.
Carol Tome: I'm very, very pleased with where we are today and in this new renewed relationship with USPS.
This was the impact of the elimination of the de minimus exemption that that would have.
[Analyst 2]: 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?
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.
Carol Tome: It's too early. We don't expect any benefit in the fourth quarter. It'll start, we hope, knock on wood, so we can knock it all down by the beginning of the year. It's not just for our GroundSaver product, which is in our U.S. small package business, but also for mail innovations. We're excited about what that's going to mean to our mail innovations margin looking forward. At the end of the year, we'll give you more color.
SMB played out versus what seem to be a lot of concern.
<unk> 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 those two things thank you.
Sure.
Look at our F&B 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 Americas and the decline year on year wasn't as dramatic as we thought it could be and we are one.
[Analyst 2]: All right, thank you for the time.
Operator: Thank you. Our next question comes from the line of Todd Wadewitz from UBS. Please go ahead with your question.
[Analyst 3]: Good morning. Wanted to ask, let's see. I think on your comments in Q2, you talked about concern on SMB stepping down. I think this was the impact of the elimination of the de minimis exemption that would have a meaningful impact, and then it became a global elimination, not just China and Hong Kong. Can you give us a bit more perspective on how SMB played out versus what seemed to be a lot of concern in Q2? When we look at September, how was the impact different in the international business when it became a global elimination versus China, Hong Kong? On those two things. Thank you.
And the S&P is very closely though Tom is it some are doing just fine and managing through the changes in trade policy and some of them candidly are challenged.
We've got a close attention to these to these customers. Let me just give you some data which is amazing how many how many shippers are looking for help in the third quarter. We had 12 trade webinars with more than 8300 participants and we've reached out and had conversations with 61.
And 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 minimus exemption will certainly play some havoc on some of these shippers and I will just make that real for you to just some data back in March.
Carol Tome: All right. If you look at our SMB results for the quarter, we were down slightly year on year. As we look at our performance relative to the market, we took share both in volume and value. We were pleased with our performance relative to the market, and the decline year on year was not as dramatic as we thought it could be. We are watching the SMBs very closely, though, Thomas. Some are doing just fine and managing through the changes in trade policy, and some of them candidly are challenged. We have close attention to these customers. 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.
We had 13000 packages that came into the United States everyday that required some sort of a durable clearance and we handle that.
21% was handled with technology, so cleared without any manual intervention.
As for it to September when the.
Global elimination of 112000 packages, a day required some sort of durable clearance and thank goodness, we invested in technology. So we were able to clear 90% of those packages without any manual intervention.
It's great, but it's 10% needed some help and where they needed some help they really needed some help because when the global.
Carol Tome: We reached out and had conversations with 61,000 customers trying to help them navigate through these changes in trade policy. It is complicated. It is super complicated. To your point about the elimination of the de minimis exemption, it certainly plays some havoc on some of these shippers. I will just make that real for you too, just some data. Back in March, we had 13,000 packages that came into the U.S. every day that required some sort of a doable clearance. We handled that, about 21% was handled with technology. It cleared without any manual intervention. If you fast forward to September, when now it is a global elimination, 112,000 packages a day required some sort of doable clearance. Thank goodness, we invested in technology. We were able to clear 90% of those packages without any manual intervention, which is great. 10% needed some help.
Exemption went into place.
Place you might have seen that soon mail systems like Royal mail or Deutsche post really stop shipping into the United States, which meant shippers predominantly consumers who used to use those mail carriers as a way to get packages to the United States came into carriers, like UBS or Fedex or others and many of those shippers consumer to consumer.
Naive and you wouldn't expect them to understand the intricacies of trade policies and the shift in packages that didn't have the information necessary to clear and so you might want to talk about how we worked with those shippers because it was.
At 13000 packages that came into the United States everyday that required some sort of a durable clearance and we handled that.
21% was handled with technology, so cleared without any manual intervention.
A lot of hard work and effort to work with those shippers, yes sure. It was and so to help especially these CVC 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 with on food and if you think about a fan.
Yes, four to September when the.
Global elimination of 112000 packages a day requires some sort of durable clearance and thank goodness, we invested in technology. So we were able to clear 90% of those packages without any manual intervention.
<unk> shipping through two family members and that tended to be the pension that three week I'll call. It initial.
It's great that it's 10% needed some help and where they needed some help they really needed some help because when the global.
Carol Tome: 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 U.S., which meant shippers, predominantly consumers, who used to use those mail carriers as a way to get packages to the U.S., came into carriers like UPS or FedEx or others. Many of those shippers, consumer to consumer, were naive. You would not expect them to understand the intricacies of trade policies. They shipped in packages that did not have the information necessary to clear. 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.
Exemption went into place.
Third from the international both the post <unk> got the exception and that food and and low very low end value for the consumer to consumer move back to the Pope and so.
Place you might have seen that soon 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 to the United States came into carriers, like UBS or Fedex or others and many of those shippers consumer to consumer.
Since that point, we've been clearing and now up to 97% within the last week and a half same day clearance on our goods, so helping our that very valued shippers ensure that they meet the requirements of the U S government.
Naive and you wouldn't expect them to understand the intricacies of trade policies and the shift in packages that didn't have the information necessary to clear and so you might want to talk about how we worked with those shippers because it was.
And Tom 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 hard work and effort to work with those shippers, yes sure. It was and so to help especially these CVC 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 with on food and if you think about a fan.
We had a lot of this is demand related ratio because of the technology allows us to scale, our brokerage operations, but there, but there is a demand effect and it will just 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.
