Carol Tome : So on the fuel surcharge as we look to the rest of the year, fuel prices are increasing. And this is not atypical for us to adjust our surcharge on the base of rising fuel costs. You also should know that, that doesn’t impact all of our customers. Clearly, some are exempted from this. So in terms of the ability to stick, we think the will stick. And just a comment on the capacity at our Investor and Earnings Day, we said there was about $12 million ADV excess capacity in the market, and that equilibrium is about 6%, you need about 6%. So really, the excess capacity is around 6 million today, and we think that will be fully absorbed by 2025. Now you may say why. Well, we’re part of that excess. And so we’re closing stores.
We’re taking capacity out of the market, and our Network of the Future initiative is capacity neutral. Also with our large competitors’ consolidation efforts capacity will be leaving the market. And then another player headquartered in Seattle on the regional, I think the capacity will be taken out of the market. So we think all that capacity will be absorbed in the pricing environment is actually very rational.
Brian Ossenbeck : And Brian, just on your secondary question around the pension. I had quoted cash — free cash flow ex pension of $59 million to $67 million. We do have annual service cost in the $1.4 billion range. So from a modeling perspective, you can use that as a placeholder. But the reality is taking a look at strategic options on pension, a little too a bit of early days to comment on that, but we’ll come back later in the year and share our thinking on some of the actions and activities we’re pursuing.
Carol Tome : Yeah. Our pensions are very well funded. They’re over 90% funded. And it gives us an opportunity to step back on. You just look at our asset liability strategy, our funding strategy. So we thought we should just pause right now, take a look at it and then when we — if we make any decisions, we’ll share that with you.
Brian Ossenbeck: Thank you.
Operator: Our question will come from the line of Conor Cunningham of Melius Research. Please go ahead.
Conor Cunningham : Hi, everyone. Thank you. Just curious on your expectations for — I mean, sorry, you talked a little bit about volume inflecting soon. And can you just talk about your expectations in terms of volumes as you move from first half to second half? I think previously, you were talking about flat to up 2% in the U.S. domestic market, then you came in a little bit ahead. Just trying to understand how the back half are to look outside of just comps being pretty easy. Thank you.
Brian Newman : So from an ADV perspective in domestic, I think that’s where you’re headed with a little bit of a slight tick up in positive volume in the second quarter will likely finish low single-digit decline in the first half, second half we’d expect that to be low single-digit increase. And you can look at it through various different lenses. We’re building momentum ever since August, each month is basically getting sequentially better each quarter from Q3, Q4, Q1 improves. We’d expect to see slight positive volume trends in the second quarter. And then just from a comp standpoint, I mean if I go back from a trend perspective, over the last 10 years, our Q3 is generally about close to 300,000 ADV better than Q1. And even if we assume flat from a Q3 to Q1, that would be 4.5% growth.
So any way you cut it, we see the back end of the year and most important, it’s the visibility on the sales pipeline that we’re pulling through and the volume levels we’re seeing going into Q2.
Conor Cunningham : Super helpful. Thank you.
Operator: Our next question will come from the line of Jonathan Chappell of Evercore ISI. Please go ahead.
Jonathan Chappell: Thank you, good morning. Brian, you’d mentioned the $1 billion of productivity that you expected to see in the full year ’24 guide. Can you just tell us where that stands after the first quarter and how we think about the cadence throughout the rest of the year? Is it front half loaded? Or is it kind of extrapolated evenly by quarter?
Brian Newman : Yeah. The initiative is progressing slightly ahead of plan. Reductions began in March and will continue through I2. We’d expect more than 80% of the resource reductions to be complete by I2. We’re on track to that $1 billion that I mentioned. And at a full annual run rate going into next year, we’d expect $1.3 billion. So there’ll be some benefit early part of next year.
Jonathan Chappell: Great. Thank you.
Operator: Our next question will come from the line of Daniel Amaro [ph] of Stephens Incorporated. Please go ahead.
Unknown Analyst: Yeah. Thanks, good morning, guys. Thanks for the questions. Wanted to follow up on the USPS contract. Carol, the air cargo, I think, should come into your network in the fourth quarter. I think first, any business coming in sooner than that, just to clarify, and then looking at 4Q in the outlook, are there any minimum volume component to the agreement? I mean, obviously, that customer has moved a lot of freight out of the air network as it looks to save costs by using ground. It still looks like ground is cheaper out there. So how do you protect for more of that volume leaving the air cargo market into maybe slower transit time, similar to the rest of your business? Thanks.
Carol Tome : Well, clearly, we want to get all the volume on boarded before peak. That’s in their interest in our best interest. We will onboard the volume as we can. Our teams are in Washington, D.C. working with the postal service hand-in-hand as we build our operating plan.
Operator: Our next question will come from the line of Bascome Majors of Susquehanna. Please go ahead.
Bascome Majors : Yeah, thanks for taking my questions. As you work on cash flow with the pension strategy stuff you’ve talked about that we might hear more about late this year. Can you talk a little bit about the dividend? If you look at your payout guidance, it implies roughly $13 in earnings at the dividend level that you’re paying now. Is there an opportunity to start to raise it more meaningfully before the earnings power of the business gets there? Or do you think we need to wait and get more increases like we saw this year until the business is supporting that more literally? Thank you.
Carol Tome : We have a disciplined approach when it comes to capital allocation. The first use of our cash, as you know, is to invest back into our business and the second is to pay our dividend. We have a targeted dividend payout ratio of 50%. We are higher than that. It’s our intent to earn back into a 50% payout ratio over time. We have no intent to cut the dividend to make that math work. We’re going to earn back into it and the dividend is an important part of the value proposition. So we just raised the dividend and we look to, of course, subject to board approval, we look to raise the dividend every year. Any color you’d like to add here?
