Good morning. My name is Steven, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Mr. Ken Cook, Investor Relations Officer. Sir, the floor is yours.

Good morning, and welcome to the UPS Second Quarter 2022 Earnings Call. Joining me today are Carol Tome, our CEO; and Brian Newman, our CFO. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within the federal securities laws and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2021 Form 10-K, our first quarter 2022 Form 10-Q 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 refers to adjusted results. For the second quarter of 2022, GAAP results include after-tax transformation and other charges of $31 million or $0.04 per diluted share. A reconciliation to GAAP financial results is available on the UPS Investor Relations website along with 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.

Thank you, Ken, and good morning. Let me begin by recognizing our more than 500,000 UPSers around the world for their dedication, hard work and efforts. Our founder, Jim Casey, said, "We do what we promise." And in the second quarter, our UPSers did just that. They not only met, they exceeded our promises to our customers, our shareowners and each other. In the second quarter, the macro environment remained dynamic. We expected volume levels to decline from last year. They did, but more than we planned, given a number of factors that Brian will detail. Despite the decline in volume, we continue to win in the most attractive parts of the market with strong gains and revenue quality. Under our better, not bigger strategy, our actions are creating a more resilient UPS. We are delivering better service for our customers and stronger financial results for our shareowners. For the second quarter, consolidated revenue rose 5.7% from last year to $24.8 billion and operating profit grew 9.3% to $3.6 billion. Consolidated operating margin expanded to 14.4%, a 40 basis point improvement from last year, and it was our highest quarterly consolidated operating margin in nearly 15 years. All business segments delivered operating profit growth. And I'd like to give a shout-out to our Supply Chain Solutions businesses, which delivered operating profit of $517 million, a record high performance. Moving to our strategic update. Our customer-first, people-led, innovation-driven strategy is powering consistent improvement across our company. Starting with customer-first, which is about creating a frictionless customer experience, we are growing in the parts of the market where we want to grow, like SMBs, health care, B2B and certain large enterprise accounts. How are we doing that? By providing outstanding service and focusing on the capabilities that matter the most to our…

Thanks, Carol, and good morning. In my comments, I'll cover 4 areas. Starting with the macro environment; then our second quarter results; next, I'll cover cash and shareowner returns; and lastly, I'll wrap up with our financial outlook for the second half of 2022. In the second quarter, there were many cross-currents that contributed to a dynamic macro environment. In the U.S., even with high inflation and increasing interest rates, the job market and consumer spending remains strong with a growing share of wallet spent on services. Internationally, the environment continued to be negatively impacted by COVID-19 lockdowns in Asia and geopolitical issues, both of which drove complexity in the market for customers. Despite these external factors, we remained agile and delivered strong second quarter results as we expected. In the second quarter, consolidated revenue increased 5.7% to $24.8 billion. Consolidated operating profit totaled $3.6 billion, 9.3% higher than last year. Consolidated operating margin expanded to 14.4%, which was 40 basis points above last year and was our highest consolidated operating margin in nearly 15 years. For the second quarter, diluted earnings per share was $3.29, up 7.5% from the same period last year. Now let's look at our business segments. In U.S. Domestic, revenue quality initiatives more than offset the volume decline and drove strong second quarter results. Average daily volume in the U.S. was down 4% or 823,000 packages per day versus the second quarter of last year. More than half of the decrease was due to actions we took with a few of our largest customers, to optimize air and ground volume we bring into our network. And the majority of the volume reduction from these customers was residential. We expected to fill this gap with other enterprise volume, but macro conditions made that challenging. In the…

[Operator Instructions]. Our first question will come from the line of Chris Wetherbee of Citi.

Maybe starting, Brian, where you left off on sort of the cost side, thinking about the ramp-up in the back half of the year. I know it's early, but I want to get a sense of what you think sort of the expense profile of the business, particularly on the domestic side is going to look like exiting '22? And as we think about 2023, I know you have the Teamster contract coming up next year, probably a little too early to talk about that. But it seems like there's some cost inflation kind of picking up. I want to get a sense of maybe how you think about that exiting the year? And what are the buckets you can kind of attack to maybe offset that?

