United Parcel Service, Inc. (UPS)

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United Parcel Service, Inc. (UPS)

September 15, 2011 7:00 am ET


Alan Gershenhorn - Chief Sales & Marketing Officer and Senior Vice President

Lan Lin - Director

Daniel J. Brutto - President of UPS International

Scott Davis - Vice Chairman of the Board

Myron A. Gray - Senior Vice President of U S Operations

Brad Mitchell - President of UPS Global Logistics & Distribution Unit

Dave Barnes - Chief Information Officer, Senior Vice President and Chairman of Information Technology Governance Committee

Mitch Nichols - President of UPS Airlines

Unknown Executive -

D. Scott Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee

Andy Dolny - Vice President of Investor Relations

David P. Abney - Chief Operating Officer of UPS International

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer


Ken Hoexter - BofA Merrill Lynch, Research Division

Scott H. Group - Wolfe Trahan & Co.

William J. Greene - Morgan Stanley, Research Division

Jon A. Langenfeld - Robert W. Baird & Co. Incorporated, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Matthew Brooklier - Piper Jaffray Companies, Research Division

Unknown Analyst -



Good evening, ladies and gentlemen. Welcome to the 2011 UPS Investor Conference. UPS will take advantage of the Safe Harbor Provisions of the Private Securities Litigation Reform Act.

Some of the comments made tonight will be forward-looking statements that address expectations for the future performance or results of operations of the company. These anticipated results are subject to risks and uncertainties, which are described in detail in our 2010 Form 10-K 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.

Now please welcome this evening's host, UPS's Chief Financial Officer, Kurt Kuehn.

Kurt Kuehn

Thanks, everybody. It's great to see you all tonight, and I know Andy was relieved at not having to read that disclosure statement for once anyway. But, Andy, it's back to work with the next quarter's announcement anyway.

Well, welcome to our investor conference, and thank you for dedicating a couple of days to be with us. I know Louisville is not the easiest place in the world to get to, and I know that many of you cover many companies. And we hopefully have filled this day with enough activity, and we have plenty of stuff for you tomorrow that it's a good use of your time. I did have some of you complain today that it felt like we just were -- had an unending pace today with all of the displays and things that we ran you through. But we actually cranked it down, and that's only about 60% as fast as a driver would normally go through that. So just to give you a sense of our work measurement.

It's great to be here at the Muhammad Ali Center, and we had the opportunity to have a Board of Directors meeting here a little while ago and enjoyed it so much that we thought it'd be great. But there's also some great ties we think. Through our company's life, we think that UPS has shared many of Ali's core values with his focus on respect for the individual, his conviction, his dedication and his giving, and one other parallel we too like to think of our company as the greatest ever, and certainly Ali was.

I know I speak for Andy Dolny and his entire tired Investor Relations team, as well as the UPS executive team here. We're very excited about this opportunity to host and talk with you about our business. It has been 3.5 years. A lot has happened since I shortly was new into the CFO job in March of '08. But we're still here. You'll hear Scott give a little historical perspective tomorrow.

Andy and I had a little debate about this conference, and we think it's kind of a badge of courage to work the night sort at Worldport and go out at 1:00 at night and see the hub when it's really buzzing with the hundreds of aircraft and all that. But you all owe Andy a beer or at least a pat on the back for talking me out of that. He said that "You'd much rather enjoy a cozy dinner, a tour of the Ali Center and a few presentations and some Q&A." So you'll miss the night sort of a tour, which is amazing because the hub's running at full tilt, but at least you got some flavor today of the incredible operational focus and technology that drives that asset.

As I said, our last investor conference was back in March of '08 or to put it in UPS terms about 16 billion shipments ago. And it is good to get back on the circuit. We've held off a little bit really for 2 reasons. Number one is we do like to make sure we've got tons of stuff to share with you because we realize your time is valuable. And number two, we usually pride ourselves on being a company that can forecast pretty well. And clearly, forecasting the world for the last 3 years has been challenging. Forecasting the world in the last 2 months has been challenging. But we do feel like we've got a clear enough vision of the future to talk to you about where the company is heading and also where it's been.

