United Parcel Service, Inc. - Shareholder/Analyst Call

| About: United Parcel (UPS)

United Parcel Service, Inc. (NYSE: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, CaféPress 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.

At the end of the day, it is not our goal to have the most aircraft or the latest, most expensive airplane. We purchase aircraft with flexibility, utilization and efficiency in mind, always working to deliver more freight with fewer airplanes while maintaining service that our customers have come to know us by. This strategy delivers more profits and of course, industry-leading return on capital.

So let me give you an example of the flexibility we anticipate in our fleet design. Here's just one. Due to increased demand in Central and South America, we recently increased capacity on 19 weekly flights into these regions, and this is how we did it. We simply upsized from a narrow-body 757 to a wide-body 767. It was that simple. All of our aircraft, both modern-glass cockpits that rely on digital displays. However, the 757 and the 767 have cockpits so similar that the crews are interchangeable. We call it the same fleet type. This increases our network flexibility, fulfilling customer demand with minimal impact to our operation.

Now let's look at another more popular example. In recent years as Asian capacity and demand grew, we chose to add the 747-400 to our fleet mix. Now much has been made of the competitor's choice to add the 777 freighter to its mix. I know we've all heard about it and fly direct between U.S. and Asia. So let me talk about that.

We did evaluate the triple as we were looking at a new freighter to meet our growing international demand, and in fact, we worked with Boeing to develop it. But we elected to go with the 747-400 and fly it through Anchorage from Asia. We did this because any transoceanic freighter has got to balance range against capacity. You have to do that. And for our network of a balanced geographic coverage, combined with our internal focus on the return on invested capital, it just did not make sense to build a whole network around a costly aircraft whose characteristics limit optimal efficiency. That's not going to do it. The 747-400 costs 40% to 50% less than the 777 and has a 10% to 20% greater payload under 4,500 nautical miles. It works perfect for us. By stopping in Anchorage to refuel and add payload, we're able to carry more cargo to and from Asia, which is why I'm so amused that there's so much focus on a single plane.

Now hopefully, most of you have an opportunity to see firsthand the volume equivalent to 10 containers that would be left behind if the 777 were used in place of the 747-400, and that being between Louisville and Hong Kong and flew direct versus stopping in Anchorage like we do. This discussion about a single airplane is a diversion from what matters most: Asset utilization, fuel efficiency and network flexibility. Things that we've been optimizing for years and will continue to translate into industry-leading margins and return, you got it, on invested capital.

All right? But the proof is in the pudding as they say. The effectiveness of our air operation strategy is made clearer when you compare our block hours to our volume. Let me show you. Since 2007, both our international and U.S. block hours have consistently trended less than our volume. What this means is we are efficiently matching our volume and our aircraft. Make sense?

But our business is more than a collection of points. We have gateway facilities and equipment in most all airports. The effectiveness, the effectiveness comes from how all these components work together. I've already told you about Worldport, the crown jewel of our network. But we also have 3 other gems in some of the world's most prosperous markets. The first is in Cologne, Germany.

Since 1986, our operation in the city has been connecting Europe to the world. We've been there for some time. After an expansion in 2005, this semiautomatic facility now sorts 112,000 packages per hour, and we have the capability to expand further. It wasn't too long ago that SDF was that size. Now tomorrow, Dan Brutto, President of UPS International, will talk more about the Cologne hub, which serves every major city in Europe either by air or by road.

The Cologne hub also connects our European customers to growing economic regions in Asia, which brings me to 2 other network gems, our new state-of-the-art facilities in China. The first is our Shanghai hub located in Pudong International Airport. Currently, we serve 330 cities in China and operate 200 weekly flights. This hub links China to UPS's international network with direct service to the Americas, Europe and Asia, speeding the movement of both packages and freight around the world. Located in the heart of China's economy, the 1 million square-foot facility can sort up to 17,000 packages per hour and it can also process heavy freight. It even houses an on-site customs area.

Our Shenzhen facility serves as our intra-Asia hub and upon completion last year, replaced a hub in the Philippines. This improved our sort capacity and provided future expansion potential for us. Shenzhen's location in China's thriving Pearl River Delta is part of UPS's continuing strategy to be where our customers need us the most. This May, we completed improvements to Time-In-Transit of at least 1 day and more than 100 intra-Asia lane pairs, all made possible because of the Shenzhen hub.

Now not only do these enhancements include faster transit times, but they also provide us with later cutoff times on key lanes. This further links us with China, India, South Korea and the other Asian destinations. The most recent addition to our growing Asian portfolio marks the new western route to our China operation, an express flight to Chengdu. While Shanghai and Shenzhen hubs are strategically located on China's coast, Chengdu lies inland. In recent years, the region has seen tremendous growth due to China's 12th fifth-year plan initiatives, which are designed to foster consumption and growth in the countries Western regions

Chengdu is one of China's fastest-growing high-tech manufacturing areas, expected to become a major economic center in western China by 2015. With our Chengdu expansion, we can provide growing markets more next-day options guaranteed than any logistics carrier. This just represents another step in our evolving Asia expansion strategy, which we will continue to cultivate.

As with investments in all emerging markets, we're prudent. We consider the regulatory, the operational market and competitive landscape when we make decisions. Okay, I have talked about planes, routes facilities as integral pieces of our integrated network, but now I'd like to talk about the most crucial piece, our global network and within our global network is our people.

Let me say this. Capable people executing flawlessly produce reliability, revenue and ultimately strong operating margins. The global operation center houses our airline's 4 core groups. So let me talk about that first. Contingency, flight control, crew scheduling and aircraft maintenance control. These groups ensure that our flights run on time, 24 hours a day, 7 days a week and you've got it, around the clock, year round. These highly skilled individuals work in one large state of the art facility located in Louisville with direct access to each other, working together to problem solve and alleviate potential service disruptions wherever they may be in the world.

The area also houses a group of 5 full-time meteorologists. For you and I, those people work weather who ensure our network run smoothly by forecasting potential weather interruptions around the world. And then there's our massive team at Worldport, and we've talked about that and all of our air hubs throughout the world. Unloading, loading, aircraft and containers. Sometimes in battering rain, eye-scorching 100-degree temperatures I've got to tell you, they love logistics, okay? They get it. Some workers at Worldport are students of UPS's Metropolitan College. And in fact, this fall, we should have 1,800 students enrolled in that program. It is our private public partnership with the state of Kentucky started in 1996 where we pay tuition for the students who work in our next-day air nightly operation. It's an outstanding opportunity.

This not only provides us a stable workforce, but it also provides a well-trained and educated workforce for the commonwealth of Kentucky and just think what it does for those students who would otherwise not be able to afford to go to school. So a great program.

Okay. We've discussed UPS's cutting-edge automated facilities, our modern fuel-efficient fleet and our world-class employees. All of these components are part of a superior integrated network able to accommodate consistently changing conditions and evolving customer needs. We can adapt. We're better able to serve our customers, making their supply chains more efficient. Our network is integrated. It's reliable, and it's far-reaching. All of our competitors have a gap somewhere. UPS has the most balanced portfolio with the service quality, costs and value that meet our customers' supply chain needs. In a business like ours, details drive the network, and what matters most is the network. Ours is built to perform with greater efficiency, which translates into greater returns to our shareowners.

It's been a pleasure to talk to you. Thank you for your time. Your next speaker will be Dave Barnes. Thanks.

Dave Barnes

Well, thank you, Mitch, and good evening, everybody. I hope today you had the opportunity to participate in the tours of the Centennial Hub; also a chance to see our distribution facilities supporting our healthcare strategy, and I hope the refrigerators were set not too cold for you; and of course, Mitch's home here in Louisville, which is the center of our worldwide airline operations. Each of these plays a key role in the integrated solutions that we provide to the UPS customers. And common to each is the innovative fabric of the underlying technology that powers UPS and delivers superior results.

UPS has a long history of innovation and an extremely strong commitment to technology. In fact, on an annual basis, we invest over $1 billion. That's the equivalent of spending $100,000 an hour, 24 hours a day, 365 days a year. This intense focus on leveraging technology has allowed us to create a number of unique solutions that reduce operational costs and drive significant value for our customers, both of which provides strong returns for our shareowners.

Tonight, please indulge me as I get creative. I mean, what else do CIOs do? But what I'm going to do is to take a term that hopefully you've all heard and use it as a metaphor to help describe our global operations.

I'm going to extend the term technology cloud, a concept you may have seen and heard about and turn it into the UPS Logistics cloud. I believe this is a useful metaphor to describe our global capabilities, all of which were powered by a wealth of technologies, some that you get to see while you're here at this conference. The logistics cloud, it provides customers with a way to tap into, anywhere and anytime, a power that they need to more efficiently run their businesses. The logistics cloud lets customers streamline their global supply chain. And the cloud makes it much easier and faster to share information about their shipments with their suppliers, their transportation providers, the regulatory authorities, security agencies and customers.

And of course, in this model, costs are shared too, reducing the financial commitment of storing and accessing data on demand. Now you might ask who benefits from the logistics cloud? Well, certainly global companies can more easily export and manage supply chains that stretch thousands of miles crossing oceans and continents. But the logistics cloud, it also empowers smaller companies. They gain the power to collaborate with suppliers, to make more accurate delivery forecasts, to minimize inventory, freeing up working capital and avoid those painful last-minute surprises.

In fact, one of the greatest advantages of logistics cloud is that it serves as a business equalizer. It gives companies access to the same powerful business resources and UPS expertise. In the UPS Logistics cloud, customers don't have to waste precious resources on creating their own global network. They simply tap into ours. For example, when our middle market customers integrate our shipping, visibility and billing technologies, we see some pretty interesting results. Looking year-over-year, revenue growth at 2xs to 3xs greater than the baseline accounts and churn, that's almost in half. These customers see firsthand how logistics, enabled by technology, can and does make a difference.

There are a number of trends that are going to shape the logistics cloud, and I'd like to focus tonight on 3 of them: Mobility, scalability and visibility. Being competitive today, it means staying connected anytime, anywhere. Mobile technology has truly created a virtual logistics landscape where people and products move without limits around warehouses, facilities, networks and around the world, transforming customer relationships and business operations.

For customers, UPS mobile solutions provide anytime access to information through almost any major mobile device. These tools provide immediate insight into the status of a shipment, making operations run smoother to help businesses better serve their customers. It's only natural that people associate mobile technology with UPS, and you might ask why. Well, we pioneered the large-scale industrial use of mobile handheld, namely the DIADs, the ubiquitous handheld computers that all of our drivers around the world carry. What began 20 years ago as a bulky brown box with a very simple monochrome screen has grown over the years into a modern, lightweight extremely powerful handheld device with multiple wireless communication options. You could call it the forefather of today's modern smartphone.

Our DIADs are in global use across the globe and are instrumental in making it possible for UPS to track the deliveries of 15 million packages a day. The next generation of DIAD is even more powerful. It's going to replace the laser scanners that you've seen over the years with advanced multidimensional imagers that are much faster and much more accurate. And it provides the first in the industry's support for competing in noncompatible wireless standards, all in one single device.

The global deployment of DIAD V has already begun. UPS drivers, they're not the only ones who want the power of advanced technology right in the palm of their hand. That's why UPS offers an app for the iPhone and became the first company in our industry to offer applications for BlackBerry and Android. In fact, we're the only integrated carrier to offer mobile applications across all 3 major smartphone platforms. Now customers can use their phones to ship or track packages. They can find the nearest UPS location. They can look up rates and access a growing list of mobile functionality. These free apps have been extremely popular.

In fact, to date, over 3.2 million downloads have occurred. We've been the top 10 in the Apple store in the business side since we went out. Customers can also use their smartphones in locations outside of the U.S. in an expanding list of countries around the world. They can create shipping labels in places such as the U.K., in Canada, in France, in Italy, and we're going to expand the number of countries in the weeks to come and again, support all mobile devices.

Our strategy is to give customers accessibility to vital applications in the real world in real time, and realtime is constantly fluctuating. It's ever changing. It's dynamic, which is why scalability is so essential. Scalability is at the foundation of the very best logistics technology. And at UPS, a key tenet of our enterprise architectural approach is designing systems for global use. This eliminates the excessive cost and future integration problems that are poised by redundant systems. As a result, we achieve a higher state of consistency. We incur lower costs while allowing the flexibility that we need to be competitive.

Products that can be launched in multiple markets simultaneously, and we can leverage the strength of our integrated portfolio in the technology solutions that we provide our customers. For example, while our premier shipping system, WorldShip, is deployed around the globe to hundreds of thousands of customers, we regained or retained the ability to rapidly integrate new products in markets such as the LTL products in the U.S.

At UPS, we have architected our systems to seamlessly scale out to meet the demands of the peak holiday season. During the holidays, we will support the growth from an average of 15 million packages a day to over 24 million. And our online tracking request will grow from 28 million to over 58 million per day.

And as our operations and our systems technologies flex to meet peak needs, our customers expect and receive the same level of performance. The UPS global network? Well, it adjusts to support businesses of all sizes, supply chain complexity, industry volume or season. Any business can plug in to our network and use as much or as little of it as they need. The technology, it all makes it possible, but it's the cloud that makes it easy.

