July 24, 2012
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| D. McDowell: | Kurt, you're global and you're a people company in every sense of the word. |
| K. Kuehn: | It's been an exciting time. One of the themes you'll hear from everybody today is that the last year has provided the CFO job with a huge opportunity. For me the theme was "don't let a good crisis go to waste." I think all of us feel that a little bit. It's actually been a great time to be a CFO. You can get more done. There was less bureaucracy. I think most companies felt that they were in unchartered waters and the CFO at least had some kind of a compass. UPS is a great story company with a 102-year tradition. I started at least a couple of years after its founding. It was 32 years ago almost to the day that I started as a temporary helper for Christmas. The great thing about UPS is it's got a long history and tradition. The danger though is that it can get complacent. The financial crisis and all of the economic things that happened afterward were a great opportunity to help a great company reinvent itself. So that's really been the big theme for me - to be a catalyst for change. All of those things that finance people said should be done and are nagging the operating officers to do - all of the sudden those things became possible. We've had a great opportunity for every function, every business unit, and every geography to look itself in the mirror and ask, "What changes that we've been thinking about doing should we do in order to become more nimble, more flexible and less fixed as far as facing the future?" So it's actually been a great year, I think, to be a CFO - other than a little bit of worry about liquidity. |
| DM: | How permanent do you think that strategic position is now? |
| KK: | I think this is a fleeting moment and if CFOs don't step up and find a way to expand their role, revision to the mean is what's normally going to happen. You need to take this opportunity for your function and your people to be more relevant to the business and to find ways to communicate when you're needed right now. Clearly, all eyes are on you. In a year or two if the economy firms back up, there's a risk that the CFO role will recede again. So I think if anything, we need to determine how we firm up the beachheads and make sure that we remain with a seat at the table even if doom times happen again and liquidity and financial indexes aren't quite as critical. |
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| DM: | Kurt, I think your total employee base is down about 17,000 this year. How have you managed that? |
| KK: | The whole issue of trust and the social contract with employees is essential to maintain. I think I'm in front communicating. David, it sounds like you guys did a great job of making it clear that this is an across-the- company issue, that it's not going to be on the backs of the employees. So you do have to look a little bit over the valley. But at the same time, you've got to make tough decisions and adapt. We froze salaries. We didn't cut them. It's an agonizing process to decide what you should do, but if you've got a history of transparency and communication, reassuring people that there is a light at the end of the tunnel, letting them know what's going to happen even if it's bad is better than endless rumors. So it's transparency and communication, and that's another area where sometimes the function is a little uneasy. We're typically not the best communicators in a company. I think it's being able to telegraph your punch. Being able to - both internally to your employees and externally to your customers and to the markets - clearly delineate that you are taking steps, that there is a strong hand on the helm so people are reassured that the company's not gone out of control and that you're going to do things to help build credibility and your employees will stay with you no matter what you have to do. |
| DM: | You mentioned being nimble and flexible. In terms of overall cost transformation, give us some ideas, maybe unusual things, that you have done and where the company is now. |
| KK: | UPS always prides itself on being the tightest ship in the shipping business, so we try to make our networks very adaptable. Probably 60% of our cost is variable almost on a daily basis and then we work on the other parts. Maybe the most unusual thing we did comes out of my history. Prior to the CFO job I was senior VP of worldwide sales and marketing, which is not your usual career path. I think I had to do a detour through sales to pay due penance for all the abuse I use to give the sales guys. But one of the things that I really pushed coming into the CFO job as things got ugly was to go back and work with marketing to look at the product content of what we offer. Are we layering cost in our products? If this is a new normal and business and consumers are looking to save money, how can we adapt what we do to help our customers and reduce our cost? It's a different perspective from just saying we need to cut cost in the company. Rather, let's challenge the revenue generating parts of the business to revisit their products. Are they really positioning the products, are they really meeting the needs of our customers? We have over two million customers we visit every day, so it's a huge cross section. So the paradigm we tried to get is, "how do we help our customers reduce cost during these tough times?" And that was an interesting change of reference in which the sales and marketing people become a part of the solution. |
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| DM: | Kurt, talking about UPS, there are many parts to this business in terms of how you've grown and expanded. How far in advance do you have to look in terms of strategy and vision to say, "This is the company we want to be" and where do you see it going? How do you continue to grow it? UPS is growing underneath what you already have in ways that the audience might not even know. |
