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UPS - 2014 UPS Investor Conference
EVENT DATE/TIME: NOVEMBER 13, 2014 / 2:00PM GMT
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
CORPORATE PARTICIPANTS
Joe Wilkins UPS - IR Officer
Kurt Kuehn UPS - CFO
David Abney UPS - CEO
Dave Barnes UPS - Chief Information and Global Business Services Officer
Jack Levis UPS - Senior Director, Process Management
Geoff Light UPS - VP, New Product Development
Alan Gershenhorn UPS - EVP & CCO
Myron Gray UPS - President, US Operations
Kate Gutmann UPS - SVP, Worldwide Sales and Solutions
Jim Barber UPS - President, UPS International
CONFERENCE CALL PARTICIPANTS
Ken Hoexter Bank of America Merrill Lynch - Analyst
Donald Broughton Avondale Partners - Analyst
Brandon Oglenski Barclays Capital - Analyst
Dave Ross Stifel Nicolaus - Analyst
Chris Wetherbee Citigroup - Analyst
David Vernon Sanford Bernstein - Analyst
PRESENTATION
Operator
Good morning, ladies and gentlemen. Welcome to the 2014 UPS investor conference.
UPS will take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Today's presentations contain forward-looking
statements that address expectations for the future performance or results of operations of the Company. These expectations and anticipated
results are subject to risks and uncertainties that could cause actual results to differ materially from our historical experience and our present
expectations or anticipated results. These risks and uncertainties are described in detail in our in 2013 Form 10-K and in our third-quarter Form
10-Q, and may also be described from time to time in future reports filed with the Securities and Exchange Commission. These reports are available
on the UPS Investor Relations website and from the SEC. (Operator Instructions)
Now please welcome UPS's Investor Relations Officer, Joe Wilkins.
Joe Wilkins - UPS - IR Officer
Good morning, ladies and gentlemen. On behalf of the UPS management team and the IR team, I would like to welcome you to the UPS 2014
investor conference, here in New York City, the city that never sleeps. And speaking about not sleeping, my investment team -- my IR team hasn't
slept in the last few weeks either, getting ready for this conference; so same thing.
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But I also want to welcome those that are here today via the web, through the Internet. We will be webcasting today's presentations and they will
be available to each of you on your IR -- excuse me on your iPads and things of that nature if you want to download the information. We will also
leave the information on our websites for future reference.
As you know, I am not new to UPS, but I am new to the IR system or to the IR function. And over the last 9 months I have been out meeting with
most of you, talking with most of you; and it is really with you in mind that I have been thinking about how we should put this investor conference
together.
There's questions that we have been getting over the last 9 months as we put the agenda together. It's really those questions that we want to
answer today.
First answer -- or first question: B2C. This is a question we continue to get. Can UPS make money on B2C?
Another question: pricing. When does UPS start charging more for the great value that we give to our customers?
Another question: growth. Where does growth come from? And how do we make it profitable into the future?
Another question: long-term financial objectives. Is UPS going to change these objectives? And what are they, going into the future?
Lastly, we've had a change at the senior leadership. So some of the questions: From the new leadership, what's going to be the same? What's going
to be different?
So these are questions today that we plan to answer as we move through today and through the conference. Also, we are going to provide you
access to our senior leadership, so that you have the opportunity to talk to these great executives and get more information from them.
The complete agenda and copies of this morning's presentations are included in the conference packet that you received. After lunch, you will be
provided the remaining presentations. But first, let me give you an overview of what you can expect.
This morning you are going to hear briefly from Kurt, who you know very well. Then you're also going to hear from David Abney, who you are going
to get to know very well.
Then, our Chief Information and Business Service Officer, Dave Barnes, is going to take the stage, and he is going to talk to you about data analytics
and what does data analytics mean to UPS. Then he is going to be joined by Jack Levis from our Process Management group, along with Geoff
Light from our Marketing and New Product Development group.
What they will be talking to you about is: How does UPS bend this cost curve? And how do we redefine home delivery?
Them we're going to take a lunch break at 11:45 in Ballroom 1. And then after that it's back to this room at 12:30 for the afternoon session.
You're going to hear from our UPS Chief Commercial -- you're going to hear from David Abney first, talk about the vision of UPS; and then you're
going to hear from our Chief Commercial Officer, Alan Gershenhorn, who will lead us through the growth strategy of UPS. Then finally you will
hear from Kurt, who is going to take the stage and connect all the dots, and you'll hear about 2015 guidance and also our long-term financial
objectives.
That will wrap up the formal part of the day, but we know at the end of the day you're going to have a lot of questions, so we're going to have an
opportunity for you to ask questions to senior leadership. We will have a group modified Q&A here in this main section here.
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And during that time you will have a time to not only talk to Kurt, David, and Alan, but they will also be joined by Jim Barber, our International
President; be also joined by Myron Gray, our President of U.S. Operations; and also be joined by Kate Gutmann, our Senior Vice President, Worldwide
Sales and Solutions.
Our goal today is to maximize the time that we have with each one of you and to provide you as many answers as possible about this great Company.
So with that, let's just get this conference started. Thank you.
(video playing)
Kurt Kuehn - UPS - CFO
Well, good morning, everyone; it's great to see so many smiling faces -- maybe even a few unsmiling faces, but hopefully we will change that over
the course of the day. I would love to welcome you to the 2014 investor conference. You know, it's been 3 years since our last conference, and
we've had plenty of time to put a lot of good stuff in today. So we will guarantee you that we will keep you busy, we will make you much better
informed, and we will provide a wide array of perspectives on all the things we're doing to grow this business.
The last 3 years, though, have been a somewhat choppy environment: uneven growth globally, European meltdowns, challenges that we had in
the US with the rapid expansion of B2C. So we have been working very hard, both to enhance our network and in some cases reacting to changes.
But I believe that what you will see and hear today will be proof of a Company that is leaning in to the future and moving faster than the pace of
business. I believe the changes that we will talk about will facilitate a much deeper collaboration with our shippers, and this deeper collaboration
will also benefit in consumers, while enabling UPS to generate growth and better value for shareowners.
You'll hear a lot about the expanded capabilities of our network. And those of you that have known us for a while know that we are all about
networks, and clearly we think networks matter more than ever in this increasingly interconnected world, a point that the MIT Professor Sheffi
wholeheartedly supports.
You will recognize some of the topics today, initiatives like ORION and My Choice, from past reports and discussions, but there will be a number
of other initiatives that we will reveal today for the first time ever. More importantly, we will try to tie all these together and discuss the larger vision
that fueled these moves, and how the new capabilities we're adding and the new services we are offering will enable us to achieve the three goals
that David has established: to empower our people to make local decisions, to invest in our network, and to build an ongoing culture of growth.
So we think you'll appreciate today's agenda and the opportunity to discuss our future plans.
While I've had the pleasure of knowing at least one or two of you here for -- since going all the way back to the IPO in 1999, clearly the vast majority
of you don't have quite that historical background. So it's great to see old friends and catch up.
Most of you, though, have not had a chance to get to know our new CEO, David Abney, so we see this as a great opportunity for both the formal
communications and the informal discussions, for you to get a better sense of David. And I'm sure you'll enjoy getting to know him.
When he succeeded Scott as CEO in September, David brought a breadth of experience to the job that few of our previous 10 CEOs could match.
In fact, there are very few parts of the business that David hasn't touched during his tenure.
I've worked alongside David for many years now, and I know that the leadership skills and traits that he brings will serve him very well as CEO of
UPS. David has a very analytical mind, the ability to hear multiple sides of a complex issue and then cut through the fog and get to the truth. David
also excels at being able then to bring a team together to execute a plan and get the job done. And what you'll hear today is our plan to get the
job done.
So with no more ado I would like to welcome to the stage our CEO, David Abney.
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David Abney - UPS - CEO
Good morning. You know, was a little surprised to hear Joe this morning talk about the IR people not sleeping at night, because it seems like every
time they give me one of their reports I sleep like a baby. No, I'm kidding; but it is good to see you this morning.
A lot has changed since our last conference, for me personally, obviously, as well as for the Company. For me to have been selected as the CEO of
this Company, quite an honor. But something else has happened this year too that was a little unpredictable, and that is that my Mississippi State
Bulldogs are number one in the country. Who would have imagined that?
When we last met 3 years ago, it seemed like the business world couldn't move any faster, but the pace of change just really hasn't left up. If
anything, it has accelerated.
We live in an era of great change and disruption, where many aspects of business are being disrupted by new technologies and innovative ways
of thinking. Old business models are being disrupted by mobile and cloud computing, data analytics, crowdsourcing, and 3D printing, just to name
a few.
In this era of change, networks matter more than ever. The future is -- Peter Hinssen is writing a book called The Network Always Wins. We invited
Peter to speak about this topic at our most recent leadership conference.
The premise behind this concept is that digital is just the appetizer, and the main course is the connection of everything: consumers, businesses,
and networks. Today, you can see how technology is creating new networks of connectivity, networks that are borderless. These new networks
are pervasive, and they speak a common language.
So networks matter, and this is particularly true with global trade. I recently had the honor of being appointed by the White House to the President's
Export Council, PEC. I take this appointment seriously because we have a significant opportunity before us to expand global trade.
At the moment there are several major trade initiatives in various stages of negotiation, including the US-European pact known as T-TIP and the
Trans-Pacific Partnership. Last month I traveled with the Council on a trip to Turkey and to Poland and made several stops across Europe to meet
with our people, our customers, and of course government officials. And I just returned this past Monday from China, where I met with government
and business leaders at the APAC CEO Summit where, of course, TPP was top of mind.
I've returned from these trips even more convinced that we've only begun to realize the potential of global trade. If these agreements are enacted,
as we expect, we can be on the cusp of a renaissance in trade, with a boom in exports, all supported by these global networks you are going to
hear about today. UPS will benefit from these trade agreements, enabling our customers to sell their goods and services more freely around the
world.
It's no surprise then that at UPS we believe in the power of networks. But those networks must evolve. Going forward, they must become more
flexible, more efficient, and more innovative.
We have been expanding our networks in many ways to culminate a deeper collaboration with our customers. In some instances, our customers
in healthcare, in aerospace, have outsourced much of their supply chain network to UPS so they can focus on their core business. The capabilities
that we have in healthcare and other industries demonstrates that UPS is networked for growth.
Few if any companies have been immune to the disruptive forces that I mentioned earlier, and that includes UPS. But UPS is filled with determined
people, people who have devoted their entire careers to this Company. They see extraordinary opportunities where others only see challenges,
and who will not be satisfied until we achieve our full potential.
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UPS has a legacy of change and transformation. We have reinvented ourselves many times over the past 107 years, and yet we have been disciplined
in how we have adapted our business model. Every enhancement, every growth initiative is a logical extension of our network and of our business
model.
In the early years of our business, we expanded our network from messenger bicycles to a fleet of trucks, then movement by rail. We then built our
own airline. We expanded the geographies that we serve, then the mode, and finally the types of goods that move, all in the physical domain.
20 years ago, we fueled a new era of expansion by using data -- data to optimize how we run our network. Going forward, we see opportunities to
support our customers through deeper integration into our network. In doing so, we believe that we can give them a degree of visibility, flexibility,
and predictability that no logistics company has ever provided.
Think of it this way. If small package represents the first dimension of our network, and the expansion of our supply chain capabilities marked the
second dimension, then what we are doing today is adding a third dimension by bringing customers deeper into our network. We are providing
greater flexibility, greater visibility, not only to shippers but to the end recipients of our services, the consumers and businesses to whom we deliver.
And given how our network is so tightly integrated, I am convinced our competitors will have a hard time offering customers this degree of
collaboration and value. We believe that the strength, the reach, and the flexibility of our network will become even more compelling as the global
economy becomes more interconnected.
That is why we are confident when we say that UPS is networked for growth. Initiatives like UPS My Choice and Synchronized Delivery Solution
enable us to provide greater value for our customers. That in turn ensures we will be compensated appropriately for the value that our network
delivers, which creates higher returns for our shareholders.
To wrap up, before I succeeded Scott as CEO of this Company this past September, I traveled the country -- really the world -- on a listening tour
to hear from employees, customers, and investors. I heard great ideas on how we can provide more value to our customers.
And I told our employees that my three biggest priorities as CEO would be, first, to ensure that our 400,000 employees have everything they need
to serve our customers. I want our people to be inspired, I want them to be empowered, I want them to be engaged.
Second, I want to accelerate the development and deployment of operational technology, as well as shipper- and consumer-facing technology.
Finally, I went to create a growth culture at UPS. At UPS, we have been great over the years at identifying risk, and we are great at analyzing every
cost, and then we figure out how to lower those costs. As CEO, I will make sure that we also consider the growth opportunities in every decision
we make.
These priorities can be summed up in three words: empower, invest, and grow.
To ensure that we are focused on growth, I have recently created a new position, Chief Commercial Officer, that Alan Gershenhorn has assumed.
Part of Alan's mandate is to make sure that we truly have the ingredients to create a culture of growth.
I also promoted Kate Gutmann to oversee Worldwide Sales and Solutions. Kate will work closely with Alan to make sure that we are listening to
our customers, that we are anticipating the challenges that they face, and that we are providing the solutions they need when they need them.
I also promoted Mitch Nichols to oversee Transportation and Engineering. Mitch most recently managed our airline and is the right person to
oversee our transportation operations.
We have a great team in place, made up of the right people for the challenges and opportunities ahead. You will hear from some of them today
during the presentations and in the Q&A afterwards. And with that I would like to invite a key member of my team, Dave Barnes, to the podium.
Dave?
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Dave Barnes - UPS - Chief Information and Global Business Services Officer
Thanks, David. Good morning, everybody. Now, we can do better than this: Good morning, everybody.
As the CIO for UPS, I think I have got one of the best jobs there can ever be. I get the opportunity to travel the world, and I tell you we go to all
places. And I get a chance while I'm out there to experience firsthand emerging technologies from companies both large and small.
And as interesting is all these technologies are -- and they really can be -- what excites me the most is a little bit different. It's combining these
technologies with the unparalleled dedication, the skills, and the intellectual capabilities of the world-class people on the UPS development teams.
This powerful combination allows UPS to architect, design, build, and implement systems that are unique to UPS. These are not out-of-the-box
solutions. They are solutions that not only support UPS and our customers but, more importantly, they provide the platform for accelerated business
growth and improved profitability.
Now, when you're listening to a presentation on technology -- and I'm sure you have heard many of them -- you almost always hear the promise
of the next big thing. For instance, Big Data.
Well, let me take you back a little bit. UPS began laying the foundation for a data-driven network long before people considered data big.
60 years ago, George Smith, our Company's second CEO, praised the benefits of extensive data collection and the application of data analysis. Here
is what he said back in 1954: "The ability to make decisions is the power to manage. Without Operations Research, we could only analyze our
problems intuitively."
What the technology pioneers at UPS understood so well decades ago is that Big Data -- well, it forms the connective tissue, what we are calling
the network, for efficient, reliable, and scalable data-driven operations. Data collection and analysis tell us, for example, that the reduction of just
1 mile each day per driver over the course of a year will save UPS $50 million.
It also tells us that as each driver shaves a single minute of idling across our entire fleet, it represents the savings of $500,000 in fuel alone. Now,
those are savings that go straight to the bottom line, savings that are made possible by enterprise-class data and the application of advanced
analytics.
Now, UPS is using data and analytics throughout our operations to streamline our network, to improve our margins, to provide opportunities for
growth, and to offer greater flexibility and convenience to our customers. With so much of our present and future tied to operations research and
the development of advanced technology, it is appropriate to remember how we got here.
In the mid-1990s, when the Internet was morphing from the information superhighway to the digital uber-sales channel that we all know so well
today, well, we saw an opportunity to transform our business model, linking electronically with our shippers for rapid exchange of information, for
tight collaboration. Today, the convergence of globalization and technology is once again dramatically altering the business of UPS. This convergence
is taking us from a Company that delivers packages to one that synchronizes global commerce and provides solutions to a wide range of businesses
across the globe.
If once we were a trucking company with a small amount of technology, from my perspective I would say we transformed into a technology
company with a few trucks. Well, to be fair there to Myron, a lot of trucks; lots and lots of trucks. And we're using that technology to build a network
that globally connects UPS operations, our shippers, and our consumers.
Today in Mahwah, New Jersey, and in our second major international facility in Alpharetta, Georgia, tens of thousands of servers and 10
hypercomputing mainframe platforms run around the clock. They are capable of processing 27 million instructions every second of every day,
facilitating 117 million online track requests on our busiest day during Christmas, and supporting delivery of over 4 billion packages per year.
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From around the world, these digital network hubs collect and distribute information from our drivers' mobile devices and unheralded numbers
of sensors and scanners across our operations. Order, shipment, and related logistics information is moved seamlessly between UPS and millions
of customers. This information is the key to coordinating the vast operations of our global fleet of vehicles, an entire airline, as well as our global
logistics centers.
Our data infrastructure is designed from the ground up to know the location of every package, when it needs to be there, what time of the day it
has to be delivered, and the special needs of our customers for handling, delivery, and supply-chain visibility. And we do all that for 9.4 million
customers a day.
Needless to say, when you're delivering nearly 17 million packages a day and over 34 million on our peak day, well, the data has to be precise. It
has to move reliably. There can be no downtime. And it has to move at warp speed.
So how do you improve upon a foundation that has always prioritized efficiency, while adding more services and value? Well, that is the big question
and the ever-present challenge. At UPS, we do it with the help of operations research and advanced analytics.
We have moved from using descriptive analytics, which simply evaluate the past, to prescriptive analytics that are quite capable of predicting the
future. The path has taken us from manual to automated to optimized, and our ORION system, which David mentioned, which I know some of you
have been made aware of, is an outstanding example.
ORION is built on a technology foundation supported by advanced algorithms that are custom developed. Telematics, our drivers' mobile computing
devices that we call DIADs. All of these technologies together optimize driver routes to increase efficiency and to reduce both miles and carbon
footprint.
We introduced ORION back in 2011, and I can tell you that the fuel, CO2, and more importantly the time savings -- well, what we're seeing is quite
meaningful. In fact the results, they are exceeding our expectations.
