Q2 2023 United Parcel Service Inc Earnings Call
Yeah.
Good morning, My name is Steven and I will be your facilitator today I would like to welcome everyone to the U P. S Investor Relations second quarter 2023 earnings Conference call. All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer period.
Any analyst that wants to ask a question now is the time to press. The one then zero on your telephone keypad.
It is now my pleasure to turn the floor over to your host Mr. Tim Cook Investor Relations Officer, Sir the floor is yours.
Good morning, and welcome to the UBS second quarter 2023 earnings call.
Joining me today are <unk> <unk> our CEO .
Brian Newman, our CFO and a few additional members of our executive leadership team.
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 2022 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 UBS Investor Relations website and from the SEC.
Unless stated otherwise are discussion refers to adjusted results.
For the second quarter of 2023 GAAP results include after tax transformation and other charges of $106 million or <unk> 12 per diluted share.
A reconciliation to GAAP financial results is available on the <unk> Investor Relations website, along with the webcast of today's call.
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.
<unk> ask only one question. So that we may allow as many as possible to participate you may rejoin the queue for the opportunity to asking additional questions and now I will turn the call over to Carol.
You, Ken and good morning, let me begin by commenting on our agreement with the Teamsters.
We believe that the contract is a win win win.
Together, we reached agreement on the issues that were important to teamster leadership to our employees at UBS.
We have the best people and our new contract continues to reward our employees with the best pay and benefits in our industry.
I'll share some highlights of the new contract in a moment.
The second quarter was challenging and I'd like to recognize them more than 500000 ups's around the world for their hard work and effort.
And for doing what they do better than anyone and that is to deliver industry leading service.
I'd also like to give a special shout out to our salespeople for their dedication to our customers.
And most importantly, I want to thank our customers for putting their trust and their business with us during our labor negotiation.
And for those customers, who divert it we look forward to bring you back to our network.
Moving to our second quarter results.
We expect that negotiations with the teamsters to be late and loud and they were.
As the noise will increase throughout the second quarter, we experienced more volume diversion than we anticipated.
And faced with volume declines for some companies might go off strategy or chase unprofitable business.
But that is not today's UPN.
Today's UBS is focused on the long term.
During the quarter, we stayed on strategy and continue to invest in the business.
We also maintained our pricing discipline.
Further the investments we've made in our automated facilities and technology like network planning tools our M. P T.
[noise] enabled greater agility than ever before.
As volume levels declined we've demonstrated that agility by quickly adjusting our integrated network and maintaining high level of productivity.
Looking at our second quarter results versus last year consolidated revenue declined 10, 9% to $22 1 billion.
Under our expectations due to lower volume.
But by controlling what we can control.
Quickly took cost out of the network and delivered $2 $9 billion of operating profit.
In line with our expectation.
Consolidated operating margin was 13, 2%, which exceeded our expectations.
Over the past three years, we've executed several initiatives in support of our customer first people add innovation driven strategy.
Let me highlight some recent accomplishments.
Starting with customer first during the labor negotiation communication and transparency with customers was a top priority.
During the quarter over 500, UBS executive had regular contact with many many customers.
Our approach with these customers what to keep volume from diverting or epic diverted when it back after the labor negotiation with subtle.
This approach brought us closer to our customers and we've gained an even better understanding of their end to end supply chain.
Which will allow us to better serve them.
We are now laser focused on executing our wind back initiative and pulling through the more than $7 billion of opportunity in our sales pipeline.
To do so we will leverage our superior service and capability.
And the investments we've made in the digital customer experience.
Well I'll win back in new volume won't happen immediately we are at.
<unk> already seen some volume returns.
On the digital front, our digital access program or DAP continues to grow.
We've introduced new plug and play technology to make it even easier for e-commerce platforms to connect.
In the second quarter, we added seven new platforms to that including four international platform.
In the first six months of this year that generated more than one $4 billion in revenue.
Putting us on our way to achieving our 2023 DAP revenue targets of.
Around $3 billion.
One of our strategic objective is to become the number one complex health care logistics provider in the world.
In the second quarter, we further expanded our European footprint by opening our first dedicated health care distribution facility in Ireland.
Giving a certified health care facilities F 35 countries.
For the first six months of 2023 revenue from our health care portfolio reached $4 $7 billion.
For the full year, we expect to generate $10 billion and health care revenue.
On the international small package funds, we think quickly expanding in India, which is one of the fastest growing economies in the world.
In May of last year, we launched movement are asset light domestic joint venture.
And we recently expanded from three studies to 49 of the largest cities in India now covering approximately 90% of the beta be market opportunity.
Turning to people that we expect our new labor contract be ratified in two weeks.
Today I'll just share some highlights and we will provide more details after ratification.
Let's start with weekend delivery.
The new contract converts all 22 dot for employees, who are our weekend delivery driver.
Two regular fulltime package car driving.
This gives us the flexibility we need to schedule delivery drivers Tuesday through Saturday and.
And provides more work life balance for our driver.
Further we kept our Sunday delivery service.
Maintaining our share of postal products.
