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Operator
Good morning. My name is Steven, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations Second 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.
Scott Childress - VP & IR Officer
Good morning, and welcome to the UPS Second 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 that 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 second quarter of 2021, GAAP results include after-tax transformation and other charges of $11 million or $0.01 per diluted share. Also in the second quarter, on April 30, we closed on the sale of UPS Freight, which triggered remeasurement of certain of our pension and postretirement benefit plans. The remeasurement resulted in a $2.1 billion reduction in pension and postretirement benefit obligations on our balance sheet, primarily due to higher discount rates. The vast majority of the remeasurement impact fell within the corridor. So the impact to GAAP net income was negligible at approximately $3 million.
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.
Following our prepared remarks, we will take questions from those joining us via the teleconference. Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question, press 1, then 0 on your phone to enter the queue. Please ask only one question so that we may allow as many as possible to participate. You may rejoin the queue for the opportunity to ask an additional question. And now I'll turn the call over to Carol.
Carol B. Tomé - CEO & Director
Thank you, Scott, and good morning, everyone. Let me start by thanking all UPSers for their hard work and efforts. Our better, not bigger framework, is enabling consistently high service levels and producing improved financial results. Our team is truly moving our role forward by delivering what matters.
More specifically, we are winning in the most attractive parts of the markets with new capabilities, like our fastest ground ever weekend initiatives and improvements in our customer experience journeys. We are continuing to deliver life-saving COVID-19 vaccines, and our healthcare growth initiative is gaining momentum. We are also driving sustainable revenue per piece growth through targeted revenue quality strategies. And lastly, we are driving productivity improvements in the network and implementing targeted transformational expense reductions. Our second quarter financial results across all segments were much better than we anticipated.
Consolidated revenue in the quarter rose 14.5% from last year to $23.4 billion, and operating profit grew 40.8% to $3.3 billion. As we expected, U.S. average daily volume for the quarter was down slightly from 1 year ago, driven primarily by tough comparisons due to the jump in e-commerce-related volume last year, but our revenue quality in the U.S. was much improved due to a change in customer mix as well as our revenue quality strategies. All of our business segments delivered record quarterly operating profit and expanded operating margins on a year-over-year basis.
In the U.S., operating margin was 11.6%, our highest second quarter operating margin since 2017. In the International segment, operating profit increased 41.3% and operating margin reached a record 24.7%. And in Supply Chain Solutions, continued strength in freight forwarding and healthcare drove operating margin of 9.7%, a record for the segment. While we closely monitor external factors, like the tight labor market and low inventory levels, the execution of our initiatives has put us well on our way to achieving the high end of our 2023 financial targets. Brian will share more details with you during his remarks.
Moving to our Customer First, People Led, Innovation Driven strategy, we strive to provide our customers with the best digital experience, powered by our global Smart Logistics Network. Customer First is about creating a frictionless customer experience and building the capabilities that matter the most to our customers.
During the second quarter, Saturday Ground delivery volume grew 13%, as we continued expanding our weekend coverage. This is an example of better, not bigger, as we are expanding service with very little capital spending. We are currently halfway through our efforts to expand our existing centers and turn on Saturday operations in more than 200 additional centers.
By the end of October of this year, we will cover about 90% of the U.S. population on Saturdays, which will further extend our market-leading Saturday commercial delivery and pickup services and support our ongoing Sunday delivery services. These improvements benefit all of our customers, large and small, by enabling faster time in transit and expanding capacity.
As we execute our strategy, our focus is on growing value share. We are changing the growth targets of the company and are no longer focused solely on volume growth. Instead, we are creating new capabilities and leveraging our competitive advantages to grow revenue and profits from the most attractive parts of the market like SMB, B2B, healthcare and international, while at the same time providing value and service to targeted large enterprise customers.
It's early days, but we believe our strategy is working. For example, in the U.S., we grew SMB average daily volume, including platforms, by 21.6%, and we saw a total U.S. revenue per piece increased by 13.4%. As you know, healthcare is one of our wildly important Customer First initiatives. In the second quarter, healthcare customer revenue on a global basis grew 19.8% and contributed to margin expansion in all 3 segments.
To grow in the healthcare sector, we are creating new capabilities like our recent launch of UPS Cold Chain Solutions. And we're deploying sophisticated solutions that customers want into new geographies like the expansion of UPS Premier to Canada and Europe. These actions are advancing our leadership position in the global healthcare logistics market.
To support growth in our International segment, we continue to invest broadly, including the launch of our first-ever daily flight from Osaka to Shenzhen, thus significantly speeding up our time and transit across multiple trade lines. We are also improving the customer experience across 16 journeys to make them simpler and more helpful. One of the customer pain points we are addressing is claims.
We recently completed a successful pilot that shortened the average claim processing time from 20 days to 5. The improvements we made resulted in a 1.9% reduction in churn among pilot participants. We are rolling out our new claims process to all U.S. SMB customers over the next 12 months.
To put this into perspective, every 1 percentage point reduction in U.S. SMB churn is worth about $170 million in annual revenue. Moving to the People Led component of our strategy, our focus here is to make UPS a great place to work so that our people feel confident recommending UPS to others. During the second quarter, our executive leadership team spent many days in our operations around the world, delivering packages, walking our facilities and talking with our people.
When we visit, we don't take a list, we bring back a list of the actions we can take to simplify our processes, drive productivity and improve the quality of the work environment for our people. I cannot say enough about the commitment of UPSers who, over the last year, rose to meet the challenges of elevated volume, while ensuring great service to our customers day in and day out.