The theme of the conference is stronger than ever and positioned for growth, and my hope is that by the time we get done with you tomorrow after lunch, you'll understand exactly both pieces of those things that the current UPS is very strong. We've come through tough times. We're better than ever and that we're also very focused on growth with things like My Choice and other things setting really new bars in the industry for service for customers.

We're also proud of continually delivering results that others in our industry use as a benchmark, and frankly, we intend to stay out in front and hold onto that cherished view that only the lead dog can enjoy. An objective for this conference and the reason for the field trips was to really allow you guys to see for yourself the types of capabilities, the interconnectivity that we built and are continuing to develop across the supply chain.

So we're on the move in many areas and hopefully, you got a good sense today at least on how we put over $2 billion worth of investors' money to work to build unique assets and even more importantly, to build sustainable capabilities that differentiate us and link together all parts of the supply chain. At our last investor conference, we were starting to bring the pieces of the puzzle together. The economic results hadn't come through for the supply chain group, and many of you remained skeptical about our ability to become a world-class forwarder and distribution company. We think tonight, at least, and today from what you saw, you'll get a little better a sense that we had arrived and that we are enjoying those capabilities.

We split the conference into 2 days really just if nothing else, so you could get some rest in between the 2 parts of it. But really today, the tours you saw and tonight the focus is on the backbone of the company, the -- a little bit of the results we had but really the integrated network, the technology and the people that run it. And that really will be the primary focus of the presentations tonight. And we ask that the Q&A sessions today or tonight primarily address those areas that are covered for things you saw today and things you hear this evening. I promise you tomorrow, we'll go into much more details about business unit strategies, financials, the markets we're in and the business unit activities. We'll also provide you some new breakdown of information, notably within the supply chain group giving you new insights into revenue and margins within the supply chain segment. So we'll have a few new data points for you anyway to fill up some of your models. And importantly, also share a number of 3- to 5-year goals and financial objectives across the business.

In addition, we've allowed even more time tomorrow for group Q&A and also an extensive group of breakout sessions with some of the senior management. So you'll have plenty of time to pick our brains, challenge our assumptions and hopefully we'll all learn a little bit from that.

Before the speakers get started, and I'll get off the stage, I did want to let you know that we are going to have a Q&A session after the 3 presentations here tonight. And on each table should be a stack of note cards that those of you that are interested in writing questions if you can jot down questions that hit you during the course of the presentations, that'd be great. Our eager IR team will be collecting those cards at the end of the presentations before we get started with Q&A. And we'll also have ready microphones if you wish to ask your questions directly. So we're kind of a multimodal here, both cards and microphones.

I'm sure that with all the things we've showed you today and all the things you saw in the booths and what you hear tonight and tomorrow, it may feel like maybe we're showing off a little bit. But I guess to quote the immortal words of Muhammad Ali, it's not bragging if you can back it up.

So without further delay, let me introduce Mitch Nichols, the President of UPS Airlines.

Mitch Nichols

Well, good evening, everyone. On behalf of more than 2,000 UPSers, welcome to Louisville, Kentucky, the home of UPS's airline. It's great to have you here. Now tonight, while you're fast asleep, our massive all points hub service international will come alive. I wish you could be there. It's a sight to behold. I know many of you saw the tour today. But tonight, 6,000 employees work in the next-day operation turning over 100 airplanes in about 3.5 hours, with destined aircraft all over the world.

It was February 2002 when we hosted our last investor's conference here in Louisville. And since that time, both Worldport and the airlines have changed in significant ways. It's unbelievable. For example, we have refined our overall design of our Domestic operations. We've moved the larger airplanes, we've reduced the use of satellite hubs and we extended Worldport significantly. In fact at the time of the last conference, we were opening or operating 253 aircraft. Today, we're operating 222. Now that's a 12% reduction in assets.

And while our domestic air volume has grown slightly and our international export volume has more than doubled, you've got to agree with me that's capital efficiency, which brings me back to why we made the decision to change the design of the hubs and fleet. It underscores the type of planning and investments that UPS is famous for. Long-term holistic and built to provide efficiency and superior returns.

