聯合包裹運送服務公司 (UPS) 2021 Q3 法說會逐字稿

Good morning, My name is Kaley Johnson, and I will be your facilitator today.

I would like to welcome everyone to the UPS Investor Relations Third Quarter 2021 Earnings Conference Call.

(Operator Instructions) It is now my pleasure to turn the floor over to your host, Mr. Scott Childress, Investor Relations Officer.

Sir, the floor is yours.

Good morning, and welcome to the UPS Third Quarter 2021 Earnings Call.

Joining me today are Carol Tomé, our CEO; and Brian Newman, our CFO.

Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within the federal securities laws and address our expectation for the future performance or operating results of our company.

These statements are subject to risks and uncertainties, which are described in our 2020 Form 10-K, subsequently filed Form 10-Qs and other reports we file with or furnished to the Securities and Exchange Commission.

These reports, when filed, are available on the UPS Investor Relations website and from the SEC.

For the third quarter of 2021, GAAP results included after-tax transformation and other charges of $54 million or $0.06 per diluted share.

Unless stated otherwise, our comments will refer to adjusted results, which exclude transformation and other charges.

The webcast of today's call, along with the reconciliation of non-GAAP financial measures is available on the UPS Investor Relations website.

(Operator Instructions) And now I will turn the call over to Carol.

Thank you, Scott, and good morning, everyone.

I'd like to begin by thanking all UPS-ers for continuing to deliver great service to our customers.

In the 17 months that I've been CEO, I've learned that no matter what comes our way, UPS-ers deliver.

The third quarter brought several extreme weather events, including the widespread effects of Hurricane Ida in the U.S. But through it all, UPS-ers leverage the flexibility of our integrated network and the technology that powers it to deliver what matters.

A little over 1 year ago, we laid out our better, not bigger framework under a customer-first people-led innovation-driven strategy.

Inside that strategic framework is a focus on 3 main areas.

First is to improve revenue quality, including growing SMB volume.

Second is to reduce our cost to serve through productivity and cost takeout initiatives.

And third is to effectively allocate capital to create a better customer experience, happier UPS-ers and higher returns on the capital we deploy.

While it is early in the execution of our strategy, the progress we are making is clearly visible in our results.

Looking at the third quarter, our performance was better than we anticipated.

Consolidated revenue rose 9.2% from last year to $23.2 billion driven by another quarter of improved revenue quality across all 3 of our operating segments.

Consolidated operating profit grew 23.4% to $3 billion driven by solid revenue growth and strong expense control.

Each of our segments delivered year-over-year operating profit improvement and double-digit operating margins.

And for the first 9 months of 2021, UPS has generated more operating profit than any full year in our history.

Brian will share the details of our performance shortly.

As we've discussed, we are laser-focused on adding capabilities that enable UPS to grow with SMBs.

These improvements also benefit large customers that value our end-to-end network.

Expanded weekend delivery services is one of our new capabilities.

This initiative will be completed in the U.S. as planned by the end of this week.

We will now cover about 90% of the U.S. population on Saturday for both residential and commercial pickups and deliveries.

In addition, expanded Saturday services provides more capacity for Sunday SurePost delivery.

The best part of our weekend delivery program is that we've unlocked additional network capacity that benefits all customers without deploying additional capital.

And we've done this while expanding our U.S. operating margin on a year-over-year basis.

As we look at our third quarter results, we see that SMBs value the new capabilities we are providing.

In the U.S., SMB average daily volume, including platforms, was up 10.9% year-over-year.

In fact, we've seen strong growth here for the past 6 quarters.

In the third quarter, SMBs made up 27.4% of our total U.S. volume up 380 basis points from 1 year ago.

And outside the U.S., SMB average daily volume growth was 3.9%.

We see many opportunities to grow our international SMB volume as we continue to improve our digital experiences and roll out DAP, our Digital Access Program, to customers outside of the U.S.

Let me also touch on SMBs and health care.

When COVID-19 vaccines were rolled out late last year, the world turned to UPS, and we were ready with connected capabilities, technology and expertise.

Our brand relevance here is attracting new SMB health care customers and significantly driving profit growth in this sector.

And just on COVID-19 vaccines, we are on track to deliver more than 1 billion vaccine doses by the end of this year with 99.9% on-time delivery.

Moving to productivity.

We are relentlessly focused on reducing our cost to serve, and we're making good progress.

While Brian will go through the details, I'll call out a few highlights.

In the U.S. we drove a measurable improvement in productivity as PPH, or pieces per hour, increased by 2.5%.

Additionally, as Nando described at our June Investor Day, through our ongoing efforts to optimize loads in our trailers, cube utilization in the third quarter was up 520 basis points versus last year.

This helped us eliminate more than 10% of daily trailer loads year-over-year.

And as we've discussed previously, we are creating fewer but more impactful jobs.