Scalability helps us stay competitive and increases the ways by which we can help our customers grow and providing immediate access to the information, and it's the right information at the right time. We're able to service our customers in ways that our competitors cannot.

Earlier today, many of you visited our Centennial building. You saw firsthand several of our operational technologies, including the Next Generation Small Sort. This technology reduces the complexity of sorting packages. It allows us to change parameters in real time, and that allows us to rapidly adapt to changes in volume or related package characteristics. It's truly an example of scalability in action.

And tonight, we demonstrated our on-road optimization technology, Orion, which represents the next evolutionary step in our dispatch technology to determine yet a more efficient route for our drivers. And that translates into flexibility, improved productivity and, of course, better quality.

In addition to mobility and scalability, today's complex supply chains -- well, they require a new level of visibility. Our innovative UPS online tracking solutions lead the industry in customer adoption, supporting the highest volume of tracking. And as I said earlier, over 58 million online tracks on peak day alone. Larger customers, they make use of our full suite of visibility solutions including UPS Quantum View and Flex Global View to see outbound and inbound movements across the complete supply chain.

In addition, UPS has been a leader in moving from browser-based applications that require customers to pull information to them to a wide-ranging set of push applications which push information automatically out. We've demonstrated an extensive set of solutions that integrate directly into our customers' ERP systems. This type of tight integration, it's required, it's what's necessary to meet our customers' needs for timely reporting and management of logistics performance. And it's going to be necessary in the future as the industry moves to utilize the growing power of predictive technologies.

Customers not only demand an extensive dashboard that gives them realtime metrics on their logistics, but they also expect predictive power. And they want us and them to work together to anticipate and respond to events that occur in the real world in real time. Utilizing the strength of our vast portfolio visibility of solutions and the flexibility of our integrated multimodal network, UPS can work directly with customers in response to unpredictable events such as the volcano in Iceland last year or the tragic tsunami and the earthquake in Japan.

UPS visibility enables companies to use analytics to uncover the root cause of the supply chain problems, so that they can learn from the information and make those necessary adjustments to their supply chains to improve performance and the service they give their customers. And at UPS, we believe in an innovation cycle where technologies that are developed for one set of customers or for an operation serve as a catalyst for innovative advances in other areas. And, for example, the visibility services that I discussed brings substantial value to our shippers across the globe. However, businesses are not the only ones who want visibility into the services that we provide. Consumers also want to tap into our visibility of services. They want to tap into our operational systems to control package delivery, so that it better fits the way that they work and live, and that's what the UPS My Choice is all about.

Announced earlier today, this product introduces a level of self-service never before seen in our industry for consumers. You'll hear more about UPS My Choice tomorrow, but let me first emphasize, this is a first of a kind consumer service, and it's the logical extension of sophisticated logistics right down to the individual consumer. It's the revolutionary next step in a technology drive that has transformed UPS's capability to move packages around the world. And it all began with the deployment of UPS developed technology in 2004 that not only made our operations more efficient, but also laid the technological foundation for the company to offer innovative new services to our customers.

Just a few years ago, UPS delivered the first public hint of what was to come. We unveiled a Web-based service called UPS Delivery Intercept that gave shippers the ability to intercept and reroute packages before they were delivered. Our technology was allowing packages to be flagged for special handling while they were in the UPS network up to and including while they were in the package car on the last mile before delivery.

As groundbreaking as Delivery Intercept was, and by the way, it's still not fully matched by our competitors, it was an option for shippers, not the consumer waiting for the package at home. Today, we're taking that next technological step with UPS My Choice. This time, an entirely new range of options is being deployed for consumers that allow them to control the timing and the circumstances of package deliveries. Current and innovative systems like Orion, they all interconnect to enable us to plan routes electronically and then empower our customers with visibility right into our delivery windows.

This data, it transforms the package delivery experience, putting the recipient right into the driver's feet. Having the strong commitment to deploying technology across UPS and extending it to our customers is a very powerful strategy. By now, it should be clear that technology does more than just enable logistics. It powers logistics. And we have been able to integrate, codify and simplify even the most complex of logistical situations. This approach, it drives significant gains and operational efficiency, improvements of service reliability and accelerates the introduction of new and innovative products to the market.

Looking ahead, you can count on UPS to continue to make significant investments in technology. Our integrated operations, coupled with our global technology architecture, provides robust opportunities for UPS in the future. And our teams of highly skilled and extremely motivated technologists are hard at work, developing fresh approaches to meet the needs of our customers and to bring even further improvements in our operational efficiency and reliability. UPS, we understand, and we promote the power of innovation broadly across our organization. And we clearly understand the role of technology to drive superior service, operating efficiencies and financial results.

Thank you for your time tonight, and the next speaker is going to be Dave Abney.

David P. Abney

I'm glad to be here tonight, and after what you just heard from Dave Barnes, I'm going to try to get you out of the clouds and see if I can get your feet back on the ground a little bit.

So today, I hope you've witnessed that this is not the same old UPS. It's not the one that investors saw in 2002 when they visited here in Louisville. Beyond the change that we've made in our brand and logo, the larger, more efficient planes and the new innovative technology, this is a company that once again has transformed itself over the past decade to play a much larger role in the global business models of tomorrow.

The numbers show this transformation. Consider that in the year 2000, only 19% of our revenue and 12% of UPS profits were generated by the International and supply chain segments. Fast-forward to 2010, those 2 segments make up 40% of the revenue and 43% of the profits. And we accomplished this while maintaining by far the highest margins and profitability in the industry. The advantage of our integrated global network and portfolio of solutions are evident in this chart. As competitors look to close the gap, we continue to raise the bar and strengthen our leadership position.

As the COO, I'm in a unique position to look across the organization to find the best processes, technology and customer solutions and put them to work throughout the company. And you saw evidence of our transformation today. UPS is a company with logistics expertise. We have become the planet's premier provider of logistics, which is my special definition of 3PL. So you know we COO types are known for our love of numbers and for our results. Because all of you are familiar with UPS, you know how important details are to us. Some might say we can even be a bit obsessive with the small things that add up. So to confirm your suspicions, I will convert some of the operational stats you heard earlier today into numbers friendly to investors, confirming why COOs are the investor's best friend.

Today, you saw how we intend to replace the key ring we've carried on our little finger for decades with new keyless technology. Keyless systems that just enable the ignition or unlock doors are not new to the industry. What's unique about the UPS keyless system is that it does all of this and automatically opens the bulkhead door. You were told today that it would save about 3 seconds per stop, which is about 6 to 7 minutes per driver day. But that equates to an expected annual cost savings of about $70 million.

We plan to get additional savings by implementing this technology in the international locations that make sense. Telematics is our sensor technology connected into the vehicle's information bus, combined with analytical tools that we use in conjunction with driver data. You know we've been deploying this technology over the past few years and perfecting it.

If you talk with the team today, you'll learn that last year's telematics -- last year, telematics reduced backing occurrences by 1/4, vehicle maintenance expense by over $13 million, engine-idle time by 15 minutes per driver day and miles driven by almost 2 million miles. All good stuff to a COO. That good stuff adds up as well.

We estimate the value of telematics at full deployment in the U.S. alone to approach $100 million. And this is a technology that applies across our network in UPS freight and in international, wherever we have vehicles in motion. Okay, just one more, and I really like this. Of course, I like them all when you're talking about that kind of savings, but the Next Generation Small Sort. Dave just told you about the sort-to-light technology. Instead of memorization, small sorters scan a package and place it in the bin that lights up. Simple enough that even a COO could make work. This benefits our -- I meant to say CIO, I'm sorry.

This benefits our operation by allowing us to make realtime sort changes. There are other benefits too, including improved service levels, significant gains in productivity, reduced training costs and further network optimizations. These things add up very quickly at UPS. We estimate the value of that little blue light at full deployment in the U.S. and in some of our largest international sites to be approximately $40 million per year. And that doesn't include network flexibilities, which is a lot of value there.

Now I know you like me to continue and reveal numbers behind all of the technology that you've seen today and tonight. At my table today, believe me, they drilled me as much as they could about getting numbers. But what I can commit to is to tell you that we'll stay focused on each of these and other promising technologies and we will keep you informed of our progress. When you view them collectively, they reinforce a key message that I want to deliver today. There is still significant value that can be unlocked in our business. That is true in the Small Package segment, domestically and internationally, and it's especially true in our supply chain segment across forwarding, distribution and UPS Freight. Across all segments, I see potential to be more effective and productive. And we see opportunity to do things for our customers that will be difficult, if not impossible, for our competitors to keep up with.

You know that we have seen encouraging results from our Supply Chain and Freight segment. In fact, operating profit improved from breakeven to almost $600 million from 2006 to 2010. Last quarter, they recorded their best performance ever, achieving an operating margin of over 8%. Today's economy has caused many companies to reevaluate each component of their business model. And supply chain management is an area that they recognize as an opportunity, and that's where UPS can help.

Our mission has been to further develop our distribution capabilities, positioning us to move deeper into our customers' supply chain. I'll spend a minute talking about the distribution business unit because tomorrow, you'll get reports on UPS Freight and UPS Forwarding. As evidenced by your visit to our distribution campus today, this business is a significant differentiator. It's more than just a big, open building. If requires no help, designing the warehouse layout, processes and systems, significantly improving the use of resources, bringing true expertise to our customers. We continue to invest in this business, particularly in the industry-specific sectors of healthcare, high-tech and retail.

It's not just about fulfillment services and shipping either. It's also about products such as service parts logistics, the on-site repair we do for the high-tech industry and our reverse logistics offerings, including the unique branded presence provided for more than 4,600 UPS stores. We've been extending our capabilities to drive value to customers and return to shareowners.

Those of you who did some walking in today's tour saw our facility that covered 830,000 square feet. This is less than 3% of the more than 32 million square feet we currently manage for our customers in 120 countries. We continue to expand, growing not only our physical and market footprint, but also developing new technologies and services.

In healthcare alone, we've opened 3 additional facilities this quarter, second quarter, to bring the total number to 30. And plans are in place for more openings in 2012. In June, we announced a game-changing partnership with Merck. This relationship was nurtured over time, and we're providing distribution and transportation services for them here in the U.S., Brazil and in some European countries. And now we will continue to expand globally to meet their needs.

We believe that in Asia, Merck and UPS working together will enhance a critical supply chain, ensuring the quality of drugs and vaccines in ways that cannot be accomplished today. This underscores one of our basic strategies of helping our customers.

Back to the bigger picture of the UPS enterprise, sometimes it's tempting for people who have become familiar with the UPS here in the States to assume that we utilize the same business model worldwide. We do keep the foundation of that model, and we adapt it to each market in which we serve. The results from our International segment demonstrate the value of this tactic. Our approach regarding capital and fixed cost must also adapt.

Typically, we work in stages, and we tailor our investments into -- for the characteristics of each market. Once we've established the presence, usually with a local partner, we continue to develop relationships and look for opportunities to expand through joint ventures or alliances. And the final stage is often to fully own the operations.

We usually enter a market with a limited product offering, export products mainly. And then as we develop the infrastructure, we look to expand into cross-border and domestic service. Of course, only when it makes sense financially. One example of how we execute this strategy is China. We first began serving this important market in 1988, using Sinotrans as our local operating partner. Then in 2004, we acquired those operations and began expanding into the major economic centers. Then we added to our infrastructure with the addition of our hubs in Shanghai and Shenzhen. And now we're expanding our capabilities domestically to better serve the needs of this market.

You will hear more about this from Dan tomorrow. This is just one example of our measured approach in emerging markets, enabling UPS to produce outstanding returns on invested capital. The foundation for these different models is our management team. These are some disciplined people.

Our culture, including our promotion from within policy, ensure that we have people who know the business, know our customers and think like owners. Our compensation and incentive plans emphasize accountability and results. Continuous improvement is ingrained in our DNA, and we're proud of our strong work ethic that is reflected in our people each day.

We're also proud of our accomplishments in the area of sustainability. Consider that in 2010, we achieved significant milestones, including reducing the fuel consumed per package by 3.3%, reduced miles driven by 63.5 million and engine idle by 15.4 minutes. Improving the efficiency and reducing waste are important to UPS and, of course, to our environment. A recent example of those efforts is UPS Smart Pickup, a service we began offering customers in the last couple of years. It's always been frustrating to drive to a pickup stop that had no packages on a given day. It's not efficient. Technology has provided a way to eliminate those unnecessary stops, saving fuel while reducing the pickup costs incurred by our customers. In fact, the annual cost savings for UPS due to this product is approximately $100 million.

Earlier today at our Centennial facility, we had the UPS alternative fuel vehicle rolling laboratory on display. These developing technologies are being tested in a real world environment to see if they can deliver the fuel savings as promised. And recently, that fleet surpassed an important milestone over 200 million miles of operation. It won't be a single solution for reducing fuel consumption. It will be a combination of the best technologies on the right routes.

So to wrap it up, our business today is more balanced, with better results and more opportunity ahead than any time in our history. I believe that through our focus on the broader logistics business, UPS is creating value for customers that the competition simply can't match. This is a competitive position that is sustainable long into the future. Only UPS has built a breadth of capabilities and solutions with a balanced global reach. We are redefining what a global integrator must be, and it involves a whole lot of logistics. After all, we do love logistics.

