Q3 2021 United Parcel Service Inc Earnings Call
To deliver what matters.
A little over one year ago, we laid out our better not bigger framework under a customer first people led innovation driven strategy.
Inside that strategic framework is focused on three main areas first.
First is to improve revenue quality, including growing SMB volume.
Second is to reduce our cost to serve through productivity and cost takeout initiatives and third is to effectively allocate capital to create a better customer experience happier U P. S errors.
And higher returns on the capital we deploy.
While it is early in the execution of our strategy. The progress we are making is clearly visible in our results.
Looking at the third quarter.
Our performance was better than we anticipated.
Consolidated revenue rose nine 2% from last year to $23 $2 billion.
Driven by another quarter of improved revenue quality across all three of our operating segments.
Consolidated operating profit grew 23, 4% to $3 billion, driven by solid revenue growth and strong expense control.
Each of our segments delivered year over year operating profit improvement and double digit operating margins.
And for the first nine months of 2021 ups's generated more operating profit than any full year in our history.
Brian will share the details of our performance shortly.
As we've discussed we are laser focused on adding capabilities that enable UBS to grow with smbs.
These improvements also benefit large customers that value our end to end network.
Expanded weekend delivery services is one of our new capabilities.
This initiative will be completed in the U S. As planned by the end of this week.
We will now cover about 90% of the U S population on Saturday for both residential and commercial pickups and deliveries.
In addition expanded Saturday services provides more capacity for Sunday sure post delivery.
The best part of our weekend delivery program is that we've unlocked additional network capacity that benefits all customers without deploying additional capital.
And we've done this while expanding our U S operating margin on a year over year basis.
As we look at our third quarter results, we see that smbs value the new capabilities, we are providing.
In the U S. F&B average daily volume, including platforms was up 10, 9% year over year.
In fact, we've seen strong growth here for the past six quarters.
In the third quarter Smbs made up 27, 4% of our total U S volume.
380 basis points from one year ago.
And outside the U S. F&B average daily volume growth was three 9%.
We see many opportunities to grow our international SMB volume as we continue to improve our digital experiences and rollout DAP, our digital access program to customers outside of the U S.
Let me also touch on Smbs in healthcare.
When COVID-19 vaccines were rolled out late last year, the world turn to U S and we were ready with connected capabilities technology and expertise.
Our brand relevance here is attracting new F&B healthcare customers and significantly driving profit growth in this sector.
And just on COVID-19 vaccines, we are on track to deliver more than 1 billion vaccine doses by the end of this year with 99, 9% on time delivery.
Moving to productivity, we are relentlessly focused on reducing our cost to serve.
And we're making good progress.
While Brian will go through the details I'll call out a few highlights.
In the U S. We drove a measurable improvement in productivity S. P P H or pieces per hour increased by 2.5%. Additionally.
Additionally, as Nando described at our June Investor day through our ongoing efforts to optimize loads in our trailers.
Cube utilization in the third quarter was up 520 basis points versus last year.
This helped us eliminate more than 10% of daily trailer loads year over year.
And as we've discussed previously we are creating fewer but more impactful jobs.
So to reduce turnover and improve productivity, we are converting around 1000 part time supervisor positions and our operations into nearly 400 full time positions at no additional cost to our company.
Turning to what we have referred to as transformation two dot O our plans to optimize our non operating expense.
We are on track to eliminate $500 million and nonoperating costs. This year.
With about $500 million of additional opportunity in 2022.
Finally, our third area of focus is disciplined capital allocation.
Since we began executing our strategy we've seen marked improvement in our employee satisfaction and competitive net promoter scores.
Due in part to how we've allocated capital to enhance the employee and customer experience.
In October we completed the acquisition of Roading, a technology platform that also provides delivery services for packages that don't lend themselves to our small package network. We are delighted to welcome the roadie team to U P. S.
We continue to be disciplined in our capital spending practices.
This discipline plus record earnings yield a significant amount of cash.
So far this year, we've generated a record $9 3 billion and free cash flow and.
And we expect full year 2021 return on invested capital to be around 29%, which is a 730 basis point improvement from what we reported at the end of last year.
Turning to the fourth quarter, the global supply chain market is challenging there are capacity congestion and cost concerns.
But for U P S. Our outlook is positive.
Once we get a package we get it delivered.
Outside of the U S, where we peak we are ready.
And tight capacity benefits, our freight forwarding business.
In the U S. We project a robust peak season and through our planning efforts. We believe we are well on our way to deliver a peak that will be a win for upa shippers recipients and shareowners.
Let me share a few details.
To begin with the calendar is helpful. As we have one more peak operating day than last year.
Further we've expanded weekend deliberate and added additional sorting capacity.
Nonetheless, we expect consumer demand will outpace capacity in the market.