So to reduce turnover and improve productivity, we are converting around 1,000 part-time supervisor positions in our operations into nearly 400 full-time positions at no additional cost to our company.

Turning to what we refer to as Transformation 2.0 or plans to optimize our nonoperating expense.

We are on track to eliminate $500 million in nonoperating costs this year with about $500 million of additional opportunity in 2022.

Finally, our third area of focus is disciplined capital allocation.

Since we began executing our strategy, we've seen marked improvement in our employee satisfaction and competitive Net Promoter Scores, due in part to how we've allocated capital to enhance the employee and customer experience.

In October, we completed the acquisition of Roadie, a technology platform that also provides delivery services for packages that don't lend themselves to our small package network.

We are delighted to welcome the Roadie team to UPS.

We continue to be disciplined in our capital spending practices.

This discipline, plus record earnings, yield a significant amount of cash.

So far this year, we've generated a record $9.3 billion in free cash flow.

And we expect full year 2021 return on invested capital to be around 29%, which is a 730 basis point improvement from what we reported at the end of last year.

Turning to the fourth quarter.

The global supply chain market is challenging.

There are capacity, congestion and cost concerns.

But for UPS, our outlook is positive as, once we get a package, we get it delivered.

Outside of the U.S., where we peak, we are ready, and tight capacity benefits our freight forwarding business.

In the U.S., we project a robust peak season, and through our planning efforts, we believe we are well on our way to deliver a peak that will be a win for UPS shippers, recipients and shareowners.

Let me share a few details.

To begin with, the calendar is helpful as we have one more peak operating day than last year.

Further, we've expanded weekend delivery and added additional sorting capacity.

Nonetheless, we expect consumer demand will outpace capacity in the market.

We began collaborating with our largest customer several months ago, and we'll stay in close contact with them during the holiday shipping season.

Our technology allows us to match daily capacity with customer demand.

And where we need to, we will again control the amount of volume that enters our network.

These actions will minimize chaos costs and enable high service levels.

On the labor front, we've digitized and simplified our job application process, enabling qualified applicants to receive a job offer within 30 minutes of applying.

In parts of the country, labor costs are higher than they were last year but we are effectively managing through that cost pressure.

When you add it up, in the fourth quarter, we expect to generate record consolidated operating profit and expand operating margin year-over-year.

While we are laser-focused on peak, our business doesn't end on December 31.

Later this week, we will release our U.S. general rate increase.

The 2022 increase will be 5.9%, reflecting the value of the services we offer and cost inflation pressures.

The details will be posted to ups.com.

As we move ahead, we will continue to execute by leveraging our global Smart Logistics Network, our amazing UPS-ers and a strategy that's driving strong financial results today and positions us well for the future.

Thank you, and now I'll turn the call over to Brian.

Thanks, Carol, and good morning.

In my comments today, I will cover 4 areas, starting with a macro overview, then our third quarter results.

Next, I'll review cash and shareowner returns.

And lastly, I'll wrap up with some comments on our outlook for the full year.

Okay.

Let's start with the macro.

In the third quarter, the global economy continued its strong growth despite the dampening effects of COVID-19 and inflation, along with shortages in inventory and labor.

Within this backdrop, demand for our services remained high and the pricing environment in the industry was firm.

We expect similar dynamics in the fourth quarter, and as we demonstrated in the third, we will continue to execute our strategy and capture profitable growth opportunities in the market.

IHS is forecasting fourth quarter global GDP will grow 3.8% and U.S. GDP is expected to grow 4.9%, which remain above historic GDP growth rates.

Moving to our third quarter consolidated performance.

The progress we've made to improve revenue quality enhance productivity and allocate capital is driving strong top and bottom line results.

Consolidated revenue increased 9.2% to $23.2 billion.

Consolidated operating profit totaled $3 billion, 23.4% higher than last year.

All 3 segments generated record third quarter operating profit and achieved double-digit operating margins in the quarter.

Consolidated operating margin expanded to 12.8%, which was 150 basis points above last year, and diluted earnings per share was $2.71 and up 18.9% from the same period last year.

Now let's take a look at the segments.

Our results in U.S. domestic were better than we anticipated principally due to higher than planned for improvements in revenue per piece and productivity gains.

As we expected, average daily volume in the U.S. was down 540,000 pieces or 2.7% due to a decline in SurePost of 576,000 packages per day.

This decline was partially offset by growth in ground commercial volume.

Our results reflect the continued execution of our strategy to win in the most attractive parts of the market.

In fact, customer mix continued to be positive as higher-yielding SMB average daily volume, including platforms, was up 10.9%.

And in the third quarter, SMBs made up 27.4% of U.S. domestic volume compared to 23.6% last year.

Regarding our delivery mix, our commercial business continued to recover and grew 6.8%, representing 42% of our volume in the third quarter compared to 39% in the third quarter of last year.

Nearly all industry sectors grew B2B average daily volume, including retail and high tech.

