UPS - Earnings Call - Q2 2025

Executive Summary

• Q2 2025: Revenue $21.221B, GAAP EPS $1.51 and adjusted EPS $1.55; GAAP operating margin 8.6% and adjusted operating margin 8.8%.
• Mixed performance: U.S. Domestic revenue down 0.8% to $14.083B, International up 2.6% to $4.485B; Supply Chain Solutions down 18.3% to $2.653B on Coyote divestiture.
• Management withdrew revenue/operating profit guidance given tariff uncertainty, but reaffirmed FY25 capex ~$3.5B, dividends ~$5.5B, tax rate ~23.5%, ~$3.5B expense reduction target, and completed ~$1.0B buybacks.
• Key near-term swing factors: Amazon glide-down accelerates in H2 (target ~30% YoY decline in Q3/Q4), Ground Saver delivery density miss (~$85M incremental cost), and international mix shift away from China→U.S.; all flagged as reasons margins could be pressured in Q3 before benefits accrue in 2026.

What Went Well and What Went Wrong

What Went Well

• Revenue per piece rose 5.5% in U.S. Domestic (base rates, mix, fuel) while total expense was flat, supporting a 7.0% adjusted domestic margin.
• International ADV increased 3.9% (export +6.1%), with agile network changes (100+ flight adjustments) and strong growth out of China to rest-of-world and Southeast Asia.
• Healthcare logistics grew revenue 5.7%; UPS Digital (Roadie, Happy Returns) grew 26.4%, highlighting strategic portfolio strengths.
• “We are proactively taking action to put our company on a much stronger footing… focused on serving our customers, growing in the more complex and economically attractive parts of the market” — CEO Carol Tomé.

What Went Wrong

• U.S. Domestic ADV fell 7.3% YoY; attrition was lower than planned, delaying cost take-out and lifting near-term expense.
• Ground Saver delivery density model did not hold; ~$85M incremental cost in Q2; USPS re-engagement underway to mitigate.
• International margin compressed (15.2% adjusted) due to a 34.8% May/June decline on China→U.S., revenue-per-piece pressure, and lower demand-related surcharges; lap expected in Q4.
• Supply Chain Solutions revenue down 18.3% YoY largely from Coyote divestiture; segment adjusted margin 8.0%.

Transcript

Operator (participant)

Good morning. My name is Matthew, and I'll be your facilitator today. I'd like to welcome everyone to the UPS Second Quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise, and after the speakers' remarks, there will be a question-and-answer period. Any analysts that would like to ask a question, now is 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. PJ Guido, Investor Relations Officer. Sir, the floor is yours.

PJ Guido (Investor Relations Officer)

Good morning and welcome to the UPS Second Quarter 2025 earnings call. Joining me today are Carol Tomé, our CEO, Brian Dykes, 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 2024 Form 10-K and other reports we file with or furnish to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results.

For the second quarter of 2025, GAAP results include a net charge of $29 million, or $0.04 per diluted share, comprised of after-tax transformation strategy costs of $57 million, which were partially offset by a $15 million gain from the divestiture of a business within Supply Chain Solutions and a $13 million benefit from the partial 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 UPS Investor Relations website. 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. Now I'll turn the call over to Carol.

Carol Tomé (CEO)

Thank you, PJ, and good morning. To begin, I want to thank all UPSers for their hard work and efforts as we've made material progress against the strategic actions we laid out in January. Those actions include accelerating the glide down of Amazon volume, transitioning our Ground Saver product, and generating savings through our Efficiency Reimagined initiative. During the quarter, our team of dedicated UPSers remained focused on execution while keeping supply chains moving and delivering best-in-class service. Our second quarter financial results reflect the impact of a complex macro environment driven by ever-evolving trade policies, as well as the significant actions we are taking to strengthen UPS's competitive and financial positioning. Looking at our second quarter results, consolidated revenue was $21.2 billion. Consolidated operating profit was $1.9 billion, and consolidated operating margin was 8.8%.

As Brian will provide more detail regarding our financial results, I'd like to comment on what we are seeing from a business climate perspective and then spend my time talking about the progress we are making on our strategic actions. First, our thoughts on the business climate. Despite uncertainties around trade policies, in the second quarter, the overall U.S. economy demonstrated continued resilience. Our sector, specifically the U.S. small package market, was unfavorably impacted by U.S. consumer sentiment that was near historic lows. A recent research report from McKinsey showed that in the face of tariffs and other uncertainties, consumers are trading down, while at the same time splurging. For the first time in three years, consumer spending on discretionary categories like restaurants and automobiles outpaced growth in essential items. On the commercial side of the economy, manufacturing activity in the U.S. remained soft.

These macroeconomic dynamics impacted overall market demand as well as demand by customer segments and product. In the quarter, our overall U.S. average daily volume declined by 7.3%. Due to our strategic actions, we saw a positive shift in the mix of business as revenue declined by just 0.8%. Moving to the business climate outside of the U.S., trade follows policy, and generally, tariffs are not good for trade. With the announcement of certain changes to trade policies in the second quarter, we saw that play out. For example, looking at our China to U.S. trade lane, an increased tariff and the elimination of de minimis exceptions resulted in a year-over-year drop in average daily volume of 34.8% for the months of May and June. Our China to U.S. trade lane is our most profitable trade lane, and the volume decline here pressured our international operating margin.