Moving to working conditions, we will be improving the working conditions for all employees, including air conditioning and every new U S packaged car starting in January 2024.
We retained our ability to introduce new technology and the flexibility to use seasonal support during the peak holiday season.
For our teamster employees. This contract further strengthens the industry, leading pay and benefits they already enjoy.
When you look at total compensation by the end of the new contract. The average U P. S. Full time driver will make about $170000 annually and pay and benefit.
And for all part time Union employees that are already working at UPN.
By the end of this contract they will be maintained at least $25.75 per hour, while receiving full health care and pension benefit.
And in fact are part timers are among only 7% of all U S. Part time workers in the private sector to enjoy these benefits.
It was much much more.
But the last point I would like to highlight is the addition of a new paid holiday on Martin Luther King Junior day, which will be a benefit for all of U S employees.
UBS has a long history of honoring Dr. Kim.
And this additional paid holiday aligns with our value.
All of them.
And more helps to make U P F.
Best place to work.
Which brings me to innovation driven.
We run the most efficient integrated network in the world.
Powered by technology developed by U P S engineer.
In the quarter, we leveraged the agility of our network to match capacity with volume level.
Key to this agility with N P T.
Set of technologies that use AI and machine learning to harness the value of our data to quickly make changes to love planning scheduling and volume flows across the network.
This technology is powerful and.
In fact M. P. T can do in an afternoon, what used to take a team of engineers month to do.
By using M. P T with our total service plan, we quickly match the network to volume level.
This resulted in a nearly 10% reduction in hours in the U S. In line with the decline in volume.
Additionally, MPT enabled us to further reduce semi variable and fixed costs, which Brian will detail in a moment.
Importantly, we did all of them, while continuing to provide industry, leading service to our customers.
There is no finish line when it comes to driving efficiency works.
Apple we've made great progress in rolling out Smart package smart facility, our RFID initiative.
At the end of the second quarter, almost 50% of our U S buildings, we're operating with its technology.
And we expect to complete the U S deployment by the end of October .
Quickly touching on our outlook.
Now that labor negotiations are behind us.
We've updated our guidance for the full year, primarily to reflect the volume impact from labor negotiation.
And the costs associated with the tentative agreement.
Ian will share more detail in a moment.
Let me close by talking about our future.
Customer first people led innovation driven under are better and Boulder framework is a winning strategy.
We are winning and the best parts of the market and making our integrated network, even more agile and efficient.
And now for the people that part of our strategy, our new contract establishes a platform for the future.
Our company is stronger than ever and we will move even faster to execute our strategy and continue delivering industry, leading service for our customers.
I'm excited about what the future home and what Ups's will accomplish together.
I truly believe our best days are ahead of them.
And with that thank you for listening.
And now I'll turn the call over to Brian .
Thanks, Carol and good morning, let me begin by echoing Karl's comment on how pleased we are on achieving a win win win labor agreement covering our more than 300000 teamster employees.
This contract provides a significant measure of certainty around labor gives us operational flexibility to increase productivity.
Providing industry, leading service to our customers.
And it will help us attract and retain the best employees.
Now in my comments today I'll cover four areas.
I'll start with the macro followed by our second quarter results next I'll cover cash and Shareowner returns and lastly, I'll provide some comments on the second half of the year.
In the second quarter, the overall macro conditions in the U S were in line with our expectations.
Internationally conditions were a little worse than we expected due to lower growth in both real exports and industrial production.
Moving to our financial results for the quarter consolidated revenue was $22 1 billion down 10, 9% from last year.
All three of our segments demonstrated agility and on a combined basis drove down total expense by $2 $1 billion in the second quarter year over year.
This enabled us to deliver $2 9 billion and operating profit, which is the target. We communicated to you last quarter and was a decrease of 18, 4% compared to last year.
Consolidated operating margin was 13, 2% a decline of 120 basis points compared to the same period last year.
With all three segments, achieving double digit operating margins for.
For the second quarter diluted earnings per share was $2 54.
Down 22, 8% from the same period last year.
Now, let's look at our business segments in U S. Domestic our disciplined approach to revenue quality, partially offset the decrease in volume.
As volume declined throughout the quarter. The team did an excellent job adjusting the network to match demand and drive out cost in real time.
All while maintaining industry leading service levels.
We expected volumes to decline in the second quarter and it did but we saw more volume diversion than anticipated as noise levels around our labor negotiations increase.
We estimate the impact of volume diversion combined with a slowdown in our sales pipeline pull through reduced volume in the second quarter by approximately $1 2 million packages per day.
For the quarter total average daily volume was down nine 9% with June down 12, 2%.
Moving to mix in the second quarter, we saw lower volumes across all industry sectors with the largest declines from retail and high tech.
B to C average daily volume declined 11, 5% compared to last year.
B to B average daily volume was down seven 7%.
In the second quarter <unk> represented 43, 7% of our volume, which was an increase of 100 basis points from a year ago.
Also in the second quarter, we continued to see customers shift volumes out of the air onto the ground total air average daily volume was down 16, 5% year over year and ground average daily volume declined eight 6%.