I'd like to recognize our 38,000 part-time management employees in the U.S. that work primarily in our preload, hub, sort and air operations. In appreciation of their extraordinary efforts, we provided them with a onetime financial award in the second quarter. People Led builds on a strong foundation, and we will continue living our values, modernizing our policies and rewarding our people to make UPS an even better place to work and employer of choice.
Turning to Innovation Driven. Our disciplined approach to capital allocation is generating significant levels of free cash flow. In fact, in the first 6 months of this year, we generated $6.8 billion in free cash flow. This is a record. We've generated more free cash flow in the first 6 months of this year than we previously generated in any full year at any time in our company's history.
Also in the second quarter, we completed the divestiture of UPS Freight, a capital-intensive, low returning part of our business. This and other actions have greatly improved our financial condition from 1 year ago, as Brian will detail. And looking ahead, we expect to see a significant increase in our return on invested capital this year.
Innovation Driven will also help us reach carbon neutrality by 2050. In August, we will publish our annual sustainability reports, which include our 19th GRI content index, along with our second Sustainability Accounting Standards Board, or SASB report, and our first Task Force on Climate-related Financial Disclosures, or TCFD report. Social and environmental stewardship goes right to our core values, and we remain committed to providing investors transparency through our expanded ESG disclosures.
Next month, UPS will celebrate our 114th anniversary. It is such an honor for me to guide this company through our next chapter. We are a purpose-driven company, and we are investing in the capabilities that matter most to our customers to create value for our shareowners. Thank you.
And now I'll turn the call over to Brian.
Brian Newman - Senior VP, CFO & Treasurer
Thanks, Carol, and good morning. In my comments today, I will cover four areas, starting with macroeconomic trends, then our second quarter results. Next, I'll review cash and shareowner returns. And lastly, I'll wrap up with some comments on our outlook.
Okay. Let's start with the macro. All major economic indicators remain strong, with the economic recovery progressing faster than expected. In the second quarter, looking at IHS forecast, global GDP is expected to finish up 10.6% and U.S. GDP is expected to be up 12.5%. However, robust economic growth and high consumer demand is putting pressure on global supply chains and inventory replenishment. In fact, the U.S. inventory to sales ratio declined further from the figure I shared last quarter and was 1.09 in June.
As a point of reference, for the 3 years prior to COVID, this ratio ran between 1.4 and 1.5. For the full year, global GDP is now expected to grow 5.8% and U.S. GDP is expected to grow 6.6%. Accordingly, as we look at the back half of the year, while economic growth is forecast to remain positive, the rate of growth slows.
Moving to our second quarter consolidated performance. We delivered double-digit top and bottom line growth. Consolidated revenue increased 14.5% to $23.4 billion. Consolidated operating profit totaled $3.3 billion, 40.8% higher than last year. And I'll note that this is the first time UPS has generated quarterly operating profit over $3 billion. Consolidated operating margin expanded to 14%, which was 260 basis points above last year. And diluted earnings per share was $3.06, up 43.7% from the same period last year.
Now let's take a look at the segments. In U.S. domestic, our mix improvement and other revenue quality initiatives as well as productivity efforts continue to drive strong results. As expected, last year's surge in essential goods delivered to homes created tough comparisons on a year-over-year basis.
As a result, total average daily volume in the U.S. in the second quarter of this year was down 619,000 pieces per day or 2.9% due to a decline in SurePost volume of 1.3 million packages per day. The decline in SurePost volume was partially offset by double-digit percentage growth in Ground commercial and Next Day Air volume.
The unique year-over-year comparisons were also visible in our volume mix. B2C average daily volume was down 15.8% year-over-year. Conversely, B2B volume increased 25.7%. All industry sectors grew B2B volume, led by retail as more foot traffic returned to the brick-and-mortar locations. In fact, B2B retail posted its first year-over-year increase in volumes since 2019. And healthcare remained a bright spot with B2B volume up 28.6%.
Customer mix continued to be positive as our network enhancements drove SMB volume growth, including platforms of 21.6%. And in the second quarter, SMB made up 27.2% of U.S. domestic volume. For the quarter, U.S. domestic generated revenue of $14.4 billion, up 10.2%, driven by a record 13.4% increase in revenue per piece with fuel driving 220 basis points of the revenue per piece growth rate. We are pleased with the progress of our revenue quality efforts. The combination of base rate increases, surcharges and mix improvements generated double-digit revenue per piece percentage increases in our Next Day Air and Ground products.
Turning to costs. Total expense grew 7.3%, driven by three main areas. First, fuel represented 220 basis points of the increase. Second, were the enhancements to speed up our network and expand weekend operations, which accounted for around 200 basis points of the total expense increase. And finally, another 210 basis points came from an increase in employee benefit expenses, as more employees became eligible for health, welfare and retirement benefits and from the reinstatement of the federal excise tax.
Looking at efficiencies. We continue to see productivity improvements within package and inside operations. In fact, direct labor hours were down 1.4%, which includes a double-digit percentage reduction in overtime hours. Most notably in the quarter, revenue growth was significantly above expense growth, which generated positive operating leverage.
In summary, the U.S. Domestic segment delivered $1.7 billion in operating profit, an increase of $460 million or 37.9% compared to last year, and operating margin expanded 230 basis points.