| KK: | We've been transforming quietly from a U.S. company to a very broad global company that serves over 200 countries, and in the last decade we've shifted from the movement of small packages to freight forwarding, logistics, customs brokerage - even a small banking branch. So we've broadened ... |
| DM: | Computer repair. |
| KK: | Compute repair - that's true. If you have a broken Toshiba laptop, you can drop it off at a UPS Store and we do a quick triage and get it back to you the next day via our repair facilities and air hub. So you name it. But having a broad portfolio also means that with a lot of opportunity comes more exposure. When times get tough, you've got to be disciplined. The best metaphor I can use is that senior management needs to be a good gardener during times like these. And even in the worst of winters, you need to be pruning the branches that shouldn't grow. In some cases, revising your product portfolio and your project portfolio is critical right now. People are willing to say goodbye to businesses that may have been on life support. So a good gardener has the discipline to prune branches because the tree will grow stronger. At the same time, just to brutalize the metaphor, you need to continue to fertilize in the winter and invest in those products that will grow. And make sure you don't eat your seed corn - meaning don't get crazy. Don't sacrifice the future. So we're trying to do all three of those things. |
| DM: | And Kurt did not grow up in Kansas. |
| KK: | We had a lot of half-successful projects and services. Some countries were prospering better than others. We used this as a catalyst early to say, "What's really worked and what do we want to concentrate our energy on? What do we want to fertilize, and what are those things that are okay but they're sapping the strength of the company?" That was a big strategic element for us - to sit down and force ourselves to look in the mirror and say, "Five years from now, is this going to be a vital part of the company?" |
| DM: | Give us some examples. What did you prune? What did you cut? And what are you fertilizing? |
| KK: | During the course of doing a lot of acquisitions - and we did a broad number of acquisitions as we got into distribution, warehousing, freight forwarding - you tend to buy more than just the pure play business that you want. In Europe, for example, we did some 15 acquisitions in logistics. There were bits and pieces of those businesses. Some of it worked tremendously as part of our high velocity just-in-time process and some were little niches that didn't make as much sense. In Europe, it's always better to delay a decision because the cost of redundancy is so terrible and disposing of a business is very expensive. But, when something that's kind of break-even all of the sudden goes into the tank, which happens during these economic conditions, then you have to make those decisions. So we have been streamlining. We had some businesses where our technicians were swapping ATM machines at banks. We're great at moving the parts quickly and maybe fixing overnight. But to have these big bulky ATM machines didn't fit well into our model. So that was one instance where it was probably better to bite the bullet and say goodbye to that. |
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| DM: | What about acquisition opportunities - how many do you see out there right now for you? |
| KK: | As far as M&A is concerned, we're fortunate. We've got a solid balance sheet with a double-A rating, and so we've tried to be aggressive and opportunistic. But we've been a little frustrated that price expectations on the target lag the market. So even though the market was incredibly low, the price you had to pay to complete big deals remained high, not to mention some of the challenges with the incredible cost for bridge funding. So we've focused more on smaller opportunities. And I've used that to help flush out some of our emerging market presence in Turkey, Romania, Korea, you name it. And the smaller companies clearly have a little more of a burning platform and they're easier to get done. So we've had to kind of lower our sights. One area that we've actually increased our spending is in the real estate area. We've got five or six thousand facilities across the globe. We told our real estate people to go out and be aggressive. We're in the process of renegotiating leases. The ability to come in and say, "Hey, we need some relief but we'll give you two more years on the lease but give us a 15% reduction" has been incredibly low hanging fruit. It's really turned our real estate people into hunters rather than farmers. In a lot of cases, there are landlords that we lease a building from that would love some liquidity, so it's a good time to have cash. You should be creative about that. If you have cash but you want to be cheap, then at least let your people know if there's a great deal out there that you can't find the funds. So that's been a real success for us this year. |
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| DM: | Kurt, I wanted to stay on the cash and funding issue because of your entire customer base and how you have coped with their funding ability. |
| KK: | There are two sides to that coin. Number one is, if you do have a solid balance sheet, it's important to help your sales people communicate the benefits of that to customers. For those businesses where we're doing a deep integration or a multi-year solution when we compete with other logistics companies, it's a point of differentiation. One of the things I've brought back to the salespeople is to help them quantify that. But we have had to be a little more diligent around receivables. I heard mentioned that there's going to be a discussion on fraud. Fraud is greater than ever - especially Internet-oriented fraud. So that's been a busy area. But the area that I'm most worried about right now with liquidity is for the small customers - and we have millions of small customers. Most of you in this room probably feel like credit markets have loosened up. The credit spreads and some of the ridiculous distortions we saw are mitigating, but there's still a real crisis. UPS has a small business lending branch that frankly I have to hold back because there's so much demand right now. I think that is a real challenge for the government. We certainly took care of the big headline issues. But there are millions of small businesses that are struggling for liquidity right now. |