So we continue to deploy ORION across even larger portions of our service area. A little later this morning, Jack Levis is going to take you behind
the scenes of ORION, but you will have to wait for David Abney after lunch to share with you the aggregate savings that we project we'll have with
ORION when we are fully deployed.
Before that, I would like to talk a little bit about what we call the innovation cycle of UPS. In an innovation cycle, technologies developed for one
set of customers or internal operations often serve as a catalyst for innovative advances in other areas. Technologies used internally are not only
leveraged by our customers for greater visibility across their entire supply chains, but also to improve the experience of our consumers.
UPS My Choice is just an outstanding example. My Choice has more than 11.4 million registered users, and we are experiencing right now today
growth at a pace of 100,000 new members per week. The success of My Choice here in the US led us to extend the service last month to 15 additional
countries.
The UPS Access Point network is another innovative consumer-facing solution. Access Point allows consumers to route and reroute their packages
to a more convenient pickup location.
The technology and the mobile communications infrastructure is in place today to extend this convenience even further, so our customers can
take greater control of their packages and their deliveries. And Geoff Light is going to talk more about the benefits of these technologies on a
global basis a little later this morning.
But first let me introduce one of the senior members of our ORION development team, who has been with ORION from the concept all the way
through to deployment, Mr. ORION himself, Jack Levis.
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Jack Levis - UPS - Senior Director, Process Management
Thank you, Dave. You know, there is an interesting coincidence when we talk about ORION. In the night sky there is a beautiful constellation of
stars that's called Orion. The Orion constellation is also known as Orion the Hunter. Our star, our ORION, is also a hunter. It's one that is going to
hunt down and eliminate miles.
I am looking forward to telling you about ORION, but first I need to give you a little background. I want to give you a little background on UPS; I
want to give you a little background on analytics.
As Dave mentioned, ORION is an advanced analytics technology, and I think if we have an understanding of analytics in general we will have a
better framework to discuss ORION and the tools we have built around it. I am also going to talk about our pickup and delivery technology.
What came before ORION? ORION is built on this fantastic foundation, this network we've built, and I think when you understand that, you can
understand the power of ORION as well. From then I will talk about ORION; we'll actually give you a demo, and then talk about deployment and
where we've been.
It was mentioned -- and here is a reminder -- the value of time at UPS. If we can just reduce 1 mile per driver per day, in the United States alone that
is worth $50 million to our bottom line. Just 1 minute per driver per day as a reduction is worth over $14.5 million to our bottom line. And just
shutting off vehicles appropriately -- 1 minute of idle time is worth over $0.5 million of time.
See, at UPS, we look for little things. It doesn't take a big change to make a big impact. This is why our founder said that if we look for the little
things, the big things will take care of themselves.
So the little things to us today are analytics. Analytics finds lots of little things, and we've seen innovation through analytics.
Most research firms have a slide something like this. They break analytics into multiple pieces of a continuum.
The starting point is descriptive analytics: Where am I today? Some add diagnostic analytics: Where will I be, or why am I here? Then we move to
predictive analytics: Where am I headed? And finally, prescriptive analytics. Prescriptive analytics says: Where should I be?
In this continuum, where am I today, where am I headed, where should I be headed? That is the value of analytics.
All research firms say the same thing, though. As you move up this continuum of analytics, your data needs will grow. That is why the UPS data
infrastructure is so important, as we move into advanced analytics.
The skill set needed by your people is going to grow, too. Our mathematicians help us with that. That is why we have PhDs and mathematicians
helping with things like ORION.
Most importantly, as you move up this hierarchy of analytics from descriptive to predictive to prescriptive analytics, your business impact will grow.
This is exactly what we have seen.
Everybody is talking about analytics. Does it surprise you? This is the percent of companies getting impact from their analytics, at least according
to one large major research firm.
Look at the analytics at the top. With everybody talking about it, why is only 16% of companies getting value from predictive analytics, and only
3% in the prescriptive realm? In those advanced analytics areas where the most benefit exists, only few companies are getting value from their
data.
We are proud that we are part of an elite group -- an elite group with ORION actually, at the 3%, that is getting value from prescriptive analytics.
You see, you need to go from data to information to insight and impact, and I think we've figured out how to do that.
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Let's look at how UPS has looked in this analytics realm. Dave mentioned George Smith. George Smith brought with him methods, measurement,
procedures, operations research, back in the 1940s. He taught us that.
So we have a base of quantitative analysis. We have a base at UPS of analytics. That's our culture.
But over the years, before analytics was vogue to talk about, we were doing analytics. In the early 1990s, before anybody talked about Big Data,
we had the DIAD. We had Big Data in the 1990s; that was our drivers' handheld computers.
Diagnostic analytics. In the early 2000 we brought in telematics. In 2003, Package Flow Technologies started making predictions. And finally, at
the top of the heap is ORION. ORION is something we will talk about more today.
We are getting benefit from this prescriptive realm. And as I said, we are in that elite 3% group.
We all talk about Big Data. You hear it everywhere you go. Everybody is chasing Big Data, and I think you would agree that that is the case.
But you need to ask yourself, like the dog who is chasing the car: What are they going to do with it when they catch it? Do they know how to take
that data and turn data into insight, and insight into impact? That's the importance of Big Data.
Data that doesn't turn into impact is really just trivia. We need to turn it into business impact, and I think at UPS we know how to do that.
This slide is a little dated. It is a year old. At the end of 2013, InformationWeek said: here is the 20 greatest ideas to steal in 2013. They mentioned
our predictive analytics platform, Package Flow Technologies.
Well, this is interesting to me. We deployed this a whole decade earlier and the world caught up 10 years later that what we did was remarkable.
I believe 10 years from now the world is going to go: How did you guys figure out ORION 10 years ago? And we're going to be off on many other
things by then using our platform, our global network. We will be off onto the next area.
So let's talk about the foundation. Let's talk about what came before ORION, and let's start with the 1940s. Let's start with George Smith and the
measurement and the methods and procedures he put into UPS.
On the left side is what we call a package car, that is the truck, the vehicle our drivers load. If you look at that vehicle you can see there are shelves
in the vehicle, and that is important.
On the right-hand side is a schematic of the shelves in the vehicle. The outer boxes are upper shelves; the inner boxes are lower shelves.
We load our vehicle in the general order that the driver is going to deliver. So if you were loading the vehicle and you were looking at it from the
back, starting in the upper right-hand shelf, that is the first shelf the driver should deliver.
Why are we fanatic about that? Why do we put vehicles in the truck in the general order of the driver?
Remember the value of a minute: we don't want the driver fumbling around in the vehicle looking for a package. They should open the door behind
them, take one step in; in an arm's reach, that is their next delivery.
If the vehicle is not properly loaded and the driver is fumbling in the vehicle, 1 minute is $14 million. If it is not loaded properly, you have to go
around the block a few times because they have to get a package that was misplaced; 1 mile is $50 million.
So we are fanatic about getting this vehicle loaded properly. This is our methods and procedures, and this is still good today.
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Well, in the late 2000s we wanted to look at what the bottleneck was to UPS's improvement. As the world is changing around us, we wanted to be
more nimble, and we found a bottleneck. The bottleneck is the person in that red shirt, that person that loads the vehicle for the driver.
That person had to remember a tremendous amount of information, anywhere between 500 and 2,000 pieces of information, just to do their job.
It would take 6 to 8 weeks for that person to be proficient. They need to know for every package they loaded -- and they loaded about three vehicles
to four at the same time -- which vehicle did the package go into and where within the vehicle did it go.
If we wanted to redesign areas, move the trace of a driver, the order that they delivered, we had to retrain that person; and that was a bottleneck
to improvement. So we wanted to tackle that bottleneck. We wanted to move from the manual methods and procedures age to the digital age.
We did that by analyzing the information that this person used to make decisions. We looked at that information from a data perspective and found
some of the information was in corporate repositories, some of it was in local repositories, some in spreadsheets, some in hand-written notes. And
there was even other information in this person's head alone.
In order to truly change UPS, we wanted to take the information out of people's heads and we wanted to put it into a data model. Think of this as
our virtual network. And I said data model; I didn't say database.
The data model understands how UPS operates. It understands where every package is, where it's going, where it needs to go, and why it needs
to go there.
Our concept was, if we could build this virtual network, we could change tomorrow by flipping a bit. We wouldn't have to retrain people; we could
flip a bit and change tomorrow and be nimble.
Well, with our virtual network done -- and that was completed in the early 2000s -- we now could really take our delivery forecasting and planning
to the next level. Now, I should mention that prior to this, prior to building this foundation, we built something called Package Level Detail, or PLD.
With PLD we gathered information on every single package we had. We knew the demands of that package, and we put it in a database. Our
customers would give us EDI on the information on the packages they were going to send.
So now we were in a position to take the electronic PLD from our customers and marry it with our data model. When we do that, we can now
forecast when is every package going to be at the destination building ready for delivery.
Now, there is advanced mathematics in here, too. The advanced mathematics needs to figure out how many packages are going to show up, where
they are going to be; and we have to do this before we have even picked up all the packages.
So what we did is we created some mathematics around it. Some packages we have already touched; they are in our network; they have a very
high probability of being in the destination on the day we forecast.
There's other packages that we haven't touched yet. A shipper may have created a label; it could be in a trailer on their property. That has a lower
probability of being in the destination on the day we predict.
And then we have historical delivery patterns. Remember, we have to create this forecast days before the delivery.
With all that information we do some sampling techniques and we come up with what you see on the right. This is a graphic forecast of where we
think deliveries are going to occur. The squares are the forecast location of delivery; the circle are possible locations of a delivery.
Our planning tools then take over. They look for routes that have too much work, too little work, or inefficient work.
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If you take a look at that route there, it has too much work. The planner needs to take some work off this driver and put it on a different driver to
balance the day, to make us more efficient for that day's customers, that day's needs, that day's demands.
In this case, it looks like the planner grabbed about nine stops. You can see the graphic on the right. They can do it textually; they can do it
geographically.
The planner grabbed more than just the actual deliveries, grabbed territory around it. A package can still come in in one of those possible locations.
So now we have a good plan, but we need to communicate to the pre-loader. We need to tell that person what we've done.
So we created something that is very simple on the surface but very hard to do in the real world. This is called a PAL label, Pre-Load Assist Label.
This tells the pre-loader exactly which truck the package goes into and where within the vehicle. In this case, route 120, position 1118.
With this PAL label, we have now connected the virtual world of our planning tool to the physical world of the actual loading of the packages. We
have now connected the two networks, and we can truly flip a bit to make sure a package goes where it needs to go.
I would like to let you know that we can move a neighborhood, as you see here; we can move a street; we can move an address. If we really needed
to, we can move an individual package to make the day's deliveries efficient, to meet the needs of our customers.
Now, we mentioned the DIAD. The DIAD stands for Delivery Information Acquisition Device, because that is what it was built for. It was built to be
an acquisition device so we could gather data to help us track, to help us trace, to help us bill customers.
The DIAD is no longer an acquisition device; it is an assistant. We wanted to give drivers information so that they could better serve our customers.
That is what they do best.
So the DIAD used to start its day empty, and the drivers keyed into it all day long; ended its day full. Now at the beginning of their day, the driver
pulls the information, downloads it -- that's why we call it Enhanced DIAD Download -- and the driver's day starts with an itinerary of everything
they need to do.
If you take a look, there's a couple of things on there, we call them tasks. Those are reminders for work the driver needs to perform. The top one
says make sure you fill out your driver vehicle inspection report.
Below the tasks are the addresses the driver is going to serve. Generally it's in the general order of delivery; of course, there's multiple ways they
can view it.
The drivers can now plan their day in the DIAD. They can see the addresses they are going to serve; what time they need to be at those addresses,
because we have multiple services on the vehicle; how many packages they have for each address; where in the vehicle the packages are.
They even know if there is special processing they need to do, like get a signature, get a COD, etc. They plan their day with the DIAD.
You can say that we had PDAs before you had smartphones. We are pretty proud of being forward thinking in that regard.
Made the DIAD smarter as well. If you ask for a signature, the DIAD knows it. The DIAD is not going to let the driver leave without obtaining that
signature.
Then we did something that I am pretty proud of: we took information that was in drivers' heads and we indexed it and brought that into the DIAD
as well. We want to be able to personalize service for every customer, as if they are the only ones we have.
Take a look at this example. These are some notes that might be inside an individual delivery. This says park at the dock, deliver to the mailroom.
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But look at that bottom one. That is an interesting note. That says: no reroute, no indirect, no left at.
This customer says, if I am not home don't bring my package to a neighbor; come back and bring it back tomorrow.
Another customer may say, if I am not home make sure you bring my package to a neighbor or put it on my back fence or my back porch.
The DIAD knows the difference between the two, and the DIAD will ensure we will fulfill the promise we made the customer. And again, it will stop
the driver and say, you need to go ahead and do what we promised.
I would like you to think back to the year 2000. In the year 2000 we were starting to design our fourth-generation DIAD; it was called DIAD IV. In
the year 2000 we didn't have smartphones and GPS was an emerging technology.
We evaluated that emerging technology and said: Why don't we put GPS inside of our DIAD? Why don't we gather that information?
So we started looking at, where are we when we interact with a customer's package? Where are we when we get a scan? Where are we when we
make the delivery? Where are we when we get a signature? Where are we when we leave the stop?
With some advanced mathematics -- because GPS can drift and people can push buttons at different spots -- we throw out outliers, we do some
clustering algorithms, and we come up with a picture something like this. We can get a picture of where addresses are in the United States, and
you can see it is pretty darn accurate, all from our data and advanced mathematics.
After about 4 months, this is the footprint we have. We have 250 points in our database today. 200 million of these address points are in the United
States with latitude and longitude; about 50 million outside of the United States in Europe and Asia.
This brought us with another innovation. We thought, we know the latitude and longitude where the packet should be delivered, and the DIAD
knows the address it's going to deliver. Let's marry the two up.
So if the driver is making a delivery within some circle of confidence of where we think that address should be, life is good; they get this green
target. If we are outside a circle of confidence, they get a red target and a raspberry sound; and that says, I think you might be at the wrong place.
This really is a rare occurrence, but every so often a driver is on Elm Street and they think they are on Oak Street. They are looking at the address
on the package and it says 123, and they see a house number that says 123; they miss the fact that they are one block off.
This helps avoid some costly and embarrassing mistakes, all through the use of our data. We are pretty proud of that innovation.
We don't stop just because the driver has left the building. And you might have been looking at these screens on the side here; that's real live data.
Those are real drivers in real time in Gettysburg, Pennsylvania.
We can see in real time where every driver is, what work they've completed, and what work they have left to complete. So if a customer calls us
and wants to meet a driver, or a customer needs an on-demand pickup, we can dispatch that work: not to the driver who is closest right now or
who is generally in the area, but who is going to be closest to the customer at the time they want to be served.
I know I haven't gotten to ORION yet, but think about ORION on top of this. Why can't ORION make the decision as to which is the best driver? That
is on our roadmap.
With these pieces together -- our ability to connect with the drivers while they're on-road, to be able to flip a bit and change the physical network
-- we now open the door to have real-time execution, real-time customer-driven requests.
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Tracking is 1990s technology. Like descriptive analytics, it tells you what's happened; it doesn't tell you what's going to happen. Our devices now
are forward-looking.
Every time we touch a package with a device, it is a chance for us to connect with the customer. What does the customer want? Is this package
moving to where the customer wants it to move? And we want to be nimble to allow that.
Our devices are connected to our mainframe, and so are our customers. So if a customer wants a change in a delivery, they can flip the bit. Our
devices know it and make sure we execute the request the customer has.
Again, a connection of the virtual and physical network. This opens the door to My Choice. My Choice is a service that lets the customer flip bits
and change where packages go.
If you would look at the services that a customer can do with My Choice, they align almost one-per-one in the operations technology that I just
told you about. A customer gets a delivery forecast; it's the exact same forecast I get. A customer can say, I don't need a signature, or leave a package
at a neighbor; the exact same bit I can flip.
So what we've done is we built technology for ourselves. We built technology so that we could be more effective, then we opened up that supply
chain and logistics technology to our customers so they can change and be connected with us, so they can change their delivery experience.
That's the model we have and that's the model we will continue. And as you think about ORION, the same thing will be there: we built it for ourselves;
we will open it up to our customers. That's how we have done things.
This is a little bit of a tangent and I want to talk about SurePost just for a second, because I think this is an example, a glimpse into the future of
supply chain and the future of analytics.
SurePost is a service where we pick up, transport, and deliver the package through the UPS network, but we deliver it to the USPS. The USPS makes
the final-mile delivery.
Usually it is a day later than a normal service, and this is a deferred-type service. It's going to be a little bit later, no-frills.
Remember, we know that we are delivering it to the post office. Our data also tells us the final-mile address.
Well, what if we can detect with some simple algorithms that it's cheaper for UPS to deliver the package than the price we are paying the USPS?
Our data in real-time will detect that, and if we see we can deliver it cheaper ourselves, this very special PAL label prints out. It is reverse print, so
that we know that UPS caused this redirection ourselves.
We will tell the DIAD: you are going to make the delivery. Every person that touches the package now knows that UPS is going to make this delivery
itself. We reduce our cost, we reduce our UPS spend, and we did it in real time.
Now, this is a simple algorithm, final-mile delivery. As we talk about ORION and analytics, imagine higher-level prescriptive analytics algorithms
making transaction-by-transaction decisions in the supply chain.
Which trailer does a package go into? What destination? Who is going to sort it? Where within the destination?
By having a virtual network as we have, we open up the door for this advanced analytics to make transaction-by-transaction optimizations. I think
this will be the future of supply chain, and you have a glimpse of that today with our My Choice redirection -- with our SurePost redirection.
So what have we seen before we got to ORION? Remember, we've had descriptive analytics so long we don't know what gains we got. Predictive
analytics, we've reduced 85 million miles driven a year since we put in our predictive analytics tools.
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If you are looking at that formula on the top, that comes from an award-winning paper that we co-authored with the University of Georgia. That
says if you take energy and add information to it, you end up needing less energy.
So we have reduced our fuel spend by 8 million gallons a year; 85,000 metric tons of CO2 are not going into the atmosphere; our loaders can be
trained 95% quicker than they could before; and our drivers now no longer need to key-enter all day long. They make 8 billion fewer manual entries
today, which makes them more productive and it means the information we give to our customers is more accurate.