We began collaborating with our largest customers several months ago and will stay in close contact with them during the holiday shipping season.
Our technology allows us to match daily capacity with customer demand.
And where we need to we will again control the amount of volume that enters our network.
These actions will minimize chaos costs and enable high service levels.
On the labor front, we've digitized and simplified our job application process, enabling qualified applicants to receive a job offer within 30 minutes of applying.
And parts of the country labor costs are higher than they were last year, but we are effectively managing through that cost pressure.
When you add it up in the fourth quarter, we expect to generate record consolidated operating profit and expand operating margin year over year.
While we are laser focused on peak our business doesn't end on December 31st.
Later this week, we will release, our U S general rate increase.
The 2022 increase will be five 9%, reflecting the value of the services, we offer and cost inflation pressures.
The details will be posted to your P. S Dot com.
As we move ahead, we will continue to execute by leveraging our global Smart logistics network, our amazing <unk> and a.
<unk>, that's driving strong financial results today and positions us well for the future.
Thank you and now I'll turn the call over to Brian.
Thanks, Carol and good morning, and my comments today I will cover four areas, starting with a macro overview than our third quarter results next I'll review cash and shareholder returns and lastly, I'll wrap up with some comments on our outlook for the full year.
Okay, let's start with the macro.
In the third quarter the global economy continued its strong growth. Despite the dampening effects of COVID-19, and inflation along with shortages in inventory and labor within this backdrop demand for our services remained high and the pricing environment in the industry was firm.
We expect similar dynamics in the fourth quarter and as we demonstrated in a third we will continue to execute our strategy and capture profitable growth opportunities in the market.
IHS is forecasting fourth quarter global GDP will grow three 8% in U S. GDP is expected to grow four 9%, which remain above historic GDP growth rates.
Moving to our third quarter consolidated performance the progress we've made to improve revenue quality enhanced productivity and allocate capital is driving strong top and bottom line results.
<unk> revenue increased nine 2% to $23 2 billion.
Consolidated operating profit totaled $3 billion 23, 4% higher than last year.
All three segments generated record third quarter operating profit and achieved double digit operating margins in the quarter.
Consolidated operating margin expanded to 12, 8%, which was 150 basis points above last year and diluted earnings per share was $2 71.
Up 18, 9% from the same period last year.
Now, let's take a look at the segments.
Our results in U S domestic were better than we anticipated principally due to higher than planned for improvements in revenue per piece and productivity gains as we expected average daily volume in the U S was down 540000 pieces or two 7% due to a decline in share posed a 576.
Packages per day. This decline was partially offset by growth in ground commercial volume our results reflect the continued execution of our strategy to win in the most attractive parts of the market.
In fact customer mix continued to be positive as higher yielding S&P average daily volume, including platforms was up 10, 9%.
And then in the third quarter Smbs made up 27, 4% of U S domestic volume compared to 23, 6% last year.
Regarding our delivery mix, our commercial business continued to recover and grew six 8% representing 42% of our volume in the third quarter compared to 39% in the third quarter of last year.
Nearly all industry sectors grew b to B average daily volume, including retail and high Tech.
For the quarter U S domestic generated revenue of $14 2 billion.
Up seven 4% driven by a 12% increase in revenue per piece with fuel driving 270 basis points of the revenue per piece growth rate.
Turning to costs total expense grew five 8% with fuel driving 180 basis points of year over year expense growth rate.
Through our focus on productivity overall improvements led by our inside sort operations and on road activities helped offset the market rate adjustments, we implemented in certain geographies as well as the cost of expanding Saturday delivery.
And as Carol mentioned, a key measure of UBS productivity is pieces per hour.
And in the third quarter, we made improvements in nearly every area of our operations led by preload, which improved by six 5%.
Combined these improvements contributed to a decrease in direct labor hours per day, a five 1%.
In summary revenue growth was above expense growth, which generated positive operating leverage.
The U S. Domestic segment delivered $1 4 billion and operating profit an increase of $281 million or 24, 8% compared to last year and.
And operating margin expanded 140 basis points.
Moving to international the segment continues to generate strong profit growth driven by the execution of our strategy.
Due to tough year over year comparisons and some supply chain disruptions growth in average daily volume moderated in the third quarter and was up one 9%.
<unk> average daily volume grew three 8% on a year over year basis, and offset a decline in <unk> volume, which was down two 3%.
On a two year stack total average daily volume was up 14%.
Total export average daily volume was up one 3% on a year over year basis export growth in Europe, and the Americas offset a four 8% decrease in export average daily volume out of Asia.
The decline in Asia was due to difficult comps from a year ago and the implementation of network contingency plans in response to COVID-19 protocols at select airports.
Relative to our plan, we had 137 fewer flights out of Asia that we anticipated.
