Q1 2024 United Parcel Service Inc Earnings Call
Consolidated operating margin was 8%.
Our operating profit performance was a bit better than we expected due to higher productivity.
At our Investor and Analyst day last month, we shared our three year targets and how we intend to reach them under our better and bolder approach we.
We are re imagining our network through network of the future.
And we are leaning into the parts of the markets that value our end to end integrated network.
For example, we recently announced that UBS will become the primary air cargo provider for the United States Postal service.
Under this contract we will move most of the U S. P S air cargo within the United States.
The U S. P S air cargo business fits beautifully with our strategy to grow our b to B business.
Two when we put together an innovative and differentiated solution that leverages, our integrated network and existing asset.
The U S. P. S air cargo business will contribute to top line growth and be accretive to consolidated and U S domestic operating margin.
Brian will share more details, including what to expect during that transition period, and where this will show up in our financial reporting.
Moving to our strategic update through our customer first people led innovation driven strategy, we are investing to grow in the premium parts of the market.
And drive efficiency.
Speaker Change: Let me give you a few recent examples.
Speaker Change: Starting with customer first.
Speaker Change: Through our on demand network, we are expanding our addressable market with capabilities like no box no label returns.
Speaker Change: Happy returns and the convenience of our more than 5200 UPN store location.
Speaker Change: During the first quarter, our overall returns volume in the U S increased one 4%.
Speaker Change: And happy returns more than quadrupled its ATB in the first quarter.
Speaker Change: Returns are attractive to us for a couple of reasons.
Speaker Change: First they are typically be to be movement, and as a result drive pickup and delivery density.
Speaker Change: Our frictionless offering creates customer loyalty and repeat business.
Speaker Change: We are also expanding our addressable market with capabilities like big and bulky deliveries through roadie.
Speaker Change: In the first quarter, we launched roadie, XD, which adds cross dock capabilities to Roadie X L. R.
Speaker Change: Our cross dock solution brings the digital and physical together prolonged zone deliveries of bulky items, such as grills in furniture that do not fit in the U P. S small package network.
Speaker Change: This is enabling us to unlock additional revenue opportunities in the highly fragmented 60 billion dollar big and bulky market in the U S.
Speaker Change: It's still early days, but this is a large opportunity for us to grow quality revenue and profit and serve the needs of our customers.
Speaker Change: As we laid out at our Investor day.
Speaker Change: Long term target is to grow our U S SMB volume penetration to 40%.
Speaker Change: DAP our digital access program is one of the tools, we will use to reach this target.
Speaker Change: Recently, we enhanced our DAP pricing capabilities by launching a solution we call fast lane.
Speaker Change: Fast lane, we can optimize rates and target attractive volume growth, whether it would be by apartment my product or by customer segment.
Speaker Change: All of which can drive revenue per piece growth.
Speaker Change: We can even target volume growth by geography to drive density.
Speaker Change: Prior to vaseline, right and other adjustments and that could take months.
Speaker Change: Now, we can make them in a matter of days or even hours.
Speaker Change: In terms of results in the first quarter DAP revenue grew by 3% year over year and in 2024, we expect to generate over $3 billion and global DAP revenue.
Speaker Change: Speaking of F&B over the last year, we've gained traction on improving the customer experience across 16 journeys taken.
Speaker Change: Pick up.
Speaker Change: We redesigned our process and deployed new driver dispatch technology.
Speaker Change: This resulted in a 74% reduction in pickup concerns and a net promoter score or NPS.
Speaker Change: <unk> 48 for this journey.
Speaker Change: Which is an all time high for UBS.
Speaker Change: And for our international customers, our Nextgen brokerage solution is making it easier for smbs to navigate the ins and outs of export them.
Speaker Change: As evidenced by a 40% decline in custom brokerage hold since April of 2023.
Speaker Change: Turning to health care, we aim to become the number one complex health care logistics provider in the world.
Speaker Change: Health care companies are innovating and so are we.
Speaker Change: Our latest example is the opening of lab port at World Port Our global Air hub in Louisville, Kentucky, La Porte is unique.
Speaker Change: It's an end of the runway state of the art facility built specifically for lab customers.
Speaker Change: <unk> been at Walport, we can deliver urgent air packages to our lab customers well before the Sun comes up so they can provide diagnostic results by early morning.
Speaker Change: And in terms of health care revenue in the first quarter revenue from our health care portfolio reached $2 $6 billion.
Speaker Change: Outside the United States, we're continuing to enhance our network to grow our premium international business.
Our most recent example is the launch of next day flights between Shenzhen, China, and Sydney, Australia.
Speaker Change: The addition of these blades enables faster import and export movement between 11 Asian markets in Australia.
Speaker Change: And now exports from Australia, and even reach in Europe by the next business day.
Speaker Change: This enhancement further enables us to serve our customers, particularly those that are in high tech manufacturing and health care as they are shifting their supply chains in response to changing international trade flows.
Speaker Change: Now, let's turn to innovation driven.
Speaker Change: As we've discussed network of the future includes physical and digital changes that will deliver benefits in the short term and the long term.
Speaker Change: Smart package smart facility, our RFID solution is a great Digital example.
Speaker Change: We are moving from a scanning network twist sensing networks.
Speaker Change: Following last year's phase one deployment to a preload operation.
Speaker Change: This year, we are installing RFID readers and over 40000 U S packaged cars with the balance to be completed in 2025.