Kate Gutmann: Yeah, it sure was. To help, especially these C2C, consumer to consumer shippers, there were multiple calls with them, helping, trying to get them to understand the missing information that they are required to provide. A good portion was on food. If you think about a family shipping food to family members, that tended to be the pinch in that three-week, I'll call it, initial surge from the International Post. The Post then got the exception, and that food and very low-end value of goods, consumer to consumer, moved back to the Post. Since that point, we have been clearing now up to 97% within the last week and a half, same-day clearance on our goods. Helping our very valued shippers ensure that they meet the requirements of the U.S. government.
<unk> shipping through two family members and that tended to be the pension that three week I'll call. It initial.
And over 20% decline in that in the third quarter and expect that will continue into the fourth quarter. That's right now Theres, a big meeting coming up this week.
Third from the international both the post <unk> got the exception and that food and and low very low end value for the consumer to consumer move back to the Pope and so.
Maybe level more certainty about the trade between our two countries, but we are right now forecasting a decline in those trade lanes in the fourth quarter.
Hi.
Quick circling back on SMB do you think youre at stability now like now we shouldnt have as much concerned about a drop off going forward as maybe you had in <unk>.
Since that point, we've been clearing and now up to 97% within the last week and a half same day clearance on our goods, so helping our that very valued shippers ensure that they meet the requirements of the U S government.
And so as we look at the peak forecast and Thats. 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 search to be about 60% from where they are buying this.
Brian Newman: If I could just maybe dimensionalize the impact of that. In the third quarter, that had about a $60 million impact for us. We estimate in the fourth quarter, the direct impact will be $75 to $100 million. A lot of this is demand-related, right? The technology allows us to scale our brokerage operations, but there is a demand impact.
And Tom 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.
We had a lot of this is demand related ratio because the technology allows us to scale, our brokerage operations, but there, but there is a demand effect and it will just 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.
Today, that's the same surge that we've seen over the past three years, so they're they've got the inventory there 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 100% Mark the SMB customers that give us forecast at the 90.
Carol Tome: To 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 U.S. We saw an over 20% decline in that in the third quarter and expect that will continue into the fourth quarter.
And over 20% decline in that in the third quarter and expect that will continue into the fourth quarter. That's right now Theres, a big meeting coming up this week.
9%, Mark so as it stabilizes it a bit but it's still something I think to watch out for it 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 where they source.
Brian Newman: That's right.
Carol Tome: Now, there's a big meeting coming up this week, so maybe we'll have a little bit more certainty about trade between our two countries. We're right now forecasting a decline in those trade lines in the fourth quarter.
Maybe level more certainty about the trade between our two countries, but we are right now forecasting a decline in those trade lanes in the fourth quarter.
Hi.
[Analyst 3]: 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 Q2?
Quick circling back on F&B do you think youre at stability now like now we shouldnt have as much concerned about a drop off going forward as maybe you had in <unk>.
They're good how do they think about the mode of transportation that you so on 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.
And 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 search to be about 60% from where they are buying this.
Carol Tome: As we look at the peak forecast, the best way to tell you where we are is we look at our, as you know, 100 of our customers, most of them are enterprise customers, make up 80% of our peak surge. What those large customers have told us is 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 three years. They've got the inventory. They're ready for a peak. On the SMB side, they're a little short of where they were a year ago. If you think about effectiveness being 100% effective, our enterprise customers are at the 100% mark. The SMB customers that give us forecasts are at the 99% mark. Has it stabilized? A bit.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Ari Rosa from Citigroup.
Please go ahead with your question.
Today, that's the same surge that we've seen over the past three years, so they're they've got the inventory theyre 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 at the 90.
Hi, good morning, 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.
And kind of as you work through some of these shifts in revenue mix.
9%, Mark so as it stabilizes it a bit but it's still something I think to watch out for it 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 where they source.
Yes, great. Thanks, Ari and good morning, it's great great to hear from you.
Carol Tome: It's still something I think to watch out for, particularly as we head into next year. Next year is when you're going to feel the full brunt of some of these tariffs hitting some of these SMBs. We're working with them to try to help them think about how they change, where they source their goods, how they think about the mode of transportation they use, so on and so forth. 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.
Look we saw the Q3.
Free cash flow bounce back there were some timing issues in our in our Q2 versus Q3 that are kind of work themselves out and we expect Q 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 youll see that our penetration of <unk> was up 350 basis points are.
They're good how do they think about the mode of transportation that you so on 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.
Penetration in F&B was up 340 basis points.
[Analyst 2]: Great. Thank you.
Great. Thank you.
We're seeing growth in the areas of the markets, where we want to growth that allows us to drive better returns and better margins and with the cost takeout and the network efficiency that we are creating through our automation investment we do expect the business to generate significantly more free cash flow over time.
Carol Tome: Thank you.
Thank you.
Operator: Thank you. Our next question comes from the line of Ari Rosa from Citigroup Inc. Please go ahead with your question.
Thank you. Our next question comes from the line of Ari Rosa from Citigroup.
Please go ahead with your question.
Hi, good morning, 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.
[Analyst 2]: Hi, good morning. 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. Thanks.
Clearly we've got.
We've got a dividend of around five four to $5 $5 billion and we expect it to be above that.
The very near future.
Occur and kind of as you work through some of these shifts in revenue mix.
Great. Thank you.
Brian Newman: Yeah, great. Thanks, Ari, and good morning. It's great to hear from you. 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, I think you're exactly right. This is why we're leaning into the parts of the market that we're leaning into, 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. 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.
