Q2 2021 United Parcel Service Inc Earnings Call
Good morning, and welcome to the U P. S second quarter 2021 earnings call joining.
Joining me today are Carol <unk>, our CEO and Brian Newman our CFO.
Before we begin I want to remind you that some of the comments, we'll make today are forward looking statements within the federal.
All securities laws and address our expectation for the future performance or operating results of our company. These statements are subject to risk and uncertainty which are described in our 2020 form 10-K subsequently filed form 10, Qs and other reports that we file with.
Or furnish to the Securities and Exchange Commission. These reports when filed and are available on the UBS Investor Relations website and from the SEC for.
For the second quarter of 2021 GAAP results include after tax transformation and other charges of 11.
$7 million or 1 cent per diluted share.
Also on the second quarter on April the 30th we closed on the sale of U P. S freight, which triggered remeasurement of certain of our pension and post retirement benefit plans. The remeasurement resulted in a $2.1 billion reduction.
<unk> and pension and post retirement benefit obligations on our balance sheet, primarily due to higher discount rates and the vast majority of the remeasurement impact fell within the corridor. So the impact to GAAP net income was negligible at approximately $3 million.
Unless stated otherwise our comments will refer to adjusted results, which exclude transformation and other charges. The webcast of today's call along with a reconciliation of non-GAAP financial measures is available on the Investor Relations website, following our prepared remarks.
And we will take questions from those joining us via the teleconference. If you wish to ask a question press..1 then zero on your phone to enter the queue. Please ask only 1 question. So that we may allow as many as possible to participate you may rejoin the queue for the opportunity to ask and.
And additional question and now I'll turn the call over to Carol.
Thank you Scott and good morning, everyone. Let me start by thanking all U P. S errors for their hard work and efforts are better and not bigger framework is enabling consistently high service levels and producing improved financial results.
Our team is truly moving our roll forward by delivering what matters.
More specifically, we are winning and the most attractive parts of the market with new capabilities like our fastest ground ever weekend initiatives and improvements and our customer experience journeys.
We are continuing to deliver lifesaving, COVID-19, vaccines and our health care growth initiative is gaining momentum.
We are also driving sustainable revenue per piece growth through targeted revenue quality strategies and lastly, we are driving productivity improvements.
Network and implementing targeted transformational expense reductions our second quarter financial results across all segments were much better than we anticipated.
Solid added revenue and the quarter Rose 14, 5% from last year to $23.4 billion.
And operating profit grew 48 per cent to $3.3 billion.
As we expected U S average daily volume for the quarter was down slightly from 1 year ago, driven primarily by tough comparisons due to the jumped and e-commerce.
Ms related volume last year.
But our revenue quality and the U S was much improved due to a change and customer mix as well as our revenue quality strategies.
All of our business segments delivered record quarterly operating profit and expanded operating margin.
And on a year over year basis.
In the U S. Operating margin was 11, 6% our highest second quarter operating margin since 2017.
And the international segment operating profit increased 41, 3% and.
And operating margin.
And reached a record 24, 7%.
And in supply chain solutions continued strength and freight forwarding and health care drove operating margin of 9.7% a record for this segment.
While we closely monitor external factors like the title.
Labor markets and low inventory levels and the execution of our initiatives has put us well on our way to achieving the high end of our 2020.3 financial targets.
Brian will share more details with you during his remarks.
Moving to our customer first people led innovation.
Innovation driven strategy.
Strive to provide our customers with the best digital experience powered by our global Smart Logistics network.
Customer first is about creating a frictionless customer experience and building the capabilities that matter the most to our customers.
During the second quarter Saturday ground delivery volume grew 13% as we continued expanding our weekend coverage. This is an example of better and not bigger as we are expanding service with very little capital spending.
We are currently halfway through our efforts to expand our.
Existing centers and turn on Saturday operations and more than 200 additional centers.
By the end of October of this year, we will cover about 90% of the U S population on Saturdays, which will further extend our market, leading Saturday commercial delivery and pickup services.
And support our ongoing Sunday delivery services.
These improvements benefit all of our customers large and small by enabling faster time and transit and expanding capacity.
As we execute our strategy our focus is on growing value share we are changing.
The growth targets of the company and are no longer focused solely on volume growth.
Instead, we are creating new capabilities and leveraging our competitive advantages to grow revenue and profit from the most attractive parts of the market like F&B b to be health.
Health care and international.
While at the same time, providing value and service to targeted large enterprise customers.
It's early days, but we believe our strategy is working for example in the U S. We grew SMB average daily volume, including platforms by 'twenty 1.
1, 6% and we saw total U S revenue per piece increased by $13.4 per cent.
As you know health care is 1 of our wildly important customer first initiatives.
And the second quarter health care customer revenue on a global basis grew 19, 8%.
And contributed to margin expansion and all 3 segments.
To grow and the health care sector, we are creating new capabilities.
Our recent launch of U P S cold chain solutions and.
And we're deploying sophisticated solutions that customers want into new geographies.
And like the expansion of U P S Premier to Canada and Europe.
These actions are advancing our leadership position and the global health care logistics market.
To support growth and our international segment, we continue to invest broadly, including the launch of our first ever daily flight from Osaka.
<unk> to Shenzen, thus significantly speeding up our time and transferred across multiple trade lanes.
We're also improving the customer experience across 16 journey to make them simpler and more helpful.
1 of the customer pain points, we are addressing is claims and we recently completed.
And a successful pilot the shortened the average claim processing time from 20 days to 5 the.