This is before ORION. So let's talk about ORION now and how ORION is going to build on this foundation.
ORION is going to take the data architecture, the virtual network we have already built, and it's going to add three important components to that.
ORION is going to add analysis tools; a brand-new algorithm, the ORION brain; and it's going to add customized map data.
These three things are very important, so I would like to talk to you about the map data first. This is a new asset to us, taking that data we showed
you and taking it to the next level.
Remember for the places where we use Smart Stop, we now know where addresses are, latitude and longitude. Well, we need to make them
navigable. We need to be able to get between the addresses, and we're going to use our data to do so.
The DIAD has GPS in it; so does telematics. If we know that we are driving on a road that the map doesn't know about or a map isn't accurate, our
planners get these little red circles. It's their job to fix those red circles to make the maps accurate.
I would like to show you the impact. I think we have all used a navigation system that didn't get you accurately between two points. It's not the
most fun thing in the world, but it is a disaster for an algorithm.
So I would like you to take a look at this picture. This is a UPS map, I can tell; that big building there is Walmart. The building to the right of Walmart
is Wendy's, and the building to the right of that is the Hampton Inn.
Now, I know this is a UPS map. I notice that you can't get to the Hampton Inn from that yellow road. That yellow road is the Lincoln Highway in
Gettysburg, Pennsylvania; it's also known as Route 30; it's also known as York Road. By the way, our data knows that those three things are the
same.
So I can't get to Hampton Inn from York Road; but I also can't get to the medical center and the shopping mall across the street from York Road
either. My data knows that.
Here is your favorite website and their maps. Now, their maps are smart enough; they know that's Walmart, they know that that's the Hampton
Inn, they know that that's Wendy's. If I ask this map: how do I get from Walmart to the Hampton Inn, here's the travel path.
Let me explain to you what it did. It didn't know how to get from Walmart to the road; so it's magic, there are just dots. (laughter)
As you go down York Road it gets to the front of the Hampton Inn, but it's smart enough to know that this is a divided highway. I can't stop here,
because Hampton Inn is on the other side of the road. Has you make a left turn and then three right turns, come back down Lincoln Highway, stop
right in front of the Hampton Inn -- which, by the way, I can't get to at that point.
Another interesting piece. You see that first right turn in that upper right-hand corner? That field is closed. You can get in, but you can't get out;
you will end up about a quarter-mile away at a farmhouse down a gravel road. You can make a turn around and come back; you have now driven
a half a mile, still trying to figure out where the Hampton Inn is.
For your personal car, it is an annoyance. You will go around the block, you will figure it out.
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For an algorithm, it is a problem. Because an algorithm would say: well, while are you driving down the Lincoln Highway, deliver the Ruby Tuesday's,
deliver the shopping mall, deliver the medical center. But those aren't on Lincoln Highway either.
This data is not accurate enough. So we created personalized accurate data just for UPS so that we could feed the ORION algorithm.
That is your favorite website on the left. Take a look on the right. This is the proper way to go from Walmart to the Hampton Inn.
We now have data accurate enough that we can give to an algorithm, accurate enough that a professional UPS driver who knows their territory
can use to make better decisions. This is a piece of ORION.
To the driver, ORION looks to them like we're sorting a list. Remember, we start with a delivery order that is a general order of delivery, and they
figure out how they are going to work around that general order.
On the right is what that order might look like to the driver. They have a button they can push, and if you look at it, the list just sorts. That's all they
see.
But while ORION is sorting that list, it is taking into account all the demands of the day. What time do I have to be at each address? Which packages
are commercial versus residential?
It is making cost-based decisions based on the maps that we have. So it is taking into account all of UPS and it is balancing all of those things,
coming up with the best plan for today's demands, today's customers, today's needs.
This man is Tom Davenport. He wrote the first book on analytics, called Competing on Analytics. He was a Harvard Professor; he is a Babson College
Professor now. He has written many books.
He is known as the world's leading expert on analytics. I think he was named one of the top 25 consultants in the world. Tom calls ORION "arguably
the world's largest operations research project." This is fitting, since George Smith brought operations research to us over 70 years ago.
Well, if you are sitting there saying, why is this so hard? Computers are fast, and you're sorting a list; there's navigation systems already. So what?
I would like to put this in perspective for you. I would like you to understand the complexity that we are all under.
So let me show you as an analogy, this is the Earth. The Earth is known to be about 4.5 billion years old, and this is the number of seconds in 4.5
billion years.
Average UPS driver runs about 120 stops. Now, think back to your college days, and you think you understand the term factorial; but this is what
120 factorial looks like. This is the number of ways to deliver 120 stops.
Now, I am not putting this up there because I want a pat on the back for our technology, even though it is fantastic. I am not putting it up there so
you understand how great our mathematicians are. I am putting it up there so you can understand the complexity that we are all under.
This driver has been delivering 120 stops forever. Do they really know the most effective way to do that? Can we really as humans think through
all of those possibilities?
Think about the chores you might run on a weekend. If you've got six things to do, there's 720 ways to do them. If you've got 10 things to do, there's
about 3.5 million ways to do them. Move from 10 to 12, there's now almost 500 million ways to do just the 10 things.
We don't think through that, so we create rules of thumb. Tools like prescriptive analytics go beyond rules of thumb and optimize the business,
and I would like to prove that to you.
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We came up with a test. We wanted to prove the power of prescriptive analytics, so this is a route in Gettysburg, Pennsylvania, run by a driver
named Tim Ahn.
He has been running the route about 20 years. A fantastic driver; he sorts -- -- he serves his customers well.
These are the stops he needs to deliver, and take a look: how would you deliver these? It's difficult, and as you look at it you realize there is complexity
on delivering these 140-some stops that Tim has.
But this is only a toy problem for Tim, because he has more than just doing things in the cheapest miles or cheapest cost. Tim has to be at certain
places at certain times.
He has to be at the yellow stars by 10:30; has to be at the blue star by noon. And then that shaded area is a commercial area; he has to be there
earlier in the day rather than later on in the day to serve his commercial customers. Triangles are pickups that he needs to make within certain time
windows.
You see, we have this problem, or a challenge, because it is also our competitive advantage. We have one integrated network, so Tim is serving air
packages, ground packages, commercial, residential. He is serving international packages all on the same vehicle.
Our one integrated network means that we have one driver, one vehicle, one building serving an area or serving a customer. So that is our competitive
advantage. It is our challenge, and it is also why ORION brings us such a great opportunity to handle not only one type of service but many coming
off a single vehicle.
We had a chance to demonstrate the power of ORION to the show NOVA. They came out. They were doing a show called Making Stuff/Faster; some
of you may have seen it.
The concept of the show was, how can we do things quicker? They looked at muscle cars; they looked at building a boat that was built like an
airplane; they looked at a bicycle that can go 80 miles an hour.
But they turned to, can we do things faster because we are smarter? Can we do it faster with operations research?
The man in the middle there is named David Pogue. He was the commentator; he is the talent for the show. He was the tech writer for the New
York Times at that moment.
David came out and he was going to challenge ORION. He was going to challenge Tim. We pretended he was a UPS driver and he created a route
to see how he would do against ORION.
So take a look at this. I have done this with thousands of people -- I won't do it here -- but if you looked at these two ways to run Tim's route, from
the countless ways to do so, which one has fewer miles? I can tell you that every time I have done this, about half the people pick the one on the
left, half the people pick the one on the right.
The exception was a high school class. In the high school class they all picked the same one; I don't know why. And they did pick the one that had
the fewest number of miles.
Does this surprise you? That one is David; the one on the right is ORION. Now, of course I wasn't going to show this if ORION got beaten by David
Pogue.
But does this surprise you? There is a 10-mile difference between the two.
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So let's put this in prospective. If every driver at UPS did the one on the left versus the one on the right, that would be $0.5 billion worth of cost
difference, and we can't even see it.
Descriptive analytics: I can put the two up, we don't know which one is better. Predictive analytics: I can predict tomorrow, but you can't tell that
there is a better way to do it just because you have a prediction.
It wasn't until we got to prescriptive analytics that we knew there was a better way, another way to run this route. That is the power of prescriptive
analytics. That is why research firms show that value, and that is why we are moving down that path ourself.
By the way, it gets better, because David couldn't even fathom getting to places at certain times. ORION balanced all of those needs. It got to every
stop at the time we needed to, and it did it at the lowest cost.
I gave this sheet to David at the end of the show. I told him he was our least best driver; that not only did he get beaten by ORION, he missed almost
all of our air commitments; he got to businesses after they closed; he missed pickups. And as you could see, it didn't work out well for him and we
told him he had to move on.
I think it is time for an ORION demo. I would like to show you the system. In the back of the room is a colleague, Bob Santilli. Bob is the ORION
project manager.
Bob will go ahead and run the demo. Bob will run the demo, and I will narrate.
So let's start here. This is a program called [Snap]. Snap isn't just a program; it's a process. The Snap process is something we have a patent on.
So there is information in the breadth of data you see here. Bob, can you zoom in for a second?
Each square you see on this map represents an address that we have information for. Remember Smart Stop; we leverage that.
Bob, can you zoom in again? Most of the data we have is maintained automatically, and it's hard to find an address that we haven't touched. You
can play Where's Waldo for a minute, but there's very few that UPS hasn't delivered to. That is our impact on the world's commerce.
How about, Bob, one more zoom in? From this view you can see that there is more than squares. There is a square, there is a circle, and there is a
line that connects the two.
The square represents where we think the driver delivers the package at. The circle is where a navigation would end. So if you had a navigation
system, it would end at that circle; so you've arrived at your location.
And then there is a line that connects the two. We know the difference between the delivery point and the end of navigation. And if we find that
is too long, we are going to assume that a driver is going to drive that; it might be a long driveway. If not, we assume the driver is walking it.
Now put this together for a second. Our data knows the name of the address; we see the address number on the screen. It knows if it is a residential
or commercial address. We scrub against a plus-4, so we know if it is a plus-4 compliant.
We know the name of the street that this address is connected to, what the map calls it. And we also know the customer name if we really wanted
to grab it. So we have a wealth of information.
As I said, most of the data is maintained automatically. But every morning new packages are coming in, and we have to match those packages to
our virtual network, to our map.
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So should a package come in that is not on the map already, our system is going to do its best to figure out where that package goes. And we will
do that every morning for every package.
Bob, can you show an example? There is a house that we haven't delivered. You can see the package comes in; the system looked for known, good
data that UPS has validated and said, based on that, here is what I think the delivery point is. You can see it is really quite remarkable, the accuracy
of that data, how we can interpolate and get smarter every single day as new packages come into our network.
Now, the location of the delivery or what we call a service point, the end of the park position, we call that a [NAPP]. Those are important.
It drives the optimization. It helps ORION make better decisions. You see, ORION is making decisions a quarter-mile here, an eighth of a mile there;
that is why you couldn't see the difference between the two maps.
So accuracy is important for us. If we notice that a package is delivered not on the normal street, if we stop our travel on a street different than the
name of the address, our data will take care of that and will give our planners a chance.
If you take a look at that address on the corner, you see that end of travel ends on Caribou Street. Well, in reality, the driver is going to deliver at
the driveway.
Bob, will you show what we would do when we catch this situation? We will grab that NAPP; we will move it to where the driver actually stops
travel; we will use our data to help with that. We're done.
We now have data ready for our drivers on ORION. We are constantly maintaining, making sure we have that level of accuracy in our maps.
Not every address we get to is on streets that are public roads. Often we have to go on people's private roads, and it's important that we know that.
So, Bob, can you put in an example of that for our maps?
Okay, this is a house on a private road. Bob, can you zoom out a little bit? You can see this house is really pretty far away from the actual road where
your navigation system would take you.
Why don't you show us how far away it is, Bob? We will go ahead and measure that real quick. If you look there, Bob is highlighting; it is about 6/10
of a mile from the road. We have to account for that distance in time. ORION needs that level of accuracy in time so it can make decisions.
Your normal navigation system -- Bob, would you highlight where your normal navigation system would have had this go? It would have probably
dropped you off right there. You would've looked and say, where's the house?
We need to know that. Our navigation system will actually drive us down the road and say: turn left to this person's property.
It's simple to tell here that that is where that road needs to be. But when we started there was no road there; it was just an address in the middle
of the field. We used our data to help guide us.
Will you show us what our data showed us, Bob, so we knew how to draw that road in? We grabbed our DIAD data; we created those breadcrumbs
I talked to you about; it pointed out this road existed. We drew it in, and now we are ready to go.
That is our map data for ORION, and I would now like to show you how that input goes into our planning tools and our algorithm. So this is the
same route in Gettysburg, Pennsylvania, run by Tim Ahn, same route. You can see the deliveries Tim needs to make on the left. Textually on the
right is the text view of those deliveries.
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On those deliveries we know what time we need to be there, the demands of the customers, and -- can you highlight the premium packages on
that route, Bob? If you look at the fourth column from the left, you can see the time that our service guide says we need to be at each one of those
addresses.
So Tim has a problem. He has got to know how he is going to service those time-committed packages and all the other packages as well, meeting
service and at the lowest cost.
Why don't you put it on a map so we can see where they fall in his route? So you see they go throughout his route; it is a hard problem to solve.
Tim needs to know how he is going to go and take those other deliveries and interleave them with these premium-type deliveries.
I would like you to know at the top, before we solve this, that Tim leaves -- before you solve it, Bob, show what time Tim leaves. Tim is going to
leave at 8:45. That is his normal delivery time.
Go ahead and push the Solve button and let me talk. ORION is going to solve quicker than I can talk.
When Bob pushed that button, ORION went ahead and calculated over 200,000 ways for Tim to run his route. Each time it went and looked: is there
another way, another way, until it came up with this. And after 200,000 tries, it said this is how to run Tim's route.
You can see the route there on the left. Even though it shows crow-flies lines between stops, it is using the map network to make decisions.
In the very lower-hand left we have some statistics. They have been cleansed a little bit, but this route should solve for about 117.85 miles; that is
now information we have, meeting our customers' needs at the lowest cost.
Now, we talked about My Choice and how customers can create special, customized, personalized services. One of them is what we call a confirmed
delivery window. Given a list of choices that are near the time that the driver would normally get there, a customer can pick a 2-hour confirm
delivery window.
I would like to show you how that works with ORION. Now, in the real world, we are connected to our network; there is no editing that is happening.
Bob is going to simulate that here.
So we have a customer that, according to this plan, we wouldn't be there until about 1:25, and you could see that there. The customer has asked
to have a delivery between 11:00 in the morning and 1:00 in the afternoon. We now have to get there 25 minutes earlier than our plan would have
normally allowed.
Bob has keyed that in, and we are going to ask ORION to solve this. If you want to look at the lower left-hand corner we will see what that did to
our miles.
So that decision or request from the customer -- it wasn't free. It added about 1.39 miles to our day; it added about $1.99 of cost to our day. But
ORION figured out how to do that, meet all the customer's needs, and keep our costs low.
Why don't we do it again? Let's find a customer later on in the day that needs a delivery later than ORION, see how it solves that one.
Here is a customer, the delivery right now would be about 10 minutes till 4:00. The customer says, I want you to wait until I get home at 4:30. So
we have a choice between 4:30 and 6:30 to serve this customer.
Do you have that keyed in? Let's go ahead and have ORION solve this. Again you can look in the lower left-hand corner, see what ORION does.
So after 200,000 tries, ORION added about 1.64 miles to the driver's route; that added about $2.77 worth of cost. We now have a plan for Tim to
go; he is ready to run. The DIAD will pull that data and tell him the order of delivery.
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I think as we know, things don't always go as planned. Tim starts at 8:45. On this particular day, the plane is late or the trailer pulling the air packages
in are late. We now need to disrupt Tim's day, so Tim can't leave until 9:00.
Now, don't push the button yet. We're humans. When things happen that go different than plan, we start using rules of thumb. We worry about
the most important things first; and in this case, Tim would worry about getting to all his time commitments first without ORION.
ORION doesn't sweat that. ORION is going to figure out how to handle this disruption.
Why don't you go ahead and solve, Bob? Again, you can look in the lower left-hand corner.
But ORION is going to keep things calm. This is why drivers tell me that ORION takes away their complications, how ORION takes away their stress,
because it figures out the little things and lets them worry about the big things like customer service.
So ORION ended up adding 1.86 miles, because we had less time in the morning.
Want to make it a little harder? Let's add another 15 minutes and see what ORION can do. Why don't we go ahead and move it 15 minutes later?
You can look in the lower left-hand corner again. But ORION is not going to get nervous; ORION is going to say, I'll figure out how to meet all of my
needs at the same lowest cost. That did add another 2 miles to our day.
Tim go out now with a plan that he knows he can complete. We now handled our disruption, and I think we would all like to have something like
this to help us with our chores on a weekend.
All right, why don't we go ahead and finish up? If you can come on back, I want to talk to you about deployment for a little bit.
Let me tell you about deployment status. We have 700 people dedicated full-time to ORION.
About 600 of them are in the field deploying this, updating maps; it is a driver-by-driver deployment. About 100 of us are in corporate, building
the next version, supporting what is in the field.
To date, we have deployed about 22,000 drivers on the system, and we expect to complete by the end of 2016. The gentleman in that seat is a
deployment person; you see he has a tablet. That tablet is a tool they use that mimics ORION in a little handheld device; they can edit data there;
they can test that routes are working real time in a little tablet.
That is also our little vision to the future of ORION. It's one thing to install software; it is one thing to deploy. It is another thing to get insight and
impact from analytics, and we are proud that we figured out how to get impact from things like ORION.
In order to get ORION in, proficiency has to be shown. So you can't even start deploying ORION without making sure the foundation is there.
There's exit criteria which says that before a deployment team can leave a site they have to have met some minimum level of proficiency. Now, we
measure that with a balanced scorecard -- red, yellow, green, based on points. A deployment team is allowed to leave a site when that site has
been green for 2 weeks in a row.
That means that we can take the training wheels off, we can give the keys to the management team. They are ready to run on their own.
95% of our sites have graduated. We do have a small group that are going through remedial training -- they are going to summer school, but we
are positive they will be as good as their peers.
