UNITED PARCEL SERVICE INC Q3 FY2026 earnings call

• Strategic Milestones & Network: Celebrated anniversaries in Europe, Germany, Mexico, and China. Launched a new global operating model to enhance agility and standardize processes while maintaining local flexibility.
• Premium Growth Strategy: Shifted focus to premium B2B and SMB segments. SMBs represented 35.1% of U.S. volume. Healthcare revenue exceeded $3 billion for three consecutive quarters.
• Operational Efficiency: Completed the Driver Choice Program (~1,500 participants exited). Moving from a 'scanning' to a 'sensing' network via RFID; expect >4 billion RFID-enabled packages by year-end.
• Infrastructure Investments: Opened new air hub at Clark International Airport (Philippines) for Asia-Pacific connectivity. Added a multifunctional facility in Amsterdam for freight forwarding and healthcare cold chain.
• Peak Season Readiness: Expects strong holiday demand with ~25% sequential ADV increase. Leveraging automation to reduce vehicle rentals/aircraft leases. Maintaining leadership in on-time peak service for nine consecutive years.

U.S. Domestic: Revenue of $14.9 billion (+4.5% YoY), contributing approximately 65% to consolidated revenue. Operating profit exceeded $1 billion (+14.3% YoY) with a margin of 7% (+60 bps). International: Revenue of $5.0 billion (+7.1% YoY), contributing approximately 22% to consolidated revenue. Operating profit was $746 million (+$55 million YoY) with a margin of 14.9%. Supply Chain Solutions (SCS): Revenue of $3.0 billion (+17.5% YoY), contributing approximately 13% to consolidated revenue. Operating profit was $274 million with a margin of 9.2%. Consolidated: Total revenue was $22.9 billion (+6.7% YoY) and operating profit was $2.1 billion.

• Full Year 2026 Revenue: Raised to approximately $92.6 billion.
• Full Year 2026 Operating Profit: Raised to approximately $8.75 billion.
• Full Year 2026 EPS: Implied diluted EPS of approximately $7.28.
• Q4 2026 Revenue: Expected to be approximately $25.7 billion (+~5% YoY).
• Q4 2026 Operating Profit: Expected to be approximately $3.3 billion.
• Q4 Segment Margins: U.S. Domestic ~10.5%; International ~20%; SCS ~12.2%.
• Free Cash Flow 2026: Raised to approximately $6.1 billion.
• Dividends: Expecting ~$5.4 billion in payout for 2026.

• Geopolitical Tensions: International volume declined due to geopolitical issues, though trends improved monthly.
• Trade Policy Changes: Impact of European de minimis exemption elimination caused sharp volume declines in July, though subsequent months showed recovery.
• Amazon Volume Reduction: Deliberate reduction in Amazon volume negatively impacted total ADV but improved underlying unit economics and operational efficiency.
• Labor Relations: Teamster contract expires August 2028; past negotiations (e.g., Driver Choice Program) faced union displeasure, requiring careful management.

Q: Analyst asked about the magnitude of free cash flow improvement for 2027 given the removal of Driver Choice Program costs ($1.4B this year) and pension contributions.

A: CFO confirmed FCF will improve as the one-time driver buyout costs disappear. While a $450M pension contribution may offset some gains depending on funding methods, structural domestic margin improvements and business outperformance are driving sustained FCF growth, enhancing dividend coverage.