Yes, Chris, thanks for the question. Look, we expect CPP in the back half of the year to actually improve versus the first half. As I think about 2H, we're looking to put about $1.7 billion up in revenue growth in domestic, and there'll be a comparable increase in cost of about $1.7 billion. But Nando and the team in the U.S. are taking a number of actions to actually drive productivity and efficiency. We just launched Total Service Plan. We've got Smart Package/Smart facility, cube automation, a number of initiatives. Those will drive about $300 million to reduce that $1.7 billion in cost increase. So as I think about exiting, I actually think CPP will be high single digit in the second half of the year. And so as we exit, I think we'll be in good shape going into '23.

And maybe just a little color on the Total Service Plan. This is a formative initiative for our company. And it's really running our integrated network the way it was designed to run. And to make that real for you, sometimes we're a little light with feeder arrivals and departures. And with the initiative that we just kicked off on July 11 is about getting back on time and to dimensionalize that for you, a 10-minute improvement within the integrated network is worth $257 million. So we're really excited about this. We've just kicked it off. It was a monumental effort. Get this, Nando and his team had to have one-on-one conversations with 64,000 drivers in our company, talking to them about their individualized service plan because some people want to get home for dinner at night and some people want to have some overtime. So we've built individualized plans for our drivers, and we retrained hundreds of thousands of people in our methods. And we're very, very excited about the Total Service Plan.

Our next question comes from the line of Allison Ann Poliniak of Wells Fargo.

I just want to ask a question on SMBs. Obviously, you're growing faster than the market, Deal Manager obviously impacting that as well. Is there a way to think about that as we kind of look to the back half? Does that outperformance still continue? And I think Deal Manager also touches on pricing a little bit. Does that, I guess, strength in that revenue quality, the SMBs that you guys are onboarding at this point?

Yes. From a numbers perspective, Allison, we had guided to 150 basis points of SMB improvement as a percentage of volume mix in the U.S. We're right on track to do that. We had a bit stronger performance in the second quarter, 200 bps, but we're holding to that full year 150. So that obviously does contribute to the revenue quality that we saw in the first half and we'll see in the second half.

Our SMB initiative is multifaceted. And certainly, Deal Manager is part of it. We saw our win rate at 71% in the second quarter, that was 12 percentage points higher than we had planned. So we were super excited about that, and we're looking forward to rolling that outside the United States. But it's not just the Deal Manager. By the way, I should say with Deal Manager, we're holding more of the base rate, which is great, too. That's part of the RPP strategy here. But it's much more the Deal Manager thinking about that, we have $1 billion of DAP revenue in the first 6 months of the year. And in fact, the revenue in the second quarter grew by about 100%. So we are on track to have $2 billion in DAP in the back half of the year. We've got 18 key partners, 2.5 million merchants on the DAP platform, and we're taking that outside the United States as well. But there's more to it. It's about creating a seamless and frictionless experience for our customers. And as you know we have 16 customer journeys, we've actually identified 3 of those that really matter. And one of those is we've kind of thrown our wallet in the middle of the road, and we're going after it. And that's how to manage claims. The claims process here is pretty clunky and it's not a good customer experience. So we are staffing that, Brian. We're staffing that and we're going to fix the claims experience because we think if we eliminate that pain point, we're going to grow even faster than the market, which we're already doing.

Our next question comes from the line of Jeff Kauffman of Vertical Research Partners.

Congratulations. So the inbound questions I'm getting on this release are volumes came in a little lower than expected. Why isn't this a negative economic signal? Now you had a couple of anomalies that Brian went through in the quarter, and you talked about second half growth improving. So how do you read the economic tea leaves? I know you mentioned that GDP forecast had come down, but it sounds like you're more optimistic about volume returning to the network in the second half in part because you're deemphasizing the volumes you don't want. But what are our takeaways here?

Well, maybe I'll start, Brian, and then you could add. So -- if you recall, at the end of the first quarter, we told you we thought our volumes would be down in the second quarter. They were. They were down a little bit more than we thought. We missed our forecast by 222,000 packages a day. And that miss was split evenly between the U.S. business and the international business. So I would call that pretty close to being on forecast. As Brian detailed in his prepared remarks, more than half of the volume decline in the United States was based on actions that we took with a few of our customers under our better, not bigger framework. One of those customers is Amazon. So I'm just going to talk about Amazon right now. We have a great relationship with Amazon. They are our largest customer. But as we've shared with you in the past, we have reached a contractual agreement with Amazon about the volume that we will take into our network and the volume that they will deliver. No, by the way, they got a lot of volume to deliver. The last time I looked, they have $35 billion of inventory. So they've got a lot of volume to deliver. But we've contractually agreed on what makes sense for us versus what makes sense for them. That means that both volume and revenue for Amazon is coming down. We project by the end of this year that Amazon revenue will be less than 11% of our total revenue. That gives us room to grow in the parts of the market that we want to grow, like SMB and B2B and health care and others. So part of this is a glide path that's occurring. We thought we could fill up the divot with more enterprise volumes than we got. Part of that is macro, but here are a few fun facts. Of our top 20 customers in the second quarter, more than 65% of them grew volume with us. Another fun fact is that in the second quarter, we won new great revenue quality business in the enterprise part of our segment than we have in the past 5 years. Now that volume hasn't come into the network yet because we just won it, but it's coming in the back half. So we are running our business the way that we want to run it in this better, not bigger framework despite the macro environment. And Brian, what else do you want to share?