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And I am proud that almost 50% of our sites have gone Green-Green in their very first 2 weeks with ORION. So we are proud of that ability and able
to get gains and, as I said, turn insight into impact.
So let me show you impact. David is going to tell you the numbers later, so this chart has been cleansed, but this is UPS as a whole. It is actually
non-ORION sites going back to January of 2012.
The measurement is stops per mile because that is a good metric of density. ORION should increase density as we pull miles out of the network.
This is UPS as a whole; again, non-ORION sites. How did ORION sites do compared to their peers over that same period of time?
I think you can see the results are startling. We have gotten huge gains compared to everybody else.
If you look at the very left in January of 2012, the ORION sites started at the same place as everybody else. The only difference between them and
their peers is ORION and the processes we put in place.
Now, getting gains with a corporate team or with a small number of drivers is one thing. Getting gains at scale is another. We have gotten these
gains at scale with 700 people; over 20,000 drivers make up this chart.
We are able to replicate these benefits by using our advanced analytics infrastructure, driver by driver by driver. And we are proud of that.
Now, we're not done; this is the beginning, not the end. We have a roadmap of things we're going to do with ORION. And you may be thinking
about this as you are listening to the presentation -- what about this, what about that?
There's many things ORION doesn't do today. ORION optimizes a driver's day at the beginning of the day. That list never changes when the driver
leaves.
The number-one request from drivers: Can you adjust ORION and have my list change after a deviation, if there is a problem on-road? It will do
that; we are working on that right now -- dynamic optimizations -- and that will allow us to remain nimble and tight all day long regardless of any
disruption to the network, any change that a customer may want, while we're in-flight.
We don't have a navigation system for our drivers yet. They are still using their memory on how to get between stops.
Many drivers have come to me and said: I know where the next stop is that ORION says; I know that is the right stop, and there is probably three
or four ways to get there. I don't know the one that is the shortest path. If you could tell me, I could take the shortest way to get between these
exact points.
So we will be working on a navigation system for our drivers that will not only help our new drivers, drivers that work on Saturday, it will help our
regular drivers as well. New drivers will now become more efficient, more proficient, much earlier in their process by adding dynamic navigation.
ORION makes decisions after work is put on a vehicle. So a planner says, here's the deliveries that this vehicle is going to have, as I showed you in
that demonstration that the planner had. And then it says, here is the number of miles for that decision.
Well, if ORION knows, here's the number of miles in this route and here's the number of miles in that row, why can't it decide what is the best work
to move between them? It can, and we are working on it.
It can make decisions as to who should get an on-demand request if a customer has a new pickup they want us to make. There is no reason we
can't do that; our researchers and mathematicians are working on this problem right now, and we will get there.
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Finally, in the works is enhanced cost modeling. We can run simulations with ORION -- many ways to change services, many ways to change delivery
times, many ways to change areas -- and have ORION come out with a very intelligent analysis of what our cost models are.
That will help with determining new services. It will help with pricing in the future. As I said, this is just the beginning of our movement into
prescriptive analytics, and we are proud that we have done it with ORION so far.
I've given you an idea of our last 15 years; I've given you a glimpse into the next 15 years and where we are with ORION. And we think the future
is bright.
So with that we have a break. We will come back at 10:45 for more presentation. Thank you.
(video playing)
Geoff Light - UPS - VP, New Product Development
Good morning. Just as the video said we are in the middle of a revolution that is sweeping the retail industry. This revolution is being fueled by the
increased power of connected consumers.
As consumers spend more and more online, their expectations around the entire delivery experience, the entire shopping experience, is increasing.
They expect the shopping experience from prepurchase all the way through to delivery to be easy, fast, and convenient.
This increased set of expectations, combined with virtually unparalleled choice via the Internet, is causing merchants to have to work harder and
harder for those same consumer dollars. We expect this trend to continue.
One indication of that is the proliferation of mobile connected devices. About 6 months ago I had the opportunity to take my high school senior
to his first rock concert, and I experienced something a lot different than the rock concerts that I had gone to when I was younger. These pictures
describe the difference in experience.
Back when I was a young adult, that rock concert was mainly filled with people waving their hands over their heads, maybe occasionally a lighter
or two going off. What I saw at this concert was completely different: I saw an ocean of smartphones and tablets being held over the audience's
head as they recorded the event.
And I was struck by just how pervasive mobile technology is in society today. As a matter of fact, Cisco Systems recently estimated that by the year
2017 there will be 3.6 billion mobile connected users worldwide. That will be half the world's entire population by the year 2017.
Now, nobody could argue that the physical delivery of the goods is an essential part of the shopping process and the shopping experience; and
in many cases the delivery of the physical goods happens without incident. However, in some cases there is great difficulty for consumers to receive
their goods -- and at no fault of the carrier; this is an industrywide phenomenon -- where individuals who live, let's say, in multitenant dwellings
and work are unavailable to accept their package and there is no safe place for the driver or carrier to leave it.
As a result, the carrier ends up having to make multiple attempts to complete that delivery. And oftentimes the consumer has to take extraordinary
means to get the package as well; they either have to stay home from work the following day, or in some cases they have to make arrangements
to go across town to the carrier's depot to pick up their package. Obviously this is inconvenient for the customers, inefficient for carriers.
But think about the Internet and ecommerce as this superhighway. These consumers are stranded on the shoulder, in the breakdown lane, and
they are unable to compete fully into this growth of ecommerce. In many cases, they have resolved themselves to shop predominantly in physical
stores.
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It is our ambition at UPS to free these consumers, to allow them to participate fully in the growth of ecommerce, because it means more package
volume for UPS. We believed in order to do that we have to do two things: we have to find fast, convenient ways for these consumers to get their
packages, and we want to deliver 100% of our deliveries successfully on the very first attempt.
Now, to make those two things reality, we believe we have to involve consumers in the delivery process. We have to give them control over where
and when the packages are delivered. It was this concept that led to our launch of an industry-leading consumer delivery service in 2011 called
UPS My Choice.
Dave Barnes in his presentation earlier talked about the UPS innovation cycle. Dave Barnes mentioned the innovation cycle, leveraging one set of
investments to make other benefits; and My Choice would be a poster child for the UPS innovation cycle.
The foundation of My Choice is the operations technology that you heard Jack speaking about in his presentation, plus some of the other investments
we've made in previous years. That same technology that's made the UPS logistics system the most efficient and effective in the world is now being
repurposed to provide value to consumers and shippers in the form of My Choice.
Here is how it works. Private individuals can either through their smart device or through UPS.com sign up for My Choice. We perform some
authentication to make sure you are who you say you are. And once registered, anytime a package enters the UPS network we match that package
to the name and address of a My Choice member, and we proactively notify them that a package is on its way.
These notifications can happen in any form that the consumer chooses. They can come by text, they can come by email, voice notification.
If the consumer has the UPS app, we will even send a push notification to the app on the delivery alert. This delivery alert contains some pretty
important information: who the package is coming from; the scheduled date of delivery; and, if we have enough delivery history at that address,
we will forecast a 4-hour approximate delivery window.
Then through that alert the customer can actually action the package. They can take control of the delivery; they can tell UPS what day to deliver
it; they can tell UPS where to deliver it, if it is a different address; they can select a neighbor, they can select their place of work, or they can select
the convenient UPS store right around the corner. They can also tell UPS that they will accept liability for the package and release it without a
signature, which allows UPS to deliver it at their doorstep.
All of these actions happen through this proactive notification to the customer. So literally when a customer signs up for My Choice, they never
have to track a UPS package again. We do it for them; we proactively tell them the status of the package.
The response to My Choice has been amazing. Today we have over 11 million members in the US, and we have momentum. On average, every day
we sign an additional 14,000 members.
We deliver over 400,000 packages a day to My Choice members. And on average, every day we send almost 900,000 delivery notifications.
Now, why so successful? It's because we built My Choice for consumers on the go.
Our UPS mobile app was completely retrofitted so that it is fully My Choice-compliant. My Choice app works on all the major mobile operating
platforms -- iOS, Android, Windows, even Kindle.
We have also put My Choice where a lot of our consumers are, and that is in Facebook. In July of last year, we introduced the UPS Facebook app
for My Choice. Since last July over 1 million UPS customers have linked their UPS credentials to their Facebook credentials, and now can seamlessly
move back and forth between Facebook and UPS.
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Now, on the back of this huge success that we have experienced in the US, you heard Dave mention earlier that we have expanded My Choice,
and we have significantly expanded the geography. So as of October, customers in Canada, Mexico, and 13 European countries can now take
advantage of My Choice.
My Choice has a lot of obvious benefits for consumers, but it also has a lot of benefits for our shipping customers. First and foremost, satisfying
customers who have to go through less pain, less friction, less inconvenience to get their package are more satisfied; they return less product
because they get the product faster, a little less buyer remorse; and they order more.
The other thing My Choice does, it eliminates calls to the retailers' call centers on where is my order, because they have complete knowledge of
where the order is. They are in complete control.
My Choice also offers a very unique benefit to our shippers. Let me start by saying if you order online today, it's commonplace that you will get an
email after you complete your order that says: thank you, we have your order. We call that an order confirmation email.
I think increasingly you also get what we call a ship notification, which is once the package leaves the warehouse, it leaves the warehouse and it's
on its way to you, many cases retailers will send you a note that says: hey, it's on its way. But in the vast majority of the times, that is the last time
you hear from the retailer until you decide to purchase again from them by visiting their website. They rely on you to go track the package, and
their communication with you has stopped.
Well, with My Choice, we allow our retail shipping customers to embed messages in the My Choice alerts that are destined for their customers on
their orders. These messages can include promotional messages to customers; sometimes it is an offer for a future shipment or a future purchase;
sometimes they may recommend accessories or additional items that go well with the purchase they just made. In some cases, it is just to say:
thank you, thanks for your order, we appreciate your business.
In all cases, our customers are embedding hyperlinks into these messages that allow the customer to click that hyperlink and go back to the retailer's
website, where they can continue to shop and buy more product, which generates more package volume for UPS. UPS is the only carrier that offers
this capability.
Even in some cases, if the shippers want, on the notification we will socially enable the offer. In this example you can see it has got a Twitter feed
and a Facebook feed at the bottom, Google+ feed. So if the retailer wants and is willing to have that offer offered beyond just the original customer,
they can click on that note and they can post it to Facebook or tweet it out to their followers, that same offer, which again makes the offer viral.
The last thing I'll mention about the delivery notes that makes it really attractive is in traditional email marketing campaigns if you can get a view
rate of, let's say, 10% to 18%, that is a really good campaign. At My Choice with our delivery notes, because our My Choice members really want
those delivery notifications, we have view rates that exceed 50% and sometimes even reach up to 70%. So these emails are far more effective than
your traditional email marketing campaign that the vast majority of retail shippers in the US use.
My Choice is -- obviously we are proud of it, and it is a key component of our strategy to capitalize on B2C growth and on the growth of ecommerce.
I would like to turn our attention to another solution we have that is just as impactful and actually complements My Choice. You have heard it
mentioned a couple of times already today, and that is the buildout of the UPS Access Point network.
Back in 2011, UPS acquired a European company named Kiala. Kiala was a leading European ecommerce solution provider, and they had a very
unique business model. Kiala had established a network of local businesses, had vetted those businesses based on security standards, appearance
standards, making sure they have wide range of opening hours.
And once they had this network built of local businesses, who agreed to accept packages on behalf of consumers who were having difficulty getting
packages delivered successfully, they then went to some of Europe's leading online retailers, embedded their technology, and offered access points
as a delivery option when customers were at the checkout page. So as customers placed their order they got to the checkout page, besides the
traditional shipping options that were offered Kiala enabled them to offer: ship directly to an access point.
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Now in Europe, because of the way cities are built and the dense population centers, unsuccessful deliveries are at a much higher rate than they
are in the US. As a result, this Kiala business model was quite successful, and Kiala built a sizable business on the back of this innovative approach.
Well, since 2011 we have been busy and we have expanded the Kiala model across Europe and starting into North America. In January of this year,
we introduced our version of Kiala Points, UPS Access Points, in Canada, the UK, and Germany; and just last month we began signing up Access
Points in Italy, Poland, Mexico, and here in the United States starting in New York and Chicago. We are also in the process of rebranding all of the
Kiala Points over into UPS Access Points, this integrated Access Point network that we'll have across the globe.
Now, Kiala wasn't a transportation provider, and they had a pretty unique business model. But as we looked at Kiala and as we also began to
integrate the Kiala technologies into our IT platforms and seamlessly bringing Access Points into our logistics network, we found a way to significantly
expand the capabilities of these Access Points, provide even more value to shippers and consumers.
On this slide I have three bullets, three circles. The first circle represents the business model -- Kiala's primary business model, which was embed
your technology into retailers and then offer the ability to ship to an access point at the checkout page. That is available in all Access Points globally
for UPS.
But we also have two other models that take advantage of Access Points as alternate delivery locations. The first and the obvious one is with My
Choice. My Choice members can select convenient Access Points close to their home, have packages redirected to those Access Points before the
very first attempt.
In fact, My Choice members can set standing preferences to have all of their packages taken directly to the Access Point. And within minutes of
those packages being available, My Choice members are notified either through their app or through direct communication, email, text, etc.
A third way that we are using Access Points as alternate delivery locations is something that we call not-in-one-ADL. What that means is, as a driver
attempts to make a delivery to a non-My Choice member and that delivery is unsuccessful, rather than taking that package back to the building
and then bringing it out the following day to attempt a delivery, forcing the consumer to wait at least 24 hours for their shipment or in even some
cases having to stay home from work, in the new world with Access Points, our service providers will leave a note on the door telling the customer
that the package has been left at the nearby Access Point, generally within a half a mile of where they are located. And the driver will take that
package to the Access Point so the customer can pick it up at their convenience, in many cases the same day as the failed delivery attempt. So
rather than taking packages back out for multiple deliveries, the customers can now pick it up at their convenience and in many cases even faster
than they are getting packages today.
In addition to leveraging Access Points as alternate delivery locations we also have other capabilities and plans for Access Points. A logical extension
is, if I am a consumer and I now regularly use the Access Point as a place to have my packages delivered, if I am in a situation where I want to return
one of those shipments back to a retailer, it makes perfect sense that I should be able to take that same return, that same package, back to the
point of delivery and be able to send it back to the retailer.
So, one logical extension and something that is available at Access Points is for prepared returns. Access Points accept those for return back to the
retailer.
So now that we have Access Points with the capability to handle packages being dropped off, we also extended that same capability for all prepaid,
prepared shipments. We think this is a real benefit for small business.
If I am a small business and I only prepare a few orders a day, in today's world, once those orders are prepared I still have to wait for the UPS driver
to get there for my packages to be handed off. And if I am in a shop that only has a few employees, that is inconvenient.
Well, in today's world, with Access Points, I can have those shipments prepared; I can drop them off conveniently at the Access Point; and I can get
on with my day, making sales and growing my business. So this ability to have packages that are already prepaid and prepared dropped off we
think is going to be significant.
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Both of those capabilities -- because we have talked a lot about how Access Points improve delivery density by taking residential shipments and
making them into commercial shipments; Access Points also create pickup density for UPS. It consolidates small or pickups with few packages and
consolidates them. So it consolidates delivery and it consolidates pickup.
The last capability I'll talk about today is something we call forward stocking. We have a service parts logistics business that helps support field
technicians for some of our high-tech customers and our healthcare customers. These technicians in a given day have to pick up items for the day
that they mean to install or to repair machinery. And then at the end of the day they return the defective parts back to the warehouse so they can
be refurbished and put back into inventory or handle warranties.
Access Points are ideally situated to act as forward-stocking locations. Technicians on a daily basis can come into the Access Point in the morning
to collect the orders that were shipped to them the previous day, those parts for the day. And at the end of the day they can drop off those same
defective orders and send them back to the retailer, and do it on territory, either close to their home or close to where their pathway is for providing
service that day. Huge convenience for our business-to-business customers who have field technicians.
This map shows the current UPS Access Point network for Europe, and I want to highlight a couple of points on here that I think are really important.
First, I color-coded the countries just so you could see how we have been progressing over the last year in deployment.
The red countries are the original countries we acquired through the Kiala acquisition. The orange countries are the UK and Germany that I mentioned
we expanded to earlier this year. And the yellow/tan countries are Poland and Italy that we launched just last month.
Today, UPS has the broadest integrated Access Point network in Europe. What do I mean by integrated Access Point?
I mean that today a customer in the UK, if we embed -- think about that same Kiala model of providing integration to retailers, a shipper, an online
shipper in the UK today can ship packages to Access Points in Germany. An online retailer in France can ship to Access Points in Spain.
We are the only carrier that provides that, this ability to ship directly to Access Points cross-border in another market. We are uniquely positioned
to capitalize on the lucrative cross-border B2C business in Europe.
We are uniquely position compared to any other carrier. The other thing I'll mention is, even though we have only been expanding for a year, we
have a sizable network, over 12,000 Access Points across Europe and we are just getting started in Italy and Poland.
I've talked a lot about what we call staffed Access Points. These are local businesses -- the Kiala model of signing up local businesses to handle
packages on behalf of consumers.
We are also testing what we call unstaffed Access Points, also known in the market as parcel lockers, delivery lockers. We prefer to think of them
as unstaffed Access Points because our plans with these unstaffed Access Points is to complement our existing network.
The primary component of our Access Point network will be small shop owners handling packages on behalf of their customers. We believe a key
component to the customer experience is the face-to-face interaction in receiving the package.
But there are circumstances where we believe an unstaffed Access Point could be better. Think of high-traffic commuter locations. We have very
large multitenant dwellings where you may have multiple Access Points for a single building. Special venues like universities or large condominium
complexes.
These are all examples. I guess the last one which is also going to happen is areas where we think are ripe for a staffed Access Point but there aren't
any suitable candidates that meet our criteria for appearance, hours, and security.
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We are testing nine of these unstaffed Access Points in Chicago. After testing and if we move to a broader deployment, these unstaffed Access
Points will support all of the capabilities that I spoke about earlier, and they will be selectively added to the network where we think they provide
the most value, the most economic return.
There are benefits to being a global carrier, and one of the benefits is you're able to see business models and business solutions that work very,
very well in certain markets and you're able to see other areas across the globe in your business where similar situations occur that you believe this
solution could fit.