For the quarter International revenue was up 15, 5% to $4 7 billion.
With strong growth across all regions.
Revenue per piece was up 14%, including a 500 basis point benefit from fuel revenue quality improved on a year over year basis, as we continued to utilize surcharges to match demand with available capacity.
In the third quarter international delivered its fourth consecutive quarter of profits over $1 billion.
Operating profit was $1 1 billion, an increase of 14% and operating margin was 23, 5%.
Now looking at supply chain solutions, the segment delivered record third quarter top and bottom line results as the team executed exceptionally well in a dynamic environment.
Revenue increased eight 4% to $4 $3 billion with all major business categories contributing to profit growth.
Market demand remained elevated with a couple of key profit drivers.
In forwarding capacity constraints and consumer demand in the market drove volume growth in air freight forwarding and strong yields in our ocean freight product, which drove top and bottom line results and.
And in logistics revenue and operating profit grew by double digits led by our healthcare portfolio.
In the third quarter supply chain solutions generated record operating profit of $448 million and the operating margin was an impressive 10, 5%.
As a reminder, this is our first full quarter without <unk> freight results given that we closed the sale on that business on April 30 of this year.
Walking through the rest of the income statement, we had $177 million of interest expense or other pension income was $285 million and lastly, our effective tax rate came in at 22, 3%, which was lower than last year due to favorable changes in jurisdictional tax rates and discrete items.
Now, let's turn to cash in our balance sheet.
We are generating strong cash flow from our disciplined focus on capital allocation and growth in net income.
So far in 2021, we have generated a record $11 $8 billion in cash from operations and $9 3 billion and free cash flow and in the first nine months of this year Ups's distributed $2 6 billion in dividends.
In August we announced a $5 billion share repurchase plan with the intent to repurchase $500 million of shares in 2021, which we completed in the third quarter, we expect to execute the remainder of the program over the next few years.
Now I will make a few comments regarding the full year outlook, we are continuing to pay close attention to and manage through several external factors, including COVID-19, inflationary pressures and inventory and labor shortages.
Despite these challenges consumer demand is expected to be strong during peak season and in the fourth quarter.
Due to our third quarter outperformance.
Combined with the progress we are making with our strategic initiatives and our increased fourth quarter plan. We are raising our full year guidance on a consolidated basis. We expect full year 2021 revenue growth of around 13, 8% year over year, which takes into account the divestiture of UBS freight. Additionally.
Consolidated operating margin should be around 13%.
In U S. Domestic we anticipate full year 2021 revenue growth of about 12, 7% with revenue growing faster than volume.
We anticipate the full year 2021 U S operating margin will be around 10, 5%.
As you update your models for the U S. Domestic segment. There are a couple of things to keep in mind as we get into the fourth quarter.
First as usual enterprise and BDC volume will represent a larger percentage of our total volume due to peak when compared to the rest of the year.
And second we are lapping more than $550 million in peak season surcharges. In addition to the early customer pricing actions, we implemented last year as a part of our revenue quality initiatives. As a result, we expect a sequential revenue per piece growth rate to moderate in the fourth quarter.
Moving to the International segment, we expect full year revenue growth of around 27% with an operating margin of about 23, 9%.
And in the supply chain solutions segment, we anticipate full year revenue growth of around 10, 3% and operating margin of about 10%. Additionally for the full year in 2021, we expect free cash flow to be around $10 5 billion and return on invested capital will be around 29%.
Capital expenditures are now expected to be approximately $4 2 billion.
And lastly, our effective tax rate for the full year is expected to be about 22, 5%.
As I wrap up the economic outlook and the effects of our revenue quality and productivity initiatives are putting us well on our way to achieving the high end of our 2023 targets that I shared with you in June.
We are executing our strategy under the better not bigger framework and delivering on our commitments. Despite a very dynamic environment.
We are laser focused on improving revenue quality, reducing our cost to serve and remaining disciplined on capital allocation to improve the experience for our customers and our people and the financial performance of our company.
Thank you and operator, please open the lines.
Thank you we will now conduct a question and answer session. As a reminder, teleconference participants if he would like to ask a question. Please press one then zero on your telephone keypad.
Our first question comes from comes from the line of Todd Fowler with Keybanc capital markets. Please go ahead with your question.
Great. Thanks, and good morning, and congratulations on the good performance in a tough environment.
Carol I wanted to start with the increase in cost per piece in the U S. Domestic segment. It sounds like fuel is a component. There also sounds like youre seeing some cost pressure, but can you talk a little bit about your ability to get out in front of our ahead of that and start to see cost per piece start to slow as we move into 2022 and kind of how you view that as a normal.
Wise or what a normalized rate for that should be going forward. Thanks.
I'm happy to we were very.