For the quarter, U.S. domestic generated revenue of $14.2 billion, up 7.4%, driven by a 12% increase in revenue per piece with fuel driving 270 basis points of the revenue per piece growth rate.

Turning to costs.

Total expense grew 5.8% and with fuel driving 180 basis points of the year-over-year expense growth rate.

Through our focus on productivity, overall improvements, led by our inside sort operations and on-road activities, helped offset the market rate adjustments we implemented in certain geographies as well as the cost of expanding Saturday delivery.

And as Carol mentioned, a key measure of UPS productivity is pieces per hour.

And in the third quarter, we made improvements in nearly every area of our operations, led by preload, which improved by 6.5%.

Combined, these improvements contributed to a decrease in direct labor hours per day of 5.1%.

In summary, revenue growth was above expense growth, which generated positive operating leverage.

The U.S. Domestic segment delivered $1.4 billion in operating profit, an increase of $281 million or 24.8% compared to last year, and operating margin expanded 140 basis points.

Moving to International.

The segment continues to generate strong profit growth driven by the execution of our strategy.

Due to tough year-over-year comparisons and some supply chain disruptions, growth in average daily volume moderated in the third quarter and was up 1.9%.

B2B average daily volume grew 3.8% on a year-over-year basis and offset a decline in B2C volume, which was down 2.3%.

On a 2-year stack, total average daily volume was up 14%.

Total export average daily volume was up 1.3% on a year-over-year basis.

Export growth in Europe and the Americas offset a 4.8% decrease in export average daily volume out of Asia.

The decline in Asia was due to difficult comps from a year ago and the implementation of network contingency plans in response to COVID-19 protocols at select airports.

Relative to our plan, we had 137 fewer flights out of Asia than we anticipated.

For the quarter, International revenue was up 15.5% to $4.7 billion with strong growth across all regions.

Revenue per piece was up 14%, including a 500 basis point benefit from fuel.

Revenue quality improved on a year-over-year basis as we continue to utilize surcharges to match demand with available capacity.

In the third quarter, International delivered its fourth consecutive quarter of profits over $1 billion.

Operating profit was $1.1 billion, an increase of 14% and operating margin was 23.5%.

Now looking at Supply Chain Solutions.

The segment delivered record third quarter top and bottom line results as the team executed exceptionally well in a dynamic environment.

Revenue increased 8.4% to $4.3 billion with all major business categories contributing to profit growth.

Market demand remained elevated with a couple of key profit drivers.

In forwarding, capacity constraints and consumer demand in the market drove volume growth in air freight forwarding and strong yields in our ocean freight product, which drove top and bottom line results.

And in logistics, revenue and operating profit grew by double digits led by our health care portfolio.

In the third quarter, Supply Chain Solutions generated record operating profit of $448 million and the operating margin was an impressive 10.5%.

As a reminder, this is our first full quarter without UPS Freight results given that we closed the sale on that business on April 30th of this year.

Walking through the rest of the income statement, we had $177 million of interest expense.

Other pension income was $285 million.

And lastly, our effective tax rate came in at 22.3%, which was lower than last year due to favorable changes in jurisdictional tax rates and discrete items.

Now let's turn to cash on the balance sheet.

We are generating strong cash flow from our disciplined focus on capital allocation and growth in net income.

So far in 2021, we have generated a record $11.8 billion in cash from operations and $9.3 billion in free cash flow.

And in the first 9 months of this year, UPS has distributed $2.6 billion in dividends.

In August, we announced a $5 billion share repurchase plan.

with the intent to repurchase $500 million of shares in 2021, which we completed in the third quarter.

We expect to execute the remainder of the program over the next few years.

Now I'll make a few comments regarding the full year outlook.

We are continuing to pay close attention to and manage through several external factors, including COVID-19, inflationary pressures and inventory and labor shortages.

Despite these challenges, consumer demand is expected to be strong during peak season and in the fourth quarter.

Due to our third quarter outperformance, combined with the progress we are making with our strategic initiatives and our increased fourth quarter plan, we are raising our full year guidance.

On a consolidated basis, we expect full year 2021 revenue growth of around 13.8% year-over-year, which takes into account the divestiture of UPS Freight.

Additionally, consolidated operating margin should be around 13%.

In U.S. domestic, we anticipate full year 2021 revenue growth of about 12.7% with revenue growing faster than volume.

We anticipate the full year 2021 U.S. operating margin will be around 10.5%.

As you update your models for the U.S. domestic segment, there are a couple of things to keep in mind as we get into the fourth quarter.

First, as usual, enterprise and B2C volume will represent a larger percentage of our total volume due to peak when compared to the rest of the year.

And second, we are lapping more than $550 million in peak season surcharges, in addition to the early customer pricing actions we implemented last year as a part of our revenue quality initiatives.

As a result, we expect the sequential revenue per piece growth rate to moderate in the fourth quarter.

