“Operating margin in the International segment is expected to be in the mid-teens.”

In context

“Brian Dykes (Chief Financial Officer): Thank you, Carol, and good morning, everyone. This morning, I'll cover our second quarter results, then I'll give an update on our Amazon glide down and network reconfiguration efforts. Finally, I'll wrap up with our financial outlook for the remainder of 2026. Turning to our results. Our performance in the second quarter reflected excellent execution across our businesses, especially in U.S. Domestic, where we completed our Amazon glide down and related network reconfiguration efforts as planned. Further, and as Carol mentioned, our results reflected fuel price volatility during the second quarter, stemming from the conflict in the Middle East, which drove an outsized increase in both revenue and expense relative to our expectations. While higher fuel prices were positive to revenue, the corresponding increase in expense meant that the net impact to consolidated operating profit dollars was modest. In the second quarter, consolidated revenue was $22.8 billion, and operating profit was $2.1 billion. Consolidated operating margin was 9.2% and diluted earnings per share were $1.76. Moving to our segment performance. In the U.S., we continued our focus on revenue quality and growth in the premium parts of the market as we concluded our Amazon glide down in the second quarter. For the quarter, total U.S. average daily volume was down 3.3% versus the second quarter of last year. Total air average daily volume was down 2.3% year-over-year. Excluding Amazon, total air average daily volume increased 1.2% year-over-year, driven by food and beverage and health care customers. Ground average daily volume was down 3.5% compared to the second quarter of 2025 with most of the decline attributable to our planned Amazon glide down. Notably, when adjusting for Amazon and actions taken on other lower-yielding volume, average daily volume grew year-over-year in the second quarter, underscoring the improvements we're making through the execution of our strategy. That improvement was also reflected in our customer mix. SMB average daily volume increased 4.3% year-over-year with growth from nearly all industries, led by high-tech and health care. In the second quarter, SMBs made up 34.5% of total U.S. volume, an increase of 250 basis points compared to the second quarter of last year. And looking at B2B, while average daily volume was down 3.2% year-over-year, the rate of decline was 190 basis points better compared to the first quarter with bright spots in the high-tech and automotive sectors. In the second quarter, B2B represented 43.8% of our total U.S. volume. Moving to revenue. In the second quarter, U.S. Domestic generated $14.9 billion, an increase of 6% year-over-year, with both SMB and enterprise customers contributing to the increase. Growth in revenue per piece was strong and increased 9.3% compared to the second quarter of last year. More than half of the growth in revenue per piece was driven by healthy base rates and customer mix improvement, with fuel contributing the remainder of the increase. Turning to costs. In the second quarter, total expense in U.S. Domestic increased 4.9%, with more than half of the increase coming from fuel and purchase transportation. Strong base rate growth and increased productivity in our reconfigured network contributed to revenue per piece growing 130 basis points faster than the cost per piece growth rate, demonstrating the operating leverage we expected from our network reconfiguration. The U.S. Domestic segment delivered $1.2 billion in operating profit, a 21% increase year-over-year and more than double the operating profit delivered in the first quarter of this year. Operating margin was 8%, which was an increase of 100 basis points compared to the second quarter of last year and a 400 basis point increase from the first quarter of this year. Moving to our International segment. In the second quarter, we delivered strong top line growth with all regions generating year-over-year expansion, driven by strong revenue quality. In the second quarter, total international average daily volume declined 5.8%, led by domestic declines in Europe. On the export side, average daily volume in the second quarter decreased 4.2% year-over-year. However, and importantly, we returned to volume growth on the China-U.S. trade lane as we lap the elimination of the de minimis exemption for Chinese imports in May. Additionally, Asia-to-Asia export volume increased 13.6% compared to last year, enabled by our recent investments in the region. Turning to revenue. We saw an improvement in geographic mix during the second quarter as trade lanes began to rebalance, particularly in Asia. As a result, International generated $5 billion in revenue, an increase of 12.5% year-over-year. Revenue growth was driven by an 18.9% year-over-year increase in revenue per piece with a little more than half coming from fuel. Operating profit in the International segment was $623 million, down $59 million year-over-year. International operating margin in the second quarter was 12.4%, which includes a 120 basis point year-over-year negative impact from fuel. Looking at Supply Chain Solutions. For the second quarter in a row, Supply Chain Solutions delivered strong operating profit growth year-over-year driven by improvements across multiple business