Q1 2022 United Parcel Service Inc Earnings Call
Good morning, My name is Steven and I won't be a conference facilitator today I would like to welcome everyone to the UBS Investor Relations first quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a key.
You did answer period.
Any analysts that wants to ask a question now is the time depressed the one thing zero on your telephone keypad. It is now my pleasure to turn the floor over to our host Mr. Ken Cook Investor Relations Officer, Sir the floor is yours.
Good morning, and welcome to the EPS first quarter 2022 earnings call.
Joining me today are <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 securities laws and address our expectations for the future performance or operating results of our company.
These statements are subject to risks and uncertainties, which are described in our 2021 Form 10-K , and other reports, we filed with or furnished to the securities and Exchange Commission.
These reports when filed are available on the EPS Investor Relations website and from the SEC.
For the first quarter of 2022 GAAP results include a net charge of $19 million or <unk> <unk> per diluted share comprised of after tax transformation and other charges of $43 million.
Offset by an after tax gain of $24 million, resulting from the curtailment of benefits and a Canadian retirement plan.
Unless stated otherwise our comments will refer to adjusted results, which exclude pension adjustments and transformation and other charges.
The webcast of today's call along with a reconciliation of non-GAAP financial measures is available on the <unk> Investor Relations website.
Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question press, one and then zero on your phone to enter the queue.
Please ask only one question so that we may allow as many as possible to participate you may rejoin the queue for the opportunity to ask an additional question and now I will turn the call over to Carolyn.
Thank you Ken and good morning. This is my eighth earnings call at EPS since I joined the company, we face the pandemic social unrest political unrest the fallout from Brexit and novel Bar.
So it all I continue to be so impressed by the resiliency of your PSS and their commitment to moving our roll forward by delivering what matters.
I want to thank our team for their hard work and efforts in serving the needs of our customers each other and our communities. During these most trying times.
Before I discuss our results I would like to address our situation in Ukraine.
Our hearts are with the people of Ukraine, who are feeling the effects of this tragedy firsthand.
We have suspended all commercial operations in Ukraine, Belarus and Russia.
Where we can we are supporting the humanitarian relief efforts and our focus is on the safety of our people.
Putting the issues in eastern Europe aside as we discussed in February we expected the macro environment to be dynamic and it was.
Our average daily volume fell short of our plan due to several external factors that Brian will detail.
But we remain focused on controlling what we can control and looking at the first quarter. We were pleased with our results consolidated revenue rose six 4% from last year to $24 4 billion.
And operating profit grew 12, 1% from last year to $3 $3 billion.
Consolidated operating margin expanded to 13, 6%, which was 70 basis points above last year.
All of our business segments delivered operating profit growth.
Of note our supply chain solutions businesses generated record operating profit of $481 million with a record operating margin of 11% driven by strength in forwarding and healthcare.
We continue to pivot toward opportunity.
We've made tremendous progress over the last two years.
We are leveraging the power of our data to become much more agile.
Under our better not bigger framework, we are investing in the capabilities that matter. The most to our customers and we are winning in the parts of the market that value. Our end to end network like Smbs healthcare <unk> and large enterprise accounts how.
How do we know we are winning.
Because we gained market share winning comes down to successfully executing our customer first people led innovation driven strategy.
Looking at customer first this is about creating a frictionless customer experience.
Here, we've made two significant enhancements to digitize the onboarding experience, making it easier for smbs to ship on us.
The first change I'll share is for our smallest customers.
In the U S. They can now go online at UBS Dot Com answered just three questions and get a contract that includes pricing.
This enables them to begin shipping in under two minutes instead of our old process, where they had to wait an average of 10 days to get started.
The second enhancement is for larger Smbs here, we are leveraging best in class technology to enhance the experience for our customers and our salespeople we.
We've moved from a slow manual pricing process to a new digital platform that we call deal manager.
This platform, which will be fully deployed to all U S. F&B salespeople by the end of this month operational license, our data and applies pricing science to present, the customer with the right price to first time.
For our customers. This means they no longer need to assume that commerce and sample data just to get a quote for.
For our salespeople vision close deals other spot, making them more efficient and freeing them up to spend more time selling.
And because of this platform uses advanced analytics to more we use it the smarter. It becomes is a key building block towards dynamic pricing, our digital access program or a gap is another important SMB growth driver.
In the first quarter, we created more than 500000, new DAP customer accounts.
More than three times, the number of new accounts created in the first quarter of last year, that's more near the end of the first quarter. We began shipping <unk> packages that originated outside of the U S.
As of today that is available in 27 countries around the world and we are continuing to add that partners, putting us well on our way to achieving our $2 billion GAAP revenue target in 2022.
The enhancements, we are making are resonating with SMB customers in the first quarter. The U S. SMB average daily volume growth rate, including platforms outpaced the enterprise volume growth range in fact in the first quarter.