Speaker Change: Packaged car readers will enable us to further reduce our misleading.
Speaker Change: It will improve efficiency.
Speaker Change: And the customer experience.
Speaker Change: The physical aspect of network of the future has launched and in the quarter, we continued to close sorts and blow more volume into automated facilities.
Speaker Change: Most of the phase one of major projects, we outlined during our Investor day have begun and are in the contracting and execution pesos.
Innovation, driven it's also about achieving carbon neutrality by 2050.
Speaker Change: We recently published our twenty-second sustainability report and we are well on our way to achieving our goal.
Speaker Change: In 2023, our scope one two and three C O two emissions declined eight 1% compared to 2022.
Speaker Change: We operate more than 18000 alternative fuel and at best technology vehicles and are Rolling Laboratory.
Speaker Change: And the use of alternative fuels in our ground operations reached 28, 8% last year, keeping us on track to achieve our target of 40% by 2025.
Speaker Change: Moving to our outlook, we are reaffirming our previously announced 2020 for our consolidated financial goal in.
Speaker Change: In 2024, we expect to generate consolidated revenue ranging from approximately $92 billion to $94 $5 billion and a consolidated operating margin ranging from approximately 10 to 10, 6%.
Speaker Change: Versus last year, we still expect first half earnings to decline in second half earnings to grow as we lap the first year of the Teamsters contract and.
Speaker Change: And we still expect to exit the year with a U S operating margin of 10%.
Speaker Change: As we move forward, we are staying on strategy and under are better and bolder approach. We are pursuing our declaration to become the premium small package provider and logistics partner in the world.
Speaker Change: With that thank you for listening and now I'll turn the call over to Brian. Thanks, Carol and good morning in my comments I'll cover four areas first I will review our first quarter results, followed by our 2024 financial outlook.
Brian: Then I'll provide some comments on our business with the USPS and lastly, I'll close with a recap of our 2026 targets.
Brian: While the macro environment in the first quarter showed improvement in some areas continued soft demand pressured all three parts of our business.
Brian: Through the quarter, we adjusted our integrated network to match volume levels and drove out expense, while maintaining industry leading service levels.
Brian: Moving to our financial results. Our overall quarterly performance was in line with our expectations.
Brian: In the first quarter consolidated revenue was $21 7 billion down.
Brian: Down five 3% compared to the first quarter of 2023.
Brian: All three of our segments demonstrated cost agility and on a combined basis drove down expenses by $414 million in the first quarter.
Brian: This enabled us to deliver $1 7 billion and consolidated operating profit and consolidated operating margin was 8%.
Brian: Diluted earnings per share was $1 43 down 35% from the first quarter of 2023.
Brian: Now, let's look at our business segments and U S. Domestic we remained focused on controlling what we could control to improve volume growth and drive productivity.
Brian: In the first quarter average daily volume was down three 2% year over year.
Brian: When looking at Adv sequentially the growth rate showed strong improvement compared to the third and fourth quarters of 2023.
Brian: <unk> average daily volume was down five 5% compared to the first quarter of last year, primarily driven by declines in the retail and manufacturing sectors.
Brian: And <unk> represented 41, 6% of our volume.
Brian: Looking at product mix and in line with recent trends, we continued to see a shift from air to ground as customers prioritize cost savings over transit times by taking advantage of our ground services.
Brian: Compared to the first quarter of 2023 total air average daily volume was down eight 3%.
Brian: <unk> declined two 3% and within ground share post volume grew 10, 8%.
Brian: For the quarter U S domestic generated revenue of $14 2 billion down.
Brian: Down 5%.
Brian: Revenue per piece was relatively flat year over year looking at the key drivers base rates increase the revenue per piece growth rate by 240 basis points.
Brian: This was offset by a couple of factors first changes in customer and product mix due to growth ensure posed combined with changes in packaged characteristics decrease the revenue produced growth rate by 180 basis points and.
Brian: And second changes in fuel prices decreased revenue per piece growth rate by 90 basis points.
Brian: Turning to cost total expense was down 8% or $104 million in the first quarter.
Brian: Union wage rates increased 13% driven by the contractual increase that went into effect last August.
Brian: Leveraging technology and the agility of our integrated network, we took several actions which more than offset the increase in compensation.
Brian: We leveraged total service plan and network planning tools to reduce total operational hours by six 6%, which was more than the decline in average daily volume.
Brian: We closed 18 sorts and reduced operational resources by four 8% compared to last year.
Brian: We lowered block hours by 15, 2% versus last year.
Brian: We reduced management and support staff by approximately 5400 positions year over year.
Brian: In addition, we reduced purchase transportation by 17% primarily from our continued optimization efforts and lastly, lower fuel cost contributed to the decrease in total expense.
Brian: The U S domestic segment delivered $839 million in operating profit down 43, 6% compared to the first quarter of 2023 and operating margin was five 9%.
Brian: Moving to our international segment, the macro environment remained challenged primarily in Europe and Asia.
Brian: However, volume growth in the Americas region showed early signs of near shoring.
Brian: In the first quarter International total average daily volume was down five 8% year over year.
Brian: About two thirds of the decline came from lower domestic average daily volume, which was down eight 1% driven primarily by declines in Canada and major markets in Europe.
Brian: On the export side average daily volume declined three 6% year over year, primarily due to weak manufacturing activity in Europe.