units. In the second quarter, revenue was $2.9 billion, an increase of $207 million versus last year. Forwarding increased revenue 8.1% year-over-year, driven by higher rates in international airfreight. Logistics revenue increased 4.3% year-over-year, driven by strong growth in health care logistics, partially offset by our Mail Innovations business. And UPS Digital, which includes Roadie and Happy Returns, delivered revenue growth of over 30% compared to the second quarter of 2025. In the second quarter, Supply Chain Solutions generated operating profit of $291 million, an increase of $79 million year-over-year. Operating margin was 10.2%, up 220 basis points compared to last year and the third quarter in a row of year-over-year operating margin expansion. Lastly, looking at cash and liquidity. Year-to-date, we generated $3.1 billion in cash from operations and free cash flow of $1.6 billion, which includes the one-time payments made in the second quarter for the Driver Choice program. We ended the second quarter with $4.7 billion in cash on the balance sheet and no outstanding commercial paper. And so far this year, UPS has paid $2.7 billion in dividends. Now before moving to our outlook, let me share the progress we made in the first half of the year from our Amazon glide down and related network reconfiguration efforts. Starting with variable costs. Total operational hours moved down with volume in the first half of the year. Looking at semi-variable costs, we finished down nearly 30,000 operational positions compared to the first half of last year. This includes reductions from our Driver Choice program with approximately 80% of participants departing the company in the second quarter. And our fixed cost bucket, we closed 45 buildings in the first half of the year with several additional closures planned in the back half of the year. Our engineering and operations teams executed the Amazon glide down exceptionally well, and we're pleased to have successfully completed this part of our strategy. We are seeing significant value from these efforts as well as from our broader network reconfiguration and efficiency reimagined initiatives. As a result, we still expect to deliver approximately $3 billion in related benefits in 2026. Moving to our 2026 financial outlook. As we discussed, we entered the year expecting a clear distinction between the first and second half. Given our strong first half results, which exceeded our expectations, we are increasing our full year 2026 outlook. We now expect consolidated revenue of approximately $91.2 billion and consolidated operating profit of approximately $8.65 billion. This implies full year diluted earnings per share of approximately $7.22. As a reminder, third quarter 2025 diluted earnings per share included a $0.30 benefit from sale-leaseback transactions. Now let me add some color on the segments. Starting with domestic, we expect full year 2026 revenue of approximately $60 billion, up 1% year-over-year and an operating margin of approximately 7.5%. Looking at the third quarter, we expect average daily volume to decline mid-single digits, reflecting a seasonal decline as well as the impact of this year's Amazon glide down, which completed in June. We expect revenue to be approximately flat year-over-year and a third quarter operating margin of approximately 7%. Lastly, in the back half of the year, we expect the U.S. domestic operating margin of approximately 8.8%, reflecting year-over-year margin expansion in both the third and fourth quarters. Turning to the International segment. And starting with the full year, we anticipate revenue growth in the mid-single digits year-over-year, driven by strong revenue per piece growth. Operating margin in the International segment is expected to be in the mid-teens. We expect a similar performance in the third quarter with revenue up mid-single digits, driven by strong revenue per piece. And we expect the operating margin to be between 13% and 14%. Lastly, in Supply Chain Solutions, we expect full year 2026 revenue growth in the high single digits, driven by growth in forwarding and health care logistics. We expect full year operating margin to be between 10% and 11%. In the third quarter, we expect Supply Chain Solutions revenue growth in the low double digits year-over-year and operating margin between 10% and 11%. Turning to our expectations for cash in the balance sheet. For the full year 2026, capital expenditures are still expected to be about $3 billion, and we plan to complete our pension contribution of $1.3 billion. We expect free cash flow to be approximately $5.5 billion, which includes the payments for the Driver Choice program I mentioned earlier. Lastly, we are still planning to pay out around $5.4 billion in dividends in 2026 subject to Board approval. The successful completion of the Amazon glide down and related network reconfiguration marks an important inflection point for UPS, setting us up to deliver consolidated revenue and operating profit growth and expand operating margin. As we move into the next chapter of growth, our focus is on growing premium, high-quality volume around the world, leveraging the full strength of our portfolio solutions. With the power of our integrated global network, we are well positioned to deliver sustainable profitable growth and create long-term shareowner value. With that, operator, please open the lines for questions.”