United Parcel Service (UPS) Q2 2024 Earnings Call Transcript

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United Parcel Service (NYSE: UPS)
Q2 2024 Earnings Call
Jul 23, 2024 , 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Stephen, and I will be your facilitator today. I would like to welcome everyone to the UPS investor relations second quarter 2024 earnings conference call. [Operator instructions] It is now my pleasure to turn the floor over to your host, Mr.

PJ Guido, investor relations officer. Sir, the floor is yours.

PJ Guido -- Senior Vice President, Global Capital Markets, and Investor Relations Officer

Good morning, and welcome to the UPS second quarter 2024 earnings call. Joining me today are Carol Tome, our CEO; Brian Dykes, our new CFO; and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within the federal securities laws and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties which are described in our 2023 Form 10-K 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. Unless stated otherwise, our discussion today refers to adjusted results. For the second quarter, GAAP results include an after-tax charge of $120 million or $0.14 cents per diluted share, comprised of a one-time payment of $94 million to settle an international regulatory matter and transformation and other charges of $26 million. A reconciliation to GAAP financial results is available on the UPS investor relations website and also available in the webcast of today's call.

Following our prepared remarks, we will take questions from those joining us via the teleconference. [Operator instructions] And now, I'll turn the call over to Carol.

Carol Tom -- Chief Executive Officer

Thank you, PJ, and good morning. Let me begin by welcoming Brian Dykes as UPS' new chief financial officer. With over 25 years of multinational experience with the company, Brian brings deep financial and strategic experience to our executive leadership team. Welcome, Brian.

Our second quarter performance was a significant turning point for our company as we return to volume growth in the United States, the first time in nine quarters. I would like to recognize and thank UPSers for their hard work and efforts in delivering these results. At the beginning of the year, we shared our outlook for 2024 based on four key planning assumptions. The first planning assumption acknowledged the front loading of costs associated with our new labor contract, which we believed would cause our financial performance to reflect a bathtub effect with first-half 2024 earnings down as much as 30% and second-half earnings returning for growth.

In the first half of the year, our earnings were in line with the down 30% scenario. The second assumption was that we would return to volume growth, which we did in the U.S. during the month of May. Further, while international volume growth in the second quarter was down 2.9% year over year, we saw growth in certain markets.

The third planning assumption was based on our Fit to Serve initiative to rightsize our management structure, and we are on track with this initiative to deliver roughly $1 billion in savings by the end of the year. Finally, we said we would explore strategic alternatives for Coyote, and we did, leading to a pending sale to RXO at considerably more than our carrying value. So the key assumptions we use to build our plan are holding with one distinction, and that's U.S. volume mix, both in terms of product and customer segmentation.

During the quarter, we experienced a shift toward value product with shippers choosing ground over air and SurePost over ground. And there was also a notable shift in product characteristics with a surge in lightweight short zone volume moving into our network. We will discuss the full-year impact of these shifts in a few moments, but let me first highlight our second quarter results and then provide a few updates on our longer-term strategies. In the second quarter, consolidated revenue was $21.8 billion, a decline of 1.1% versus last year.

Consolidated operating profit was $2.1 billion, down 29.3%, and consolidated operating margin was 9.5%. At our March investor day, we set forth our declarations to become the premium small package provider, the premium logistics orchestrator, and the No. 1 complex healthcare logistics provider in the world. To that end, we said we would pursue certain inorganic opportunities, and we have.

As you've seen, we've just announced our plans to acquire Estafeta, a leading domestic small package provider in Mexico. This is a big win for UPS, and it's a big win for our customers. By combining Estafeta with the end-to-end services we already have in Mexico and connecting it to the global reach of our integrated network, we will greatly enhance our logistics orchestration capabilities for customers that are shifting manufacturing and distribution closer to the United States. We are targeting to close this acquisition by the end of this year.

Let me share a few other strategic updates, starting with Customer First. In healthcare, we just opened our first dedicated healthcare facility in Dublin, Ireland. This 82,000-square-foot facility provides storage and fulfillment for a range of complex pharmaceutical and healthcare products. And in the Netherlands, we increased the size of our flagship facility in Roermond to now more than 235,000 square feet, including expanded ultra-cold storage capabilities to support the growing market of complex biopharma products.

Looking at SMBs, we continue to add partners to our Digital Access Program, or DAP, meeting small businesses where they are. In the first six months of this year, DAP generated $1.5 billion in revenue, and we are well on our way to achieving our 2024 DAP revenue target of over $3 billion. And because speed will always be important to our customers, in the U.S., we expanded our weekend service offering to six additional markets. With this service, we provide deliveries one day earlier than competitors who don't offer weekend pickup services.

In fact, we are the only private U.S.-based carrier that provides both commercial and residential pickup and delivery services on Saturday as a general service offering/ Outside of the U.S., we are continuing to enhance our portfolio to support our customers as they balance the need for speed with cost. For example, in record time, we launched enhancements to our worldwide economy service globally. This is an e-commerce solution for nonurgent cross-border shipments. Here, we created a true door-to-door service with customs clearance and delivery fees baked into the solution, making the experience simpler for the shipper and the receiver.

In Asia, over the last several quarters, we've made a series of network enhancements with the latest being in Taiwan. Because Europe is a top 3 export destination for Taiwan, we've expanded our capacity by 30% and extended pickups to as late as midnight. These enhancements enable our customers, including high-tech manufacturing and automotive shippers, to better serve their European customers by reaching their destination in just two business days. And in supply chain solutions, we've expanded our supply chain operations at our Frankfurt Airport gateway by adding nearly 25% more warehouse space.

This facility is a major SCS hub for central Europe, where it connects all transportation modes. In this expansion, we can now provide even greater flexibility to the region's growing technology and healthcare industries. And importantly, also in SCS, we are onboarding the new USPS air cargo business with plans to be fully implemented before peak. The onboarding has gone well, and we continue to expect this business to be margin accretive for the company.