In terms of customer mix in the second quarter F. N B average daily volumes declined less than volume from our enterprise customers.
F N b's, including place.
The quarter U S domestic generated revenue of $14 4 billion.
Down six 9% revs.
Our revenue per piece increased three 3%, partially offsetting the decline in volume.
The combination of strong base rates and improved customer mix increase the revenue per piece growth rate by 670 basis points.
Changes in fuel prices decreased revenue per piece growth rates by 220 basis points.
The remaining 120 basis point decline was due to multiple factors, including package characteristics and product mix.
Turning to costs. The U S. Domestic team took out $889 million of expense year over year, which is the largest year over year cost reductions in our history.
How do we do it.
We leveraged our technology and the agility of our integrated network.
Let me walk you through some of the levers we pull.
We continue to execute our total service plan and reduced labor hours by nearly 10% to maintain our high levels of productivity.
We leveraged the power of our network planning tools to optimize package flows and pull volume out of smaller non automated building and flow it into our larger automated facilities.
While total volume was down nine 9%, we reduced the volume in our non automated buildings by 18%.
This enabled us to close or reduce operations head count by 7% compared to last year.
We reduced feeder movements by continuing to manage cube utilization and our trailers and brought on more ups's feeder drivers to support our fastest ground ever lane.
Looking at air volumes, we pulled more activity into world for our global Air hub in Louisville.
This enabled us to move more volume via our next day flight and reduced second day flights.
As a result domestic block hours were lower by six 5% versus last year, and we exited the second quarter with block hours down more than 10%.
And lastly, we've reduced management head count by over 2500 positions year over year.
All of these actions helped us reduce U S domestic expense in the second quarter.
Specifically compensation and benefits was down $205 million year over year, Despite six 5% increase in average union wage rates.
Transportation declined $207 million.
Fuel expense was lower by $394 million and there were multiple factors that drove the remaining $83 million reduction in expenses.
Our results are proof of our agility.
And in the second quarter, we took out a record amount of cost and held the cost per piece growth rate to three 7%, while volume was down nearly 10%.
The U S. Domestic segment delivered $1 7 billion and operating profit in line with our expectations and down nine 4% compared to the second quarter of 2022 opt.
Operating margin was 11, 7% an increase of 180 basis points from the first quarter of this year.
Moving to our international segment.
Crow conditions remained sluggish in the second quarter.
In Europe , persistent high inflation and tight financial conditions weighed on the consumer.
And in Asia, the slow recovery, we experienced in the first quarter. So in the second quarter.
In the quarter International total average daily volume was down six 6% year over year.
About two thirds of the decline came from lower domestic average daily volume, which was down eight 7% driven primarily by declines in Europe on.
On the export side average daily volume declined four 5% on a year over year basis.
Looking at Asia export average daily volume was down 10, 1%.
Export volume on the China to U S Lane was down 7% year over year, which was an improvement from the first quarter.
In the second quarter International revenue was $4 4 billion.
Which was down 13% from last year due to the decline in volume and a five 7% reduction in revenue per piece.
The decline in revenue per piece was primarily driven by a 570 basis point decrease from fuel surcharge revenue.
Additionally, a reduction in demand related surcharge revenue contributed 240 basis points to the decline in.
And there was an 80 basis point decline in revenue per piece due to a stronger U S. Dollar.
Partially offsetting the decline multiple factors increase the revenue per piece growth rate by 320 basis points.
Including strong base rates and favorable volume mix of export volume outperformed the domestic book.
Moving to cost in the second quarter total international costs was down $356 million primarily.
Primarily driven by lower fuel expense.
Leverage the agility of our integrated network to match capacity with demand and focused on controlling what we could control. These.
These actions included flight reduction, which drove international block hours down nine 4% compared to last year.
Which includes a 15, 5% block hour reduction on Asia outbound transcontinental flights.
We also reduced head count and operations and overhead functions by a total of more than 1700 positions.
And we did all of this while continuing to deliver excellent service to our customers.
Operating profit in the international segment was $902 million.
Down $302 million year over year, which included a $123 million reduction in demand related surcharge revenue.
Operating margin in the second quarter was 24% in line with our expectations.
Now looking at supply chain solutions, our teams continued to navigate a challenging macro environment and executed our plans to reduce cost in the second quarter revenue was $3 2 billion.
Down $990 million year over year.
Looking at the key drivers for it and continue to be impacted by softer global demand, especially out of Asia, which drove market rates and volumes lower.
This resulted in a decline in revenue and operating profit.
In response, we cut operating costs and are continuing to manage buy sell spreads.
Logistics delivered revenue and operating profit growth, including gains in our health care business and.
In the second quarter supply chain solutions generated operating profit of $336 million and an operating margin of 10, 4%.
Walking through the rest of the income statement, we had $190 million of interest expense. Our other pension income was $66 million and our effective tax rate for the second quarter was 23, 5%.
Now, let's turn to cash and shareowner returns.