<unk> made up 28, 4% of our total U S volume up 140 basis points from one year ago.
Looking at our international and supply chain solutions segments, the flexibility of our network allowed us to continue delivering for our customers within a dynamic environment and.
In many ways. This was one of our more challenging quarters as our international small package business faced tough year over year comparisons and demand was negatively impacted by ongoing disruptions due to the pandemic.
But at the same time, we scurried to keep up with heightened demand in our forwarding and healthcare businesses.
No matter what came our way, we kept delivering with outstanding service levels.
Moving to people and as previously announced in the quarter, we realigned our executive leadership team.
First net assessor, Ron who has been leading our U S operations since 2020 assumed additional responsibility for U S sales and parts of engineering.
This change gives us even closer to the customer helping us better go to market as one UBS and enabling our teams to move even faster to unlock value for our customers and our shareowners.
Second Kate Gutmann assumed a new role leading both the international and supply chain solutions segments. In addition to our health care business.
This allows us to better serve our global customers with our full range of services and provides opportunity for synergies in both revenue and cost.
Finally, we have an external search underway for a new chief digital and Technology officer, I'm delighted with the candidates that have surface for this role and hope to fill the position soon.
Which brings us to innovation driven this.
This is about driving higher returns from the capital we deploy.
Here, we are continuing to leverage the technology investments, we've made to power our global Smart logistics network.
Throughout the quarter, we leveraged our network planning tools automated facilities and other technologies to optimize the network and run it with greater agility. These efforts coupled with a laser focus on revenue quality contributed to a 90 basis point improvement in U S operating margin year over year.
Sure.
As we've discussed we've turned productivity into a virtuous cycle at UBS. We have started the rollout of our RFID technology that we call smart package with the intent of completing 100 centers in 2022.
This year, we will also begin the implementation of automated bagging automated label application and robotics small sort induction all of this to drive increased productivity.
As an innovation driven company, we are marching down the path toward our goal of being carbon neutral by 2000 and to update you.
As one example, we have two data centers that drive our global integrated network. These data centers are now powered 100% by renewable energy sources.
To give you some context the power used to run. These two data centers is the equivalent of the electricity needed to run 5000 homes for one year.
As we look ahead, we think the macro environment will be very dynamic, but we see many positives inside our business. We continue to deliver high service levels. We are gaining market share. We are more agile today than one eye on boarded and we are focused on controlling what we can control to <unk>.
<unk> the financial targets, we've laid out.
Brian will share the details regarding our outlook, but let me end by reaffirming our 2022 consolidated financial goals in.
In 2022, we expect to generate about $102 billion in revenue consolidated operating margin of approximately 13, 7% and we expect return on invested capital to be greater than 30%.
We are confident in our outlook and our financial condition. As a result, we are increasing our share repurchases for 2022, taking the target up to $2 billion for the year.
And now I'll turn the call over to Brian .
Thanks, Carol and good morning in my comments I will cover four areas, starting with the macro environment than our first quarter results next I'll cover cash and Shareowner returns and lastly, I'll provide an update on our financial outlook for 2022.
As Carol mentioned external factors resulted in a challenging operating environment in the first quarter.
Early in January omicron negatively impacted retail sales and pressured volumes the.
The impact of Omicron subsided in February and volume growth turned slightly positive.
And then late in the quarter the combination of record high inflation, a surge in energy prices COVID-19, Lockdowns in Asia and geopolitical uncertainty resulted in our consolidated volume growth rates turning negative.
Despite these external factors, we remain agile and delivered strong first quarter results by continuing to execute our strategy and quickly adjusting our network to match capacity with the needs of our customers.
In the first quarter consolidated revenue increased six 4% to $24 4 billion.
Consolidated operating profit totaled $3 3 billion.
12, 1% higher than last year.
Holiday net operating margin expanded to 13, 6%, which was 70 basis points above last year.
For the first quarter diluted earnings per share was $3 <unk> up 10, 1% from the same period last year.
Now, let's look at our business segments U S. Domestic delivered strong first quarter results. Our success was driven by continued gains in revenue quality and by leveraging the agility of our network to control cost.
We have planned for volume to be down slightly in the first quarter based on volume projections from a few of our largest customers.
We expected to fill this gap with other enterprise volume, but market conditions did not support at our volume was lower than planned.
Total average daily volume in the U S was down 3% or 611000 packages per day versus the first quarter of last year, driven by a seven 4% decline in residential volume.
Looking back to March 2021 stimulus checks arrived at many U S households, and contributed to difficult year over year comps in the first quarter of this year.
The decline in residential deliveries included a reduction in <unk> volume of about 312000 packages per day.
The decrease in residential volume was partially offset by a three 6% increase in <unk> average daily volume with growth from both enterprise and SMB customers.
In the first quarter <unk> represented 43% of our volume, which was up from 40% in the first quarter of 2021.