I only had the RPP side of that equation. Carol just painted a better, not bigger picture that we're running, Jeff. But on the back of that is revenue quality, and you see that in the domestic margin of 12% in the second quarter. I think we committed to 11.6% in the first half and 11.6% in the second half. We feel good about that running this play Carol just described.

And we're holding on to the more of the GRI aren't we? We're not discounting as much. And part of that is because our customers value the service that we provide. Our end-to-end network is allowing us to deliver record high service levels, and that matters. That really matters.

Our next question comes from the line of Ken Hoexter of Bank of America.

Carol, Brian and Ken, maybe thoughts to continue that discussion a bit. Maybe thoughts on the RPP there, Brian. As fuel comes down, we're moving under $100 per barrel. You talked about a bit about the splits. Does that start to impact? Is there a profitability built into that revenue stream from fuel? Maybe just kind of walk through that a bit.

Yes, Ken. Thanks for the question. And I think we feel fine about the fuel. It's obviously gone up at record levels in terms of the increase versus last year. And as we see fuel costs rise, Ken, our profit dollars actually increased. Margins contract a bit on the upside. In the quarter, about 1/3 of RPP growth came from fuel, and we're splitting that out. That's fuel price per gallon. We're splitting that out from the management actions we've taken on pricing, which would go into a different bucket. So we've tried to provide more transparency. As fuel goes down, I think the efficiency of our 1-week lag on the fuel service charge we feel like we're protected or insulated from a margin perspective. So feel okay and the constructive Q2 RPP. 1/3 was fuel, 1/3 was what Carol talked about, the revenue quality led by service, and then the last piece of that was the combination of mix, Ken, plus the management actions on fuel. So that's how we're looking at it and thinking about it.

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

I guess just related to the domestic margin question. I think the algorithm when you guys provided your multiyear forecast was kind of 20-ish percent incremental margins. And you're pretty darn close in the second quarter. I think you're actually forecasting that or pretty close in the back half of the year. The world has changed since then from an inflation perspective. So I think it's pretty impressive that you're still hitting that number. But is that -- Brian, as you look out in '23, which is still within that multiyear forecast period, is that 20%-plus still hold in terms of an incremental margin target for domestic? And then, Carol, I think one of the key questions and the overhang on the stock, at least, is this union renegotiation that's coming up next year. I understand it's sensitive and highly strategic, but any color? Because it is a $30 billion to $35 billion expense base for the company. And any additional color, at least in terms of how you're strategically thinking about that renegotiation, that helps us form what type of inflation the company is going to be -- have over the next several years starting next year would be helpful?

Yes, Amit, good question. So the answer to the first part of the question is, as we think about the walk on margins, that low 20s number that we're delivering it's a bit challenged in a down volume environment. And so we need to pull other levers to make sure we get there. What we're focused on guidance that I had given at the investor conference in '21, which is 12% op margin in the U.S. We are still very much on track to do that. I think the guidance we gave for this year was to go from 11.1 to 11.6. We're on track to do that and then to lift the balance next year. So still tracking to the 12% and looking to expand margin on a longer-term basis.

We have additional productivity levers today that we didn't have in our investor conference 1 year ago. One of those would be the Total Service Plan. Maybe Nando was thinking about it, but we haven't kicked it off or actually put it into any of our financial plans 1 year ago. We're also seeing some real opportunities with our Smart Packaged/ Smart Facility initiative, which we hadn't thought of 1 year ago. When we get that rolled out, we're going to eliminate all the manual scans, all those preload scans that are done manually, all that will be eliminated. All of the tens of thousands of misloads that occur every day, sorry to say, we do misload a package from time to time or lots of times. So all of that's got to be eliminated. So we've got additional productivity initiatives that we didn't have 1 year ago, which even in an environment where, yes, costs are up more than we thought they would be, we're able to offset those costs. I think it's pretty impressive that we didn't -- we planned for the $1 an hour increase for our Teamster starting in August. We didn't plan for the COLA that we're seeing. We knew there would be some inflation, but not the amount that we are seeing and we're able to offset all of that, aren't we Brian?