Moving to the International segment.

We expect full year revenue growth of around 20.7% with an operating margin of about 23.9%.

And in the Supply Chain Solutions segment, we anticipate full year revenue growth of around 10.3% and operating margin of about 10%.

Additionally, for the full year in 2021, we expect free cash flow to be around $10.5 billion and return on invested capital will be around 29%.

Capital expenditures are now expected to be approximately $4.2 billion.

And lastly, our effective tax rate for the full year is expected to be about 22.5%.

As I wrap up, the economic outlook and the effects of our revenue quality and productivity initiatives are putting us well on our way to achieving the high end of our 2023 targets that I shared with you in June.

We are executing our strategy under the better, not bigger framework and delivering on our commitments despite a very dynamic environment.

We are laser-focused on improving revenue quality, reducing our cost to serve and remaining disciplined on capital allocation to improve the experience for our customers, and our people and the financial performance of our company.

Thank you.

And operator, please open the lines.

(Operator Instructions) Our first question comes from the line of Todd Fowler with KeyBanc Capital Markets.

Congratulations on the good performance in a tough environment.

Carol, I wanted to start with the increase in cost per piece in the U.S. Domestic segment.

It sounds like fuel is a component there.

Also, it sounds like you're seeing some cost pressure.

But can you talk a little bit about your ability to get out in front or ahead of that and start to see cost per piece start to slow as we move into 2022, and kind of how you view that as a normalized or what a normalized rate for that should be going forward?

I'm happy to.

We were very pleased with the productivity that the team delivered in the third with our cost per piece increasing at a lower rate than our revenue per piece.

There were lots of goes-ins and goes-outs that Brian can share with you.

But look, productivity is a virtuous cycle here at UPS.

And I'm super proud of what Nando and the team are doing in terms of driving more pieces per hour and higher cube utilization.

And actually, as we look into '22, driving automation in our facilities, as we've talked about, we have about 141,000 people inside of our buildings.

And through automation, we'll be able to optimize that cost.

But Brian, maybe you want to give a little more detail on the third quarter cost.

Happy to, Carol, and good morning, Todd.

Our cost per base in the U.S. was up about $0.95, and there were 4 big drivers.

The union benefits and wages was up about $0.30.

Our fastest ground ever weekend initiatives contributed $0.16.

You're right, fuel did drive close to $0.20.

It's about $0.19 of the total increase.

And then we had some other items like the excise tax lapped, et cetera.

But from a growth perspective, Todd, we saw about 10.4% CPP increase in the third quarter.

You'd expect that to go down to mid-single digits in the fourth quarter if we think about that trajectory.

And our next question will come from the line of Ravi Shanker with Morgan Stanley.

Can you give us an update on what your enterprise customer volumes did in 3Q?

And also regarding your largest customer, if you can shed some light on kind of how that relationship is going.

I think you said that you're working closely with them for the fourth quarter.

But in the past, you've also said that you expect that relationship to change over time.

So if you can give us some color there, that would be great.

Sure.

So when we think about the growth of enterprise customers versus the rest of the business, we declared and called out the growth that we saw in our SMB customers.

With an increasing penetration in SMB customers, that means the enterprise customers declined a bit, as we expected, for a couple of reasons.

One, we were up against tough year-over-year comparisons.

Secondly, we're controlling the volume that comes into our network because we're laser-focused on revenue quality.

We used to think that every package was the same.

We don't think that anymore.

So for some shippers, we're no longer delivering their packages, and that's okay with us.

Now as we think about our largest customer, we've got a great relationship with our largest customer and really -- and pleased where that relationship stands.

Last year, volume with that customer surged, as you would expect, because of the impact of COVID-19 and the shift in e-commerce demand.

This year, if I look at the volume with our largest customer as a percent of total volume for the first 9 months of this year, it's trending at where it was back in 2019.

And we continue to support that customer as they continue to grow, but we're not -- they're a supply chain.

We're just part of their supply chain.

Our next question will come from the line of Chris Wetherbee of Citi.

Just taking a look at some of the implied fourth quarter guidance, particularly on the domestic side.

So it seems like from a margin standpoint, we're looking at a fairly similar quarter than what we had in the third quarter.

And from an operating profit perspective, maybe even a little bit more growth than we saw in the third quarter.

So maybe you could give us a little bit of color.

You mentioned some of the surcharges that you're lapping in the fourth quarter.

Can you talk a little bit about sort of the pricing dynamic?

And then ultimately, how you feel like you're managing through some of the cost inflation that's out there in the market?

And maybe give us an update on how you think about that sort of hourly labor cost inflation just because it looks like the profit forecast is actually very good relative to what we've seen even here in the third quarter.

Chris, happy to -- I want to -- I'd pick that up.

The spread, which we still focused on, between RPP and CPP in the third quarter, was 12% RPP and 10.4% in CPP.

