Q2 2022 United Parcel Service Inc Earnings Call
We're bringing the total availability to 33 countries.
And by the end of this year, we will add another 15 countries in Europe Asia and Latin America.
These efforts and more are keeping us on track to hit our $10 billion of health care revenue target in 2020 three.
Yeah.
Moving to people at I'm delighted the ball of sub Romanian has joined the company as Ups's, New Chief Digital and Technology Officer.
He is tasked with supercharging digital transformation across every aspect of our business.
And we will unleash even more innovation for our customers.
We are moving from digital literacy to digital fluency.
And to help us get there we are investing in our people and have created training to equip them with new skills.
The entire executive leadership team, including me is complete at this digital fluency training and we are moving quickly to train our next two levels of leadership.
Which brings me to innovation driven.
This is about the future of U P S and driving more productivity from the assets we own.
The changes we've already made have significantly increased the agility of our network and are driving productivity improvement.
In the second quarter in the United States, we were able to manage hours in line with volume levels, and we optimize our trailer loads by eliminating 1600 loads per day compared to the same timeframe last year.
And we will continue to deploy additional technology prior to peak to give you a couple of examples we are on track with our deployment of smart package smart facility to the first 100 buildings in our network and prior to peak. This year, we will bring to automated facilities online including.
The first two phases of our new 800000 square foot regional hub in Harrisburg, Pennsylvania.
Additionally on July 11th we launched our total service plan across the U S network.
Brian will share the details, but our total service plan approach creates a more predictable operating environment, enabling us to take more cost out and make our industry leading service even better.
We are also working on another big efficiency opportunity and that's how to improve delivery density. We are approaching this differently by attacking density upstream and fulfillment.
We recently completed two pilots and we're really excited about the results. We are building a new digital platform that can scale and we look forward to sharing more detail with you in the coming quarters.
Innovation, driven will also help us reach carbon neutrality by 2050.
Thursday of this week, we will publish our set of annual sustainability report, which includes our 20th G. R. I content index.
And these reports we share some new technologies that we are using like the E. Claude electric assist bikes, we're piloting in New York and London.
This equals are a great zero emission last mile solution for Super urban environment.
Before I turn it over to Brian Let me end by reaffirming our 2022 consolidated financial targets in 2022 we expect to generate about $102 billion in revenue.
<unk> operating margin of approximately 13, 7% and.
And we expect return on invested capital to be greater than 30%.
Lastly, we are again, increasing our targeted share repurchases for 2022, taking the target up to $3 billion for the year.
In the face of a very dynamic macro environment, we remain agile and on strategy, we have multiple revenue and cost levers to pull.
And we remain focused on controlling what we can control.
And now I'll turn the call over to Brian .
Thanks, Carol and good morning in my comments I'll cover four areas, starting with the macro environment.
Our second quarter results next I'll cover cash and Shareowner returns and lastly, I'll wrap up with our financial outlook for the second half of 2022.
In the second quarter, there were many cross currents that contributed to a dynamic macro environment.
In the U S, even with high inflation and increasing interest rates the job market and consumer spending remains strong with a growing share of wallet spend on services.
Internationally, the environment continued to be negatively impacted by COVID-19, Lockdowns in Asia, and geopolitical issues, both of which drove the complexity in the market for customers.
Despite these external factors, we remained agile and delivered strong second quarter results as we expected.
In the second quarter consolidated revenue increased five 7% to $24 $8 billion.
Consolidated operating profit totaled $3 6 billion nine.
Nine 3% higher than last year.
Consolidated operating margin expanded to 14, 4%, which was 40 basis points above last year and was our highest consolidated operating margin in nearly 15 years.
For the second quarter diluted earnings per share was $3 and $20 million up seven 5% from the same period last year.
Now, let's look at our business segments.
In U S domestic revenue quality initiatives more than offset the volume decline and drove strong second quarter results.
Average daily volume in the U S was down 4% or 823000 packages per day versus the second quarter of last year.
More than half of the decrease was due to actions we took with a few of our largest customers to optimize the air and ground volume, we bring into our network.
And the majority of the volume reduction from these customers was residential.
We expected to fill this gap with other enterprise volume, but macro conditions made that challenging.
In the second quarter residential volume declined eight 2% and was partially offset by a two 3% increase in <unk> average daily volume.
<unk> represented 43% of our volume, which was up from 40% in the second quarter of 2021.
We are continuing to win in the most attractive parts of the market due to our industry, leading service and enabling capabilities in.