Pleased with the productivity that the team delivered in the third quarter with our cost per piece, increasing at a lower rate than our revenue per piece. There were lots of goes ins and goes outs that Brian can share with you that the productivity and the virtuous cycle here at UBS and I'm Super proud of what nano and the team are doing in terms of driving more pieces per <unk>.
Our higher cube utilization.
As we look into 'twenty, two driving automation in our facilities as we talked about we have about 141000 people inside of our buildings and through automation, we will be able to optimize that cost, but Brian maybe you want to give a little more details on the third quarter happy to Carol and good morning, Todd look our cost base in the U S was up.
95, and there were four big drivers.
<unk> benefits and wages was up about 30, our fastest ground ever weaken initiatives contributed 16 euro.
Right fuel to drive post 'twenty is about 19.
Of the total increase and then we had some other items like the excise tax lap et cetera, but from a growth perspective, Todd we saw about 10, 4% CPP increase in the third quarter. You would expect we expect that to go down to mid single digits in the fourth quarter, if we think about the trajectory.
Thank you.
Yes.
Thank you and our next question will come from the line of Ravi Shanker with Morgan Stanley. Please go ahead with your question.
Thank you and good morning, everyone.
Can you give us an update on what your enterprise customer volume as it did in <unk> and also regarding your largest customer.
Can you shed some light on kind of how that relationship is going I think.
You said that you are working closely with them for the fourth quarter, but in the past. You've also said that you expect that relationship to change over time. So if you can give us some color there that would be great. Thank you.
Sure. So if we think about.
The growth of the enterprise customers versus the rest of the business, we declared and called out the growth that we saw in our SMB customers with an increasing penetration in SMB customers that means the enterprise customers declined a bit as we expected.
For a couple of reasons, one we were up against tough year over year comparisons.
Leanne, we're controlling the volume that comes into our network. Because we are laser focused on revenue quality. We used to think that every package was the same we don't think that anymore. So for some shippers were no longer delivery in their packages and that's okay with US now let me think about our largest customer we've got a great relationship with our largest customer.
And really I'm pleased where that relationship stands last year of volume with that customer surge as you would expect because of the impact of COVID-19, and the shift in E. Commerce demand. This year, if I look at the volume with our largest customer as a percent of total volume for the first nine months of this year, it's trending at.
It was back in 2019.
And we continue to support that customer as they continue to grow but we're not there are supply chain. We're just part of their supply chain.
Thank you.
Thank you. Our next question will come from the line of Chris Wetherbee of Citi. Please go ahead with your question.
Hey, Thanks, good morning, guys.
Just taking a look at some of the implied fourth quarter guidance, particularly on the domestic side. So it seems like from a margin standpoint, when we're looking at a fairly similar quarter than what we had in the third quarter.
And from an operating profit perspective, maybe even a little bit more growth than we saw in the third quarter. So maybe you could give us a little bit of color do you mentioned some of the surcharges that you are lapping in the in the fourth quarter could you talk a little bit about sort of the pricing dynamic at all.
Ultimately, how do you feel like Youre managing through some of the cost inflation that's out there in the market and maybe give us an update on how you think about that sort of hourly labor cost inflation, just because it looks like the profit forecast is actually very good relative to what we've seen here in the third quarter.
Chris Happy to.
Pick that up.
The spread which we still focused on between RVP and CPP in the third quarter was 12% RVP and 10%.
$10, four and CPP, we're looking to maintain that spread as we go into the fourth quarter, but your RVP will likely come down into high single digit and your CPP could come down into mid single digits. So as we think about it you highlighted the lapping of the $550 million of surcharges from last year. We're also from a volume perspective.
We grew F&B Adv last last year in the fourth quarter by 28, 5%. So there are some elements year over year over year. That's one of the reasons I have called out in my prepared remarks sequential moderation on the pricing, but we are confident that we can pull the cost per piece down so in terms of the pricing environment.
We expect it to be firm in the fourth quarter and feel good about the outlook and maybe we'll talk a little bit about the cost inflation question that you had.
If you think about our employee base in the United States, We have about 458000 <unk> in the United States, 75% of them are covered by some sort of a collective bargaining agreement. So we have a good idea of what the compensation is for those employees and we managed through that now with turnover.
Sometimes we do have to make market rate adjustments to attract people into our company and we've been able to cover those market rate adjustments with productivity.
So I feel really good about our ability to manage through adult labor cost inflation that many companies are struggling with today.
Thank you.
Thank you. Our next question will come from the line of unmet Malhotra of Deutsche Bank. Please go ahead with your question.
Thanks, Good morning Carol.
No.
On the SMB volumes.
Can you just talk about how your share with <unk>.
Three and D for SMB volumes are trending versus a year ago, because I think that's the area where.
You guys have been Underpenetrated and then just following up on the last point you made.