And the improvements we made resulted in a 1.9% reduction and churn among pilot participants.
We are rolling out our new claims process to all U S SMB customers over the next.
12 months to put this into perspective every 1 percentage point reduction and U S. SMB churn, it's worth about $170 million and annual revenue.
Moving to the people that component of our strategy. Our focus here is to make you P. S. A great place to work so that our people still.
Confident recommending U P S 2 others.
During the second quarter, our executive leadership team spent many days and our operations around the world delivering packages walking our facilities and talking with our people.
When we visit and we don't take a list we bring back a list.
Of the actions, we can take to simplify our processes drive productivity and improve the quality of the work environment for our people.
I cannot say enough about the commitment of U P. S Herz, who over the last year rose to meet the challenges of elevated volume, while ensuring great service to our customers.
Day in and day out.
And I'd like to recognize our 38000 part time management employees and the U S that work, primarily and our preload hub sorts and air operations and appreciation of their extraordinary efforts, we provided them with a 1 time financial.
<unk> and the second quarter.
People Ed builds on our strong foundation.
And we will continue living our values and modernizing our policies and rewarding our people to make U P S and even better place to work and employer of choice.
Turning to.
A war and driven our disciplined approach to capital allocation is generating significant levels of free cash flow.
In fact, and the first 6 months of this year, we generated $6.8 billion and free cash flow and this is a record we've generated more free cash flow.
And the first 6 months of this year than we previously generated in any full year at any time and our company's history.
Also in the second quarter, we completed the divestiture of U P. S freight a capital intensive low returning part of our business.
This other actions.
Innovation greatly improved our financial condition from 1 year ago as Brian will detail.
And looking ahead, we expect to see a significant increase and our return on invested capital this year.
Innovation, driven will also help us reach carbon neutrality by 2050.
In August we will publish our annual sustainability report, which include our 19th G. R. I content index, along with our second sustainability accounting standards board or SaaS be report and our first task force on climate related financial disclosures.
Or T C F D report.
Social and environmental stewardship goes right to our core values and we remain committed to providing investors transparency through our expanded ESG disclosures.
Next month U P. S will celebrate our 114th anniversary.
And as such and for me to guide this company through our next chapter we.
We are a purpose driven company and we are investing and the capabilities that matter most to our customers.
To create value for our shareowners.
Thank you and now I'll turn the call over to Brian.
Thanks, Carol and good morning, and.
And my comments today I'll cover 4 areas, starting with macroeconomic trends.
And then our second quarter results next I'll review cash and Shareowner returns and lastly, I'll wrap up with some comments on our outlook.
Okay, let's start with the macro on.
All major.
Economic indicators remain strong with the economic recovery progressing faster than expected and.
And the second quarter looking at IHS forecasts global GDP is expected to finish up 10, 6% and U S. GDP is expected to be up 12, 5%, however, robust economic growth.
<unk> and high consumer demand is putting pressure on global supply chain and inventory replenishment.
In fact, the U S inventory to sales ratio declined further from the figure I shared last quarter and was 1.09 in June.
As a point of reference for the 3 years prior to Covid this ratio.
Between 1.4 and 1.5.
For the full year global GDP is now expected to grow 5.8% and U S. GDP is expected to grow 6.6%.
Accordingly, as we look at the back half of the year, while economic growth is forecast to remain positive the rate.
Ramp slows.
Moving to our second quarter consolidated performance.
We delivered double digit top and bottom line growth.
<unk> revenue increased 14, 5% to $23.4 billion.
Solid and operating profit totaled $3.3 billion.
<unk> grew 48% higher than last year.
And I'll note that this is the first time ups's generated quarterly operating profit over $3 billion.
Consolidated operating margin expanded to 14%, which was 260 basis points above last year.
And diluted earnings per share was 3.
$3 <unk> up 43, 7% from the same period last year.
Now, let's take a look at the segments and U S domestic our mix improvement and other revenue quality initiatives as well as productivity efforts continued to drive strong results and.
As expected last.
Last year's surge and essential goods delivered to homes created tough comparisons on a year over year basis.
As a result, total average daily volume and the U S. In the second quarter of this year was down 619000 pieces per day or 2.9% due to a decline in share post volume of.
And <unk> 3 million packages per day.
The decline and share post volume was partially offset by double digit percentage growth in ground commercial and next day air volume.
The unique year over year comparisons were also visible and our volume mix.
B to C average daily volume was down 15.
Of 1% and 8% year over year.
Conversely, <unk> volume increased 25, 7%.
All industry sectors grew BBB volume led by retail as more foot traffic returned to the brick and mortar locations.
In fact, <unk> retail posted its first year.
Year over year increase and volume since 2019.
And healthcare remained a bright spot with <unk> volume up 28, 6%.
Customer mix continued to be positive as our network enhancements drove SMB volume growth, including platforms of 21, 6%.
<unk> and and the second quarter SMB made up 27, 2% of U S domestic volume.
For the quarter U S domestic generated revenue of $14.4 billion.
Up 10, 2% driven by a record 13, 4% increase and revenue per piece with fuel.
Driving 220 basis points of the revenue per piece growth rate.
We are pleased with the progress of our revenue quality efforts.
The combination of base rate increases surcharges and mix improvements generated double digit revenue per piece percentage increases and our next day air and ground products.
Turning to cost total expense grew 7.3% driven by 3 main areas.
First fuel represented 220 basis points of the increase.
Second worthy enhancements to speed up our network and expand weekend operations, which accounted for around 200.