Now let's turn to Innovation Driven and progress with Network of the Future. In the first half of 2024, we completed 35 operational closures, which included closing five buildings, and we are on plan to complete an additional five operational closures in the second half of this year. Simultaneously, we are continuing to automate more of our operational tasks. For example, in the U.S., we are automating the dispatch process for our package car and theater drivers to reduce dispatch staffing by half.

We deployed Phase 1 of the project. And so far this year, we've reduced staffing by 26%. As we continue deployment, we expect to achieve our reduction target by 2026. As a reminder, these actions are outside of Fit to Serve and are part of Network of the Future.

Lastly, touching on Smart Package Smart Facility, which is our RFID solution, we are moving from a scanning network to a sensing network. As we've discussed, we're adding RFID readers to our package cars, but we're not stopping there. We're moving upstream. First, we are enabling customers to print RFID labels themselves.

Second, we are installing readers at customer dock-doors. This will enable immediate visibility as our trailers are loaded for pickup. This solution provides a significant competitive advantage to us and to our customers. Moving to our financial outlook, Brian will provide more details, but let me share a few highlights.

First, while we have entered into an agreement to sell our Coyote business, we are retaining Coyote revenue and earnings in our outlook until the transaction is consummated. Second, while our first-half earnings were in line with the low end of the guidance, we provided our revenue came in just short of the low end. Given the current volume momentum we are now experiencing [Inaudible] our business, we are resetting our revenue guidance, taking us to the midpoint of our original revenue guide. But for operating profit, as we look to the back half of the year, in the U.S., we expect the same volume mix characteristics as we had in the first half of the year, which compresses revenue per-piece growth.

While we still expect an operating profit bathtub effect with solid earnings growth in the back half of the year, the growth rate will not be as high as we projected at the beginning of the year. Accordingly, we are adjusting our full-year operating margin guidance to reflect the nature of the volume flowing through our U.S. network. As a result, we now expect consolidated revenue of approximately $93 billion and a consolidated operating margin of approximately 9.4%.

Importantly, we expect to exit the final month of 2024 with a U.S. operating margin of 10%, which creates a solid footing as we drive the U.S. business to a longer-term operating margin target of 12%. One last comment before I hand the call over to Brian.

We believe it is important to have a disciplined and balanced approach to capital allocation with the first uses of capital going back to the business and to pay our dividends and then any excess cash being used for share repurchases. As we have fine-tuned our capital requirements for Network of the Future, we expect to spend less than we originally anticipated further. With the pending sale of Coyote, we expect to free up cash that was not in our original guidance plan. As a result, we are restarting our share repurchase program with the intent of repurchasing about $1 billion of shares annually, including roughly $500 million in 2024.

So with that, thank you for listening, and let me turn the call over to Brian.

Brian Dykes -- Executive Vice President, Chief Financial Officer

Thank you, Carol, and good morning, everyone. First, I'm very thankful for the opportunity to lead the global finance organization and work with the entire leadership team to achieve the targets we've set. We have a lot of opportunity in front of us and the right team to achieve our goals. I'm also particularly eager to meet our investors as I hit the road over the next few weeks.

This morning, I will review our second quarter results; provide an update on capital allocation; and lastly, provide additional detail for our 2024 financial outlook. First, our results. The second quarter represented an important turning point for our business. In the U.S., volume inflected positively, and it was the last full quarter of the high-wage growth rate associated with the first year of our new Teamsters contract.

Outside the U.S., we saw pockets of demand improved in each export region, driving growth in many of our more profitable lanes. Additionally, through our Fit to Serve initiative, we've reduced our workforce by over 11,500 positions, which is translated into approximately $350 million in savings for the first half of 2024. And as Carol said, we are on track to deliver roughly $1 billion in savings by the end of the year. Looking at our consolidated performance, in the second quarter, revenue was $21.8 billion, a reduction of $237 million compared to the second quarter of 2023.

Consolidated operating profit was $2.1 billion, down 29.3%, and consolidated operating margin was 9.5%. Diluted earnings per share was $1.79, down 29.5% from the second quarter of 2023. Now let's look at our business segment. In the second quarter, U.S.

average daily volume increased 0.7% year over year. This marks a return to positive volume growth for the first time since the fourth quarter of 2021. Consequentially, when compared to the first quarter of 2024, the average daily volume year-over-year growth rate increased by 390 basis points. At the beginning of the year, we expected to see three things in the second quarter: volume growth, growth in B2C, and relatively consistent product mix to what we had experienced last year.

While we saw strong volume growth in the second quarter led by B2C, it came with a different product mix. For the quarter, B2C volume increased 4.8% year over year and made up 58.5% of our volume, an increase of 220 basis points from a year ago. This growth was driven, in large part, by several new e-commerce customers that entered our network. B2B average daily volume finished down 4.6%, but returns remained a bright spot and increased 3% year over year.

From a product perspective, we saw customers trade down between services. Specifically, we saw customers shift from air to ground and from ground to SurePost. As a result, total air average daily volume was down 7.8%. By ground, average daily volume increased 2.3%.

Within ground, SurePost average daily volume grew 25%, driven by new shippers' product choices, product trade-downs, and easier comparisons due to last year's decline in volume during our contract negotiations. By enhancing our matching algorithm, we saw an increase in the percentage of SurePost packages redirected to UPS for delivery. As a result, SurePost redirect increased, returning to 2020 level. Turning to SMBs.

We saw the trend from the first quarter continue with total SMB volume down until June when it flipped positive. And in terms of total volume, SMBs made up 29.7% in the second quarter. For the quarter, U.S. domestic generated revenue of $14.1 billion, down 1.9% compared to last year.

Revenue per piece was down 2.6% year over year. Let me break down the components of the revenue per piece decline. Base rates increased the revenue per piece growth rate by 90 basis points. The combination of product mix, lighter weights, and shorter zones decreased the revenue per piece growth rate by 310 basis points.