Excuse me can you talk about the priorities with respect to the Union negotiations I mean, theres going to be here sooner than anybody anybody realizes but.
I'm just wondering what your priorities are in those negotiations that will kind of allow the company to be more competitive and deliver on the long term plan.
Yes happy to so on the SMB question, we look at Smbs through a series of segments, we used to call them. My numbers now we actually have names attached to those segments, but happy to say that they're all growing and that's what we want to see is growth in all segments from the medium size down to the micron platform side. So we're delighted.
With growth in all of those categories and as it relates to the Union question.
Look we want a win win win at the end of the day and we're looking at this through the lens of our strategy rather than just a negotiation. So in fact, we have a board meeting next week and we're going to talk to them about how we're approaching this is different than we've done in the past and we'll keep you apprised as we go along.
Brian is there any other color you want to share on the F&B.
No Carl.
Had good growth moderated obviously with some of the overlaps I did call out though in the fourth quarter last year, we posted 28, 5% growth. So as we think about this this fourth quarter you might look for lower growth rates, but the mix has been holding steady at that 27%. So as we think back to last year. We were in the low twenties, we're well on our way up into the high <unk>.
And our goal by 'twenty three is to get to that 30%.
Biomarker and couldn't be more pleased with the progress we're making on the 16 customer journeys that we shared with you because our smbs are really responding to those journeys and it's not just good for Hasnt base, though it's good for all customers were just improving the overall experience.
Okay. Thank you very much I appreciate it.
Thank you. Our next question will come from the line of David Vernon of Bernstein. Please go ahead with your question.
Alright, Thanks, operator, and good morning, guys.
Brian and Carol I was hoping to talk a little bit about a longer term issue around when did what level of domestic margins you want to see before you think about allocating a little bit more capital in the domestic business I know you've been pretty clear that Adv. The next couple of years should be in that 2% to 3% range.
But how do we think about that.
The level of profitability you want to achieve in that domestic segment before you maybe think about allocating a little bit of capital in and driving growth at all at a faster rate than the mortgage book.
Hey, Thanks for the question so.
Laid out the trajectory here in the domestic is due to move that business up to 12% by 'twenty three.
The full year forecast now stands at 10, five so we're well on our way into that journey.
We are actually allocating capital growth capital to the.
Domestic segment.
But we're doing it in a very disciplined way and we're trying to create some more capacity in the network by sweating, our assets opening up weekend et cetera. So there's a few variables at play here, but we will come back to you on the next quarter call as we talk about a 20 to guide and break down the capital for you.
Just on that point I called out we can delivery.
And how important that is for our customer experience last Saturday, we delivered 6 million packages.
A year ago that would have been basically nothing and we did that without adding any incremental capital spending into that work. We just opened up the network.
Add capacity, so we're going to we're going to make sure that this network is as optimized as it possibly can be before we start investing a lot of additional capacity then but when is as optimized as it possibly can be and we'll have more capital and Dave we'll unpack for you.
The shifting capital domestically you may go from the buildings to more technology and we've talked about the smart package initiatives. So as Carol mentioned, making the experience better for our customers. Those are the things we want to unlock and investing.
Alright, Thank you guys Thats helpful.
Thank you. Our next question will come from the line of Allison <unk> of Wells Fargo. Please go ahead with your question.
Hi, Good morning, just wanted to focus on your comments around optimizing its existing labor Force I guess first you highlighted the benefit of the cube utilization efforts and reducing the direct labor hours I guess when does that start to accelerate from here and then second just automation, you're obviously a longer tail to get benefits, but any other choke points that you're looking to address first.
Any color there thanks.
Well, we are all in on smart package and automation.
And we've kicked off two big projects to attack those opportunities smart package alone by putting RFID tags on our packages are pre loaders, the men and women who are loading in our packaged cars offer delivery will eliminate manual scans because they'll have a wearable device that means there'll be eliminating.
20 million manual scans, a day that alone drives productivity and then when you think about the cool technology that we're going to introduce into our buildings automated label application automated bagging robotic induction into the packaged cars, there's just a ton of opportunity here to drive automation.
And in ways that we haven't done before.
I'm really excited about that Brian what else do you want to add.
I think for me.
Our cost perspective Allison.
<unk> talked to Carol talked about 75% of the union workforce being under a contract and that gives us some certainty of our largest cost expense going forward to plan that look it is a dynamic environment, though going into fourth quarter and I talked last call about so many MRA as the market rate adjustments were doing for the part timers, we've increased that amount in our forecast, but that's embedded and captured.
Already within the tenant App Arjun I put out there. So I think we have a good line of sight to the future and we're prepared for it.
Excellent. Thank you.
Thank you. Our next question will come from the line of Xyrem Nathan of Daiwa. Please go ahead with your question.