Now let me show you some insight about Worldport expansions. Some of you may have heard this, and some of you may not. We made two $1 billion expansions to Worldport. It is now the largest fully automated package handling facility on the planet. And in true UPS form, we completed it ahead of schedule and of course, within budget.

We've expanded Worldport several times over the years. The most recent was completed in 2010. Our processing capability has grown to over 90% from the 215,000 packages an hour that we sorted in 2000 to the 416,000 packages an hour today, and you know what, we can expand it even further. We chose to expand in Louisville as opposed to growing our regional hubs because we already had a significant investment here in the infrastructure such as the runway system capacity and our outstanding relationships with airport authority, local government and the business leaders at large.

In addition, being located in the central part of the U.S. means that we can reach almost any part of the country with by-ground within 1 to 2 days and as far west in 3 days.

Finally, if UPS expanded our regional hubs, we would have created the need for more aircraft. We estimated that if we had not expanded Worldport and instead relied on our regional hubs, the required number of less efficient narrow-body aircraft would have increased by a minimum of 40%. This would not have been an investor-friendly option for us.

Worldport enabled us to streamline our fleet, rely on more newer wide-body aircraft and improve fuel efficiency, which ultimately lowers our transportation costs. And you've got to agree with me, that's asset utilization that turns into profits. The technology we use within Worldport is unmatched in the industry. The package data captured at pick up moves with the shipment into our fully automated hub. That physical package then becomes a virtual package.

So follow me on this. As the data travels inside the building, it's not a building of concrete and steel anymore. It basically resides in a technology cloud. That allows a package to be easily moved, redirected, intercepted and in the end, doing what we do so well is delivering timely and intact to our ultimate customer.

Worldport enables us to give customers more options than ever before. With amenities like our airfreight facility, our end of runway service, it can't be matched. Our supply chain campus, which some of you toured this afternoon, contains over 8 million square feet of facility space. It's amazing. And it just lies minutes from the Worldport runways, basically in our backyard.

This allows UPS to offer solutions that meet customer shipping needs and distribution needs. And customers have responded. It's been amazing. By the end of 2010, almost 150 people -- excuse me, customers have moved into the area to take advantage of the proximity of Worldport and not excluding our distribution of facilities. Companies like Clearwater Fine Foods, Chegg, Caf├ęPress and Zappos, and that's just to name a few. The new and improved Worldport is a critical part of UPS's vast worldwide integrated network. It's designed to provide scale and scope of logistics solutions that optimize every link in our customer supply chains.

At the heart of this integrated network is a strategic composition of our airline fleet. So let me talk about that. UPS operates the most modern fuel-efficient airline in our industry. Period. Our fleet's average age is 14 years. That's versus DHL's 25 years, FedEx is 24 years and TNT is 19 years. We achieved this leadership by recognizing early the benefits of efficiency and executing fleet strategies that are just outstanding.

Right now, we have 222 aircraft, and they're made up of 757s, 767s, A-300s, MD-11s and our newest addition, the 747-400. We planned our fleet to optimize both international and domestic movements. We don't own smaller feeder fleets. Instead, we contract that with and ultimately, that gives us better flexibility. Our strategic combination of aircraft gives us the ability to put the right plane in the right lane at the right time.

In determining our fleet composition, we consider many factors. You'll be glad to know -- relate back to optimization and the translation for us is growing the bottom line. Let's look at fuel efficiency, for example. We use advanced and unique technologies such as lower flight speeds, computer-optimized flight plans and whenever possible, single-engine taxis. Our surface decision support system is a complex computer-based tool that manages gate departures, arrivals, and we even manage taxi times.

It allows us to monitor the ground movements of our aircraft at Worldport, which results in substantial operational savings. And efficiency also extends to the ramp through the use of fuel-efficient towing tugs and biodiesel ground support equipment. We even consider the kind of paint we put on our aircraft, get this, to reduce drag. With the balanced worldwide network, we planned our fleet for both long-haul and short-haul assignments optimizing payload, range and trade-laden demand trends. Should trade lane patterns change, our fleet is designed to have the nimbleness to follow.

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