In the second quarter, SMB average daily volume, including platforms grew three 3% year over year and Smbs made up 29, 2% of our U S. Domestic volume an increase of 200 basis points over last year, putting us well on our way to achieving our 2023 target of 30%.
For the quarter U S domestic generated revenue of $15 5 billion.
Up seven 3%.
Revenue per piece increased 11, 9% with double digit increases across all products.
Changes to price per gallon for fuel drove 400 basis points of the revenue per piece growth rate increase and the remaining 790 basis points of revenue for peace improvement came from the actions, we took which included base rates fuel pricing and mix improvements.
Turning to costs total expense grew six 9% primarily driven by two factors.
First fuel drove 370 basis points of the expense growth rate increase due primarily to the rise in price per gallon compared to last year.
And second wages and benefits contributed about 200 basis points of the increase due to the rise in health welfare and pension rates.
The remaining variance was driven by multiple factors, including maintenance and depreciation.
Had we managed our second quarter costs for the short term they could've been better.
But we made the decision to manage for the longer term so.
So we pulled on most cost levers, but not all of them.
Knowing that we would need to hire for peak soon we did not want to make a short term decision that would negatively impact service later in the year.
Our industry, leading service is driving revenue quality and is bringing new customers in the door.
Hoping to offset cost increases we are continuing to see the benefits of our cube utilization and other productivity efforts.
Our latest initiative is called total service plan, which we launched earlier this month across the U S network.
This is about running an on time precision network every day.
Specifically, we've optimized our operating plans to minimize driver lead times and executed on time dispatch across our network. We are happy with the early results, including a marked improvement in on time, Peter departures, which reduces idle time across the network.
Total service plan is a key initiative that will drive lower cost and provide greater predictability for our customers and our operators.
To wrap up U S domestic segment delivered $1 9 billion and operating profit.
An increase of $180 million or 10, 7% compared to the second quarter of 2021.
And operating margin expanded 40 basis points to 12%.
Moving to our international segment.
Software macro environment the war in Eastern Europe , and Lockdowns in China pressured volumes, but our teams stayed agile in the air and on the ground as we adjusted the network to match our volume levels.
Total average daily volume was down nine 2% in the second quarter, reflecting more normal shopping behaviors in parts of the world like Canada and Germany.
In the second quarter of this year International domestic average daily volume was down 13, 4%, which represented more than three quarters of the total decrease in international volume.
Total export average daily volume declined four 4% due to a combination of factors, including high global inflation, and COVID-19, Lockdowns in Asia, which disrupted manufacturing output.
As we did last quarter, we adjusted the network and we're able to keep our operations moving in Asia to serve our customers.
In the second quarter International revenue increased five 3% to $5 $1 billion revenue per piece increased 14, 8%, including a 610 basis point decline due to currency, which was more than offset by a <unk> hundred basis point benefit from fuel.
The remaining revenue per piece growth rate increase of 790 basis points was from base pricing product mix and revenue quality actions that we took.
Operating profit grew to $1 2 billion include.
Including a $60 million negative impact from currency.
Operating margin in the second quarter was 23, 7%.
Now looking at supply chain solutions, our team did a great job leading into the dynamic macro conditions and responding to the needs of our customers in.
In the second quarter revenue was $4 $2 billion.
Up 0.7%, despite the divestiture of UBS free which accounted for $297 million of supply chain solutions revenue in the second quarter of 2021.
Looking at the key performance drivers in forwarding, our ocean freight product had strong revenue growth due to higher rates in both air and Ocean freight forwarding generated strong operating profit growth by managing the buy sell spreads.
Within forwarding, our truckload brokerage unit delivered excellent operating profit growth driven by revenue quality initiatives and customer mix and.
And our health care business again delivered record top and bottom line results driven by complex customers and cold chain clinical trials and labs and.
In the second quarter supply chain solutions generated record operating profit of $517 million and delivered a record operating margin of 12, 2% an increase of 250 basis points from last year.
Walking through the rest of the income statement, we had $171 million of interest expense. Other pension income was $298 million and our effective tax rate for the second quarter was 23%.
Now, let's turn to cash to shareowner returns.
Year to date, we've generated eight $3 billion in cash from operations and free cash flow was $6 9 billion.
And in the first half of 2022, <unk>, two 6 billion in dividends and completed $1 2 billion in share buybacks.
Which brings us to our outlook for the second half of 2022.
According to IHS GDP expectations for the full year have again been lowered from previous forecasts.