Moving to international. The segment delivered another quarter of record operating profit. Total average daily volume was up 12.7%. B2B volume grew 25% on a year-over-year basis, with growth across all industries and customer segments. Conversely, B2C volume was down 4.1%. These year-over-year comparisons reflect the unique pandemic effects from last year, as B2C volume doubled in the second quarter of 2020.
Total export average daily volume was up 14% on a year-over-year basis with all regions, except Asia posting double-digit growth. Asia export volume faced difficult comps and was down 5.8% compared to the remarkable growth rate of 46.8% in the second quarter of last year, driven by the surge of PPE.
For the quarter, International revenue was up 30% to $4.8 billion, with all major regions growing revenue by double-digit percentages. We generated positive operating leverage in the quarter. Revenue per piece was up 15.5%, including a 530 basis point benefit from the fuel surcharge. And cost per piece was up 12.4%, including a 570 basis point impact from higher fuel costs.
In the second quarter, International delivered operating profit of $1.2 billion, an increase of 41.3% and operating margin expanded to 24.7%. Our strategy in the International segment is absolutely driving value share and growth from the best parts of the market. As Scott Price shared in June, we are underpenetrated in almost all geographies around the world. So we see tremendous potential, as we continue executing our wildly important initiatives internationally.
Now looking at Supply Chain Solutions. Revenue increased 14.3% to $4.2 billion, and the segment generated record profit and operating margin. Market demand was elevated and revenue growth in our major business categories more than offset the revenue impact from the sale of UPS Freight, which closed on April 30.
Looking at operating profit. In forwarding, our Ocean Freight product more than doubled its operating profit on a year-over-year basis, driven by strong inventory replenishment demand. And in healthcare, our clinical trials, along with cell and gene solutions again delivered record top and bottom line results.
In the second quarter, Supply Chain Solutions generated operating profit of $408 million, and the operating margin was 9.7%. We are extremely pleased with our performance in this segment. We have moved the needle on operating margin, where over the past 5 years, operating margin has averaged 6.6%.
Walking through the rest of the income statement, we had $167 million of interest expense. Other pension income was $302 million. And lastly, our effective tax rate came in at 22.1%, which was lower than last year due to 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 bottom line results. For the first 6 months of the year, we generated $8.5 billion in cash from operations and $6.8 billion in free cash flow. Also in the second quarter, the sale of UPS Freight triggered remeasurement of certain U.S. pension and postretirement plans, which resulted in a reduction in our net pension liability of $2.1 billion on our balance sheet, primarily due to higher discount rates. GAAP income only benefited by about $3 million because the vast majority of the gains fell within the corridor.
As Carol mentioned, our financial condition has greatly improved. A strong balance sheet is a core UPS principle. And since the end of 2020, we have reduced our pension liability and outstanding debt by $10.2 billion, bringing our debt-to-EBITDA ratio to 2.1. And lastly, so far this year, UPS has distributed $1.7 billion in dividends.
Moving to our outlook. I'll cover both the second half of 2021 and the full year. First, we expect market conditions to remain favorable and our initiatives to continue delivering positive results in our business. We are also paying close attention to several external factors, including the Delta variant of COVID-19, inflationary pressures, the U.S. inventory to sales ratio and consumer spending preferences. Nonetheless, we expect our revenue quality efforts to cover known expense pressures, and we are on track to meet our 2021 nonoperating savings target of $500 million.
On a consolidated basis, we expect second half 2021 revenue growth of around 5.4% year-over-year, which takes into account the divestiture of UPS Freight, tough comparisons from last year and our revenue quality initiatives. We expect the second half 2021 consolidated operating margin of around 12%.
In U.S. Domestic, we anticipate back half 2021 revenue growth of about 8.2%, with revenue growing faster than volume. Operating margin should be around 9.2%. Operating margin in the back half of the year is expected to be lower than what we reported in the first half due to three factors: First is higher compensation expense from our contractual labor increase, which goes into effect each year in August. Second, we have made targeted hourly rate adjustments in certain geographies to remain competitive in the market. And as usual, lower-margin enterprise and B2C volume will represent a larger percentage of our total volume due to peak. Pulling it all together, we now expect full year 2021 U.S. operating margin to be approximately 10.1%.
In the International segment, for the second half of 2021, we anticipate year-over-year average daily volume growth from Europe to be in the mid-single digits. In addition, we expect Asia outbound volume to remain elevated relative to pre-pandemic levels. As a result, we expect revenue growth around 10.7%, with an operating margin of about 22.9%.
In the Supply Chain Solutions segment, in the second half of this year, we expect freight forwarding and healthcare to continue to lead the segment. We anticipate total revenue in the segment will decline around 9.6%, due to the sale of UPS Freight. However, we expect operating profit growth of around 8.1% and an operating margin of about 9.1%.
Moving to the full year. In 2021, we expect consolidated operating margin of approximately 12.7% and return on invested capital of approximately 28%. We expect capital expenditures to be about $4 billion. And in April, we repaid $1 billion in debt and have achieved our 2021 target of $2.55 billion in debt repayment.
We have no plans to repurchase shares in 2021 at this time. But given the strong free cash flow and further reductions to our pension liabilities, we continue to evaluate the option to repurchase shares later this year. And lastly, our effective tax rate for the remainder of the year is now expected to be around 23%. Looking out to 2023, the current economic outlook, coupled with the early results from our revenue quality and productivity initiatives, is putting us well on our way to achieving the high end of our 2023 targets.
In closing, we are laser-focused on executing our strategy under the better, not bigger framework, and leaning into the best market opportunities to improve the financial performance of the company, provide the best customer experience and benefit our shareowners.