So thank you, and let me turn the podium over to Andy for the Q&A session. Thanks.

Question-and-Answer Session

Andy Dolny

I'm going to ask David, Dave Barnes, Brad Mitchell, Mitch Nichols to come up, and we've got some questions here. Good. Mike Jones works for me. I can read his hand writing, I can read anybody's. Okay. There's a question here on yields, base rates. I'm going to put it in my pocket. We'll talk about that tomorrow. So trust me. They're talking about -- so to let you know, it's a legit question. Since we're in Kentucky, the horse racing capital of the world, how would you handicap your base rate pricing? So we'll save that one for tomorrow. Oh, boy. Okay. Let's see. Let's have this one. Since UPS has always been a very efficient-operated company, how did you reduce the number of aircraft from 253 to 225 today? Was it deploying larger aircraft or shifting more volume to ground, et cetera, et cetera? So I'll start off with Mitch, and then if David wants to jump in, go right ahead.

Mitch Nichols

Okay. So the question is how did we do that? It's a great question. Think about it in multiple layers, first off, we've been moving to wide-body aircraft. As you saw with the 757, 767, by going from a 57 to a 67, we've doubled your capacity. It's basically twice here. The other thing we did is we expanded Worldport. And when we did that, we were able to consolidate our growth into a larger automated facility with a processing capability to get it done in 3.5 hours. So that eliminated the need for some of the narrow body that we thought we might have. And so remember back in the day, we're deploying 27s, we're deploying DC-8s, both narrow-body aircraft. Now we're deploying 67s, A-300s, MD-11s. So we go to wide-body aircraft, more volume on a single jet, smaller carbon footprint, lower costs and we leverage the infrastructure that we have in Worldport. The combination of those things had allowed us to do more with less. And I think that's a good story.

David P. Abney

And when it comes to our air business, from an internal perspective, it is all about reducing airplanes. All the other costs, that is compiled in our air business, pales in comparison to this air fee. So everything we do to plan this business is focused on reducing the number of aircraft that we're going to need. As Mitch mentioned, the main things that we were able to do, and it's what we think will continue over the next few years to allow us to be so efficient on how we utilize our aircraft.

Andy Dolny

Okay. I think I'll start with David Abney on this one. What gives you confidence that you can leverage your learnings in the U.S. package to other parts of the organization to be successful?

David P. Abney

Well, Scott just told me -- look, no. Throughout the history of our company, we have proven this time and time again. You look at -- and we don't just repeat the U.S. model. You can't do that in all places. But that U.S. model is a basis for the foundation. And in Europe, the way that we put together our network was very similar. The principal locations other than Louisville here in the States was Cologne. When we went into the LTL business, one of the first things we did, we utilized the rails that we had done for years in our small package business. Dave is an excellent example to my left of finding ways that we take our technology and go across all parts of our business, domestically and internationally, small package and non-small package, whether it be DIAD or WorldShip or other numerous examples that we can give. But the things that you have to remember, the foundation for our success is reliable, efficient, integrated network. And that is the basis upon we build everything else.

Andy Dolny

Okay. Well, Dave Barnes, do you think you are over building your technology infrastructure? Are you truly getting a return on your investment?

Dave Barnes

All right. Let me hit that one real easily.

Unknown Executive

Just remember it's budget time, Dave.

Andy Dolny

That was -- Kurt gave us that question.

Dave Barnes

Yes, I'm looking -- I'm seeing right in front of me the CFO. Now he may have a different thought, but let me give a real thought. So definitely not over building. I mean, the key to this technology is to leverage it. The bottom line is the fabric that ties together our diverse operations and capabilities. It is the glue that binds us. Beyond that, it's the catalyst that allows us to drive customer experience just to a higher level, while at the same time, allowing us to do what Dave talked about. To give consistent experiences across to set up global operations that are quite complex. And on the other side of the scale, it goes right into the heart of what CO is all about. It is what we use to drive the most significant gains in operational efficiency and the liabilities that we delivered in recent years. It's technology that's doing that.

Andy Dolny

Okay. Mitch Nichols. This is a question about j-e-t-s, jets, jets, jets. Beyond 2013, what are your plans for aircraft acquisitions?

Mitch Nichols

I got this question earlier in the evening, and it didn't surprise me because I get it all the time. I'm asked by our employees and any one that's associated with the airline. Let me start where we're at. I mean, we're currently acquiring a 767 upgrade. We've got 7 being delivered next year and 8 being delivered beyond that. If you think about the flexibility that provides, the interchangeability of 757 and our network flexibilities I talked about, I think we're very well positioned right now to adapt to any and all situations, rapid expansion, shifts and demographics, whatever it might be. So I feel very good about where we're at. Now the question really is, is where are we going with aircraft acquisitions? We, in the airline, are laser-focused on an operating leverage and internal invested capital. And you would -- so you would look at aircraft that would compliment your existing fleet structure and go into operation. But I want you to think about this differently. The customers have the packages. They have the logistic needs. We'll line up with their needs, we'll adapt to what they need us to adapt to. They define, ultimately, what our network needs to be, and like I told you, it can adapt quickly and it's very flexible. And that, in turn, will define what aircraft we'll look at. If there's a number of good aircraft out there, we can still buy 6-7s, Boeing's producing that. We know the triple is out there, Airbus has got the 330. I'd go through the whole list and the litany of choices that we have. We have choices, all right? So I feel very good about where I'm going forward in terms of our acquisition stream, and I feel great about the options that are out there. And I think very strongly that we have the flexibility and we make the right choices.

David P. Abney

Now just to summarize that, I want to leave you with this thought. We do not want to have the largest fleet. We want to have the most utilized fleet and that allows us to get the returns that we need to get.

Andy Dolny

Okay. Brad Mitchell, what gives you confidence that others can't replicate what you're doing today in distribution?

Brad Mitchell

That's a good question. We talked about it this afternoon in a number of the tours through the distribution centers, for sure. And I think 2 words come to mind. One is integrated and the second is global. And I used that example of Novartis we all saw this afternoon, where their products start coming out of that manufacturing facility in Germany or the U.K. It goes on a brown tail. It crosses the ocean. It clears customs. When in the Worldport, crosses the street, gets stored in the distribution center, you all saw it today, and they get picked, packaged, shipped and, of course, transported on our vehicles to the doctor's office in Chicago. And it's all done through that same integrated network with open visibility and access to information at the same time as the products moving through the chains. I think that differentiates us a great deal. And I think as customers look at growth in emerging markets, they're looking for -- expecting the same things from one provider around the globe.

Andy Dolny

Now that's all the questions I have, and I don't see -- I see somebody standing over there. Do you have a microphone over there? [Indiscernible]

William J. Greene - Morgan Stanley, Research Division

It's Bill Greene from Morgan Stanley. Today, we had a briefing from the pilots, where they talked about what their hopes were for the next contract. And I realize that's an opener, but they talked about a $1 billion increase in expense there over the next 5 years or the 5-year contract that they're going for. They also said they had $1.3 billion in increased expenses for the contract that you signed in '06. Now you did a great job sort of outlining some of the things you did for savings. And I'm wondering, if your pilot expenses increased by anything close to that magnitude, do you have much more you can do with the fleet to significantly reduce the net effect of that kind of increase in the pilot expense? How do you think about what kind of efficiencies that are left there?

David P. Abney

All right. The first thing that we all realize and it's -- Christmas will be here in 3 or 4 months. So I will send a letter to Santa Claus, too, what I'm looking for, right? So obviously, they have their list, and I understand that. And it didn't surprise us. But I mean, when you go into negotiations, we're going to have what we need, too. And we're not going to negotiate in front of all the people in this room. We're going to look at 2 things, the same 2 goals we have in all negotiations. And that is, one, we'll award the people that help us with our success; and then, of course, two, is make sure we remain competitive. And if we were going to increase our costs in any significant way, then we absolutely will have to find efficiencies to counter that. So I think that Mitch did a great job of explaining what we have done in the past few years to increase that efficiency, and we will continue to look for ways to do that. And you have to remember that this negotiation is going to be a pretty lengthy process. It follows the National Railway Labor Act, and it could be a few years. And they have certainly led to some of our success, we recognize that. But we're also going to do the right things for this business. So we will keep that in mind with the negotiations. Mitch, anything you want to add to that?

Mitch Nichols


Andy Dolny

Okay. Just to show this is legit, this says right up here, Go Jets. Okay? But this is a question on changes in China and potential new air hubs. And I'm going to hold this one again until tomorrow. It will get answered, okay? Is there -- anybody else have any questions? Tom? Somebody get a microphone to Tom, please.

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

Can you comment on utilization at your major hubs, Worldport, Cologne and Shenzhen? And then, a second question on the logistics side, you done a lot of work to improve margin in contract logistics and very strong success in that the last couple of years. You've got a lot of opportunity with the healthcare that you've talked about. Would we expect a step-up in the revenue growth in your business as you -- that made more of a focus than the margin improvement has been in the last several years?

Andy Dolny

I guess I'll start off, and question B will be answered tomorrow, okay? I think that will be part of Kurt's presentation. Okay? So the first of the question, I guess, will -- the hub utilization. Anybody? Start Mitch?

David P. Abney

Okay. Why don't you start on Worldport, and I'll talk about the other half?

Mitch Nichols

Can you repeat the question? I got more tied up in the B than the A.

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

So I guess, how's the fourth year hub utilization look like at the 3 major global hubs at Cologne, Worldport and Shenzhen? And sort of how much runway do you have before you estimate big investments again?

Mitch Nichols

Okay, you're talking about -- you said runway or you're talking about just capacity?

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

Just sort of the capacity in the major hubs.

Mitch Nichols

Okay. I mean, we'll reach our capacity at peak, okay? We extend the sort, and we do some of those things here in Worldport. We'll move 1.5 million to 1.6 million -- or the 1.6 million pieces is what we're looking at. So you take that 416,000 and you multiply it times a sort span, that gives you the capacity. Every night, we're over 1 million pieces, sometimes higher around the holidays or special occasions, or days of the year and month, quarter. We'll push that up to 1.2 million, 1.3 million, okay? But we're not at capacity. We also have the ability to expand Worldport. So we can take that up almost to 500k, shy of that. So we still have expandability in that. And I think my -- is it on? Okay. The other hubs, we haven't reached capacity. We do have the -- like I said in my presentation, we have the ability to expand both of those. So we have room to move. We always build hubs with the idea that we don't hit capacity right out the gate. And we've got a 5-year plan, and David can talk some to that. But we looked at building a hub to anticipate volume and then we have ability to expand beyond that. I don't know if that helps.

David P. Abney

So tomorrow, Kurt is going to talk about CapEx a good bit more. I can just say that when Mitch talks about reaching capacity at Worldport, he's talking about for a select few days.

Mitch Nichols

That's right.

David P. Abney

So what we can obviously do, at any point in the future, as that starts to -- volume starts to increase, is we can look at expanding some of the existing regional hubs. We can add a regional hub or 2, or we could expand Worldport. But we're not to that point in the next few years. Second, when it comes to Cologne, Dan's going to talk about that more tomorrow, so we'll just let that sit. And Shenzhen was designed to be expanded to twice the size it is today. So we have plenty of room there. So we're okay from a sorting capability over the next few years.

Andy Dolny

I think we have a question.

Mitch Nichols

If I could add on this.

Andy Dolny

Go ahead.

Mitch Nichols

We plan capacity to be maximized during peak for the hub. So to David's point, that's a plan. I mean, we -- that's not because we can't push the volumes of result [ph]. So we actually bring it into Worldport [indiscernible]. That's our choice.

Andy Dolny

We got a question over here.

Unknown Analyst -


Andy Dolny


Unknown Analyst -

Orion starts March 1, 2012. Does that mean system-wide, all of a sudden? Now I remember when you started improving the packing of your delivery vehicle several years ago, that process took several years. Is this the same thing, or is it just all at once?

Andy Dolny

You want to take it? Okay. We're going to have Dave Barnes.

Dave Barnes

Yes, I'll take that one. So Orion, we introduced it here tonight, and we gave a display on it to try to talk about this emerging technology. It's truly on the cusp, so it's still in development right now. So we have a hybrid release, which is the one that's going to go to market and be deployed in our operations beginning 2012. Simultaneously with that, we're actually co-developing the next release after that, which has a major gain in functionality and value to it. In any case, this is a multi-year rollout. There is no big bang, it won't go to all drivers at once. We're talking a multi-year rollout, 3 to 4 years and multiple versions.

Andy Dolny

I think -- why don't we -- I'll save this one for -- yes, this one I'll save for tomorrow, too. We need to wrap up. So why don't we do this? You'll have ample time for Q&A tomorrow. Please enter -- the buses are waiting for you folks out here, enter the way you came in. And I'm sure there'll be folks from my staff over there, pointing you to the elevators. So thank you very much for your time with us today, and we'll look forward to you tomorrow. Thanks.