Brian: In Asia export average daily volume was down four 8%, which was an improvement from the fourth quarter of 2023.
Within Asia export volume on the China to U S Lane increased 12, 8% and showed steady growth for the second consecutive quarter.
Brian: More than offsetting the overall decline in Asia near shoring became evident as export average daily volume in the Americas region increased three 8%.
Brian: This was led by SMB customers in Canada, and Mexico, leveraging our cross border ground service in the first quarter International revenue was $4 3 billion down six 3% from last year, primarily due to the decline in volume.
Brian: Revenue per piece increased 2% and included a number of moving parts store.
Brian: Strong base pricing drove a 360 basis point increase in the revenue per piece growth rate of.
Brian: A decline in fuel surcharge revenue combined with a stronger U S. Dollar negatively impacted revenue per piece growth rate by 80 basis points.
Brian: And finally lower demand related surcharge revenue decrease the revenue per piece growth rate by 80 basis points in.
Brian: In the first quarter total international expense was down $163 million a decline of four 4%.
Similar to previous quarters, we leverage the agility of our integrated network to reduce block hours by six 6%.
Brian: Operating profit in the international segment was $682 million down $124 million year over year.
Brian: Operating margin in the first quarter was 16%.
Brian: Now looking at supply chain solutions in the first quarter revenue was $3 2 billion.
Brian: Five 3% year over year.
Brian: Looking at the key drivers within forwarding market rates in international Air freight continued to drive down topline revenue.
Brian: On the ocean side excess market capacity continued to pressure market rates and drove a decrease in revenue despite volume growth.
Brian: In our truckload brokerage unit continued to face soft demand and market rate pressures.
Brian: Logistics delivered revenue growth and increased operating profit driven by gains in health care.
Brian: In the first quarter supply chain solutions generated operating profit of $226 million down $32 million year over year, and an operating margin of 7%.
Brian: Walking through the rest of the income statement, we had $195 million of interest expense or other pension income was $67 million and our effective tax rate for the first quarter was 26, 8%.
Brian: Now, let's turn to cash and shareowner returns in the first quarter, we generated $3 $3 billion in cash from operations free.
Brian: Free cash flow for the period was $2 3 billion.
Brian: We finished the quarter with strong liquidity and no outstanding commercial paper.
Also in the first quarter UBS rewarded shareowners with $1 3 billion in dividends.
Brian: Turning to our outlook as Carol mentioned, we are reaffirming our 2024 consolidated financial targets for the full year 2024 on a consolidated basis revenues are expected to range between 92, and $94 $5 billion and we expect to generate consolidated operating margin ranging from approximately 10 to $10 six.
Brian: Percent.
Brian: Looking at the shape of the year in the first half of the year and we expect consolidated operating profit to be down between 20% and 30% and in the back half of the year, we expect volume and revenue growth to accelerate as we lap the diversion, we experienced as a result of our labor negotiations.
Brian: Additionally, our labor cost growth rate will drop substantially we will also see the majority of the $1 billion in savings from fiserv.
Brian: We still expect revenue per piece to outperform foster peace and lastly in U S. Domestic we expect to exit the year at a 10% operating margin.
Brian: Looking at cash flow and capital spending for the full year in 2024, we still expect capital expenditures to be within our target of around 5% of revenue or $4 5 billion.
Brian: We're reviewing certain aspects of our pension strategy and so we expect free cash flow to be within a range of approximately five nine to $6 $7 billion before reflecting any pension contributions.
Brian: Now, let me share more detail about servicing air cargo for the USPS.
Brian: This is good business for us and we are moving quickly to begin onboarding. This cargo.
Brian: We will leverage our integrated network in existing assets and we expect the majority of the volume will fit within our current U S domestic daytime flight operations.
Brian: Our operators and engineers are already planning the network to support the complete transition to UBS in the third quarter.
Brian: In terms of financial reporting the revenue and expense associated with U S. P. S Air cargo will show up in the SCS other line in our financial reporting.
Brian: Adding the USPS air cargo volume to our existing network will result in a higher share of the network costs being allocated to SCS indirectly benefiting our U S domestic segment.
We expect to see a benefit to operating margins. This year at both the consolidated level and within the U S domestic segment.
Brian: To wrap up we are also reaffirming our three year consolidated revenue and operating margin targets, we put forth at our March investor and analyst day.
Brian: Specifically, we aim to grow revenue to be between 108 and $114 billion by 2026.
Brian: The high end of the range includes inorganic opportunities primarily in health care and international.
Brian: Additionally, we expect to expand our consolidated operating margin to more than 13% by 2026, which includes expanding our domestic operating margin to at least 12%.
Brian: And I'll note that the USPS volume is consistent with or better than bolder approach to grow in the parts of the market that leverage our integrated network and it gives us a strong start toward our 2026 targets with that thank you and operator, please open the lines.
Speaker Change: Thank you we will now conduct a question and answer session. Our first question will come from the line of where I don't know glinski of Barclays. Please go ahead.
Speaker Change: Hey, Good morning. This is Eric Morgan on for <unk>.
Eric Morgan: Thanks for taking the question I just wanted to ask about the guidance in the first half.
Eric Morgan: I know you mentioned kind of coming in line with your expectations, but you did call out the.
Eric Morgan: 40% decline expectation at the Investor day. So I was just wondering if.