Thank you, and operator, please open the lines.
Operator
(Operator Instructions) Our first question will come from the line of Ravi Shanker of Morgan Stanley.
Ravi Shanker - Executive Director
Carol, a few questions on enterprise customers. What was that growth or decline year-over-year in 2Q? Was that mostly, again, running into really difficult comps? Or have any enterprise customers changed their sourcing behavior in response to your pricing and surcharge strategy? And lastly, you said that you're targeting large -- you're going after targeted large enterprise customers in the future. What does that mean? Kind of what's the basis for that targeting?
Carol B. Tomé - CEO & Director
Thank you, Ravi, for the question. On the enterprise, customer behavior in the second quarter was largely impacted by SurePost volume. As Brian declined, our SurePost volume was down 1.3 million pieces. That happened because many of our brick-and-mortar enterprise customers reopened their stores. And as the economies reopened, customers went back to those stores.
So we actually anticipated this when we built our second quarter plan. And in fact, to be -- average daily volume performed better than we had planned at the beginning of the year. As we focus our efforts going forward, we're really leaning into those customers that value our end-to-end network and focused on value share, not so much volume share. As we discussed during our June investor conference, a package is not a package, they all come with different characteristics. And we're leaning into those packages and those customers that value our end-to-end network.
Brian, anything to add?
Brian Newman - Senior VP, CFO & Treasurer
Yes, just, Ravi, if you back out that SurePost volume that Carol alluded to, we'd actually be up 4% in Ground and Domestic business for the quarter.
Ravi Shanker - Executive Director
Great. Any follow-up on larger e-commerce enterprise customers? Kind of any update there versus the brick-and-mortar guys?
Carol B. Tomé - CEO & Director
So we value our very large e-commerce customer that doesn't have a storefront as well as all of our enterprise customers. And if I look at our very large enterprise customer that doesn't have a storefront or much of a storefront, the percentage of our total revenue was about the same as it was in the first quarter.
Operator
Our next question will come from the line of Ken Hoexter of Bank of America.
Kenneth Scott Hoexter - MD and Co-Head of the Industrials
So just looking at your volume comp, just to follow that discussion, are you seeing the B2C deceleration or your outlook on that B2C relative growth continuing to decline as you face these tougher comps? And then just looking at the margin thoughts there, right? So you're looking for a deceleration in the margin, maybe you could just flesh that out a little bit? You kind of highlighted, Brian, your three thoughts on that, but maybe just trying to talk to Carol's historical conservatism versus your thoughts on the extending costs that you see coming back online with the union cost?
Carol B. Tomé - CEO & Director
Well, maybe I comment on volume and then we'll turn to cost. We were really pleased with the growth that we saw in our SMB customer in the second quarter. Last year, SMBs in the United States made up about 20% of our total revenue. This year, they make up more than 27% of our total revenue. So we think that the capabilities that we are investing to grow this very important customer segment, well they're working.
Now if you look at the breakdown of SMB, 50% of the revenue was for commercial, 50% of the revenue was for residential delivery. So you can see a shift within SMBs, what you would expect as the economy start to reopen, and we were very pleased with the growth that we saw in our commercial business.
Looking ahead, we would expect the volume trends to be about the same in the third quarter. And we're not getting into the process of giving you quarterly guidance, but we would expect the volume trends to be about the same in the third quarter and then volume up in the fourth quarter as we head into peak.
Brian, comments on costs?
Brian Newman - Senior VP, CFO & Treasurer
Ken, on the cost front, I think I articulated what drove the 730 bps of increase in the second quarter. If you look at the first half of the year, cost per piece was about 6.5%, so mid-single digit. I think we would anticipate that looking to be somewhat similar from a CPP basis in the second half of the year. And we can unpack that for if you want more detail.
Kenneth Scott Hoexter - MD and Co-Head of the Industrials
No, no, no more detail. I was just kind of wondering your thoughts on the deceleration versus trying to be conservative with the outlook versus your thoughts on kind of the margin follow-through?
Brian Newman - Senior VP, CFO & Treasurer
Well, I think from a cost perspective, Ken, one of the elements that's driving that cost per piece is our union labor increase in August. So when you look sequential from the first half of the year to the back half of the year, it's a fairly material number when you look at the market rate adjustments and the union increase. It's north of $400 million, so it's about 150 bps on the margin.
Operator
Our next question will come from the line of Amit Mehrotra of Deutsche Bank.
Amit Singh Mehrotra - Director and Senior Research Analyst
Brian, I just wanted to confirm or Carol, I just wanted to confirm your comments. Are you expecting total average daily volume in domestic volumes to be down year-over-year in 3Q versus a similar rate in the 4Q and then positive in 4Q? And then also maybe a little bit more of a bigger picture question. Carol, the company has committed to basically paying down debt. The balance sheet and financial position have gotten better, as some of these pension issues have kind of resolved themselves so wondering if you're opening up the company to maybe more of a major acquisition over the next couple of years. Is there an appetite for maybe significant M&A? And if there is, what are some of the areas and adjacencies that kind of make sense for how you see the company evolving over the next many years? That would be helpful as well.
Carol B. Tomé - CEO & Director
Well, Brian, why don't you comment on the volume and then I'll talk about the balance sheet.
Brian Newman - Senior VP, CFO & Treasurer
Sure. Amit, our current forecast that we're holding for the second half of the year is low single digit from an ADV perspective. So I'm not going to get into Q3 versus Q4, as there's a lot of movement right now in the market. But we had 1H was about 4%. We're expecting low single digit, slightly lower than that in the second half.