Unknown Executive

Good morning, ladies and gentlemen. Welcome to Day 2 of 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 today 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 were 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 today's host, UPS' Treasurer and Vice President of Investor Relations, Andy Dolny.

Andy Dolny

We're looking for Kurt's folder. If anybody has found Kurt's folder which has his presentation in it, please return it to my team. Thank you.

Good morning. Hopefully, you had a good night's sleep, you didn't stay up too late and sharing notes with one another. We enjoyed yesterday and hope you did also. Welcome to Day 2 of the UPS Investor's Conference here at the Brown Hotel, how appropriate.

Yesterday, we focused on our technology and our operations. You saw the UPS integrated network in action, Worldport and Centennial, focus on capabilities built through innovation and technology. At our distribution campus, you saw that UPS does much more than deliver packages. We've developed a considerable supply chain capability in healthcare, high tech, service parts and retail. At the Ali Center, we demonstrated how UPS continues to invest in our network, applying technology to drive new efficiencies and capabilities that find their way into UPS products and solutions in what we call the innovation cycle.

David Abney made it clear that our core values of constructive dissatisfaction and accountability would continue to generate superior results. He also highlighted UPS' leadership position and how we are redefining the definition of a global integrator. Today, we're going to shift gears. We're going to focus on our strategies and our positioning, the markets, the business units, the financials. At the end, we ask you to complete a short survey to give us feedback on the conference.

And now without further delay, it's my pleasure to introduce our Chairman and CEO, Mr. Scott Davis.

Scott Davis

Thanks, Andy, so much, and good morning, everyone. Let me add my welcome to all of you for joining us this conference. I know we ran you pretty hard yesterday, a little late, but hopefully it was well worthwhile.

Our intention is to build on yesterday's review of our operations and our technologies. We'll keep the formal presentations brief. And I assure you this will not be a 3-hour infomercial. Instead, we'll talk about topics important to all of you, such as UPS' strategy, market opportunities and our long-term objectives. And we've devoted ample time to Q&A breakout sessions, designed to listen and answer your questions. Frankly, I think it's your favorite part and it's my favorite part of these conferences.

When I addressed this audience at our last conference in 2008, we talked about the UPS portfolio, and how it was in place to meet the supply chain needs of our customers, and that we're now entering a period of execution. Over the last couple of years, we've been doing just that, while navigating through some very challenging economic conditions. In the last few months, we have seen a bumpy ride that may likely continue. Despite this greater uncertainty, UPS still expects to set a new high for EPS this year.

During the recession, we talked about 3 types of companies that would emerge. Some companies were not going to survive. A second group of companies were going to be damaged and probably take 5 to 7 years to get back to their peak performance levels. And then a third set of companies, that would be customer focused and lean. They would transform and adjust for challenging conditions and come out stronger than ever. And just as we predicted, UPS would be in this last group. Stronger than ever, and perhaps, more importantly, positioned for growth.

This morning, we're going to share with you our vision and how we will get there. We'll also look at some megatrends and why UPS is in a great position to capitalize on them. Let me start, first, by taking a moment to discuss the UPS enterprise strategy. We believe that a differentiated factor is the UPS solutions-based approach. Everything we do is focused on creating value for our customers, not just getting a shipment from one place to another. It's a solution designed to improve our customers' existing supply chains. This is the competitive advantage of UPS. We are determined to maintain this competitive advantage well into the future. How?

We'll continually transform, pushing the customer experience higher and enhancing our performance through quality, efficiency and technology. I'm very excited about the opportunities in front of us. I assure you, we are making the necessary investments to grow our business, including building out our infrastructure and presence in key emerging markets and expanding our capabilities to provide unmatched solutions. Each of these tenets create value, transform and invest to grow is important to our future.

Now I think most of you would agree that whoever coined this phrase had no idea what they were wishing on us. I, for one, will be more than happy to go back to a period of good old-fashioned global economic prosperity and so would you. Many people are working diligently to forecast the future. This is an extremely difficult but necessary component of strategic planning. Think of all the variables in play: energy prices, macroeconomic output, jobs, currency, inflation and legislative uncertainty, a lot of that. These interconnected factors are more volatile than ever, creating a broad range of potential outcomes.

Now here's the good news for UPS and our shareowners. Nearly every plausible scenario continues to see an expansion of global trade. Trade is the world's most powerful engine of growth and prosperity, and it offers the best path out of the current economic doldrums. UPS is one of just a few companies that are positioned at the center of this tremendous opportunity created by global trade. But what gives us the competitive edge? Unmatched solutions, extensive global network and superior technology. Being positioned doesn't guarantee success, you still have to execute. And global trade means global competition in nearly every industry space. We must pay attention to every detail, while building advantages where possible and creating models that work across markets.

As companies look to expand their customer base and penetrate new geographies, they must look beyond the developed markets and rely on service partners that have the necessary footprint and capabilities. Tremendous opportunity exists beyond the BRIC companies. Another group of favored emerging markets is Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, better known to us as CIVETS. I know, just what we need, another acronym. I'm not so sure Egypt will stay in that group either, by the way.

The fact is, these emerging economies offer great opportunities. They have dynamic and diverse economies, sound financial systems and young growing populations. These markets provide an excellent option for sourcing, as well as growing middle classes that will increase consumption within the countries. Rising middle classes will drive more consumption. It's projected that by 2020, more than 1 billion consumers will come from China and India alone. Now many of you have heard that number before. But you got to remember, 2020 is not that far away.

This growth provides market opportunities that are only now beginning to develop. A sizable portion of these new customers are projected to be below the age of 35. Demographics will impact how companies meet the needs and capture the attention of this group. This generation is very different from their parents. They value individualism, rely heavily on technology and they want things now. The new consumers want choices that allow for customization, and they expect fast and reliable delivery networks. UPS is there to provide our customers with the flexible and efficient supply chain they need to serve their customers.

The direct-to-consumer business model plays a huge part in serving the next generation. And we've seen this trend occurring in the U.S., and it will continue to evolve in other parts of the world. UPS already covers every address in North America and Europe, and therefore we're in an excellent position to take advantage of this trend. UPS offers robust supply chain options in an unmatched suite of return solutions. Our continued work in the area of reverse logistics enables our customers to have greater visibility and improved inventory management, while enhancing the post-sales experience for their customers. UPS is aligned with our customers on improving the B2C shopping experience.

Just yesterday, we unveiled UPS My Choice, which does just that, by putting you, the consumer, more in control. And Ken Hoexter, I understand your wife has already endorsed that product. I appreciate it. I know that most of you had an opportunity to visit the My Choice display last night. Later on, Alan is going to talk more about this innovation that ensures UPS remains the premier B2C choice.

Another market where UPS is rapidly becoming the industry leader is healthcare logistics. The healthcare sector is one of our top priorities. This sector provides a significant opportunity for growth. Companies are producing medicines, products and solutions that will increase the quality of life, as well as lengthen the human life span. Healthcare companies that were highly profitable in the past now face major challenges. Such as the explosion of generics and more stringent regulations. This industry is in the early innings of outsourcing. They need trusted, reliable partners whose core capabilities enable global distribution, so they can concentrate on the next medical breakthrough.

That's where UPS comes in. We continue to ramp up our investments by providing robust solutions, special storage and handling requirements, as well as ensuring regulatory compliance and speeding products to market. This enables our healthcare partners to focus on their core competencies, product development, leaving the efficiency of the supply chain to us at UPS.

When we talk about creating value for our customers, we're talking about the approach we take and how we go to market. UPS has the best technical people, the broadest portfolio of solutions and capabilities and the most efficient integrated network. Now Alan, Myron and Dan will share with you how UPS is out in front, creating value to the UPS Logistics experience. This value provides UPS customers and helps them drive their success which, in turn, will drive UPS' success. UPS' results show that our model is connecting quarter-after-quarter. We're generating higher levels of return and expect to push them even higher over the next few years, benefiting you, our shareowners.

ROIC is a key metric, as you know, at UPS. While the past few years have challenged many companies' return profiles, our ROIC is on a very solid trend. We expect a new high within the next year, and this is just the beginning. In fact, in the next 3 to 5 years, we expect our ROIC to be a minimum of 25%.

During the past few years, we've continued to make prudent investments, to ensure growth and connection to a changing world. Our financial strength enables UPS to build our footprint around the globe, adding to our unmatched capabilities. These investments are the foundation for the UPS growth engine. There's work to be done here at home to capitalize on the opportunities that exist in emerging markets. We must find ways to increase U.S. exports. America's jobs and economy depends on it. Free trade agreements are essential, and Washington needs to act upon them. For example, the agreement with South Korea has the potential to add as many as 70,000 jobs. Foreign markets, particularly those in Asia, are hungry for American brands and products. We must find ways to produce and export more of them.

Okay, I better move on. I could go on trade and exports all day long, and Andy's already waving at me. So for the past few minutes, I've been talking about a UPS that's on the move, even during these challenging times. And we are working toward a vision that redefines what it means to be a global integrator. I must emphasize that not all is in flux. Our approach, the way we integrate everything that we do remains firmly rooted in our core UPS values. We believe that in challenging times where risk is high, values are more critical than ever. I'm proud to say that one element that remains constant is a trust that customers are willing to place in UPS and our people. No single element of business is more powerful than our reputation for delivering on our promises. Our success during the last few challenging years is a testament to the values of our UPS people around the world.

Next, Alan Gershenhorn will tell you more about why customers choose UPS. Alan?

Alan Gershenhorn

Good morning. In the world of business and business people, it's results that count. And you already know, based on quarter-after-quarter results, that UPS leads the industry. I want to spend a few minutes with you this morning discussing why customers choose UPS. I'll also show you how our unique strengths have positioned UPS for future growth and returns.

Customers choose UPS for the genuine quantified value that we create, value that helps them improve their own business results. We continue to be #1 around the globe because of the value we bring to the markets that we serve. Our focus is to be recognized as the experts in logistics. We're energized, we're equipped to transform our customers' global supply chains, whether they're large or they're small, helping them accelerate both their top and their bottom line growth.

Let's hear from one of our customers about the value of doing business with UPS.


It's no accident that the Zappos warehouse, with its millions of shoes, is just 15 minutes down the road from here and UPS Worldport. Zappos has, literally, built their platform around UPS to realize the full value of doing business with us. Like the other million-plus UPS customers that put nearly 2% of the world's GDP in our hands, Tony and his team trust UPS to extend the distinctive customer experience that is the Zappos brand.

As Scott indicated, UPSers are known around the world as hardworking, capable and trustworthy. For over 100 years, we've been fixtures in offices, warehouses, cities, towns, safely and reliably delivering critical shipments and valuable inventory. Brown exemplifies trust. And today, when customers consider new approaches to their supply chains, they know that in addition to trust, they can also count on UPS now to provide reliability, reach and a broad portfolio of capabilities that's second to none.

These are 3 of the keys to the unique value we provide, value that's unmatched in the industry. Let's take a closer look at each one. Reliability has been our trademark for over a century. As you saw yesterday, UPS has continued to invest the capital and the expertise to build a robust foundation that's second to none. Our people, our network and our technology ensure our continued leadership and reliably delivering a wide range of services error free time after time. That foundation enables UPS as the global express package leader to deliver more guaranteed packages on time than anybody, bar none.

Balanced global reach is another reason customers choose UPS. We're the only integrator that has significant operational presence across all major economic regions of the world. It sets UPS apart from our major competitors, each of them having strategic coverage gaps. Our balanced presence provides clear advantages for customers with supply chain needs in multiple geographies. When our customers are looking to extend their business within or across the U.S. in Americas, Asia or Europe and the Middle East, UPS is their choice.

In addition, our balanced presence also enables us to grow with the more localized native prospects, further diversifying our geographic base. It allows us to seize opportunities that our competitors simply cannot take advantage of, primarily because they're not there. UPS is committed to growing where our customers need us most.

So we've talked now about why UPS is the choice, reliability and global reach, but there's a third reason also. UPS has the broadest portfolio of capabilities. Our combination of global transportation, distribution, forwarding, brokerage, state-of-the-art supply chain technology that you heard from Dave Barnes about, just to name a few, coupled with that global balanced presence, differentiates UPS from any other transportation carrier.

As you heard last night, we've defined what it means to be a global -- we've redefined what it means to be a global integrator. And in doing so, we continue to open up enormous markets of opportunity. Consider Merck, which you've heard a little bit about these last couple of days. Over the years, our relationship has expanded into a highly collaborative partnership. Each of our companies focusing on our core competencies. Merck is working on developing life-saving drugs, while we continue to develop our global expertise and scale in healthcare logistics. Together, we're figuring out how to serve giant new markets, like China and Brazil, at impressive levels of efficiency.

You're also familiar with the examples like Toshiba. In addition to managing their small package, we repair their laptops, provide distribution services and handle their forwarding and brokerage. Customers have made us the leader because we create that differentiated value. We've become integral to our customers' businesses. We enable them to grow and thrive with our broad portfolio of capabilities, our balanced global reach and our reputation for reliability.

As I opened, I showed you how UPS leads the market among the major competitors. Even with our leadership and healthy competition, you should know that combined, the big 4 global carriers make up just 33% of our addressable market. It's a big world out there. So there's plenty of opportunity for growth. And I suggest that as global trade increases, so does the demand for UPS.