Thank you. Our next question comes from the line of Jonathan Chaplin from Evercore ISI. Please go ahead with your question.
Yes, great. Thanks, Ari and good morning, it's great to hear from you.
We look we saw the Q3.
Free cash flow a bounce back there were some timing issues in our in our Q2 versus Q3 that are kind of work themselves out and we expect Q 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 youll see that our penetration of <unk> was up 350 basis points are.
Thank you good morning.
Just kind of a two parter I'm, sorry to do two partners here, but Amazon glide down.
You're kind of running on track here, but down 21%.
So 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 <unk> and then secondly, it really looks like you're on track with the cost takeout associated with that volume glide down.
Penetration in F&B was up 340 basis points.
We're seeing growth in the areas of the markets, where we want to growth 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 investment we do expect the business to generate significantly more free cash flow over time.
To the cost alignment with the rest of the business ex Amazon just given all these changes that you've spoken about already with the rest of world de Minimis, maybe some of the smbs being a bit later into 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.
Brian Newman: Clearly, we've got a dividend of around $5.4 to $5.5 billion, and we expect it to be above that in the very near future.
Really we've got.
Amazon Costco one.
We've got a dividend of around five four to $5 $5 billion and we expect it to be above that.
On the Amazon glide down we're gliding down there and the volume that we don't want and we're right on our plan over a growing the volume that we do want and so that's why the year over year decline lessened 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 werent like returns is good for our business.
Very near future.
[Analyst 2]: Great, thank you.
Great. Thank you.
Operator: Thank you. Our next question comes from the line of Jonathan Chaplin from Evercore ISI. Please go ahead with your question.
Thank you. Our next question comes from the line of Jonathan Chaplin from Evercore ISI. Please go ahead with your question.
Question about.
[Analyst 4]: Thank you. Good morning. Just kind of a two-parter. I'm sorry to do two-parters 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. Maybe just help us understand where you are as we think about exit rate and Q4. 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 the rest of the world de minimis, maybe some of the SMBs being a little bit lighter into 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?
Thank you good morning.
I would say excellent job managing through the Amazon glide down but were also driving a heck of a good business and now that you might want to talk about your production numbers.
Sure.
Just kind of a two parter I'm sorry to do two partners here, but.
Amazon glide down.
You're kind of running on track here, but down 21%.
I thought we were supposed to be around 30% at this point. So maybe just help us understand where you are as we think about exit rate in <unk> 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 the rest.
<unk> 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 are 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 have closed.
The World de Minimis.
The operations. We've closed also the 34000 physicians that we've eliminated that's part and parcel of course, driven by some Amazon, but also our productivity. So if you think about.
Maybe some of the SMB as being a bit later into peak do you feel like you're on track there as well or is there a little bit more catch up to do on X.
Amazon Costco one.
Carol Tome: On the Amazon glide down, we're gliding down the volume that we don't want, and we're right on our plan. We're growing the volume that we do want, and that's why the year-over-year decline wasn't as much as we had anticipated at the end of the second quarter. 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. Now that you might want to talk about your production numbers, you know, they're the best that we've seen in 20 years, 10 years. Talk a little bit about that.
On the Amazon glide down we're gliding down there and the volume that we don't want and we're right on our plan over a growing the volume that we do want and so that's why the year over year decline lessened 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 werent like returns is good for our business.
Production across the network.
Brian mentioned that are 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, let's safety end of decade, and other items related to cost.
I guess, what should give everybody comfort is what we've displayed in the first nine months. We have also started to stage next year in 2020.
Question about.
I would say excellent job managing through the Amazon glide down but were also driving a heck of a good business and now that you might want to talk about your production numbers.
So this continues.
We'll hit our Amazon targets in our drawdown in terms of cost and productivity just gets enhanced because we.
First that we seen in 20 years 10 years talk a little bit about that yes, sure and I think it is really exciting as we look at our network. We're not looking at everything exclusively are 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.
Nando Cesarone: Yeah, sure. 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. Of course, we keep finding opportunities for us to bring costs down. 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. If you think about production across the network, you know, Brian mentioned it, 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 a decade and other items related to cost. What should give everybody comfort is what we've displayed in the first nine months, we've also started to stage next year in 2026.
First introduced more NOI 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 NOL.
A great example of that is mesquite.
40, 8-K hub per hour for US just opened up two weeks ago and prior to that a similar hub in Texas and.
The operations. We've closed also the 34000 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.
Sweetwater, So really excited about those additions to the network and of course more to come and.
Production across the network.
And Jonathan just to put a number to that because I think the third quarter really shows assessment. We started the year, saying that we were going to focus on getting the right volume and the network and drive efficiency and volume was down 12, 3% and we expanded operating margin and we will look to continue that trend going forward.
Brian mentioned that are 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, let's safety end of decade, and other items related to cost.
I guess, what should give everybody comfort is what we've displayed in the first nine months. We have also started to stage next year in 2020.
Alright, Thanks, Brian Carolyn Linda.
Thank you.
Thank you. Our next question comes from the line of Scott Group from Wolfe Research. Please go ahead with your question.
Nando Cesarone: 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 Network of the Future 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 Network of the Future. A great example of that is Mesquite, you know, 48,000 hub per hour for us, just opened up two weeks ago. Prior to that, a similar hub in Texas in Sweetwater. Really excited about those additions to the network and of course, more to come.
So this continues.
We'll hit our Amazon targets in our drawdown in terms of cost and productivity just gets enhanced because we.
Hey, Thanks. Good morning, 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.
First introduced more NOI projects, but also all the peripheral buildings that we had supporting those.