Global GDP is now expected to grow two 9% in U S. GDP is expected to grow one 4%.
We are continuing to pay close attention to macro elements, including COVID-19, inflationary pressures the health of the consumer and the geopolitical environment.
The execution of our strategy under our better not bigger framework is enabling greater agility and resiliency against an uncertain macro environment.
Despite this backdrop, we are reaffirming our consolidated financial targets for 2022, driven by our results in the first half of the year and the progress we are making on our strategic initiatives for.
For the full year 2022 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%.
Looking specifically at the second half of 2022 in U S. Domestic we anticipate back half 2022 revenue growth of around five 5% driven by strong revenue quality and we expect second half operating margin to expand to about 11, 6%, which is consistent with our full year guidance.
As you update your models for U S. Domestic there are a few things to keep in mind.
First we anticipate volume growth rates will improve slightly in the second half of the year compared to the first half and we expect revenue per piece to continue to increase year over year, but at a slower rate than in the front half of the year.
Second we expect an increase in compensation expense in the second half of the year.
Our annual wage increase for our teamster employees goes into effect in August and as a dollar per hour.
Which is higher than last year.
Additionally, our current contract includes a cost of living adjustment that will be significantly higher this year compared to last year, and we expect to continue to pay market rate adjustments in certain geographies around the country.
And third Union benefit rates will also increase in August .
Together with pension service costs. These union wage and benefit rate increases will add nearly $600 million to our cost in the second half of 2022 compared to the second half of 2021.
The investments we are making in our integrated network like our new Harrisburg, Pennsylvania automated hub smart package smart facility additional labeling and bagging automation plus our total service plan will help to offset the increase in wages and benefits in the back half of the year and.
And we expect our cost per piece growth rate will be lower than in the first half of the year as we continue to implement our productivity initiatives the.
The combination of our revenue and cost initiatives will enable us to grow revenue per piece faster than cost per piece and achieve our 11, 6% full year operating margin target.
Moving to the international segment in the second half of the year, we anticipate volume growth rates will improve relative to the first half driven by our speed and service advantages in Europe .
We expect revenue growth to be in the low single digits.
Additionally, we expect currency will remain a headwind in the second half of the year opt.
Operating margin in the international segment is anticipated to be about 23%.
And supply chain solutions, we expect revenue in the second half of 2022 of nearly $9 billion.
Driven by our logistics and health care businesses.
We've already begun to see ocean forwarding rates moderate and we expect that trend to continue through.
Sure.
Operating margin in the supply chain solutions segment is expected to be about 10%.
On a consolidated basis, we anticipate operating margin will be around 13, 6% in the back half of 2022 with the fourth quarter, increasing about 20 basis points year over year.
And lastly, we expect the tax rate to be around 23% for the remainder of the year.
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 planned to be about five 4% of revenue or $5 5 billion.
We plan to pay out around $5 2 billion in dividends subject to board approval, we plan to repay $2 billion in debt maturity this year, including the $1 billion, we've already paid in the first half of the year.
Lastly in terms of share repurchases, we are again, increasing the amount of cash we plan to allocate to share repurchases.
Taking the target up from $2 billion to $3 billion in 2022 further rewarding our shareholders.
The execution of our strategy is enabling greater agility and has driven fundamental changes to nearly every aspect of our business.
As we discussed last quarter, there are multiple ways for us to deliver our targets, including offsetting softer volume through revenue quality and productivity. We have many levers to pull and we are confident that we will deliver the targets we've laid out.
And operator, please open the lines.
Thank you we will now conduct a question and answer session.
Our first question will come from the line of Chris Weatherby of Citi. Please go ahead.
Maybe starting Brian where you left off in sort of the cost side thinking about the ramp up in the back half of the year I know, it's early but wanted to get a sense of what you think sort of the.
<unk> profile of the business, particularly on the domestic side is going to look like exiting 'twenty two and as we think about 2023 I know you have the teamster contract coming up next year, probably a little too early to talk about that but it seems like theres. Some cost inflation kind of picking up wanted to get a sense of maybe how you think about that exiting the year and what are the buckets you can kind of attack.
Maybe offset that.
Yes, Chris Thanks for the question and good morning.
We expect CPP in the back half of the year to actually improve versus the first half as I think about two H. We're looking to put about $1 billion seven up in revenue growth in domestic and there'll be a comparable increase in cost of about 1 billion seven but nando and the team in the U S are taking a number of actions to actually drive productivity and efficiency.
We just launched total service plan, we've got smart package smart facility.
