Earnings Call Transcript - UPS Q3 2024

Operator, Operator

Good morning, my name is Greg Alexander, and I will be your facilitator today. I would like to welcome everyone to the UPS Third Quarter 2024 Earnings Conference Call. 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, Investor Relations Officer

Good morning, and welcome to the UPS third quarter 2024 earnings call. Joining me today are Carol Tome, our CEO; Brian Dykes, our CFO and a few additional members of our executive leadership team. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within the Federal Securities Laws and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2023 Form 10-K and other reports we file with or furnish 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 non-GAAP adjusted results. For the third quarter of 2024, GAAP results include an after-tax net gain of $36 million or $0.04 per diluted share, comprised of a $152 million gain from the divestiture of our Coyote Logistics business, net of transformation strategy costs of $116 million. Transformation strategy costs consisted of after-tax costs of $81 million related to our Fit to Serve program and $35 million related to our Transformation 2.0 program. Additional detail on our transformation costs and initiatives as well as a reconciliation of non-GAAP adjusted amounts to GAAP financial results is available in today's webcast materials. These materials will also be available on the UPS Investor Relations website. Following our prepared remarks, we will take questions from those joining us via the teleconference. 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 Tome, CEO

Thank you, PJ, and good morning. On our last earnings call, we said that the second quarter would not only be the bottom, but a turning point for our performance and that we would return to revenue and profit growth in the third quarter, which we did. I would like to recognize and thank UPSers for their hard work and efforts. Their relentless focus on driving productivity while ensuring excellent customer service allowed us to deliver these results. In the third quarter, we faced a macro environment that was slightly worse than we expected. In the U.S., online sales slowed and manufacturing activity was lower than we anticipated. This slowdown in manufacturing activity was also true outside of the U.S. as we continue to see lower industrial production weigh on volume in certain geographies. But the macro-environment didn't prevent us from growing revenue and profit. As we leaned into the parts of the market that value our end-to-end network and we drove expense leverage through ongoing productivity initiatives. In the third quarter, our consolidated revenue was $22.2 billion, an increase of 5.6% versus last year. Consolidated operating profit was $2 billion, up 22.8% from last year and consolidated operating margin was 8.9%. In the U.S., this was the second consecutive quarter of average daily volume growth, and it was our highest year-over-year ADV growth rate since the first quarter of 2021. In International, average daily volume growth finished flattish and continued the upward momentum we've seen since the first quarter of this year. And in SCS, air and ocean forwarding contributed to strong revenue growth. Looking at the U.S., during the quarter, we focused on growing certain pockets of commercial business and grew B2B volume by nearly 1% compared to last year. One of the areas of commercial focus was retail B2B. Our B2B routes are in retail. In fact, we deliver merchandise to over 20,000 retail outlets across the country. To serve these customers, we offer a store replenishment with delivery window solution that provides retailers daily inventory replenishment within a two-hour window. Within this solution, we also provide visibility to the number of packages scheduled to be delivered. Our store replenishment solution, along with our RFID technology enables retailers to reduce stockouts and more efficiently run their receiving operations. This is just one example of how our customer-focused capabilities are enabling us to win new commercial volume. Now that U.S. volume is flowing back into our network, we have heightened our attention to revenue quality with a focus on the segments of the market we want to serve. You will recall that in the second quarter, we saw an unexpected surge of short zone lightweight e-commerce packages flow into our network. In the third quarter, we responded strategically, adjusting our pricing and optimizing our operating plans on a portion of this business. Further, we increased our focus on matching our pricing to the quality and attributes of the service we provide. We did this by leveraging the power of pricing science through our pricing architecture of tomorrow or AOT technology. Our revenue per piece growth rate improved in the third quarter from what we reported in the second quarter, and we expect this trend to continue. On the cost side, our team did an excellent job of managing expenses across the board. As it relates to our two major cost-out initiatives, we are continuing to deliver solid results. Fit to Serve, which was designed to optimize and rightsize our management structure, is slightly ahead of forecast. And with Network of the Future, so far this year, we've completed 45 operational closures, including nine full buildings that have been shut down. I'd like to give you a brief update on our customer-first, people-led innovation-driven strategy, starting with customer-first. As we discussed, we