Eric Morgan: Anything happened late in the quarter that drove the EBIT above your expectations in the first quarter and then.
Eric Morgan: Anything negative going on in Q2.
Eric Morgan: To maintain first half guidance rather than raise it similar to the <unk>. Thank you.
Eric Morgan: Morgan Good morning, it's Brian happy to take this one look our guidance for the first half of the year remains the same declining and profit down 20% to 30%. So that's consistent I did call out at the end tail end of the quarter expected minus 40% I've said consistently that Q1 would be the tougher quarter in the first.
Brian: Half of the year there were two elements that contributed to beating that 40% one on the topline we did see positive volume momentum going into the end of the quarter. In fact, the last couple of weeks, where we're basically breakeven from a volume perspective, I think the last week was about zero percent thereabout. So sequentially, we were seeing improved volumes, but the bigger <unk>.
Brian: And it was just some cost trading between.
Brian: April and March things like occupancy and maintenance cost shift in terms of when that when they hit the P&L between March and April So no change from a guide perspective still down 20% to 30, some cost timing at the end of the quarter there, but the positive was the trajectory of volume momentum. Thanks Marty.
Yeah.
Speaker Change: Our next question will come from the line of them meet the Marlboro through please go ahead.
Speaker Change: Thanks.
Speaker Change: Daryl Bryan.
Daryl Bryan: Can you just provide.
Daryl Bryan: A bit more details on.
Daryl Bryan: The contribution margins associated with USPS contract you know this was a zero margin business that your direct competitor.
Daryl Bryan: And somewhat surprisingly is now moving from from your direct competitor to you.
Daryl Bryan: Of harkens back to kind of pre 2020, when when you PFS was less price disciplined.
Speaker Change: And so can you just let's wait.
Speaker Change: Wage concerns that this wasn't one on price.
Speaker Change: And just talk a little bit in more detail I know, you're obviously raising some block hours to fund to services volume, but what other costs do you kind of expect to bring on to service. This billions and billions in a house of incremental revenue. Thank you.
Speaker Change: Well, thanks very much for your question on age and we're delighted to have won the air cargo business from U S. P. S. R. Together innovative solution using our integrated network and.
Speaker Change: In contrast.
Speaker Change: Hub and spoke.
Speaker Change: Models, we don't have to run all of the air volumes to our main air hub for US of course, we will use.
Speaker Change: But we will also use our regional gateways that allows for splits to occur outside of the network. So there'll be built at origin and then we will bypass the main point to point. This is an integrated solution that's very different than I think all the former provider offered we also will use all of the assets.
Speaker Change: Of our integrated network.
Speaker Change: And that'll allow us to actually optimize block hours.
Some of the investments that we need to make.
Speaker Change: We have plenty of space on our existing aircrafts, so we won't be purchasing any aircraft.
Speaker Change: We'll be hiring.
Speaker Change: But less than 200 pilots and we factored all of that in to the call.
Speaker Change: Awesome.
Speaker Change: So this will be margin accretive it will be EPS accretive.
Speaker Change: And your one.
Speaker Change: Okay.
Speaker Change: Our next question will come from the line of Tom <unk> of UBS. Please go ahead.
Tom: Hi, good morning.
Tom: Wanted to see.
Tom: Brian or Carol if you could walk through what are the key pieces of the <unk> versus <unk> ramp.
Tom: In EBIT and then.
Tom: The same thing for for second half.
Tom: Obviously, you've got fit to serve as a significant cost benefit <unk>, but I think just trying to figure out how much of the improvement sequentially is based on volume that you have visibility to and how much would be based on anticipation of improvement in the broader parcel market.
Tom: On a macro improvement thank you.
Speaker Change: Hey, Tom I'm happy to take that.
So listen from a Q1 to Q2 perspective the shape.
Speaker Change: If we if we look at the U S. We would expect.
Speaker Change: The largest growth from a volume perspective, which relative to past trends normally Q1 steps down to Q2 from an absolute volume level. So by maintaining that'll be a natural accretion from an EBIT perspective, the big component, though full year on a run rate basis, the fit to serve program Janet will generate $1 3 billion.
Speaker Change: In savings and we're ramping that up in Q2, so that'll be a big driver as well as we think about it and then from a.
Speaker Change: Q1 to the back half of the year.
Speaker Change: It's the it's the same three components fit to serve its the volume lift along with the drivers of <unk> and then it's the labor contract lapping which is the big piece in the back end of the year.
Speaker Change: Just a few more comments on <unk> in the U S was flat first quarter.
To see RPT growth as we head towards the back half of the year why well first of all fuel prices were a drag on the RFP.
Speaker Change: First quarter projection for fuels that it's going to increase we are also announcing a fuel surcharge later today. So those two comes on that stuff.
Speaker Change: Bill will be a bonus to RFP P. As we head towards the back half. We also are going to have a pretty picky peaks we anticipate.
Speaker Change: Four fewer operating days this year than last which means the demand surcharge should be pretty strong this year compared to last year and then we brought in a lot of surplus product into our network for meeting our customers where they want to go we will be anniversarying a lot of that in the back half of the year as well. So we don't have that luxury plus by the way.
Speaker Change: We don't expect to see the drag on the RVP from surplus in the back half like you said in the first quarter.
I think all of those that you stated Carol and then the volume growth, obviously with the comps it's going to be a big help to us.
Speaker Change: Our next question comes from the line of Jordan Oliger.