Even within the current environment the execution of our strategy is continuing to drive improvement in customer mix.
In the first quarter SMB average daily volume, including platforms was up one 9% and Smbs made up 28, 4% of U S. Domestic volume an increase of 140 basis points over last year.
For the quarter U S domestic generated revenue of $15 1 billion.
Up 8%, which included the benefit of one additional operating day.
Revenue per piece increased nine 5% more than offsetting the volume decline in the first quarter.
Together fuel surcharges and base rates drove 820 basis points of the revenue per piece improvement with mix contributing the rest of the growth.
Additionally, revenue per piece grew across all products and customer segments with ground revenue per piece up eight 4%.
Turning to costs total expense grew six 9%.
<unk> payroll and benefits, which included market rate adjustments drove 390 basis points of the increase and fuel drove 230 basis points of the expense growth rate increase.
The remaining expense growth rate increase was driven by multiple factors, including weak and expansion and depreciation.
The investments we've made in our automated facilities, coupled with our productivity improvement initiatives enabled us to eliminate more than 1300 trailer loads per day compared to the same period last year, which contributed to the positive operating leverage in the quarter.
The U S. Domestic segment delivered $1 7 billion and operating profit an increase of $242 million or.
Or 16, 5% compared to the first quarter of 2021, and operating margin expanded 90 basis points to 11, 3%.
Looking outside of the U S. Let me start by providing some information on our direct exposure to Ukraine, Belarus and Russia.
Revenue from these three countries represented less than 1% of our consolidated revenue in 2021.
While the direct financial impact is not material to our business. We are closely monitoring the broader impacts across the global economy.
Moving to our international segment performance by leveraging the agility of our global network and focusing on revenue quality international executed well in a challenging global market now.
<unk> been getting through increases in global inflation.
War, and COVID-19 disruptions.
In contrast to the U S. We plan for international volume to grow in the first quarter and it did not.
Total average daily volume was down 256000 packages per day or six 7% in the first quarter.
Part of the decline was due to tough comps from one year ago.
When looking at performance on a two year stack basis total International average daily volume was up 16, 4% and.
In the first quarter of 2022 International domestic average daily volume was down 10, 1%, representing nearly 80% of the decrease in international volume.
It'll export average daily volume declined two 9% due to a combination of factors, including COVID-19, Lockdowns in Asia. In response, we adjusted the network and we're able to keep our operations moving in Asia and at the same time shifted capacity, where it was needed to serve our customers globally.
For example, average daily volume on the Europe to U S Lane grew 10, 7%.
In the first quarter International revenue increased five 8% to $4 9 billion.
Revenue per piece increased 10, 5%, including a 710 basis point benefit from fuel and a 680 basis point benefit from revenue quality and mix offset by a 340 basis point negative impact due to a stronger U S. Dollar.
Operating profit was $1 1 billion.
An increase of two 7% and operating margin was 23% down 70 basis points year over year.
Now looking at supply chain solutions in the first quarter. The segment delivered record operating profit in a dynamic environment.
Revenue increased to $4 4 billion.
Up 2%, despite the divestiture of UBS free which accounted for $767 million of supply chain solutions revenue in the first quarter of 2021.
Looking at the key performance drivers forwarding revenue was up 25% and operating profit more than doubled by managing the buy sell spreads while global market demand continued to outpace supply.
Our teams did an outstanding job, helping our customers manage through this challenging market.
Within forwarding, our truckload brokerage unit delivered strong operating profit growth driven by revenue quality initiatives.
And our health care business delivered record revenue and operating profit results in the first quarter led by pharma clinical trials and lab customers.
In the first quarter supply chain solutions generated an operating profit of $481 million and delivered a.
Our record operating margin of 11% or 180 basis points above last year.
Walking through the rest of the income statement, we had $174 million of interest expense. Other pension income was $298 million and lastly, our effective tax rate in the first quarter came in at 21, 5% flat to last year and lower than planned due to discrete items for the full year in 2022, we expect.
Our effective tax rate to be around 23%.
Now, let's turn to cash and shareholder returns, we are continuing to generate strong cash flow from our disciplined focus on capital allocation and bottom line results in the first quarter, we generated $4 $5 billion in cash from operations free cash flow for the period was $3 9 billion, a five 5% <unk>.
Kris year over year.
And in the first quarter UBS distributed $1 3 billion in dividends and completed $260 million in share buybacks.
Which brings us to our outlook for the remainder of 2022.
According to IHS GDP expectations for the full year have been lowered from previous forecasts.
Global GDP is now expected to grow three 2% in U S. GDP is expected to grow 3% in.
And the macro environment is expected to be bumpy for the remainder of 2022.
We are continuing to pay close attention to macro elements, including COVID-19 upstream supply chain constraints inventory and inflationary pressures and the geopolitical environment.