We're looking to maintain that spread as we go into the fourth quarter but your RPP will likely come down into high single digit and your CPP will come down into mid-single digits.

So as we think about it, you highlighted the lapping of the $550 million of surcharges from last year.

We're also -- from a volume perspective, we grew SMB/ADV last year in the fourth quarter by 28.5%.

So there are some elements here year-over-year.

That's one of the reasons I called out in my prepared remarks.

This is sequential moderation on the pricing, but we have confidence that we could pull the cost per piece down.

So in terms of the pricing environment, we expect it to be firm in the fourth quarter and feel good about the outlook.

And maybe we'll talk a little bit about that cost inflation question that you had.

If you think about our employee base in the United States, we have about 458,000 UPS-ers in the United States.

75% of them are covered by some sort of a collective bargaining agreement.

So we have a good idea of what the compensation is for those employees, and we manage through that.

Now with turnover, sometimes, we do have to make market rate adjustments to attract people into our company.

We've been able to cover those market rate adjustments with productivity.

So I feel really good about our ability to manage through the labor cost inflation that many companies are struggling with today.

Our next question will come from the line of Amit Mehrotra of Deutsche Bank.

Carol, on the SMB volumes, can you just talk about how your share with D3 and D4 SMB volumes are trending versus a year ago?

Because I think that's the area where you guys have been underpenetrated.

And then just following up on the last point you made.

Can you talk about the priorities with respect to the union negotiations?

I mean those are going to be here sooner than anybody realizes.

But yes, just wondering what your priorities are in those negotiations that will kind of allow the company to be more competitive and deliver on the long-term plan.

Yes, happy to.

So on the SMB question, we look at SMBs through a series of segments.

We used to call them by numbers.

Now we actually have names attached for those segments.

But happy to say that they're all growing, and that's what we want to see -- is growth in all segments from the medium size down to the micro and platform size.

So we're delighted with growth in all of those categories.

And as it relates to the union question, look, we want a win-win-win at the end of the day, and we're looking at this through the lens of a strategy rather than just a negotiation.

So in fact, we have a Board meeting next week, and we're going to talk to them about how we're approaching this.

It's different than we've done in the past.

And we'll keep you apprised as we go along.

Brian, is there any other color you want to share on the SMB front?

No, Carol, we had good growth.

It moderated.

Obviously, with some of the overlaps.

I did call out, though, in the fourth quarter last year, we posted 28.5% growth.

So as we think about this fourth quarter, you might look for lower growth rates but the mix has been holding steady at that 27%.

So as we think back to last year, we were in the low 20s.

We're well on our way up into the high 20s and our goal by '23 is to get to that 30% as a mile marker.

I couldn't be more pleased with the progress we're making on the 16 customer journeys that we've shared with you because our SMBs are really responding to those journeys.

And it's not just good for SMBs, though.

It's good for all customers.

We're just improving the overall experience.

Our next question will come from the line of David Vernon of Bernstein.

So Brian and Carol, I was hoping to talk a little bit about a longer-term issue around when did -- what level of domestic margins you want to see before you think about allocating a little bit more capital into the domestic business.

I know you've been pretty clear that ADV in the next couple of years should be in that 2% to 3% range.

But how do we think about the level of profitability you want to achieve in that domestic segment before you maybe think about allocating a little bit of capital and driving growth at a little faster rate on the volume front?

Dave, thanks for the question.

So we've laid out the trajectory here in the domestic, is to move that business up to 12% by '23.

The full year forecast now stands at 10.5%.

So we're well on our way to that journey.

We are actually allocating capital -- growth capital to the domestic segment, but we're doing it in a very disciplined way.

We're trying to create some more capacity in the network by sweating our assets, opening up weekend, et cetera.

So there's a few variables at play here, but we'll come back to you on the next quarter call as we talk about the '22 guide and break down the capital for you.

And just on that point, too.

I called out weekend delivery and how important that is for our customer experience.

Last Saturday, we delivered 6 million packages.

A year ago, that would have been basically nothing.

And we did that without adding any incremental capital spending into the network.

We just opened up the network to add capacity.

So we're going to make sure that this network is as optimized as it possibly can be before we start investing a lot of additional capacity then.

But when this is optimized as it possibly can be, then we'll have more capital.

And Dave, we'll unpack for you.

The shift in capital domestically may go from the buildings to more technology.

We talked about the smart package initiatives.

So as Carol mentioned, making the experience more a better one for our customers, those are the things we want to unlock and invest in.

Our next question will come from the line of Allison Poliniak of Wells Fargo.

Just want to focus on your comments around optimizing the existing labor force.

I guess, first, you highlighted the benefit of the key utilization efforts and reducing the direct labor hours.

I guess, when does that start to accelerate from here?

And then second, just automation.

Obviously, a longer tail to get benefits.

But any other choke points that you're looking to address first?

Any color there?

Well, we are all in on smart package and automation.

And we've kicked off 2 big projects to attack those opportunities.