In Access Points and My Choice, that is exactly what is happening. Access Points were a proven solution through Kiala in Europe, and we are bringing
that same capability, Access Point capability, across the ocean and are now deploying it throughout North America.
And My Choice has been a proven success in the US, and we are taking that same success and now bridging it across the ocean into Europe. This
slide depicts the markets that we have today where we have both Access Point capability and My Choice capability.
I've talked a lot about the individual merits of both, of My Choice and of Access Points. It's probably appropriate to talk about how these two
incredible solutions work together, because that is where we think the real power is.
Probably the best way to do that is through an example. This is also what I would frame to be the old delivery process for UPS; now, this is still, by
the way, the current delivery process for many of our competitors, particularly for those consumers that are having difficulty getting deliveries. But
this is going to very quickly become the old delivery process for UPS.
In this example, I am going to use Dawn. Dawn is a consumer who happens to live in the outskirts of London, has a flat in the outskirts of London.
She has to take the Tube into the city every day because she works in the city. And while she is commuting every day, she uses her smart device
to shop, because it is the same kind of boring commute every single day.
In today's world when she shops, she makes an order, she is still working every day. So the driver comes out with her package once it has been
shipped; and because Dawn isn't home, Dawn has no neighbors that she feels comfortable signing for her package, and because there is no safe
place to leave it, the driver leaves a delivery notice indicating they will be back again tomorrow.
Now, Dawn could do nothing, and a second delivery notice and a third delivery notice would appear. But eventually that package is going to get
returned to the shipper.
So that night Dawn calls UPS and says: Hold my package at the depot; I will come get it. So UPS holds the package at the depot in downtown
London. And at the end of a busy week, rather than going home after she finishes work on Friday, Dawn heads across town to the UPS center and
picks up her package and then makes the long commute back.
This is a standard experience for many customers who live in super-urban areas. But with My Choice and Access Points we fundamentally change
it, and this is the new reality of home delivery.
So in this world, Dawn takes her smart device and signs up for UPS My Choice right off her phone. While she is in My Choice she sets a preference
to have all of her packages delivered to an Access Point that happens to be right around the block from where her flat is located.
Dawn continues to shop on her commute, just like she always has; and instead of receiving delivery notices, Dawn receives a text message on her
phone the next day that the package has arrived, it's at the Access Point, and it is ready for pickup. That notification also tells Dawn what the
operating hours are of the Access Point, when they open and close, do they have weekend hours. It also gently reminds Dawn that she needs to
pick up that package within 7 days or the package is going to be sent back, so that Dawn can plan to make sure she gets there quickly.
In this scenario, Dawn at the end of the next day stops by the Access Point on her way home and has the package within 48 hours. That is going
to be the new reality of home delivery for super-urban and urban settings with My Choice and Access Points combined, and we believe it is the
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power of this experience that will unlock the opportunity for many of these, again, castaways and orphans out there from the online commerce
world.
I would like to end with a couple of key points. The first is we are actively pursuing opportunities to have UPS capitalize on the significant opportunities
created by ecommerce.
The second thing I'll mention is we are taking steps and continuing to take steps to drive the economics of home delivery to be more positive and
to distinguish UPS in the eyes of our shippers and our consumers as the carrier of choice.
Lastly, My Choice and Access Points today are powerful separate. They are really powerful combined. We will continue to enhance those platforms
to drive more consumer value and more shareowner value.
That ends my presentation, and I will now turn it over to Dave Barnes.
Dave Barnes - UPS - Chief Information and Global Business Services Officer
I certainly want to thank Geoff for adding a little bit of color and a little depth to our customer technologies and the value that they create, and
certainly make special mention to Jack Levis, taking us behind the scenes of ORION. I think you found it fascinating to take a look at how we use
the analytical research we have talked about, advanced mathematics, to drive our business forward.
Now I would like to say that we are a little up to speed on a small amount of the technology we have, but nonetheless, let's take a look into the
future and see what might be on the near-distant horizon. As we continue to squeeze efficiencies, we drive the network to become more efficient,
more automated, more streamlined, ultimately more optimized.
It is an endless pursuit. You are never really done with that. It's something you're always driving towards.
The data-driven foundation that we've built over the last several decades is continuing to pay strong dividends to UPS, not only for us and our
operations, but as you could see with Geoff's talk, for our customers themselves. Our latest example of these type of technologies is right now in
pilot and it's called Synchronized Delivery Solution, or as we like to refer to it here at UPS, SDS.
Now, SDS leverages UPS's massive network and our deep, unmatched collaboration with millions of shippers to derive what we refer to as synthetic
density. That's a term that's a little bit new. So what is it?
Synthetic density, it's a fancy way of describing the benefit that we get when our drivers deliver multiple packages from multiple retailers to one
address, saving both time and money in the process. Increasing density has a profound impact on B2C profitability. For example, increasing package
stops by just 1/10 would improve operating profit at UPS by over $200 million annually.
Here is an example of how SDS works. A consumer right here in New York used his tablet on Saturday to order three items: item A from a merchant
in Pennsylvania, item B from a merchant in Georgia, and item C from a merchant in Texas. Without SDS, each of these merchants would independently
fulfill and have these orders ready for Monday pickup, and this consumer in this example would receive a shipment of one on Tuesday, one on
Wednesday, and the third on Thursday.
However, utilizing the power of SDS, all three merchants can work with UPS to time their release of shipments so that all three deliveries are
synchronized and are delivered with just one stop. In this example, all packages are delivered on Thursday, benefiting both UPS and the shippers.
SDS innovation improves the customer's delivery experience by consolidating multiple orders into one single delivery and addressing the increasing
trend of recurring or scheduled ordering with single delivery of multiple orders.
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Now, SDS benefits shippers with additional incentives on residential orders that match shipments already in the UPS network. This coordination
of shipments from distribution centers, stores, and vendors provides their customers with a single delivery at a reduced cost to the shipper.
Matching orders are shipped using standard UPS products, decreasing the need to use the postal hybrid service. And UPS operations, they are
more efficient, with increased delivery and route densities, reduced miles and time associated with each package.
Much of our discussion today has been focused on the actual delivery part of the process. We see clearly a tremendous opportunity in front of us
to apply technology to harmonize our inside operations, which brings me to EDGE, a suite of more than 20 internal optimization projects that we
plan to implement over the next several years. These are truly on the cutting-edge, building on our strong technology capabilities that we see,
more clearly now than ever, the ability to apply innovation, to better share data in real time, as we have done across our networks, to do it throughout
our operations and our centers.
All work will be planned and adjusted dynamically. Activities will be tracked and visibility of inside operations dramatically expanded. This is going
to result in improved accuracy, timeliness, efficiency, and enhanced customer service. We are going to create, in essence, an ORION-like system to
optimize inside operations in our package centers, and it will act like a brain for our nighttime operations.
This will include the local sort and the origin data capture opportunities that we have in front of us. From multiple sources we will be able to pull
data together and simulate and optimize a dynamic operating plan.
The planning process and utilization of advanced technologies will also allow the distribution of work to lower-skilled employees. Now let's take
a look.
(video playing)
As we've seen, analytics are informing and powering multiple aspects of the UPS global operations, and we think analytics can work even harder
for us. Other analytics possibilities in the future include areas such as -- where is my driver? Imagine linking the power of ORION with the technology
that we've built for our customers and pulling that all together.
More personalized and tighter delivery windows can result, which is a huge advantage for home healthcare and other time-sensitive deliveries.
You heard Jack speak about the data analytics and the phases; well, we're right now on the prescriptive side, the 3%. This phase brings together
Big Data with high-end mathematical and computational sciences and our unique UBS business rules to enhance intellectual property.
The work that we are doing is customized. It is UPS proprietary. And the advanced analytics is going to aid UPS with proactive response for areas
such as at-risk shipments, using advanced algorithms for weather and other operational issues. Leveraging these analytics will enable quicker
resolutions to customer concerns, more accurate customer churn forecasting, and dynamic pricing for better profit optimization.
Current innovative systems and networks, they all interconnect, result in optimized delivery routes, empowering our customers with visibility into
their delivery windows. And, as you know, UPS has a long history of innovation and has made an ongoing strong commitment to technology. In
fact, we're continuing to invest $1 billion annually in technology, the equivalent of more than $100,000 an hour, 24 hours a day, 7 days a week, 365
days a year.
Having such a strong commitment to deploying innovative technologies across our network and extending it to our customers directly, well, it is
a powerful strategy. This approach drives important gains in operational efficiency while accelerating the introduction of new and innovative
products, as Geoff explained today.
It's a strategy that creates a data-driven culture, reinforcing our network while helping our customers compete better and grow faster.
Now, after lunch you are going to have an opportunity for David Abney to join us on stage and share the details of the investments that we are
making to not only ensure that we grow in the next 3 to 5 years, but also to generate leverage on that growth.
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We are going to break now for lunch. It's going to be in Ballroom 1. Ballroom 1 is immediately behind us, and we're going to reconvene in here at
12:30. Thank you.
Joe Wilkins - UPS - IR Officer
Welcome back, everyone. I hope you had a good lunch and this morning's session was to your liking, lots of good discussion, lots of good detail
from that perspective, so looking forward to this afternoon. What I want to just do a little bit just talk to you a little bit about this afternoon what
you can expect. We will be using the Safe Harbor language. I know I'm not that nice British lady who read it earlier this morning, but you will just
have to listen to my voice and I am not going to read it again.
So just to let you know a little bit about this morning or this afternoon, David is going to come up here shortly and talk about his vision for the
business, then he will be followed by Alan who will give us from a growth perspective and then, of course, Kurt will come up after that and connect
the dots and talk about 2015 guidance and our long-range forecast. Just also after that, we'll do a Q&A session here in the main room. We will do
it with all the people from the group and then after that, we'll go into a round-robin Q&A. So there will be more detail from that perspective.
So the presentations for David and Alan you have. We have not given you Kurt's presentation because there's information in there that -- I know
this is a read-ahead crowd -- that you would absolutely look ahead. So when Kurt takes the stage, then we will give you that presentation and they
will be download -- you can go to our website and get them to download as well. So there's also a link on our website that you can get to or on the
back of your badges that you can look at to get to our website. So with that, I'd like to just turn the stage over to David Abney.
(video playing)
David Abney - UPS - CEO
Good afternoon. I hope that Jack this morning made everybody in the room ORION experts. I'm sure he did. I know he went into a lot of detail and
I'll have the final piece of that puzzle in just a minute. So my goal today is, of course, to share with you and make sure that -- give you the information
that you're looking for. At the same time, our other goal is I don't take one step back and wind up sitting down. But if I do, I'm going to act like I
just planned it that way, so you'll just have to work with me. Okay?
All right, so we are -- this afternoon, we're looking forward to providing you with more information, more transparency into our strategies and of
course, our business plans and financial projections. I'll use my time to discuss our competitive position and our strategy to deliver the growth and
returns that our investors are looking for. Alan will discuss how we see our markets and we'll walk you through the industries and geographies that
we're targeting. We will wrap up the presentation with Kurt who will provide you guidance for 2015 and tell you how we see our business over the
next few years.
The theme for this conference, Network for Growth, symbolizes the power of our integrated global network. It also signifies the investments we're
making to enhance our network today and in the future while growing faster and earning higher profits. The theme also signals the deeper
relationships we've been building with our customers, relationships that, in many cases, are true partnerships where we work together to improve
their business through the power of our capabilities, our expertise and a network that is broad and is balanced.
UPS has always managed our business with shareholders in mind and we will do the same going forward. Over the last decade, we returned $50
billion to shareholders thanks to our strong cash flow and I expect that we'll return another $30 billion to shareholders over the next five years.
Now I believe this is something that's worth repeating, so I want to make sure that you got that we plan to return another $30 billion to shareholders
over the next five years.
At UPS, we've taken pride in our ability to balance the needs of our customers with the needs of our shareholders. Our efficient use of capital has
enabled us to return this cash to our shareholders. We know that our customers need UPS to extend our expertise in logistics across many industries.
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The good news is that our customers depend on our insights into logistics and the skills and knowledge that our people bring to every project.
Our customers view UPS as a trusted advisor and that's a role that we truly embrace.
So we've worked hard and invested to maintain our leadership in technology, in sustainability and in the capabilities of our network. We blend
these offerings together into solutions that are difficult for our competitors to replicate. Given our competitive advantages, I am bullish about our
future. Over the next few years, you will see a company that is more adept, more agile and can seize opportunities quicker. We will continue to
deliver top and bottom-line growth.
This afternoon, I'd like to walk -- well, since I'm a runner, maybe I'll just run through the next five -- through the five investments that we are making
to generate revenue growth and greater operating leverage over the next three to five years. So the first type of investment is in capacity. As the
global package leader, UPS plays an important role not only in e-commerce, but in the other sectors that rely on us during the holidays. We have
an obligation to serve our business customers, providing the same reliable service during the holidays that we provide the other 11 months of the
year. Of course, higher demand is a good problem to have, so we're increasing our capital spending to ensure that we can meet our customers'
needs not only during the holidays, but throughout the year.
We'll increase investment and increase capacity in the markets where we're fairly compensated wherever they occur. Also, we'll add capacity where
we know it will generate a strong return on invested capital. UPS has always led the industry with the highest returns on invested capital and that
won't change going forward.
Turning to Europe, we've disclosed our plans to increase the capacity of our ground network. We will invest more than $1 billion over the next five
years. We will use this investment to modernize and expand the number of facilities there. Despite the challenging economy, we're confident that
this investment will enable us to grow at a rate that exceeds the market.
The second area of focus is to improve our efficiency. We've been investing in technologies that make us more efficient, technologies, of course,
such as ORION that we talked about this morning. For the past couple of years, we've been telling you how ORION drives on-road efficiencies while
improving our delivery performance. We've been reluctant to provide details about the benefits until we had tested and scaled it sufficiently.
Today, we're prepared to share our expectations. More than 40% of our drivers are using ORION and ORION has helped shave an average of seven
to eight miles off their daily routes. When fully implemented in 2017, ORION should generate $300 million to $400 million in combined cost reduction
and avoidance. I don't need to repeat that number. I have a feeling over the next few years we will hear that number back from you at times, but
we wanted to make sure we shared that and this is like the finishing piece to what Jack reviewed with you today.
So of course, I'd be remiss not to mention that some of those savings will be offset by the costs associated with the growth in B2C. ORION, though,
is not an endgame; it is part of a platform. It's part of a platform that supports new products and other technologies like SurePost Redirect and
synchronized delivery solution. These initiatives, along with others, will reduce our delivery costs and provide economic value to our customers
and our shareholders.
Our growth plan requires us to continually reinvest in our world-class network. Given that our air fleet is relatively young, we can devote much of
our capital spending to other initiatives like automation. Automating our existing facilities is one of the areas where we see future gains and
efficiency. The size of our infrastructure creates a challenge in finding equipment that meets our requirements for throughput, for speed, for
reliability and variability and at the prices that we can justify.
In our North Bay, California building, we are proving that we can retrofit an automated hub, automated sort in a conventional hub. We've just
reopened that facility and we expect an increase in production by 20% to 25%, as well as a 10% gain in throughput with higher quality and more
operational flexibility. Going forward, our standard approach will be to automate our hubs. Given our success at North Bay, we are accelerating
the number of hubs that we'll retrofit. We'll monitor each project to ensure not only the soundness of the technology, but also of the investment
case. Ultimately, our plan is to retrofit the majority of our Tier 1 sorting facilities by the year 2020.
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Automation is another example of our approach to innovation. In the end, automation enables us to achieve three key goals. First is higher
productivity, greater flexibility and improved service levels. History has taught us that these investments in efficiency will be good for our customers
and for our bottom line.
The third area of focus is international. Economists tell us that the majority of global growth in future decades will come from emerging economies
and we're ready to seize this opportunity. At the same time, I believe that UPS still has significant room for growth in the developed markets of
Europe. We're optimistic about the opportunities for UPS in these international markets and we're committed to expanding our presence in not
only emerging markets like Vietnam, but the more advanced markets like China and Mexico. Cross-border trade between the US and Mexico will
be significant and you will hear more about this later today.
We see opportunities in these growth markets to provide services that meet the evolving supply chain needs of our customers. Using partnerships
in both asset and asset-light models, we are focusing on premium services with high growth and high margins. Our success depends on building
teams that understand the local markets and can deliver the world-class experience UPS is known for. So we've made it a priority to attract and
retain the best talent in these economies.
I'd like to update you on our plans for China, a top priority market for UPS. And this was reinforced for me again this weekend when I was in Beijing
talking to several well-known multinational CEOs that they still see plenty of opportunity in China. We have a two-pronged strategy in China focused
on import and export opportunities. The first is to widen our footprint, expanding our presence in 20 new markets across China.
The second is to deepen our presence further in the 33 markets we are in today with more premium services and an expanded focus on target
industries, as well as large Asian multinationals and private companies. As part of this strategy, we're focusing on the markets that generate 90%
of China's GDP. Much of this expansion will occur in 2015.
On the other side of the world, we have a multi-billion dollar trade opportunity in our backyard and I'm referring to trade between the US and
Mexico, another market where we're employing a two-phase strategy. In phase 1, we have been enhancing our existing portfolio. In phase 2, we'll
launch additional services and solutions to meet the needs of selected high-growth industries and verticals.
Many of you are aware of the operating unit we created to focus on India, the Middle East and Africa. Creating this unit has already enabled us to
build our presence and attract the people who know this region. The south-to-south trade lanes create great opportunities for UPS to build
partnerships. It also gives us the opportunity to deploy solutions that bundle our services and products without a heavy commitment of assets.
These investments represent important long-term plays for UPS. We'll be opportunistic in our approach while carefully matching our expansions
with market demand.
The fourth area of focus is in fast-growing industries, industries such as healthcare, high-tech, e-commerce and retail. These industries, as well as
several others you'll hear about later, all make full use of our multimodal network. Some need the specialized services that UPS provides such as
our cold chain capabilities in healthcare. These sectors demand new products, more expertise and differentiating technologies, all of which we
can provide. The good news is they also generate higher margins for UPS.