Hi, Thanks for taking my question. So this is somewhat connected to the earlier question here. So I just wanted to understand you talked about pieces, but are being met.
Metric of what is the what kind of potential do you see if you could also give us some perspective on where pieces, but our wallets about two or three years back and how much of it how much of him for the reduction you can see it.
As we looked at our productivity results in the third quarter you have to go back to 2016 to see that kind of productivity. So it's a dramatic improvement driven by just the great work of our operating team and our engineers what is the potential we're going to get better.
Quarter after quarter after quarter and will report to you as we do that.
Okay. Thank you thanks.
Thank you. Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead with your question.
Thanks, Good morning, I know, it's a bit early but Karl maybe can you talk about the pricing outlook for next year and your ability to maintain an inflation plus pricing again next year and just along those lines. I mean, you guys have talked about 100 basis points of U S margin improvement next year do you still feel good about that from the <unk>.
Higher 2021 base now within the guidance.
Well, we're putting the finishing touches on our 2022 plan and we'll tell you what we think.
22 at the end of the fourth quarter as it relates to the pricing environment that we mentioned in the call today that our general rate increase of five 9%. We've also made some other adjustments in pricing and you can go on the website to see all of those that includes a 1% increase in fuel that goes in in November of this year.
We priced our products for the services and value associated with those products.
Thank you we'll go next to the line of Scott Schneeberger of Oppenheimer. Please go ahead with your question.
Thanks very much.
Good morning.
International margin higher than we expected in the third.
Third quarter and it sounds like it's going to remain elevated in the fourth.
Could you just talk about the sustainability it looks like it's trending nicely above the 2023 guide.
So just some thoughts on the puts and takes in the quarter in which what we should expect a little bit more color on the fourth quarter with regard to international volume and margin.
Yes, Thanks Scott.
You are right, we delivered a 24% March internationally in the first half of the year and we're looking to do the same in the second half of the year. So full year will be right at that should be right at that number.
We did experience some challenges in the quarter with some of the lanes out of Asia.
But as we think about the tight supply chains, we don't expect to see the demand surcharges.
Fall off anytime soon so we're we feel confident through through most of 'twenty two that those surcharges would remain in the <unk>. It doesn't matter. The most and we don't see belly capacity returning to pre pandemic levels until 'twenty three so hopefully both of those things should maintain demand for both our international small package and for the supply chain business.
Yeah.
Okay. Thanks.
Thank you. Our next question will come from the line of Jordan Allegis of Goldman Sachs. Please go ahead with your question.
Yeah, Hi morning, just a quick follow up around pricing can you talk maybe.
<unk>, where do you think you may be in terms of the actual quarter repricing of contracts, especially on the enterprise business and then the revenue per piece up 12% domestically.
Any sense.
Ill mix impacted that and specifically of course, and the underlying profitability better with Smbs et cetera. Thanks.
So do you want to unpack the RVP sure happy to Jordan. So the in the third quarter a little over half came from rate this quarter and the balance from surcharges in mix, where we are in the journey. We are in the low <unk> in terms of contract renegotiation.
In terms of that cycle and those contract renegotiations have gone very favorably haven't been we haven't did yes.
Thank you.
Thank you. Our next question will come from the line of Duane <unk> worth of Evercore ISI. Please go ahead with your question.
Hey, Thanks, good morning.
Wonder if you could talk a little bit about supply chain constraints into the ports and how you think about the net impact of this environment to the to the domestic segment specifically.
Supply chain urgency tilts more to air cargo.
But perhaps throughput.
From the ports is not as high as it could be.
How do you think about the net impact of this tightness and could we see an elongated peak thanks for taking the question.
Yes, it's such an interesting conundrum isn't it.
We're hearing from some of.
Our surveys that consumers are quite panicked about this cause supply chain jams are all over the news and in fact, some think that holiday shopping will be completed by cyber Monday or 50% of holiday shopping will be completed by cyber Monday as a result, some of our customers are actually pulling forward promotions.
And we saw that last week as an example, our volume was quite good because the promotions that are retail customers. We're offering so I think everyone's trying to work through the supply chain demands to ensure a good holiday season. There is also a belief that there will be more gift cards sold this year than in prior years, which should suggest that packages.
I'll continue to be deliberate post the holiday if that's kind of elongate the holiday shipping season and in a way if we think about what it means for US right now I'll just make it real for you for the ports in California, and there's a lot of discussion about the ports in Los Angeles and at long Beach.
We have hubs are very close to those ports, we receive containers from those ports.
Through a drop ship arrangement with a third party. So when people say, there's a supply shortage of truck drivers. It's true cause. This third party is delivering those containers.