Despite this backdrop, we are reaffirming our consolidated financial targets for 2022, driven by our results in the first quarter and the momentum we are seeing in the second quarter.
Consolidated revenues are expected to be about 102 billion.
Which takes into account the divestiture of Ups's free.
Consolidated operating margin is expected to be approximately 13, 7% and return on invested capital is anticipated to be above 30%.
We expect our path to achieve these financial targets will be different than we shared with you in February .
We have proven our ability to adapt in a dynamic environment and we have many levers to pull that give us confidence in our ability to achieve our targets in.
In U S domestic our revenue guidance is not changing.
We anticipate revenue growth of around five 5% with revenue per piece growing faster than volume.
In terms of volume however, we anticipate volume growth rates will be lower than we originally expected.
The volume growth rate in the first half of the year is expected to be negative and we expect it to improve in the second half of the year.
Pricing is expected to remain firm and will continue to price based on the value we provide to our customers.
Lastly in U S. Domestic we expect operating margin to expand around 50 basis points for the full year in 2022.
In international our revenue guidance is unchanged.
Revenue growth is anticipated to be approximately seven 7% driven by revenue quality initiatives.
We anticipate volume will be lower than originally planned and given the value we offer our customers, we expect pricing to remain firm.
Operating margin in the international segment is anticipated to be about 23, 6%.
And supply chain solutions, our revenue expectation is unchanged at around $17 billion.
Driven by our health care portfolio and forwarding.
We expect ocean rates to moderate below 2021 peak levels.
Operating margin is expected to be about nine 4%.
As a reminder, we will lap the sale of UBS free at the end of April .
Turning to capital allocation for the full year in 2022, we still expect free cash flow to be around $9 billion.
Including our annual pension contributions.
Capital expenditures are still expected to be about five 4% of revenue or $5 5 billion.
Which includes two 747 dash eight aircraft to automated hubs more than 3700 alternative fuel vehicles and additional technology investments.
All of which will enable greater efficiency in our integrated network and move us further down the path to achieving our 2050 carbon neutral goal.
And in 2022, we are planning to pay out around $5 2 billion in dividends subject to board approval.
Regarding debt repayment as of today, our plan is to repay $2 billion in debt at maturity this year.
Lastly in terms of capital allocation, we are doubling the amount of cash we plan to allocate to share repurchases to $2 billion in 2022 further rewarding our shareholders.
We are executing our strategy and we will remain agile as we continue to navigate the dynamic macro environment. We are laser focused on improving revenue quality, reducing our cost to serve and disciplined capital allocation and.
And by controlling what we can control we are confident in our outlook and our financial condition. Thank you and operator, please open the lines.
Thank you. Our first question will come from the line of Amit Malhotra of Deutsche Bank. Please go ahead.
Thanks, Hi, everyone.
Brian .
What impact if you have an RP and domestic I know you said 800 bps fuel plus base rates I wanted to see if you can just give us.
Just just isolate the fuel piece of that.
And Carol I was hoping you could talk about the recent Amazon.
By with a prime initiative it seems like.
That eats into the SMB strategy.
Or potentially eats into the SMB strategy just wanted to get your thoughts.
On that strategy that Amazon is pursuing and the implications for.
And also ups's relationship with Amazon as well.
Hey, good morning, happy to break down the fuel piece.
And then I'll turn it over to Carol for the Amazon question.
You saw the nine 5% RVP growth in domestic and think of that as about 80% rate in 20% mix approximately the mix being driven by our continued performance on the SMB side, but the the split of the 80% is roughly equal.
<unk> fuel and then half based pricing as you split it out and then I would just make one comment as we think about pricing and as we go down further down this journey of fuel as one component of our pricing lever. We have surcharges. We are base rate <unk>. So within that it was it was approximately split between based pricing and fuel.
Carol do you want to take out levels, we are happy to take the Amazon question.
We have a very good relationship with Amazon They are our largest customer and as we talked about at the end of the fourth quarter. We reached agreement with Amazon about the packages that we will take into our network and the packages that they will deliver on their behalf and it's a mutually beneficial relationship as it relates to their latest announcement.
We see that as a very clever marketing play by Amazon, but just somebody new.
Amazon Prime badge on a SNB website, if the website even exists for.
And for that matter to us we believe.
Okay, Alright, thank you very much I appreciate it.
Our next question comes from the line of Tom wider width of UBS. Please go ahead.
Yes, good morning.
Wanted to ask you a little bit for a little bit more perspective, just on the volume framework.
What I mean, I'm guessing you don't want to give us a kind of precise month by month, but what did.
If you do great, but what it March look like in terms of how much weaker and then what is what does April look like I don't know if you want to comment that I mean, I'm asking primarily in domestic package. If you want to offer international.
Thought as well, but just kind of that volume trajectory.
And how that fits into the overall outlook and expectation for.