Regardless of whether our customers are in healthcare, retail or importing and exporting from emerging economies, the services we provide
customers today go far beyond small package and freight. Better yet, we can configure these different services into customer solutions for specific
industries. The demand we're seeing for these broader solutions demonstrates the power of the UPS network. We've learned that when we combine
our broad portfolio of specialized capabilities with our vast network, there are few limits to what we can do for customers. When we create solutions,
we ensure that we'll be compensated appropriately for the value and service we provide. Yield growth will be an even greater emphasis for UPS
over the next few years. Alan will talk more on this in a moment.
The fifth area of focus is one that amplifies the power of the other four. It's about renewing our commitment to operating in more customer-centric
ways. Alan is leading this initiative, which we call [One UPS]. As part of the One UPS initiative, we are identifying and reengineering key processes
and interfaces that cause customer frustration.
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While I recognize that UPS is a large and complex company, we are determined to address any area that reduces the collective power of our network,
portfolio and people. We'll make it easier for more customers to use our products and solutions across our lines of businesses. Customers, large
and small, want to experience UPS as a single entity. The improvements we'll make will increase loyalty, share of wallet, revenue growth and more.
The One UPS initiative also supports the three priorities I mentioned this morning -- empower, invest and grow.
So to recap, our five major initiatives include more capacity to ensure that UPS remains at the center of the global economy; greater efficiency so
that we remain the industry leader in providing value through automation and technology; the growth economies, ensuring that UPS is positioned
to meet the demand of tomorrow; industry-centric solutions, creating the innovations and specialized services that leverage our multimodal
network; and finally, leveraging the multiplier effect of One UPS, signaling my commitment to remove any barriers that prevent UPS from operating
with energy, agility and customer centricity.
So there you have it. I've covered the five types of investments that we believe will accelerate growth and contribute to higher returns. We're
confident in our ability to continue to generate returns on invested capital of 25% or even higher on these investments. Our UPS leadership team
knows that our performance and ability to achieve our plans will come not from my words here, but from disciplined management of our business
and from a strong and balanced execution on our investments. We will deliver in both areas.
Today's UPSers, including our leadership team, stand on the shoulders of those who came before us and one day, a new generation of UPSers will
take this Company to places we can only imagine. UPS is a strong company. We're not intimidated by the pace of change, but not so secure that
we're complacent. Times change and we're changing with it. We believe that the power of our network and the power of 400,000 UPSers give us
a bright future. I'd now like to invite Alan Gershenhorn to the podium. Alan?
Alan Gershenhorn - UPS - EVP & CCO
Thanks, David and good afternoon, everyone and for those that ate lunch with me today or didn't allow me to eat lunch today, you guys are free
to leave this session because I already gave it all to you. So it was a very enjoyable lunch.
So hey, this past summer when I took the role as the Company's first Chief Commercial Officer, David charged me to lead UPS in three critical areas
-- first, to continue to define UPS' growth strategies, which is where and how we compete; second, to develop the playbook that will continue to
differentiate UPS, first, to maintain our market leadership and second, to earn the highest returns, a topic that I know unites all of us in this room;
and third, to oversee execution with our marketing, sales and solutions teams.
In short, my job is growth, profitable growth and opportunities exist like never before. Our growth strategy levers a stack of value built on the
foundation of our transportation and logistics networks. The crown jewel, the crown jewel is our global small package network. It's the most efficient
and balanced in the world and it processes 17 million packages every day. It also provides customers with the earliest delivery times around the
globe.
We've complemented that small package network with our purchased and freight transportation networks -- air, ocean and road -- to efficiently
move larger shipments around the world. Then we've appended our contract logistics network, 30 million square feet of our customers' products,
most of which find their way back into our small package network and underpinning these physical networks is the world-class IT network that
Dave Barnes talked about earlier. And that's also configurable to meet our customers' needs.
Now each of these networks is unique in their own right, but the real magic happens when we operate them as one interoperable network, like
enabling our service, parts and logistics business to feed our small package or when we inject individual parcels from an ocean container into our
package network bypassing distribution facilities as they move straight to retail stores. These are real examples of the formidable competitive
advantage that Dr. Sheffi spoke about -- layered services built on our highly efficient, flexible and balanced global network. It's the foundation of
our growth strategy.
These layered services that are stacked on top of this network represent the broadest and most balanced logistics portfolio in the world. We have
the capabilities to meet nearly every logistics need. Complex? Yes, but in the hands of the right people, people who can identify and configure our
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
offerings and technologies, this portfolio literally transforms our customers' businesses. We have the right people, thousands of them, working
with customers every day, a highly skilled group with deep industry-specific knowledge and extensive training to bring the full capabilities of UPS
to bear.
Now building these unique solutions isn't easy and it's not easily replicated either. It requires investigative expertise, process mapping, opportunity
identification, solution design, value quantification and ultimately execution. Now this expertise also positions us for deeper engagement in more
areas of our customers' supply chains. And customers absolutely view our solutions as a competitive advantage.
Solutions are also good for UPS. When we engage with our solution teams, growth rates for middle-market customers increase 4X and our enterprise
customers 10X and as we earn greater share of wallet and profits, we create a higher-yielding and more loyal customer. At the same time, we also
gain tremendous insights, which we connect back to our product development group, who you heard from earlier, Geoff Light. It's a virtuous circle
of innovation. It's how Worldwide Express Freight, Proactive Response Secure and many more products are conceived.
Now, since 2011, we've engaged over 100,000 customers and continue to expand the use of our solutions approach around the globe and this is
critical. Our solutions disrupt the marketplace by redefining the way customers think about and ultimately buy logistics. I want you to think of it
this way. We create and quantify economic value for our customers and it drives higher yields and returns for our investors. And these interoperable
solutions are ones that pure plays and others in LTL, forwarding or small package cannot replicate.
Now we focus our unique approach on three areas of greatest opportunity -- first, lucrative and fast-growing industries; second, global growth
economies, both developed and emerging; and third, e-commerce with a growth engine of the modern economy. This formula that's uniquely
UPS continues to deliver the best profits and margins in the business.
Now in my role, I spend a lot of time with customers and prospects. And regardless of industry or geography, they are amazed by the complexity
and the accelerating pace of change in this economy. Their customers are demanding experiences that are seamless, synchronized and visible
across an even wider range of channels and let's face it, with global competition, disruptive technologies and business models, it's a pace that will
continue to challenge business and it creates vast opportunities for UPS. And that's because supply chains have become the central lever in the
overall value that businesses across all industries deliver to their customers. And that's why the One UPS initiative that David spoke about is so
powerful. It multiplies that value by aligning our network and processes in ways that increase customer benefit and ultimately drive higher-yield
UPS sales. Now let's see how we serve these fast-growing industries through the lens of a healthcare growth leader.
(video playing)
Supply chain complexity is a key reason that UPS is ideally suited for the $72 billion healthcare logistics market and healthcare has strong fundamentals
-- aging populations, emerging middle classes, lots of pressure for affordability that's driving both demand and complex changes for supply chains.
Healthcare also illustrates our ability to move from a peripheral player to a global market-leading industry expert.
Now at our last investor conference, many of you saw our Louisville operations. Since 2011, we've nearly doubled our healthcare footprint to 7
million square feet through both organic growth and acquisition, which will continue. We're providing compliant state-of-the-art supply chain
solutions that include both temperature-sensitive and ambient services. This considerable capability and expertise is driving growth and scale
leading to margin improvement.
Now let me switch gears to the industrial manufacturing and distribution space that, after some tough years, is experiencing year-over-year growth.
In this core high delivery density business, we're finding new ways to optimize customer supply chains. For example, a large flooring manufacturer
needed to improve operations efficiency. We designed solutions that expedited material from Mexico directly to US customers through UPS Trade
Direct bypassing warehouses. We provided cross-border shipping from the US to Canada, Mexico and Latin America and we also mitigated their
supply chain risk through UPS Capital Solutions. All of this while providing multimodal visibility that streamlined their backend processes.
Our interoperable expertise in package, forwarding, brokerage and distribution is our advantage with industrial supply chains, as well as other key
industries like high-tech. Now high-tech, with its addictive products, has its own set of unique needs such as large-scale, high-profile product
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
launches. We have the industry-leading interoperable launch solution for both large and middle-market customers. It's a source to shelf or home,
Asia to doorstep, seamless solution and it provides control of both the store and consumer delivery, ensuring simultaneous availability. And our
balanced global presence enables us to meet these needs across geographies. Now here's a short video to highlight other UPS solutions in the
high-tech space.
(video playing)
Just as we provide comprehensive solutions to high-techs like GE and NetComm, we provide unique solutions to the aerospace segment also.
We're an award-winning supplier meeting the stringent demands required to support aerospace manufacturing, as well as the critical maintenance
support. An AOG, or an aircraft on ground, is expensive and by offering more next-day early morning delivery points than anybody worldwide, we
get that urgent part into the technician's hands.
UPS also operates the world's largest field-stocking location network. We stock and deliver critical parts for the $11 billion post-sales market in as
little as two to four hours. However, the majority of the parts are delivered leveraging our global small package network that's fed by millions of
square feet of distribution space that's strategically located around the world. These capabilities keep MRI machines and communication service
humming, while also reducing our customers' fixed and working capital, improving their technicians' efficiencies and meeting or exceeding their
customer service levels.
Now, earlier, I emphasized the importance of global growth economies. Our network and strategies enable the critical trading links between and
within the markets of the world. Globally, we position import and export small package, forwarding and brokerage services. Then in North America
and Europe and other developed markets, we add domestic and transborder transportation services. As one developing market example that
David also mentioned, we're focused on the multi-billion dollar close-to-home US-Mexico trade lane, which is benefiting from increased near-shoring.
We're providing an integrated set of solutions that includes our forwarding, package and brokerage capabilities and UPS is the only integrator with
a full range of express, expedite and ground small package and also forwarding and customs brokerage services between these very important
trading partners.
Our strategy is to move interoperability into the US-Mexico trade lane and other developing markets to solve customers' complex needs. We have
teams and business units in place to assess and execute against similar opportunities around the globe in China, Latin America, the Middle East
and Africa. We'll make use of both organic and M&A to strategically build presence in both emerging markets and for other beneficial capabilities.
Now my final focus area is e-commerce, the growth engine of the economy. Now don't think of this space as just retail. The lines between B2C and
B2B have blurred, just as lines between industries have blurred. Businesses across a variety of industries, retail and non-retail, are using e-commerce
models to reach both consumers and businesses. And as you all know, increasingly, manufacturers are opening up their channels to end consumers.
So when you think about it, it's anything anywhere any time as long as it's on time. Now years ago, we positioned UPS as the e-commerce leader.
The hypergrowth market and our ability to expand our US margins even with the high levels of e-commerce growth validates that decision.
Now to understand our strategy to increase revenues, yield and profits from the e-Economy, let's return to that value stack. The foundation remains
our world-class integrated network. We've added capabilities to drive efficiencies to bend the cost curve of e-commerce, capabilities like UPS
SurePost, SurePost Redirect and Mail Innovations. Hybrid, low-cost, but not necessarily low-margin delivery and returns products that use postal
delivery yet are differentiated by their interoperability. And with synchronized delivery solutions that we introduced to you today, we're leveraging
our technology to increase delivery density offering UPS customers another unmatched offering.
Now our strategy to increase final mile efficiency led us to acquire Kiala. We've integrated and expanded that business model to the now rebranded
UPS Access Points. We already have over 12,000 locations in Europe and North America and by the end of 2015, we expect to have over 20,000
locations. UPS customers can direct their deliveries to Access Points through retailer websites, My Choice preferences or we can redirect after the
first UPS delivery attempt. These locations are also convenient for consumer returns and other drop-off shipments, which also reduce our pickup
costs. Access Points increased the number of e-commerce buyers while reducing UPS costs and also enhancing consumer experience.
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
Now our technology platform also plays a critical role. It's a powerful combination of UPS offerings and integration tools. It enables hundreds of
thousands of customers and over 200 vendors to build specialized applications, including UPS APIs, integrating them to their inventory systems,
logic engines and more. These tools are the basis for our UPS omnichannel solution set. They enable retailers to use their store inventories or nearby
distribution facilities to reduce their inventories while delighting e-commerce consumers with speedy short zone shipping. We today have over
20,000 retail stores fulfilling e-commerce orders, many shipping hundreds of packages per day. We also are offering late-night pickups enabling
our omnichannel retailers to offer next-day delivery to customers who shop well into the evening hours.
Now to enhance consumer experience, as well as operational efficiencies, you may recall UPS My Choice was literally launched at our last investor
conference. As noted earlier, three years later, we have over 11 million households, along with 15 additional countries we just added. Today, we
sign up a new My Choice consumer every six seconds. We continually enhance My Choice with new features like UPS Access Points and the retail
promotions that benefit both shippers and receivers and we've also integrated similar advantages into our Quantum View visibility tool for B2B
receivers.
And now with our recent i-parcel acquisition, we're opening new international markets for consumers and e-commerce retailers around the globe.
And as important, we're adding UPS export revenues and profits from retailers who are traditionally underrepresented in the export industry. With
i-parcel, consumers are able to purchase goods from an Internet seller in over 100 countries without the hassles of currency, duties, taxes, brokerage
fees or international returns.
Now UPS i-parcel, SurePost, synchronized delivery solutions, Access Points, omnichannel, My Choice, UPS Returns, any one of these capabilities
sets UPS apart from the other integrators, regionals or courier companies. But put them together and you have a multi-continent and cross-border
e-commerce ecosystem that only UPS offers. We're moving both the cost and the yield curves through this multilayer e-commerce strategy while
providing UPS customers with differentiated value with more to come.
Now beyond just for e-commerce, we're pursuing pricing strategies that find the right balance between the value we provide, customer discounts
and the demands on our network. This includes varied discounts by time of year, including peak season, as well as other pricing mechanisms.
Another example is US ground dimensional pricing that's effective with the 2015 rate change. It will increase base pricing to reflect the appropriate
value across all industries, including e-commerce. And to increase compliance, we continue to invest in dimensional pricing technologies across
all of our transportation businesses.
In addition, we are pursuing increasing yields and pricing with larger lower profit customers and we're also increasing focus on growth of
higher-yielding smaller and occasional customers. These and other pricing initiatives across all of our businesses are important aspects of our
profitable growth strategies.
So now let me pull this all together. I've explained how customer solutions built on our value stack, the broad portfolio, underpinned by our
expansive network creates exceptional customer value and differentiates UPS in the marketplace. Where we focus is critical -- lucrative high-growth
industries, global growth markets and then our e-Economy strategies. These strategic plans are laser-focused and our teams remain disciplined to
ensure that execution of each strategy provides strong returns on your investment. And now Kurt will share our view of the market, capabilities
and expectations for the next five years. Thank you. Kurt.
Kurt Kuehn - UPS - CFO
Great. Thanks, Alan and good afternoon, everyone and we'll give just a second or two here for the people to hand out the packets since we already
know you're a go-to-the-back-of-the-book kind of group. You've heard a lot today, a ton of stuff about our plans and initiatives. And I hope you'll
agree that after seeing the coordinated effort we have to lean in and address the challenges of the future that it is pretty impressive. So my hope
today is to be able to be the puzzle master and bring together the technology innovations that Dave Barnes and his team introduced, the strategic
initiatives, both customer and operational, that David and Alan discussed, the UPS capabilities and solutions, some of which we've launched and
others that we're developing and show how all of these come together to drive profitable growth and provide opportunities for investors. All in
all, it's what we call the UPS Network Effect.
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
Before I talk about our plans for the future though, I do think it's important to review our performance since our last investor conference in 2011.
While we've made progress in a number of areas, we are clearly not satisfied with the results in others. The US Domestic segment has performed
a bit below where we expected. We adapted well to the growth in e-commerce and we're well on track to meet all of our targets up through the
third quarter of last year.
During that period, we demonstrated expanded operating margins even in a period where the majority of growth came from B2C. However, in
the last few quarters, we certainly have had some challenges adapting our network to handle this increasing e-commerce surge. The plans you've
heard today are helping us get back on the right track and we're highly confident on that front.
Meanwhile, the International segment fell far short of our expectations. In 2011, global economic forecasts were much more optimistic. Asia was
booming, Europe was progressing, so we projected strong growth and increased exports. Since that time, though, we did experience a double
whammy -- a severe recession in Europe on top of a significant unprecedented slowing in global trade. Both contributed to disappointing results.
Looking at our Supply Chain & Freight results, our distribution and UPS Freight groups performed pretty close to expectations, but clearly the
freight forwarding group was hurt by the market conditions in Asia and frankly we continue to adapt to those conditions. If you look as a total
company, we did fall below our targets for revenue growth and earnings per share.
On the other hand, we did achieve our free cash flow and return on invested capital goals, a testament to the efficiency of the integrated network.
And of course, I know that you will all appreciate that UPS did return more than 100% of net income to share owners, increasing the dividend by
29% and repurchasing more than $8 billion in shares.
So that's the past. Turning to our guidance for 2015, where we expect earnings per share to increase by 10% to 15%. Today, you've heard a lot,
maybe too much, about a lot of initiatives that UPS has underway to aggressively tackle and harness the rapid growth of B2C. This is not a one-year
effort; it's a multiyear effort to provide differentiated value to customers, reduce our delivery cost and improve our yields. We are making great
progress and we'll see progress on all three fronts; although there is still much more to do as you heard some of these are multiyear processes.
In the US Domestic segment, we anticipate current trends to continue, resulting in average daily volume gains of about 4%, which should drive
revenue growth up 5% to 6%. The higher yields we're expecting are due to dim weight pricing and the increased concentration on revenue
management that Alan mentioned.
On the operating side, we should make good progress with ORION and the other operating technology next year. However, there are some
headwinds for next year. We do anticipate about $80 million in additional pension expense due to surprisingly low interest rates compared to
December of last year, as well as about $90 million in recurring peak and project-related expenses. That's the half of the $175 million that we've
talked about all year that would recur. On the International front, we see continued strong growth there with International shipments up 5% and
revenue up 6% to 7%. Operating profits are expected to increase by 9% to 11%.
On the Supply Chain & Freight side, we anticipate slightly slower growth of 4% to 5% due primarily to the increased revenue management initiatives
that are planned in our air freight forwarding group. Operating profits there as a result are expected to climb by 10% to 12%.