Carol B. Tomé - CEO & Director
And I think a lot of this on the volume side is still highly dependent on the inventory to sales ratio, isn't it? We've been talking to our large customers about what they're seeing in their business. And interestingly, one large brick-and-mortar customer told us they have 50 containers that were stuck in the port. And until those containers can get into their warehouses and into their stores, it's hard to sell. So there's a bit of an uncertainty out there, but we kind of control what we are going to control. And we shared this back half view with you because we thought you should know what we're seeing and what we're thinking about our business.
On the balance sheet question, I mean, gosh, from where we were a year ago, the financial condition of our company has greatly improved. Even from the end of the year, it's greatly improved, with our debt and pension liabilities down $10 billion from the end of the year. And having a strong financial condition, lets us all sleep well at night so that we can lean into our customer experience and do the right thing for our people, for our communities and for our customers.
As we think about our strategic opportunities ahead, we are opportunity-rich. And so we're going to continue to lean into those 16 customer journeys that we've talked to you about because we really think by improving the end-to-end experience, we get stickiness with our customers and can grow that value share that we are seeking to grow.
Could there be a capability that we might want to acquire to enable or speed up those journeys? Perhaps. But we're not seeing here building a large M&A war chest, if you will. In fact, we're just going to try to run the best business that we can.
Now we do believe that cash belongs to the shareowners and not to us. We told you that at the beginning or at the end of this year, if you will, we have a new dividend payout target, which is 50% of earnings. So based on the guidance that Brian has shared with you today, that could imply a fairly nice use of cash when we announced that new dividend. We are also looking at reentering the share repurchase market. This is something that we discussed with our Board every quarter. We have a Board meeting next week. So Brian shared with you in his prepared remarks that we're looking at as well.
Amit Singh Mehrotra - Director and Senior Research Analyst
So is $1 billion a year the right target that you disclosed 1.5 months ago? Or is it now, there's more upward bias on that as you look forward?
Carol B. Tomé - CEO & Director
So I think as we reported, we generated more free cash in the first 6 months of this year than we have in any year and any time in our company history. So with a debt-to-EBITDA ratio now of 2:1, things are looking to good for UPS and our ability to return capital to our shareowners. So when we get ready to change how much you should put in your model for share repurchases, will tell you.
Operator
Our next question will come from the line of Allison Poliniak of Wells Fargo.
Allison Ann Marie Poliniak-Cusic - Director & Senior Equity Analyst
I want to dig into the domestic revenue per piece a little bit more. I know you called out fuel, but you had also mentioned the surcharges, which I believe are weighted more towards B2C as well as some the revenue quality issues. Any way to break that down a little further? I'm just trying to get a better sense of what the organic revenue quality impact is to that revenue per piece, if you could.
Brian Newman - Senior VP, CFO & Treasurer
Allison, I'll take that. So when you look at the RPP in the quarter, we were up domestic 13.4%. 2/3 of that improvement came from customer product mix and surcharges. And as you think about the surcharges and the mix, the big driver of mix was SMB volume, which it increased to 27.2% of our total mix.
If you think back to last year, in Q2, that was down at about 21.2%. So we're on that journey. At the Investor Day, we talked that we wanted to get north of 30% to hit the high end of our guidance. We're well on the way of that journey, and we feel good. Lastly, on the rate component, we're not even really halfway through the rate and contractual negotiations as those contracts open back up. So there's still more gas in the tank across the three levers.
Operator
Our next question will come from the line of Chris Wetherbee of Citi.
Christian F. Wetherbee - MD & Lead Analyst
I guess I wanted to kind of comment that yield point for a second and then maybe tie it into the domestic margin outlook in the second half of the year. So low single-digit ADV in the back half of the year is the kind of way to think about it, I guess you sort of maybe get mid-single-digit yield growth. And then in the context of that SMB sort of step-up as well as B2B being up, I guess I'm a little surprised to not see the incremental margins or implied margins in the back half of the year be a little bit stronger. So it sounds like there's some cost dynamics probably fuel sort of weighing in there a little bit. But can you help us unpack a little bit more some of those moving pieces maybe on the cost side or maybe something is going on within mix between B2B and B2C that kind of help us that with the sequential progression in the domestic margins in the back half of the year?
Brian Newman - Senior VP, CFO & Treasurer
Sure, Chris. I'll take a stab at that. So the way I think about the second half of the year, when I say low single-digit in ADV, it's really closer to the 1% range. RPP should be in sort of the high single digits, 7-ish, 7.5 thereabouts. And then cost per piece is probably similar to what we saw in 1H, which was in that 6.5 range. So that's sort of from an algorithm perspective how the math plays out.
There are a lot of moving pieces here from a CPP. I mentioned the cost increases from the wage and union contract. We've also got some market rate adjustments that are going in, in the second half of the year to remain competitive on a geographic standpoint. And then RPP, obviously, you've got that higher enterprise and B2C mix in the peak season.
Carol, anything to add?
Carol B. Tomé - CEO & Director
I think the peak season comment is right because we will see a mix difference.
Brian Newman - Senior VP, CFO & Treasurer
That's right.
Carol B. Tomé - CEO & Director
We will see a higher penetration of enterprise than we have today.
Christian F. Wetherbee - MD & Lead Analyst
And just a quick follow-up. Is the fourth quarter, do you assume that you can get domestic margin expansion in 4Q during peak season this year?