Year to date, we generated $5 $6 billion in cash from operations and free cash flow was $3 8 billion <unk>.
Including our annual pension contribution of $1 $2 billion that we made in the first quarter.
Also this year in the first quarter, we issued $2 $5 billion in long term debt.
We've used $1 $6 billion to pay off debt maturities in the second quarter, and we plan to use $900 million to pay off debt.
Second half of this year.
And in the first half of 2023 U P. S paid $2 7 billion and dividend.
We also completed $1 5 billion in share buybacks at an average price of around $178 per share.
Now I will share a few comments about our outlook as Carol mentioned with the contract out for ratification we have updated our consolidated revenue and adjusted operating margin guidance.
For the full year 2023, we expect consolidated revenues of about 93 billion.
Consolidated operating margin of around 11, 8%.
Now let me provide some color to help you update your models for the second half of the year.
The U S. Domestic segment is navigating a couple of unique factors in the back half of the year.
First in the second quarter and into July we experienced more volume diversion than we anticipated.
Because of this our volume ramp up for the second half of the year is starting from a lower base.
We're already executing our initiatives to win back diverted volume and accelerate the pull through from our sales pipeline, while remaining disciplined on revenue quality.
As a result of our efforts by the end of the year, we expect our average daily volume level to be about even with December of last year.
And overall for the second half of 2023, we expect U S average daily volume to be down by a mid single digit percentage year over year.
And second looking at expense in the U S. Domestic segment, the union wage rate increases, including in our new Labor agreement for the first year are higher than we originally planned.
We started to accrue for the terms of the tentative agreement on August 1st while.
While the contract is out for ratification.
Further we will address wage compression that resulted from the new labor contract. These additional labor costs in the back half of the year will be partially offset by the network adjustments, we made in the second quarter.
Turning to the international segment in the second half of the year, we expect the year over year volume growth rates to be similar to what we saw in the second quarter and revenue per piece growth to be flattish compared to the same period last year.
And in supply chain solutions, we expect second half revenue to be down by a high single digit percentage year over year with full year revenue approaching 14 billion.
Yes.
Moving to capital allocation.
2023 full year targets have not changed we will continue to stay on strategy and invest in both efficiency and growth opportunities.
Capital expenditures are still expected to be about $5 3 billion.
Which includes completing the deployment of the first phase smart packaging facility in the U S.
To expand our health care logistics footprint globally, expanding DAP internationally and investing in our logistics as a service platform.
We are still planning to pay out around $5 $4 billion in dividend and 2023 subject to board approval and for the full year, we still plan to buyback around $3 billion of our shares.
With negotiations behind US we are moving our business forward.
For our people we have a platform for the future that continues to reward our employees, which helps us to deliver industry, leading service to our customers and enables us to win back volume and drive revenue quality.
We will control, what we can control, which means continuing to manage cost as we scale up the network with volume.
We are staying on strategy and investing through this cycle, which will enable us to grow in the most attractive parts of the market make our integrated network, even more efficient and continue to reward our shareholders. Thank you and operator, please open the lines.
Thank you we will conduct a question and answer session. Our first question will come from the line of David Vernon of Bernstein. Please go ahead.
Yes.
Question so.
I want to understand kind of at a high level, what we should be expecting about the shape of inflation over the course of the contract I know, we're probably not going to get into too many of the details today, but I'd love to understand kind of from a CAGR perspective, how you're set up for inflation.
Inflation over the life of this contract.
Well, maybe I'll just start with some observations about the contract and then Brian you can provide details on the shape of that curve.
Got into the negotiations David It became very clear to me that we were negotiating on behalf of a number of stakeholders. We were negotiating on behalf of our people we were negotiating on behalf of our customer.
And on behalf of our country, we were negotiating on behalf of our shareholders and we are negotiating on behalf of UPN N.
And as I look at the handshake agreement that we achieved I think we have a win win win for all shareholders all stakeholders they'll make that real for you first in terms of our people. They will continue to be paid the highest wage and benefits in the industry that has better work life balance and working conditions will also be improved as we will be adding air.
Oh, I guess cars starting in January for our customers that we avoided a work stoppage and that would've been disruptive for them and for their customers. So I think that's a win for our country. As you know we moved 6% of the U.
U S. GDP every day and there was no place for this volume took out with so we avoided a disruption to the economy with this a handshake agreement for our shareowners I would say we also have the win because as I look at the economic package over the five years, the compounded annual growth rate of this economic.
Package is 3.3% so I'd say, that's a win and for UBS, we retain the flexibility we need to take care of our customers.
To provide seasonal helped during the holidays.
To add technology to drive productivity and efficiency. So I think it's a win win win and maybe Brian you can talk about the same yes Carol.
I'm going to host a call, Dave and go a bit deeper on it but it's sort of a barbell type effect. We've got a we've got a majority of the increase went all majority of over 40% in year, one and then years 234 quite reasonable from an inflation standpoint, and then with another step up in year five but I'll go into more details on that when we host a call following ratification.
Alright, thanks for that and maybe just as a quick follow up.