New automation, a number of initiatives those will drive about $300 million to reduce debt $1 seven and cost increase so as I think about exiting I actually think CPP will be high single digit in the second half of the year and so as we exit I think we'll be in good shape going into 'twenty three.
Maybe just a little color on the total service plan. This is a transformative initiative for our company and that's really running our integrated network. The way. It was designed to run and to make that real for you, sometimes we're a little late with the theater arrivals and departures.
With the initiatives that we've just kicked off on July 11th.
Getting back on time and to Dimensionalize that for you a 10 minute improvement within the integrated network is worth $257 million. So we're really excited about this we just kicked it off it was a monumental effort get the Netherlands.
His team has to have one on one conversations with 64000 drivers in our company talking to them about their individualized service plan because some people wanted to get home for dinner at night and some people might have some overtime. So we built in the blood individualized plans for our drivers and we retrained hundreds of thousands of people on.
Our methods and we're very very excited about the total service plan.
Okay, great. Thank you very much.
Our next question comes from the line of Allison <unk> of Wells Fargo. Please go ahead.
Hi, good morning.
Just wanted to ask a question on Smbs, obviously, youre growing faster than the market deal manager, obviously impacting that as well is there a way to think about that as we kind of look to the back half does that outperformance will continue and I think the only materials that touches on pricing a little bit does that I guess strengthen that revenue quality. The F&B is that you guys are them.
Onboarding at this point.
Yes.
A numbers perspective, Allison we had guided to.
150 basis points of SMB improvement as a percentage of volume mix in the U S. We're right on track to do that we had a bit stronger performance in the second quarter 200 bps, but we're holding to that full year 150, so that obviously it does contribute to the revenue quality that we saw in the first half and we will see in the second half.
SMB initiative is is.
Multifaceted and certainly deal manager is part of that with our win rate at 71% in the second quarter that was 12 percentage points higher than we had planned. So we're super excited about that and looking forward to rolling out to outside the United States, but it's not just the deal manager and Oh by the way I should say with Dell manager will ignore them.
Base rate, which is great. That's part of the ERP strategy here, but it's much more than deal management.
We have $1 billion.
Revenue in the first six months of the year and in fact, the revenue in the second quarter grew by about 100%. So we are on track to have $2 billion in gap in the back half of the year. We've got 18 key partners, two and a half million merchants on the platform and we're taking that outside the United States as well, but there's more to it it's about creating a seamless.
And frictionless experience for our customers and as you know we have 16 customer journeys, we actually identified three of those that really matter and one of those as we've kind of thrown our wallet in the middle of the road and we're going after it and that's how to manage claims the claims process here is pretty clunky and it's not a good customer experience. So we are.
Staffing that Brian was talking about and we're going to fix the claims experience because we think if we eliminate that pinpoint we're gonna grow even faster than the market, which we're already doing.
Great. Thank you for the color.
Our next question comes from the line of Jeff Kauffman of vertical Research partners. Please go ahead.
Jim Congratulations.
So the inbound questions I'm getting on this release our volumes came in a little lower than expected why isn't this.
Negative economic signal now you had a couple of anomalies that Brian went through in the quarter and you talked about second half growth improving so.
How do you read the economic tea leaves I know you mentioned that.
GDP forecast had come down, but it sounds like youre more optimistic about volume returning to the network in the second half in part because youre deemphasizing. The volumes you don't want but what are our takeaways here.
Maybe I'll start Brian and that he could add so if you recall at the end of the first quarter. We told you we thought our volumes would be down in the second quarter. They were they were down a little bit more than we thought we missed our forecast by 222000 packages a day and that MS. Ms was split evenly between the U S business and the <unk>.
A national business, So I would call that pretty close to being on forecast.
Brian detailed in his prepared remarks more than half of the volume decline in the United States was based on actions that we took with a few of our customers under our better not bigger framework.
One of those customers is Amazon So I'm, just going to talk about Amazon right. Now we have a great relationship with Amazon They are our largest customer but as we've shared with you in the past we have reached contractual agreement with Amazon about the volume that we will take into our network and the volumes that they will deliver no by the way they've got a lot of volume to deliver the latter.
Time, I looked at $35 billion of inventory. So that's kind of a lot of volume to deliver but we have contractually agreed on what makes sense for us versus what makes sense for them that means that both volume and revenue for Amazon is coming down we project by the end of this year that Amazon revenue will be less than 11% of our total revenue that gives.
The us room to grow in the parts of the.