Brian Newman - Senior VP, CFO & Treasurer
We do.
Operator
Our next question will come from the line of Allison Landry of Credit Suisse.
Allison M. Landry - Director
So obviously, you called out the comps headwinds weighing on domestic margins in the second half, but you should start to lap comps related to the Saturday expansion and speeding up the network. So does the 220 basis point headwind in Q2 related to this ease in Q3 and go away by Q4? So maybe if you could just sort of address some of the factors that are positive for margins. And just to clarify, so is it fair to assume for both Q3 and in Q4 that the spread between RPP and CPP should remain positive?
Carol B. Tomé - CEO & Director
Well, I'll start with the expansion of our weekend delivery, which we're so pleased with, as we commented that we saw 13% growth on Saturday in the second quarter. We're about halfway through this initiative to reach 90% of the U.S. population by October of this year. We are expanding services in over 500 buildings, existing and new. So we've got some more costs coming out of us in the third quarter. But then as you point out, we're going to lap that next year, which we'll look forward to.
Brian Newman - Senior VP, CFO & Treasurer
Allison, just in terms of the margin and sequential performance, look, we plan for positive spreads between RPP and CPP on a quarterly basis. So that's our objective. It's probably a little tighter in Q3 than it is 4. And I'd just remind you, the journey we're on, as I said in my prepared remarks, we're going towards that 12% by 2023. And I think at the Investor Day, I had mentioned we want to be more than halfway there by 2021. The guidance of 10.1% versus 7.7% last year, we had 240 basis points in the first year, that leaves another 200 basis points over a 2-year basis. So I think we passed that 50% mark, and we're confident that we'll deliver that 12%.
Operator
Our next question will come from the line of Helane Becker of Cowen.
Helane Renee Becker-Roukas - MD & Senior Research Analyst
I just have two questions. On the free cash flow, when you think about so much free cash flow and the forecast for greater free cash flows, as you continue to see these improvements that you're talking about, do you worry about underinvesting in the business and then having to invest later to catch up to the growth that you're seeing? And maybe you could talk a little bit more about that?
Carol B. Tomé - CEO & Director
I'm happy to talk to you about it philosophically, then Brian, please add on. When we had our Investor Day back in June, we laid out a capital investment plan on the high side of about $14.5 billion between now and 2023. That's based on what we know.
If we have an opportunity to invest, that returns the kind of returns that we are looking for, will increase that capital. So we laid out what we knew. There's no gating factor here. We will continue to invest in the capabilities that are necessary to drive the business forward.
Brian Newman - Senior VP, CFO & Treasurer
I just -- Helane, I just follow up. We are still adding capacity when we look at the business. So in terms of this year, we'll bring on 7 newer retrofit lines, about 2 million square feet of space, 130,000 pieces per hour. And it's a journey.
As Carol mentioned, we've got about a 60-40 split in terms of our buildings and facilities and capacity and future growth, making 60% maintenance, 40% or less. So I think we will continue to evaluate. The thing I would highlight is with ROIC going up to 28% on a full year basis, we're very happy with the returns that we're making in the business. As Carol mentioned, with the excess cash, if we find areas to continue to invest and grow the business, we'll certainly do that.
Carol B. Tomé - CEO & Director
And we're also adding aircraft currently, Brian, from a capacity perspective.
Brian Newman - Senior VP, CFO & Treasurer
We sure are.
Carol B. Tomé - CEO & Director
So we're thinking about, I think, 6 aircraft, yes, between now and then.
Brian Newman - Senior VP, CFO & Treasurer
Yes, balance of the year. That's right.
Operator
Our next question will come from the line of Scott Schneeberger of Oppenheimer.
Scott Andrew Schneeberger - MD & Senior Analyst
I'm going to go International, it's a bit of a 2-parter. Just curious what you're seeing with regard to SMB penetration in the international markets, contrasting it with the U.S. market. And then looking at International, it's been tremendously strong, very high margins. I'm just curious what are the factors you're watching that might put you a little higher or lower in the back half of the year with regard to the international business overall?
Carol B. Tomé - CEO & Director
Well, I'll address the SMB. We were very pleased with the SMB performance in the second quarter. It grew 17% year-on-year. Many of the customer journeys that we are introducing in the United States, we are taking outside the United States as well. And Scott Price and his team are doing a really nice job of understanding customer pain points and where we need to invest.
One of the areas that we need to invest candidly is time and transit. And that's one reason we were so excited about the new Osaka to Shenzhen lane that we opened up in the second quarter, where our time and transit was something like 26%, it's now 76%. So we're leading the pack in that regard. So pleased about that. You might talk about margin?
Brian Newman - Senior VP, CFO & Treasurer
Yes. I think from a margin perspective, Scott, you're -- what's plus up or plus down drivers. I think Scott and the team are focused on controlling what they can control and doing that very well. They've remained -- they have still continued to deliver these elevated margins, which are terrific. I think the thing that would really plus it up or plus down would be the external factors in terms of the inventory pipeline and COVID spikes with the Delta variant. To the extent, there are less impactful, maybe we go up to the extent there are more shutdowns and inventory remains tighter, it could be a challenge. But those are really the external factors that I would highlight.
Operator
Our next question will come from the line of Todd Fowler of KeyBanc Capital Markets.
Todd Clark Fowler - MD & Equity Research Analyst
So I wanted to ask a little bit on the labor availability side. It sounds like that there were some actions taken in the current quarter for some incentive compensation there. And as we think about the back half of the year, it sounds like some market adjustments. I guess we typically think about us being a little bit more locked in on the labor cost side. Can you speak to what you're seeing with labor availability? And how you think you're positioned at this point from a labor cost standpoint for the rest of the year?