Smart package alone by putting RFID tags on our packages, our preloaders, the men and women who are loading our packaged cars for delivery, will eliminate manual scans because they'll have a wearable device.

That means they'll be eliminating 20 million manual scans a day.

That alone drives productivity.

And then when you think about the cool technology that we're going to introduce into our buildings, automated label application, automated bagging, robotic induction into the packaged cars, that's just a ton of opportunity here to drive automation in ways that we haven't done before.

So I'm really excited about that.

Brian, what else do you want to add?

I think from a cost perspective, Allison, we talked -- Carol talked about 75% of the workforce being under a contract, and that gives us some certainty of our largest cost expense going forward to plan that.

Look, it is a dynamic environment, though, going into the fourth quarter.

And I talked last call about some of the MRAs, the market rate adjustments, we're doing for the part timers.

We've increased that amount in our forecast, but that's embedded and captured already within the 10.5% margin I put out there.

So I think we have a good line of sight to the future, and we're prepared for it.

Our next question will come from the line of Jairam Nathan of Daiwa.

Just somewhat connected to the earlier question here.

So I just wanted to understand, you talked about pieces per hour being a metric.

What is the -- what kind of potential do you see?

If you could also give us some perspective on where pieces per hour was about 2, 3 years back and how much of a further reduction you can see.

As we looked at our productivity results in the third quarter, you have to go back to 2016 to see that kind of productivity.

So it's a dramatic improvement driven by just the great work of our operating team and our engineers.

What's the potential?

We're going to get better quarter after quarter after quarter, and we'll report to you as we do that.

Our next question will come from the line of Scott Group of Wolfe Research.

I know it's a bit early, but Carol, maybe can you talk about the pricing outlook for next year and your ability to maintain inflation plus pricing again next year?

And just along those lines, I think you guys have talked about 100 basis points of U.S. margin improvement next year.

Do you still feel good about that from the higher 2021 base now within the guidance?

Well, we're putting the finishing touches on our 2022 plan, and we'll tell you what we think we're going to do in 2022 at the end of the fourth quarter.

As it relates to the pricing environment, we mentioned in the call today that our general rate increase is 5.9%.

We've also made some other adjustments in pricing, and then you can go on the website to see all of those.

It includes a 1% increase in fuel that goes in, in November of this year.

So we priced our products for the services and value associated with those products.

We'll go next to the line of Scott Schneeberger of Oppenheimer.

On international margins, higher than we expected in the third quarter, and it sounds like it's going to remain elevated in the fourth.

Could you just talk about the sustainability?

It looks like it's trending nicely above the 2023 guide.

So just some thoughts on the puts and takes in the quarter and what we should expect a little bit more color on the fourth quarter with regard to international volume and margin.

Yes.

Thanks, Scott.

The -- you're right.

We delivered 24% more internationally in the first half of the year, and we're looking to do the same in the second half of the year.

So full year will be right at that -- should be right at that number.

We did experience some challenges in the quarter with some of the lanes out of Asia.

But as we think about the tight supply chains, we don't expect to see the demand surcharges fall off anytime soon.

So we feel confident through most of '22 that those surcharges would remain, and the Asia lane does matter the most, and we don't see -- capacity returning to prepandemic levels until '23.

So hopefully, both of those things should maintain demand for both our international small package and for the supply chain business.

Our next question will come from the line of Jordan Alliger of Goldman Sachs.

Just a quick follow-up around pricing.

Can you talk -- maybe update us where you think you may be in terms of the actual quarterly pricing of contracts, especially on the enterprise business?

And then the revenue per piece up 12% domestically.

Any sense how mix impacted that and, specifically, of course, and the underlying profitability better with the SMBs, et cetera?

Do you want to unpack the RPP?

Sure.

Happy to.

Jordan, so the -- in the third quarter, a little over half came from rate this quarter and the balance from surcharges and mix.

Where we are in the journey, we're in the low 40s in terms of contract renegotiation in terms of that cycle.

And those contract renegotiations have gone very favorably haven't they.

They have indeed.

Yes.

Our next question will come from the line of Duane Pfennigwerth of Evercore ISI.

Wonder if you could talk a little bit about supply chain constraints into the ports and how you think about the net impact of this environment to the domestic segment specifically.

Supply chain urgency tilts more to air cargo but perhaps throughput from the ports is not as high as it could be.

So how do you think about the net impact of this tightness?

And could we see an elongated peak?

Yes.

It's such an interesting conundrum, isn't it?

We are hearing from some surveys that consumers are quite panicked about this because supply chain jams are all over the news.

And in fact, something that holiday shopping will be completed by Cyber Monday or 50% of holiday shopping will be completed by Cyber Monday.

As a result, some of our customers are actually pulling forward promotions.

And we saw that last week, as an example, our volume was quite good because of promotions that our retail customers were offering.