The market, though we want to grow like F&B, and B to B and health care and others. So part of this is a glide path that's occurring we thought we could fill up the debate with more enterprise volumes than we got part of that is macro but here are a few fun facts of our top 20 customers.
In the second quarter more than 65% of the volume.
With us another thought.
Is that in the second quarter, we won new rate revenue quality business.
In the enterprise part of our segments than we have in the past five years now that volume Hasnt come into the network yet because we just want it but it is coming in in the back half.
We are running our business the way that we want to run it in this better not bigger framework, despite the macro environment and Brian what else do you want US you only had the RPT side of that equation, Daryl just paint us a better not bigger picture that we're running Jeff but on the back of that as revenue quality and you see that in the domestic margin of 12% and.
Second quarter, I think we committed to $11 six in the first half of 11 six in the second half we feel good about that running this play Carol just described and we're holding.
The more of a G. R. I honestly, we're not discounting as much.
Part of that is because our customers value. The service that we provide our end to end network is allowing us to deliver record high service levels and that matters, but really matters.
Thanks, Paul Thank you for that answer that's my one.
Our next question comes from the line of Ken <unk> Bank of America. Please go ahead Sir.
Great Good morning, Carol Brian and Ken.
Maybe thoughts can you continue that discussion a bit maybe your thoughts on the RP. There Brian is as fuel comes down we're moving out of $100 per barrel you talked about a bit about the split does that start to impact their profitability built into that revenue stream from from fuel, maybe just kind of walk through that a bit.
Yes, Ken Thanks for the question and I think we feel fine about the fuel. It's obviously gone up at record levels in terms of the increased versus last year and as we see fuel cost rise Ken our profit dollars actually increase margins contract a bit on the upside in the quarter about a third of RPT growth came from fuel.
And we're splitting that out that's fuel price per gallon were splitting that out from the management actions, we've taken on pricing, which would go into a different buckets. We've tried to provide more transparency.
As fuel goes down I think the efficiency of a one week lag on the fuel service charge, we feel like we're protected are insulated from a margin perspective, so fuel okay.
Constructive Q2, <unk> was fuel a third was what Carol talked about the revenue quality led by service and then the last piece of that was a combination of mix Ken plus the management actions on fuels. So that's how we're looking at it and thinking about it.
Thanks, Matt.
Yes.
Our next question will come from the line of Amit Malhotra of Deutsche Bank. Please go ahead.
Hi, everybody.
I guess just related to the domestic margin question.
I think the algorithm when you guys provided your multi year forecast was kind of twentyish percent incremental margins and youre pretty darn close in the second quarter I think you're actually forecasting that we're pretty close in the back half of the year.
The World has changed since then from an inflation perspective, so I think it's pretty impressive that you are still hitting that number but is that Brian as you look out in 'twenty, three which is still within that multi year forecast period does that 20% plus still hold in terms of an incremental margin target for domestic and then Carol I think.
One of the key questions on the overhangs on the stock at least is this union renegotiation, that's coming up next year.
Understand it's sensitive in highly strategic but any color because it is a 30% to 35 billion expense base for the company.
And maybe any additional color at least in terms of how you're strategically thinking about that renegotiation that helps us form what type of inflation. The company is going to be have over the next several years starting next year it would be helpful.
Yes. Good question. So the answer the first part of the question is as we think about the walk on margins.
<unk> <unk> number that we're delivering is a bit challenged in a down volume environment and so we need to pull other levers to make sure. We get there what were focused on was the guidance that <unk> given at the Investor Conference in 'twenty, one, which is 12% op margin in the U S. We are we are still very much on track to do that I think the guidance. We gave for this year or does it go from 11 one.
To 11, six we're on track to do that and then to lift the balance next year, so still still tracking to the 12% and looking to expand margin on a longer term basis, we have additional productivity levers today that we didn't have in our Investor Conference one year ago, one of those would be the total service plan, maybe now that we're thinking about it but we haven't.
Kicked it off.
Or actually put it into any of our financial plan one year ago. We're also seeing.
Some real opportunities with our our smart package Smart facility initiative, which we hadn't thought of one year ago. When we get that ruled out we're going to eliminate all the manual scans. All those prelim scans that are done manually all of that will be eliminated all of the tens of thousands of mis loads that occur every day, sorry to say we do.
Misquoted packets from time to time lots of time, so all of that's got to be able eliminated. So we've got additional productivity initiatives.