Jordan Robert Alliger: Goldman Sachs. Please go ahead.
Jordan Robert Alliger: Yeah, Hi, good morning.
Jordan Robert Alliger: Just sort of curious you mentioned.
Jordan Robert Alliger: Some actions taken in the first quarter closing sorts and working on seed purchase transport et cetera, amongst other things can you maybe talk to some additional actions that are helping too.
Jordan Robert Alliger: The profit uplift from here not related to the volumes and maybe the.
Speaker Change: Yeah head count reduction.
Speaker Change: Well productivity is a virtuous cycle here at UBS domestically.
Speaker Change: Domestically and outside of the U S and I, just can't say enough good things about how our team is running our business.
Speaker Change: <unk> are running under the volume declines higher productivity and utilization.
Speaker Change: Utilization packages per hour, we measure productivity in minutes miles and packages per hour and all across the board, we're seeing record levels.
Speaker Change: One just a call out because we've been talking about this for a while is safety our safety stats.
Speaker Change: They've been in.
Speaker Change: And of course, if you haven't brought a safer business, where you don't have as many claims.
Speaker Change: At the top in the auto liability, so a real shout out to our operators.
Speaker Change: Tony you might say well why is it productivity getting better one reason is because our turnover is down and as people stay in place for.
Speaker Change: Yes, so let me throw it over now to was there anything else you'd like to add on the productivity no I'm actually quite impressed with our engineers and our operators I think the best in the business and we're continuing to follow our game plan that we were going to do it with you at the Investor Conference, which is a key.
Speaker Change: Keenly focused on closing down stores moving volume to our automation in our automated facilities and in fact, when I talked about pieces per head count at our.
Speaker Change: Conference were actually up $2 seven in March so we are pushing.
Speaker Change: All of the things that help us be more productive and less reliant on wave.
Speaker Change: Outside of the United States.
Speaker Change: We're all talking about price yeah.
Speaker Change: Absolutely it is.
Speaker Change: System value at UBS, and something that all of us work very hard towards everyday so.
Speaker Change: So when you look at the major regions around the World, We're setting records on our.
Speaker Change: Cube utilization both on the ground and in the air as our margin shall we have a very good handle on expense management and that's we're unlocking more of this segment growth healthcare, specifically SMB around the world It only feels that further.
Speaker Change: We have a question from the line of Ken Hicks to Bank of America. Please go ahead.
Ken Hicks: Hey, great good morning.
Ken Hicks: International margins were a bit lower than that.
Ken Hicks: It just maybe thoughts on increased cost it sounded like you throughout some impacts of a near sourcing and then I guess, Brian just a clarification you said, you're moving the U S postal service or it will be listed in SCS and benefiting domestic I just want to understand are you shifting cost than out of domestic into Ses or maybe just clarify that comment there.
Brian: Well first of all the international margin I think he did a terrific job of managing costs in an environment, where demand was down there was a onetime item that we didn't call out in our prepared remarks, but if you back out that one time item the international margin 17%.
Brian: The first quarter is usually our lowest margin quarter. So we anticipate that the international business and in our planning for the international business to be in the high teens as we've told you.
Then on the tonnage in terms of the USPS comes in through SCS, other but because we're using a lot of the U S assets, we allocate cost to that business and that will have a positive benefit on the domestic margin.
Brian: And can you clarify what the one time item was there.
Brian: It was a cleanup really isn't in our revenue data Mart, which assists in accounts, we wrote off.
Speaker Change: Thanks, a lot for the time appreciate it.
Speaker Change: Yes.
Speaker Change: We have a question from the line of David Vernon of Bernstein. Please go ahead.
David Scott Vernon: Hey, good morning, I got a couple of quick commercial questions for you can you talk about how the volume outlook outside of Europe posted shaping up I think you mentioned it a couple of pockets. The second derivative is getting better but if you could talk about whether you feel better or worse about where volumes are going to end up in a year today versus when you started the year that would be helpful. And then the second question would be on onshore.
David Scott Vernon: Post you know 10% demand for anything in small package is is is a very high number when are you going to have a chance to maybe address pricing in that product because it does sound like you have what looks like a relative advantage in terms of marketing against the lower end of the E Commerce small package market.
David Scott Vernon: So from a volume mix perspective.
Speaker Change: Look at the volume that's in our pipeline I would say the volume that's in our pipeline is not sure.
Speaker Change: Commercial volume in our pipeline additional enterprise volume at all.
Speaker Change: So we're going to be our customers, where they want to go but the mix is looking very different as we look ahead than it was in the fourth.
Speaker Change: First quarter.
Speaker Change: And in terms of pricing I don't think we're going to talk pricing on this.
Speaker Change: Oh.
Speaker Change: Well, we always look for opportunities to optimize our pricing.
Speaker Change: The headwind we saw from a mixed perspective Carol alluded to this in the back end of the year. We are Anniversarying, a fair amount of share post from last peak and so the overlaps won't won't drive as big of a headwind.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: We have a question from the line.
Speaker Change: Scott.
Scott: I have a question from the line of Scott Group of Wolfe Research. Please go ahead.
Scott H. Group: Hey, Thanks, Good morning, Brian.
Scott H. Group: Second quarter Guide I guess implies EBIT down anywhere from 10% to 30% so any more directional color there and then on this.