It is important to remember that with policy changes, trade does not stop; it moves. Given our global integrated network, we are well positioned to service these moves. As an example, in the second quarter, we saw volume in our China to the rest of the world trade lanes increase by 22.4%. We nearly doubled our capacity between India and Europe to meet the growing export demand on that trade lane. Further, with the investments we have made in brokerage capabilities, in the second quarter, nearly 90% of all cross-border transactions were processed digitally. Given our proven trade expertise and vast global network, our customers are coming to us for solutions that will help them navigate tariff uncertainty.

In fact, so far this year, we have engaged in over 600 supply chain mapping assessments to help customers visualize, evaluate, and optimize their global supply chains, including looking at opportunities for nearshoring. Speaking of nearshoring, last year we announced our plan to acquire Estetta, a Mexican logistics company. Clearing regulatory and pre-closing conditions is turning out to be a slow process. We continue to be bullish on the opportunity here. Growing our international small package business remains a strategic priority for us, and we see an opportunity for outpaced growth in this $99 billion addressable market. In our supply chain solutions business, global freight forwarding was also impacted by changes in trade policies, with revenue falling more than we expected. This softness was partially offset by solid growth in our digital and healthcare subsidiaries as we continue to build out those businesses.

Now to an update on our strategic actions. First, our Amazon glide down efforts are, for the most part, proceeding as planned. In concert with our network reconfiguration efforts, so far this year, we have closed 74 buildings. Each building had a closing checklist of over 1,000 steps, and I am happy to report that the closures went smoothly with minimal issues. From a staffing perspective, our attrition rate was lower than we anticipated, which resulted in higher expense than we planned. From a part-time hourly position perspective, we believe most of this will correct over time. Further, we've announced a voluntary separation program for all full-time U.S. drivers. We've seen a lot of interest in the program so far, and participating drivers will leave UPS starting at the end of August.

Finally, while our plan to not complete it, in concert with the Amazon volume decline, we will be closing more buildings and sorts during the back half of this year. As we told you last quarter, this year we expect to remove approximately $3.5 billion in expense from our base business. Part of this effort rests with our Efficiency Reimagined initiatives, which launched in the first quarter and accelerated in the second quarter. With Efficiency Reimagined, we are redesigning end-to-end processes to drive savings, like a new global payment strategy. Here, we've centralized how we make and receive payments under a digital-first strategy, which will drive efficiency for UPS and improve the customer experience. Second, during the quarter, we took a hard look at our economy product we call Ground Saver.

For UPS, we believe Ground Saver should be a product that complements an array of products used by our customers and not be a product just by itself. During the quarter, we took deliberate pricing actions to manage our Ground Saver volume, and as a result, the volume in this product declined by 23% year over year. A small portion of the volume decline was directly related to our Amazon glide down plan, and the rest was primarily related to volume declines from non-U.S.-based e-commerce companies. As you will recall, at the end of last year, we insourced from the USPS the last mile delivery of our Ground Saver product. This decision, while right for the customer experience, pressured our financial results as delivery expenses were somewhat higher than we anticipated. We are working on solutions to relieve this pressure in the back half of the year.

Before I wrap up, I want to touch on a positive in our business, and that's healthcare logistics. Healthcare logistics remains a key driver of growth for all three of our business segments. Complex healthcare logistics is an $82 billion addressable market. We are laser-focused on becoming the number one complex healthcare logistics provider in the world. To that end, we are leading radiopharma logistics globally and, in addition, lead U.S. integrators in terms of seed-certified cold chain cross-dock building. Along with growing healthcare organically, we remain committed to inorganic growth too, like with our previously announced planned acquisition of Andlauer Healthcare Group. Andlauer supports our focus on complex healthcare and will enhance our cold chain and pharmaceutical transportation capabilities in the Canadian and U.S. markets. We expect this acquisition to close before the end of the year. Now moving to our outlook.

For our sector, this remains a very unsettling time. Changes in trade policy have not been cemented, and the impact on customer demand and the overall economy is unknown. While our customers who have scale may be able to thwart the impact of rising costs due to tariffs, many of our S&B customers may not. Further, peak plans have not yet been submitted by our customers, which is an indication that they too are having difficulty in forecasting demand for the holiday selling season. Given that, we are not providing any forward-looking revenue or earnings guidance. As Brian will detail, we are focusing on what is within our control, which is the Amazon volume glide down plan, the execution of our network reconfiguration, and ongoing efforts to drive productivity. As I wrap up, I want to touch on our financial position.

UPS is rock solid strong, and so is our dividend. The UPS dividend is backed by solid free cash flow and a strong investment-grade balance sheet. We know how important the dividend is to our investors, and you have our commitment to a stable and growing dividend. In closing, over the past five years, we've operated in a dynamic and complex world. Today's world is the same: complex and dynamic. We would argue that the dynamics impacting today's marketplace are very different than the dynamics caused by that pandemic, or high inflation, or labor disruptions, or war. Changes in trade policies are impacting global trade and demand. It will likely all settle down at some point, but for now, it is a very volatile environment. We're not letting this knock us off our strategic plan.

At UPS, we are proactively taking action to put our company on a much stronger footing and position our company well for the future. We are focused on serving our customers, growing in the more complex and economically attractive parts of the market, and creating value for our shareholders. Our founder, Jim Casey, said, "Our horizon is as distant as our mind's eye wishes it to be." We've got our eyes on the future. With that, thank you for listening. I will turn the call over to Brian.

Brian Dykes (CFO)

Thank you, Carol, and good morning, everyone. This morning, I will cover three areas, starting with our second quarter results. Then I will discuss progress with the Amazon volume glide down, our network reconfiguration efforts, and our Efficiency Reimagined initiatives. Lastly, I will comment on our capital allocation priorities for the year. Moving to our results.