That we didn't have one year ago, which even in an environment, where yes costs are up more than we thought they would be were able to offset those costs I think it's pretty impressive that we didn't we plan for the dollar an hour increase for our Teamsters starting in August we didn't plan for the colon that we're seeing we knew there'd be some inflation, but not the amount that we are seeing that we're able to offset all.
The Army, Brian , Yes, Carol that's actually a big number we're going to see we saw 33 and coal the cost of living adjustment last year, we're going to see 82. This year. So you combine that to the Buck and contractual wage increase last year. We went up about 23 and as youll be about getting to the fact that we're able to manage through that and drive the additional productivity you talked about when the environment turns around and enough volume environment.
Cooking on all cylinders and to your question on that on the Union negotiation first.
This is incredibly important to us.
<unk> posters and our company for 100 years.
Or thereabout.
As we think about the upcoming contract negotiation, we're gonna leave the negotiations at the bargaining table, but just a few things for you to remember.
Our teamsters are the highest paid in the industry, both wage and benefits and in fact, if you're a four year driver here, you're making $40 an hour and fully loaded with benefits of close to $150000 a year.
Our workforce is very different than a lot of the workforce that you hear in the media every day, where that are trying to be organized theyre not paid the way that our teachers aren't paid these are great jobs that we value very much our goal with the Teamsters is win win win and that's our goal and again, we'll keep the details of that win.
Win win strategy at the bargaining table and the other thing I'll leave with you and this is I think an important important point is we're winning business today with customers, who know we have an upcoming negotiation because we told our customers we're going to take care of them. We are building contingency plans and we will take care of our customer.
Yeah.
Okay very good thank you very much.
Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead Sir.
Hey, Thanks, Good morning, Brian just a couple of few things I wanted just follow up with you.
Can you talk about the net impact of fuel in the quarter, how youre thinking about currency in the back half of the year and I think you gave a comment about fourth quarter margins, but I didn't hear anything about third quarter margin so could.
If you could just help there thank you very much.
Sure Scott from a margin perspective look we I guess as a whole company. We would expect all business segments to have higher margins in Q4 relative to Q3 based on the seasonality Scott we expect the back half domestic margin seasonality to be very similar to last year relative to Q2. So if you go back last year and look at Q2.
The sequential Q3 Q4, the change should be comparable.
As far as the currency and fuel that you laid in.
A stronger USD in Q2, it reduced our return reported international revenue by $261 million in reduced international profit by $60 million and I think youre familiar Scott with the layered hedge we use it as a percentage of our revenue.
Then in terms of fuel fuel prices increase we take a layered approach and start hedging that out about.
A few years in advance we try to be 100% hedged. So the revenue impact will be more than the profit impact but net.
Net net I think we feel fuel.
Fuel prices will moderate in the back end of the year the net impact in the quarter was 400 basis points and as we look at Dimensionalize any further we're splitting out the elements of management control pricing actions versus the price per gallon Scott to give you more transparency.
I think that's the way I think about it is this.
This change in the price per gallon is one component of the RP and as Brian called out that was a 400 basis points to the R&D day in the second quarter. The costs associated that also impacted cost per piece or our overall increase in expenses up 370 basis points related to appeal. So as the price per gallon goes up or down.
The margins pretty protected to the change in price per gallon. We also have a pricing algorithm, but it has just used to fuel as a simple way to price. It's just price. So don't think of those pricing actions as anything different than I.
And fuel margins will just hold tight if you look at change in price per gallon on the revenue line and change in pricing gallon on the expense line, that's how I think about it.
Okay.
Thank you.
Our next question will come from the line of Todd Fowler of Keybanc capital markets. Please go ahead.
Hey, great Thanks, and good morning.
I guess I wanted to ask on your peak expectations. It sounds like that there was maybe a little bit of cost here in the quarter from a hiring standpoint as you prepare for the peak.
I'm curious what your expectation would be it seems like the second half outlook is a little bit uncertain just how the peak this year would compare to last year, and then with the $300 million productivity improvement that you're expecting in the back half of the year is that something that you hold on to and carries forward into 'twenty three or how do we think about the sustainability of those cost improvements.
Thanks.
Yes, certainly the productivity piece, we would hold on to that and to <unk> earlier comment we're going to build on it. So so that would carry forward.
On peak, we're getting forecast from all of our large customers now as we build our peak planning.
And we expect it to be a good peak inventory levels are good.
A product to sell relapsed true.
That should help the peak demand and then the comment about expenses and we could've done better is we managed hours relative to the volume I'm really proud of that.