Can you talk about what you need to do to win back some of the boy that you might have lost a contract uncertainty I'm just wondering kind of how quickly you guys are expecting that to come back as we look into the what's baked into guidance.
So it's all hands on deck to win back the volume that was diverted as a result of the labor negotiations. So the first thing. We did is that we stood up a control tower. This is the same kind of control tower that we use during peak to ensure that we can onboard this new volume coming back without disruption.
It's up and running and I'm very pleased with what I'm seeing in that regard.
We have of course mitigated all the risk that was still remaining because we didn't know the outcome of the contract. So that those are high risk customers are now shipping with us without any risk from a marketing perspective, we're doing a number of things. The first thing. We're doing is we're amplifying our service message because we do have the best service in the industry.
We are also amplifying our share post advantage because this is a very attractive product that you're shifting lightweight packages. We are expanding our speed campaign, because we are faster than our largest competitor in many many markets. So we are amplifying our speed campaign. We are also expanding our weekend pick up to four markets.
We are expanding our Saturday delivery by 890 postal codes and we are launching new offerings inside deal manager, which is the tool that we use to win new small and medium sized businesses. So there's a lot of effort underway to bring back the business that we lost and to win new business now I will tell you.
It's not all going to happen at once and so we understand that we're working with our customers to bring it in as quickly as it can but also as fully as we can for them as they start to hurt it I'm looking at our volume in July I will say that it was still down year on year, but not as much as the decline that we saw in June .
Alright, thanks very much.
Our next question will come from the line of Ken <unk> with Bank of America. Please go ahead.
Great Good morning.
Maybe just a little bit careful your thoughts into the peak season here you know maybe outside of the diversion.
Was underlying in your your your thoughts here.
Brian mentioned still expecting negative all the way through the end of December So maybe just a little bit thoughts on the backdrop and the <unk>.
Differences between the contract and what's going on economically.
We'll still have a peak.
Even though we were winning back the volume that was deferred it overtime will still have a peak we're collaborating with the top 100 customers that represent 87% of our peak surge. So we're already starting to work with them on our operating plans for peak.
It will be 21 days. This year are the same as it was last year, we expect to see you know searched in the 60% area. This year. So it's still going to pick up it's just from a different volume level and we're well prepared to take to have another peak for us. It's just another day with more volume.
Our next question will come from the line of Amit Kumar.
So true.
Of Deutsche Bank. Please go ahead.
Thanks, Operator, hi, everyone.
Brian can you help us.
On the guidance change.
Attributes that guidance change to volume diversion and then maybe the difference in terms of what you accrued on the wages and I don't know if you provided this in the prepared remarks, but the monthly cadence of domestic volumes in June and July and then lastly, Carol.
We started the year at 12% margin expectations for domestic we went down to 11 that were probably around 10, obviously, we're in a completely different world and you have a new wage deal.
Just provide your thoughts around three 3% inflation doesn't seem.
Like enormous hurdle when do you.
What's happened over the next last seven months change kind of your view on on what you think the the the return profile of those businesses from an operating margin perspective in the domestic business and when we can get back to like a positive trajectory Matt. Thank you.
Hey, Amit Thanks for the question. So from a guide perspective, we went from 97 billion to 93 billion in revenue. That's a 4 billion change about $1 billion of that is from the softer volume Carol talked about in the second quarter, the higher diversion and about $3 billion is coming from the second half.
As we think about volume and exiting the second quarter down 12, you'll remember in March and April we were down 7%, but June exited at minus 12. So if we take that minus 12 exit and you get to flat by the end of the year that glide over the balance of the year is about it's down mid single digits down about 6% from a profit standpoint are we.
Went from we dropped about $1 4 billion in profit to <unk> 11 billion or 11 eight margin.
And most of that is coming from the domestic side about $1 billion that billing and amid is split fairly evenly between wages and then also the lower volume I just referenced there was a $400 million piece related to some inconsistent recovery in the euro inflation and interest rates, Germany is in a recession and a bit of Asia, but the vast majority is really.
Split half and half between wages and volume.
And on the monthly cadence, we were down 12% and June and down double digits in July , but better than 12% depressed.
On your question about margin.
As we got into the negotiation with the Teamsters and this is true for any negotiation. There are some things that are very important and one thing that was very important for teamster leadership was to frontload. Some of the wage inflation and we agreed to do that.
So that does put a little pressure on the margin as as Brian pointed out but that doesn't change the destination. It just changes the journey will have a bit of pressure for the next year August of next year, but the inflation is very manageable. So I see a path back to 12% or higher margins in the U S.
Because of all the investments that we're making to drive productivity and a good proof point of that is what we did in the second quarter. So let me give you. An example of just one of our initiatives.
As some of our packaged smart facility, we're now in over about 50% of the buildings in the United States and 50% of those buildings have miss load improvements from one in 401 and 1000.
So as the buildings mature they they get better and more productive.
As we think about the next phase of Smart package Smart facility, we're moving from where the preloaded just scanning the package to where the car is going to scan package. So think about the productivity that we will enjoy that.