Starting with our consolidated performance, the second quarter revenue was $21.2 billion, and operating profit was $1.9 billion. Consolidated operating margin was 8.8%. Diluted earnings per share were $1.55. Now moving to our segment performance and starting with U.S. domestic. Through our Amazon volume glide down strategy, we are shifting the mix of our U.S. business. We are laser-focused on improving revenue quality, and the changes we are making are beginning to show up in our results. For the quarter, total U.S. average daily volume was down 7.3%, primarily driven by our planned glide down of Amazon volume and revenue quality efforts. Total air average daily volume was down 11.6%. When excluding Amazon, total air ADV increased 1.4%, driven by healthcare and high-tech customers. Ground average daily volume was down 6.6% year over year.

Within ground, Ground Saver ADV declined 23.3%, primarily due to the pricing actions we took on e-commerce volume. In the second quarter, Ground Saver made up the smallest portion of our total ground volume that we have seen in two years. This shift is a proof point showing positive product mix improvement. In terms of customer mix, ADV growth within our small and medium-sized customers was lower than we anticipated. Year over year, the S&B growth rate was flat. However, we saw some bright spots in S&B healthcare, manufacturing, and automotive. In the second quarter, S&B's made up 32% of total U.S. volume, a 230 basis point improvement compared to last year. Looking at enterprise customers, excluding Amazon, average daily volume was down 10.4% versus last year due to a combination of our revenue quality actions and overall softness in the market.

For the quarter, B2B average daily volume finished down 2.3% compared to last year due to softness in manufacturing activity. B2C average daily volume was down 10.9% year over year, primarily due to the actions we took to improve revenue quality. B2B represented 43.7% of our U.S. volume, which was a 220 basis point improvement versus last year. Moving to revenue, for the second quarter, U.S. domestic generated revenue of $14.1 billion, which was down slightly to last year, mainly due to the decline in Amazon revenue, which was partially offset by increases in air cargo and revenue per piece. In the second quarter, revenue per piece increased 5.5% year over year. Breaking down the components of the 5.5% revenue per piece improvement, the net impact of base rates and package characteristics increased the revenue per piece growth rate by 250 basis points.

Customer and product mix improvements increased the revenue per piece growth rate by 200 basis points. Lastly, fuel drove a 100 basis point increase in the revenue per piece growth rate. Turning to costs, total expense in the second quarter was flat compared to last year, including an increase in air cargo. Looking at cost per piece, it increased 5.6%. This was primarily due to the short-term pressure we experienced from some of our Ground Saver volume, as well as the timing of employee attrition associated with our network reconfiguration. The U.S. domestic segment delivered $982 million in operating profit. Operating margin was 7%. Moving to our international segment. As Carol mentioned, the trade patterns we anticipated played out about as we expected, but the magnitudes were different, particularly in May when the tariff changes and the de minimis exclusion for products from China took effect.

In the second quarter, total international ADV increased 3.9%, with all regions growing average daily volume versus last year. International domestic average daily volume increased 1.5% compared to last year, led by Canada. On the export side, average daily volume increased 6.1% year over year. U.S. trade policy changes during the quarter resulted in a 34.8% decline on our China to U.S. lane in May and June, which was higher than we expected. Partially offsetting this decline in the second quarter, we saw growth of over 20% out of China to the rest of the world. At UPS, we run our global network with agility. This allows us to pivot into areas of opportunity and reduce costs in areas under pressure. With service in over 200 countries, we are where our customers need us to be.

During the second quarter, we made over 100 adjustments to add or cancel flights in our Asia, Europe, and U.S. international lanes as our customers responded to changing tariffs and adjusted their supply chain. Turning to revenue, in the second quarter, international revenue was $4.5 billion, up 2.6% from last year. Revenue per piece declined year over year due to geography mix and lower demand-related surcharges. Operating profit in the international segment was $682 million, down $142 million year over year, reflecting pressure from trade lane shifts, product trade down, lower demand-related surcharges, and the investments we are making to expand weekend services in Europe. International operating margin in the second quarter was 15.2%. Moving to supply chain solutions. In the second quarter, revenue was $2.7 billion, lower than last year by $594 million.

90% of the decrease in revenue was due to our divestiture of Coyote in the third quarter of 2024. Within supply chain solutions, air and ocean forwarding revenue was down year over year. The decline in the air and ocean freight was driven by changes in tariffs, resulting in demand softness and lower market rates. Healthcare logistics grew revenue by 5.7%, and UPS Digital, including Rodi and Happy Returns, grew revenue 26.4% year over year. Lastly, in the second quarter, we adjusted our process for how we handle volume and mail innovations, improving the profitability of this business. In the second quarter, supply chain solutions generated operating profit of $212 million. Operating margin was 8%. Turning to cash and shareholder returns. Year to date, we generated $2.7 billion in cash from operations, and free cash flow was $742 million.

In the second quarter, we made voluntary pension contributions, accelerated investments related to our network reconfiguration, and experienced temporary working capital pressure, primarily due to changes in tariffs. We expect these will normalize in the second half of the year. We finished the quarter with strong liquidity and no outstanding commercial paper. So far this year, UPS has paid $2.7 billion in dividends. Now let me provide an update on our cost out and network reconfiguration efforts. Related to our Amazon volume reduction actions, we are removing approximately $3.5 billion in costs this year while undertaking the largest network reconfiguration in our history. On our last earnings call, we showed a tracker to help you see our savings progress.