The remaining 40-basis-point decline in the revenue per piece growth rate was due to the combination of changes in customer mix and fuel. Turning to costs. Total expense increased 3.2% in the second quarter. Union wage rates increased 11.7%, driven by the contractual increase that went into effect in August of last year.

The U.S. domestic team took several actions and executed on productivity initiatives to partially offset the increase in compensation rates. We leveraged total service plan and network planning tools to reduce total operational hours by 1.4%, while volume grew 0.7%. Through Network of the Future, we had 17 operational closures in the second quarter, bringing our year-to-date total to 35.

And because we're routing more volume through our automated facilities, we've permanently closed five buildings so far this year. We lowered block hours by 12.5% versus last year. And we recorded our best auto safety results in 10 years, driving a better outcome for our people and a better long-term cost picture for UPS. Putting it all together, due to the actions we took in the second quarter, we held the cost-per-piece growth rate to only 2.5% even as union wages increased nearly 12%.

This is the lowest cost-per-piece growth rate we've seen in more than three years. The U.S. domestic segment delivered $997 million in operating profit, down 40.7% compared to the second quarter of 2023, and the operating margin was 7.1%. Moving to our international segment.

The second quarter was a turning point for our international business as well. For the first time in 10 quarters, 11 of our top 20 export countries demonstrated year-over-year average daily volume growth, including several key markets in Europe. At the region level, Asia grew average daily volume of revenue in the quarter. And in the Americas region, we continue to see solid signs of the shift in nearshore.

Looking at volume in the second quarter, international total average daily volume was down 2.9% year over year, which is half the decline we saw in the first quarter of this year. About three-quarters of the decline in the second quarter came from lower domestic average daily volume, which was down 4.4%, primarily driven by Europe. On the export side, average daily volume declined 1.5% year over year. However, on a sequential basis from the first quarter, export average daily volume improved 210 basis points.

While overall export average daily volume was down in Europe, in Germany, our largest export market, outbound grew 1%. In Asia, export average daily volume increased 1.7%. And within Asia, export volume on the China to U. S.

trade lane increased 20.6%. This is the third consecutive quarter of volume growth on this lane, which is our most profitable lane. And looking at the Americas region, export average daily volume increased 5%, which was the sixth consecutive quarter of growth. As we see the shift to nearshoring continue to take hold, our announced acquisition of Estafeta will further enhance our end-to-end services in Mexico.

In the second quarter, international revenue was $4.4 billion, down 1% from last year, primarily due to the decline in volume. Revenue per piece increased 2.4%, driven by strong base pricing and the positive impact of region and product mix. In the second quarter, total international expense was relatively flat year over year. Here, we leverage the agility of our integrated network to manage block hours down 2.1% compared to last year.

Operating profit in the international segment was $824 million, down $78 million year over year. Operating margin in the second quarter was 18.9%. Moving to supply chain solutions. In the face of a dynamic market, we remained agile and leaned into areas of growth.

In the second quarter, revenue was $3.3 billion, up 2.6% year over year. Looking at the key drivers. Within international air freight, strong e-commerce demand, particularly in China outbound, drove an increase in volume and lifted market rates as demand outpaced capacity, resulting in an increase in revenue. On the ocean side, total volume of revenue was down year by year.

However, toward the end of the quarter, demand on Asia outbound lanes improved and drove market rates higher. Our truckload brokerage business, known as Coyote, continued to face market pressures which drove revenue down. And in logistics, revenue grew, driven by the impact of MNX and healthcare. In the second quarter, supply chain solutions generated operating profit of $243 million, down $93 million year over year, reflecting market conditions.

Operating margin was 7.3%. Walking through the rest of the income statement, we had $206 million of interest expense. Our other pension income was $67 million, and our effective tax rate for the second quarter was 23.4%. Now let's turn to cash and capital allocation.

Year to date, we've generated $5.3 billion in cash from operations and free cash flow of $3.4 billion. We finished the quarter with strong liquidity and no outstanding commercial paper. In May, we successfully issued $2.8 billion of debt to refinance $1.6 billion in current maturities, which will shore up additional liquidity and support our acquisition strategy. And in the quarter, we announced that we would be outsourcing the asset management portion of our pension plan in order to focus squarely on our core business while adding more expertise and oversight that will benefit UPS retirees.

Lastly, so far this year, UPS has paid $2.7 billion in dividends, which brings us to our outlook for the second half of 2024. Global economic growth forecasts remained relatively unchanged in the back half of 2024. According to S&P Global, global GDP is expected to grow 2.7% for the full-year 2024, and U.S. GDP is expected to grow 2.4% Additionally, as we've discussed, we still expect the U.S.

small package market, excluding Amazon, to grow by less than 1%. Looking at our business in the first half of 2024, revenue was below our expectations, and operating profit was at the low end of the range we provided and finished down about 30%. Based on our performance in the first half of the year, combined with our expectation that the product shift we experienced in the U.S. will continue through the rest of 2024, we have updated our guidance.

This includes moving to a point estimate because it represents our best view of the many moving parts within our business. We now expect consolidated revenue to be approximately $93 billion. And because the volume characteristics are different from what we originally anticipated, we now expect a consolidated operating margin of approximately 9.4%. Our guidance includes roughly $1 billion in savings from Fit to Serve.

And as Carol mentioned, Coyote revenue and operating profit remains in our guidance and will until the transaction is executed. Looking at the segment. In U.S. domestic, we anticipate back-half 2024 revenue growth of around 5%, driven by strong volume growth.

As you update your models for U.S. domestic, there are a few things to keep in mind. First, we expect average daily volume to grow by mid-single digits. Second, we will anniversary the first year of the Teamsters contract on August 1st.

Next, product mix is expected to continue to pressure revenue per piece. However, through expense management and slowing labor inflation, we expect to grow third quarter operating profit by double digits and exit the year with a U.S. operating margin of 10%. And lastly, we expect a strong peak, driven by volume growth and demand surcharges.