No it doesn't change the destination just the journey, we plan to have an Investor conference in the spring of 'twenty four we haven't landed on a date yet but during that Investor Conference. We will lay out three year targets. So you can understand the journey to get to a 12% or higher margin and England.
Okay very good thank you very much.
Thanks.
Our next question will come from the line of Allison for linear.
Wells Fargo. Please go ahead.
Oh sure I just wanted to see if you can expand a little bit on that productivity effort, Dan Smart Smart homes Smart package you know how we should think about that you know I know a lot of the investment with going in to this year you were talking about 900 facilities and by the end of October you know does that productivity start to accelerate.
I'm here in how should we think about that in terms of an offset to some of the wage inflation going forward. Thanks, Yeah. So smart package smart facility is just one of the levers in our productivity tool kit.
Network planning tools are powerful tools, there are powered by machine learning and a R. And if you think about it. We've just recently completed the rollout of network planning tools in 2020, So every year, we get better because.
<unk> get better and think about what the tools were able enabled us to do in the second quarter. When we saw volume starting to slow down and actually divert we were able to our tools to move volume away from.
On automated hubs to automated hubs and let me make that real for you last year of the volume that was started by our hubs in the United States about 15, 3% went through an automated hubs Fisher.
7% of the volume went through an automated so the tools are making us more effective and then we are introducing new talent.
New technology inside of our buildings to make us more effective like automated label application and automated bagging and robotics.
Water injection and I could go on and on it just kind of getting out on the tools, but it's like it's a complement of tools that will help offset some of the wage pressure that we will see over the next year.
Thank you that's helpful.
Our next question will come from the line of Brian Hudson Beck of J P. Morgan. Please go ahead.
Hey, good morning, Thanks for taking the question.
I just wanted to see if this agreement that's behind you and how for education has that changed any of your thinking about the timing and magnitude of tier I or where pricing in general maybe Brian you can give more detail on our V. P trends in mix and in the U S. And then Carol I wanted to see you mentioned that the short posts advantage you just give some context around the U S.
P. S ground advantage product that just launched and if you see that as a competitive threat now that it's been out there for a month or so maybe some initial impressions of that service and we're able to deliver.
And what it means for you.
Yeah, Brian Thanks for the question. So look every year, we evaluate the GR II to provide.
The right service at the right price for our customers. This year, we had guided to roughly 500 basis point improvement in rate and then we had expected about 200 basis point headwind in fuel to land at about 3%. So we're staying with that guide for this year, Brian coming up here in the fall, we'll take a look at next year, but the thing I would leave you with is we remain very disciplined on <unk>.
<unk> management and are and will continue to deliver value for the service we provide.
And on our surplus brought into it it compares very favorably.
Post office product and they're going to continue to invest in our product we like it a lot because of the delivery density associated with that product.
Yeah.
Our next question will come from the line of Ravi Shanker.
Of Morgan Stanley . Please go ahead.
Thanks morning, everyone. Carol can you give us a little more color on the 7 billion sales pipeline kind of what kind of customers are what kind of end markets.
I guess.
I haven't heard you guys talk about our sales pipeline before too often to know how is that going to bid.
Building up Oregon is expected to come through over time and also can you give us an update on your largest customer please and kind of any changes to that relationship last volumes. There over the course of the potential kind of union docs. Thank you.
Our pipeline is across all customer segments with a real focus in the commercial area small and medium size business supporters healthcare and enterprise you name. It we're going after it our sales team are are really excited about selling the thought value that we have to offer which is.
Just the first service.
And the industry. We've also identified about 50 customers that R. R.
Target customers for our new pricing architecture, which we call architecture of tomorrow.
New pricing architecture, it doesn't fit everybody, but it does fit.
Where if based on their their their shipping needs. We can AD pricing modifiers like day of week or cube or ZIP code plus four so these pricing a lot of buyers are very interesting to these targeted customers and it won't be for everybody, but first time, so we're going to lean into that and in a big way.
Hey.
And as it relates to our largest customer we have a very good relationship with our largest customer and the business is operating as we would expect it to be we're on a glide path, but not a glide out.
Thank you.
Our next question will come from the line of Chris Weatherby of Citi. Please go ahead.
Hey, guys good morning.
I was wondering if you could comment on the $1 2 billion.
Per day.
And how would you think that comes back I guess, maybe the bigger question is just all of it would come back and maybe how long does it take to get there then you Brian you've given us some help in the past quarter. The corporate margin dynamics as we think about getting towards that full year number or is there anything we should be thinking about <unk> versus <unk> and it Walt I think volumes will be a little bit better in the second part of the back half of the year, but just curious.
But how that cadence might look.
Well the one 2 million packages per day is about 1 million of deferred at volume in other words volume that we had that diverted elsewhere and about 200 million of sales that we couldn't pull through because of concerns about some of the labor negotiation is Brian commented, we think by the end of the year, we will pull back everything that day.