Brian Newman : Just, Carol, this year marks the 15th consecutive year we’ve increased the dividend, and we’re committed to a stable and growing dividend. So we will earn back into that, but certainly committed to it.
Carol Tome : And I feel to respond to Daniel’s question about minimum levels within the USPS contract. I’d like to throw that over to Matt. Matt, did you answer your question?
Matt Guffey : Yeah, absolutely. So thank you, Carol. First of, yes, we do set minimums in the contract. As we built this, we identified a win-win for both the USPS and for us it’s just imperative that, one, we not only have it on the protection for our side and our business on what we’re bringing on but also for the USPS because we want to make sure, as Carol mentioned, that we’re onboarded before peak season, and we’re bringing this on as quickly as possible, and we’re working collectively with them. Nando and the team have done a great job with their operational team. And to Carol’s point, we’re meeting with them every week in DC to continue to onboard that volume to make sure it’s a smooth transition.
Carol Tome : Thanks, Matt.
Operator: Stephanie Moore of Jefferies. Please go ahead.
Stephanie Moore : Hi, good morning. Thank you. I wanted to touch back on the volume commentary. If you can maybe discuss in your eyes, what drove the improvement as the quarter progressed and your expectations into 2Q. How much of this was from kind of actions within your own control? And then at the same time, maybe areas where the underlying environment is improving some over kind of what we’ve experienced over the last year. And in that case, where you’ve seen that improvement in the macro. Thank you.
Carol Tome: Well, I give a shout out to our sales team. The improving volume trends are in large part due to their hard work and efforts. You may recall at the beginning of the year, we said the growth in the market wasn’t going to be very growthy this year. So the fact said, we’re able to see sequential improvement in the magnitude that we’re seeing is really because of our sales team. We are winning new. We are gaining additional penetration of existing customers. We are meeting customers where they want us to be. And our sales team will continue to do that around the world. And that’s one reason that we’re confident in the volume projection that Brian did share.
Operator: Our next question will come from the line of Bruce Chan of Stifel. Please go ahead.
Bruce Chan : Hey, thanks. And good morning everyone. Carol, just back to your DAP comment from the beginning of the call. I know that’s big part of your S&D growth efforts. You said you grew 3% in the first quarter. And I can’t help but notice that that’s materially [indiscernible] you said the plan was over $3 billion and then at the Investor Day, you said materially over $3 billion. So I just want to know if there’s something happening that’s driving a slower growth outlook for DAP.
Carol Tome : Yeah. Thanks for the question. And I think I got it, you broke up a bit, but it’s generally about DAP. So last year, in the first quarter, our DAP revenue grew 51% and our volume grew 61%. So we didn’t expect to repeat that kind of growth in the first quarter of this year. And so we were very pleased with how the DAP portfolio performed in the first quarter because it was in line with our expectations. We had anticipated a slower growth in the first quarter because there were a couple of our partners that we were working on amending the teens and fees. So we expected the growth rate to be slower and then to pick up as we move into the second quarter and the rest of the year. The projections for the DAP around the world, and we’re seeing great growth outside the United States, by the way. The projections for the DAP portfolio by the end of the year is in excess of $3 billion.
Bruce Chan : Okay, that’s very helpful. Thank you.
Carol Tome : Yes.
Operator: Our next question will come from the line of Scott Schneeberger of Oppenheimer. Please go ahead.
Scott Schneeberger : Thanks very much. Good morning. Carol, could you give us an update on your SMB progress. Curious how you’re trending towards the long-term target domestically? And then also, how does international compare? You’ve spoken in the past about making nice progress there. Just curious, how does that compare to domestic right now? And what type of aspiration can you achieve longer term? Thanks.
Carol Tome : Yeah. So we’re right now at about 29% as of the end of the first quarter. And as we look towards the end of this year, we should be over 30 in the low 30s. So we’re trending nicely. And Kate outside the United States how’s SMB performance?
Kate Gutmann : Yeah. Our history outside the U.S. is in SMB. So we have a 62% share of SMB, and this is now where we’re implementing debt. So we’re only going further. As Carol said, our DAP program and small package around the world is resonating with our SME shippers as they look for ease and access. So that’s excellent. And then I’ll just also say in our freight business, we have a DAP like service, which is our forwarding hub, and it’s actually well ahead of plan as well. So SMBs are showing that they really need access through the digital platforms, and it’s resonating very well.
PJ Guido : Hey, Stephen, we have time for one more question.
Operator: Our last question will be a follow-up from the line of David Vernon of Bernstein. Please go ahead, sir.
David Vernon : Thanks for coming back to me. I just wanted to ask about — you mentioned the pricing environment being kind of rational. Could you elaborate on how effective the GRI has been this year? What’s the stick rate there? And as you think about the underlying performance in domestic yields ex some of the mix headwinds, could you talk a little bit about the trajectory or the rate of change through the quarter?
Brian Newman : Yeah, Dave, we had expected about a 50% keep rate. We saw a 240 — roughly 250 basis points in the first quarter. So generally, in line with expectations. We’d expect that base rate to continue over the course of the year. I think Carol hit on a couple of the key points around the other elements of pricing. There’s a fuel piece. There’s PSS in the back — in the peak season and then there’s the mix component that we’ve been talking about the focus on commercial on SMB and health care. So all those things combined give us confidence that we’ll deliver a low single digit from an RPP second half of the year.
David Vernon : Okay. Thank you.
Carol Tome : Thank you.
Operator: I will now turn the floor back over to our host, Mr. P.J. Guido. Please go ahead, sir.
PJ Guido: Thank you, Steven. This concludes our call. Thank you for joining, and have a good day.