Within the international segment, our full year and second half outlook remains consistent with what we've provided at the beginning of the year. For the second half of 2024, we anticipate volume growth rates will inflect positively and the revenue growth to be in the mid-single digits. Operating margin in the second half of the year in the international segment is anticipated to be approximately 20%. And in supply chain solutions, in the second half of 2024, we expect revenue to be over $7 billion and an operating margin in the high single digit.

Included in our guidance is the newly won air cargo business from USPS which will be fully onboarded by the end of the third quarter. And lastly, we expect the tax rate to be approximately 22% for the remainder of the year. Turning to capital allocation. For the full year in 2024, we expect free cash flow to be around $5.8 billion before any pension contributions.

We tightened our capital expenditure forecasts and now expect to spend about $4 billion. We plan to pay out around $5.4 billion in dividends, subject to board approval. And given our strong liquidity, while we originally had not planned to repurchase shares, we now plan to repurchase approximately $500 million of shares this year. With that, operator, please open the lines for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question will come from the line of Tom Wadewitz of UBS. Please go ahead.

Thomas Wadewitz -- Analyst

Yeah, good morning. I wanted to see if you could offer some more thoughts on what's happening with domestic package volume and the mix effect. If I look at the core ground, so excluding SurePost, it looks like you saw a decline sequentially, so let's say 2 point -- or excuse me, 12.3 million pieces a day in 1Q to 11.7 if I exclude SurePost. So do you think I -- is that just market weaker? Or is that kind of competitive performance? So just wanted to see if you could offer more thoughts on what's happening in domestic package volume.

And then maybe why -- what are key levers to see that mixed performance improve as we look at second half? Thank you.

Brian Dykes -- Executive Vice President, Chief Financial Officer

Yeah. Thanks, Tom, for the question. I think when you look at the domestic volume performance from the second quarter and then going forward in the second quarter, there's really two big impacts that were driving the change. One is we did see customers favoring our more economical product, so going from air to ground; and within ground, from ground to SurePost, and that was across the broad base of customers.

We also saw an acceleration of new entrants, new e-commerce customers that were coming into the market that are, quite frankly, running a different model than our traditional customers and are highly leveraging our SurePost product, so we saw an acceleration of SurePost. The growth rate is also complicated as you think about what happened in the second quarter of last year because of the type of customers that diverted early as we were approaching the Teamster contract, it does also skew the growth rates. As we move forward and you see -- you can see it in our forecast and within the guide that we do expect that mix to rationalize as we move toward the end of the year. And we've got line of sight to that in our pipeline and are working to actively pull those through as we kind of balance the mix of products going into the second half.

Carol Tom -- Chief Executive Officer

And maybe a couple of other comments about just the volume. As you saw, our commercial business was down year on year, although the rate of decline has moderated greatly. As we look to the back half of the year, we expect that to improve. Our pipeline is quite robust, so we expect to see good movement in that space.

Thomas Wadewitz -- Analyst

Great. Thank you.

Operator

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

Jordan Alliger -- Goldman Sachs -- Analyst

Yeah, hi. Good morning. Just again on the trade-down from more premium products to economic products, what changes customer behavior to go back? And is it simply the economy? And then what are your thoughts on sort of the B2B side of the equation, which I guess is still under pressure? Do you anticipate a step-up with more of a focus on just-in-time inventory, a need to move things quicker from that end? And when would you think that timing could look better? Thanks.

Carol Tom -- Chief Executive Officer

On the B2B front, as we discussed, it was down year on year. Part of that was because of customers who left us during the contract negotiation that not returned. They left us. They locked themselves into long-term contracts, and they have not yet returned.

That just gives us an opportunity to win them back for the excellent service that we provide. We've also seen some dynamics within the B2B space occur recently within poolers, companies going out of business, like overnight, which gives us an opportunity to bring that business back into our network. It's already starting to flow. And as I mentioned, the pipeline of commercial accounts is robust.

So we expect that to improve dramatically in the back half of the year. On the RPP, it's really interesting. We've had these new e-commerce entrants into the United States. And their volume, well, it's exploded.

It was certainly more than we anticipated flowing into our network. So in -- to your question, is this a phenomena forever? I don't know. It depends on what consumer demand will be, but we're going to focus on the parts of the market that really value our end-to-end service and expect to see some of the pressure that we saw on the RPP in the second quarter moderate. And, Brian, maybe you can give a little bit more color on what we think the RPP will look like in the back half of the year.

Brian Dykes -- Executive Vice President, Chief Financial Officer

Yeah. So as Carol mentioned, yes, we do expect our RPP growth to moderate in the back half and actually as we move from kind of the negative 2.6% that we're at to almost approach breakeven as we get toward the end of the year. And there's a couple of pieces of that. Carol had mentioned the B2B piece.

I would say the bright spot within B2B is returns. That improved 3%, and we are seeing uptake with the addition of Happy Returns into the portfolio. And as that pipeline builds and we start to see that pull through, that continues to accelerate our B2B business. The other thing I would say is that we do have a strong pipeline of ground-ready products.

And what happens with the SurePost product is it allows you to get new customers in leveraging that. We get the integration into their systems. We get the pickup process set up, and they become part of the UPS portfolio but then allows us to expand that as we go through the cycles.

Carol Tom -- Chief Executive Officer

And maybe one other comment about SurePost because the question may be do you like that product. We actually like the product. It provides a steady solution for us. We also, through our matching algorithm, we can redirect the packages back into the ground network.

And in fact, the redirect percentage was 40%. So that's returning back to levels we saw during the COVID.

Jordan Alliger -- Goldman Sachs -- Analyst

Thank you.

Operator

Our next question will come from the line of Ken Hoexter of Bank of America. Please go ahead.

Ken Hoexter -- Analyst

Hey, great. Good morning. Carol or Brian, I guess the spread of margins, can you talk about kind of the reaction we should see in third quarter? I guess, typically, we see maybe 100 basis points pullback. I just want to get seasonality or kind of flow that we should expect through the year.