Yes, that's -- Carol, it's actually a big number. We're going to see -- we saw $0.33 in COLA, the cost-of-living adjustment last year. We're going to see $0.82 this year. So you combine that to $1 in contractual wage increase. Last year, we went $1.23. This year, it will be $1.82. The fact that we're able to manage through that and drive the additional productivity you talked about when the environment turns around in an up volume environment, should be cooking on all cylinders.

And to your question on the union negotiation first, these are incredibly important to us, and we've had Teamsters in our company for 100 years or thereabout. As we think about the upcoming contract negotiation, we're going to leave the negotiations at the bargaining table. But just a few things for you to remember. Our Teamsters are the highest paid in the industry, both wage and benefits. In fact, if you're a 4-year driver here, you're making $40 an hour and fully loaded with benefits close to $150,000 a year. So our workforce is very different than a lot of the workforce that you hear in the media every day that are trying to be organized. They're not paid the way that our Teamsters are paid. These are great jobs that we value very much. Our goal with the Teamsters is win-win-win, and that's our goal. And again, we'll keep the details of that win-win-win strategy at the bargaining table. The other thing I'll leave with you, and this is, I think, an important point is we're winning business today with customers who know, we have an upcoming negotiation because we've told our customers, we're going to take care of them. We are building contingency plans, and we will take care of our customers.

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

Brian, just a couple of few things I want to just follow up with you. Can you talk about the net impact of fuel in the quarter? How you're thinking about currency in the back half of the year? And I think you gave a comment about fourth quarter margins, but I didn't hear anything about third quarter margins. So if you could just help there.

Sure, Scott. From a margin perspective, look, we -- I guess, as a whole company, we'd expect all business segments to have higher margins in Q4 relative to Q3 based on the seasonality, Scott, we expect the back half domestic margin seasonality to be very similar to last year relative to Q2. So if you go back last year and look at Q2, the sequential Q3, Q4, the change should be comparable. As far as the currency and fuel that you laid in, look a stronger USD in Q2, it reduced our reported international revenue by, I think it was $261 million and reduced international profit by $60 million. And I think you're familiar, Scott, with the lard hedge we use as a percentage of our revenue to manage that. In terms of fuel, fuel prices increased. We take a layered approach and start hedging that out about a few years in advance. We try to be 100% hedged. So the revenue impact will be more than the profit impact. But net-net, I think we feel fuel prices will moderate in the back end of the year. The net impact in the quarter was 400 basis points. And as we look at dimensionalizing further, we're splitting out the elements of management control pricing actions versus the price per gallon, Scott, to give you more transparency.

Yes. I think, Scott, the way I think about it is the change in the price per gallon is one component of the RPP. And as Brian called it out, that was 400 basis points on the RPP in the second quarter. The costs associated that also impacted cost per piece or our overall increase in expenses, up 370 basis points related to fuel. So as the price per gallon goes up or down, the margin is pretty protected. To the change in price per gallon, we also have a pricing algorithm, but it has -- it's just used it fuel as a simple way to price. It's just price. So don't think of those pricing actions as anything different than price. And fuel margins will just hold tight if you look at change in price per gallon on the revenue line and change on pricing gallon on the expense line. That's how I think about it.

Our next question will come from the line of Todd Fowler of KeyBanc Capital Markets.

So I guess I wanted to ask on your peak expectations. It sounds like that there was maybe a little bit of cost here in the quarter from a hiring standpoint as you prepare for the peak. I guess I'm curious what your expectation would be. It seems like that the second half outlook. It's a little bit uncertain just how the peak this year would compare to last year. And then with the $300 million of productivity improvement that you're expecting in the back half of the year, is that something that you hold on to and carries forward into '23? Or how do we think about the sustainability of those cost improvements?

Yes. Certainly, the productivity piece, we would hold on to that. And to Carol's earlier comment, we're going to build on it. So that would carry forward.