Basis points of the total expense increase.
And finally, another 210 basis points came from and increasing and employee benefit expenses as more employees became eligible for health welfare and retirement benefits and.
And from the reinstatement of the federal excise tax.
Looking at it.
<unk>, we continue to see productivity improvements within package and inside operations.
In fact direct labor hours were down 1, 4%, which includes a double digit percentage reduction and overtime hours.
Most notably in the quarter revenue growth was significantly above expenses.
<unk> growth, which generated positive operating leverage.
In summary, the U S. Domestic segment delivered $1.7 billion and operating profit and increase of $460 million or 37, 9% compared to last year.
And operating margin expanded 200.
30 basis points.
Moving to international the segment delivered another quarter of record operating profit.
Total average daily volume was up 12, 7%.
<unk> volume grew 25% on a year over year basis with growth across all industries and customer segments.
Conversely be to see volume was down 4.1%.
These year over year comparisons reflect the unique pandemic effects from last year as BDC volume doubled in the second quarter of 2020.
Total export average daily volume was up 14% on a year over year basis with all regions.
Except Asia, posting double digit growth.
Asia export volume faced difficult comps and was down 5.8% compared to the remarkable growth rate of 46, 8% and the second quarter of last year, driven by the surge of PPE.
For the quarter International revenue was up.
30% to $4.8 billion with all major regions growing revenue by double digit percentages we.
We generated positive operating leverage and the quarter revenue.
Revenue per piece was up 15, 5%, including a 530 basis point benefit from the fuel surcharge and cost per.
<unk> was up 12, 4%, including a 570 basis point impact from higher fuel costs.
And the second quarter International delivered operating profit of $1.2 billion and.
And increase of 41, 3% and operating margin expanded to 24, 7%.
A piece of our strategy and the international segment is absolutely driving value share and growth from the best parts of the market.
As Scott price shared and June we're underpenetrated in almost all geographies around the world. So we see tremendous potential as we continue executing our wildly important initiatives.
And internationally.
Now looking at supply chain solutions revenue increased 14, 3% to $4.2 billion.
And the segment generated a record profit and operating margin.
Market demand was elevated and revenue growth and our major business categories more than offset the revenue impact.
<unk> from the sale of UBS freight, which closed on April 30th.
Looking at operating profit and forwarding, our ocean freight product more than doubled its operating profit on a year over year basis, driven by strong inventory replenishment demand.
And in healthcare, our clinical trials along with selling.
Cell and gene solutions again delivered record top and bottom line results.
And the second quarter supply chain solutions generated operating profit of $408 million and the operating margin was 9.7%.
We are extremely pleased with our performance and this segment, we have moved the needle on on.
Margin, where over the past 5 years operating margin has averaged 6.6%.
Walking through the rest of the income statement, we had $167 million of interest expense.
Other pension income was $302 million and lastly, our effective tax rate came in at 22.1.
Operating which was lower than last year due to discrete items.
Now, let's turn to cash on the balance sheet.
We are generating strong cash flow from our disciplined focused on capital allocation and bottom line results for the first 6 months of the year, we generated $8.5 billion and cash from operation.
Percent and $6.8 billion and free cash flow.
Also in the second quarter, the sale of UBS freight triggered remeasurement of certain U S pension and post retirement plans, which resulted in a reduction in our net pension liability of $2.1 billion on our balance sheet.
Primary.
<unk> due to higher discount rates.
GAAP income only benefited by about $3 million because the vast majority of the gain fell within the corridor.
As Carol mentioned, our financial condition has greatly improved our strong balance sheet is a core principle and since the end of 2000.
Primarily we have reduced our pension liability and outstanding debt by $10.2 billion <unk>.
Bringing our debt to EBITDA ratio to 2.1.
And lastly, so far this year UBS has distributed $1.7 billion and dividends.
Moving.
<unk> outlook I will cover both the second half of 2021 and the full year.
First we expect market conditions to remain favorable and our initiatives to continue delivering positive results and our business we.
We are also paying close attention to several external factors, including the Delta variant of COVID-19 inflation.
2 our pressures the U S inventory to sales ratio and consumer spending preferences.
Nonetheless, we expect our revenue quality efforts to cover known expense pressures and we are on track to meet our 2021 non operating savings target of $500 million.
On a consolidated.
<unk> basis, we expect second half 2020, 1 revenue growth of around 5.4% year over year.
And which takes into account the divestiture of UBS freight.
Tough comparisons from last year, and our revenue quality initiatives.
We expect the second half 2020, 1 consolidated operating.
<unk> margin of around 12%.
In U S. Domestic we anticipate back half 2021 revenue growth of about 8.2% with revenue growing faster than volume.
Operating margin should be around 9.2%.
Operating margin and the back half of the year is.
Operating to be lower than what we reported in the first half due to 3 factors.
First as higher compensation expense from our contractual labor increase which goes into effect each year in August.
Second we have made targeted hourly rate adjustments in certain geographies to remain competitive and the.
As expected.
And as usual lower margin enterprise and BDC volume will represent a larger percentage of our total volume due to peak pulling it altogether. We now expect full year 2021 U S operating margin to be approximately 10, 1%.
And the international segment for the second.
A market half of 2021, we anticipate year over year average daily volume growth from Europe to be in the mid single digits.
In addition, we expect Asia outbound volume to remain elevated relative to pre pandemic levels.
As a result, we expect revenue growth around 10, 7% with an operating margin.
And second half 'twenty 2.9%.