And then I think you mentioned the 90 basis points of pure pricing. I want to understand the margin impact there. Is that just a fraction of GRI? Has that shifted as well?

Carol Tom -- Chief Executive Officer

So maybe I'll talk about the RPP, and then you can talk about the margin. So on the base pricing, there are many dynamics on the base pricing. First, we were up against very tough comparisons from a year ago. Why? Well, you'll recall that our volume declined in the United States in the second quarter by almost 10%, and this was related to noise around the labor contract negotiation.

If you look at who declined during that time frame, it was predominantly dual sourcers who are low-GRI customers. So last year's base pricing was a bit artificially inflated because of just the mix change. If you roll forward now to this year, what you see in the base pricing is, OK, the tough comparisons year on year, as well as new entrants that don't have a GRI because they're starting to ship with us for the first time. And then finally, if you zoom out and say, well, what's the keep rate looking like on those customers who have a GRI? The keep rate is looking about 50%.

So as we get past this time frame and get into an easier compare, that's why we think our base rates can improve dramatically in the -- from where it was in the second half. And maybe you can talk about the margins.

Brian Dykes -- Executive Vice President, Chief Financial Officer

Yeah. And, Ken, I'll give you a little bit of shaping for how we think the second half is going to go because we do have confidence in how we're going to be able to pull through the margin. First, if you think about in the U.S. from Q3 to Q4, we expect ADV to be up around kind of mid-single digit.

We do -- as we just talked about, the decline in RPP growth will moderate, so about negative 1.5% in the third quarter, negative 5% in the fourth quarter. And as we get to peak and we see the holiday demand surcharges, we expect that to get even better. And we expect op profit to be up kind of double digits in Q3. And then December, as Carol mentioned before, we're going to hit a 10% operating margin.

In international, Q3 ADV is kind of flat to slightly positive year over year with Q4 up mid-single digits and the RPP growth of 1% to 2% year over year in the second half. Our Q3 op margin is in the high teens and then getting to over 20% in Q4, so continuing that strong momentum in international. And then we expect a mid-teens revenue growth in SCS and stronger year-over-year profit growth in Q3 and Q4 with the second half up about 20% And, look, I think we've got a lot of confidence that we can pull through the second-half forecast for a couple of reasons. One is we've got line of sight to the volume.

We've shown the volume momentum has been building. We've got a line of sight to the volume that we need to deliver the top line, and that helps offset some of the RPP growth, and you can see that in the guide. On the cost side, Fit to Serve is on track. We have reduced 11,500 or 90% of the resources that we had anticipated, and then we've also got line of sight to revenue improvements that are in the pipeline as well that are going to help us drive better profitability as we get into the second half.

So we absolutely feel confident that we're back to the point of revenue growth, profit growth, and back to margin expansion in the U.S.

Carol Tom -- Chief Executive Officer

And just one other piece of color, don't forget that we're anniversarying our labor contract on August 1st, so the pressure associated with that contract moderates dramatically in the back half.

Brian Dykes -- Executive Vice President, Chief Financial Officer

That's right.

Ken Hoexter -- Analyst

Thank you.

Operator

Our next question will come from the line of Ravi Shanker of Morgan Stanley. Please go ahead.

Ravi Shanker -- Analyst

Thanks. Good morning. A two-parter, if I may, please. Given -- I mean, you've done a pretty good job of kind of managing your largest customer in terms of size.

Will you be looking to also meter the growth from these new e-commerce customers as part of better, not bigger, if the mix is not being helpful? And second question is, can you help us dimension the size of returns in your operation, either in terms of volume or revenue, please? Thank you.

Carol Tom -- Chief Executive Officer

So, first, in terms of our largest customer, we have a very good relationship with that customer, and the revenue for the quarter was at 11.5% of total revenue, so about the same as it was a year ago. And we look forward to continuing to optimizing the relationship we have with that customer. In terms of the new e-commerce entrants that have come into our network, we are focused on serving the segments of the opportunities that really respect our end-to-end network, and we will continue to do that. One reason why we're leaning so hard into healthcare, another reason why we're leaning so hard into SMBs.

And I couldn't say enough goodness about our SMB business, particularly our Digital Access Program, where the revenue grew 7.7% year on year. We now have 38 partners around the world in that program and over 5.8 million shippers on the program. Returns, Brian, do you want to comment on that?

Brian Dykes -- Executive Vice President, Chief Financial Officer

Yeah. So, Ravi, we don't -- return rolls up into our B2B product and also into the ground commercial breakout that we give. Look, returns is a portfolio that UPS has had for a long time that we continue to add to and be a leader in. It's one that we've continued to see growth in B2B, even when we've had pressures in other parts of the business.

And it leverages not only are kind of single-piece returns and technology capabilities that enable customers to integrate with their process but also the UPS store footprint, which allows us to have a very unique returns offering. Now when you add Happy to that, we're able to do consolidated returns, it really becomes a unique portfolio that provides growth in B2B.

Carol Tom -- Chief Executive Officer

And Matt Guffey is here. Maybe, Matt, you want to comment on Happy Returns and how that's going, the integration is going.

Matt Guffey -- Executive Vice President, Chief Commercial and Strategy Officer

Absolutely. So Happy Returns integration has been extremely important. Remember, we made that acquisition last November. We turned on all 5,200 stores in a matter of eight weeks, which gives us great scale.

And with this, to Brian's point, it's just not about the digital capabilities, but it's also about that physical footprint and the experience that you can drive for not just the consumer but also the shipper. So we continue to see growth from the Happy Returns portfolio and -- but also complementary to the single-piece returns as well. So as we think about no box, no label, and consolidation, we're also doing the no box, no label single piece. So it allows consumers and shippers to get the benefit on -- and managing the rules on how they want the returns to come back to them.

Ravi Shanker -- Analyst

Thank you.

Operator

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

Scott Group -- Analyst

Hey, thanks. Good morning. So, Brian, can you just clarify, you're saying that U.S. package EBIT will be up double digits.