Those upgrades will start to fall off as well as we start to implement NOI.
Smaller and as we think about like the next wave of Amazon volume to come now does it is it any different in terms of mix any harder or easier to manage from 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.
Great example of that is mesquite.
40, 8-K hub per hour for US just opened up two weeks ago and prior to that a similar hub in Texas and.
Sweetwater, so really excited about those additions to the network and of course more to come.
Brian Newman: Just to put a number to it, because I think the third quarter really shows attachment. 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 going forward.
And Jonathan just to put a number to that because I think the third quarter really shows assessment. We started the year, saying that we were going to focus on getting the right volume and the network and drive efficiency and volume was down 12, 3% and we expanded operating margin and we will look to continue that trend going forward.
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 on the Amazon <unk> think about it as Theres a portion of the Amazon volume that were exiting that theyre going to in source that thats. The outbound that's a pretty consistent glide. It's all schedules right. Because this is where our ecommerce gets very physical right. We have to hand over building. They catch a building there has to be <unk> cars and drivers it's orders that all transition in kind of a.
[Analyst 4]: All right. Thanks, Brian, Carol, and Linda.
Alright, Thanks, Brian Carroll and Linda.
Kate Gutmann: Thank you.
Thank you.
Operator: Thank you. Our next question comes from the line of Scott Group from Wolfe Research LLC. Please go ahead with your question.
Thank you. Our next question comes from the line of Scott Group from Wolfe Research. Please go ahead with your question.
Hey, Thanks. Good morning, So just a follow up on the Amazon piece. So I think when you first talked about this it was it would be down to be cut in about.
[Analyst 3]: Hey, thanks. Good morning. Just to follow up on the Amazon piece, I think when you first talked about this, it would be down, be cut in about half by the middle of next year. Is that number changing at all, bigger or smaller? As we think about the next wave of Amazon volume to come out, is it any different in terms of mix? Any harder or easier to manage from a decremental standpoint? It's all part of the same question. 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? Thank you.
Same week Lane by Lane Lane by Lane building by building city by city. So so thats 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 has been a great relationship separate to that.
We have by the middle of next year.
Is that number changing at all bigger.
Smaller and as we think about like the next wave of Amazon volume to come out is it is it any different in terms of mix any harder or easier to manage from a decremental standpoint, and then it's all part of like the same question like I know, there's three 5 billion of cost reduction this year, what's the right number to think about for next.
Amazon is going to be a large customer right and theres a lot of places, where we can add value to their supply chain like returns. There are 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 going into next year. It's the same it's the same type of volume. It's just over a period of time on the cost.
At year in terms of cost reduction.
Take out will reset that in January.
Brian Newman: Sure, Scott. Thank you, and good to speak to you. 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 insource that's at the outbound. That's a pretty consistent glide. It's all scheduled, right? This is where e-commerce gets very physical, right? We have to hand over a building, they catch a building, there has to be package cars and drivers and sorters that all transition in kind of the same week.
Sure Scott.
We as we roll forward, but nando seen it's been doing a great job that as these buildings transition we moved to work we consolidate we're investing in Nols and we'll we'll drive a similar level of efficiency next year and the same cost buckets right, Philippines, the variable semi variable and the fixed cost.
Thank you and good to speak to you.
So on the on the Amazon <unk> think about it as Theres a portion of the Amazon volume that were exiting that theyre going to in source that thats. The outbound that's a pretty consistent glide. It's all scheduled right. Because this is where our ecommerce gets very physical right. We have to handover building. They catch a building there ought to be X cars and drivers it's orders that all transition in kind of a.
You should expect that to continue into next year, and we will dimensionalize that at the end of the quarter ended the fourth quarter absolutely.
Same week Lane by Lane Lane by Lane building by building city by city. So so thats 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. This has been a great relationship separate to that.
Carol Tome: Lane by lane, right?
Brian Newman: Lane by lane, building by building, city by city. That is all scheduled out. It is on track. We are working very collaboratively with them. I think it shows in our service numbers, both for ourselves and for them, that this has been a great relationship. Separate to that, Amazon is still going to be a large customer, right? There are 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. When you think about the decrementals going into next year, it is the same type of volume. It is just over a period of time. On the cost takeout, we will reset that in January as we roll forward.
Thank you. Our next question comes from the line of Jordan <unk> from Goldman Sachs. Please go ahead with your question.
Yes, hi, good morning.
I wanted to come back to international maybe some additional thoughts around your international trade flow analysis.
Amazon is going to be a large customer right and theres a lot of places, where we can add value to their supply chain like returns. There are 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 going into next year. It's the same it's the same type of volume. It's just over a period of time on the cost.
The rest of the de Minimis as Don when we sort of lap Liberation day next year can we get back to.
Normal sort of trajectories are patterns or is it permanent shifts and then.
Along with that you know what does it take to keep international margin more sustainably in that high teen level, you guys had been used to it.
Takeout will reset that in January.
As we roll forward, but nando team has been doing a great job that as these buildings transition we moved to work we consolidate we're investing in Nols and we'll we'll drive a similar level of efficiency next year and the same cost buckets right. So it will be this the variable semi variable and the fixed cost.
With an eye towards 2026 as well thanks.
Brian Newman: Nando's team's been doing a great job that as these buildings transition, we move the work, we consolidate, we are investing in Network of the Future, and we will drive a similar level of efficiency next year.
Sure. Thanks Jordan.
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 slowed down now, but theres still a lot of flux going on in the world where things things are moving around what we are seeing is a lot of growth outside the U S. Right, so trades continuing to flow, but it's not touching.