have a goal to become the number one complex healthcare logistics provider in the world. To that end, we said we would pursue certain inorganic opportunities and we have. Last month, we entered into an agreement to acquire Frigo-Trans, a move that will enhance our end-to-end temperature-sensitive healthcare capabilities across Europe. Today, 80% of pharmaceuticals in Europe require temperature-controlled transportation. Frigo-Trans offers pan-European cold-chain transportation as well as temperature-controlled and time-critical freight forwarding capabilities. Plus, Frigo-Trans has temperature-controlled warehousing capabilities with every temperature from cryopreservation, which is minus 196 degrees Celsius to ambience, which is about 25 degrees Celsius. We are targeting to close the Frigo-Trans acquisition in the first quarter of next year. Complex healthcare logistics is a growing business for us and we're continuing to invest in the capabilities needed to accelerate growth. We have dedicated healthcare facilities in 36 countries and provide specialized handling and visibility to our customers through our UPS premier product. In the third quarter, we generated $2.5 billion in consolidated healthcare revenue, which contributed to revenue growth across all three segments. Shifting to International. In time for the holidays, we've made several enhancements. In September, we expanded residential Saturday delivery to the eight largest markets in Europe without an additional charge. This enhancement meets our customers' need for speed, and we now provide a superior service offering. Further, we sped up deliveries to over 35 countries across Asia, Africa and the Middle East. And to meet the expected demand for this year's peak holiday season, we added over 200 flights connecting Asia to Europe and the U.S. Quickly touching on DAP, our Digital Access Program, DAP continues to deliver strong SMB growth in both B2B and B2C segments. In the first nine months of this year, we generated $2.3 billion in global GAAP revenue, and we expect to deliver over $3 billion in GAAP revenue for the full year. As you know, we have been onboarding our new air cargo business with the United States Postal Service. During the third quarter, our network planning teams worked closely with the USPS to ensure the transition progressed smoothly and it did. As of October 1, all contracted USPS air cargo business has been fully onboarded and we expect this business to deliver strong consistent revenue at an attractive margin. Moving to People-led. Since our founding, we've had a culture of driving safe work practices. And by using new technology and tools, we've seen a dramatic improvement in the number of injuries and accidents. For example, in the U.S., this year we've had our best auto safety results in 10 years. The advances in safety were achieved through innovative driver education and training, like our Integrad driver training schools. This focus on safety enables driver achievements like our Circle of Honor, which recognizes drivers with 25 years or more of driving without an accident. Today, our Circle of Honor has grown to nearly 10,000 drivers. Now let's turn to Innovation Driven, which for this call is all about the peak holiday season. This year's holiday season has only 17 shipping days between Black Friday and Christmas Eve. We haven't seen such a compressed peak since 2019. We do peak better than anyone and with six years in a row of industry leading service, we're confident our plans and execution will make that seven. To prepare, we've been collaborating with our customers on daily volume expectations and the timing of their promotions. While our customers are still expecting a good holiday selling season, recently, shippers have tempered their volume expectations. In any case, we'll be ready to deliver and we'll leverage our network planning tools and other proven technologies to control first how the volume comes in. Second, how to flow more volume to our automated facilities. And third, how to adjust the network to operate as efficiently as possible. And talking about efficiency. This year on our peak day, which is December 18th in the U.S., we expect to deliver 2 million more packages than we did on peak day last year, but we'll do it at a higher productivity rate. This will be possible due to the efficiency improvements we've made over the years and the use of seasonal support drivers, many of which are experienced part-time UPSers who work inside our facilities. To sum it up, we're ready to deliver another successful peak. Moving to our financial outlook, we continue our better, not bigger approach, enhanced by some bold moves. The addition of the USPS air cargo business and the divestiture of Coyote are recent examples. With these moves, we eliminated a highly volatile truckload brokerage business and added air cargo volume that is predictable and margin positive. Looking at our consolidated revenue outlook in the third quarter, we increased our emphasis on revenue quality resulting in a glide down of certain volume which we expect will continue into the fourth quarter. Given our third quarter results, our latest peak volume expectations, and adjusting for the impact of the Coyote disposition, we now expect consolidated revenue of approximately $91.1 billion for the year and are lifting our consolidated operating margin target to approximately 9.6%. Brian will provide more details. So with that, thank you for listening. And now I'll turn the call over to Brian.