Two our hubs we have capacity example, at one of our hubs for 70 containers today, we're only getting about 50 of those containers. So it is slowing down the flow of our packages as soon as we get it get it delivered so our business is doing well, but in terms of the end to end supply chain.
It's jammed upstream so and the administration that by the administration's recently announced you know we're gonna have efforts to operate these spreads of 24 seven we've said that's great news because if you can pull the containers off the ships and then get them drop ship to US we've got the capacity to take on those containers. So we're here ready enable to support any.
That we can do to unlock some of that some of that channel.
Thank you.
Yes.
Thank you. Our next question will come from the line of Ken <unk> of Bank of America. Please go ahead with your question.
Hey, good morning.
Congrats on a solid quarter.
Just looks like a Brian the 12, 7%.
Domestic growth pretty solid with the tenant to 5% margin pretty solid outlook just wanted to see where you think youre seeing some acceleration or improvement to get that I guess Carol you mentioned the $500 million of productivity not only this year, but next year, maybe you can talk or walk us through what is leading that for next year is that same thing.
Labor or are there shifts in where you're getting those cost cuts.
So Ken.
We obviously had a good top line results in the third quarter, and we expect to see that spread continuing.
We're pushing hard on the productivity lever theres non ops and Theres ops, we've talked to you about that non op piece.
That will repeat next year, so we'll get to a $1 billion over the two year period, and we feel confident in that the productivity side is the thing that took a little longer to kick in but the optimization right now as we think about cube utilization.
I think our track.
Track, our travelers were down about 10% in terms of utilization, which is a great stat I talked about direct labor hours being down five relative to volume. So we're going to track those metrics very closely on the pieces per hour the cube utilization in.
And watch those as we go into next year, but we feel good about maintaining the margin spread from Q3 to Q4 in terms of the delta between RVP and CPP and as Carol mentioned will come back in the fourth quarter and talk about the trajectory of margin expansion for 'twenty two.
Thanks, Mike.
Thank you and our next question will come from the line of Bruce Chan of Stifel. Please go ahead with your question.
Thank you operator, and good morning, everyone team great results for the quarter here just a question on the international side can you remind us what your approximate market share is on the European export and when we think about the better not bigger strategy does that apply in Europe as well.
<unk> got a competitor that's turning the corner on a major integration there next year.
Just kind of wondering what your baseline expectations are for how that affects the competitive dynamics in that market.
Well our market share in export is low.
We're taking share on the ground in Europe.
I couldn't be more proud of what the team is doing outside the United States to grow this business.
Yeah.
Yeah.
Thank you. Our next question will come from the line of Brandon Glinski of Barclays. Please go ahead with your question.
Hey, good morning, and thanks for taking the questions. So just a quick point of clarification, but it sounds like.
Your largest customer volumes are trending in line with your enterprise customers I think that's what I heard but then I guess the bigger issue for me Carol or Brian.
Do you guys leverage.
Your technology package like what is innovative about working with UBS for a small and medium sized business, our shipper that would be differentiated from someone that's running a much larger bill.
<unk>.
It's the end to end network, it's not just the technology solution. It's what we offer from an end to end perspective on the technology side. We are laser focused on making sure every experience is best in class. So we've talked to you in the past about our billing system when you compared our billing system against every other.
They're out there we were not best in class, we were worst in class. So we've just introduced a new billing system and all of the attributes and applications associated with ethylene system are now best in class. So we're in many ways. We're fortunate that we hadn't invested so much in the past because now we can leapfrog everybody else to do.
So and without 16 customer journeys that we are well down the road well down the road that creates a sticky.
And experience.
With those customers, we created a P eyes that are unique to them. So their systems can link in with US. It's really important when you think about our digital access platform and how we connect to those platforms like shopify and stamps and ebay and all the other platforms that we interact with in fact, our DAP business well.
It'll be way over $1 billion business this year and growing Brian anything you want add I'd just highlight three things from a technology standpoint, we're thinking about what's important to the customer you've got claims you've done loss packages, you've got pricing on the claims front, we're speeding up the claims process and simplifying that using some technology.
<unk> the loss package, which is really important Carol talked about the RFID the investment there to drive tracking of packages and then on the pricing front, we're piloting right now dynamic pricing, which will make it more effective and optimize the pricing in the areas. Those are the three ways that we're employing technology to make the customer experience more effective.
Thank you.
Thank you. Our next question will come from the line of Tom Water rights of Barclays. Please go ahead with your question.
Excuse me UBS.
Yes, good morning, Tom out of it.
UBS.
I know you've talked a fair bit about <unk>.
Labor and inflation.
I ask you a little bit more about it Brian you said the market rate adjustments above $100 million, but you didn't quantify that would you care to tell us what that is at a 150 is at 200, maybe just to ballpark it.
And then just wanted to get a broader thought on.