Carol Tome: The same cost buckets, right? It will still be the variable, the semi-variable, and the fixed cost.
Brian Newman: That's right.
Carol Tome: You should expect that to continue into next year. We will dimensionalize that at the end of the quarter, end of the fourth quarter.
You should expect that to continue into next year, and we will dimensionalize that at the end of the quarter ended the fourth quarter absolutely.
Brian Newman: Absolutely.
Operator: Thank you. Our next question comes from the line of Jordan Robert Alliger from Goldman Sachs Group Inc. Please go ahead with your question.
Thank you. Our next question comes from the line of Jordan <unk> from Goldman Sachs. Please go ahead with your question.
Not especially in the U S as much as it was before as we as we look into next year and we think about the margin.
[Analyst 5]: Yeah, hi, good morning. Just wanted to come back to international, maybe some additional thoughts around your international trade flow analysis. Now that the rest of de minimis is gone, you know, 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? Along with that, you know, what does it take to keep international margin more sustainably in that high teen level you guys had been used to? That's with an eye towards 2026 as well. Thanks.
Yes, hi, good morning.
There will be some permanent change until things until the system settles in the new equilibrium on trade flows.
I wanted to come back to international maybe some additional thoughts around your international trade flow analysis.
The rest of the de Minimis as Don you know when we sort of lap Liberation day, you know next year can we get back to.
I do think that this mid to high teens margin for international is absolutely the target, but we need we need kind of trade flows to settle in order to get there well ill, let Kate and her team have done is really operationalize the change in trade flows in the third quarter alone you did a 100 different operational changes to make sure that we can meet the needs of our customers is true.
Normal sort of trajectories are patterns or is it permanent shifts and then.
Along with that you know what does it take to keep international margin more sustainably in that high teen level, you guys had been used to it than that.
With an eye towards 2026 as well.
Trade flows are changing and we're investing ahead of some of this you might talk about what Youre doing in Asia. We've mentioned this before but just remind everyone. What we're doing in Hong Kong and in the Philippines, Yeah, absolutely and so to unlock that growth, where our global network with a global portfolio and we're seeing the return on the investments we made in Asia expanding our.
Brian Newman: Sure. Thanks, Jordan, and good to hear from you. On international trade flows, as Carol Tomé mentioned, as we went through the third quarter and particularly into September with de minimis, we did see things slowed down. There is 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? 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, there will be some permanent change 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.
Sure. Thanks Jordan.
Good to hear from me on.
National Trade flows look as Carol mentioned as we went through the third quarter and particularly into September with de Minimis. We did see things slowed down now, but theres still a lot of flux going on in the world where things things are moving around what we are seeing is a lot of growth outside the U S. Right, so trades continuing to flow, but it's not touching.
Our service fastening our time in transit.
If you look at.
Say the top 20 export lane non U S 16 of them are growing and growing very nicely.
As in the U S as much as it was before as we as we look into next year and we think about the margin.
There will be some permanent change until things until the fifth system settles in the new equilibrium on on trade flows.
Lot of them are Asia to either Asia, Asia, or Asia to Europe and reverse.
That's really the expansion customers have needs. They are shifting trade and within there I will tell you. We see this small and medium sized businesses and international growing 9% in many regions of the world. So that also will help us with momentum for next year.
Settles I do think that this mid to high teens margin for international is absolutely the target, but we need we need kind of trade flows to settle in order to get there.
Carol Tome: 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 flows were changing. We're investing ahead of some of this. You might talk to 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.
Kate and her team have done is really operationalize the change in trade flows in the third quarter alone you did a 100 different operational changes to make sure that we can meet the needs of our customers is transferred trade flows are changing and we're investing ahead of some of this you might talk about what Youre doing in Asia. We've mentioned this before but just remind everyone. What we're doing in Hong.
Thank you.
Thank you. Your next question is coming from the line of Bruce Chan from Stifel. Please go ahead with your question.
Hey, Thanks, and good morning, everyone.
Kong and in the Philippines, Yeah, absolutely and so to unlock that growth where 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.
Kate Gutmann: Absolutely. 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. 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. That's really the expansion. Customers have needs. They are shifting trade. Within there, I will tell you, we see the small and medium-sized businesses and international growing 9% in many regions of the world. That also will help us with momentum for next year.
To see the results and the guidance here and maybe just on that last point.
Since the books closed and since you built your guidance in the 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 that range in terms of.
So if you look at.
Say the top 20 export lane 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.
Demand or service or operations.
With regard to ATC in payrolls and consumption.
Yeah. 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.
So that's really the expansion customers have needs. They are shifting trade and within there I will tell you. We see this small and medium sized businesses and international growing 9% in many regions of the world. So that also will help us with momentum for next year.
On 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 to the peak season, because we really rely on what our customers are telling us and our customers are telling us dosing peak that theyre going to have a good peak. So we haven't factored any of that.
[Analyst 5]: Thank you.
Thank you.
Operator: Thank you. Your next question is coming from the line of Jizong Chan from Stifel Nicolaus & Company Incorporated. Please go ahead with your question.
Thank you. Your next question is coming from the line of Bruce Chan from Stifel. Please go ahead with your question.
[Analyst 2]: Hey, thanks. Good morning, everyone. Nice to see the results in the guidance here. Maybe just on that last point, I'm guessing that since the books closed and since you built your guidance in the fourth quarter budget, we've got yet another variable with a 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?
Hey, Thanks, and good morning, everyone.
Nice to see the results and the guidance here and maybe just on that last point.
But of course, it's smart to always think about what could happen hopefully this will be.