Carol B. Tomé - CEO & Director
Yes. It's a tight labor market for sure. And to your observation, we are pretty much locked in because of the way that most of our people are employed. But in certain parts of the country, we've had to make some market rate adjustments. That's a smaller piece of the cost pressure that we have in the back half that Brian detailed for you in his remarks.
We need to hire a lot of people for peak. And I'm happy to say that even in the face of this tight labor market, we are ahead of where we were a year ago. And Nando and his team are just managing this on a day-to-day basis. And just as it relates to peak, our peak planning is well underway. The good news is, from an operating perspective, we have one additional operating day this year, which helps us. We are lining up the aircraft that we need to lease to manage the volume. We're lining up all the rental equipment that we need to have in place to handle the volume and of course, on the people side. So we're -- every day, we're working on peak. I know it's just July, but we're working on peak every day.
Operator
Our next question will come from the line of Scott Group of Wolfe Research.
Scott H. Group - MD & Senior Analyst
Just couple of things I want to clarify. Can you just give us how much the onetime bonus was in 2Q that you talked about? And is the August wage increase different than normal? And then just bigger picture, I'm struggling with just understanding if we have positive price cost spread in the second half, why margins aren't really improving? And then if I can just ask one more, Carol. Going back to the Analyst Day, we heard a lot about mix. I don't know that we heard a lot about like underlying pricing. And can you just talk about that as well?
Carol B. Tomé - CEO & Director
Sure. Go ahead, Brian.
Brian Newman - Senior VP, CFO & Treasurer
Yes. So the first two questions, Scott, you got a few packs in there. The onetime bonus cost about $20 million in terms of the impact that we put out. The increase, we have step-ups in our wage contracts, and so it would be higher than previous year. Obviously, we're always talking more sequentially, what was in the first half versus the second half, and that's the big impact, which is about -- in or about $400 million in total, so about 150 bps on margin.
And I think the margin, the spreads get a bit tighter. I laid out the -- what our assumptions were in the back half of the year. So there's still positive leverage. They just get a little bit constrained by two things, one is the mix that we talked about during peak and the higher enterprise and B2C, and then the additional headwind pressure in terms of the labor piece that I mentioned.
Carol B. Tomé - CEO & Director
You might give a little color on next-gen profit too and the activity underway there?
Brian Newman - Senior VP, CFO & Treasurer
So next-gen profit has evolved, Scott, to look at both the RPP and the CPP. And so the teams get together each and every week to think about how do we drive the right customer and service trade-offs to deliver the right product and availability. A lot of it has to do with the dynamic pricing. So we announced our surcharges. We're trying to target specific areas and basically play the mix rate and surcharge lever.
We still got plenty of room to go, as I mentioned, on the rate renegotiation. On the cost piece, we're looking at bigger ticket items to change the game. So Nando and his team are thinking about. They're doing the blocking and tackling every day, but how do we take on a few initiatives in that much bigger cost bucket? Non-ops, we're making good progress. We've delivered about half of that $500 million in non-ops on a year-to-date basis, about $220 million. But on the back end of the year, we'll be getting after some of the operations opportunity and going into '22.
Scott H. Group - MD & Senior Analyst
On just the broader pricing?
Carol B. Tomé - CEO & Director
The broader pricing market. So pricing remains tight. It's projected that at peak. There will be a demand capacity and balance of about 5 million pieces per day. So that is a nice environment to be working in. But you don't want to run your business just on price lift day in and day out. You really want to drive the total value equation. So we've got a laser focus on cost and productivity as well as providing the capabilities that our customers value the most.
Operator
Our next question will come from the line of Brian Ossenbeck of JPMorgan.
Brian Patrick Ossenbeck - Senior Equity Analyst
I guess two quick follow-ups on the last commentary. Brian, could you elaborate on just the next-gen profit initiative? Is it fully rolled out across the entire company? Is this more of a U.S. domestic focus? And we heard about it at the Investor Day about how embedded. Is it 100% ramped up across the operations and fully working?
And then, Carol, you mentioned the 5 million pieces per day shortfall, I think that's down from 7 million. Last time you talked about it, I don't necessarily think that's a bad thing because people are trying to secure capacity in advance probably. But maybe you can put some context around that in terms of the broader supply/demand balance, which seemingly is still pretty tight, but obviously, maybe a little bit more capacity coming back into the market ahead of another strong peak?
Brian Newman - Senior VP, CFO & Treasurer
So on the first question that you were asking about the next-gen profit, look, Scott Price and the international team are really focused on value share growth. And so this is mainly a domestic initiative at this stage of the game, as we look at margin opportunities between RPP and CPP in terms of it being fully deployed.
Now the cost runway, it takes a little longer to get after. So we're still catching up with some of the initiatives taking hold from an operations and a cost perspective, that will have a longer tail to it. And then we're well on the journey in terms of getting a playbook. I would say the piece on RPP that still needs sort of revenue that still needs to catch up, would be the dynamic pricing that relies on technology. So that's the next chapter on the revenue side. Costs, we continue to work on, and it's more of a domestic focus.