Here, we've grouped the associated cost savings into three buckets: 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 initiative. Amazon's average daily volume rate of decline in the second quarter was a little lower than we expected, which followed the first quarter where their ADV rate of decline was higher than we expected. When looking at the first six months of 2025, Amazon's ADV declined 13% compared to last year. Now that we are in the second half of the year, we expect to accelerate the pace of Amazon's volume decline to approximately 30% year over year in each of the third and fourth quarters. Now let's look at the progress with our network reconfiguration and efforts to remove expense associated with the Amazon volume decline.

Starting with variable costs, total operational hours paced down with volume in the first half of the year, and we are on track to reach our reduction target of approximately 25 million hours this year. Moving to semi-variable costs, year to date, operational positions have been reduced by nearly 9,500. As Carol mentioned, our attrition rate was lower than we anticipated. In terms of part-timers, we expect the attrition rate to synchronize over time. For full-timers, we recently announced a voluntary separation program for all U.S. drivers. One week into the offer, we are seeing a level of interest that's in line with our expectations. In our fixed cost bucket, year to date, we've completed the closure of 155 operations, including closing 74 buildings.

We continue to evaluate the network and the impact of the Amazon volume decline and expect to close additional buildings and operations in the back half of 2025. While we've been right-sizing the network, we've also deployed additional automation to continue to drive efficiency. Lastly, as Carol mentioned, savings from our Efficiency Reimagined initiative accelerated in the second quarter. Putting it all together, we remain on track to achieve our 2025 expense reduction target of about $3.5 billion. Partially offsetting this reduction is the higher-than-expected Ground Saver delivery expense. Moving to the rest of 2025, there's a lot of uncertainty right now due to tariff and trade changes, and the potential impact on consumer behavior is unknown. Because of this, we see a risk for greater variability in S&B and enterprise volume.

Additionally, in the U.S., while we are confident in the strategic changes we are making with our network reconfiguration and revenue quality focus, two impactful changes remain uncertain. First, the timing with implementing Ground Saver solutions is pending. Second is the full impact of the driver voluntary separation program and related take rate and departure dates. For all these reasons, we are not providing any forward-looking revenue or operating profit guidance. Our expectation is that there will be more certainty at the end of the third quarter, and we will have a better read on peak and the timing and scale of these initiatives. We are, however, confirming our 2025 capital allocation expectations. 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. We have completed the targeted repurchase of about $1 billion of our shares.

Lastly, we expect the tax rate to be approximately 23.5% for the full year 2025. Operator, please open the lines for questions.

Operator (participant)

Thank you. We will now conduct a question-and-answer session. If you have any questions or comments, please press star then one on your phone. Our first question comes from the line of David Vernon of Bernstein. Sir, please go ahead with your question.

Carol Tomé (CEO)

Hi everyone. Thanks for taking the question. This is Justine Weiss speaking on behalf of David Vernon. Is the lack of guidance in some ways a sign that things are worse, or is this purely about things still being uncertain? Also, how do you feel about progress on cost cuts being enough to exit with domestic margins at double digits?

Justine, thanks for your call and question. I'll start with the rationalization for not providing guidance. First, we debated this a lot. There is so much uncertainty out there. We are building scenarios, and the range of the scenarios is wide enough to drive one of our 18 wheelers through. We elected not to provide guidance. Let me tell you why. First, if I look at the volume in July, it's actually a bit better than what we've been seeing. Part of that in the United States, anyway, was influenced by Amazon Prime Day and other retailers who had similar-like promotions. We're not sure that the volume in July is an indicator of the volume for the rest of the quarter. Further, the volume outside the United States was strong too, but we believe that's because companies were purchasing inventory ahead of the August 1 tariffs.

July, while good, we don't think is a predictor necessarily of the rest of the quarter. Why? Because of the uncertainty. As we look at the tariffs, there are a number of tariffs that are slated to go in on August 1. We don't know if that's going to happen or not. There only have been six trade deals that have been negotiated. There is a lot of uncertainty regarding the tariffs as it relates to the China tariff. That agreement expires on August 12. It's rumored that that will be extended, but we don't know. There is uncertainty around tariffs, and then there means there's uncertainty around consumer demand. Consider this: at the end of the first quarter, our customers had inventory, and they sold that inventory down in the second quarter. They're now at a point where they need to replenish their inventories.

If you're an S&B customer sourcing from China alone, you could see that your cost could increase by 55%. As we recorded, our S&B volume was flat year on year, and we just think there might be some risk to S&Bs in the third quarter. We just don't know. Finally, we don't have peak plans yet. All these things make the range of revenue for the third quarter very wide. On the expense side, I'm certainly pleased with the progress our team is making in terms of delivering the $3.5 billion in cost out that we laid out at the beginning of the year. I'm very pleased with that. There are a couple of things that we have to work on. First, the attrition related to our Amazon glide down was not as high as we expected it to be.

What we're seeing is that the longer a building is closed, the higher the attrition rate. The majority of the closures that occurred in the second quarter were back-end weighted. We expect the attrition to get higher as time progresses. This should take care of itself from a part-time hourly perspective. To address the full-time driver roles, we've offered this voluntary buyout. We don't know the takeout yet. We don't know the cost associated with that takeout or the benefit associated with that takeout, so that's to be seen. Finally, on Ground Saver, while we're pleased with the customer experience that we have been providing with Ground Saver, the algorithm that we modeled for delivery density didn't hold true in the second quarter. As a result, we had more delivery stops than we had anticipated. We're working through that algorithm, but we have also re-engaged with the USPS.

There's new leadership there. We have excess capacity. We're working through a number of different solutions on Ground Saver. We don't know the outcome of that yet, but we expect to know that hopefully in the quarter. At the end of all of this, by the end of the third quarter, we think we'll have more certainty on tariffs. We think we'll have more certainty on peak. We think we'll have more certainty on costs so that we can come back and give guidance for the fourth quarter. Now, with all that being said, Brian, maybe you could kind of give some shaping for the third quarter just to help people with their modeling.