A few years ago, we wouldn't have been able to do that we would have de levered, but we were able to manage our hours Fernando and his team and Kate and her team did a great job of that.
We kept the bench.
Because if we let the bench scale.
Then we'd have to rehire them for peak and that doesn't seem like a good idea now the bench, obviously, we don't pay an hourly wage if they're not working but they do get benefits. So that I would say that's the money that we left on the table, but we'll get that back in Spain by giving great service to our customers during peak.
Thank you.
Our next question will come from the line of Jordan <unk> of Goldman Sachs. Please go ahead.
Yes, Hi, I was wondering can you talk a little bit more about the total service plan, just trying to understand a little bit, perhaps what the implementation or implementation or rollout aspect of that may be in.
You know how quickly that starts to dig in and is that a part of the contribution to.
This year's second.
Second half.
Cost saves et cetera. Thanks.
Yes, Jordan.
It's included in my $300 million that I talked about in terms of driving productivity as Carol mentioned it just kicked off I think July 11th. So we're just getting going here net net it is to run a precision on time network. So we don't have late deliveries relates departures and it's worth it's worth quite a bit to us it will ramp up over time.
Al mentioned, the nano and the team met with over 60000 people talking about their specific.
Service plans pretty exciting when you think about what can be accomplished from the TSP perspective, well and Brian and Ken I'm going to call an audible here and I'm going to throw that question over to Matt now do you want to talk a little bit more about the total surface land, yes sure. So the plan is really.
Based on that as Brian mentioned, a predictable environment, where our operators can plan with a lot of confidence on start times finish times sort spans how we can better utilize our automated facilities in more volume from legacy facilities too.
Our newer more automated facilities.
In addition to that we've catered a very unique dispatch for our full time drivers and so we expect that the efficiencies coming out of those customized dispatches and the service. We provide are going to allow us to run a really really great efficient network for our customers and our employees.
<unk> nano and the cool thing is we're not trying to integrate the network, we already have an integrated network.
Running it the way it was designed.
Thank you.
Our next question will come from the line of David Vernon of Bernstein. Please go ahead.
Hey, good morning, everybody. Thanks for taking the time I wanted to see if you could comment a little bit about sort of revenue quality of the efforts, we're making on revenue quality and how sensitive they might be to sort of a weaker economic environment you did.
A great job managing down hours to volume I think the market is looking at the.
Global financial crisis past recessions to kind of get it.
For earnings Cyclicality, and I'm, just trying to get a sense for what's different about the business today that might limit some of that downside too to a downturn or a pullback in overall shipping volume versus kind of maybe what we've seen in the past.
I think in the past as I understand it when the air volumes softened up and was near prices softened up that's just not happening now as Brian detailed in his prepared remarks more than half of the volume decline in our business, including air was because of agreements that we reached with a few of our.
Customers on the volume that we will take and the volume that we won't take the revenue quality is very good.
As sticky as we bring in new customers, we're bringing them in and at very good revenue quality Y because of what we have to offer.
And then service our life. So part of it is what we have to offer from a service perspective, dependability reliability and what else do you want to add in terms of revenue quality, perhaps talk a little bit about you know the.
The technology of the future.
I think we've talked before.
As we think about dynamic pricing and we're running some pilots that we we feel good about there is a technology component to that but.
From a lag perspective, but the tools that we've been running out rolling out with with our accounts whether its deal manager some of the others. It allows us to be more efficient or timely.
And quite candidly the revenue quality is showing 11, 9% with the growth in revenue Ali for for the year. The RVP growth in the second quarter. That's a good number we expect that to moderate for a few reasons in the back half of the year to high single digit what's critical there is managing that spread as Carol talked about driving the productivity will bring the CPP down and then deliver on.
Our margin commitments I love duo manager for some of the ways. It makes it easier for our salespeople first makes it better and faster for our customers, which is awesome, but we're also bringing intelligence to the decision, making before I can't believe is a bit of tribal knowledge, but now we're using AI to help inform the decisions and we're coming in at better pricing as a result.
Alright, Thanks for that and then maybe Brian can you just clarify the EBIT dollar impact of fuel in the quarter and if there's any risk that as fuel prices moderate theres going to be an earnings headwind into the <unk>.
I don't see a headwind.
With the dollar with the fuel prices moderating, it's factored into our guidance.
Okay. Thank you.
Our next question will come from the line of Bruce Chan of Stifel. Please go ahead Sir.
Hey, Thanks, operator, and good morning, everyone.