I'm guessing that since the books closed and since you built your guidance in the fourth quarter budget, we've got yet another variable with the government shutdown.
Resolution <unk>.
We should hope for.
Okay. Thank you.
Thank you. Our next question is coming from Kenn Hoekstra from Bank of America.
Wondering if that is contemplated in the guidance and if not is there any downside to that range in terms of.
Please go ahead with your question.
Demand or service or operations, especially with regard to ATC in payrolls and consumption.
Hey, great good morning.
So it seems like your 300 basis points an 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 about <unk> 10, just want to understand your view on maybe the potential for accelerating that that cost cutting benefits above normal trend as we are.
Carol Tome: Yeah. 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 U.S., 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. We haven't factored in any significant impact to the peak season because we really rely on what our customers are telling us, and our customers are telling us those who peak that they're going to have a good peak. We haven't factored any of that in. Of course, it's smart to always think about what could happen. Hopefully, there will be a resolution soon.
Yeah. 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.
It's not only fourth quarter, but.
Your thoughts on.
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 to the peak season, because it really rely on what our customers are telling us and our customers are telling us dosing peak that theyre going to have a good peak. So we haven't factored any of that.
As we go into 'twenty six 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.
Did that get reversed and we start seeing that for the rest of the world If not China Hong Kong Lane.
Maybe any any thoughts on the Supreme Court process.
But of course, it's smart to always think about what could happen hopefully a resolution soon.
Sure, Let me talk about the sequential impact first.
Carol Tome: That's what we should hope for.
So circuit as you go from Q3 to Q4 remember as Carol said, we have been working closely with our customers and we expect <unk> to be similar shape as it has in the last four years right. So we will see about a 20% step up in sequential Adv in the U S about 10% and international now also there will be holiday demand surcharges.
We sure hope so.
[Analyst 2]: Thank you.
Okay. Thank you.
Operator: Thank you. Our next question is coming from Kenneth Scott Hoexter from BofA Securities. Please go ahead with your question.
Thank you. Our next question is coming from Kenn Hoekstra from Bank of America.
Please go ahead with your question.
[Analyst 1]: Hey, great. Good morning. 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, you know, your thoughts on as we go into 2026. 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?
Hey, great good morning.
So it seems like your 300 basis points an 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 that I'm just trying to understand your view on maybe the potential for accelerating that that cost cutting benefits above normal trend as we are.
Had been announced our take rate on those has been good even though theres one incremental day in the peak season were still balancing balancing demand and expect to see good take on the holiday demand surcharges on the cost side remember, we have been investing and deploying automation throughout the year and network of the future Theres been.
It not only in the fourth quarter, but.
Your thoughts on.
As we go into 'twenty six and then next I guess next week, we're going to start the Supreme Court hearings on Paris thoughts initial thoughts on the potential impact de minimis.
There'll be 42, new automation projects live by the time, we start <unk>.
And part of the function of bringing down the water level in the total U S network as it allows us to run more efficiently. So you need less variable capacity fewer leased aircrafts fewer rental vehicles fewer seasonal workers that that allows you to run a.
Did that get reversed and we start seeing that for the rest of the world If not China Hong Kong Lane.
Maybe any any thoughts on the Supreme Court process.
Brian Newman: Sure. Let me talk about the sequential impact first. Ken, as you go from Q3 to Q4, remember, as Carol Tomé said, we have been working closely with our customers, and we expect peaks to be similar shape as it has in the last four years, right? We'll see about a 20% step up in sequential ADV in the U.S., about 10% in international. 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 and Network of the Future. There will be 42 new automation projects live by the time we start peak.
Sure, Let me talk about the sequential impact first.
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.
So as you go from Q3 to Q4 remember as Carol said, we have been working closely with our customers and we expect <unk> to be similar shape as it has in the last four years right. So we will see about 20% step up in sequential Adv in the U S about 10% and international now also there will be holiday demand surcharges.
Okay.
Quick question, obviously, we'll be watching it very closely but we don't we're not in a position to speculate on what the outcome will be.
Thank you. Your next question is coming from Brian <unk> from Jpmorgan. Please go ahead with your question.
<unk> been announced our take rate on those has been good even though theres one incremental day in the peak season were still balancing balancing demand and expect to see good take on the holiday demand surcharges on the cost side remember, we have been investing and deploying automation throughout the year and network of the future Theres been.
Hey, good morning, Thanks for taking the question.
Just one quick follow up on first on the USPS I know last quarter, you called out some density headwinds. It sounds like those are probably still present here in <unk> and I would expect in <unk>.
Can you clarify that and then.
There'll be 42, new automation projects alive by the time, we start and part of the function of bringing down the water level in the total U S network as it allows us to run more efficiently so you'd need less variable capacity fewer leased aircrafts fewer rental vehicles fewer seasonal workers that that allows you to run a <unk>.
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 is a lot going on with the mixed dynamics some of the product service changes, but clearly it looks like theres still some phase III momentum and also bit of a help from fuel. So can you give us a little more thoughts on those three parts of that.
Brian Newman: Part of the function of bringing down the water level in the total U.S. network is it allows us to run more efficiently. You need less variable capacity, fewer leased aircraft, fewer rented vehicles, fewer seasonal workers. That allows you to run a much more efficient network. 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.
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.
Okay helpful. Thank.
Thank you.
On the <unk>.
Ground favorite product Destiny is continuous 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 still very excited about our renewed relationship with the USPS, we estimate that the cost drag in the third quarter was about $100 million.
Okay.
Carol Tome: On the Supreme Court question, obviously, we'll be watching it very closely, but we're not in a position to speculate on what the outcome will be.