Brian Dykes (CFO)

Yeah. Thanks, Carol. I think Carol hit on all the right points, right? Volume remains depressed right now, right? There is the possibility, particularly with our retail and S&B customers, that it could get better. It could get a little bit worse as we go in. We are dealing with the lower attrition and higher Ground Saver costs as we have got. As you think about Q3 margins, they could be pressured a little more than we thought earlier in the year, even more than the kind of normal seasonality that we have from Q2 to Q3. International and FDS, I mean, you see in the performance, things are holding pretty well. We expect those to be about the same. We are going to get clarity as we go through the quarter on this, right?

What we can say, look, is we have got a high degree of confidence, and I think it is starting to show in the results that the actions that we are taking are setting ourselves up for the longer term, right? The rep for peace is turning. The growth in international is positive. This is going to put us in a much better competitive position, not only to drive growth in the future, but expand margins.

Justine Weiss (Assistant VP and Senior Research Associate)

All really helpful. It sounds like basically exiting domestic margins at double digits is just a bit uncertain right now.

Carol Tomé (CEO)

We'll have more certainty by the end of the third quarter.

Yeah. Great. Thank you so much.

Thank you.

Operator (participant)

Thank you. Our next question comes to the line of Ariel Rosa of Citi Group. Please go ahead with your question.

Ben Mohr (Director and Equity Research Analyst)

Hi, good morning. This is Ben Moore of Citi on for Ariel Rosa. Thanks for taking our question. At this rate of the China to U.S. parcel lane shifts to the rest of Southeast Asia, like Vietnam or Thailand to the U.S., when do you expect to fully lap those costs on the trade lane shifts? With your total investments in infrastructure in the rest of Southeast Asia as it stands, is there enough excess capacity to handle these shifts, or will you need to make additional infrastructure investments into Southeast Asia in order to handle these shifts?

Carol Tomé (CEO)

We are really pleased with how our integrated network is meeting the demands of our customers. Kate, why do not you give some color?

Kate Gutmann (EVP and President of International, Healthcare and Supply Chain Solutions)

Yeah, absolutely. I think you may recall we engaged with tens of thousands of customers to see how we could help them with supply chain shifts. Some of them were able to move faster than others. Some are waiting for the outcome of the tariffs. That said, we've unlocked the growth of rest of world to rest of world. Now, the China to U.S., as we indicated, was down, and then the China rest of world is up. We have shown agility, and to the question on capacity, we are shifting our resources around, and we do it very quickly so that we can capture that growth. In terms of investments, we actually were building out an Asia diversity strategy for the last few years. With that, we actually were seeing, call it 10% type growths that we're unlocking. It's not a cost.

It's actually alignment of resources now to the increased trade lane flow outside of the U.S. We are capturing that. China again, rest of world over 20%. You mentioned Southeast Asia, Malaysia, Vietnam, all growing over 20%. We've doubled India. We are seeing that UPS's global integrated network is capturing that growth. Now, as we deal with the revenue per piece changes, again, it's not the cost side as much as the revenue per piece. We are unlocking that profitable growth, and we will be harnessing more of it as the Indias get stronger. You'll see a heavier weighting in that too is profitable to offset a China.

Carol Tomé (CEO)

Maybe just a couple of other comments about investments because to Kate's point, we got ahead of this. We are expanding our air hub in Hong Kong. We are building a brand new air hub in the Philippines. That positions us very well for these changing shifts in trade lanes. I think it's important to remember that of the 80 largest trade lanes in the world, 49 have an Asian country on one end of the trade lane, and 22 have an Asian country on both ends of the trade lane. The investments that we laid out several years ago now will be able to capitalize on these shifting trade lanes.

Ben Mohr (Director and Equity Research Analyst)

Great. Thanks so much. Maybe if I can ask a follow-up more domestically, we've seen smaller parcel carriers taking share in the parcel market, names like LaserShip, BDEX, some gig economy carriers that compete with your Rodi. Do you see them as you work on existing or prospective customers that put out RFPs to bid? What's your view on their strategy? They seem to be competing on price and less comprehensive service. What's your strategy to maintain your competitive moat?

Carol Tomé (CEO)

Competition's good. I will say that. Our offering is very different than theirs because we do operate an end-to-end network. I mean end-to-end from one coast to the other coast. In every aspect of the supply chain, we can meet our customers' needs. From a market share perspective, we look at the addressable market. For us, we define the addressable market as the market that excludes Amazon and excludes packages that are less than 1 pound. That market in the second quarter was soft, but we gained share. We're very proud of the fact that we gained share in that market, even in this highly competitive environment.

Brian Dykes (CFO)

Carol, if I can just add one thing to that because I think it's really important that the rep for peace growth of 5.5% is starting to show that the strategy of dynamically changing the volume and the network is working, right? If you look at the segments where it really matters for us, S&B, our penetration was up 230 basis points. Commercial, our penetration was up 220 basis points. We actually saw our zone, which means people who are using our end-to-end network over long distances, get longer for the third straight quarter, right? The pace of the weight decline, which has been an industry trend, is slowing, right? We are shifting the volume and the characteristics in our network to customers that see value in our service offering.

Carol Tomé (CEO)

We could talk a lot about the capabilities that we offer that our competitors do not. Like on healthcare, we have special labels that our competitors do not. We have RFID tagging on our packages that our customers do not. We have boxless, label-less returns that our competitors do not. From a capability perspective, we will continue to invest in the capabilities that set us apart from our competitors.