For the first second quarter.
Well I'll start Brian and then please join in so Tom as Brian mentioned, we planned for our U S domestic volume to decline slightly in the first quarter, we actually missed our plan by about 500000 pieces per day and when we started to Peel back the layers of the onion to understand what happened because it was a lot of variability.
And the demand January was soft because of Omnicom. Then February came back and was nicely positive and then March turned negative again, and we're like why well as we as we looked at the impact of the stimulus we found Ah ha moment, when the stimulus checks hit last year.
We saw our average daily volume jumped by 400000 pieces per day, we and our customers thought we could comp that this year, but because of all of the external factors that we're facing consumers that proved to be tough and in fact, if you look at the performance of our share post product <unk>.
Last year sure post grew 35% this year sure post declined in the first quarter, 10.5% and if you look through that you can see that five customers actually drove more than 60% of the year over year decline in and talking to those customers. They tell us it was just too hard to comp.
Those stimulus checks so that explains what happened in the quarter why do we feel good about the volume going forward, while the comparisons get easier and all I can look at what's happening in April or April volume is better than our March volume. So we're trending in the right direction and then I look at the.
Volume Thats coming into the network a great revenue quality for deals that we've just cut so over the next several months, we got new volume coming into our business both from enterprise customers.
<unk>. So we feel very good about the volume projections that are coming into our network just to comment on the international volume if I could.
We thought we had export volume growth in the quarter, we did not it really was because of the COVID-19 Rolling Lockdowns in Asia, We had flight cancellations, but that was it was a tough environment. In fact, we still have the people who were sleeping and sleeping bags in the hub is a tough it environment. There if you back out the Covid lockdowns in some ship.
<unk> from air freight our export business would've been up in the quarter. So we're going to get through this we are convinced we're going to get through this and expect the volume to improve internationally, Brian what would you like to ask Carol I think you've covered it well the only thing I would add just one point on international we did approve agile with the Covid Lockdowns in Asia as you referenced you were able to move.
Of that aircraft and air lift over to Europe , and as I mentioned in the Europe to U S. Airline was was up 10% so moving the equipment. Despite the volume softness I think plays very well in the integrated network.
Great. Thank you.
Our next question will come from the line of Jordan Oliger.
Oldman Sachs. Please go ahead.
Talk a little bit more in detail I think you mentioned productivity levers a few times.
The agile.
Depending on what happens with.
With overall demand maybe hit on a couple of those five points.
Hey, you can flex the network if need be to to get to your targets.
Sure happy to Jordan and good morning.
We do have cost inflation and pressures like everyone else out there and obviously payroll and benefits and fuel are the two biggest in our system, but we are driving productivity.
As we think about it.
We're leveraging automated facilities, we're bringing two automated hubs online this year, one in Pennsylvania, one in California, and that will allow us to leverage automated bagging label applications et cetera, Carol has talked before about the smart package smart facility, we're rolling that out in 2022, and so that will be a further driver of productivity.
<unk> this year as we think about it and then within the quarter Adv was actually down 3% as we mentioned but hours per day were down 3%. So pieces per hour were basically flat and then lastly, one of the things that the team is doing very effectively in the U S. Jordan is the <unk> and leveraging data to cube out the trucks.
It reduced our loads per day better than the volume decline or outpaced it.
I just wanted to give a shout out to our operators in the U S for managing through this very choppy volume environment to have pieces per hour flat when volumes up and down in the quarter is it just as a sign of agility and as to your question about leathers, we are able to manage hours very well if there were to be sustained volume down and we're not.
On that but if that were the case, then we would actually take head count out, but now we're just managing the hours and doing a masterful job of it.
Thank you.
Okay.
Our next question will come from the line of Todd Fowler of Keybanc capital markets. Please go ahead.
Hey, great Thanks, and good morning.
Wanted to ask on the cadence of U S domestic margins throughout the year I think Brian previously you'd given some guidance for first half versus second half and I'm just curious with the change in the volume expectations with what Youre seeing on the pricing front, if that pushes out kind of the cadence of how we see U S. Domestic volumes trend throughout the year or are we going to be kind of in a.
A more steady state kind of reducing some of that seasonality like you've talked about in the past. Thanks.
Thanks Todd.
To talk about domestic margin works, we're sticking with the guidance I had given previously which was 11 six domestically for the full year and it was pretty balanced pretty close to that the first half and second half we printed a 11 three in the first quarter, we're still holding to that 11, 6% for the for the first half and we think the second half will look.
Similar so net net up 90 bps in the first quarter, but looking for a 60 basis point improvement in the first half.
Thank you.
Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks, good morning.
Can you just talk about I think you said that the volumes would be.
Better or positive in the second half of the year, what what changes first half versus second half is that just a comp and then.
If we if we are in a period of more sustained volume pressure.