Just wanted to get your sense of how supply chains are flowing right now maybe just broadly upfront, but also in the context of your Capex plans for rolling stock and the automated facility Rollouts.
Brian maybe if you see any risk to guidance there.
See any additional delays on the supply chain.
Yes, why don't I pick up the first for the back half of that on Capex Carolina. If you want to add any color on supply chain, but the guide we're holding at $5 5 billion.
We feel good about where were not immune and other our supply chain challenges around the world and some of the parts and motors and trucks.
There are more challenging to get but I think we look at capital now from a sort of a perpetual rolling cycle its not episodic and so we're looking at opportunities to invest in different areas that may not have been in the original plans to drive automation et cetera. So we're all of $5 five that you can hold and we will continue to remain agile.
Keep you updated if theres any change I don't expect a big change.
Supply chains are flowing better than they were a year ago.
But we're not out of the woods.
And a lot of it has to do with the rolling Covid Lockdowns in China.
Were shut down in Shenzen again.
And we thought we've gotten through the worst in the second quarter, Kate and her team did a masterful job of managing through that because of the rolling Lockdowns in China.
In different cities when you add up the number of days that we were effectively shut down cumulatively.
Look at all of the city's combined 106 days.
We had people EPS are sleeping on the floor of our hubs to try to keep commerce movie manufacturers couldn't manufacture because they were shut down ocean freight.
Volume levels were down in the second quarter because of the Lockdowns in China. So we're and then we see what's happening with the current variant of Covid and you just wonder about what will we ever get through it but what you have to do is get through it you have to manage through it and that's what we as a team said we will do we are going to.
Our business, we're not going to let the business run us we're going to get through it and that's what we're doing.
Great. Thank you.
And we have time for one more question.
Our last question will come from the line of Brian Us and bank of J.
B Morgan. Please go ahead Sir.
Alright. Thanks, Good morning appreciate taking the question.
So maybe one more quick one for Brian on fuel can you just talk about the management actions.
On fuel that you've quantified I think about a third of the RPC was was that and mix.
Yes, I think where some of the concern is that you might not be able to hang on to that in a weaker fuel price environment are those getting built into these contracts and these renegotiations that you are talking about and then for Carol. If you can just give us more update on the upstream density program. It sounds like another new initiatives I think the company tried that a few years ago didn't quite pan out so maybe.
What's different this time, what sort of visibility in partnership do you think it can drive to pretty much hope everybody in the supply chain, including those who sign up for these pilots.
Yes, Brian Thanks on the fuel surcharge look as Carol mentioned, we run a pass through on the fuel surcharge from the price per gallon piece and we've now isolated that for Ya for transparency, that's a very efficient mechanism and we will move up and down.
Pricing actions, we've taken over the last couple of years, we've actually taken four or five pricing actions.
And those we feel are embedded as Charles said, it's a different type of price. We don't think of as fuel, it's an element of pricing and we're embedding some of that in the base rate.
And I'm just so happy you asked about delivery density.
We've tried to move the needle on this area for a long time and we haven't been successful principally because we've been focused on downstream.
Improving delivery density through access points or surplus redirect and we just really haven't moved the needle.
There definitely was the best this quarter since 2019 a fractionally.
Alright, what we're doing isn't we've gotta go upstream and what I mean upstream when you think about e-commerce retailers their upstream supply chain is from the manufacturer to their warehouse or store their upstream supply chain is also their order management system. So we have been in a pilot with a third party.
<unk> company.
<unk> order management systems for most of the retailers in the country.
The pilot is a virtual halt we're in the we're in the order management system. The third party technology company is holding the order until it can match another order going to the same address and then it releases two orders. This pilot has been working very well now you may say well what about the service.
<unk> agreement to the customer well the virtual hold is only as long as the service level agreement allows but there's a lot of hours and that service level agreement nine hours 12 hours. So what we found through the pilot is enough time to be able to match then we release and we didn't deliver the dense.
And just to make this really for you and this is just an estimate but we estimate the cost of the last mile for us is $5.50 that incremental package cost of 60 cents. So imagine how you that can be released if we improve the density. So we're going to get some of that value back to our customers why not their service.
Level is not disrupted and we are going to value share. So the pilot has been so successful we're going live in the third quarter with the customer we've got nine other customers lined up who are anxious to talk to us about this so more to come early days, but super excited because it's different from what we've done in the past.
Alright, Thank you everybody for joining us today and look forward to talking to you all next quarter that concludes our call.
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