Ben Mohr (Director and Equity Research Analyst)

Great. Thanks so much for your time and insights, as always.

Carol Tomé (CEO)

Thank you.

Operator (participant)

Thank you. We do ask that participants please ask one question. Our next question comes from the line of Bruce Chan of Staple. Please go ahead with your question.

Bruce Chan (Analyst)

Hey, good morning, everybody. Thanks for the question here. Just wanted to dig into the S&B results a little bit more and see if you could provide some thoughts around whether that is all just policy uncertainty and something you think could accelerate if maybe we get more clarity on the macro or if there's anything maybe coming from competitive pressure as some of your peers are chasing that business as well.

Carol Tomé (CEO)

As we said, our S&Bs are a bit challenged. We talk to our S&B customers to understand how they're thinking about the current trade environment, and many of them are wrestling. They want to find different alternatives of sourcing, but if they knock on the door, they're not necessarily getting attention from the countries where they might be able to move their sourcing to. There's really a lot of trade uncertainty out there. It's not just trade uncertainty. Some of them are finding that in today's environment, credit conditions have tightened up a bit on them. It's not that they don't have access to capital in the ways that they have seen in prior years. There are a number of challenges this group is faced with.

Our job is to listen to them through our supply chain mapping capabilities, help them think about how they might move their sourcing around, help them think how they might be able to reduce their costs by moving inventory in different places or using different modes of transportation. With over 600 supply chain mapping projects in the second quarter, many of that came from the S&Bs. Matt is here. Matt, is there anything you'd like to add on S&Bs?

Matt Guffey (EVP and Chief Commercial and Strategy Officer)

I just highlight one thing just to complement what Carol said. I think S&Bs are disproportionately impacted in this space. However, they're looking to UPS and where the strength of our capabilities, the strength of our network is really what positions us well right now. They come to us, one, because they trust the brand. To Carol's point, they're looking to where they should source and should they shift manufacturing. They're looking at modes. Do you keep it near? Do you put it on an ocean container? When we think about end-to-end, we do think about coast to coast, but we think about it globally across the world because we have an integrated network that positions us to win in that space.

Carol Tomé (CEO)

I might highlight healthcare as well in the S&B. We are seeing the shining light through our differentiated capability with our lab placards. Our U.S. operators are delivering 99% plus on basically doctor's offices and assurance that your lab sample will go back to the lab, your specimen be tested. I mean, literally, we get into Worldport up to, call it 1:00 A.M., and it is back on to the patient's, if it is a treatment, doorstep by 10:30. I mean, that is exceptional service.

Maybe one other comment, just a bright spot on S&B World, and that is our Digital Access Program. That platform continues to provide excellent service for our customers. We have 41 partners on that platform serving over 7 million shippers. We saw good growth on that platform again in the second quarter.

Bruce Chan (Analyst)

That's great. Thank you.

Operator (participant)

Thank you. Your next question is coming from the line of Chris Weatherbie of Wells Fargo. Please go ahead with your question.

Rob Salmon (Analyst)

Hey, good morning, guys. It's Rob Samanon for Chris. With regard to the outlook that you had just provided, Brian, in terms of the second-half shape of the margins, could you discuss a little bit more how international package margins trended over the quarter as you saw the much bigger declines on that China-U.S. trade lane and what your expectations are looking out to the third quarter? I thought I heard flattish, but it would be really helpful if we could get a little bit of color given the cost adjustments that you guys were making there.

Brian Dykes (CFO)

Sure. Rob, I do think it's worthwhile to brag a little bit on the international and the European here because we did see the trade flows played out about as we expected. As Carol mentioned, the magnitudes were very different, right? We did see that China to U.S. decline more than what we expected. We saw China to the rest of the world increase more, particularly in specific lanes. Within the second quarter, we made over 100 ad hoc adjustments to our air network to flex to what our customers needed us to do, which I think is a tremendous accomplishment for the international team. It shows up in the export growth numbers that were really, really strong. Now, what that does mean is, look, there's some frictional cost, right, as you're adjusting that air network.

I think as we move through the third quarter and we get more certainty on tariffs, we get more certainty on orders for peak from our customers, we'll be able to harden off the capacity on those lanes, get the assets in the right place, and continue to drive the margin. Right now, we think it's kind of the same second quarter to third quarter. As we get more certainty, that allows us to make adjustments that can drive the margin back to where we think international can be high teens over the long term.

Carol Tomé (CEO)

Part of the margin contraction was due to less demand-related surcharges this year than last. When do we lap that, Brian?

Brian Dykes (CFO)

We'll lap that in the fourth quarter.

Carol Tomé (CEO)

Yeah.

Operator (participant)

Thank you. Our next question comes from Robbie Shanker from Morgan Stanley. Please go ahead with your question.

Ravi Shanker (Analyst)

Great. Thanks for the morning, everyone. Carol, you said that the Amazon glide down is proceeding for the most part as planned. Can you share some light on what is not going as planned maybe? Is it just the shifting rate of drawdown in 1Q and 2Q, or is there something else different than expected?

Carol Tomé (CEO)

It's simply the attrition rate. The attrition rate is not where we thought it would be. As I mentioned, Robbie, the building closures were back-end weighted towards the end of the quarter. What we see as time goes on, the longer a building is closed, the higher the attrition rate. To make that real for you, in the first month of closure, it's in the single digit. By the third month of closure, it's 25%. The turnover on the part-time hourly side is going to normalize over time as time progresses. On the full-time drivers, they have the opportunity to bump into a building. They can follow the work and bump into the building if there's no driving work. That's fine for them if they choose to do that.

