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Q2 2015 Earnings

July 28, 2015
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Insights on Leadership Series


Scott Davis, chairman and chief executive officer, addressed attendees of the Insights on Leadership series hosted by the Atlanta Chamber of Commerce in Atlanta, GA. Davis was interviewed by Chamber President Sam Williams, and he discussed aspects of UPS business and related issues.

S. Williams: I want to kick it off by asking, you’ve been in this job now for not quite two months, sort of like the first 100 days. How do you think about what to do in the first 100 days? Is there a template or how do you manage that?

S. Davis: We’re orderly and we planned this succession for about a year. So about a year ago I kind of got my head together and worked with Mike and the board and the rest of the team. And I’m absolutely committed to the strategy of UPS right now. We’ve built a wonderful mission. We developed this idea of enabling global commerce back in the 90s and we’re starting to see great results. We’ve had a lot of acquisitions to develop the supply chain capabilities. And as is typical with many acquisitions, there are challenges on integration, and investors and others get impatient. But we are a patient company. And we’re a company that is already looking 10, 20, 30 years down the road. I think you’re seeing the results of the supply chain side, especially in 2007. It’s a tremendous turnaround in our freight forwarding and distribution businesses and our LTL businesses. So it takes time. It takes patience. It takes perseverance to build the company the way you want to build it.

Our international business was the same way. We started in Germany in the mid-70s. We lost a lot of money as we developed that business and it would have been easy in the 90s to say this isn’t working. Let’s get out of here. We were making more money in the U.S. Let’s forget this endeavor. And as in all cases you’ve got some people pushing to do that. Even some UPSers said this -- you know we’re costing ourselves bonuses. We’re costing ourselves share price appreciation. But we stuck with it. One of our competitors didn’t -- they pulled out of Europe in the 90s. They had more public pressure than we had. We were a private company but we stuck with it. Today, international package is our fastest growing business, with great results. You’ll see the same thing going forward in our supply chain business, so absolutely I’m committed to the strategy of the company.

S. Williams: One of the things we were talking about earlier is that global trade is so critical to where we are, not only as a planet but particularly as a country. Mike Eskew and UPS championed so much of the positive aspect of global trade but yet the grassroots politics now of America seems to be pushing against that. What can we as a community and as companies do?

S. Davis: It’s an education process. Cross-border trade is at historic levels. It’s not going to decrease. It’s going to move forward. It’s good for businesses. It helps businesses grow through exporting manufactured goods and services. It helps the consumer. The consumer has more choices in goods and certainly lower prices because of global trade. But with global trade you have some winners and losers. I think we have to put more of an effort into the people who lose in global trade and we have to put more money into training. I think we’re not doing a good enough job of that. But the idea of saying let’s be isolationist is a bad idea. The world is going to continue going on with global trade whether we like it or not.

Also, in recent years there’s been a lot of attention paid to China and Japan and how they’ve prospered. If you go back and look at globalization, no country’s prospered more than the United States over the years. So we have to continue to educate people, to reinvest in training. But we cannot jump off the world -- we’ve got to stick with trading.

S. Williams: How do we educate Congress?

S. Davis: I’m talking with our congressmen on a regular basis because it’d be a serious mistake for this country to abandon global trade.

S. Williams: That’s really tough. One of the things that you all have done so successfully is increase your revenues and net income. But the Street doesn’t seem to realize that. That’s got to be extremely frustrating not only for a CEO but certainly for the whole management team.

S. Davis: You’re right and again I appreciate your nice opening comments. They’re flattering to the company and we are a great company. We’ve done great. In the last five years earnings and revenue growth has been spectacular. A lot of the large-cap growth companies were valued pretty highly back in 2002 and 2003. And UPS was no exception. We got to where we were about a 30 price earnings ratio and the S&P 500 dropped to about a 15. And we’re a $50 billion revenue company. We think we should always be valued more than the market because of our competitive position, quality of earnings, predictable cash flow, that type of thing. We certainly hope that the market’s price earnings compressions are done and that we continue to put up the earnings growth we’ve seen in recent years so that the stock price will perform.

S. Williams: One of the things that a lot of companies are starting to focus on now is the greening phenomenon. At one of our logistics seminars, some of your supply chain people were talking about how the convergence of the consumer sensitivity to greening as well as the fuel price has reached an inflection point. When oil hits $100 a barrel and the price of flying things per unit volume is as high as it is, you’ve got to be sensitive to the carbon element of running your business. How do you do that?

S. Davis: We’re quite sensitive to that and environmental concerns are critically important to us and to our future. We’ve always been a company that invested heavily in technology trying to find more efficient ways to run our business. And I think nobody burns less fuel for the size of fleet than we do. We’ve made big investments in what’s called package flow technology, which changes the way we route our drivers.

S. Williams: I understand you even avoid left turns - you make all right turns.

S. Davis: Our wonderful industrial engineers have determined that by using all right turns you save a lot of miles on a given day. It’s not something that jumps right out at you but it’s a fact. With package flow technology we know the night before how many packages are coming in and where they’re going. We automate the routing and scheduling and load the package cars the next morning in the most efficient way. We save millions of miles every year by doing that. We are sort of half transportation company, half technology company today. We’ve invested heavily in technology for years. And we have the industry’s largest alternative fuel fleet and we’re continuing to invest and experiment.

What really burns fuel in our business is flying airplanes. Out of all the companies that we compete with, we are better at getting packages onto trucks versus airplanes and that saves an awful lot of fuel. Our fuel consumption as a percentage of revenue is 5 or 6 percent. It was three percent about a year ago and then the prices went up. But it’s 5 or 6 percent where the competition is double that, and part of that is just our efficiency.

S. Williams: That’s incredible. As for the implications of fuel price, do you think we’re going to see oil drop back down in the near future?

S. Davis: I’m not a very good prognosticator on oil prices. I never dreamed it would be pushing $100 today, just based on fundamentals. I’m not sure where it’s going. We’re fortunate that we can tap a fuel surcharge onto customers but the bottom line is that if fuel prices get too high, the economy is going to slow and it’s going to impact all of us. And that’s the challenge we have.

S. Williams: You talked about technology. You’re half a transportation company and half technology company. When you came out with the tracking system for packages I thought it was really unique that I could track a package wherever it was. What’s the next evolution? Where are we going next?

S. Davis: We’re going to continue to leap in technology. What you’re seeing right now is we can intercept packages. If you’re shipping a package, we have the ability to intercept it in the middle of shipment because we know exactly where it is. It’s taking technology and making new products with that technology. We’ll continue to look for ways to automate the sortation. We’ve come a long way there over the last several years. I think it’s just like everything you see in technology today. You’re going to continue to get better and more efficient.

S. Williams: You really were legend in going into customers and saying “let us run your shipping department” by automating it and helping them manage their inventory. You made great penetration in market share. Is there more to grow in that sector?

S. Davis: Absolutely. I think that most of the supply chain is still in-sourced around the world. I’d say maybe 10 or 15 percent of supply chain is outsourced to companies like UPS. More and more companies are sourcing and manufacturing goods farther away from the end consumer. Supply chains are getting longer. You’ve got customs and brokerage issues. For most of these companies supply chain is not their expertise. Companies need that kind of help so I think you’re going to see more and more outsourcing as time goes on.

Today, it’s mostly larger companies that have outsourced. It started with the IBMs and HPs and the Dells. And once they’ve proved they’re successful, you’re going to see more of the middle market do the same thing. Already you’re seeing more of that today.

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