Are you sort of pointing us toward that -- around that 10% growth rate and then just because double digits is going to obviously mean a lot? And then bigger picture, Carol, at the analyst day, you talked about industry oversupply. We're seeing negative yields. It doesn't feel like there's a lot of pricing power right now. But in that context, your -- the peak season surcharges coming are really big, and we were surprised by the magnitude of them.

So I guess my question is like are we at an inflection point where you think you can start pushing price more aggressively? And is this a turn? Is this just a unique quarter with a compressed peak? I just want to understand, the peak surcharges seem to go in contrast with what we're seeing in underlying price and yield right now, and I just want to understand if we're at a turning point.

Carol Tom -- Chief Executive Officer

Well, let's talk about the margin first, and then we'll talk about peak.

Brian Dykes -- Executive Vice President, Chief Financial Officer

Yeah. So, Scott, I think what I was talking about was the shaping of Q3 to Q4. And in Q3, yes, we expect domestic package EBIT to be up in the 10% to 15% range. And then for the -- and then it will moderate a little bit.

The growth will moderate a little bit in Q4 as the comp levels out. And, Carol, do you want to --

Carol Tom -- Chief Executive Officer

I'll be happy to talk about peak. So it is a condensed peak. It's the most condensed peak since 2019. There are only 17 days between Thanksgiving and Christmas.

And as we look at the volume projections for peak, we are expecting on our peak day, which is December 18, has the highest volume ever in our network. Now when you have that kind of volume flowing to your network, you actually have to charge to service them well because you have to hire people and lease aircraft and delivery vehicles, so on and so forth. So we think that the prices are going to stick because of what the environment is telling us from a demand perspective. I would also say, candidly, they're up against very easy comparison last year.

Because, as you recall, well, we peaked. Volume was declining in the network. So the year-over-year comparisons and the fact that this peak is tight gives us confidence. That being said, we also have an opportunity to price -- moving from the art of pricing to the science of pricing through the new tools that we have been talking to you about.

Pricing architecture of the future gives us the opportunity to use modifiers and price that creates opportunities to -- for value for our customers, as well as value for ourselves. That, plus deal manager, which has been a huge home run for us, we are winning more deals at less discounts than we have in the past. And, Matt, maybe I'll turn it back over to you for a comment on price.

Matt Guffey -- Executive Vice President, Chief Commercial and Strategy Officer

Yeah. So first off, we think we're competing in a rational pricing environment today. And to Carol's point, I think about it in three segments. She hit on some of the mediums.

We also talked about our Digital Access Program, where we have the ability to leverage the architecture of tomorrow. And the way to think about the technology, if I could, just to give you context, is the technology gets dynamic pricing across all customer segments and all channels. So we've leveraged it to win in the Digital Access Program. Carol highlighted deal manager.

How you think about now moving forward, which I think is really exciting for us, is now we have the ability, through the modifiers that she highlighted, to dynamically price across our enterprise customers to better align our price to our cost to serve while also providing the best value for our customers.

Carol Tom -- Chief Executive Officer

So hopefully, that's helpful, Scott.

Scott Group -- Analyst

Thank you.

Operator

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

David Vernon -- Analyst

Hey, good afternoon or good morning, and thanks for taking the question. So, Carol, when you came in, there was a lot of focus on value over volume, but here we are guiding down the back half on really easy comps through growth in lower-value volume. Has something changed to your focus for the company? Like what should investors take away from this sort of -- what seems like a pivot toward chasing volume again?

Carol Tom -- Chief Executive Officer

Yeah. So we're not chasing volume. We actually accepted new customers into our network of certain volume expectations that blew up on us. We're not chasing it.

It's just their demand was much higher than we had anticipated, and so we are laser-focused, focusing on the segments of the market that value our end-to-end network. Better not bigger has not gone away. We'll be managing through this. We need to manage through it, and we will be managing through it.

So don't read anything into this, other than we had new customers come into our network whose volume blew up, and we were able to serve that with the best on-time service of any carrier.

Brian Dykes -- Executive Vice President, Chief Financial Officer

And, Carol, if I can just add one thing because I think the value of the volume is also very important. And while we had a lot more shippers in the network, it is important to reinforce this point that SurePost rides in the same theaters and the same hubs that all the other packages do, and it helped us drive incremental productivity. Our key utilization was up in the theater network. Our hub productivity was up.

Our preload productivity was up. And when you look at what that does with cost per piece, the U.S. business was able to hold cost per piece to a 2.5% growth rate in the face of a 12% increase in compensation rate. So that alone is huge.

Then you layer on top of that the impact it can have on the delivery side with the redirect and really driving stop-and-route density, it's -- the volume generates productivity improvements throughout the entire network, now we have the ability to manage as we move forward.

David Vernon -- Analyst

So I mean, I guess, I appreciate that. But when you think about the guidance you just gave for 3Q being 10% to 15% off a really low base, it just doesn't seem like it's dropping to the bottom line. And that's what investors are looking to capitalize, your earnings, not necessarily productivity or cost per piece growth.

Carol Tom -- Chief Executive Officer

Yeah. No, we appreciate that. We do. There are a number of actions that we can take to address this, but we thought it was important to provide guidance today.

That's the most realistic view of the back half of the year. It doesn't mean that this is the future of our company. In fact, as we mentioned, we will exit the U.S. with a 10% operating margin.

That's a significant change from where we have been.

David Vernon -- Analyst

All right. Thank you for the time.

Operator

Thank you. Our next question will come from the line of Chris Wetherbee of Wells Fargo. Please go ahead.

Christian Wetherbee -- Analyst

Yeah, hi. Thanks. Good morning. Maybe touching on that last response, Carol.

What are some of the things that you can do to adjust to the network changes that we're seeing and the product mix changes that we're seeing? Is your ability to pull forward Fit to Serve, cost takeout, some of the other network structure changes? I guess just how do you fix profitability running at that low level as it is right now?