Brian Dykes, CFO

Thank you, Carol, and good morning, everyone. This morning, I will cover our third quarter results, review our capital allocation for the year, and then I'll wrap up by providing additional detail for our fourth quarter and full year financial outlook. Starting with our results, in the third quarter, we returned to revenue and profit growth for the first time in two years. Looking at our consolidated performance, in the third quarter, we generated $22.2 billion in revenue, an increase of 5.6% compared to the third quarter of last year, with all three of our business segments delivering revenue growth. Consolidated operating profit was $2 billion, an increase of 22.8% versus the third quarter of 2023, and consolidated operating margin was 8.9%, an increase of 120 basis points compared to the third quarter of last year. Diluted earnings per share was $1.76, up 12.1% from the third quarter of 2023. Now let's look at our business segment. In the U.S. domestic segment, our performance in the third quarter was driven by two factors. First was strong volume growth, the highest growth rate we've seen in more than three years. And second was excellent cost management, which resulted in a year-over-year decrease in cost per piece of 4.1%. U.S. Average Daily Volume or ADV increased 6.5% compared to the third quarter of 2023. Looking at product mix in the third quarter, ground average daily volume increased 8.9%, while total air average daily volume was down 6.3%. We continue to see customers shifting down from air to ground and some ground volume is shifting down to SurePost. Within ground, SurePost volume levels rose slightly compared to the second quarter, driven by growth in our Digital Access program. While SurePost volume comes at a lower revenue per piece, given the enhancements we've made to our matching algorithm, we were able to redirect more SurePost packages into our network, driving delivery density. For the quarter, B2B average daily volume was up 0.8% year-over-year, increasing for the first time in two years. Growth was driven by SMBs, which had an increase in B2B average daily volume of 3.8%. B2C average daily volume increased 11% year-over-year and made up 58.3% of our volume, a slight downward shift from the second quarter. In terms of customer mix, we saw ADV growth from both enterprise and SMB customers. SMBs made up 29.4% of total U.S. volume in the third quarter. For the quarter, U.S. domestic generated revenue of $14.5 billion, up 5.8% compared to last year, driven by strong volume growth. As expected, U.S. domestic revenue per piece was down year-over-year. In the third quarter, revenue per piece declined 2.2% year-over-year, but showed a 40 basis point sequential improvement from the second quarter. Breaking down the components, first, we took actions to address revenue quality, which translated into higher base rates. In the quarter, base rates increased the revenue per piece growth rate by 170 basis points. Second, the combination of product mix, lighter weights and shorter zones decreased the revenue per piece growth rate by 300 basis points. And finally, we experienced a 90 basis point decline in the revenue per piece growth rate due to the combination of changes in customer mix and fuel. Turning to costs. As you all recall, the cost of our new labor contract was front-end loaded. As of the end of July, we lapped the first year of the contract and for the quarter, Union wage rate growth slowed to 5.2% year-over-year. Productivity is a virtuous cycle at UPS and in the third quarter, we took several actions to drive productivity. Through our Network of the Future initiative, this year, we've completed 45 operational closures, contributing to an 8% improvement in pieces per workforce hour. While 8% might not seem like a big number, that translated into an efficiency gain of 11 million hours. Production improvements, including total service plan offset 50% of the Union wage increase and we continued to see positive trends in our safety performance, which contributed to lower expense. The U.S. domestic segment delivered $974 million in operating profit, a 46.5% increase compared to the third quarter of 2023, and the operating margin was 6.7%, a year-over-year increase of 180 basis points. Moving to our International segment. In the third quarter, our international business grew revenue and operating profit and expanded operating margin for the first time in nearly three years. This performance was driven by strength in exports in 13 of our top 20 export countries. Total international average daily volume growth continued its sequential improvement trend from the second quarter and was about flat to last year. In the third quarter, international revenue was $4.4 billion, up 3.4% from last