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| KK: | Dagen, in the essence of full disclosure, I have to make one confession. In one of the ultimate acts of bad timing, my first major decision as CFO of the company was to launch a major recapitalization and a $10-billion share repurchase. That was in January 2008. |
| DM: | Yes, I remember. |
| KK: | We were very excited about levering up a little bit … for about three months. And then things tightened up quite a bit. |
| DM: | That's just an "oops." So how will that change your thinking and how will that affect how you make decisions? |
| KK: | When we announced we were cutting back on our share repurchases, one of our largest shareowners, a great long-term shareowner, shook his head and said, "You guys are just like every other company. You buy the stock when it's high and when it gets cheap, you don't want to buy it anymore." So it's frustrating that you know when liquidity gets tight, the stock is low. That should be a time if you believe in the business you're buying the stock. But those are compromises we have to make. |
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| KK: | Typically, Wall Street leads Main Street and clearly that's what we're seeing. It's just a matter of how far that lead is. We touch a very broad cross section of customers and as we've surveyed them about the holiday season - because we have a big stake in that - we see companies with a stronger focus on the Internet being more optimistic. The brick and mortar players are perhaps more cautious. Clearly, the comps have improved. With the year-over-year trends, we're seeing the same thing. It's getting "less worse" year-over-year, but what is really hard to see is whether this is a trend or just an overlap. And frankly, I'm not sure yet. We're looking for a relatively flat quarter - maybe a little bit of growth for holiday season. We did round up on our press release so year. But right now... |
| DM: | Actually, you just have to say zero percent growth. |
| KK: | That's it. I have to remember that one. But right now, we've got an economy on steroids. There's been a lot of artificial stimulus. So the real question is, "What happens as some of that buzz wears off?" Europe had cash for clunkers before we did. We're seeing a little bit of the shadow of that now. One thing most notable for us about this slowdown is - and UPS has operated through 20 recessions - is the combination of the dramatic business downturn - financial markets and inventories - and the radical drop in consumer wealth and spending. We've seen a bigger drop in our consumer oriented deliveries - B to C - than we have on the B to B side. So that whole consumer sentiment is a big issue. Ultimately, they're going to be the ones that'll lead the sustainable recovery. |
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| DM: | I'm going to open it up to the floor for questions so get ready. But I wanted to end this part of the discussion on one note because Kurt, you mentioned there's so much stimulus out there. But when that starts to disappear you better hold on to your hats. That also focuses on what the government's doing right now in terms of major overhauls of giant industries. Let's just focus on one because we can talk about cap and trade. We can talk about re-regulation of the financial system. But just the healthcare overhaul. How will that impact you? How much time do you even spend thinking and analyzing the potential impact on your business? |
| KK: | Dagen, I'll take a swing at it maybe with just an example of atmosphere. Clearly the feeling in this room is better than it was a year ago. |
| DM: | Better complexions. People have color back in their face and I'm not kidding about that. Y'all looked bad last year. |
| KK: | But maybe to contradict that a little bit, I sat in two CEO roundtables that UPS sponsors in Atlanta. We had one in January and clearly, the world was coming to an end and there was a lot of worry. But then we had one just a month ago. And after listening to it for about an hour, the mood was just as gloomy. And I jumped in and said, "What's the deal? This January, we thought the world was coming to an end. You guys don't look any happier." I think the worry has shifted away from the financial markets to the long-term ramifications of the incredible entry of government to business. The CEOs were climbing a world of worry I guess. There's a real concern as an American-based company whether we are planting the seeds of long-term lack of competitiveness, and then even globally, are we writing a lot of checks across the world that can't be cashed? That's the new gloom - how business can operate effectively with the incredible intrusion that's happened. |
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| KK: | There is one key area I think politically that UPS does take a pretty strong stand and that is the risk of protectionism. Certainly part of our platform is to enable global commerce. And we were very concerned with the "Buy American" movement that was getting a lot of buzz. The worst thing in the world that the U.S. could do is close the gates and try to solve its own problems at the expense of the rest of the world. So we do see that as a continual risk. We are on the Hill frequently talking with lawmakers. It's a tough political issue with unemployment so high. But global trade is going to be one of the catalysts to help the U.S. work its way out of this. It's not something to be feared. |
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| Audience: | Going back to some of your earlier comments on cost transformation and trying to move more of your fixed or semi-fixed cost to variable cost, how has that impacted your view in outsourcing functions or activities within your firm to create more truly variable components to some of your cost? |