One of the true powers and differentiators of UPS is our ability to blur the lines between the transportation modes. Our focus is on helping our customers optimize their supply chains. Our offerings, for example, UPS Trade Direct and UPS World Ease actually cross transportation categories and provide customers with state-of-the-art international shipping solutions. In this case, these 2 services combine the best of our package and our forwarding services, while eliminating warehousing and distribution costs for our customers. We're able to operate within and across each of these spaces seamlessly. This is just another reason why UPS will remain the global leader.

Scott explained a few minutes ago why the healthcare sector is one of our priorities. It's an industry that faces a variety of complex challenges with a simultaneous mandate to become more efficient. Sounds like a great fit to me. Our success to date in an underpenetrated healthcare industry that currently spends about $60 billion on logistics demonstrates 2 key points. First, our ability to place the UPS brand in a critically complex market by rapidly assembling talent and executing to build deep competency, some of which you saw yesterday, state-of-the-art global infrastructure, coal chain, controlled substance, regulatory requirements that vary by country, not simple stuff. Second, UPS' ability to win. Healthcare customers recognize our value and respond. These companies are receptive to UPS process, our technologies and our efficient execution. They know that compliance and supply chain continuity and costs are safe in our hands.

Beyond healthcare, in order to seize other major market opportunities, UPS has developed supply chain practices and expertise in a variety of industries. To name a few, high tech, automotive, industrial manufacturing, retail, government and professional services. Similar to healthcare, whether that industry has a higher propensity for growth or a lower UPS market penetration, or it's purely our ability to leverage our overall supply chain capabilities, all of these industries provide significant upside potential for UPS.

As you may have seen yesterday on our supply chain campus, our solutions professionals with their substantial expertise across these targeted industries help our customers look at their supply chains in uniquely different ways. Whether it's transportation related, domestic, transborder or intercontinental, express or deferred, package or freight, or supply chain related, warehousing, kitting, service parts or reverse logistics, or even financial products, these UPSers, along with our greater team, are focused on helping companies improve their key performance indicators, driving down their inventories, reducing days outstanding, improving speed to market, just to name a few.

These supply chain professionals utilize their specialized knowledge to market our vast array of capabilities in a differentiated and meaningful way, tailoring our services to address industry and customer-specific paying points and value drivers. Solutions that benefit customers benefit UPS and, ultimately, our shareowners. When we sell more than point-to-point movement, specifically these integrated solutions, we see increased levels of loyalty and higher levels of return.

Getting these global capabilities together is UPS' innovative technologies. As we saw yesterday, we deploy robust, standardized operating models and technologies around the world, making us the most efficient and profitable carrier in the industry. These underlying operational systems are the backbone that allow us to offer customers that unparalleled experience, whether they track a package, process an order or prepare a shipment. Customers respond to that quality of the experience, for example, by making our UPS Mobile the only Apple top 10 downloaded integrated business app in our industry. And by the way, you heard from Dave yesterday that our mobile apps have been downloaded over 3 million times.

On the international technology front, UPS was the first company to offer customers a paperless commercial invoice process for global express shipping. And we just recently introduced that same capability for our international air forwarding service. UPS Paperless Invoice makes it nearly effortless to ship samples from Chicago to Shanghai as it would be to send them to New York. This innovative product has accelerated the growth of our international business, generating solid levels of profit by improving our customers' service and overall cost, while also saving our customers' time and even over 100 million pieces of paper.

By the end of this conference, you should clearly see that UPS is out in front of the megatrends in the healthcare and high-tech industry, as well as the various facets of global trade. Similarly, e-commerce and e-tailing is another important megatrend that UPS is capitalizing on and leading the way. UPS has a second-to-none portfolio of B2C options that allow us to fit the right service to a variety of needs. And the industry first UPS My Choice, enabled by UPS' advanced technology, shows our commitment to making the shipping experience better for consumers or the receiver of the packages. It's going to give consumers a whole new level of visibility, flexibility and control, never before seen in the industry. Simply put, UPS My Choice is designed to ensure that missed deliveries are a thing of the past.

I imagine most everyone in this room has experienced the frustration of not getting your package on the first delivery attempt and finding a delivery notice from UPS or another carrier for that item you were expecting. With UPS My Choice, for the first time ever, consumers are armed with the ability to know when a package is coming, and then to control the timing and location of the delivery before the first delivery attempt is ever made. UPS My Choice will free consumers from worrying about when packages arrive, where they'll be left or what to do if they're at home to receive them. You can control deliver location and other options even allow you to control the delivery window. With UPS My Choice, the days of receiving a delivery notice and wondering how and when you'll receive your package are over. As they say, a thing of the past. You can now schedule package delivery around your life. No other company gives consumers this much visibility, flexibility and control of your shipments.

So as you now step out of your customers' shoes and into your investor shoes, you can see how this innovative offering enables UPS to build closer relationships with our receiving customers, fundamentally we're addressing their needs and their paying points, improving their delivery experience, ultimately building more consumer preference for UPS. At the same time, we're also increasing the loyalty of great partners like Zappos. So whether it's UPS My Choice or UPS Paperless Invoice, we continue to create unmatched value for our customers through the effective integration of our worldwide capabilities. Our customers are not just buying distribution services or an express movement of packages, they're buying solutions that best optimize their supply chains, reduce costs, accelerate their revenues and deliver a customer experience that's approaching a one-to-one relationship.

This is a level of service and value that cannot be achieved by purchasing these components separately from multiple suppliers. It's also a level of service and value that cannot be achieved without the expertise to build these solutions that are greater than a sum of the parts. Companies large and small are getting in touch with the value of UPS Logistics.

Let's hear from Amazon on consumer's expectations.


From the giants like Amazon to a middle-market customer in China, like Milky Way Jewelry, our customers recognize the value of integrated solutions that leverage UPS capabilities around the globe and across the entire supply chain. They trust that UPS will continue to invest in a foundation of equipment, people and technology that reliably and efficiently deliver in markets all over the world. Our customers know that we'll continue to provide innovative services like UPS My Choice, while improving existing best-in-class offerings like our international Paperless Invoice to stay one step ahead. Reliability, reach and capability, that's the new logistics, and that's why customers choose UPS.

Thank you. And now I'd like to introduce Myron Gray, our President of the U.S. Operations. Myron?

Myron A. Gray

Good morning, and thanks, Alan. If there's one thing I've learned in my 33 years at UPS, it's that change is constant. I'm going to tell you about some of the big changes that we've put in place and how they position UPS for future growth and returns. We intend to expand our lead in the U.S. on the terms that matter to us, growing earnings. We'll accomplish those goals by focusing on providing the solutions that meet our customers' needs. Our sales teams have focused on bringing the right packages into the network and effectively managing the quality of revenue we receive. And as you saw yesterday, we continue to raise the bar for ourselves and the competition with our people, technology, products and solutions, all of which are supported by the most efficient network in the industry. Though we face macro challenges, we're on the right track to achieving our goals. For some of you, yesterday may have been the first time that you experienced Worldport, our supply chain campus, or the Centennial Hub, all of which are strategic assets. I'm confident that you know one of our strongest and most recognized assets, your UPS driver. Everywhere I go, business leaders and neighbors tell me about their driver.

David Abney spoke about the power of our integrated network last night. And the fact that we typically have one driver that picks up and delivers all of your air, ground and international packages. It is a differentiator in the UPS integrated network. As we've been doing for much of our 104-plus years, our winning ways are due to the willingness to transform ourselves. The U.S. domestic segment today is leaner. It's a more efficient business with significantly fewer districts and regions than just a few years ago. Our employees are working together, and the management team is energized. They see that our strategies are paying off. We've added specialized marketing teams at the local level and aligned our sales force in ways that allow us to build meaningful value-based lasting relationships with our customers.

The transformation was not just about shrinking the organizational footprint. Our go-to-market approach is different, significantly different. We take to learn about our customers' business, looking for opportunities to enhance their supply chain. In fact, one COO told me that we learned more about their business in 3 months than their former provider did in the previous 10 years. That speaks volumes to our new approach. We assemble what we learn into a specific quantifiable proposal, which demonstrates the value that we can achieve with UPS solutions. For example, we recently won a medium-sized firm who specializes in technology repair. They seek to differentiate themselves through same-day repairs or what they call, Day 0 repairs. By understanding their goals, we were able to provide them with early enough delivery to do just that. We leveraged our industry-leading returns portfolio by providing them with a single driver, so that their operation is not disrupted with multiple deliveries. We also enabled visibility to inbound shipments, allowing them to schedule their receiving and their repair operations. We aren't done with this customer yet. They are a perfect candidate for products that change. Service that you saw on display last night, as well as the host of other international solutions that will enable their ability to expand globally.

This is what competing on value looks like. The UPS solutions-based approach puts less pressure on discussions that simply revolve around price. It focuses the customer on looking at their entire supply chain and highlights the value that UPS brings to the table. All of this is part of the UPS transformation. Clearly, our changes have been much more than a cost-cutting exercise. It's allowing us to show them what UPS can do for them over time. This prudent approach has allowed us to steadily grow our base pricing, as customers realize the value we add. And based on that success, we're able to further penetrate their business. We've continued to identify opportunities in distribution, freight, international shipments or return services. We showed them how the scale and efficiency of UPS benefits them. It's a win for our customers, their customers, and it's a win for UPS. Though I am impatient, and I've been told that a few times, you've seen the success of our go-to-market strategy over the past few quarters. We have changed the dialogue with our customers from will a lower price keep your business, to consider the value of all we offer. These discussions are yielding mutual understanding of our businesses. And as a result, improved base rates, which are up 3% during the first half of 2011. We expect this to remain a positive trend for years to come.

We're targeting 2% to 3% annual increases in base pricing. And as we transformed our organizational structure, we remain focused on productivity improvements and operational efficiencies. Over the past several quarters, we've demonstrated considerable gains in reducing labor hours, miles driven and block outs. I'm extremely proud of how UPSers have responded to the transformational challenges, providing -- proving that the right plan can enable you to do much more with less. The performance metrics that we use every day in managing our business make it clear to what's expected of each of UPSer to ensure success. Not only do these metrics enable productivity gains that you just saw, but they are also instrumental in how we manage our capacity. For example, every trailer load we bill has expected pieces per trailer level, regardless if volume projections are heavier or lighter than normal. This mentality enables us to have a more linear relationship between volume and road capacity. It also allows us to manage our rail expense.

Some of the operational technologies you witnessed yesterday are instrumental in this process. Our improved efficiency, combined with the value proposition we offer customers, will continue to produce strong operating leverage. That will continue as we move forward. As proof of our success and our strategy, you only need to look at our quarterly results. In the second quarter, our revenue was up 6.4%, with operating profit growth of 30%. And we improved our yields by more than 6%, and that was in a slow economy. Our approach includes integrating UPS technology platforms like shipping, visibility and messaging within our customers' environment. Technology provides its own value, and it often extends that value to our customers' customer. We know that when we're enabled to integrate UPS technology, loyalty and penetration go up, churn goes down. We've increasingly observed that when we win customers' small package business, there are opportunities to also support their truckload needs.

So let's turn to UPS Freight. We've been able to leverage our extensive customer base and UPS' technology platform to generate solid growth and industry-leading yield. Those elements, coupled with our continuous improvement in service and efficiency, are driving progress quarter-by-quarter and redefining how our customers think about LTL. We're on the right track, but this is a multi-year process. I expect UPS Freight to double its current operating margin to around 6% over the next 3 years. Though this is still ultimately not where we need to be, it does represent an annual growth rate and operating profit of more than 30%.

During my opening, I've said that the U.S. domestic segment was raising a bar. Beyond the value approach we take to market, we continue to invest in operating capabilities that extend our leadership position and drive operational effectiveness. As we execute our latest products like UPS My Choice or Returns Exchange, realize that these are great from a customer experience perspective and provide additional sources of revenue tied to the rapidly expanding B2C market, but they're also good for UPS operations.

In the package business, you want to deliver packages on the first attempt. Redeliveries don't make our customers happy, drivers or me happy. Just as Alan said, My Choice, through its notifications and routing abilities, will reduce that dreaded delivery notice or what we refer to as send agains. Now that's a win. Our new technology puts us out in front and combined with superior density, UPS will continue to have levels of efficiency and service that our competition just can't touch. I'll admit that it would be nice to get a little help from the U.S. economy, but our continued focus on revenue quality, while capturing a greater portion of our customers' transportation spend and executing on our operating plans, will continue to help move us in the right direction. Over the next 9 to 12 months, there may be some bumps in the road, due to the economy, but it's my expectation that the U.S. domestic operation will reach and surpass its previous peak operating profit within the next 3 years.

And now I'd like to turn it over to my colleague, Dan Brutto, who will talk to you about our international operations. Thank you.

Daniel J. Brutto

Thanks, Myron. It's good to be with you this morning. I'm absolutely passionate about UPS International and looking forward to the opportunities of discussing UPS' International segment, as well as UPS forwarding.

