UNITED PARCEL SERVICE Q1 FY26 earnings call UPS

UPS executed several major strategic actions in Q1 FY26, including a further reduction of non-nutritive Amazon volume by an average of 500,000 pieces per day, progressing towards a 50% reduction target by June 2026. The company also shifted a portion of its Ground Saver volume to the USPS for last-mile delivery and launched a voluntary Driver Choice program, which will reduce approximately 7,500 full-time driver positions. These actions, along with the closure of 23 buildings in Q1 (with 27 more planned), are aimed at creating a more profitable U.S. small package business, with the second half of 2026 expected to be an inflection point.

The company is overturning the old industry assumption that scale alone drives profitability, instead focusing on premium segments such as SMB, B2B, and complex healthcare. This strategy is yielding favorable mix improvements, with SMB and B2B volumes representing a larger share of total U.S. volume and driving meaningful revenue per piece growth. UPS is winning through innovative capabilities like RFID labeling, end-to-end cold chain solutions, and Happy Returns, leading to a meaningful reduction in customer churn in the U.S. and global DAP revenue of $1.2 billion in Q1.

Healthcare remains a top priority growth engine for UPS, leveraging its world-class, end-to-end logistics network for complex, time- and temperature-sensitive products. The global healthcare portfolio has gained market share every year since 2021, achieving its first $3 billion healthcare revenue quarter in Q1 FY26, with all three segments delivering year-over-year revenue growth. The company sees significant opportunities in evolving pharmaceutical distribution models, such as GLP-1 drugs going direct-to-consumer, where it leads the market.

UPS is driving profit growth through margin improvement from higher productivity, building on its already efficient integrated network. Expanded automation and robotic deployments are making the network even more productive and adaptable, creating strategic capacity for premium volume growth. Hub productivity is at its best in 20 years, with 67.5% of hubs automated. Automated buildings demonstrate a 28% lower cost per piece compared to non-automated facilities, highlighting the efficiency gains from these investments.

The International segment delivered solid top-line momentum, with revenue growing 3.8% year-over-year, driven by strong revenue quality and a focus on premium markets. SMB penetration in International reached over 60%, and B2B penetration was about 71%. Despite a decline in the China to U.S. trade lane, the company is seeing recovery in other trade lanes and is speeding up its ground network in Europe and expanding in Asia to capture premium commercial volume, particularly in manufacturing, high-tech, and healthcare sectors.

Q1 FY26 performance deviated from seasonal norms due to approximately $350 million in short-term cost pressures. These included temporary third-party lease expenses for aircraft capacity, transition costs and excess staffing related to Ground Saver, inclement weather, and higher casualty expenses. Management stated these pressures are largely behind the company. As a result, UPS expects a significant ramp from Q1 to Q2, with U.S. domestic operating margin projected to be between 7.5% and 8.5%, driven by normal seasonal uplift and the cessation of these temporary costs.

UPS acts as a pass-through entity for IEEPA tariffs, having processed 16 million entries and remitted over $5 billion to the U.S. Treasury since the tariffs' inception. Following the tariffs being deemed refundable, UPS is applying for refunds for 2.5 million entries, totaling approximately $500 million, for tariffs incurred this year. The company began these applications on April 20 and, once received, will remit the funds directly back to its customers, emphasizing that these refunds will not impact UPS's financial statements.