Carol B. Tomé - CEO & Director
Yes. And that dynamic pricing is such an exciting aspect of our future. But it is highly dependent on data and technology. We have -- one of our wildly important initiatives is enterprise data strategy. We've got data and lots of data and lots of data pools around the company. And I would say some of those data pools are not very clean. So we're going to clean up all those data pools and get to one version of the truth. So all of our consuming applications go into one clean data pool that will make it so much easier for our revenue leaders and our sales leaders to manage the business.
The same is true for costs, right? So this is a pretty exciting initiative that we have underway and then you layer technology on top of that. The technology piece is not the heavy lift the data is that haven't lift. But that initiative is well underway. And in terms of the demand supply capacity challenge, it has gotten a little it better because people have added capacity. As you would expect, we're adding capacity, so have our competitors.
So it's still an interesting environment for sure. And as we work with our customers, we want to ensure that we meet their needs. So we're sitting down with -- there are about 300 customers, who make up that peak volume surge, and we're sitting down with each of them, understanding what their projections, what their promotions are, how are they thinking about the holiday season and really trying to work with them so that we provide to them the same outstanding and excellent service that we gave to them last year. We are laser-focused on making them happy.
Operator
Our next question will come from the line of Tom Wadewitz of UBS.
Thomas Richard Wadewitz - MD and Senior Analyst
So I think when -- I guess when I try to process the comments and the guidance and everything, it does seem like there's a bit of positive outlook, but loss of momentum relative to the year-over-year improvement in domestic margins. So focused on domestic in particular. Is that the right way to understand this? Again, not that you can't improve in the future, but just a slower pace. And I guess, is there -- I wonder, is there something that would kind of reaccelerate that as you look to '22? Is there pricing that labor inflation moving through that would cause another bite at the apple on some of this pricing? Or how would you think about that, I guess, question on slower improvement? And is there an acceleration in -- or a potential driver of acceleration in domestic in 2022?
Carol B. Tomé - CEO & Director
It's so very interesting when you look at the shape of our years, our quarters and our business. We're not a sequential business. Q2 is usually the high watermark for margin, and then it comes in the back half because our mix changes in the fourth quarter related to peak.
So the way you should think about our business is year-on-year-on-year. At the beginning of this year, I can recall quite clearly at our earnings call at the end of the fourth quarter, where I said our U.S. operating margin would increase this year. And the reaction was, "No, it won't, you can't possibly do it." And in fact, Brian, we are increasing the operating margin in the U.S. by 240 basis points. So we are well on our way to increasing our operating margin in the U.S. to the 12% target that we set forth in 2023. So think of our business year-on-year, not so much quarter-over-quarter or first half versus back half.
Brian Newman - Senior VP, CFO & Treasurer
And Tom, one of the other things that changed this year, if you look at last year's Q1, which was 3 percentage. Nando and the team did an extraordinary job of focusing to get the cost out from peak, and that changed the shape of the calendar a bit. And that's one of the reasons that, combined with the strong 2H -- 2Q performance, why the first half of the year. But as Carol said, we're managing on a full year basis. And to go from 7.7 last year to 10.1, it's more than 50% on that journey to get to that 12.
Thomas Richard Wadewitz - MD and Senior Analyst
Yes. Okay. That's helpful. What about the inflation component? Is there -- if you have stronger wage inflation, there's -- every company, it seems, is talking about difficulty of labor availability and inflation. Is it possible that, that gives you the ability to go back and ask for a second price increase or that supports more pricing as you look to 2022? Or it's more supply-demand-driven and the market's getting a touch less tight?
Carol B. Tomé - CEO & Director
Well, we know what happens in an inflationary environment, don't wait. Somebody pays for it, usually the consumer, which means right price increases get passed along all the way to the end to the consumer until the consumer says, "Ouch, I'm not going to buy anymore." Consumer continues to buy. So, there we are in the cycle, and this is a cycle right, this is a cycle.
Scott Childress - VP & IR Officer
Steven, it's Scott. We've got time for one more question, if you would, please.
Operator
Certainly, sir. Our final question comes from the line of David Vernon of Bernstein.
David Scott Vernon - Senior Analyst
I kind of want to specifically kind of drill into this lack of momentum seen here lately. When you think about the rate of change even on a year-over-year basis, if we're looking at something in a 9 handle in the back half of the year, the rate of change is decelerating. So I'd love to understand kind of what specifically we should be looking for to reaccelerate that rate of change into 2022? And how we should be thinking about the risk the 2H domestic margin guide, whether you can actually do a little bit more than that 9 in the guidance?
Brian Newman - Senior VP, CFO & Treasurer
So from a 2H risk perspective, David, look, there's a lot of uncertainty out there with COVID and the Delta variant and what happens. We're using the data we have today to build the best forecast we can. I think then from a sequential margin perspective, look, I think the improvement from 7.7 to 10.1 is positive. Next year, what can accelerate. We have an annual GRI, we look at our pricing, our cost and productivity initiatives are taking further hold. So we're going to continue to press. And the journey on SMBs, that's been a great story. As we've been walking up, obviously, in Q4 with peak, the mix of SMBs will be a little bit less than the B2C enterprise customers. But I would look for that journey to continue next year.
Kevin and the team and Kate, they're doing a wonderful job of working with platform customers and SMBs to drive that. So as that mix goes up, margin improves. So there are several levers.
Carol, I don't know if you want to provide some color?
Carol B. Tomé - CEO & Director
No, I think you called it. Thank you.
Operator
I will now turn the floor back over to our host, Mr. Childress. Please go ahead, sir.
Scott Childress - VP & IR Officer
Thank you, Steven. This concludes our call. I want to thank everyone for joining, and hope you have a great day. Thank you.