And the supply chain solutions segment, and the second half of this year, we expect freight forwarding and healthcare to continue to lead the segment.
We anticipate total revenue and this segment will decline around 9.6% due to the sale of UBS freight.
However, we expect operating profit.
And of above around 8.1% and and operating margin of about 9.1%.
Moving to the full year in 2021, we expect consolidated operating margin of approximately 12, 7% and return on invested capital of approximately 28%.
Growth capital expenditures to be about $4 billion.
And in April, we repaid $1 billion and debt and have achieved our 2021 target of $2.55 billion and debt repayment.
We have no plans to repurchase shares in 2021 at this time, but.
But given the strong free cash.
Cash flow and further reductions to our pension liabilities, we continue to evaluate the option to repurchase shares later this year.
And lastly, our effective tax rate for the remainder of the year is now expected to be around 23%.
Looking out to 2023, the current economic outlook coupled with the.
We <unk> from our revenue quality and productivity initiatives as putting us well on our way to achieving the high end of our 2023 targets.
In closing we are laser focused on executing our strategy under the better not bigger framework and leaning into the best market opportunities to improve the financial.
Financial performance of the company provide the best customer experience and benefit our shareowners and thank you.
And operator, please open the lines.
Thank you Sir we will now conduct a question and answer session. As a reminder, for our teleconference. Participants if you would like to ask a question. Please.
Early reads, 1 and zero on your telephone keypad.
Our first question will come from the line of Ravi Shanker of Morgan Stanley. Please go ahead.
Great. Thank you good morning, everyone. A few questions on enterprise customers and what was that growth or decline year over year in Q.
Is that mostly again running at a really difficult comps or have any enterprise customers change their sourcing behavior in response to your pricing and surcharge strategy and.
And lastly, you said that you are targeting large youre going after targeting large enterprise customers and the future what does that mean kind of what's the basis for that.
Targeting thank you.
Thank you Ravi for the cash.
First John on the enterprise customer behavior, and the second quarter was largely impacted by share post volume and Brian declined our surplus volume was down $1.3 million pieces.
That happened because many of our brick and mortar enterprise customers.
Reopening our stores and as the economies reopen and customers went back to the stores. So we actually anticipated when we built our second quarter plan and in fact to be.
Daily volume performed better than we had planned at the beginning of the year.
And we focus our efforts going.
Going forward, we're really leaning into those customers that value our end to end network and focused on value share not so much volume share as we discussed during our June Investor Conference.
Package is not a package.
And with different characteristics, and we're leaning into those packages and those customers.
Debt value.
Brian anything to add.
No. It's just Ravi if you back out that sharp host volume and the Carol alluded to we would actually be up 4% and ground and domestic business for the quarter.
Yeah.
Great and any follow up on larger E Commerce and enterprise customers just kind of any.
And there versus the brick and mortar guidance. Thank you.
So we value our very large e-commerce customer that doesn't have a storefront as well as all of our enterprise customers and if I look at our very large enterprise customer that doesn't have a storefront on much of a storefront.
The percentage.
<unk> of our total revenue was about the same as it was and the first quarter.
Thank you.
You bet on that.
Our next question will come from the line of Ken Hester Bank of America. Please go ahead.
Great. Good morning, So just looking at your volume comp just to follow that discussion are you.
And the B to C deceleration or or your outlook on that day to see relative relative gross you know continuing to decline as you face these tougher comps.
And then just looking at the margin thoughts there right. So youre looking for a deceleration and the margin maybe you could just flush that out a little bit you you kind of highlighted Brian.
You see your 3 thoughts on that but maybe just kind of talk to Charles historical conservatism versus your thoughts on the extending cost that you see coming back online with the with the union costs.
Well, maybe I'll comment on volume and then we'll turn to cost we were really pleased with the growth that we saw and our SMB customer and the second quarter.
Brian last year, Smbs, and the United States made up about 20% of our total revenue this year and make up more than 27 per cent of our total revenue and we think that the capabilities that we are investing to grow this very important customer segment.
They're working.
If you look at the breakdown of F N b.
<unk> 50 per cent of the revenue west for a commercial and 50% of the revenue was for residential deliveries. So you can see a shift within F. N B's when do you expect as the economies start to reopen and we were very pleased with the growth that we saw and our commercial business.
And looking ahead, we wouldn't expect the volume.
<unk>.
And at the same and the third quarter and we're not going into the process of giving you quarterly guidance, but we would expect the volume trends to be about the same and the third quarter, and then volume up and the fourth quarter as we head into peak, Brian comments on cash.
Cost.
Ken on the cost front, I think I articulated what drove the 730 bps of increase and the second quarter.
And you look.
And the first half of the year on cost per piece was about 6.5%. So mid single digit I think we would anticipate that looking to be somewhat similar from a CPP basis in the second half of the year and we can unpack that for US if you want more detail.
Yeah.
No no no more detail I was just kind of wondering your thoughts on that day.
Celebration versus.
Trying to be conservative with the outlook versus your your your thoughts on on kind of the margin volatility.
Well I think from a cost perspective, Ken 1 of the 1 of the element that's driving that cost per piece.
<unk> is our union.
Labor increase in August.
So when you look sequential from the first half of the year on the back half of the year.
It's a fairly material number when you look at the market rate adjustments and the union increased north of $400 million. So it's about 150 bps on the margin.
Very helpful. Thanks for the time.
Our next question will come from the line of Amit Mehrotra.
Please go ahead.