First, I'm very proud of UPS around the globe executing our international strategy and the results they've been delivering, including maintaining our industry-leading Small Package margins while at the same time, growing market share. The Forwarding and distribution groups are demonstrating strong performance, as well as making significant contribution to the supply chain segment.

Together, I expect these businesses will continue to be a catalyst for meaningful revenue and profit growth at UPS. Our International segment's operating profit as a percent of consolidated profit has gone from 6% in the year 2000 to 33% in 2010. From just under $300 million to $1.9 billion, a CAGR of 21%. Our profits reflect the focus on investing strategically to create both opportunity and balance, targeting the right combination of initiatives, those that harvest returns from more advanced markets while simultaneously building out the capabilities for developing markets.

Success often drives more success. Those of you who know me, understand that I've been known to set aggressive goals. One of our current ones, doubling International segment profit by 2016. Putting up a mark creates some fun, challenges our people, shows our potential. Global growth opportunity remains substantial and here's why we can set aggressive goals. Sales force execution is driving new business growth. In year-to-date June, we've seen a 35% year-over-year growth from new customers. Conversions from our competition, a key differentiator. We focus across our entire portfolio with Small Package distribution and Forwarding businesses all contributing. Lastly, we're able to scale the leverage of our integrated network along with innovated operations technology.

We put these advantages to work and operating models that make sense for each market around the world. It's not a one-size-fits-all approach. UPS has the ability to provide our international customers with a comprehensive set of products and solutions that meet their global needs. Air and ocean forwarding, brokerage, transportation services, distribution, the portfolio and solutions resonate well with our international customers.

As Alan said earlier, our strategy has been to build and leverage differentiated products and solutions with a balanced global presence that no one else can offer. Over the last year, we've been developing growth initiatives to leverage our competitive advantage. Tactical plans to improve our value proposition in geographies with the strongest growth opportunities. A perfect example of a product portfolio you may not know much about, but which is helping us deliver growth opportunities is UPS customs brokerage.

Did you know that UPS is the world's largest customs broker? With 80 years of brokerage experience in the extensive UPS integrated network backing us up, we can offer customers the best solution to optimize their custom clearance process bar none. Let's spend a few minutes talking about Europe, one of UPS' growth engines. Europe provides a developing Small Package market with strong intra-Europe activity. This cross-border trade creates a natural alignment with our Distribution business as companies respond to the open borders by examining their internal supply chains.

Second, countries like Germany, U.K., France, Italy, Spain and Netherlands are strong exporters, creating profitable revenue streams. Third, consider that in nearly all European countries, we're a smaller share player. With UPS' globally recognized brand, Europe is presenting us with blue ocean opportunities by converting Freight movements into Small Package. Customers are looking for a Pan-European integrated capability and UPS is in the best position to provide. It is evidenced by our above-market growth.

Our Europe export volume CAGR over the last 10 years has averaged over 10%. We are capitalizing on the evolving supply chain needs of European businesses, as they move from more localized palletized freight movements to strategic sourcing and complex cross-border schemes. A perfect example of applying our strategy to leverage this opportunity is our acquisition in Turkey in 2009. We're pleased with the double-digit growth in both export and domestic, and we see existing potential throughout the Middle East.

We're confident about our ability to grow faster than the market so we're continuing to strategically invest in Europe despite all the macro noise. Our strong balance sheet and commitment to growth leads us to strengthening the Small Package market. Our investments in an integrated network designed from the U.S. model, create great flexibilities for both UPS and our international customers. Another way to demonstrate our capabilities to customers is through the 2012 London Olympics, not only as a sponsor but as the logistics provider for the games. And we're going to provide 100% of the logistics for the 2012 games.

Olympic Games receive a great deal of attention and are a source of immense pride for the host country. That's why we were in Beijing in 2008, using our execution to provide flawless execution. You can only imagine if things went wrong in China during the Beijing Olympics but we executed flawlessly. As a result of our Beijing sponsorship, UPS experienced a 33% increase in brand awareness in China. That's also why we're so pleased to be a major contributor in the 2012 London Games, and excited about the doors that will open for continued profitable growth opportunities throughout Europe.

Speaking of flawless execution, in Europe, our Cologne hub is at the heart of our European scale and scope. It's not by accident. We built the hub to harness the power of Cologne/Bonn Metropolitan area, which is well situated within the core of the European economic engine and in the heart of the population densities. And today, I'd like to announce a major expansion of that facility. The growth that I've been talking about is pushing us to embark on an expansion that will increase the capacity over 65% of our Cologne building to 190,000 pieces an hour, up from our existing 112,000 pieces an hour.

Our hub has been operating since 1986 and we've expanded it 4x including the last time in 2005 when we incorporated an automated sortation system to leverage UPS technology and sophisticated package level detail. Since then, with the continued globalization of supply chains and evolving market dynamics, we've seen some pretty dramatic changes in customer transportation needs. While our Cologne hub has adapted well as evidenced by our European growth over the last decade, the original design is no longer optimal. The Cologne expansions will be completed in stages with the first stage coordinated with this year's peak. Final completion is scheduled for 2013 and estimated cost is close to $200 million.

And that's not the only expansion. We have others in the pipeline. In fact, including Cologne, we have over $500 million in scheduled facility expansions over the next 2 years. Including France and other European strategic hubs, and package centers, as well as Latin America, China, Vietnam and Korea to name a few.

Let's move the discussion onto Asia and beyond, including the BRIC countries. Sometimes we hear the concern that we're not moving fast enough in Asia. So let's begin by setting the record straight and clarifying how important these markets are to UPS. Starting with China, which is important to UPS both within Asia and globally. In fact, we already serve 330 cities primarily through our 33 fully owned operating centers. We cover over 85% of the Chinese population with our import and export products. We've been in China for over 2 decades and we've been investing since we arrived. Since 2002, we've invested over $900 million in China.

We began taking direct control of our international express operations in 2004 in 3 cities across China, becoming the first independent international express operator in China. Our goal is nothing less than to be a top-tier package carrier and logistics provider in China. You know that we've applied to be a licensed domestic express carrier. The application continues to clear hurdles and we believe that approval will come soon. And when it does, you can expect UPS to remain focused on prudent growth strategy.

But we're not only paying attention to growth within China. We also see tremendous growth potential from the developing intra-Asia market. China joining the association of Southeast nations, ASEAN. Free trade area in 2010 is a powerful catalyst, driving ground and air trade in the region. We positioned our recently opened Shenzhen hub strategically at the center of this burgeoning market. And we're rolling out initiatives to capitalize on it by the intra- Asia network enhancements Mitch spoke about last night.

Through our expertise and capabilities, UPS can offer significant value to businesses seeking to leverage the growth trend in the intra-Asia market. But this isn't just crafty marketing speaking. We're doing it today. We're helping businesses grow through our expertise. Residents[ph], let me tell you, I'd like you to hear it from one of our customers Dr. Lan Lin executive VP of the Hisense Group. His company manufactures TV appliances, smartphones and other communications technology throughout Asia, and in North and South America.

Lan Lin

Hisense is a China-based company, it's a $10 billion sales volume per year, Hisense has been the #1 player on TV business for 8 consecutive years. But this is only in China, every 1% of growth in China is going to be quite difficult. Four years ago, we are determined to become a global company. We have great neighbors in Asia that this is going to be the next major growth area for our business, including Malaysia, Thailand, Philippines and also India.

Those countries are about $150 million of our sales. But we see it can be easily doubled or tripled in the next 3 to 5 years, not only we have to build up the sales network, also we have to a select the right partner on logistics. Without this, no matter how good your product or how good your sales will be, you won't be successful to meet the on-time delivery, also the good after service standards.

UPS will play a very important role to helping companies like us. We are young. We are new and also we are very fashionable to introduce the new technology to consumers and also we are short of experience on handling the after service on the logistics. So if we can have a good match, a good combination between the 2 companies, then we will create a real win-win situation for both of us and then we can grow also together. I'm very keen to see the opportunities here.

Daniel J. Brutto

We help Dr. Lin and many other companies like his find the best solution for their overall supply chain. This means using the right combination of all the products in our portfolio for maximum optimization. The Forwarding business out of Asia is also proving to be a success story in both Ocean and Air, not only does this low asset business drive profitable margins of its own, it complements our Small Package strategy by creating flexibilities and opportunities.

Typically, for every 1 kilo of air freight we put on our UPS Ground sales, we put 4 to 5 kilos on commercial carriers. We've invested in our Air network preparing for the future demand by expanding capacity over the last year, all while maintaining overall utilization. One reason is that our ability to fill excess space on UPS airplanes with our own Forwarding business airfreight products.

Then when Small Package market demand picks up, we flex the other way and fill our ground sales with express Small Package, and then move the air freight over to commercial carriers. That's a relationship you can relate to. Increased asset utilization, higher margins and higher ROIC.

International airfreight continues to drive overall profit in the Forwarding segment, and we believe it's a natural fit with our focus on high-tech manufacturing, retail and health care segments. Our airfreight portfolio includes 4 key products that allow our customers to solve their complex supply chain needs. Selecting the option that meets their time and space requirements on any given day. In Ocean, we launched our preferred LCL Ocean product in 2010 to a strong customer response.

Currently, we have 24 Asian origins. It's particularly appealing to shippers concerned with transit time. We remain focused on business and other parts of Asia as well. For example, in Vietnam, our volume has doubled since entering into an alliance with TNT Express in 2010. We're also working with alliances in Indonesia and Malaysia, not to mentioning keeping a sharp eye in Korea.

Though we've been there since 1988 and bought out our JV in 2008, we see lots of potential from the pending U.S. free trade agreement and have been executing initiatives since 2008 to leverage that trade lane. UPS is ready when we sign the free trade agreement with South Korea. And never far off our radar, India remains a market that although we currently serve through only import and export, has great potential for significant growth in the future.

Lastly, let's discuss our Latin America strategy including the important markets of Brazil and Mexico. In Brazil, we offer a full portfolio that includes express, distribution, forwarding and brokerage. We operate 14 facilities including a newly opened health care site in Guyana, which is about 6 miles north of Sao Paulo, that's already busting at the seams. Brazil's economy and Small Packet market potential remain key drivers of our interest in this geo.

Mexico is another key Latin America market. While we continue to build our business in Mexico, our approach there has been organic growth from the beginning. Today, with nearly 2,000 employees and 70 locations, we remain well-positioned with Freight, Domestic and International products, as well as a distribution presence.

Colombia is positioned is to take advantage of the future free trade agreement with the U.S., and holds great promise for the Small Package, import-export market. To prepare for this opportunity, this year we announced a strategic alliance there, providing Deprisa customers, which Deprisa's subsidiary of Avianca Airlines with access to the International portfolio. This is in addition to the presence we already had there. Since we made this announcement, our export volume out of Colombia has more than doubled. Our International Package business, Small Package, Forwarding, distribution of brokerage is a catalyst for future UPS growth.

Europe, Asia, Middle East and the Americas, each of these geographies offers real potential for us in both the immediate and the long term. Yes, we're focused on the BRIC countries, but we're also excited about growth initiatives in CIVETS that Scott mentioned in his opening and we're actively seeking the next acronym, in UPS we love acronyms, for this opportunity.

We believe that with our broad portfolio of solutions, our balanced global footprint and a truly integrated network, UPS is positioned for very strong and profitable growth. With goals that include doubling our International segment profit in 5 years. We're clearly bullish on the future. Now I'd like to introduce Kurt who will put together all the pieces of the puzzles for you and give you the much anticipated numbers that you've all been looking for.

Kurt Kuehn

Well, great, Dan, and thanks for the tie-in there and I think all the speakers have done a pretty good job so far today, really giving you a sense of the detail that's going on. Yesterday, we talked about the network and the operational technology. Today, you've heard presentations really on the strategy and the rationalization behind what we're doing.

But the quality of the presentations makes my job both easier and harder. Easier in that they've laid out quite a few expectations for you so I just need to bring the parts together. Harder in that they're setting the bar pretty high with both some ambitious views of the future and also, pretty well put together strategies.

Just as a reminder, this conference is focused on the long term. We have our quarterly calls to talk about current trends. We're really here looking on the 3 to 5-year horizon. Our vision of where the world's going, our expectation and as you've heard, our strategies to position ourselves. That being said, in today's environment, I know it would be extremely frustrating to not hear some update on what we are seeing in the market today with all the uncertainty. It was this day less than 2 months ago that we had our last earnings call in July, and we kind of stepped out in front of the train and commented frankly that we thought the U.S. economy was remaining slow. And frankly, we did not see an upward catalyst that most economists had forecast and some of our competitors, and that there was an increased risk from a macro perspective.

Quite frankly, we caught a lot of flak and I know Andy and the IR team felt pretty lonely for a couple of days there as everybody was asking what's the problem. Clearly, in the few days that followed, the macro data points have come in. Significant revisions to the historical GDPs and a number of other stats. So unfortunately, we were right. And this is one in which we wish we had been wrong. But we have seen momentum in the U.S., basically a stall. But that's good news, bad news I guess.

The bottom line so far for this quarter, is as far as the U.S. Domestic business is concerned, is that it is developing about as we expected. It's stable but slow, not better but then again, not worse. So we don't see significant downward momentum nor do we see a spike up. So pretty much as steady as she goes on the domestic side.