We are offering them an opportunity to leave with a nice check if they say, "That's not work we want to do." If you think about our drivers, Nat, tell me how many of our drivers have been driving for 35 years or more.

Nando Cesarone (EVP and President U.S.)

Yes. So, 84-85% of our drivers are at the top end of our pay scale and anywhere from 25 to 40 years of service. We have thousands and thousands of drivers that we're entertaining a buyout package. And just one comment on the Amazon drawdown. That is our biggest concern, but something we have to deal with that we had modeled a little differently. On the whole, when you look at the variable expense that Brian had talked about, 8 million hours in the quarter, the semi-variable, 9,500 more employees. We see part-time attriting faster than full-time. We'll be at a, call it even as we continue drawing down on Amazon. The real concern is in our full-time category. For our fixed buildings, I'd say it's mostly administrative. Payroll, assigning people to the right new facilities and new positions.

In the end, 74 facilities, 155 operations, I think, done rather smoothly. Our service continues to be very strong, so.

Carol Tomé (CEO)

I couldn't be more pleased with how we're progressing on this strategic pivot. It's just we modeled an attrition rate that didn't hold in the second quarter, but we expect that to correct over time.

Brian Dykes (CFO)

Robbie, one other thing I would just add because I think it is important. On the top line, the volume, we have worked very closely with Amazon on the glide down and how we do this in an orderly manner for both our network and their network and customers. It is all going very well. As you think about the pace of that, we always said the first half was around 13%, and the second half jumped to 30%. Just to kind of give you context on that, what that means is from the second quarter to third quarter, the decline is an incremental, sequential 500,000 pieces, right? That is why we are moving to get ahead of the cost out. Nando's team has got a great plan on how we pull down on the assets, the hours, and the people as we go into the second half.

We are tracking to that $3.5 billion cost takeout.

Nando Cesarone (EVP and President U.S.)

If I could just add also, that is a big number, 30% when you think about it, but we are going to feather into a peak season in a much more efficient way. As we think about peak and the spike, although we do not have 100% of the picture yet, we will see that Amazon glide down feathers into peak very nicely for our company.

Ravi Shanker (Analyst)

That's a really helpful detail. Is there a risk that the slower attrition rate could put that $3.5 billion of cost savings at risk or maybe shift the timing out a little bit? Or do you expect that to catch up over time?

Carol Tomé (CEO)

We expect that to catch up over time.

Ravi Shanker (Analyst)

Understood. Thank you.

Carol Tomé (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Connor Cunningham from Melius Research. Your line is live.

Conor Cunningham (Director)

Hi, everyone. Thank you. Maybe just sticking with the facility closures. You did 74 in the first half. I was hoping you could level set on what you expect to do in the second half. In the same context, could you talk about how much volume is going through fully automated facilities and where you expect that to end in 2025? The bigger question I have, though, is is that all enough that we get to the point where we can start to see margins uptick next year? I realize there's a lot going on in the world, but just as you level set today, just how that's all going right now. Thank you.

Brian Dykes (CFO)

Sure. Thanks. Thank you very much for the question. On the building closures, look, we're evaluating a number of different options. There are several buildings that we're looking at. We will come back with more information on how many that we're going to do. There is the Amazon piece, and then there is also the macro. We have to take into account the impact on the entire network. We will provide more color on that. On the automation, look, we continue to invest in automation within the network. Because remember, we're not just gliding down Amazon volume and e-commerce volume. We're also investing to be a more efficient network that's going to make us higher margin as we go forward. In the second quarter, 64% of our volume went through automated facilities, up from 60% in the second quarter of last year. We continue to make material improvements.

Those automated facilities give us more flexibility to add sorts, be more dynamic with how we manage the volume, and ultimately will help us scale more efficiently for peak and drive better cost structure as we reset the network.

Carol Tomé (CEO)

You know, Connor, this is a big strategic pivot. The reason why we're doing this is to grow the U.S. margin. We are all hands on deck here to grow the U.S. margin.

Brian Dykes (CFO)

I think it's another great proof point. Look, we got a proof point in. We're getting the right volume into the network. We're getting more volume through automation. Ultimately, Carol, you're exactly right. That drives better long-term margin.

Operator (participant)

Thank you. Our next question is coming from the line of Jordan Alinger from Goldman Sachs. Please go ahead with your question.

Jordan Alliger (VP and Equity Research Analyst)

Yeah, hi, morning. Curious. I know there's a lot of peak uncertainty out there. Perhaps customers are waiting and seeing to see what happens. To the extent maybe that delays stuff coming in in containers on ocean ships, et cetera. I mean, is it possible if the consumer stays resilient that your peak season surge as people need faster air could actually give some tailwind to that half of the year or at least the fourth quarter? Thanks.

Carol Tomé (CEO)

It's absolutely possible. We just don't have the plans yet. I talked to a CEO recently, and I said, "What do you think about peak?" He says, "I'm planning to win," which tells me that he's planning to have a pretty good peak here. We will have a better sense of this story at the end of the third quarter, at which time we will plan to give you guidance.

Jordan Alliger (VP and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Your next question is coming from Ken Hoekster from Bank of America. Please go ahead with your question.

Ken Hoexter (Managing Director)

Hey, great. Good morning. I guess on ground margins, maybe two parts. Carol, I think I'm a little confused on your answer to Ravi on the Amazon side where you talked about the timing of facility closures relative to the attrition rate. I just want to understand, though, the concept. Is the volume still on target as you expected, or it sounded like this quarter was a little lighter in terms of fading away? I'm just not certain. Is that changing the plans from the pace you're moving Amazon behind? I got that you're going to accelerate to 30%. I just want to understand if something happens where they do not fade away. Secondly, on the Ground Saver. Are you surprised that you won the business two quarters ago? Are you confident still to get to the double-digit margins?