Freedom quick question, obviously, we'll be watching it very closely but can we don't we're not in a position to speculate on what the outcome will be.
Operator: Thank you. Your next question is coming from Brian Ozenbeck from J.P. Morgan. Please go ahead with your question.
Thank you. Your next question is coming from Brian <unk> from Jpmorgan. Please go ahead with your question.
Right.
Another cost that we overcame.
Down to drive margin expansion and Brian on your on your point on Rep per piece look we continue to see strong base rate improvement and rep for peace.
[Analyst 4]: Hey, good morning. Thanks for taking the question. Just one quick follow-up on the USPS. In the last quarter, Carol, you called out some density headwinds. It sounds like those are probably still present here in Q3, and I expect in Q4. If you could clarify that. Brian, can you give us a little bit more color on how you think rep per piece will track into the fourth quarter and sort of exit the year? There's a lot going on with the mixed dynamics, some of the product service changes, but clearly, looks like there's still some base rate momentum, and also a bit of the help from fuel. If you can give us a little bit more thoughts on those three parts of that trend, that would be helpful. Thank you.
Hey, good morning, Thanks for taking the question.
Just one quick follow up on first on the USPS I know last quarter, you called out some density headwinds. It sounds like those are probably still present here in <unk> and I would expect in <unk>. So if you could clarify that and then Brad.
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% were coming in higher than that and so and we expect that to come through both in base rate slightly less mix improvement.
Ian 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 exited the year is a lot going on with the mixed dynamics some of the product service changes, but clearly it looks like theres still some phase III momentum and also a bit of a help from fuel. So if you give us a little more thoughts on those three parts of that.
In the third quarter as we start to lap some of the Chinese E Commerce shipper actions that we took last year.
And then in that holiday demand strong holiday demand surcharge.
Thank you.
Okay helpful. Thank.
Thank you.
Thank you. Our next question is coming from Ravi Shanker from Morgan Stanley. Please go ahead with your question.
Carol Tome: On the GroundSaver product, you know, density is continuing to be a challenge. We just can't seem to get more packages per stop on these much eventual deliveries. This is one reason why we're so very excited about a renewed relationship with the United States Postal Service. We estimate that the cost drag in the third quarter was about $100 million.
On the other.
Groundskeeper product destiny is continuous to be a challenge we just can't seem to get more packages first up on these residential deliveries and this is one reason why we're still very excited about our renewed relationship with the USPS, we estimate that the cost drag in the third quarter was about $100 million that's right.
Great. Thanks morning, everyone.
A lot of traction with head count reduction and bought the building side and the driver side.
A union, saying that kind of you guys have committed to net job increases through the course of the contract to open or how do you see that playing out in the remaining <unk> contract would you have to start hiring again to make up that difference.
Brian Newman: That's right, which is another cost that we overcame as the market came down to drive margin expansion. Brian, on your point on rep per piece, we continue to see strong base rate improvement in rep per piece. We expect the fourth quarter to be a little bit above 6%. 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. We expect that to come through both in base rate, slightly less mix improvement in the third quarter as we start to lapse some of the Chinese e-commerce shipper actions that we took last year, and then strong holiday demand surcharge.
Another cost that we overcame as it came.
Came down to drive margin expansion and Brian on your on your point on Rep for piece look we continue to see strong base rate improvement and rep for peace.
We are in compliance with the terms of our contract and Brian you might want to give us a little bit more color there sure and Ravi what part of the.
We expect the fourth quarter to be a little bit above 6%.
The terms of the contract.
And if you look at that with where we set out originally at the full year to be 6% were coming in higher than that and so and we expect that to come through both in base rate.
Allow us to offer full time physicians to part time employees in order to give them the ability to go part time to full time, which 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 to EPS. So so the way the contract.
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 in that holiday demand strong holiday demand surcharge.
Work is.
We offer offer full time positions to part time employees from a net head count.
[Analyst 4]: Thank you.
Thank you.
Operator: Thank you. Our next question is coming from Ravi Shanker from Morgan Stanley. Please go ahead with your question.
Thank you. Our next question is coming from Ravi Shanker from Morgan Stanley. Please go ahead with your question.
Standpoint, it doesn't really change things, but it's a way for us to create career pathing. It's good for the Union is good for our people. It's good for US helps us have more trained workers that are that are committed to <unk> and.
[Analyst 2]: Great. Thanks, everyone. What was the HLR traction with headcount reduction in both the building side and the driver side? The union is saying that you guys have committed to net job increases through the course of the contract, though. How do you see that playing out in the remaining two and a half years of the contract? Would you have to start hiring again to make up for that difference? Thank you.
Great. Thanks morning, everyone.
A lot of traction with head count reduction and bought the building side and the driver side of the.
And in sometimes Theres messaging, that's confusing on this point. So if you are if you read something that's confusing just call us and we'll clarify it.
The union, saying that kind of you guys have committed to net job increases through the course of the contract to open or how do you see that playing out in the remaining <unk> of the contract and what do you have to start hiring again to make up that difference.
Okay.
Thank you. Your next question is coming from Stephanie Miller from Jefferies. Please go ahead with your question.
Carol Tome: We are in compliance with the terms of our contract. Brian, you might want to give a little bit more color there.
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 what part of the the terms of the contract.
Brian Newman: Sure. 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, quite frankly, that's the best outcome for us, right? We want to create lifetime jobs and good careers with people who can earn a solid income with benefits at United Parcel Service Inc. 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, and it's good for us. It helps us have more trained workers that are committed to United Parcel Service Inc.