So in total, we expect revenue growth of 5% to 6% and operating profits up 9% to 11%. Earnings should be in a range of $5.45 to $5.70 a share, an
increase of between 10% and 15%. The variables that will impact where we land in that range are a few big ones -- our success in handling peak
season -- clearly this peak will be a great test -- the accelerated rollout of these technology initiatives that will begin to pay dividends in 2015, but
really kick in in 2016 and then ultimately 2017 and not least our ability to increase prices.
Now let's look a little farther into the future because really what we've spent the day talking about is not 2015. Everything here is real; there is no
vaporware. On the other hand, some of these have multiyear processes, the initiatives that make us optimistic about the growth opportunities and
our confidence in generating high returns for share owners over the long run.
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Looking at the economic front, we are looking at global economic forecasts calling for slightly improved conditions over the next five years. On
average, targets are based on a US GDP of about 2.8% and a global GDP of 3.6%. So steady as she goes.
So let's start now with the outlook for the US Domestic segment. As mentioned earlier, current B2C trends are expected to continue and provide
a tremendous growth opportunity for UPS, one we do intend to harness. More and more consumers around the world are discovering the benefits
of e-commerce, those 3 billion connected consumers, while ones that have already started are increasing their reliance on it as ease of use and the
experience improves. Forecasts call for online sales to continue to increase at 4 times the rate of GDP for the next several years. In fact, for UPS, B2C
shipments are likely to grow more than 30% between 2015 and 2019 and to reach over 50% of our total deliveries in the US.
So today, you've heard about a wide array of things that we are focused on to improve the economics of B2C, including improving consumer choice,
lowering cost and increasing yields. And as Alan said, the combination of all of those is what gives us confidence for the future.
This slide shows the characteristics and the economics of making residential deliveries and it is a tough nut to crack. While revenue per piece and
cost per stop are fairly similar between B2B and B2C, there is a huge difference in the number of packages at that stop and the revenue per stop.
So we're working to address these structural differences. Certainly UPS is working to improve pricing to reflect the higher cost of B2C shipments
with initiatives such as dim weight pricing to make sure that if packages use up extra space, we collect the revenue. But there is still much more to
do on this front and we will continue to evaluate and execute pricing options to ensure that we are properly compensated for the value of our
service and capacity, most notably during the increasingly substantial peak season.
As David mentioned, upon full deployment, ORION should provide $300 million to $400 million in cost reduction and avoidance, while shortly after
that our hub automation will begin rolling out and has the potential to improve productivity by up to 25% on a building-by-building basis. So
obviously though the essential key to improving B2C margins is through increased delivery density, getting more pieces at the stop and solutions
like SurePost and SDS that we just opened up the door a little bit for you here today will lower our delivery costs significantly.
As Dave Barnes mentioned, we are developing solutions to improve delivery density, something we call synthetic density. We're going to create
density that does not exist in nature. Synthetic density is an ingenious collaboration to take advantage of our integrated network, this combined
technology and the deep collaboration with selected shippers, to time deliveries, to combine them and to drive margins higher.
The changes we've already made are beginning to help bend the cost curve. If you look at this graph, prior to 2010, our unit cost growth was about
2.3%. Over the last several years though, the introduction of SurePost, the addition of SurePost Redirect and our productivity improvements are
beginning to take shape and you can see that we've slowed the cost inflation line substantially, bringing our unit cost increases down to about
1%.
Many of the things you heard today like My Choice, UPS Access Points will help lower our delivery cost both by improving density at the stop and
also reducing those pesky [send agains], while at the same time differentiating UPS by improving the customer experience and delighting our
shippers. These innovations will allow us to be at the lead pack and profit from the retail revolution that's continuing as we speak.
For example, if we can improve our delivery density for residential shipments by just 1/10, 1/10 more package per stop in residential, we can lower
our delivery costs by more than $200 million annually. The synthetic density that we will help create with selected shippers will help us to control
and lessen our variable cost, bending that cost curve lower and ultimately expanding our margins.
If you aggregate everything you heard today, at least over the horizon that we're talking, the next five years, these initiatives as they build and are
accretive will lower our cost per piece growth by an average of 40 basis points per year. The first year, it's minor, but it compounds continuously.
So we do see over five years a substantial reduction in the rate of growth of our expenses, keeping our unit costs at approximately 1% over the
next five years. Real changes.
These market dynamics, along with stable economic conditions, should contribute to revenue growth in our US business of 5% to 6%, substantially
above GDP. In addition, the wage and benefit inflation has moderated as this accelerated growth has resulted in more new employees coming
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into the business. So the combination of the volume and revenue growth, the revenue management and the operational improvements should
allow us to confidently increase profits in the United States at a compounded rate of 8% to 10%, bringing margins up to 15%.
On the International front, trade between countries will continue to be a catalyst of economic expansion around the world. There were a couple
of years in the last few in which global trade grew less than global GDP. We do think that's flipping back over and that global trade will accelerate.
Clearly, the trade pacts that David talked about and the increased collaboration across countries, US and China being a great example, will be an
accelerant that we think will get that flipped the proper way.
We do think e-commerce is going to push exports higher also as consumers reach across borders to order goods. In fact, we're going to make those
borders seamless and that's why i-parcel, although a small acquisition, is a huge signal to the market of our determination to reinvent global
commerce. It will also improve standards of living in these developing economies and increase this virtuous cycle.
So our strategy in these growth markets will position us to benefit from these dynamics. It will be a different solution in each country, but we're
putting together the playbook and UPS is happily investing around the world to ensure that we are positioned as the preferred carrier to these
markets. As we expand our presence around the globe beyond traditional US-based exporters, we will see changes in our product mix, some that
we're seeing already. For example, we expect our UPS non-premium products to grow from about 63% of our business today up to 67%. These
lower-priced non-premium products, like our UPS Expedited and UPS Standard products, are proving to be more popular with a number of
International customers, particularly in the Retail segment. As a result, reported export yields and the growth on those will continue to be a challenge.
Meanwhile, the shifts we've seen in global trade patterns we think will continue to happen. Intra-regional shipments within continents within
theaters are expected to grow faster than intercontinental ones, increasing from about 65% of our volume today to about 70%. And although we'd
love to see stronger intercontinental growth, the news isn't all bad. So this is not bad news. Because while intra-regional volume generates
substantially lower revenue per package, it also consumes a heck of a lot less capital. While the revenue per package is about a third of what a
transcontinental shipment would be, they only require 1/8 the capital to move and therefore generate 2.5 times the revenue per invested capital
dollar. That's why we're so focused on transborder services across Europe and our increased focus in North America.
And we also have plans to add, replace and expand existing facilities at key locations throughout Europe. During 2015 alone, we will begin expansion
projects on large facilities in Paris, Istanbul, Hamburg and Berlin. We'll start construction on new facilities near Copenhagen and in the UK, our new
East Midlands airhub. These are just a few of the projects we have planned and they are part of that well over $1 billion commitment to the euro
zone market that David mentioned earlier.
Now looking at the International going forward, our revenue growth is going to be stronger as a result of improving market conditions, renewed
growth in global trade and most important, our strategies for established and high-growth markets. We expect revenue growth rates to increase
as a result of a number of key initiatives, including our cross-border initiatives in North America and Europe, expansion of Access Points, the i-parcel
acquisition and our expansion plans for China.
As a result, our outlook for International revenue growth over the next five years is for 6% to 9% growth. The investments we're making, combined
with the economies of scale we're creating and the productivity improvements, will produce improved bottom-line results also. And we're looking
for strong margins and operating profit growth of 9% to 12% over the next five years.
Turning now to our Supply Chain & Freight segment. As you heard from Alan, the value of this important business segment goes beyond its
contribution to the business, to the bottom line. UPS connects customers to our vast global network by providing this broad array of solutions for
forwarding, distribution and freight needs. And in fact, to demonstrate the value of this broad portfolio, we took a look back at our 2013 results
and found that for every dollar one of our top 100 large customers spent on our supply chain solutions, they spent an additional $4 in small package.
It's part of our success in gaining share so aggressively across the globe.
The capabilities offered by this segment also allow UPS to create unique solutions, interoperable solutions, as Alan says so smoothly, such as Trade
Direct, North American Airfreight, Express Airfreight and Ocean Preferred less the container load. These are solutions that use multiple pieces of
the business to create a unique end-to-end solution and products like this would not be possible as standalone businesses. They work because
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they share the common network. Interestingly, these types of solutions have margins that are multiples of our standalone offerings. And truly
demonstrate the power of the network we've built.
Looking a little deeper at the individual business units, the Forwarding unit clearly has been under pressure for the last several years as have many
forwarders, but conditions in Asia are gradually improving. We're hearing good news politically and our focus is on diversifying our customer base.
We see those beginning to take dividends.
Our revenue management initiatives are concentrated on reducing reliance on a few large accounts and on integrating our forwarding capabilities
with the specific industries that Alan talked about. One area that we're going to continually invest aggressively in is the Ocean Forwarding capabilities
as we see that becoming increasingly relevant to shippers, even in healthcare and we're offering that to more countries and more ports. Particularly
notable is our preferred less than container load service, which has proven very popular with customers seeking something less costly than Airfreight,
but faster than traditional Ocean. We think these initiatives will push growth higher and as a result, the Forwarding revenues should grow by 4%
to 5% with an emphasis on margin expansion, so we're looking for 8% to 12% profit improvements.
Looking at our distribution unit, our healthcare distribution capabilities continue to resonate with customers. In fact, since we started putting a
strong focus on healthcare, we've experienced substantial growth and as a result, our revenue from healthcare clients specifically jumped by 40%
from 2010 to 2014. This important and profitable segment now accounts for almost 10% of total Company revenue. We're taking a similar approach
with retail and aerospace industries and as you can certainly see in the retail industry, we're gaining tremendous traction.
So the investments we're making in these distribution capabilities around the world are paying off, so we expect to see continued strong growth
between 5% to 8% with operating profits growing at 8% to 10% and the connectivity continuing to increase. Looking at UPS Freight, the LTL
industry remains fragmented and highly competitive. We compete in this market with a disciplined approach, one designed to grow and grow
profitably. We're expanding our mid-market presence by leveraging our technology, our UPS customer base and this broad extended portfolio
and expect Freight revenues to grow 4% to 6% over the next five years. Operating profit should also improve with an average growth of approximately
10% to 15% over the next five.
So to summarize our Supply Chain & Freight segment, we see revenues growing 5% to 7% and operating profits increasing 10% to 12% and margins
of 9%, maybe 10%. So I've thrown an awful lot of numbers at you here. Luckily we gave you paper and you can download all this stuff. Let's bring
it all together to see what's the net outlook then and how do we aggregate this. So for the total Company, we are looking for global growth of
between 5% and 7% over the next five years with earnings-per-share increases of 9% to 13%.
So let's take a look now at how are we going to invest to make this happen. As this interesting 25-year history graph shows, we have been able to
expand our business around the world as a result of investments made in past decades. Going forward, we plan to become more aggressive in
investments, but we can do that at a rate that still keeps our revenue -- CapEx to revenue at just 4.5% to 5%. As David mentioned, we've got a great
young fleet and we don't need more aircraft. Our capital investments are focused on growth at a time when many other major investments have
been made. The aircraft are young and in addition, we've made large investments in our big airhubs in Cologne, Germany and in Louisville. So the
assets are in place there. Our focus now is on the ground infrastructure.
In the US Domestic segment, we will continue to automate and expand our ground network to support growth and lower our variable cost. These
efforts will provide opportunities for productivity improvements, most notably the 20% to 25% improvement in productivity from hub modernization
that we'll be executing, current plans for capital investments in hub automation alone to be more than $1 billion through 2019.
Meanwhile, investments in International will be in two areas. First, of course, the expansion in our great European ground network to support the
double-digit growth we're seeing there and then second, develop our capabilities to serve the wide array of growth markets. On top of the European
network expansion that I mentioned earlier, we have network expansions planned in Asia and the Americas too. In fact, in total, over the next five
years, we plan to invest almost $2 billion in building and facilities outside the US.
So as you've heard today, UPS is continuing to seek opportunities to expand our network, expand our capabilities, exceed customer needs and
drive that into growth. The targets we've laid out today represent a primarily organic strategy, although there may be some small tuck-in acquisitions
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
along the way, much like the healthcare and e-commerce ones that we did this year. Our acquisitions this year are a great example of how we're
extending this value stack. We purchased new temperature-sensitive distribution capabilities with the acquisition of Polar Speed in the UK and
with this addition of i-parcel and its unique cross-border, e-commerce, low-cost business model, and each one of those is critical, it adds tremendous
capabilities to UPS.
So whether it's CapEx for physical assets and technology, and Dave Barnes keeps me busy asking for more, or it's M&A activity, UPS has consistently
produced high returns on invested capital and we expect that tradition to continue for the next five years. It's also important to note though that
even in years where our earnings growth slowed, our return on invested capital remained impressively high. So we're happy to continue to invest
in opportunities to grow this business. It's a great use of our capital. And looking forward, we anticipate that we can continue to reinvest in this
business aggressively and generate returns on capital between 25% and 30%.
The marketplace dynamics we're seeing today and our solutions will drive ROICs higher. The e-commerce growth here in the US and the faster
intra-regional and non-premium trends all allow for lower amounts of capital and we prove that by having increasing returns to capital even in a
period where our earnings weren't growing as well as we'd like.
Another example, and this difference is clear when you compare here in the US, the capital requirements of a Next Day Air package to a Ground
package. We all know that it generates less revenue, but did you know that a Next Day Air package drives 5 times more capital than a Ground
package in our network and more than 10 times the capital that a UPS SurePost package drives. So not all margins are created equal and part of
the value that UPS creates is balancing these products with dramatically different capital needs across multiple productlines run through the same
asset base. That's the network.
So we often get asked how does UPS produce such high returns on capital compared to others in your industry and I tell them it's the network. It's
the highly integrated, highly efficient model that creates the high returns for UPS. It's not just economies of scale or size. It's a network that creates
multiple sources of revenue that we can flow through an integrated common set of assets, our buildings, our technologies and of course, our
vehicles. Like the UPS driver who with one vehicle can deliver Next Day Air packages, Ground, B2B, B2C, SurePost, import international, export
international products all from the same vehicle. It's what Alan calls a value stack; it's what I call a cash machine.
So coupled with our history of generating high returns is our long history of rewarding investors. Since going public in 1999, our dividend has
increased, compounding more than 10% on average. And when you consider share repurchases on top of that, UPS has returned since going public
more than 100% of net income over that time. As David mentioned, we've redistributed, and there's a few crusty veterans here, since that IPO over
$50 billion to share owners.
Looking forward, we expect this great tradition to continue and we will continue to distribute approximately 100% of net income or about $30
billion by 2019. Of that $30 billion, we plan to repurchase more than $15 billion in shares over the next five years.
Looking at our plans for capital, our first priority remains growing the business and if there's nothing else you remember today, it's that we are
leaning into the future. We're putting our money where our mouth is and embracing the incredible opportunities in this space. We will continue
to seek solutions that meet our customers' business needs and I think frankly we're getting ahead of them, which is great. We're going to acquire
technology and capabilities either through targeted acquisition like i-parcel or building it in-house with the great collaborative team that Dave
heads up. We will invest in the right strategies and the right capabilities to ensure that UPS remains the market leader, running faster than the
market, gaining its lead.
So after those investments, we are going to make sure that the balance sheet remains strong and capable of withstanding market disruptions. We
certainly loved the balance sheet back in the global recession. We're going to continue to maintain a high investment-grade rating and target an
FFO to debt ratio of about 50%. In the past couple of years, you've seen several examples of us making prudent use of our cash to manage balance
sheet liabilities to benefit share owners with both lower future expense and reduced risk. Later this year, we do plan to make an accelerated
voluntary pension contribution.
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Due to the falling interest rates in 2014 and the fact that they still haven't come up, although I don't know how many times I've said they can't get
any lower, we do expect to see reduced funding or reduced levels in our pension plans and so we're expecting higher pension expense that I
mentioned and a higher unfunded liability. So this accelerated pension contribution of about $1 billion or so that we'll make in Q4 will allow us
directly to avoid some $50 million in PBGC premiums over the next couple years. And certainly also help reduce that aggregate pension expense
in the mid-term.
So our third priority for capital after taking care of the balance sheet is, of course, growing the dividend and we've successfully met this challenge
by maintaining and growing our dividend every year since 1969, even before I joined the Company. So that's 45 years in a row and more than
tripling the dividend since going public in 1999. And after dividends are paid, of course, our last discretionary use of cash, because we don't intend
to hoard it, will be to repurchase shares.
This slide summarizes our long-term targets. So as we bring all this together, over the aggregate and the long term, we see a growing business
with 5% to 7% revenue growth, generating increasingly high returns on capital. We anticipate earnings-per-share growth of 9% to 13% and the
great advantage with UPS is you can expect a strong dividend on top of that compounded earnings-per-share return, a fact that sometimes gets
ignored.
So to bring things together here, since 1907, UPS has been transforming from the messenger service that started it all, to dedicated retail delivery
for department stores, to then offering common carrier for B2B. In the 1980s, we became an airline. In the 1990s, we expanded our presence
worldwide and today, UPS is the leading global logistics provider and the company that is evolving to continue to meet the changing needs of
our customers.
As an industry leader, we remain dedicated to growing our business and providing value to share owners because all of us in the management
team at UPS are very deep share owners. As an investment, UPS presents we think a strong value proposition, a sustainable business model that
produces industry-leading margins, a company with a history of solid financial results and a sound balance sheet so we can all sleep at night. We've
created an admired, globally recognized brand with a great heritage and a culture second to none and our strategy positions the Company to
capitalize on future opportunities. But most importantly, we continuously strive to adapt this business to meet the future so we can continue
growing for many years.
So over 107 years of innovation, service excellence and diligent management has positioned this Company to be at the forefront of the way the
world is changing. The business model and the network that we have built is unique, it's efficient, it's difficult to copy and it's extremely profitable.
In short, we are networked for growth. I want to thank you for your attention today. Now I will turn it back over to Joe Wilkins.
Joe Wilkins - UPS - IR Officer
Okay, as Kurt said, that concludes our prepared remarks, so we're going to give us a little time to get our stage set up and then we are going to
move into some group Q&A here on the stage, so just give us a couple minutes. I know it's a lot of information to digest. We've got lots of numbers.