What's the ability to maintain this level of pricing improvement and margin improvement if the volumes stay negative for longer.
Okay.
So in terms of our confidence in the volume and getting better the comparisons do get easier Scott for sure. But we also are winning in the marketplace because of the service we.
And I'm Super proud of our sales team who are out there knocking on doors, bringing back customers some of which candidly had left us but they love the service that we provide they are coming in a great revenue quality and that's very important too so.
We feel very good about what we see coming into the network and I just wanted to go back and talk a moment about gap our DAP revenue grew over 50% in the first quarter that that platform is on fire and we're taking it out how does the United States now, which is very exciting and an okay looking forward.
<unk> come to Europe , So, we're well on our way to get to that 2 billion <unk> target by the end of this year.
Yes.
In terms of sustained pricing pricing is really a function of demand and supply and there still is a demand and supply imbalance, particularly in certain geos around the world where for whatever reason be of COVID-19 or labor shortages or just challenges the service levels arent.
We price for the service that we provide and are not seeing any pressure on the pricing environment right now.
Our next question will come from the line of David Vernon of Bernstein. Please go ahead.
Hey, good morning. Thank you operator, so Carol as you look out in the back half of the year can you talk to kind of what's embedded in the guide with respect to mix and whether youre seeing any sort of pickup in <unk> given the fact that the the Fedex ground network seems to be running at service levels, we probably havent seen in I don't know 20, some odd years.
Well, Brian perhaps you want to talk more about the guidance sure so happy to.
Looking in the first quarter, our <unk> was 57% of the mix and commercial was was 43, we had guided for the full year to a 60 40 spread and we still think Thats a pretty good number.
As we think about mix changes in the business, we're looking for SMB to actually grow about 150 basis points improved from a mix perspective, we saw a 140 in the first quarter. So we think that 150 is a good number so Dave I think as you split the year of 60 40 on the resi to come in about 150 improvement in the SMB is probably.
Still stands I would say interestingly in the SMB space itself.
The commercial residential and that's a good point and we saw our commercial business grew almost 4% in the first quarter.
We're going to take every opportunity to win in that space as well because service matters to that customer base.
And do you have any thoughts on where that long term mix like what are you kind of designing the network to be for say three years out is that 60 40 going to hold or like how do you think about what you want this business to look like in three years.
We want the business to be the best.
Is that meets the needs of the customers and so we haven't declared what that mix should be but that's actually pretty interesting challenge for us team at our dual strategy of bidding to think about what we're what we wanted to clear that makes debates.
Alright, Thank you guys. Thank.
Thank you.
Our next question will come from the line of Brian <unk> of Jpmorgan. Please go ahead.
Hey, good morning, Thanks for taking the question so.
Carol maybe to follow up on that last one can you just give us an update on where you think.
Market sizing is when you.
Look at the small the short zone, rather than the long and mid zone last time I think that's it.
As in the Investor Day in 2021 has that really changed at all given all the various puts and takes and dynamics that we've seen here.
The last couple of quarters, and then for maybe for Brian you've seen any price sensitivity with fuel going up so much customers started to trade down to make any adjustments given how much those prices went up thank you.
So we haven't updated the market sizing in any material way since our June Investor day.
And when we do it we will certainly share that with you.
And just on the Brian the price sensitivity comment no I think as Carol mentioned, probably the most important piece is the service we provide them with the service numbers, we're printing not getting a lot of pushback on that because I think we're delivering good service also when you think about the the pricing there is a.
There is a split as I mentioned between fuel and base rates. So we're managing holistically, but I think the pricing holding firm is probably the guide.
And if I can just give a quick reminder to limit the questions to one and you can jump back in queue for follow up opportunities.
Our next question will come from the line of Chris Weatherby of Citi. Please go ahead.
Yeah, great. Thank you.
I guess, when you're thinking about the <unk> mix and I think it's.
A 7% decline in residential <unk> was up for the quarter. I know 60, 40 is sort of what youre looking at looking for for the full year.
I'm guessing in the interim it's probably more likely that we're seeing <unk> grow faster than residential and does that provide you any sort of margin tailwind. When you think about sort of the outlook for the full year on the domestic side 11, six are we expecting any sort of tailwind that you could get from pick up in <unk> and then maybe Carol just a little bit more finer point.
And sort of what youre seeing from the consumer or just kind of curious I know you mentioned the stimulus last year being part of that impact on volume. What are you seeing sort of anything else that might suggest either a pivot from goods to services or other deceleration in the consumer end market.
Okay.
So we don't have direct insight to the consumer behavior, it's more from what we're hearing from our customers who are telling us there has been a bit of a shift from goods to surfaces and you're probably experiencing that if you've gone on vacation. So it seems like the hotel's revpar lift planes are full and people are going out to eat and gosh I was.