Scott H. Group: Revenue cost allocation thing with the with the post office is there any way to just quantify what the benefit is to to the U S margin as Youre doing this and does that already sort of captured in the 10% margin comment for Q4 or does this now take it up versus what you previously thought.
Speaker Change: Well, maybe I'll talk about the full year guidance and then you can talk specifically about the second quarter. One of the questions may be well why aren't you changing your guidance now that you won this air cargo business and you say, it's going to be margin accretive.
Speaker Change: We were highly confident of the range of guidance that we provided at the end of the year and we're even more confident now, but it's just too early in the year to change the guidance. So once we get through the second quarter will tell you. What we think the back half of the year will be on Q2 alone you're talking about sure Scott where we're maintaining the first.
Speaker Change: Have a negative 20% to 30% from a profit perspective. So you can choose the element of the range you want to point towards I think Adv and domestic we're expecting Q2 to be slightly positive RP piece should be consistent with what we saw flattish in the in the first quarter as we move out of the the headwinds from a mix perspective, and as Carol said fuel.
Speaker Change: And in PSS in the back end of the year will help us cost per piece will get better in Q2, I'm sorry in Q3, when they when we anniversary the cost of the labor contract, but somewhat similar from a Q2 perspective in the U S. And then from a Adv perspective internationally case looking to see that business improve.
Speaker Change: As we sequentially move over the course of the year. So I guess I would I would steer you towards the 20%, 30% we've been very consistent on that from a profit standpoint for the first half and you can squeeze it.
Speaker Change: Okay.
Speaker Change: And then any thoughts on that the postal shift in the margin benefit for Q4.
Speaker Change: So he says what I'd like to do just that.
Speaker Change: Through the second quarter, and then we'll come back and give you more.
Speaker Change: It gives us volumes I'd like to get some of it into the network. We've modeled it out I wanted to actually see outperformance. So we'll give you more color at the end of second quarter.
Speaker Change: Okay.
Speaker Change: We have a question from the line of Ravi Shanker of Morgan Stanley. Please go ahead.
Ravi Shanker: Thanks, Good morning, everyone.
Ravi Shanker: Kevin in your opening comments, you mentioned that our returns were a good business because they were b to b.
Ravi Shanker: I'm surprised to hear that because I mean, it almost seems like a <unk> type business.
Ravi Shanker: Hi, a fragmentation of the last mile. So if it goes on backing up how that works through the supply chain and kind of the the profit contribution of that that would be great. Thank you.
Ravi Shanker: We like to return. This is a lot you are right the consumer typically walk into a UBS storage to start the return and we consolidate the returns at the UBS store and they returned to the chip.
Ravi Shanker: Shipper and that would be upbeat returns. So if you think about I'll use our largest customer for.
Ravi Shanker: For an example, we have returned to our EPS doors with our largest customer we take in thousands of returns for that customer and package. It into what one consolidated return that goes back to that so that's a that's a good business for us with happy returns now we were able to offer the same service, which is no box in the label.
Ravi Shanker: They might get consumer walks in they make the return we consolidate it and return it back that's how we think about it being a <unk> business and the margins are very attractive to us.
Ravi Shanker: Density that's one reason why the margins are so good because you got that.
Ravi Shanker: Okay.
Ravi Shanker: Our next question will come from the line of Brian <unk> of J P. Morgan. Please go ahead.
Brian: Hey, Thanks. Good morning appreciate you taking the question.
Brian: Maybe one for Karen one for Brian Carol can you just talk about I know you won't talk.
Brian: About too much about pricing, but your increase in the fuel surcharge by another 50 basis points thing Thats South of 125.
Brian: In December so just wanted to see your thoughts on how the market could absorb that with some excess capacity and do you still view it as sort of a lever in terms of all in all in pricing.
Brian: Ryan maybe you can elaborate on the pension contribution strategy you talked about it sounded like maybe the cash contribution was on hold until some other options were considered so any more thoughts about you helpful. Thank you.
Brian: So on the fuel surcharge as we look to the rest of the year if fuel prices are increasing and this is not atypical for us to adjust our surcharges in the face of rising fuel costs.
Brian: You also should know that that doesn't impact all of our customers literally exempted from that.
So in terms of the ability to stick, we think it will check and just a comment on the capacity.
Brian: At our Investor Day, We said there was about 12 million Adv excess capacity in the market and that equilibrium is about six you need about six so really the excess capacity is around 6 million people today, and we think that will be fully absorbed by 2025 now you may say why well we're part of that access. So we're closing stores we're taking.
Brian: As the out of the market and our network of the future initiative.
Brian: Any neutral also with.
Our large competitors.
Brian: Consolidation efforts capacity will be leaving the market and then another player headquartered in Seattle with a regional I think capacity will be taken out of the market. So we think all of that capacity will be absorbed in the pricing environment is actually very rational.
Speaker Change: And Brian just on your secondary question around the pension I had quoted.
Speaker Change: Cash free cash flow ex pension of 596, 7% we.
Speaker Change: We do have annual service cost in the $1 $4 billion range. So from a modeling perspective, you can use that as a placeholder, but the reality is we're taking a look at strategic options on pension a little bit of early days to comment on that but we'll come back later in the year and share our thinking on some of the actions and activities we're pursuing.
Speaker Change: Pensions are very well funded they are over 90% funded and it gives us an opportunity to step back and.