Hi, good morning, Thank you.
I wanted to touch on.
Allow us to offer full time physicians to part time employees in order to get it and the ability to go part time to full time, which book 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 to EPS. So so the way the contract.
The add back.
In the U S domestic segment for the quarter. If you could just break down maybe the delta between the add back going from $66 million to the $302 million in the quarter.
Really what the what the components are those the major developments that backs were for the quarter. Thank you.
Anthony just to clarify you are talking about the non-GAAP adjustments.
Works is we offer offer full time positions to part time employees.
That is correct.
Correct, yes, so as Carol mentioned, so we executed on our driver voluntary separation plan.
From a net head count.
Standpoint, it doesn't really change things, but it's a way for us to create career pathing. It's good for the Union is good for our people. It's good for US helps us have more trained workers that are that are committed and in sometimes theres messaging. That's confusing on this point. So if you're if you read something that's confusing just call us and we'll clarify it.
In the quarter about 90% of the drivers exited on August 31.
80% of that charge is associated with that with the severance included in that.
Carol Tome: If you read something that's confusing, just call us and we'll clarify it.
In the second quarter, we laid out a range of kind of $400 million to $650 million associated with the total network reconfiguration efficiency re imaging program, we're still within that range.
Okay.
Yeah.
Operator: Thank you. Your next question is coming from Stephanie Moore from Jefferies LLC. Please go ahead with your question.
Thank you. Your next question is coming from Stephanie Miller from Jefferies. Please go ahead with your question.
And I think just to make it real real we had $166 million of cost in the third quarter for that driver buyout against a total cost of 175, yeah. So we won't see that same amount in Q4, that's right.
[Analyst 6]: Hi, good morning. Thank you. I wanted to touch on the addbacks, specifically in the U.S. domestic segment for the quarter. If you could just break down, you know, maybe the delta between the addbacks going from $66 million to the $302 million in the quarter, you know, really what the components of those, the major components of the addbacks were for the quarter. Thank you.
Hi, good morning, Thank you.
I wanted to touch on the add back 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.
And Matthew we have time for one more question.
Certainly our final question comes from the line of Conor Cunningham familiar research. Please go ahead with your question.
Really what the what the components are those the major components of add backs were for the quarter. Thank you.
Brian Newman: Stephanie, just to clarify, you're talking about the non-GAAP adjustments?
And just to clarify youre talking about the non-GAAP adjustments.
Hi, everyone. So I think you said you had 195 operations.
[Analyst 6]: That is correct.
That is correct.
Brian Newman: Correct. As Carol Tomé mentioned, 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. In the second quarter, we laid out a range of $400 million to $650 million associated with the total network reconfiguration and efficiency reimagined program. We're still within that range.
<unk> reduced our 93 buildings that have been closed I was hoping you could talk about.
Correct, yes, so as Charles mentioned, so we executed on our driver voluntary separation plan.
How that may trend into 2026 like are we expecting that to continue to ramp up or it seems like there's further opportunities that'd be just talk about.
In the quarter about 90% of the drivers exited on August 31.
80% of that charge is associated with that with the severance.
The opportunity.
In terms of getting more efficient on the network. Thank you very much.
Included in that.
Sure well the Amazon Glenn I don't continues we're three quarters in a six quarter glide down so the Amazon Gladstone continues which means there will be further consolidation of buildings at the end of the fourth quarter. We will provide guidance for 2026, our outlook for 2026, where we can be more specific on what that looks like.
In the second quarter, we laid out a range of kind of 400.
$650 million associated with the total network reconfiguration efficiency re imaging program, we're still within that range.
Carol Tome: I think just to make it real, we had $166 million of cost in the third quarter for the driver buyout against a total cost of $175 million. We won't see that same amount in Q4.
And I think just to make it real real we had $166 million of costs in the third quarter for that driver buyout against a total cost of 175, yes.
Okay.
Thank you I will now turn the floor back over to your host Mr. P. J <unk>.
Don't see that same amount in Q4, that's right.
Brian Newman: That's right.
[Analyst 3]: Matthew, we have time for one more question.
And Matthew we have time for one more question.
Thank you Mathieu. This concludes our call. Thank you for joining and have a good day.
Operator: Certainly. Our final question comes from the line of Conor T. Cunningham from Melius Research LLC. Please go ahead with your question.
Certainly.
Anil question comes from the line of Conor Cunningham familiar research. Please go ahead with your question.
[Analyst 4]: Hi, everyone. 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 turn into 2026. Are we expecting that to continue to ramp up, or it seems like there's further opportunities? If you could just talk about the opportunity just in terms of getting more efficient on the network. Thank you very much.
Hi, everyone. So I think you said you had 195 operations that have been reduced.
Produced 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 that you can just talk about.
The opportunity.
In terms of getting more efficient on the network. Thank you very much.
Carol Tome: Sure. The Amazon glide down continues. We're three quarters in a six-quarter glide down. 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.
Sure well the Amazon Gladstone continues we're three quarters in a six quarter glide down so the Amazon Gladstone continues which means there will be further consolidation of buildings at the end of the fourth quarter. We will provide guidance for 2026, our outlook for 2026, where we can be more specific on what that looks like.
Okay.
Operator: Thank you. I'll now turn the floor back over to your host, Mr. PJ Guido.
Thank you I will now turn the floor back over to your host Mr. P. J <unk>.
Brian Newman: Thank you, Matthew. This concludes our call. Thank you for joining and have a good day.
Thank you Mathieu. This concludes our call. Thank you for joining and have a good day.
Okay.