So I think everyone is trying to work through the supply chain demands to ensure a good holiday season.

There's also a belief that there will be more gift cards sold this year than in prior years, which should suggest that packages will continue to be delivered post the holiday, as that's kind of elongates the holiday shipping season in a way.

As we think about what it means for us right now, I'll just make it real for you, for the ports in California.

A lot of discussion about the ports in Los Angeles and at Long Beach.

We have hubs very close to those ports.

We receive containers from those ports through a drop-ship arrangement with a third party.

So when people say there's a supply shortage of truck drivers, it's true because this third party is delivering those containers to our hubs.

We have capacity, as an example, in one of our hubs for 70 containers today.

We're only getting about 50 of those containers.

So it is slowing down the flow of packages.

Now as soon as we get it, we get it delivered.

So our business is doing well.

But in terms of the end-to-end supply chain, it's jammed upstream.

So when the administration -- the Biden administration recently announced we're going to have efforts to operate these ports at 24/7, we've said that's great news because if you can pull the containers off the ships, and then get them drop shipped to us, we've got the capacity to take on those containers.

So we're here, ready and able to support anything that we can do to unlock some of that jam.

Our next question will come from the line of Kenneth Hoexter of Bank of America.

And congrats on a solid quarter.

It just looks like, Brian, the 12.7% domestic growth, pretty solid with the 10.5% margin, pretty solid outlook.

Just want to see where you think you're seeing some acceleration or improvement to get that.

I guess, Carol, you mentioned the $500 million of productivity not only this year but next year.

Maybe you can talk there or walk us through what is leading that for next year.

Is that same thing labor?

Or are there shifts in where you're getting those cost cuts?

So Ken, we obviously had a good top line result in the third quarter, and we expect to see that spread continuing.

We're pushing hard on the productivity lever.

There's nonops and there's ops.

We've talked to you about that nonop piece, and that will repeat next year.

So we'll get to $1 billion over the 2-year period, and we feel confident in that.

The productivity side is the thing that took a little longer to kick in, but the optimization right now, as we think about cube utilization, I think our trailers were down about 10% in terms of utilization, which is a great stat.

And I talked about direct labor hours being down 5% relative to volume.

So we're going to track those metrics very closely on the pieces per hour, the cube utilization and watch those as we go into next year.

But we feel good about maintaining the margin spread from Q3 to Q4 in terms of the delta between RPP and CPP.

And as Carol mentioned, we'll come back in the fourth quarter and talk about the trajectory of margin expansion for '22.

And our next question will come from the line of Bruce Chan of Stifel.

Team, great results for the quarter here.

Just a question on the international side.

Can you remind us what your approximate market share is on the European export?

And when we think about the better, not bigger strategy, does that apply in Europe as well?

You've got a competitor that's turning the corner on a major integration there next year.

And just kind of wondering what your baseline expectations are for how that affects the competitive dynamics in that market.

Well, our market share in export is low.

We're taking share on the ground in Europe.

And I couldn't be more proud of what the team is doing outside the United States to grow this business.

Our next question will come from the line of Brandon Oglenski of Barclays.

So just a quick point of clarification.

It sounds like your largest customer volumes are trending in line with your enterprise customers.

I think that's what I heard.

But then I guess the bigger issue for me, Carol or Brian, how do you guys leverage this -- your technology package?

Like what is innovative about working with UPS for a small, medium-sized business or shipper that would be differentiated from someone that's running a much larger business?

It's the end-to-end network.

It's not just the technology solution.

It's what we offer from an end-to-end perspective.

On the technology side, we are laser focused on making sure every experience is best in class.

So we've talked to you in the past about our billing system.

When you compare our billing system against every other player out there, we were not best-in-class.

We were worst in class.

So we've just introduced a new billing system and all of the attributes and applications associated with that billing system are now best-in-class.

So we're -- in many ways, we're fortunate that we hadn't invested so much in the past because now we can leapfrog everybody else with new.

So -- and we've got 16 customers earnings that we're well down the -- well down the road that creates a sticky experience with those customers.

So we created APIs that are unique to them so their systems can link in with us.

It's really important when you think about our Digital Access Platform and how we connect to those platforms like Shopify and Stamps and eBay and all the other platforms that we interact with.

In fact, our DAP business, well, it will be way over $1 billion business this year and growing.

Brian, anything you want to add?

I'd just highlight 3 things.

From a technology standpoint, we're thinking about what's important to the customer.

You've got claims, you've got lost packages, you've got pricing.

On the claims front, we're speeding up the claims process and simplifying that, using some technology.

On the lost package, which is really important, Carol talked about the RFID, the investment there is to drive tracking of packages.

And then on the pricing front, we're piloting right now dynamic pricing, which will make it more effective and optimize the pricing in the area.

So those are just 3 ways that we're employing technology to make the customer experience more effective.

Our next question will come from the line of Tom Wadewitz of Barclays -- excuse me, UBS.