Kind of labor impact from an availability perspective.
I don't know how much you know maybe how much visibility you have is 100000 seasonal workers in peak and just whether you think that labor market stabilized or is that something we ought to think about you know further pressure as we go into 'twenty two thank you.
Tom Good good to hear you and Youre still UBS I like that so.
The increase in the Mras I had talked last call. We were spending about 80 to 100 in terms of the market rate adjustments to remain competitive in certain geographies. We've got in our forecast that was for the second half of the year, we've kind of increase that range moved to 80 to 100 up to 100 to 130, so its bumped up marginally, but I will say all of that increase.
<unk> is embedded within the 10, 5% full year domestic margin outlook.
Yeah.
And then on the Labor front, maybe I'll give you some color it's really interesting when you look at the labor dynamics, there are 5 million fewer jobs in the United States today than there were pre pandemic.
And yet there are only 4 million.
So bottom line.
So there's not excess demand.
<unk> says that everybody was rushing to fill the jobs and so that's why you see so much pressure out there because as the economy has opened up everyone's rushing to fill the jobs now in some ways. We got ahead of it because if you think about last year when our volumes surged we hired 40000.
People in the second quarter. So we got ahead of some of the challenges I hiring last year.
We are heading into peak, where we do hire a 100000 seasonal workers.
We are pretty good at this and we've done this for the past several years the environment is different than it's ever been for sure, but we're all hands on deck and we have hundreds of recruiters that are working for us. These are <unk> as well as partners that we work with outside of the company.
We have simplified the hiring process. So now within 30 minutes you can get an offer before you had to go through a gaming exercise before you get an offer and trust me I play those games and I didn't do well.
Let's go ahead of the game so we've simplified the process.
On board and look.
We're not it's not over until it's over.
But we're making progress here I'll just give you one data point last week alone we hired over 13000 people. So we've been at this for a while and it will stay at it until we can get the number of people we need to deliver a great peak for our customers.
Great. Thank you.
Thank you we'll go next to the line of Bascom majors Susquehanna. Please go ahead.
Yeah. Thanks for taking my question Carol I wanted your perspective on the regional last mile competition can you give us some thoughts on where they fit in the competitive landscape today and does that change is laser ship experience acquisitive really under the leadership of incredible CEO from your former company.
And just.
As an extension of that just any thoughts on how you focus on improving your revenue quality, while being cautious not to shed enough orange its share to help create a new nationwide low cost competitor banks.
Yeah, So as we've talked about the small package market in the United States is very attractive there is a demand supply imbalance and everybody wants a piece of the pie and.
And so these regional players certainly want a piece of that high if you look at the laser ship announced acquisition that combined company, which by the way. It's bicoastal. So they don't have an end to end regional network out there just by coastal fab less than 2%.
Okay.
And they are delivering actually for our largest customer by the way.
Because our largest customer have to have lots of players delivering their boxes. So as we.
As I think about it you know came on right, it's a competitive environment and what we have to do this we've got to invest in the customer experience. So that we've got an experience where people want to come to us and pay for the experience that we offer and just on the leader and that's joining that company you know I have a great amount of respect from our colleagues mills I worked with him for 16 years he isn't.
Leader.
I love to compete.
So welcome to them.
And history and that we were going to have fun together competing so more to come.
Operator, we've got time for one more call or one more question. If you would please.
Thank you and our final question comes from the line of Brian Austin back of Jpmorgan. Please go ahead with your question.
Hey, good morning, Thank you for squeezing me in here.
Just wanted to ask a little bit more about the long term, we've talked about moving further upstream of coordination with retailers and others throughout the supply chain.
That's often been hard to actually execute.
In the past do you think with the amount of disruption in demand that we're seeing that this might actually be a good time to to have this conversation and maybe you can elaborate on how those are trending as you look to more synchronized deliveries, which I would imagine it might be challenging to get into place, but would actually benefit everybody from a capacity utilization standpoint.
Thank you.
We don't have a lot of time to talk about this this morning, but we do have some pilots underway with a third party platform to see if we can move upstream to consolidate orders into a basket for multiple shippers and ship. It on one packaged car. It's early days the pilots just kicked off but we'll have more color for you I think at the end of the fourth quarter.
Alright, Thank you Carol Yep. Thank you.
Thank you I will now turn the floor back to your host Mr. Scott Childress.
Well, we want to thank everyone for joining us today and that concludes our call and we hope everyone has a fantastic day. Thank you.
Thank you, ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconferencing you may now disconnect.
Yeah.
Okay.
[noise].
Yeah.
Yeah.
[music].
Hum.
Yes.
[music].
Yeah.
[music].
Yeah.
Hmm.
Yeah.
[music].
Yeah.
[music].
Yes.
Okay.
[music].
Yeah.
[music].