On peak, we're getting forecast from all of our large customers now as we build our peak planning and we expect it to be a good peak. Inventory levels are good. Retailers are brought in to sell. Where last year, they didn't. So that should help the peak demand. And then the comment about expenses, and we could have done better, is we managed hours relative to the volume. I'm really proud of that. A few years ago, we wouldn't have been able to do that. We would have delevered, but we were able to manage our hours. Nando and his team and Kate and her team did a great job on that. We kept the bench though. Because if we let the bench go, then we'd have to rehire them for peak, and that doesn't seem like a good idea. Now the bench, obviously, we won't be an hourly wage if they're not working, but they do get benefits. So I would say that's the money that we left on the table, but we'll get that back in spade by giving great service to our customers during peak.

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

I was wondering can you talk a little bit more about the Total Service Plan? Just trying to understand a little bit perhaps what the implementation or rollout aspect of that may be? And how quickly that starts to dig in? And is that a part of the contribution to this year's second half cost saves, et cetera?

Yes, Jordan, it's included in my $300 million that I talked about in terms of driving productivity. And as Carol mentioned, it just kicked off, I think, July 11. So we're just getting going here. Net-net, it's to run a precision on-time network. So we don't have late deliveries or late departures. And it's worth quite a bit to us. It will ramp up over time. Carol mentioned that Nando and the team met with over 60,000 people talking about their specific service plans. Pretty exciting when you think about what can be accomplished from a TSP perspective.

And Brian, Ken, I'm going to call an audible here, and I'm going to throw that question over to Nando. Nando, do you want to talk a little bit more about the Total Service Plan?

Yes, sure. So the plan is really based on, as Brian mentioned, a predictable environment where our operators can plan with a lot of confidence on start time, finish time, sorts bands, how we can better utilize our automated facilities and move volume from legacy facilities to our newer, more automated facilities. In addition to that, we've catered a very unique dispatch for our full-time drivers. And so we expect that the efficiencies coming out of those customized dispatches and the service we provide are going to allow us to run a really, really great efficient network for our customers and our employees.

Thanks, Nando. And the cool thing is that we're not trying to integrate the network. We already have an integrated network. Now we're just running it the way it was designed.

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

I wanted to see if you could comment a little bit about sort of revenue quality and the efforts you're making on revenue quality and how sensitive they might be to sort of a weaker economic environment. You did a great job, I guess, managing down hours to volume. I think the market is looking at the global financial crisis past recessions to kind of get a sense for earnings cyclicality. And I'm just trying to get a sense for what's different about the business today that might limit some of that downside to a downturn or pullback in overall shipping volume versus kind of maybe what we've seen in the past?

Yes. I think in the past, as I understand it, when air volume softened up, the end was near. Prices softened up. That's just not happening now. As Brian detailed in his prepared remarks, more than half of the volume decline in our business, including air, was because of agreements that we reached with a few of our customers on the volume that we will take and the volume that we won't take. The revenue quality is very good. It is sticky. As we bring in new customers, we're bringing them in and at very good revenue quality. Why? Because of what we have to offer. And in services are life. So part of it is what we have to offer from a service perspective, dependability, reliability. And what else do you want to add in terms of revenue quality, perhaps talk a little bit about the technology of the future?

Yes. I think we've talked before as we think about dynamic pricing, and we're running some pilots that we feel good about. There's a technology component to that, but from a lag perspective, but the tools that we've been running out -- rolling out with our accounts, whether it's Deal Manager or some of the others, it allows us to be more efficient, more timely. And quite candidly, the revenue quality is showing 11.9% was the growth in revenue quality for the RPP growth in the second quarter. that's a good number. We expect that to moderate for a few reasons in the back half of the year to high single digit. What's critical there is managing that spread. As Carol talked about, driving the productivity, will bring the CPP down and then deliver on our margin commitments.

I love Deal Manager for so many ways. It makes it easier for our salespeople first, it makes it better and faster for our customers, which is awesome, but we're also bringing intelligence to the decision-making. Before [indiscernible] a bit of tribal knowledge. But now we're using AI to help inform the decisions, and we're coming in at better pricing as a result.

All right. And then maybe, Brian, can you just clarify the EBIT dollar impact of fuel in the quarter? And if there's any risk that the fuel prices moderate, there's going to be an earnings headwind in sort of 3Q, 4Q?

I don't see a headwind with the dollar -- with the fuel prices moderating, it's factored into our guidance.