So 2011, 2014, 2015 and our forecast into the future. So going to take a few questions here and then I'll go through how we're going to break out
into Q&A after we finish with this.
With that, if I can have the management committee join me on stage and we're going to open up questions to the audience here and we're also
going to take some questions from the Internet. So if David and Alan and Kurt and joining them will also be Jim Barber who is our International
President, he will be joining us on stage. We'll also have Myron Gray, who is our President of US Operations and we will also have Kate Gutmann,
our Senior Vice President, Worldwide Sales and Solutions.
And speaking of Andy Dolny, which many of you are fond of just like I am, earlier, we had the Safe Harbor language. Today, we are going to institute
the Andy Dolny language. So that means you get one question when you come to the microphone and then we will do follow-up questions and
things of that nature when we do in the breakout. So there will be plenty of time for you to get questions. So with that, we have people with
microphones that they are going to be walking around. I see hands going up.
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So first off, I would like to take one from -- before we come here, I want to take one from -- I think we have one from the Internet, just kind of engage
them. So I think the first question we will take and then we will come back to the crowd is -- from the Internet, it says, with the leadership change
with David, and this really I guess goes to you, David, since you're David, do you plan to change the capital allocation strategy of UPS now that
you're the CEO?
David Abney - UPS - CEO
This question must've come in just before Kurt did his presentation, but the answer, of course, is no, that we do plan to return approximately 100%
of net earnings back to shareholders, whether it be in dividends and then share repurchases and of course, the $30 billion that I talked about and
Kurt talked about is a key part of that.
Joe Wilkins - UPS - IR Officer
Thanks, David. One thing, when you ask a question here, if you could please just state your name and what firm you're with so the people on stage
would know who it's coming from. So okay, I've got one back here.
QUESTIONS AND ANSWERS
Ken Hoexter - Bank of America Merrill Lynch - Analyst
It's Ken Hoexter from Merrill Lynch. Maybe for Alan, you mentioned quickly in your pricing slide your thoughts on pricing. Can you maybe delve
into some of the thoughts a little bit deeper on your thoughts on peak shipping pricing and the likelihood of that being implemented and how
that would be implemented? Thank you.
Alan Gershenhorn - UPS - EVP & CCO
So we've got a number of options there to manage the capacity and right now, we're working very closely with our customers to make sure we're
aligned on what capacity we have and what volumes they have to make sure that they're married up. But some of the things we're looking at with
this control tower is that if we have capacity in the network and we can take it, we can, in fact, charge more for that. But on a longer-term basis,
we're looking at mechanisms today -- we could have a customer that gets say 30% off of our list rates year-round today. We could actually have
time-of-year discounts that are different for peak than they are not at peak and we can also do that for other capacity-constrained times of year
like Valentine's Day, something like that. We are also looking at the overall pricing on a year-round basis for customers that spike and then the
other way is obviously we have the capability if warranted to actually put a peak season surcharge in.
Joe Wilkins - UPS - IR Officer
Next question. I can't hardly -- who has got the microphone. All right, Jason, over there.
Donald Broughton - Avondale Partners - Analyst
Donald Broughton at Avondale Partners. Last year, we had some service issues. You were very clear saying you are going to spend $175 million on
infrastructure to help provide for this peak. Plus you're going to spend additional money with purchased transportation, linehaul suppliers, etc. to
guarantee you don't have a repeat. Tell us how close, how accretive will the incremental volume be or is it possible that we'll see decremental
margins given the spending?
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Kurt Kuehn - UPS - CFO
Great, I'll start off with that on the economic side and then I'll have Myron maybe talk a little bit about the preparations we've made, both the
physical and technological ones. Clearly, this year, as you've heard me say repeatedly, the priority was on building added capacity. Much of it
flexible or mobile so that we can adjust location by location to handle peak. Historically, we'd seen the peak season was maybe a factor of 40%,
45% higher than our average base levels and last year, it jumped well in excess of 60% higher and so those kind of spikes do create a whole different
equation. We've typically been able to absorb these pluses and minuses. We've always had some control of capacity, but last year was an exclamation
point and that's why it's been all hands on deck to generate added capacity and connect with customers.
So we have said that we're spending a significant amount of extra money this year, $175 million. We did say about half of that was one-time and
half of that would recur and so that is a continuing issue. The long-term ramifications will be based on two issues. One is how does that base level
to peak level look. Last year was magnified by a shortened season. So does that level begin to stabilize or does it keep going up? Clearly, if we have
to continue adding more investments, it's a different equation. And then the other, as Alan referred to, is this was the year of capacity and so we
are now looking certainly at what is a prudent and sustainable way to generate the appropriate revenues. So Myron, maybe you could talk a little
bit about all the preparations because we are ready for peak.
Myron Gray - UPS - President, US Operations
You just answered the question. We are ready for peak. But to answer your question more succinctly, you've heard us talk about adding 49 additional
hub sorts that we didn't have last year and we've added over 47 new or improved buildings to the network for this year. We expect an 11% growth
in volume during this peak season and we have the capacity to handle it. You've also heard us talking about hiring 90,000 to 95,000 additional
personnel. Over 80,000 of those people are currently already on board. They are trained, they are prepared and they are ready. We've had 600
additional parked car positions that we've added and we expect to be able to handle the flowthrough and output in our hub operations to pull
the volume through much faster than we would've had last year. So overall, UPS is ready for peak.
Joe Wilkins - UPS - IR Officer
Thanks, Myron. Let's take one, Jason, down here.
David Abney - UPS - CEO
Just a couple things about peak before we get off of it. First is we've been meeting since December 26 of last year. And as Myron -- well, Kurt kind
of said before and then Myron said, but as a company speaking for all of our employees, we're absolutely ready for peak. That's been the dedication
and very confident about that. There was a little bit mentioned about the control towers and I think that that, especially that week of Christmas,
and Kate, I'm going to ask you to talk about it a little more, but the role of the control tower the week of Christmas and how that can affect our
business.
Kate Gutmann - UPS - SVP, Worldwide Sales and Solutions
Yes, absolutely. And I would be remiss if I didn't note the collaboration that we have and increased communications with our customers. Peak is
about success for everyone, for business success and there was a consumer shift last year, a lot of learnings that came out of the year and from the
start, we have focused on communications with our customers, helping them to get better forecasts, as well as this year I would say unique to
other years working even with their merchandising groups on when promotions would hit and you've seen from some of the headlines that many
are very focused on trying to pull the demand earlier in the season.
But there will be some consumers that procrastinate; hopefully none of you in the audience here. But if indeed that does occur, those control
towers are a cross-functional team of executives and we actually will look at the health of the network each day and the requests of the specific
customers, how it differs from the forecasts that we've spoken about and then be able to determine the best path to take whether that is
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
accommodating, not being able to accommodate, possibly doing so, but the next day or in some cases for seasonal shippers potentially a surcharge.
So increased collaboration will lead to success.
Joe Wilkins - UPS - IR Officer
Thank you, Kate.
Brandon Oglenski - Barclays Capital - Analyst
Brandon Oglenski from Barclays. So Kurt, I think you mentioned that prior to previous expectations, your International results have been a big
source of disappointment and yet here again we're targeting 9% to 12% EBIT growth going forward, top line of 6% to 9% above what you have
achieved in the last few years. And yet the market is pretty concerned about EM expansion in China and European growth doesn't look all that
strong all of a sudden. So what can you do if growth rates globally don't accelerate? Is there anything internal that's going to help you get the
organic growth rate of your business higher or does this just become a macro story for UPS?
Kurt Kuehn - UPS - CFO
No, it's not, not at all and clearly Jim and I spend a lot of time talking about these targets and it is the biggest shift from what you've seen the last
few years. So no, we are increasingly optimistic that the economic forefront is improving. And David's comments about increased trade I think are
valid. But the majority of this is our confidence in the expanded focus. Over the last several years, we had a few major economic challenges. We
also had a little acquisition that diverted our attention for about a year and a half and since that time, Jim has been working on a number of
strategies. So we were very conscious about the targets we laid out and this isn't going to happen by chance. So Jim, maybe you could expand.
Jim Barber - UPS - President, UPS International
Somehow I thought you'd ask me to do that. So the comment about it's not really based on the economic flows is true. We believe that as we went
after TNT and we all know how that ended, we have been in the throes of option B, option C, option D. Some of those you've seen today, some of
the investments you've seen from restructuring the network, to adding capabilities, but there's many you can't see yet. There's many maybe none
of us can see yet, but when you look at the world in the market today for example and we talk about the 20 cities that we're adding in China, realize
China has got 160 million cities over 1 million people. The US has eight. We're in 33 now, but the deepening and widening is still yet to come.
There's immense opportunity out there.
Our intra-Asia network in that part of the world is really getting up and out of the water just like our European transborder network did back in the
early 2000s. So that comes forward. We talked about trade lanes in and out of Mexico, a $26 billion market in which we participate very little right
now. You just keep going around the globe and the fact is the opportunities are endless. It's just how we prioritize the capital, our technology and
ourselves to go take those gains. So very, very bullish on it and I think the growth rates are absolutely doable.
David Abney - UPS - CEO
And obviously macroeconomic trends help, but if you just looked this past year at our Europe business, the condition of the European economy
and the way that we have grown that business. So this is a major initiative for us and we believe we can grow internationally and a lot of our
strategies are targeted in these areas that we believe are going to get the growth over the next few years.
Joe Wilkins - UPS - IR Officer
Thank you, David. Keith, who's next?
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Dave Ross - Stifel Nicolaus - Analyst
Yes, good afternoon. It's Dave Ross with Stifel. You talked about pricing in your slides and maybe a refocus on pricing going forward. But when I
look at the 2015 numbers for US Domestic Package, it kind of looks like maybe 2% to 3% pricing is what you're assuming if I back out some of the
mix changes and a lot of that's coming from the change in the dim. So it doesn't sound like pricing is really being pushed. I think there is more of
an opportunity there. So can you comment on why not push price a little bit harder because it's not a very fragmented industry and I would think
that the competitors might follow?
Kurt Kuehn - UPS - CFO
Great. We've never heard that question before so thanks for bringing that up. Certainly next year is a seachange for us. The dim weight is a very
visible catalyst. We are going to show significant yield increases and given some of the trends of growth in lighter packages, we're swimming
upstream on that. So it may be a little more significant than you think. Some of this is also a gradual or multiyear process and Kate, as the Senior
VP of our Sales and Marketing group, is responsible for an incredible array of customers. But one of the ones that have the most impact are larger
shippers and so in some cases, these are multiyear processes. So Kate, maybe you could talk about how do we drive yields up?
Kate Gutmann - UPS - SVP, Worldwide Sales and Solutions
Yes, absolutely and just to emphasize that point, if you think about the macro trend that's going on, think of the products that you've purchased,
they are all lighter and usually smaller, not bigger and heavier and therefore that shows up in that same number. But we have had a consistent
objective of a 2% to 3% rate increase. We will be getting that. We do have this better alignment between cost to serve, size of package with weight
so that would -- I'm sorry -- with the cost to serve that. So that's the dim weight and you will see both of those hit next year. But it's also important
to know that because we solution with our customers and we get deeply engaged in their business, we formulate multiyear contracts. And so
changes occur over time, but with an added emphasis in 2015, as Kurt noted.
Alan Gershenhorn - UPS - EVP & CCO
I would just add that I think two quarters ago in the US, our yields were down 2%. This past quarter, it was 1.5% and Kurt, you guided towards 1%,
negative 1% in the fourth quarter. And according to the guidance for 2015, you'll see that the revenue is going to be growing faster than the
volume, so our revenue per piece is actually going to be in the positive range and I think it's the result of some of the yield improvement strategies
that we already have in place, as well as the dim weight and I think that you'll see that we'll be on the higher side of the 2% to 3% whereas in this
last year, in the last couple of years, we've been down on the lower side of the 2% to 3%.
Chris Wetherbee - Citigroup - Analyst
Great. Chris Wetherbee from Citi. You talked a little about the Domestic business and if you kind of take the mid-point of the range for the outyear
targets, it looks like the margin is going to come into that 15%, 16% range, which is pretty close to the peak levels we saw during the last cycle. I
guess when you think about that pricing opportunity and the cost, does more come from the cost side and what gives you comfort that we can
get back to that just given all of the mix changes we've seen over the last several years?
Kurt Kuehn - UPS - CFO
That's a good question. I think hopefully you had some sense today of the comprehensive plan that we're driving. 40 basis points a year due to
these initiatives after the span of four to five years begins to create a big spread. Plus we do have a commitment to create value and capitalize on
it. You heard some mentions today of peak pricing initiatives and how we're looking to be implementing those prudently if the spikes of peak
continue to grow and also the fact that we're continuing to differentiate. So it's 100 little things done right, but we've got 95 of them mapped out
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pretty well we think and that's why we're pretty confident that improved yield, improved value and then aggressively automating with the hub
modernizations that David talked about and other things, we'll continue to lower that cost base.
David Vernon - Sanford Bernstein - Analyst
Hi, David Vernon from Bernstein. David, maybe you could talk a little bit at a high level about the decision to bring in the near-term or the longer-term
guidance targets. Where in the business have you seen either a change in the competitive dynamic, the market outlook that has made you maybe
a little bit less optimistic? And then, Kurt, if you could follow up on that in terms of where you think there may be the biggest sources of up or
downside risk outside of the general macro as we think about the longer-term rate of growth in the bottom line. Thanks.
David Abney - UPS - CEO
Okay. So starting out when you took a look at 2011, the world was a different place at that point. We thought that there was going to be stronger
economic growth, especially in Europe. Kurt talked about it in his slide. At that time, global trade was 1.7 or so times GDP and of course, that went
into our numbers and so we've looked at it over the last few years. We looked at current trends, even though we can take advantage of it, but we
still see that it's regional trade more than global, non-preferred is growing faster than preferred, although preferred is growing and then, of course,
e-commerce.
So when you take all those together, compared it to where we've been the last few years, we thought -- and then we looked at all of our initiatives
and we factored in the positive effect of those initiatives, so we felt very comfortable that we're at a good spot with the revised guidance. Well, not
revised guidance, but the guidance for the next five years.
Kurt Kuehn - UPS - CFO
Yes, and we think that a 9% to 13% earnings per share compounded for five years, you layer on top of that that rock-solid dividend yield, that's
about as good a return as any company is committing to these days. We are in a -- maybe it's not quite a new normal, but the economic outlooks
are 2.5%, 3% Domestic and maybe an extra click or two on the International. So we've worked very hard on this forecast. We have got very tangible
things. You probably heard more about them than you wanted to today. We think this is a realistic set of goals. I certainly don't think they are
conservative. They are realistic and we've got action plans to initiate them.
Pluses and minuses, we've mapped in our guidance the things we know we're going to do pretty much. We've not mapped some of the
next-generation things, the next couple of generations of ORION going out, how all of this technology and collaboration. So there's certainly upside.
There's also risk of either reverse economic conditions, maybe -- and the risk of us just managing this incredibly busy world. So we think this is a
good solid set of guidance that UPS will execute to and we look forward to reporting on our progress.
Joe Wilkins - UPS - IR Officer
We just have time for one more question here in this room because we want to make sure we stay on time so you get access to all the executives
when we do the round-robin and you can ask those follow-up questions. So I'm going to take one last question from the Web and then we'll -- the
rest of the questions we can get into in the Q&A, but there's one question that came in -- another question from the Web that says -- it's for you
again, David. It says though you are just starting your tenure as CEO, fast-forward the time when you decide to pass the torch to the next CEO.
What would you define success as and what do you want to be evaluated on?
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
David Abney - UPS - CEO
I've been in the job 70 days. I'm already being asked about passing the torch, but what do you think about it or what I think about it, as soon as I
hear the question is, a few years ago, former President Bush talked about the way the circumstances were, he became the war President and that's
not what he chose, but that's what he became.
In this situation, obviously, not the war CEO, but the point is, right now, we have some challenges, but we also think that there are very big
opportunities and it's along the lines of global growth and it's along the lines of e-commerce and yes, there are challenges, but we think there are
huge opportunities for this generation of UPSers. So that would be the two areas that I'd want to be remembered as the CEO that led this team to
make sure that we addressed, seized the moment and took advantage of these two big opportunities.
Now there are some tools that we will use to do this and the first is technology and you heard so much about technology today. And that is going
to be a big part of our answer to these two challenges. Another is innovation. Some of the innovation will be focused on technology. Some of it is
different thinking and then the third tool is the valuable resource we have in our people. So those three tools.
I'd also want to be remembered or want to be measured on how we took advantage of the assets that we have to address these two huge
opportunities that we have in front of us. So that day when I am passing the torch at some point way down the road, that would be the areas I'd
want to be remembered for.
Joe Wilkins - UPS - IR Officer
Thank you, David. And that concludes this portion for the management committee. Thank you for all the questions and the answers. So you guys
are free to leave the stage at this time, get you some water. If everybody else could stay here just for a second, just want to give you some details
of what we're going to do next and how this is going to work, but I'm assuming that -- get you some water because there will probably be some
more questions.
So as you leave, as we just finished, a summary press release has been released of today's information. So you should either get that from our
website and if you want a hard copy of it, we have copies of it in the back as you leave. It is on our website and as I said, there's copies of it in the
back.
Momentarily, we are going to take a break and when we take that -- we will take a break until 2:30, Mike, is that when we are going to take a break
to? 2:35 we're going to take a break. But our goal was to make this conference as informative and helpful as possible, but we know there's always
opportunities to improve so we're asking for your help on this. We'd like for everyone listening on the webcast and everyone here to participate
in a survey. We really put these things on so that gives you access to our senior leadership. So if you could please take the survey when we send it
to you later. For the people here in the room, we'll send a survey to you later today after Q&A. For those on the webcast, on your screen, there's a
little button that says survey. If you could just click on that and please take the survey. So we do value your input and we do look to try to make
this effective for each one of you.
At this time, we are going to conclude the webcast portion, so we will say bye to our friends on the webcast. So I just want to thank everybody for
viewing it and have a good and safe, productive day. So don't leave yet because I want to walk you through where you are at with your name
badges.
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NOVEMBER 13, 2014 / 2:00PM, UPS - 2014 UPS Investor Conference
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