I'm just surprised in such a short time frame from winning the contract that we're not seeing there are cost adjustments that need to be made. Maybe you could talk about that.

Carol Tomé (CEO)

All right. On the Amazon glide down, the glide down, I'll just give you the numbers. Q1, the glide down was 600,000 pieces a day. Q2, the glide down was 400,000 pieces a day. It was a little lighter than we had anticipated, but that's because of volume we wanted to keep. As you recall, we have a very complicated relationship with Amazon. Part of it is volume that we want to grow and keep, and part of it is volume that we want them to deliver. The volume that we want to grow and keep, it was better than we anticipated. I give that a check in the right direction. The only thing that's off is the attrition rate. The attrition rate, we had modeled it with an attrition rate based on when we thought it would come in.

It's coming in a little bit later than we thought, but it's still going to come in. From a full-year perspective, very pleased with the Amazon glide down. Now, on Ground Saver. We too had a modeled algorithm that we put into our plan regarding delivery density per stop. That algorithm did not hold. What we found is that we had more expense than we had anticipated in the second quarter. To dimensionalize that for you, it was about $85 million. We are working on operational changes that we could make, but we also have re-engaged with the USPS. There is new leadership there. They have excess capacity. We are having a discussion with them. Brian, what would you like to add?

Brian Dykes (CFO)

I think, look, we also have a very complicated relationship with the USPS as well. I want to distinguish Ground Saver, which was our former SurePost product, where we insourced the volume from the USPS, from the air cargo volume that we won last year. The air cargo volume, look, it's going great. It's fully implemented. Teams work really well together. As with every relationship, there's operational stuff that we're constantly working on to make each other better. I think that's been a win for the USPS. It's been a win for us, and it's driving accretive margin. The Ground Saver, where we insource our former SurePost volume, is causing a little bit of the cost.

Ken Hoexter (Managing Director)

Helpful clarification. Thank you, Brian. Thank you, Carol.

Carol Tomé (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Stephanie Moore of Jefferies. Please go ahead with your question.

Joe Hafling (Equity Research VP)

Great. Good morning. This is Joe Hoffman on for Stephanie Moore. Busy day for Transport today. Carol, I kind of wanted to go back to peak season and understanding that we'll get more clarity as kind of the year progresses. I'm sure you've seen maybe some of the same calls that we won't see a peak season this year or that peak season already occurred with all the pre-term shipping. I don't know if you had any thoughts on that or if your conversations with shippers were inventory levels currently are. I know the demand picture remains uncertain, but if you can maybe help unpack kind of the puts and takes on thinking about peak season in that regard.

Carol Tomé (CEO)

We have about 100 customers that drive 80% of the surge during peak. Ordinarily, we do not get peak plans until the end of August and then final plans at the end of September. I think they are going to be pushing them more into September as they are working through their plans. In my conversations with CEOs, no one is telling me they are not going to have a peak, but they are not in a position to dimensionalize that for us, as you can appreciate, because of all the macro issues that we are all facing. We are going to be ready for whatever happens. To Nando's point, we have more agility in our network than ever before because of the strategic pivot that we have made with our largest customer. We will be prepared up or down, will we not, Nando? What would you like to add?

Nando Cesarone (EVP and President U.S.)

We'll be prepared if there's a volume influx or a volume reduction. Peak season for us is very variable. We're able to scale up, scale down as quickly as possible. Those expenses do not linger once we scale down if that's what we need to do. Scaling up, not concerned at where we currently sit. Everything we're doing from Network of the Future, the scaling down on Amazon is all feathered into our peak season plans. It should fit quite nicely and allow us to have a really good, quality service peak season as well.

PJ Guido (Investor Relations Officer)

Matthew, we have time for one more question.

Operator (participant)

Certainly. Our final question comes from the line of Scott Group of Wolfe Research. Please go ahead with your question.

Jake Lacks (Senior VP)

Hey, this is Jake Laxon for Scott. Thanks for the time. Just to confirm, are the employee buyouts included in the $3.5 billion of savings? Any early sense on how large this can be? Any updates you can provide on Efficiency Reimagined looking out into 2026? Do you think you can see a similar number as Amazon volumes continue to glide down, or does the slower attrition mean maybe there are some more limited opportunities here?

Brian Dykes (CFO)

Thanks for the question. First of all, yeah, the driver separation package is a lever for us to get to the $3.5 billion. It is a means for us to accelerate the attrition levels to get back on plan. We expect that, as Carol said, part-timers will work out over time. Full-timers, we will get them on plan. As far as Efficiency Reimagined goes, look, we are seeing good traction. We saw a steep ramp in the second quarter. It will ramp in the back half, and then that wraps next year. Yes, we would expect as the volume for Amazon continues to decline, Efficiency Reimagined ramps, it will carry through a similar number to next year.

Carol Tomé (CEO)

It's early days on the driver buyouts, but so far it's progressing as we would expect. Once we have gotten it finished and we understand the number of drivers who have elected to leave us, then we can tell you what the money is.

Jake Lacks (Senior VP)

All right. Thanks for squeezing me in.

Carol Tomé (CEO)

Appreciate it. Thank you.

Operator (participant)

Thank you. I'll now turn the floor back over to your host, Mr. PJ Guido.

PJ Guido (Investor Relations Officer)

Thank you, Matthew. This concludes our call. Thank you for joining and have a great day.