In Washington D C last week and the bar with Hoffman at Midnight. So people are spending money differently than they would but as it relates to the guidance that we've got right and we feel good about the volume that's coming back into our network and the guidance that we've laid out.
And I'll just pick up one point on the.
Commercial is certainly the <unk> from a density standpoint is better than the resi. So we like that but you have to remember <unk> was down 10%, so thats impacting the mix as well.
Our next question will come from the line of Helane Becker of Cowen. Please go ahead.
Thanks, very much operator, hi, everybody and thank you very much for the time.
Just on the Capex it hasn't really changed from prior guidance and how you're thinking about it as a percent of revenue.
Should we think about your use of automation.
Zach Koff Act.
And within that robot use of robotics and <unk>.
Like cyber security and just protecting your customer information.
So that you can continue to grow.
Yes happy to to address the Capex, we are holding at the $5 5 billion for the year, so not coming off that a little bit of timing noise in the first quarter. So it looked like we understand but that was simply timing as far as where we're investing certainly putting into automation.
That's the one area, we're trying to to double down in.
On the technology side some of those are opex versus Capex investment. So in terms of splitting the type of investments, we're making but certainly we are we have to.
Two large automated hubs going in this year, we're looking at the smart packaged smart facilities that we're investing there whatever we can do to drive more automation as a positive thing from us from a cost and expense standpoint.
I've asked the team to do is to tell me how fast they can go.
Capital is not going to get in the way of upstate here automation is critically important to deliver service for our customers as well as drive productivity of the automation activities. We have underway at automated automated label application, our automated bagging robotic sort of injection and so the head count opportunity.
This year alone of 1200 people inside our buildings and that's going to double next year and it's going to take off so we're not going to let perfection get in the way. It was good enough here, we're going to go fast as it relates to cyber security. That's the one budget I will knock that we continue to invest in cyber it's a scary time for all of us, but we are leaning in from a cyber person.
<unk> clearly if you think about the challenges coming out of eastern Europe . We have taken every system down. So we're at no risk there but of course, we couldn't we havent.
Taxed on our company every day, but our cyber team did a masterful job of awarding off those attacks and we're spending a lot of money to ensure that we protect.
Our customer data or our personal information of our of our people and all of the incredible pricing information that we have that gives us a competitive advantage. So knock on wood of course.
Every company's vulnerable here, but we're certainly investing in protection.
That's very helpful. Thank you very much.
Thanks.
Our next question will come from the line of Ken <unk> of Bank of America. Please go ahead.
Great Good morning.
Just to clarify.
Brian if you see volumes more negative in the near term than they are a bigger push on pricing or mix gains to get to those same margin and revenue targets and then I guess just a follow up on Capex you only spent I guess half of $1 billion in the first quarter. Yet you kept the capex at five 5 billion is there increased confidence you can get.
The targets by yearend or.
Maybe just talk about your capex target a bit.
So Ken on the Capex I mentioned a minute ago that it was more timing related in terms of the year over year I think it was about a 300 million decline year over year in the first quarter. So that basically was just timing so that won't impact us will come back in the middle of the year and we look to full year number but as of now our holdings of $5 5 billion in Capex.
Poverty in our network to allow us to go out and win where in the past couple of years. It was harder because of peak gaiting. There's only so much got a company like <unk> can take into the network. During peak you only have so many doors per car you only have so many buildings, but because we've freed up.
With the capacity, we can actually give our customers more peak availability, that's allowing us to win with.
Revenue quality, so right now we don't view it as a revenue quality is at risk and remember there is still a demand supply.
And it's exasperated and certain parts of the country. So we are winning because of this survey.
Great. Thank you.
Our next question will come from the line of Brandon Oakland scaled Barclays. Please go ahead.
Hey, good morning, everyone and thank you for taking my question.
I wanted to come back to the fuel.
Issue because it looks like you guys have adjusted your fuel surcharge, maybe three or four times.
And the better part of the past year.
Is there any risk that if fuel prices were to materially come down from here.
That's essentially a margin or profit headwind and can you just tell us why adjusting the surcharge. So frequently is the right way to go.
So if we look at our fuel surcharges as Brian mentioned is just part of our overall pricing algorithm.
Yes, It does move off of the weekly change and the PPG index.
But to that we added pricing modifier, so think of it no differently than a demand surcharge or network surcharge or just a plain price.
And.
People are willing to pay for this because of the service we provide if we look at the impact to our business in the first quarter for the domestic business alone.
55% of the appeal of benefit came from changes in the P. P. G.
45% of the benefit came from actions that we took from a pricing perspective, we're always thoughtful about changes in pricing of course.
We price for the services we provide.
Many of our published prices as you know are also discounted.
So I think that's something we need to keep in mind too as you think about.
Adjusting too frequently we price for the services, we provide and then we also will discount, but just on the discounting and if I could we mentioned the new tool that we just introduced which we call dealer manager and this is providing pricing analytics to our sales team as they go about negotiating deals and in <unk>.