Speaker Change: Just look at our asset liability strategy, our funding strategy. So we thought we could just pause right now take a look at it and then if we make any decisions we'll share that with you.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of Conor Cunningham.
Conor T. Cunningham: On the latest research. Please go ahead.
Conor T. Cunningham: Everyone. Thank you just curious on your expectations for <unk>.
Conor T. Cunningham: You talked a little bit about volume and selecting soon can you just talk about your expectations in terms of volumes as you move from first half to second half.
Conor T. Cunningham: Previously you were talking about flat to up two in the U S. Domestic market. Then you came in a little bit ahead, I'm just trying to understand what are the best.
Conor T. Cunningham: How the back half so like outside of just comps being pretty easy. Thank you.
Conor T. Cunningham: So from a Adv perspective, and domestic I think that's where you're headed.
Conor T. Cunningham: With a little bit of a slight tick up and positive volume in the second quarter will likely finish a low single digit decline in the first half second half, we would expect that to be low single digit increase in and you can look at it through a various different lenses, we're building momentum ever since August each month is basically getting sequentially.
Conor T. Cunningham: Better each quarter from Q3, Q4, Q1 improves we would expect to see slight positive volume trends in the second quarter and then just from a comp standpoint.
Conor T. Cunningham: I go back from a trend perspective over the last 10 years. Our Q3 is generally about close to 300000 Adv better than Q1, so even if we assume flat from Q3 to Q1 that would be four 5% growth. So were any way you cut it we see the back end of the year and most important is the visibility on the sales pipeline that we're pulling through in the volume levels were seeing going into Q2.
Conor T. Cunningham: Two.
Speaker Change: Super helpful. Thank you.
Speaker Change: Our next question will come from the line of Jonathan Chappell of Evercore ISI. Please go ahead.
Jonathan B. Chappell: Thank you and good morning, I'm, Brian you had mentioned the $1 billion of productivity that you expected to see in the full year 'twenty. Four guide can you just tell us where that stands after the first quarter and how do we think about the cadence throughout the rest of the year front half loaded or is it kind of extrapolate it evenly by quarter.
Jonathan B. Chappell: Yes.
Jonathan B. Chappell: The initiatives progressing slightly ahead of plan reductions began in March and will continue through Q2, we would expect more than 80% of the resource reductions to be complete by Q2. We're on track to that 1 billion that I mentioned and at a full annual run rate going into next year. We would expect 1.3, so there'll be some benefit early part of next year.
Speaker Change: Great. Thank you.
Daniel: Our next question will come from the line of Daniel one barrel of Stephens incorporated. Please go ahead.
Daniel Stephens: Yeah. Thanks, Good morning, guys. Thanks, taking my questions.
Daniel Stephens: More to follow up on the USPS contract apparel, the air cargo I think should come into your network in the fourth quarter I think first.
Daniel Stephens: Any business coming in sooner than that just to clarify and then looking at <unk> and the outlook are there any minimum volume components of the agreement I mean, obviously that customer has moved a lot of freight out of the internet work as it looks to save costs by using ground. It still looks like ground is cheaper others. How do you protect for more of that volume, leaving the air cargo market.
Daniel Stephens: And to maybe slower transit times similar to the rest of your business. Thanks.
Daniel Stephens: Clearly, we want to get all of the volume on boarded before peak that's in their interest in our best interest.
Daniel Stephens: Onboard the volume.
Our teams are in Washington D C working with it.
Hand in hand, as we build our operating plan.
Daniel Stephens: Yeah.
Basketball Majors: Our next question will come from the line of basketball majors Susquehanna. Please go ahead.
Basketball Majors: Yeah, Thanks for taking my questions.
Basketball Majors: As you work on cash flow with the pension strategy stuff, you've talked about that we might hear more about lately this year.
Basketball Majors: Can you talk a little bit about the dividend. If you look at your your payout guidance it implies.
Basketball Majors: <unk> $13 in earnings.
Basketball Majors: In light of what you're paying now.
Basketball Majors: Is there an opportunity to start to raise it more meaningfully before the earnings power of the business gets there or do you think we need to wait and get more increases like we saw this year until the business is supporting that more living your life. Thank you.
Basketball Majors: Yeah.
Basketball Majors: Planned approach when it comes to capital allocation. The first use of our cash is to invest.
Speaker Change: Packaged tour business in the second just to pay our dividend we have a targeted dividend payout ratio of 50% we are higher than that.
Speaker Change: Tend to earn back into the 50% payout ratio over time, we have no intent to tough to get to that just to make that math work, we're going to earn back into it indicates the dividends are an important part of the value proposition. So we just raised the dividend.
Speaker Change: Subject to board approval.
Speaker Change: Raised the dividend every year.
Speaker Change: Just Carol this year marks the 15th consecutive year, we've increased the dividend and we're committed to a stable and growing dividend. So we will earn back into that but certainly committed to it and respond.
Speaker Change: Respond to Daniel's question about minimum levels within the USPS contract I'd like to throw that over to Matt Matt could you answer that question, yes, absolutely. So thank you Carol first off yes, we do set minimums in the contract as we built this we identified a win win for both <unk> and for US. It's just imperative that one we not only have it on.
Matt: The protection for our side in our business on what we are bringing on.
Matt: Excuse me, but also for the USPS, because we want to make sure as Carol mentioned that were on boarded before peak season, and we're bringing this on as quickly as possible and we're working collectively with them NAND on the team have done a great job with their operational team in the carols point, we're meeting with them every every week in D. C to continue to onboard that volume to make it.