Carol Tom -- Chief Executive Officer

So one way is to accelerate Network of the Future, and I get a review from the team every two weeks on what we're doing in that regard. While we committed to five additional closures in the back half of this year, I think there's an opportunity to do more. Nando, would you like to comment on that?

Nando Cesarone -- Executive Vice President and President, U.S.

Yeah, there sure is. And, look, we -- I would just say the operators and the engineers are in tiptop shape right now, and our network is matching to the actual activity that is occurring. But I will tell you, there's additional opportunity. As we've closed 35 operational operations this year, we've got additional in the second half.

But also, we're starting online 23 new projects that is going to drive additional automation into our efficiency. And so as you start to see the efficiency unfold, we talked about the hours versus the volume, our air volume versus block hours. And of course, there's a lot of discussion about SurePost. We're up 300 basis points, making sure we're matching that product with every other package in our network to reduce our operational costs.

So as we find those opportunities, we continue making sure we're pressing forward. And for what it's worth, the value of all of that is, one, very efficient, very safe, and pleasing network to our customers.

Carol Tom -- Chief Executive Officer

And, Kate, the same is true outside of the United States. So what cost-down activities are you focused on?

Kathleen M. Gutmann -- Executive Vice President and President, International, Healthcare, and Supply Chain Solutions

Yeah. So, Carol, I think the important move that we made at the start of the year that is playing out in the second half and you can see it in the margins, of course, is the flattening of our structure. We actually -- we're focused on how do we speed up from the customer to the decision-making, and we eliminated a whole layer throughout the world, and we are getting great feedback both from the customer as well as from our people One example of that, also playing off of what Matt talked about with deal manager, we have actually shaved off two weeks of pricing time internationally. International is very complex.

Every bid is different countries and different cost structures. To be able to do that and get it down now into a two-day turn time or less for our SMBs, that's why we're seeing an over 60% SMB mix in the international arena as well. So both sides of the profit equation.

Carol Tom -- Chief Executive Officer

Productivity is a virtuous cycle here at UPS. I think we've shown that we can drive costs out, and we will continue to do that.

Operator

Our next question will come from the line of Bruce Chan of Stifel. Please go ahead.

J. Bruce Chan -- Stifel Financial Corp. -- Analyst

Thanks, operator, and good morning, everyone. Brian, you talked a little bit about the line of sight on volumes in the back half, and I'm wondering if maybe you could give us a bit more color on where RPP or yield trends have been moving into the third quarter so far. And I ask this because I think we saw a little bit of a deterioration, maybe a surprise deterioration on those metrics. Last quarter, it seems like that was not expected.

So I'm just kind of curious, what makes you so confident that mix issues and the trade-down issues that surprised us have kind of stabilized here and won't continue to deteriorate? And then maybe just worth a shot here, but is it possible to talk about what domestic volume growth would have been without that e-commerce customer?

Brian Dykes -- Executive Vice President, Chief Financial Officer

So certainly, on the first point around the RPP growth rate, I think when you take a look at the second quarter, you do have to remember, the comp is a big issue in the second quarter, and we did see quite a shift from Q1 to Q2. And as we go into Q3 and Q4, we do expect the growth rate to moderate -- sorry, the negative growth rate to moderate. So it will improve to about negative 1.4% in the third quarter, negative 0.4% in the fourth quarter, and that will continue to improve as we go through the back half. There's a couple of things that are going on there.

One is we absolutely have line of sight to new customers that are going to be coming on that normalize the mix of volume that we have. And also, we have seen the wave of these new entrants come into the market, and the volume levels are stabilized. And we're working with those customers on what those forecasts look like in the back half, so we have better line of sight to that. Related to your second question, we invited these customers into our network.

I think the idea of what they would look like if they weren't there, it doesn't really matter, right, because they are there. We found a way to make this volume very efficient within our network. And, look, we'll continue to grow in the places of the market that are growing faster.

Carol Tom -- Chief Executive Officer

And just on the line-of-sight question, we've really tightened up the visibility as to when we win an account versus when it actually comes into the network. I will say we -- our visibility there wasn't as sharp as it should have been, but we've gotten much better now, and we are holding everyone accountable for getting the cardboard onto the package car. And that makes a -- well, it may not be cardboard, it may be a volley bag but the package onto the package car. So I feel much better than I have over the past several years, candidly, in terms of our visibility on onboarding.

J. Bruce Chan -- Stifel Financial Corp. -- Analyst

OK, great. Thank you.

Operator

Thank you. Our next question will come from the line of Brian Ossenbeck of J.P. Morgan. Please go ahead.

Brian Ossenbeck -- Analyst

Thanks for taking the question. Carol, following up on the pipeline. You mentioned that several times in terms of the visibility, the types of customers, the confidence coming through there. Maybe you can elaborate on that last comment, given just how that one large customer or e-commerce customer surprised the upside, and volumes blew up.

And then separately, can you give us an update on the USPS contract, how it's going so far, any surprises, and whether or not that was a big contributor to the updated '24 guide? Thank you.

Carol Tom -- Chief Executive Officer

Yes. So to be perfectly clear, there were two new e-commerce customers that came into our network, and you can imagine who they are. These are new e-commerce shippers in the United States whose volume has been quite explosive. We are working through those relationships as we speak.

As it relates to the USPS, Nando, would you like to comment on how that's going?

Nando Cesarone -- Executive Vice President and President, U.S.

Sure. I think because with regard to the USPS, both teams are actually face-to-face planning and executing, so far close to 50% of the change, and we'll continue pushing forward. We'll be fully implemented in terms of the UPS network in place to serve the USPS on September 8, and contract really starts officially 10/1, where we'll see the -- all of the volume come over to UPS. So far, in recognition of two parties getting together for the first time in this regard, there's been some bumps but nothing systemic.

So it's working out really well on both sides, professionals from the USPS and UPS, really doing some good work there.

Operator

Our next question will come from the line of Conor Cunningham of Melius Research. Please go ahead.