Yes.

Tom Wadewitz at UBS.

I know you talked a fair bit about labor and inflation.

I'm going to ask you a little bit more about it.

Brian, you said the market rate adjustment's above $100 million but you didn't quantify that.

Would you care to tell us what that is?

Is it $150 million?

Is it $200 million, maybe just to ballpark it?

And then just wanted to get a broader thought on kind of labor impacts from an availability perspective.

I don't know how much -- maybe how much visibility you have to the 100,000 seasonal workers in peak and just whether you think that labor market stabilized.

Or is that something we ought to think about further pressure as we go into '22?

Tom, good to hear you, and you're still at UBS, I like that.

So the increase in the MRAs, I talked last call, we were spending about $80 million to $100 million in terms of the market rate adjustments to remain competitive in certain geographies.

With that in our forecast, that was for the second half of the year, we've kind of increased that range moved to $80 million to $100 million up to $100 million to $130 million.

So it's bumped up marginally.

But I will say all of that increase is embedded within the 10.5% full year domestic margin outlook.

And then on the labor front, maybe I'll give you some color.

It's really interesting when you look at the labor dynamics.

There are 5 million fewer jobs in the United States today than there were pre pandemic, and yet there are only 4 million "Help wanted" signs.

So there's not excess demand -- The problem is, is that everybody is rushing to fill the jobs.

And so that's why you see so much pressure out there because, as the economy has opened up, everyone is rushing to fill the jobs.

Now in some ways, we got ahead of it.

Because if you think about last year, when our volumes surged, we hired 40,000 people in the second quarter.

So we got ahead of some of the challenges by hiring last year.

Now we are heading into peak where we do hire 100,000 seasonal workers.

We are pretty good at this.

We've done this for the past several years.

The environment is different than it's ever been for sure, but we're all hands on deck.

We have hundreds of recruiters that are working for us.

These are UPS-ers as well as partners that we work with outside of the company.

We have simplified the hiring process.

So now within 30 minutes, you can get an offer.

Before, you had to go through a gaming exercise before you can get an offer, and trust me, I play those games.

I didn't do well.

So I was like let's -- get rid of the game.

So we've simplified the processing on board.

And look, we're not -- it's not over until it's over but we're making progress here.

I'll just give you one data point.

Last week alone, we hired over 13,000 people.

So we've been at this for a while, and we'll stay at it so we get the number of people we need to deliver a great peak for our customers.

We'll go next to the line of Bascome Majors of Susquehanna.

Yes.

Carol, I wanted your perspective on the regional last mile competition.

Can you give us some thoughts on where they fit in the competitive landscape today?

And does that change as LaserShip expands acquisitively under the leadership of a credible CEO from your former company?

And just as an extension of that, just any thoughts on how you focus on improving your revenue quality while being cautious not to shed enough lower in share to help create a new nationwide low-cost competitor?

Yes.

So as we've talked about, the small package market in the United States is very attractive.

There is a demand-supply imbalance, and everybody wants a place of the pie.

And so these regional players certainly want a piece of the pie.

If you look at the LaserShip announced acquisition, that combined company, which, by the way, is bicoastal.

So they don't have an end-to-end regional network yet, they're just bicoastaled, less than 2% of the volume today.

So and they're delivering actually for our largest customer, by the way.

Our largest customer has -- suppliers delivering their packages.

So as we -- as I think about it, game on, right, it's a competitive environment.

And what we have to do is we've got to invest in the customer experience so that we've got an experience where people want to come to us and pay for the experience that we offer.

And just on the leader that's joining that company.

I have a great amount of respect from Mark Holifield.

I worked with him for 16 years.

He is an awesome leader but I love to compete.

So Mark, a little note, welcome to the industry and that we were going to fun together competing.

So more to come.

Operator, we've got time for one more call or one more question, if you would, please.

And our final question comes from the line of Brian Ossenbeck of JPMorgan.

Just wanted to ask a little bit more about the long term.

We talked about moving further upstream with coordination with retailers and others throughout the supply chain, but that's often been hard to actually execute in the past.

Do you think with the amount of disruption and demand that we're seeing that this might actually be a good time to have those conversations?

Maybe you can elaborate on how those are trending as you look to more synchronized deliveries, which I'd imagine might be challenging to get into place but would actually benefit everybody from a capacity utilization standpoint.

We don't have a lot of time to talk about this morning, but we do have some pilots underway with a third-party platform to see if we can move upstream to consolidate orders into a basket from multiple shippers and ship it on one package car.

It's early days.

The pilot's just kicked off, but we'll have more color for you, I think, at the end of the fourth quarter.

Thank you.

I will now turn the floor back to your host, Mr. Scott Childress.

Well, we want to thank everyone for joining us today, and that concludes our call.

And we hope everyone has a fantastic day.

Thank you.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation and for using AT&T teleconferencing.

You may now disconnect.