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

Just want to get your sense of how supply chains are flowing right now. Maybe just broadly upfront, but also in the context of your CapEx plans for rolling stock and automated facility rollouts. And Brian, maybe if you see any risk to guidance there if we see any additional delays on the supply chain?

Yes. Why don't I pick up the first -- the back half of that on CapEx, Carol, if you want to add any color on supply chains. But the guide we're holding at $5.5 billion, we feel good about. We're not immune. There are supply chain challenges around the world, and some of the parts and motors and trucks are more challenging to get. But I think we look at capital now from a sort of a perpetual rolling cycle. It's not episodic. And so we're looking at opportunities to invest in different areas that may not have been in the original plan to drive automation, et cetera. So we're hold to $5.5 billion. That you can hold and we'll continue to remain agile, keep you updated if there's any change. I don't expect a big change.

Supply chains are flowing better than they were a year ago. But we're not out of the woods. And a lot of it has to do with the rolling COVID lockdowns in China. We're shutdown in Shenzhen again. And we thought we'd gone through the worst in the second quarter. Kate and her team did a masterful job of managing through this. Get this, because of the rolling lockdowns in China in different cities, when you add up the number of days that we were effectively shut down cumulatively and if you look at all the cities combined, 106 days, we had people -- UPSers sleeping on the floor of our hubs to try to keep commerce moving. Manufacturers couldn't manufacture because they were shutdown. Ocean Freight volume levels were down in the second quarter because of the lockdowns in China. So -- and then we see what's happening with the current variant of COVID. And you just wonder about when will we ever get through it? But what you have to do is get through it. You have to manage through it. And that's what we, as a team said we will do. We are going to run our business. We're not going to let the business run us. We're going to get through it, and that's what we're doing.

And Stephen, we have time for one more question.

Our last question will come from the line of Brian Ossenbeck of JPMorgan.

So maybe one more quick one for Brian on fuel. Can you just talk about the management actions on fuel that you've quantified? I think, about 1/3 of the RPP was that and mix. I think where some of the concern is that you might not be able to hang on to that in a weaker fuel price environment? Or are those getting built into these contracts and these renegotiations that you're talking about? And then for Carol, if you can just give us a little more update on the upstream density program. It sounds like another new initiative, but I think the company tried that a few years ago, didn't quite pan out. So maybe what's different this time? What sort of visibility in partnership do you think you can drive to pretty much help everybody in the supply chain, including those who sign up for these pilots?

Yes, Brian, thanks. On the fuel surcharge, look, as Carol mentioned, we run a pass-through on the fuel surcharge on the price per gallon piece, and we've isolated that for you for transparency. That's a very efficient mechanism and we'll move up and down. The pricing actions, we've taken over the last couple of years, we've actually taken 4 or 5 pricing actions. And those we feel are embedded. As Carol said, it's a different type of price. We don't think of it as fuel. It's an element of pricing, and we're embedding some of that in the base rate.

And I'm just so happy you asked about delivery density. Because we've tried to move the needle in this area for a long time, and we haven't been successful, principally because we've been focused on downstream, improving delivery density through access points or SurePost Redirect. And we just really haven't moved the needle. Yes, the density was the best this quarter since 2019, fractionally. So we're like, "All right, what we're doing isn't working. We've got to go upstream." And when I mean upstream, when you think about e-commerce retailers, their upstream supply chain is from the manufacturer to their warehouse or store. Their upstream supply chain is also their order management system. So we have been in a pilot with a third-party technology company that powers order management systems for most of the retailers in the country. The pilot is a virtual halt. We're in the order management system, the third-party technology company is holding the order until it can match another order going to the same address, and then it releases 2 orders. This pilot has been working very well. Now you may say, well, what about service level agreement to the customer? Well, the virtual hold is only as long as the service level agreement allows. But there's a lot of hours in that service-level agreement, 9 hours, 12 hours. So what we found through the pilot is enough time to be able to match, then we release and we deliver the density. And just to make this real for you, and this is just an estimate, but we estimate the cost of last mile for us is $5.50. That incremental package cost us $0.60. So imagine the value that can be released if we improve the density. So we're going to give some of that value back to our customers. Why not? Their service level is not disruptive, and we are going to value share. So the pilot has been so successful. We're going live in the third quarter with the customer. We've got 9 other customers lined up who are anxious to talk to us about this. So more to come, early days, but super excited because it's different from what we've done in the past.

All right. Thank you, everybody, for joining us today and look forward to talking to you all next quarter. That concludes our call.