year, with all regions growing revenue year-over-year. International revenue per piece increased 2.5%, driven by strong base pricing and the positive impact of region and product mix. Touching on costs, total international expense was relatively flat year-over-year, which was achieved by optimizing our network and our ongoing cost management efforts. Operating profit in the International segment was $792 million, an increase of 17.3% year-over-year. Operating margin in the third quarter was 18%, an increase of 220 basis points from a year ago. Moving to Supply Chain Solutions. In the third quarter, revenue was $3.4 billion, up 8% year-over-year. Looking at the key drivers, air and ocean forwarding revenue was up 15.1%, driven by strong market demand out of Asia. Logistics delivered revenue growth driven primarily by the impact of the MNX acquisition and onboarding of USPS air cargo contributed to revenue growth in SCS. Partially offsetting these gains was weaker performance at Coyote, our truckload brokerage business and the completion of the sale in mid-September. In the third quarter, Supply Chain Solutions generated operating profit of $217 million, down $58 million year-over-year, primarily driven by our efforts to configure our air network as we onboarded the USPS air cargo business. Now that we have fully onboarded this volume, we expect it to generate consistent revenue and we expect an attractive margin on a consolidated basis. For SCS, operating margin in the third quarter was 6.4%. Walking through the rest of the income statement, we had $230 million of interest expense, our other pension income was $68 million, and our effective tax rate for the third quarter was approximately 21%. Now let's turn to cash and capital allocation. So far this year, we've generated $6.8 billion in cash from operations and free cash flow of $4 billion, including our annual pension contribution of $1.4 billion. We refinanced $1.5 billion in current maturities year-to-date, and we finished the quarter with strong liquidity and no outstanding commercial paper. So far this year, UPS has paid $4 billion in dividends. And lastly, we've completed our targeted $500 million share repurchase program in the third quarter, which brings us to our outlook. In July, we provided an update to our full year financial targets based on global economic forecast and our performance in the first half of the year. Now looking ahead at the full year, we have updated our outlook to reflect three things. First, our third-quarter results and the focus on revenue quality; second, the sale of Coyote; and finally, new softer peak volume forecast from our customers. At the consolidated level, we now expect full year revenue of approximately $91.1 billion. Due to our focus on revenue quality, coupled with the efficiency of our integrated network and our ability to manage costs, we are lifting our consolidated operating margin expectation to approximately 9.6% to align with these new volume and revenue expectations. Now looking at the segments in the fourth quarter. Starting with U.S. domestic, we expect the combination of both volume and revenue per piece growth to increase revenue by 1.5% in the fourth quarter. We expect to generate a fourth quarter operating margin of approximately 9.5%, and we now expect the operating margin in December to be slightly higher than 10%. Looking at International. We expect the positive volume momentum we've experienced throughout the year will continue. With that in mind, we expect fourth-quarter revenue growth to be up mid-single digits year-over-year and we still expect around a 20% operating margin in the fourth quarter. In Supply Chain Solutions, we expect revenue in the fourth quarter of around $3.3 billion, which takes into consideration the disposition of Coyote, and we expect to generate an operating margin of approximately 9%. Turning to capital allocation. For the full year in 2024, we expect free cash flow to be around $5.1 billion after the $1.4 billion pension contribution we made to fund annual service costs. Capital expenditures are expected to be about $4 billion. We plan to pay around $5.4 billion in dividends subject to Board approval. And lastly, we expect the tax rate for the full year to be between 23% and 23.5%. With that, operator, please open the lines for questions.

David Vernon, Analyst

Hi, good morning, everyone, and thank you for your time and questions. As we consider the transition from the third quarter to the fourth quarter, the operating profit guidance indicates an almost 50% increase between the two quarters. Brian, could you explain the factors that contribute to this outlook? Furthermore, as these factors take effect, how do you see the profitability trends shaping up as we move into 2025?