| KK: | Certainly this whole issue of being the catalyst for change - using the current crisis as an opportunity to separate core from non-core. One thing we did - and maybe just to redirect your question a little bit - was to change the measures that are management targeted. We moved away from more fixed budgets or absolute amount of profit for absolute cost goals and unit highs to everything. We admitted that we could not forecast what was going to happen. So your goal was to maintain a constant unit cost. |
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| Audience: | The Asian currency, China in particular, has tied their currency to the U.S. dollar. Is that impacting your business and is that in your opinion fair trade? I know you were advocating free trade but when the currency tied that way, does it make it pretty hard to balance trade? |
| KK: | Clearly China's got its own mind as far as where its currency should be heading. Obama is working on that, but my guess is that'll be a very gradual process. Markets are always going to have some distortion and government interference pops up all over the world. But we still feel positive about the net benefit of helping the developing countries get access to the developed world and vice versa, for the U.S. to continue to focus externally. I saw an interesting study that says we always think about our competitive wage in the U.S. versus India or China. And yes, certainly there's a big gap, but if you look over the last 10 years, the relative competitiveness of the U.S. has become much stronger compared to virtually any other developed country. With the Euro appreciating we are at a point where the U.S. can be very competitive if it refocuses itself. I'm not worried quite so much about the current issue. I think it's more of a mindset and it's up to all of us to help lead our companies to thinking about international markets if we're not already doing it today. |
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| KK: | I'd like to add one thing related to this emerging markets discussion that I see to be one of UPS' biggest challenges going forward … and I suspect for a lot of us as we look at how we grow globally. A lot of us don't have business models that know how to make money in emerging markets. Gunter, maybe with your premium approach you don't worry about that as much. But one of our big, long-term issues is, "how do we profit at the bottom of this pyramid?" You can't have the exact same business model. The technology may have to be deeper. You might have to find ways to de-content your products if you want to sell to these emerging markets because it'll be many years before they can afford the prices that you charge here in the States. I think that's a huge issue, especially for U.S. businesses. They tend to be a little domestic-focused. |
| DM: | There's been much written about innovations that will happen at the bottom of the pyramid to meet the needs of those countries - great technological innovations, which we've already seen with cell phones and even net books. |
| KK: | Yes, just one minor example. Most of you know the UPS driver has this big electronic clipboard. And they get your signature and digitally transmit that in real time. But that clipboard costs more than an employee's yearly salary in some countries. So we let them use their cell phone and just transmit very small amounts of information. There are a lot of little things you have to do to adapt and be relevant in those markets. |
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| DM: | So the CFO is the CEO and the treasury is the new CFO and the CEO's the spokesman. |
| KK: | With the incredible cost to credit, especially with some of these credit facilities that used to be basically free if you had a relationship, we've had to go back and really look ourselves in the mirror and figure how much additional capacity or spare capacity we really need. Companies are paying 60, 70, 80, 100 basis points for the ability to tap lines that the vast majority of CFOs never tap. I would recommend that you sit down with your treasurer and figure out what is a reasonable amount of insurance, I guess, which is really what it is. But we have been trimming ours down dramatically. It drives me crazy to pay 50, 60 basis points or more for something that we probably don't need to use. Every company is different, but it's a hidden expense that can be minimized. |
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| Audience: | Now that we're nearly at the end of the first year, maybe you could each grade what the current administration's performance has been with their policies and strategies and helping the economic downturn. |
| DM: | We're going to do this on a grading system. Rather than 1 to 10, we're going to do A to F. So grade the current administration and throw out one idea for the next year. |
| KK: | I'd give it a B-. We were at times where at the very least there wasn't gridlock on decision making. There were a lot of battlefield promotions and changes. So that's the positive. Certainly, the negative is I agree with my colleagues in everything that they've talked about. It's been messy and there's certainly risk going forward. The only thing I could add to this going forward is I do think that a little more focus on small business would be important right now. I'm not sure what the right answer is. But I think that's been a missing piece of the puzzle that they don't get the headlines. They don't have the political clout but they're essential to the U.S. recovery. |
| DM: | From misplaced focus on something like a healthcare overall rather than jobs and small business? |
| KK: | I don't want to get into healthcare but I just think that financially speaking, the focus needs to get back to Main Street, which is where a lot of the innovation comes from and a lot of those guys have been frozen for a while. |
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