Do you think excuse me and thanks, operator, Brian just I just wanted to confirm or Carol just wanted to confirm your comments that you were expecting total average daily volume and domestic volume to be down year over year, and 3 Q versus a similar rate and this for Q and then positive and <unk>.
And also and maybe a little bit more of a bigger picture question.
Carol.
The company has paid and committed to basically paying down debt the balance sheet financial position has gotten better as some of these pension issues if kind of resolve themselves.
I'm wondering if you're opening up the company to maybe.
And more of a major acquisition over the next couple of years is there and appetite for maybe significant M&A and and if there is what are some of the areas and adjacencies. It kind of makes sense for how you see the company evolving over the next many years that'd be helpful. As well. Thank you.
Brian why don't you comment on the volume and then I'll talk about the balance.
And then on that.
And our current forecast and we're holding to the second half of the year and low single digit from and ADB perspective, So I.
And I'm not going to get into Q3 versus Q4 is theres a lot of movement right now on the market, but we had 1 <unk> was about 4%, we're expecting low single digits slightly lower than that and in the second half.
And I think a lot of this on the volume side and still highly dependent on the inventory and expenses ratio isn't that we've been talking to our large customers about what they're seeing and their business and interesting 1 large brick and mortar customer told us they have 50 containers for a second.
And.
And until those containers can get into their warehouses and into their stores, it's hard to.
Sales, so there's a bit of it you know and uncertainty out there, but we kind of control that we are going and control and we share. This back half view with you because we thought you should know.
What we're seeing and what we're thinking about our business on the balance sheet question Amit.
Cash from where we were a year ago the financial condition.
And of our company has greatly improved from the end of day, Yeah, It's greatly improved with our debt and pension liabilities down $10 billion from the and up a year and having a strong financial condition and that's just all sleep well at night. So that we can lean into our customer experience and do the right thing for our people for our.
Our communities and for our customers as we think about our strategic opportunities ahead.
We are opportunity rich.
And so we're going to continue to lean into those 16 customer journeys that we talked to you about because we really think by improving the end to end experience, we get stickiness with our customers and can grow that value share.
Share that we are seeking to grow could there be a capability that we might want to acquire to enable our speed on those journeys, perhaps but we're not sitting here or building a large M&A war chest. If you will in fact, we're just going to try to run the best business that we can now we do believe that cash belongs to the shareowners.
And and not to us and we told you that at the at the beginning or at the end of this year. If you will we have a new debit and dividend payout target, which is 50 per cent of earnings. So based on that guidance and Brian has shared with you today that could imply a fairly nice use of cash when we are.
On or is that a new dividend. We are also looking at reentry into the share repurchase market and this is something that we discuss with our board every quarter. We have a board meeting next week.
So Brian and I shared with you on his prepared remarks that we're looking at is as well. So so it's 1 billion a year, they're the right target that you disclosed on a month and.
And a half ago or is it now and there's more upward bias on that as you look forward.
So I think as we reported and we generated more free cash and the first 6 months of this year than we have and anywhere and anytime and our company history, so with it and a debt.
Debt to EBITDA ratio now of 2 to 1 and things are looking good for UBS and our ability to return capital.
Capital to our shareowners, so when we get ready to change how much you should put in your model for share repurchases, we'll tell you.
And thank you very much appreciate it.
Our next question will come from the line of Allison millennia.
Wells Fargo. Please go ahead.
Hi, good morning, and they want to dig in to the domestic revenue.
Your piece a little bit more I know you called out your but you had also mentioned the surcharges, which I believe are weighted more towards b to C. As well as some of your revenue quality issues any way to break that down a little further I'm just trying to get a better sense of what the organic revenue quality impact is to that revenue per piece if you could.
So I don't.
And so when you look at the RVP and our quarter, we were up domestic 13, 4% 2 thirds of that.
<unk> came from customer product mix, and surcharges and and as you think about the surcharges and the mix are the big driver on mix was SMB volume, which increased to 27, 2%.
I'll take care of our total mix. If you think back to last year and Q2 that was down at about 21, 2%. So we're on that journey at the Investor Day, We talked and we wanted to get North of 30 to hit the high end of our guidance, we're well on the way on that journey and we feel good lastly on the rate component, where we're not even really halfway through.
The rate and contractual negotiations and those contracts open back up so theres still more guests and the tank across the 3 levers.
Great helpful. Thank you.
Okay.
Our next question will come from the line of Chris Weatherby of Citi. Please go ahead.
Hey, Thanks for the question I guess I wanted.
And to kind of come out debt yield point for a second and maybe tie it into the domestic margin outlook and the second half of the year sort of low single digit Adv and the back half of the year is there kind of way to think about it I guess, you sort of maybe getting mid single digit yield growth and then and the context of that SMB sort of step up as well as b to b being up I guess I'm a little surprised.
Surprised and not see the incremental margins are implied margins on the back half of the year be a little bit stronger. So it sounds like theres. Some some cost dynamics, probably fuels sort of weighing and they're a little bit but could you help us unpack a little bit more some of those moving pieces, maybe on the cost side or maybe something is going on within mix between <unk> and b to C and kind of help us debt with the sequential progression on the domestic margin.
And the back half of the year.
Sure, Chris I'll take a stab at that.
And the way I think about the second half of the year when I say low single digit Adv, it's really closer to the 1% range RP piece should be and sort of the high single digits 7 ish 7.5 thereabouts and then cost per piece.