Brian Dykes, CFO

Sure. Thank you, David, and I appreciate the question. And yes, we do have an increase from Q3 to Q4 on the profit side. And really it's driven by a couple of things. One, as we mentioned, this focus on revenue quality and the moves that we've made to drive revenue improvement, both through pricing policy as well as the take rate that we're seeing on HCS coupled with the acceleration of Fit to Serve and Network of the Future and just the productivity initiatives give us the incremental bump over the normal seasonality. We feel very confident in both of those and we're seeing them actually start to come through in the third quarter and early in the fourth quarter on the revenue side. And you can see from our cost performance, we feel that the Fit to Serve and NOS stuff is sticking very well.

David Vernon, Analyst

And then how that's going to affect sort of into 2025?

Brian Dykes, CFO

Yes. As we progress through 2024, we have increased the consolidated margin. We anticipate the domestic margin to be approximately 9.5%. Additionally, we expect to end the year slightly above the 10% that we previously indicated. We will provide further updates as we approach the peak in 2025, but our priority is to finish with the peak first.

Brian Ossenbeck, Analyst

Hi, good morning. Thanks for taking the questions. Maybe can you expand a little bit more on the softness you're seeing into peak season? What type of themes and concerns maybe you're hearing from the customers as they sort of dialed down their expectations on volume? And maybe within that a broader comment on the pricing and the surcharges ticking if you're getting more pushback on that or seeing more trade-downs at this point? Thank you.

Carol Tome, CEO

Well, I'll start with the customer feedback. We work with a little over 100 of our customers who represent 60% of the volume in our network, but 85% of the peak surge. So we develop operating plans for each of these customers. And these plans have been in process now for months. As the year has progressed, they continue to tighten up their forecast and we just received their last forecast on October 2. And their forecasts have been tempered and we believe it's driven by a couple of factors. First, external forecast for the holiday season have come in. In fact, the forecast for ESMO in the fourth quarter is now about 3%. Earlier in the year, it had been about 5%. If you look at just the peak part of the holiday season, forecasts are all over the board, candidly from a low of 2% to a high of 11% and SMB Global has it at about 3.5%. Part of this, we believe, is influenced by the tight compressed peak period. There are only 17 shipping days between Thanksgiving and Christmas Eve. And what forecasters and some of our customers are saying is because of the tightness of the shipping season that many customers will go into a store to complete their holiday purchases. The consumer actually is in pretty good shape, but we think there'll be some dynamics in how the consumer shops during the peak season. So it will still be a good peak. In fact, in our prepared remarks, we called out that on peak day, we'll deliver 2 million more packages than we did last year. It will still be a good peak, but just not as dynamic as people thought at the beginning of the year. Whatever happens, we're prepared. We're prepared to handle the volume. And then on the pricing surcharge, we're seeing a really good take rate on the pricing surcharge for the holiday, I should say. And maybe Matt Guffey is here. Matt, perhaps you want to comment on the holiday surcharge?

Matt Guffey, Executive Team

Yes, absolutely. First off, we are closely collaborating with all of our customers. The top 100 customers are extremely important because of the peakiness they bring during the season. We've established a solid structure and process to manage our holiday demand surcharge at the customer level, providing us with greater flexibility as we navigate the peak season. Ultimately, our focus is on continuing to create value with our customers and ensuring a successful peak. We are staying attentive to forecasts and working closely with them regarding the holiday demand surcharge.

Carol Tome, CEO

And we're seeing a good keep rate on…

Matt Guffey, Executive Team

We are seeing a very strong keep rate, likely one of the best we've experienced.

Brian Dykes, CFO

And Brian, I would just add that we're following our plan. There were adjustments made due to the compressed peak that expanded the holiday demand surcharge to a larger volume, and that is what contributes to some of the additional outperformance year-over-year that you're observing.

Chris Wetherbee, Analyst

Hi, thanks. Good morning. I wanted to drill down a little bit on the cost improvement on a per piece basis in domestic, so down about 4%. It was better than what we were looking for. I guess maybe two pieces to the question. How do you think about that progress potential in the fourth quarter? And then maybe widening out a little bit with some of the initiatives that you're working on bigger picture about managing the footprint as well as maybe the headcount, how do we think this can trend as we move into 2025?