Somewhat in contrast though, as you've seen in much of the external data, the airfreight numbers, the ocean freight numbers, we are seeing slowing in the international airfreight especially really with Asia being the area that we're seeing the most significant change, even more than we expected, and we are seeing that impact in our International Package and Airfreight business. So clearly, the global statistics that we're seeing are being reflected in our business and we do think that there's moderation right now.

That being said, we are reiterating our annual guidance for 2011, and we do expect to set new highs for earnings per share in 2011. Obviously, we'll provide you with more information on our earnings call in October, as we get back to focusing on the short to midterm. But if we can raise our sights up a little bit and get back onto the horizon because as you can see, a lot of our strategies and our technologies take years to execute. I'd like to get us back looking a little longer term.

Last night and this morning, you've heard from quite a number of speakers. Some of them provided some explicit 3 to 5-year expectations and goals for the performance of their specific business units. Most of those business units are as large or larger than our competitors just in and of themselves. So these are large pieces of business. But clearly, assembling the pieces of the puzzle at UPS is much more complex than it used to be.

We are larger than we were in the past and we've become much more complex, and as you saw, very interconnected. So the level of complexity of the business model has increased, but we think also along with that has been our ability to drive growth and to generate substantial returns to share owners as we leverage the synergies and sustainable returns.

So what I'll try to do for the next few minutes is to put all of these pieces together, add it all up, 1 plus 1 equals 3 or something like that. At least that's what David tries to tell me sometimes whenever we're reviewing numbers. As you know though, let's circle back. Clearly, expectations for 2011 economic growth have come down from where they were just a few months ago. We do see all measures of confidence in the global economic community declining. And we're also seeing 2012 projections by experts also coming down a bit. And at this time, the thinking is that 2012, for better or for worse is going to be another below trend year.

Our 3 to 5-year targets for performance assume that we will have a fairly sluggish period in the short term. But do assume starting in 2013 up to 2016, that the U.S. gets back to a more normal growth trend with GDP growth in the 2.5% to 3.5%. So as we try to lay out 5-year goals for you guys, clearly, it's hard to build a base assumption.

Bottom line below trend growth through 2012, and then more trend growth beyond. So that's the underlying presumption. These financial targets that we're going to provide, we think can weather a variety of economic storms plus and minus around that, barring a full double dip recession. So that's kind of the underlying assumptions in the guidelines and the forecast that we're going to share. So let's first discuss our expectations for UPS consolidated revenue.

Through 2010, UPS consolidated revenue experienced a 5-year compound growth rate to slightly higher than 3%. Clearly lower than our normal historical trends and lower than we'd like. And the financial crisis and the worst recession in any of our careers had a huge impact. We do see much better results going forward, and our target for consolidated revenue growth in the entire company through 2016, is a 5-year CAGR of between 6% and 8%. And as I said, this reflects slow economic conditions through 2012 and a more normal growth pattern.

Digging a little deeper, for the U.S. segments specifically that Myron talked about. We do expect this segment to reach a new all-time high in operating profits within the next 3 years. Although once again, the next 12 months may be a little bumpy. Our expectation is that revenue over the next 5 years will grow at a compounded rate of 5% to 6%. You've heard quite a few speakers discuss all of the initiatives we've got going on to ensure that we will continue to grow the revenue, differentiate our products and compete on capabilities.

Also enhancing our asset utilization and the productivity with things like Orion and all the great operating technologies. We expect our operating margin target for this segment over the next 3 to 5 years, that operating margins will be in the 14% to 15% range, generating significant economic profit and substantial free cash flow.

Shifting to the rest of the world, our International segment as you heard from Dan, continues to outperform the market with margins 2x to 3x those of our competitors and also growth rates over the long term that are substantially higher. We do not expect that industry-leading performance to change. Even though the current economic environment is expected to be a little dicey, as we are seeing some slowing just in the very most recent period, we continue to have high expectations for International right, Dan? And Dan has aggressive targets in and of himself. We expect revenue to grow at a compounded rate of 9% to 12% over the next 3 to 5 years.

Over the past couple of days, we've outlined some of our expansion plans and investments for you, continuing to expand the network. We're going to add significant capacity in Cologne to keep up with the European growth and expand our capabilities. We've also highlighted how we've positioned UPS to take advantage of the market trends around the globe. As we said before, our focus in the International segment is on maximizing operating profits, not necessarily driving margins up substantially higher. When you're making upper teens margins, the way to add economic value is to grow.

So we believe we have the right plans in place to grow operating profits at a compounded rate of 10% to 15% over the next 3 to 5 years, in line with Dan's goal of doubling International profits. Certainly, we may see some margin expansion depending on the mix of export and non-U.S. Domestic but I repeat, our goal in this segment is to maximize profits [ph] and to take advantage of this balanced integrated network that we've built.

The UPS Supply Chain and Freight segment has really shown some stellar growth over the past few years. If you had been with us at our last investor conference back in early '08, that segment was kind of in, I guess in limbo, and investors weren't quite sure what to think about it. Could we really create a forwarder that would be flexible? Could we really bring the other distribution supply chain, financial services and all of these things together? And there was a lot of skepticism in the market. Hopefully, you've seen, as Scott said, that the last 3 years we've been focused on execution, leveraging what we've had and bringing the pieces together.

The improvements over the last few years have been fueled by Forwarding and Distribution. The investments we're continuing to make, state-of-the-art facilities like you saw yesterday, technologies that link those together and the capabilities across the entire supply chain will continue to fuel this growth engine. We're just beginning really to take advantage of what we've built and we have plenty of headroom.

We will though, continue to employ a disciplined management growth approach here. We could grow the Distribution business much more rapidly, but what we're looking for is to focus on solutions that are repeatable, scalable and connected to transportation spend. The history of contract logistics from a share owner perspective is not a great one. Margins tend to be in the low single-digits and don't tend to scale up. We think we have found a way to break that pattern and clearly, we're generating margins far in excess of that. But you have to be disciplined. Knowing what to pursue and what not to pursue is critical.

We expect revenue overall in this segment to grow 8% to 10%, and expect operating profits in the Supply Chain and Freight unit to grow by 12% to 18% annually over the next 3 to 5 years. Years ago, when we provided our long term targets for the Supply Chain segment, we put out a margin goal of 7% to 9%, and there were many of you that were highly skeptical of that and were scratching their heads over how in the world are we going to do that. Frankly, questioning whether we would ever be able to get all of these pieces working together.

Well, we're going to keep the skeptics scratching their heads for a little longer because we're raising our margin targets to 8% to 10% for 2013 and beyond. Clearly, at these levels, we're generating substantial economic profit. We also realize that the Supply Chain and Freight has a lot of moving parts and that the business model has both grown substantially and the complexity of it has gotten even more intense.

So we are going to provide a little more information for you here today and a little better breakdown to give you some transparency when it comes to the 3 main business units within Supply Chain and Freight, there are other smaller units but these are really the ones that move the needle. Let's start first with the UPS Freight.

Clearly, the LTL industry has been a challenging one for the last few years and a heck of a roller coaster as competitors change strategies dramatically between market share gains and yield management. As Myron talked with you about, we've remained very focused and distinguished our approach with technology integration for our customers and reliability that really add value to our supply chains, and also been very disciplined on the yield side.

We believe this continuing connectivity with our broad base of customers in the U.S. will allow us to grow top line revenue by 8% to 10% over the next 3 to 5 years in a disciplined and prudent market share approach. And as Myron noted, we also expect to grow operating profits in excess of 30% over the next 3 years, effectively doubling our Freight margins. Today, they're a little less than 3%. We expect to double those margins up to 6% in the next 3 years.

This is solid progress, but frankly, we have even higher expectations in the long term. So there's still more work to do as we create value in this space and are able to differentiate ourselves from our competitors. You've heard me say many times at UPS and Dan referred to it also, that UPS enjoys a very unique position as both a large freight forwarder and large express carrier. It's a unique combination that allows us to optimize our assets as Dan outlined in our talk. It also gives us a differentiation to go into our customers and seamlessly help them move their goods of all shapes and sizes. So it's helping drive growth and also asset utilization.

Our expectation for this business are for continued revenue growth and margin expansion. To give you a little idea on the Forwarding side, and this is a new statistic, our Forwarding revenue for 2010 was approximately $3.9 billion. We expect this to grow then on an average compounded rate of 8% to 10% over the next 5 years, with operating margins at 6% to 8%. Obviously, as volatile as the Forwarding industry can be sometime, those numbers may fluctuate as margins expand and revenue drops a little or as capacity changes but we feel very good. We've built a sustainable differentiated capability on Forwarding. And it's something different than the rest of the market.

The current reporting for this division is reported in the combined Forwarding and Logistics unit. Speaking of the rest of that unit, you'll hear us refer more and more than you have over the last couple of days to the Distribution unit. We think that's actually a better description of what you saw yesterday than the broader term Logistics. And as our advertising and our campaigns lately, we're using the umbrella word "logistics" to describe the broader set of things that all of what UPS does. So really within that segment is really Forwarding and Distribution and we'll be categorizing it that way going forward.

So Distribution is that very unique set of capabilities that links together inbound and outbound freight, connects all the parts of the supply chain for our customers. And you've heard a lot over the last couple of days about how we built unique capabilities that tie together all the pieces of the puzzle for our customers. This unit generated approximately $2 billion of revenue in 2010. Once again, a new statistic.

We do expect to see 5% to 8% revenue growth over the next 5 years as we continue to target those pieces of the business that drive the most value and margins are targeted at a full 10% as we support our global expansion. Clearly, unheard of in the traditional industry of contract logistics. So as I said earlier, I get the honor then end up sharing with you what the puzzle looks like after we bring all the pieces together. Sure we have experienced volatility in our earnings per share over the past few years, more than we expected but then I think everybody can say that, in light of the incredible changes that have happened.

But where UPS is somewhat unique, is that the bottom end of our current guidance for 2011 leads to record earnings per share. We took a hit in '09, we bounced back quickly. That's a testament to everything you've heard in the last 2 days. And although the economy may end up being a little more challenging for the next 12 months than Scott or myself would wish, we do expect to reach new highs in earnings per share and to continue growing earnings per share at a 5-year compounded rate of 10% to 15% through 2016.

This is with the scenario of a continued sluggish economy for a while. The resilience of UPS, the breadth of the business model minimizes the impact of slow economic growth allows us to adapt. Clearly, it's enabling us to quickly return to peak earnings per share and we're confident it will allow us to grow earnings per share across the vast majority of economic scenarios.

Yesterday, you witnessed firsthand the strategic investments that we've made over the past several years. Huge investments in Worldport, investing in the assets on the ground to minimize the assets in the air. We've also totally refreshed our air fleet. We have the youngest air fleet in the industry by almost a decade against our major competitors. What that means is as we look forward, spending in our Air network is only for growth. We have no maintenance CapEx as far as replacing aircraft in the midterm.

We've invested in new areas, deep investment in technology that took us 5, 6 years of deep investments to begin to bring some of these capabilities to bear. And also, sector specific capabilities like dedicated health facilities across the world. So you can see, we are investing for growth and we will continue to make prudent investments to capitalize on the opportunities that are in front of us. The good news though is that we continue to invest and have invested for years with prudent use of capital to build our capabilities. If you look over the past decade or so, you can see that our CapEx has ranged from 5% to 8% of revenue. This is as we were rapidly expanding our International network, retiring the old-line aircraft to get all stage 4, stage 3 plus aircraft in the network and building the unique set of capabilities that we've built in the supply chain.

As we look forward, as I said, we continue to expect growth but an increasing portion of our CapEx is targeted at growth CapEx with lower proportion for maintenance or replacement of assets. As a result, we are confident that CapEx will remain at historic lows as a proportion of revenue and expect CapEx to be 4% of revenue or below going forward. Substantial impact on free cash flow even as we grow as fast as we think is prudent. A lot of examples have been provided to you this morning and yesterday that show our focus on developing new capabilities to help customers in today's environment. You've also seen firsthand, in our obsession on asset utilization and productivity. All of those things add up together to create substantial efficiencies and cash flow.

We are continuing to look for growth opportunities worldwide, whether it be enhancing our direct capabilities or expanding our footprint and markets that were not as strong, and we pride ourselves on the timing of these investments to not be too far ahead of the curve but also to throw the ball enough ahead of the runner that the business maintains momentum. Always mindful of our commitments to investors because all of us in UPS are deep investors in the company also, to time our investments correctly, to focus on returns to capital, not to invest too early but to invest deeply with a long-term perspective when we've got a good idea.

The integrated business model that's been a differentiation of UPS continues to generate high incremental returns. Hopefully, in the last day, you've seen that this integrated model means a lot more than it did 5 or 10 years ago. We've expanded that network. We expect all of these activities then to drive ROIC higher to historic levels. And as Scott mentioned, project return on invested capital to meet or exceed 25% in 2014 and beyond. In addition to high incremental returns to capital, the UPS business model consistently generates strong free cash flow under all scenarios.