Margin is probably similar to what we saw and what age which was and that 6.5 range. So that's sort of from an algorithm perspective, how the math plays out there there are a lot of moving pieces here from CPP.
Mentioned the cost increases from the wage and Union contract. We've also got some market rate adjustments that are going in and the second half of the year to remain competitive on a geographic.
<unk> standpoint, and then <unk>, obviously, you've got that higher enterprise and <unk> mix in the peak season and anything to.
I think the peak seafood comment is right because we will see a mix that's right and will see a higher penetration of enterprise and we have today.
Okay, and just a quick follow up is the fourth quarter do you.
And I assume that you can get domestic margin expansion and <unk> during peak season this year.
Thank you.
Thanks, Chris.
Our next question will come from the line of Allison Landry of Credit Suisse. Please go ahead.
Thanks, Good morning.
So obviously you called out the comp headwinds weighing.
Graphics to domestic margin and the second half, but you should start to lap costs related to the Saturday expansion and and speeding up and network.
The 220 basis point headwind and Q2 related to the ease and Q3 and.
And go away by Q4, and maybe if you could just sort of address.
And on some of the factors that are.
And that are positive for margins.
And Jim just to clarify so.
Is it fair to assume for both Q3, and Q4 that the spread between <unk> and CPB and should remain positive. Thank you.
Well I'll start with the expansion of our weekend delivery, which we're so pleased with as we commented that we saw 13% growth on Saturday and the second quarter, we're about halfway through this.
<unk> to reach 90% of the U S population by October of this year.
We are expanding services and and over 500 buildings.
Existing and new so we've got some more costs coming at us and the third quarter, but then as you pointed out we're going to lap that next year, which will look forward to Alan.
And just in terms of the margin and sequential performance.
We planned for.
Positive spreads between RVP and CPP on a quarterly basis. So that's our objective is probably a little tighter and Q3 and it is for and I just remind you the journey we're on.
Does that in my prepared remarks, we're going towards that 12% by 2023, and I think and the Investor Day I had mentioned, we want to be more than halfway there by 2021.
On the guidance of 10, 1 versus the 7.7 last year, we had 240 basis points and the first year that leaves another 200 basis points over a 2 year basis. So I think we passed that 50% Mark and we're confident that we'll deliver that 12%.
Thank you.
Our next question will come.
Come from the line of Helane Becker of Cowen. Please go ahead.
Oh I'm.
Thanks, very much operator, hi, everybody and thank you for your time I just have 2 questions.
On the free cash flow when you think about so much free cash flow and the forecast for greater cash free cash flow.
And you continue.
To see these improvements that you're talking about do you worry about under investing and the business and then having to invest later to catch up to the growth that you're seeing.
Sure.
And maybe you could talk a little bit more about that.
And I'm happy to talk to you about it philosophically and then Brian.
And please add on and when we had on Investor day back in June we laid out our capital and ducting plan on the high side of about $14.5 billion between now and 2023, that's based on what we know.
If we have an opportunity to invest that returns the kinds of returns that we're looking for.
And we'll increase that capital so we laid out what we knew there's no gating factor here and we will continue to invest and the capabilities that are necessary to drive the business forward.
And I'd, just tell me and I'll just follow up we are still adding capacity when we look at the business. So in terms of.
We'll bring on 7 new or retrofit lines about 2 million square feet of space 130000 pieces per hour.
And it's a journey as Carl mentioned, we've got about a 60.40 split in terms of our buildings and facilities and capacity and future growth, making 60% maintenance 40 per cent or less.
I think we will continue to evaluate the thing I would highlight is with ROIC going up to 28% on a full year basis, we're very happy with the returns that we're making and the business as Carol mentioned with the excess cash if we find areas to continue to invest and grow the business. We'll certainly do that and we're also adding aircrafts and Brian from a capacity perspective.
Thinking about I think 6 aircrafts.
Between now and the balance of year that's right.
Yeah, that's perfect and.
And you very much I appreciate that.
Thank you for thanks Alan.
Our next question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks very much.
And I'm going to go international its a bit of a 2 parter just curious what youre seeing with regard to F&B penetration and the international markets contrasting it with with the U S market and then looking at international it's been tremendously strong very high margin I'm just curious what are the factors.
We're watching that might put you a little higher or lower in the back half of the year with regard to the international business overall thanks.
Well I'll address the SMB.
Very pleased with the F&B performance and the second quarter and grew 17% year on year many of the customer journeys debt.
We are introducing and the United States, we are taking outside the United States as well and Scott price and his team are doing it and it's really nice job on understanding customer pain points, and where we need to invest 1 of the areas that we need to invest candidly as time and transit and that's 1 reason we were so excited about the new Osaka to SUNS and lane that we opened up.
And the and the second quarter, where our time and traffic was something like 26 per cent is now 76%. So you know we're leading the pack and in that regard. So pleased about that you might talk about Mark and I think from a margin perspective, Scott you're on what point, what's plus software plus down drivers I think Scott and the team are focused on controlling what they can control.
And doing that very well they've remained a day.
And we'll continue to deliver these elevated margins, which were terrific I think the the thing that we're really also dumper plus down would be the external factors in terms of the inventory pipeline and COVID-19 spikes with the Delta Varian.
To the extent they are less impact and impactful maybe we go.
So up to the extent and they're more shutdowns and inventory remains tighter it could be a challenge, but that's those are really the external factors and that I would highlight.
Okay.
Great. Thanks.
Our next question will come from the line of Todd Fowler of Keybanc capital markets. Please go ahead.