Carol Tome, CEO

So why don't you take the fourth quarter question and then we'll turn to Nando for some thoughts.

Brian Dykes, CFO

Thank you for your question. The cost performance in the third quarter was exceptional. There are a couple of factors to consider. As we mentioned earlier, we finished the contract at the end of July. This has led to a reduction in high wage inflation, which was 12% in the second quarter and has now decreased to 5.2%. We anticipate a full quarter of wage inflation at normalized levels in Q4. Additionally, we've accelerated our Fit to Serve initiative and are exceeding our forecasts, as evidenced by the Network of the Future discussion. We've completed more sorts and buildings, which enhances our cost performance. Looking ahead to Q4, we expect strong cost performance, likely increasing about 1% per piece, but this will still be lower than our revenue per piece growth rate, allowing us to maintain a positive spread. It will be more normalized as we progress. Nando, would you like to discuss the network and future plans as we move things forward?

Nando Cesarone, Executive Team

Yes. Thanks, Brian. And look, you may be asking how are we able to have 45 operational closures and nine buildings that we've closed. We are moving much more volume about 5% through our automated facilities and we're also making sure that our legacy of production indices are performing the way we expect them to perform. The teams are doing an excellent job allowing us to really shrink the network and be a lot more productive. Safety of course helped. And at the end of the day, it comes down to hours and people, and we were down about 11 million hours compared to the last year. So really just an excellent job all around. And the last thing I would say is there's nothing that we're overlooking so every piece of our business, from car wash to automated dispatching, we are prepared for all of it and looking and scrutinizing all of that cost and finding some good improvements there.

Carol Tome, CEO

All the while maintaining outstanding service levels, which is job number one for UPS. And just to put the 5% number that Nando mentioned into perspective, he's talking about automated volume through our hubs, right. And we now processed 63% of the volume in our hubs in some sort of an automated way. That's up 5 percentage points from a year ago. That's pretty good.

Brian Dykes, CFO

Absolutely. And look, we've got 21 active projects here in this quarter. You would think it's peak season. Why would we take that undertaking? We have full confidence that that's going to provide very good productivity improvements. And then next year, we're accelerating and pulling in the number of projects that we can execute in 2025.

Tom Wadewitz, Analyst

Good morning and congratulations on the strong results. I wanted to ask, Carol, since you started the call mentioning some weakness in the industrial economy. You're clearly doing some unique things that are performing well. As we approach 2025, how much of the margin improvement do you think will be within your control? If there isn't any improvement in the macro environment, is it reasonable to expect that improvements in revenue per piece and the network of the future will lead to margin expansion? Thank you.

Carol Tome, CEO

Well, I think our team has done a masterful job of managing a very choppy environment over the past several years, actually. And as we think about our business outside the United States, we saw improvement in every quarter this year. In fact, our export business grew in the third quarter and domestic was down just slightly. So, Kate, maybe you want to talk about how you would manage the business outside the United States if the industrial production remains softish?

Kate Gutmann, Executive Team

Yes, absolutely. And I think the quarter was a good example of that. The macro indicators have come down, but yet we've expanded the revenue, profit and margin in the international business and posting an 8% margin. We intend to continue to run those same plays. Let me go into a few. Just as Nando indicated, on the domestic side, 60% of our volume goes through automated hubs and that's for the domestic and transporter of all of our large international volume markets. And then on the air side of the house, we continue to show that revenue quality matters, especially when you have expensive assets and we align with demand. So we had strong rev per piece for international we held our cost CPP flat and so delivered operating leverage. We would continue to do that into the next year.

Carol Tome, CEO

And in-markets that are soft to win, you gain share. And you gain share not by dropping price, but by actually increasing your capability. And our Saturday delivery is one example of that. We are the only carrier that offers standard Saturday delivery at no charge in these eight markets. And that's driving some nice performance, isn't it, Kate? We just started it.