Speaker Change: Sure, it's a smooth transition.
Speaker Change: Thanks, Matt.
Speaker Change: It's definitely more of Jefferies. Please go ahead.
Jeffries: Hi, good morning, Thank you.
Speaker Change: I wanted to touch back on the volume commentary, if you could maybe just Scott and <unk>.
Speaker Change: What drove the improvement.
Speaker Change: Right.
Speaker Change: Patients in Q2, Q, how much of the what's from kind of actions within your own control.
Speaker Change: And then at the same time, maybe areas, where the underlying environment is improving.
Speaker Change: What we've experienced over the last year and in that case.
Speaker Change: <unk> seen that improvement in the background. Thank you.
Speaker Change: Well I'll give a shot out to our sales team.
Speaker Change: Proving volume trends are in large part due to their hard work and efforts you may recall at the beginning of the year. We said the growth in the market wasn't going to be very grumpy. This year. So the fact that we're able to see sequential improvement in the magnitude that we're seeing is really because of our sales team we are winning new.
Speaker Change: We are gaining additional penetration of existing customers, we are meeting customers, where they want us to be.
Speaker Change: Our sales team will continue to do that around the world and that's one reason that we're confident in the volume projections that Brian Shea.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Our next question will come from the line of Bruce Chan of Stifel. Please go ahead.
Bruce Chan: Hey, Thanks, and good morning, everyone.
Speaker Change: Sure.
Bruce Chan: Back to your comment.
Bruce Chan: Any of the call I know, that's a big part of your SMB growth efforts.
Bruce Chan: You grew 3% in the first quarter and I can't help but notice that that's materially.
Speaker Change: Thank you.
Speaker Change: And then the editing.
Speaker Change: Good day.
Speaker Change: The plan was over $3 billion and then at the Investor Day, you said materially over 3 billion. So I just wanted to know if there's something happening that's driving the slower growth outlook for that.
Speaker Change: Thank you for the question and I think I got it you broke up a bit.
Speaker Change: Generally about that so.
Speaker Change: Last year in the first quarter, our GAAP revenue grew 51% and our volume grew 61%. So we didn't expect to repeat that in the first quarter of this year.
Speaker Change: And so we were very pleased with how the DAP.
Speaker Change: Portfolio performed in the first quarter because it was in line with our expectations.
Speaker Change: The anticipated slower growth in the first quarter because there were a couple of our partners that we were working on amending the Ts and CS. So we expected the growth rate to be slower and then to pick up as we move into the second quarter and the rest of the year the projections for the depth around the world oversee great growth outside the United States.
Speaker Change: Okay.
Speaker Change: Projections for the debt portfolio by the end of the year is in excess of $3 billion.
Speaker Change: Okay. That's very helpful. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Scott Andrew Schneeberger: Thanks, very much good morning, Carol could you give us an update on the on your SMB progress I'm curious, how you're trending towards the long term target domestically and then also how does international compare you've spoken in the past about making nice progress. There just curious how does how does that compare to domestic right now.
Scott Andrew Schneeberger: What type of aspiration.
Scott Andrew Schneeberger: Can you achieve longer term thanks.
Carol: So we're right now at about 29% as at the end of the first quarter and as we look towards.
Carol: This year, we should be over 30 in the low thirty's. So we're trending nicely.
Carol: Steakhouse F&B performing you know our history.
The U S. As an SMB. So we have a 62% share of F. N B and this is now where we're implementing that so we're only going further as Carol said, our adapt program in small package around the world is resonating with our SMB shippers as they look for ease of access.
Carol: So that is that's excellent and then I'll just also say in our rates business. We have adapt like service, which is our forwarding hub and its actually well ahead of plan as well. So smbs are showing that they really need access through the digital platforms and it's resonating very well.
Carol: It's Steven we have time for one more question.
Carol: Our last question will be a follow up from the line of David Vernon of Bernstein. Please go ahead Sir.
David Scott Vernon: Okay. Thanks for coming back to me I just wanted to.
David Scott Vernon: Ask about you mentioned the pricing environment being kind of rational could you elaborate on.
David Scott Vernon: However, the <unk> has been this year, what's the what's the stick right there and as you think about the underlying performance in domestic yields ex some of the mixed headwinds could you talk a little bit about that.
David Scott Vernon: The trajectory of the rate of change through the quarter.
Speaker Change: Yes, Dave we had expected about a 50% keep rate we saw a 240 roughly 250 basis points in the first quarter.
Speaker Change: It generally in line with expectations, we would expect that base rate to continue over the course of the year I think Carol hit on a couple of the key points around the.
Speaker Change: The other elements of pricing, there's a fuel piece theres PSS in the back in the peak season, and then there is the mixed component that we've been talking about the focus on commercial on SMB.
Speaker Change: And in health care. So all those things combined give us confidence that we'll deliver a low single digit from a RVP second half of the year.
Speaker Change: Okay. Thank you.
Speaker Change: So thank you.
Speaker Change: I will now turn the floor back over to our host Mr. P. J <unk>. Please go ahead Sir.
P. J: Thank you Steven This concludes our call. Thank you for joining and have a good day.
P. J: Yeah.
P. J: Okay.
Speaker Change: We're sorry your conferences ending now please hang up.