<unk> and I think we're going to win that extra 200000 bags as well as well it doesn't happen overnight of course, it's already starting to flow back in but we think by the end of the year will win it all back and Chris just with respect to the phasing we're really focused on the second half and the full year guide, but I would say both topline and profitability Q3 will be more challenged.
In Q4, due to the ADP growth rates and seasonality and we've got some one time costs in the third quarter. So I would just think of Q4 being a bit stronger than Q3.
And you might ask well where did that volume goals and so we don't have great intelligence there, but we do have some market share intelligence tool that we used from Nelson IQ or Nielsen IQ pardon me and what that would tell us it's not perfect, but what it would tell US is that a third went to the post office a third went to Fedex.
And a third went to the regionals.
That actually directs our activities as when we think about how to win that that volume back.
Our next question will come from the line of Jordan Alegar.
Goldman Sachs. Please go ahead.
Good morning.
I was wondering if you could give a little more color I think you have a good sense on the domestic margin it looks like there's a small piece.
Portability guide that supply chain and international So can you maybe talk about where unpack a little bit sort of.
The margins our expectation for the full year on that and if indeed, you know the U S margin should be at or around the 10% level give or take.
So from a margin perspective, Jordan, we'd expect international full year to be 19% to 20% SCS should be at 10, and as you think about the international business. The second half Adv were expected to be down around six 5% RV piece should be flattish.
And really it stems from some of the challenging macro situation, we've got weak real export growth, Germany is in a recession and then I would say Europe and Asia ADB growth would bottom in Q3 and the team are very focused on controlling what we control both on the air side and the head count side to protect that you saw.
Printed north of a 20% margin in the second quarter.
Yes, I would expect full year revenue to approach 14 billion with a margin of about 10% forwarding rates and volume is.
It is stabilizing but down year over year.
The team does a good job of managing the buy sell spreads as you saw obviously expanding health care is a strategic priority for the company and they were also executing the cost initiatives.
Thank you.
Our next question will come from the line of Jeff Kauffman of vertical Research partners. Please go ahead.
I just wanted to ask a little bit about the labor contract Economics I know you said, we'll have a call on this after ratification but.
You noted a number of about 3.3% CAGR on the economic benefits.
And just off the wage we're calculating a little higher than that so could you do your best to breakdown the components that help us get to that three 3%.
Hey, Jeff.
So $3 three is an all in number so it includes as wage wages and benefits of the two net together.
Rather than go into a lot of detail on this call I'm going to host a call. Shortly after ratification and I'll take you through all the details at that point, we can go line by line.
[laughter] go very deep and we want to respect the ratification process.
Alright, well that's my one thank you.
Thank you.
Our next question comes from the line of Tom Wattles.
Please go ahead.
Yes, good morning.
Wanted to see if you could help us just think about.
You know kind of volume versus price. It seems like both are important but the kind of related right. If you go for more price offset higher in place and then you know it could be a headwind to what you do on volume. So how do you think about managing between those two and then I guess that feeds into you know you you've given us a lot to work with for 2023.
But I think there's probably a lack of visibility for 'twenty for weather.
CIT earnings be up in 24, obviously, we'd like to see that.
But you know you got through August that headwind, so any broad commentary about how optimistic you might be on 'twenty four in terms of domestic margin or earnings overall.
<unk>.
Well, we run the business as a portfolio. So we want both.
Volume and price.
This doesn't necessarily mean price increases it means moving into segments.
Value our end to end network and people.
Have different products. So we run it as a portfolio we want both that's easy answer to that question and just on shaping the multiyear Tom well as Carol mentioned will come back in the spring and give your multi year targets.
Obviously, you're one of the labor contract is the most expensive piece up in August to August . So one age of 24, we'd expect to be under some pressure the back half less inflation. So we'll walk that for you in the early part of next year.
Okay, great. Thank you thanks, Tom.
Our next question will come from the line of Bruce Chan of Stifel. Please go ahead.
Great. Thanks, operator, I appreciate the time here Carol.
That rollout has been very successful this year and I know, it's early to start thinking about 2024, but as far as what the longer opportunity is does growth start to slow for that channel now that you've kind of reached critical mass or do you still see quite a bit of opportunity there.
And then Brian just to follow up broadly on ecommerce demand trends have we kind of turned the corner. There are we still seeing a bit of an air pocket in terms of spending.
<unk>.
So thanks for your comments about that we're very pleased with that product and we see nothing bad breath ahead global growth.
We are just scratching the surface when we think about that outside of the United States and we continue to add new partners here in the United States now up to 27 partners.
One thing we're doing to continue to grow that is to make it easier to onboard the platforms. So we are introducing widget, which are basically.
Program to applications that adapt partner can put it into its website and avoid the user interface and a P. I onboarding that can slow things down a bit.
The first winter that we introduced at the locator Internet. So our DAP partner can put the locator widget Intuit's website, and then you push a button and a pop up store to ship that package. So we're going to continue to make it easier to do business with as we continued to grow with this important part of our business.
Yeah.
Yeah.
And then Brian just on the e-commerce demand trends any broad commentary there.