Kate Gutmann, Executive Team

It really is. And so Europe and Canada exceeding expectations, unlocking more of the customer share of wallet and in the premium spaces too. So cross-border trade we're seeing growth with the expansion of our service out of Asia to Europe as well as throughout intra-Asia we've made the lanes faster and as a result that premium unlock and by the way with rev per piece growing. So we feel good about the equations and we'll definitely continue it.

Tom Wadewitz, Analyst

I don't think I asked the question well. I was actually thinking a little bit about domestic in terms of the margin.

Carol Tome, CEO

So I think in the domestic side, productivity is a virtuous cycle here. And as Nando pointed out, there's nothing that's not under review, right. Everything is under review and we continue to drive productivity that exceeds our expectations. Brian, anything you want to add?

Brian Dykes, CFO

Yes, I would agree. We have a contract in place that secures known costs for the next four years for 60% of our domestic cost structure. With our focus on revenue quality and our capability to grow in the areas that matter most to us, as demonstrated in the third quarter with the growth in commercial and SMB commercial, we believe we can continue to take action to drive revenue per piece. Additionally, as Carol mentioned, productivity leads to a positive cycle supported by our predictable cost structure as we move into 2025.

Carol Tome, CEO

We appreciate the commercial business because it has a higher delivery density, meaning more packages are delivered per trip. We can enhance our performance in this area with new capabilities. In the third quarter, we achieved a significant success, and a key reason this customer chose our network was our RFID labels, which represent a new capability we previously lacked.

Brian Dykes, CFO

So yes, so we do expect about $70 million incremental to go about $350 million in the fourth quarter, and we've seen great progress with that program.

Ken Hoexter, Analyst

Good morning. This is Adam Rakowski stepping in for Ken Hoexter. In your release, you mentioned the Fit to Serve initiative, which includes a reduction of around 12,000 positions. Can you provide more details on what this entails? Has this process accelerated in the current quarter? Additionally, could you share your thoughts on how you plan to expand the scope and what areas you will target? Thank you.

Carol Tome, CEO

So you're just asking for a status update on Fit to Serve?

Brian Dykes, CFO

Sure. Yes. Regarding Fit to Serve, we have identified additional savings opportunities. We have achieved the full run rate that we anticipated. We expect some additional benefits as we enter the fourth quarter, and we are continuing to move forward with the initiative as planned.

Carol Tome, CEO

And to your question, do you have additional opportunities. We are an opportunity rich company. And as you heard from Nando, we're looking at all opportunities to drive a better experience for our customer and actually higher productivity.

Brian Dykes, CFO

Greg, we have time for one more question.

Ravi Shankar, Analyst

Thank you. Good morning, everyone. To follow up on the holiday aspect, I understand you made a significant increase in your hiring for the first time in many years. I realize this is a peak season for compressed earnings. However, what is the reasoning behind this decision, especially if you are experiencing a slight decline in customer experience or expectations regarding volumes? How should we reconcile that? Also, is there a minimum surcharge you need to meet to cover the additional costs? Thank you.

Carol Tome, CEO

Last year, we announced plans to hire 100,000 people for the peak holiday season, and our Average Daily Volume declined by 7.4%. This year, we've increased our hiring to 125,000 and expect our Average Daily Volume to be positive. It makes sense for us to hire more this year than last. However, we will only hire what is necessary for the peak period, regardless of the actual volume. We won't overhire. We’ve developed a capability that allows us to quickly make job offers or rescind them, enabling us to adjust our hiring as needed. Nando, do you want to add anything?

Nando Cesarone, Executive Team

Yes. I would just say the number also includes a favorable employee mix. This year, we will increase our helper teams with our drivers by about 10%. That's a significant number. A large portion of our volume will be handled by seasonal helpers during the Christmas season. We have ramped that up and ensured that every position is optimized, and that is the number, as Carol mentioned, and we are prepared to deliver a great peak season.

PJ Guido, Investor Relations Officer

Thank you, Greg. This concludes our call. Thank you all for joining and have a great day.

Operator, Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.