Conor Cunningham -- Analyst

Hi, everyone. Thank you. I was hoping you could provide some color just on revenue contribution for Estafeta and then maybe price paid. And then just bigger picture, how you're viewing the M&A landscape now.

Are you happy with the portfolio? How are the returns of the businesses that you have or are acquiring holding up right now? Thank you.

Carol Tom -- Chief Executive Officer

So we're super excited about the Estafeta announcement. Acquiring companies in Mexico isn't easy. The team has worked very hard to get us to this point, and we'll work through all the closing conditions. We hope to have the acquisition closed by the end of the year.

Together, UPS and Estafeta will be a $1 billion-plus business. So this firmly cements our leadership position in North America, and we couldn't be more excited about it. Do you want to take the second part of the question?

Brian Dykes -- Executive Vice President, Chief Financial Officer

Yes, certainly. And then, Kate, maybe you want to talk about the broader piece of it. But I think Estafeta, just to give you a little bit of context, it covers 95% of the population in Mexico with 145 facilities. So this is a fairly large business.

It does about 325,000 pieces a day, so it gives you context of where it fits into the portfolio. And it fits very firmly than our nearshoring strategy. And, Kate, do you want to add anything on that?

Kathleen M. Gutmann -- Executive Vice President and President, International, Healthcare, and Supply Chain Solutions

Yeah, absolutely. So think about, first of all, that 300,000 pieces, all those shippers. They need a transporter, a cross-border solution that is quality and that has access to the best small package network in the U.S. That's what we give it.

So it's the additional packages. I'll answer that other part of the question on our track record with the acquisitions. If you look back at Marken, also Bomi, onto MNX, all of them are meeting their business cases, as well as their synergy, both on the revenue and cost side of the equation because what it does is opens up again this end-to-end opportunity to these premium customers. We expect the same thing.

We are ahead of the supply chain shift into Mexico. Our supply chain cross-border business is up double digits, so this will only help with us that as well.

Carol Tom -- Chief Executive Officer

And I know you asked about the purchase price. We typically won't disclose the purchase price, but I can give you a hint. Brian said that we accessed the debt capital markets in the second quarter and raised some additional debt capital for growth. It's about $1.2 billion.

We're not spending $1.2 billion on the business. So that gives you a sense of where the purchase price is going to be.

Brian Dykes -- Executive Vice President, Chief Financial Officer

That's right.

Carol Tom -- Chief Executive Officer

And in terms of the portfolio of assets that we have, we looked at strategic alternatives for Coyote. We are delighted to reach an agreement with RXO to sell Coyote to that business at a great value, higher than our carrying value, and the multiple on EBITDA was over 12 times. So I was really pleased with the value that we received or will receive when we close that transaction. And we're always looking at the portfolio of assets, are there other things that we can optimize or monetize, so we're never done.

But there's nothing large that would need to be talked about today. Stephen, we have time for one more question.

Operator

Our final question will come from the line of Bascome Majors of Susquehanna. Please go ahead.

Bascome Majors -- Analyst

Thanks for taking my questions. If you go back to the trade-down discussion in the SurePost, can you talk a little bit high level about how that business moves through your network? And what's different about it that better matches the cost of that package with the lower yield for that package? And just extending that a little bit further, if SurePost is a higher mix of the domestic business than you'd expected longer term, what nuance changes would there need to be with the network to make that a better fit? Thank you.

Carol Tom -- Chief Executive Officer

Well, SurePost is a great product in many ways. As I mentioned, it is a Sunday solution for us, and we are, with our matching algorithm, able to redirect volume. So it's delivered in our ground network. Maybe, Nando, you want to give a little bit more color at how does that work.

Nando Cesarone -- Executive Vice President and President, U.S.

Yeah, sure. And as Brian mentioned earlier, I mean, SurePost is going to flow through our network, regular theaters, regular hubs, sortation. What we're working on and very close to solving is looking ahead more than one day, so we can match even more of those SurePost shipments. So right now, if a package shows up at a destination, that particular morning, we will match that package with other deliveries for that day.

The option, moving forward, is to look for additional matching opportunities, and we're very close to that solution, so we can actually look further out. In total, as I said before, we're matching a lot more, about 3% more than last year, and each one is offsetting the cost and providing profitability to that shipment or that delivery, if you will, to that one location.

Carol Tom -- Chief Executive Officer

So that matching capability then creates more delivery density, which is a value unlock for us. We've talked about in the past, every 10 basis points of improvement is a couple of hundred million dollars, so this is an important initiative to make this product even more attractive to us over time.

Bascome Majors -- Analyst

Thank you.

Operator

Thank you. I would now like to turn the conference back over to our host, Mr. Guido. Please go ahead.

PJ Guido -- Senior Vice President, Global Capital Markets, and Investor Relations Officer

Thank you, Stephen. This concludes our call. Thank you for joining, and have a good day.

Duration: 0 minutes

Call participants:

PJ Guido -- Senior Vice President, Global Capital Markets, and Investor Relations Officer

Carol Tom -- Chief Executive Officer

Brian Dykes -- Executive Vice President, Chief Financial Officer

Thomas Wadewitz -- Analyst

Carol Tome -- Chief Executive Officer

Tom Wadewitz -- Analyst

Jordan Alliger -- Goldman Sachs -- Analyst

Ken Hoexter -- Analyst

Ravi Shanker -- Analyst

Matt Guffey -- Executive Vice President, Chief Commercial and Strategy Officer

Scott Group -- Analyst

David Vernon -- Analyst

Dave Vernon -- Analyst

Christian Wetherbee -- Analyst

Nando Cesarone -- Executive Vice President and President, U.S.

Kathleen M. Gutmann -- Executive Vice President and President, International, Healthcare, and Supply Chain Solutions

J. Bruce Chan -- Stifel Financial Corp. -- Analyst

Brian Ossenbeck -- Analyst

Conor Cunningham -- Analyst

Kate Gutmann -- Executive Vice President and President, International, Healthcare, and Supply Chain Solutions

Bascome Majors -- Analyst

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