Great Thanks, and good morning.
And so I wanted to ask a little bit on the labor availability side. It sounds like that there were some actions taken and the current quarter offer some some incentive compensation there and it did.
We think about the back half of the year. It sounds like some market adjustments I guess, we typically think about us being a little bit more locked in on the labor cost side can you speak to what you're seeing with labor availability.
And the ability and how you think you're positioned at this point from a labor cost standpoint for the rest of the year.
It's a tight labor market for sure.
And tier your observation, we are pretty much locked and because of the way that most of our people are employed but in certain parts of the country. We've had to make some market rate adjustments, that's a smaller piece.
On the cost pressure that we have and the back half that Brian detailed for you and his his and his remarks.
And we need to hire a lot of people for peak and I'm happy to say that even in the face of this tight labor market. We are ahead of where we were a year ago and nando and his team are just managing this on a day to day.
Day basis, and just as it relates to peak or peak planning is well underway.
The good news is from an operating perspective, we have 1 additional operating day this year, which helps US we are lining up the aircraft that we need to lease to manage the volume we're aligning up on the rental equipment that we need to have in place to handle the.
And of course on the people on the people side. So you know we're every day, we're working on on peak I know, it's just July but we're working on it every day.
Hum.
Thank you.
Our next question will come from the line of Scott Group Wolfe Research. Please go ahead.
Yeah.
Volume and <unk>. Thanks. Good morning, just a couple of things I want to clarify can you just give us how much the onetime bonus was and <unk> that you talked about and is the August wage.
Wage increase and different than normal and then just bigger picture I'm struggling with just understanding if if we have positive price cost spread.
And in second half why why margins arent really improving them and then if I could just ask 1 more carol going back to the analyst day, we heard a lot about mix I don't know if that we heard a lot about like underlying pricing and.
And you just talk about that as well thank you.
Yeah.
Sure go ahead, Brian.
The first 2 questions Scott and you've got a few packed in there.
The 1 time bonus cost about $20 million in terms of the impact.
And we put out.
On the.
The increase we have step ups and our in our wage contracts and so it wouldn't.
Be higher than previous year, obviously, when I was talking more sequentially almost and the first half versus the second half and that's the big impact.
Which is about and.
And in or about $400 million and totals about 150 bps on margin and I think our margin spreads get a bit tighter I laid out what our assumptions were on the back half of the year.
So there is still positive leverage they just get a little bit constrained by 2 things 1 is the mix and we talked about during peak and and the higher enterprise and and B to C. And then the additional headwind pressure in terms of the labor piece that I mentioned and Mike.
Give a little color on Nextgen proppant too and the activity underway there so.
And next Gen and profit has evolved.
And Scott to look at bolt to the RP and the CPP and so the teams get together each and every week to think about how do we drive the right customer and a service trade offs to deliver the right right product and availability a lot of it has to do with the dynamic pricing. So when we announced our surcharges were.
We're trying to target specific areas.
And basically play the mix rate and surcharges lever, we still got plenty of room to go as I mentioned on the rate renegotiation on the cost piece, we're looking at a bigger ticket items to change the game. So nando and his team are thinking about they're doing the blocking and tackling every day, but how do we.
I would take on a few initiatives and that much bigger cost bucket non ops, we're making good progress we've delivered about half of that $500 million and non ops on a year to date basis about $220 million, but on the back end of the year, we'll be getting after somebody and the operations opportunity and going into 'twenty 2.
Okay.
[noise].
<unk> taken on.
And just the broader pricing.
The broader pricing and market so pricing remains high.
And it's projected that at peak so be on.
Demand capacity and balance of about 5 million pieces per day.
So that.
Okay.
And a nice environment to be working on them.
But you don't want to run your business just on price lift Dan and day out you really want to drive the total value equation. So we've got a laser focus on on on cost and productivity as well as providing the capabilities that our customers value. The most.
Thank you guys appreciate it thanks, Scott Yeah.
Our next question will come from the line of Brian Austin back of J P. Morgan. Please go ahead.
Hey, good morning, Thanks for taking the question.
I guess 2 quick follow ups on that on the last commentary Brian.
Brian can you elaborate on just the next Gen profit initiative as it.
We rolled out across the entire company is this more of a U S domestic focus.
And we heard about it at the Investor day, but how how embedded is it 100% ramped up across the operations and fully working.
And then Carol you mentioned, the 5 million pieces per day shortfall I think thats down from $7 million last time, you talked about it I don't.
We think thats, a bad thing because people were.
Trying to secure capacity in advance probably but maybe you can put some context around that and in terms of and the broader supply demand balance, which seemingly still pretty tight, but obviously, maybe a little bit more capacity coming back into the market and ahead of another strong peak.
So on the on the first question.
That's right.
And you were asking about the Nextgen profit Scott price and the international team are really focused on value share growth and so and this is mainly a domestic initiative at this stage of the game as we look at margin opportunities between RVP and CPP in terms of it being fully deployed now on the cost runway and takes a little.
Little longer to get after so we're still catching up with some of the initiatives, taking hold and from an operations and a cost perspective that will have a longer tail to it and then and then we're well on the journey in terms of getting a playbook I would say the piece on RTP that still need sort of revenue that still needs to catch up would be the dynamic pricing that relies on technology. So that's the next chapter on the.
<unk> and side cost, we continue to work on and it's more of a domestic focus.
That dynamic pricing is such an exciting aspect of our box future, but it is highly dependent on data and technology. We have in 1 of our wildly important initiatives as enterprise data strategy.