The one good thing about the recession is our cash kept flowing and our projections of solid earnings growth combined with below trend CapEx will result, not too surprisingly, in substantial free cash flow over the next few years. In fact, we expect free cash flow conversion, which is the ratio of free cash flow to net income to exceed 100% for the foreseeable future, resulting in increasing distributions to shareowners and substantial available cash. So what are we going to do with all of this money? We do have a commitment in the company to return the vast majority of the free cash flow to investors.

And I would like to announce that based on popular demand from many of you, we have become much more aggressive and opportunistic in purchasing shares in the last couple of months. As the market plummeted and UPS stock went on sale, we have jumped in strongly. And in fact, quarter to-date, we purchased more than $1.1 billion in UPS stock. That's really just since the earnings call frankly. And we expect by the end of the third quarter, our total repurchases year-to-date will be $2.2 billion. And we're raising our full year guidance for share repurchase to $2.7 billion.

So clearly, we have upped significantly over our initial projections. We have the cash. The company is in good shape. We see the future as having great opportunity, and we thought it prudent to jump in. And we expect, if you look over the next 3 years from 2012 to 2014, that cumulative share repurchases should be approximately $8 billion or more. With the net effect of reducing our shares outstanding by 2.5% to 3% per year. That's been a little volatile as we've slowed and then sped up our share repurchases but if you smooth it out going forward, we do see those share counts dropping consistently.

The way we distribute that will be approximately as we set as a target, 100% of net income back to share owners with roughly a 50-50 split. Although as you can see in 2011, as we jumped up the share repurchases, it's certainly more weighted towards that. So as you can see we are in great shape from a cash perspective, on a return perspective. That's all good for the medium term. But the true driver of share owner value for our company is how long can that company sustain a superior competitive advantage. How long can that company generate economic returns in excess of the cost of capital? How wide is the moat, how deep?

Over the course of the past day and a half, you guys have been great sports as we've taken you through the details to try to explain to you the 1,001 things that lead to UPS' success. It's excessiveness on the operating side, it's vision and persistence on the technology side, it's innovation on the market side and it's prudence on the capital deployment.

Alan and Dan talked about how are our global reach and unmatched capabilities allow us to provide solutions that capitalize on growth around the world. Mitch talked about this air network and how by spending $1 billion in Worldport, we were able to save much more than that in aircraft and operating expense, and how we're leveraging our air network to handle both Freight and Package.

Dave Barnes and Myron discussed how we're continuing to transform, reducing our operating expense but more importantly, using innovation to push the bar higher to raise customer expectations and to differentiate UPS from our competitors, and our focus is competing based on differentiation, not destructive price competition.

David Abney provided you with a great picture of how we'd leveraged all of these learnings from one part of the business and port these synergies over to the other part of the business, very challenging, no one else in the world is doing it. But when you do it right, it generates a highly efficient economic machine that generates superior returns over many years.

And then ultimately, Scott outlined how the UPS strategy and strategic initiatives are aligned, we think well with the mega trends shaping the future of Logistics. We remain bullish on the future of global trade. We can't think of any long-term trend that's a better use of deep investment for our capital and for other businesses. So you bring all that together and as you've seen, in everyone of your discussions with the speakers and all of the UPS people that have helped you today, hopefully, you've also got an insight into that intangible about UPS, which is the UPS culture.

Equally important, it's a little touchy-feely for an investment audience but it's a culture built on managers that are deeply invested in the company and that are constructively dissatisfied, constantly looking to improve. The sum of all of these parts together creates a highly competitive and unique business model. We think the most unique thing about the UPS business model though is not the planes, trains and automobiles or even the technologies. Sorry, Dave. But it is how sustainable the advantage of that business model is. Our ever widening moat of capabilities is sustainable. In fact, I would challenge you to think of any industry or many companies that have as broad and unique set of capabilities that will be relevant 10 years from now, 20 years from now.

Technology innovation will come and go, products will flash. We think the ever evolving UPS model creates a period of extended capabilities and allows us to extend our period of economic premium returns as far out as any company that I've ever seen. So we're determined to continue to innovate to reinvest and to differentiate and ultimately then to drive superior returns to share owners.

So that concludes our prepared remarks. Thanks for your patience. If you give us a couple of minutes, we'll get the stage set up, do some brief Q&A as a group, then we'll take a much needed break and we'll have extensive breakout sessions for Q&A that will let you drill in business by business. So thanks a lot.

Andy Dolny

Okay folks, let me remind you of a few things. #1, in your portfolios, you have the survey and I really ask you, at the end of this conference please fill it out, your feedback is important to us. Your breakout rooms on your badge 2, 3 and 4 out that door. Number 1 out that door, down that hallway.

We're going to do about 5 minutes of Q&A here since we have the breakout sessions. So we've got people walking around with microphones. Where are the microphones? Okay, right there. There.

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

Andy, Jon Langenfeld with Baird. Scott, maybe 4, 5 years ago, at the analyst day, your comments on the supply chain side was that we would not be willing to do acquisitions in this space until we prove to shareholders that we've made it worthwhile, and I think you're clearly on that path. So how do you think about acquisitions specifically as it relates to the Freight Forwarding side and the Contract, Logistics, Distribution side?

Scott Davis

You're absolutely right on, it should be on right? Okay. Absolutely, we've said that in the past, I think over the last couple of years, we've been quite pleased with the progress we've made in execution on supply chain. I would think clearly, we will be looking at opportunities in that arena. I think we've talked a lot the last 2 days about health care. I think there's a lot of places around the world where we could expand geographically in health care and our capabilities in health care, so I think that would be right on top of our list, the things we're looking at. In the Freight Forwarding arena, clearly there are lanes that we'd like to enhance our capabilities, we're on great network today but there are opportunities out there. So I say clearly, top of our list is still the right International Package opportunities. But clearly, both Distribution and Forwarding are open at this point in time for opportunities.

Scott H. Group - Wolfe Trahan & Co.

Scott Group from Wolfe Trahan. Kurt, if we look back prior to 2008, in the U.S., very consistently 15% to 16% Domestic Package margins. I know the guidance now is 14% to 15%, not a big change, but actually, what's changed in the business that makes it tougher to get back to peak margins? Or do you think maybe that there's just some conservatism in the numbers?

Kurt Kuehn

No, we did and what we think is a reasonable expectation of the target. Clearly, the worst recession in any of our careers was a big impact. Volumes got hit substantially. And if you look at that period even prior to 2008, the pricing pressures, the economy weakened was substantial, and so that's why our top priority right now is being disciplined on the revenue management side. You heard Myron and Alan talking of our approach to differentiate ourselves. It's not happening quickly because the revenue decline or at least the lower yield growth happened over a number of years and we're being prudent and disciplined. But certainly, as Myron said, that's his top priority and we expect to get back to those levels.

Matthew Brooklier - Piper Jaffray Companies, Research Division

Brooklier, Piper Jaffray. My question focuses on the Domestic Air fleet. You guys have shrunken the fleet quite a bit and you're getting much better utilization with less aircraft. I was just curious, where is the utilization currently, can you just talk a little bit about that? How much more freight can you put on your current aircraft fleet before you need to start adding more airframes?

Kurt Kuehn

It's a nebulous number because as Dan talked about, our utilization stays very high but the mix between the high yielding Package volume and the Freight may change. So our goal and certainly, Dan's goal internationally, is to keep that number high no matter what the conditions are. We are in great shape in our network, we do have a number of 767s coming in that will fit well and can upsize the 75s. Right now, our only commitments for aircraft are really those 76s, and we have no huge lack of demands lacking growth. So we're in good shape, the network is reasonably utilized but we're certainly not at a point where we're going to need huge capital additions, which leads to our confidence that our CapEx will stay very low as a proportion of revenue.

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

Tom Wadewitz from JPMorgan. What are your assumptions on the competitive dynamic among the integrators over this timeframe where you're giving the guidance? And how much confidence do you have in the resilience of the Domestic Package pricing story if there is a period that's more sustained of slower growth?

Alan Gershenhorn

Maybe I'll let Myron talk about that because certainly, we've been in a pretty slow growth.

Myron A. Gray

Absolutely. I think if we look back over the last 15 to 18 months, we've been in that period that you're alluding to but rather than taking the conversation to, let's talk about price, we've been able to have our sales folks focused on the solutions that we're providing to our customers and looking for opportunities within their own distribution channels plus savings for them without having to take the conversation back to how can UPS lower the price to help me. So even moving much out ahead, we really don't see us changing that conversation with our customer base. We're proving everyday as we move forward, we can win with base pricing rather than allowing the conversation to go back to pricing. So we don't see that as an issue.

Alan Gershenhorn

Let me just add on that. I think from our last investor conference, if you look at internationally, where we stand versus the other integrators, we're in better competitive position. Things have changed pretty dramatically in that timeframe, I mean, DHL pulled out of the United States, and TNT kind of regressed [ph] a bit what's going. Fedex has not satisfied the European issues. So I think if you look at where we stand, I don't see -- and we talked 4 or 5 years ago about who's next, could Japan Post be coming into the fray, we don't see any of that. So I think globally, we're actually in a better position competitively than we were 4 or 5 years ago.

Andy Dolny

Okay. We got time for one more question here and then we'll go into breakout sessions. Ken?

Ken Hoexter - BofA Merrill Lynch, Research Division

Ken Hoexter from BoFA Merrill. Can you address -- I guess, back to the baseline a little bit, in 2011 where we start, you mentioned a little bit of weakness in Asia before, is that a precursor, is that concurrent? How do you view that, how weak is it getting? And then secondly, can you address the collapse that we're all witnessing of the post office on a kind of weekly basis, it seems like the news keeps getting harsher and harsher and what opportunities you see out of that?

Alan Gershenhorn

Yes, Ken, I guess I'll address the Asia. Actually, it's been fairly recent that Asia has gone down but in my travels to China, I'll just make folks aware that there's a big push in China for manufacturing this go west strategy. And if you take a look at Chinese New Year this year, about 15 million people didn't come back to work from South China. In the 3 cities that I recently visited Chongqing, Zhangzhou and Chengdu, they're all putting up major facilities, mainly for the high-tech industry and medical device industry where they're building over 1 million square foot factories, hiring thousands of people. And I'm wondering if there's some inflection point of 2 things that are going on at once. One is the go west strategy, which means they have to retool out into western, certainly part of China. And the second is this whole idea of raising rates on the East Coast of China and making more middle market consumers. Right now, there's 90 cities in China that have 250,000 or more middle market consumers. So there's a lot of consumption that goes on in China. So in my mind, certainly even though PacTel [ph] and HaTel [ph] have double-digit declines for exports, I think it's just an inflection point. And certainly, I would suspect that China and the rest of Asia will get back to the growths that we've been used to. Anyone, so about the USPS part of the question?

Daniel J. Brutto

Yes. Clearly, the USPS has significant challenges going forward with the decline in mail and the very, very significant losses that they're taking on. And certainly, the things that they're talking about in terms of going from a 6-day delivery to 5-day delivery, closures of post offices and other ways to streamline their business should create opportunities for UPS to compete more vigorously in the marketplace. So the other thing I'd just say is that we're a competitor with USPS, we're also a customer, we're also a supplier. So we're also, in some cases, part of the solution to help the USPS, do what they do best in terms of delivering the mail going forward.

Andy Dolny

Okay, thanks guys. And again, we're going to go to the breakout sessions. Breakouts will start in 10 minutes and that's a UPS 10 minutes, okay? So 2, 3 and 4 that way, 1, out the door, down the hall. Thanks, folks.

Unknown Executive

Ladies and gentlemen please welcome the Chairman and CEO of UPS, Mr. Scott Davis.

D. Scott Davis

Sorry to interrupt your lunch but this will not be a 45-minute discussion and if we're going to have Andy come up here and moderate the Q&A, I think I've heard every question this morning and you've heard it. So we won't do that again. I just really want to thank everybody for investing 2 days of your valuable time to learn more about UPS. I know that Louisville is not easiest place to get to but hopefully, the trip was worthwhile for everybody. Hopefully, you understand UPS' strategy better than you did 2 days ago. Hopefully, we answered your questions, you understand the technology, you understand the opportunities ahead for us as we move forward. We really are focused on creating value for our customers transforming when necessary, you saw that yesterday with My Choice, exciting new concept out there. And obviously, investing for the future. So I reminisce a little bit. I became CEO in that wonderful year of 2008, and my timing wasn't great but I was fortunate to be the CEO of a company as stable and as strong as UPS. And we talked about the 3 types of companies coming out of the recession. I think that we've showed in the downturn, in the recession, we outperformed the rest of the industry.

And so I think we showed that we can outperform in bad times. But we also outperformed in a recovery, in 2010, nobody performed any better than UPS. So I think you've got a company here that performs in good times and bad times. I can't tell you exactly what's going to happen in 2012. Kurt can but I can't, 2012, 2013. But I think no matter what the economy, you're going to see UPS outperforming going forward.

You can count on great returns on invested capital, great economic profit generation for the company going forward, great free cash flow, great distributions and strong growth for this company moving forward. So I think the stock is a wonderful value at this point in time. And we appreciate your support and I'll get off the stage, enjoy your lunch and thanks for coming.

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