As we looked at our pilots, 41% of our volume one and our volume rate wins or volume wins has increased.
From where they were trending the discounting is lower at 41% of the volume wins than it had been using our old pricing science. So science rules in many ways. When it comes to price and you asked a lot of questions here about elasticity.
What are you doing with pricing science really rules here as we think about providing the best overall equation for our customers.
Thank you.
Our next question will come from the line of Gerard Batesville. Okay. We're please go ahead.
Hi, Thanks for taking my question.
I just wanted to dig a little deeper on international I think the original guidance.
And for Jan Feb.
Intra Europe volumes will improve.
And we did see that.
It kind of come in below expectations in the first quarter.
So what are you thinking right now on that.
So from a entry Europe perspective, obviously, there's been a lot of dislocation with the conflict over there in <unk>.
Carol mentioned at the top of the call we had actually planned for volume growth internationally and it came down. So we continue to monitor the COVID-19 situation Lockdowns in Asia, the European geopolitical conflicts.
We will continue to manage from a volume perspective, but we anticipate the second quarter to look somewhat like the first quarter from a volume perspective.
So would you is the plan to offset the volume volume lower volume with a mix of price.
I think we did that in the first quarter, we were down 70 basis points on a margin perspective, and I think the full year guide was for down 60 basis points. So were basically trending in line with our full year guide in the first quarter to do exactly what you just said.
Thank you.
Jim.
Our next question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks, very much good morning.
Caroline is in this inflationary environment, obviously managing cost is important I know, it's a big focus years.
Now that we're about a third of the way through the year.
Any update on how you're progressing on the on the $500 million of cost savings, maybe some discussion of.
A little bit more in depth on how the RFID.
Improving there and keep utilization and packaged relaxing time any metrics there are you in.
Is there upside opportunity there with assume presumably an enhanced focus thanks.
So the $500 million cost out target related to what we call non ops or overhead and we initially had a $1 billion target in which we delivered $500 million last year, we're going to do it again this year. So that's tracking.
Tracking as we laid out very very proud of the team for that.
When you introduce technology it can free up a lot of manual activities.
Really all about putting our resources, where they where we can get the highest return as it relates to the RFID technology.
Boy, we were worried about putting it in this year because of supply chain Jones, but we were able to procure all the batteries the labels that we need so we will get it up this year before peak at 100 of our centers and what this will do long term for us it looks pretty powerful wave one alone it will eliminate all the manual scans.
Done by our pre loaders, if that doesn't drive productivity I don't know what it what will and it will avoid all the miss or Pat.
Package gets missed sorted and that goes into the wrong package car, that's not a very good experience for our customer that actually just a drag on productivity. So I'm really excited about where that's going to take us long term and the project is on Tac.
Now there is also driving what he calls total service, which is running this network, which was designed for protection at perfection. We haven't been there for lots of reasons Cowen and all kinds of reasons, but it's very powerful because if you think about just delays in traffic or delays, leaving the.
The packaged centers it can cost hundreds of millions of dollars that relate so running the network for the <unk>. The way it was designed as powerful and nimble just kicked this off and will bring.
Bringing you up to speed along with this initiative as we go along.
Hey, and Steven we have time for one more question.
Our final question will come from the line of Robin Schenker at Morgan Stanley . Please go ahead.
Hey, everyone. This is christina on for Robbie Thanks for squeezing me in here at the end.
And then just going back there.
<unk> b to B commentary from earlier in the call, but maybe I can ask it in a slightly different way I.
I think last week, there was a wall Street Journal article about e-commerce gains kind of that we're talking about pandemic at least as a percentage of overall retail retail had been normalizing pretty sharply but would be curious if you guys are seeing something similar and if.
If not maybe you can just touch on your thoughts on.
How much of those e-commerce game.
It will be permanent.
This is kind of reverting to trend line.
Well look I applaud the retail stores, who are doing a masterful job of offering buy online pickup in store buy online return in store come to my store come to my store come to life store, because if they don't get traffic into their store, while they will deleverage that fixed cost.
And then I'll hop close stores, so I admire what they're doing but theres still been a permanent shift in customer preferences customers want to launch shop, when where and how they want to shop and they want their packages delivered to them, when where and how they want that might be outside of the store it might be at their home or at their workplace or consolidated pickup point.
So we're not going to see the kind of growth that we experienced during COVID-19 clearly, but E. Commerce sales will continue to grow we want to serve that customer, but we also want to serve the commercial customer because that's a very good customer for us. So while we may have said a 60 40 mix. The mix is going to go where the volume is and we will lean into that growth.
Appropriate.
I would now like I would now like to turn the conference back over to our host Mr. Tim Cook.
Excellent thanks to everybody for joining today and have a great day.
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We're sorry your conferences ending now please hang up.
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