We've got data and lots of data and lots of data around the company and I would say some of those data pools and not very clean and so we're going to clean up all those data pools and get to 1 version of the truth. So all of our consumer applications go into 1 clean data pool that would make it so much easier for our revenue our leaders and our sales leaders to manage the business the famous.
Mr. Ofer costs right. So this is a pretty exciting initiative that we have underway and then you Blair layer technology on top of that the technology piece is not the heavy lift the data as to having less but that that initiative is well underway and in terms of the demand and supply capacity challenge. It has gotten a little bit better because people are out of capacity as you.
You would expect we're.
And we're adding capacity so as are our competitors. So it's still fill and interesting environment for sure and as we work with our customers we want to ensure that we meet their needs and so we're sitting down with you know that there are about 300 customers, who make up that peak volume surge and we're sitting down with each of them.
And what their projections and what their promotions are.
How are they thinking about the holiday season, and really trying to work with them. So that we provide to them. The same outstanding and excellent service that we gave to them last year.
We are laser focused on making them happy.
Understood Alright, thank you very much on.
Our next question will come from the line of Tom <unk> of UBS. Please go ahead.
Yes, good morning.
So I think when I guess when I try to process the comments on the guidance and everything it does seem.
Like there's a bit of.
You know positive outlook, but lots of momentum relative to the year over year improvement and.
And domestic margin so focused on domestic in particular.
And is that the right way to understand it again not that not that you can't improve and the future, but just slower pace.
And I guess.
I Wonder is there something that would kind of.
Re accelerate debt if you looked at 'twenty 2 you know is there.
Are you seeing debt.
Labor inflation moving through that would cause you know another bite at the Apple on some of the pricing or you know how would you think.
Think about that Ah I guess question on.
Slower improvement and is there and acceleration in or potential driver of acceleration in domestic and 2022. Thank you.
It's still very interesting and when you look at the shape of our of our year's our quarters and our business and now we're not.
On a sequential business.
Q2 is usually the high water Mark for margin and then it comes and then in the back half because mix changes and the fourth quarter related to peak. So the way you should think about our business is year on year on year at the beginning of this year I can recall quite clearly and our our earnings call on.
At the end of the fourth quarter, where I said, our U S operating margin would increase this year and the reaction was.
And want to possibly do it and in fact, Brian we are increasing the operating margin and the U S and 240 basis points. So we are well on our way to increasing our operating margin and the U S sales of 12% target that we set.
And 2023, so think of our business year on year, and not so much quarter over quarter or first half versus back half and.
And Tom 1 of the other things that changed this year. If you look at last year's Q1, which was a 3% ish nando and the team did an extraordinary job of focusing to get the cost out from peak and that changed the shape of the calendar a bit.
And that's 1 of the reasons that combined with a strong <unk> performance why the first half of the year, but as Carl said, we're managing on a full year basis and to go from 77 last year to 10, 1 it's more than 50% on that journey to get to that 12.
Yeah. Okay. That's that's helpful. What about the in place and component is there yet.
He had strong.
On the wage inflation as you know every company. It seems is talking about difficulty of labor availability and in place and is it possible that that gives you the ability to go back and ask for it.
Second price increase or you know that supports more pricing as you look to 2020, 2 or it's more supply demand.
Demand driven and you know.
The market is getting a touch less tight.
Well.
We know what happens and in an inflationary environment don't way.
Body and pays for it.
Excuse me the consumer.
Which means right Scott.
Price increases get pass along all the way to the end.
On to the consumer until the consumer says out I'm not going to buy anymore.
And so we're continuing to buy so.
And we are and the cycle and the cycle on the right. This is a cycle.
Right. Okay. Thank you thanks, Tom and.
And Steven It's Scott we've got time.
<unk> for 1 more question if you would please.
Certainly Sir our final question comes from the line of David Vernon of Bernstein. Please go ahead.
Yeah.
Thanks for squeezing me in here.
And I don't want it specifically kind of drill into the lack of momentum here Michael.
And when you think about the the.
Way to change even on a year over year basis, if we're looking at something and a 9 handle on the back half of the year. The rate of change is is decelerating, so I'd love to understand kind of.
And what specifically we should be looking for.
Reaccelerate that that rate of change into 2020.2.
And how we should be thinking about the risk.
And the 2 H domestic margin guide and whether you can actually do a little bit more than that dine.
And the guidance.
So from a 2 H a risk perspective, Dave look theres, a lot of uncertainty out there with with Covid and the Delta variant and what happens where we're using the data we have today to build the best.
Forecast we can.
I think that from a sequential margin perspective.
Look I think that the.
The improvement from 77% and 10, 1 is positive next year what can accelerate.
We have and annual Cri to re look at our pricing.
Cost and productivity initiatives are taking further.
So we're going to continue to press and the journey on Smbs.
And a great story as we've been walking up obviously in Q4 with P and the mix of Smbs will be a little bit less than the BDC enterprise customers, but I would look for that journey to continue next year, Kevin and the team and Kate Theyre doing a wonderful job of.
And their whole platform customers and Smes to drive that so as that mix goes up margin improve so there are several levers Carol I don't know if you want to provide some color.
I think you called it thank you.
Thanks, Dave.
I will now turn the floor back over to our host Mr. Childress. Please go ahead Sir.
I'm working with thank you Steve.
This concludes our call and I want to thank everyone for joining and hope you have a great day. Thank you.
Yeah.
Okay.
Conference recording has stopped.