We're looking at ESMO improving in the back end of the year. So from a macro standpoint I think the trends are are are stable to improving in the U S. Obviously under some more pressure internationally I mean, clearly what happened with ecommerce is that blew up during cold right. It blew up and so now you know everything is kind of reverting back to where it was before COVID-19, we see that.
Around the globe, which makes sense and so this is a great place to think about growth from here on out.
Great. Thanks for the time thanks Bruce.
Our next question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Thanks, very much Brian I believe you said, you're expecting a bottoming in Europe and Asia and are in the third quarter, just wanted to get a sense of cadence of.
And in your optimism that it will improve in fourth quarter, just what youre seeing that trajectory.
On on on both there and then also if you could put into perspective, just a domestic cost per piece, how you see that trajectory on that metric specifically thanks.
So on the bottoming, we had we had thought we would have seen the bottom in Asia in Q2, which I.
I would say it it didn't recover it stalled.
In Europe , we think the the bottom will be more in Q3, but there's there could be an elongated period here. So we're not putting in a lot of recovery into our into the international business going forward on the CPP basis.
We're still calling for a from a U S basis, we would look from a full year standpoint to be about $11 24.
About a one 4% change from from the 11 away that we had previously.
Yep.
Our next question will come from the line of Stephanie more of Jefferies. Please go ahead.
Hi, Good morning. Thank you I wanted to touch a little bit on your kind of your automation efforts part of your area of ongoing productivity.
Tools I think you said last year. It was up 53% went through some form of an automated hub. This year at 57 do you have kind of a line of sight on where that can go over time.
Well, we do.
We're gonna come back in the spring at our Investor Conference and give you our sense of what we're calling network of the future. It's a very exciting opportunities to really automate. This business. The good thing is we don't have to integrate our network because we're integrated but we can do a better job of automating and so we'll come back and give you all of that.
In the spring of next year.
Alright, I'll leave it at that thank you. Thank you.
Our next question will come from the line of Brandon No Glinski of Barclays. Please go ahead.
Hey, Good morning. This is Eric Morgan on for Brandon. Thanks for taking my question I just wanted to ask a follow up on sure post maybe could you give us an update on how much you're redirecting in the network today.
Maybe.
And if this was the topic of the labor negotiations and if you did need to start insourcing more kind of on an accelerated basis, what kind of potential cost implications or inefficiencies there could be and maybe some offsets there as well. Thank you.
Sure. So we are redirecting a little under 40% at the end of the second quarter. It was like a point of the negotiations we had agreed to redirect 50% no problem at all with that no concern about cost because the delivery density with surplus is really really good.
Thank you.
Thanks.
Our next question comes from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.
Hey, Thanks for letting me have a follow up so just a couple quick ones. So Brian I think you said the labor deal.
It's 500 million dollar headwind in the back half relative to what you accrued for estimating the prior guidance.
Wasn't sure if that was a gross number or there was some productivity and against that.
And then Carol I wanted to ask about M&A.
Because it doesn't get enough attention, but I think you guys have done some interesting strategic acquisitions from <unk>.
Delivery solutions, you also took a stake or a board seat on commerce hub. These are small, but I view kind of as important deals.
Kind of a long term view can you just talk about what they give you and are there is there more on the pipeline because you're generating oodles of cash flow and I'm wondering if there's an opportunity to talk on more deals you've been on the health care vertical which is such a big vertical for you guys. If you could just expand on that thank you.
The bar Bell shape of the contract. There are 500 is a gross number we had assumed originally about 500. So it's actually two X what we thought.
And on the acquisitions that we've made and we couldnt be happier because they are giving us enabling capabilities from a delivery solution.
Product from Us to follow me wishes, creating cold chain logistics for Hudson parts of the world that we didn't have that so I couldn't be happier and I shouldn't I don't want to Miss out any of the companies that we've acquired so we're pleased with our audience.
Providing for Cisco.
So, they're enabling capabilities and as we look ahead.
Sector to continue to acquire enabling capabilities, particularly in those areas that we really want to own health care logistics, but certainly be one of those technology.
Technology investments that give us platforms to accelerate the digital experience for our customers absolutely expect us to lean into that space and we will be giving you updates as we go.
Stephen we have time for one more question.
Our last question will come from the line of Jon Chapell of Evercore ISI. Please go ahead.
Thank you and good morning, just wanted to tie together a couple of things from before.
Think about regaining that 1 million packages that was diverted and you think about your pricing, perhaps going forward you have to lead with price in the next six months to win the diverted traffic and then think about pricing you know from a starting point in 2024 or do you think it's strictly service relationships and that package, but it will come back to you without adjusting the way you think about the revenue management.
Yeah.
And we don't think we have to lead with price our customers did was they thought they had to do to protect their customers, but they're very happy with us.
Its about operating plans, making sure they come back to us without disruption to their business that doesn't happen overnight, it's going to take a while but we can bring that business back because that's what we provide to them.
Thank you Carol.
Thanks, Alright, I want to thank everybody for joining us. This morning, we look forward to talking to you soon and that concludes our call.
Yeah.
Yeah.
Yes.
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