Good day, ladies and gentlemen, and welcome to today's program. At this time, all participants are in a listen-only mode. I'd like to turn the call over to your host, Joe Wilkins, UPS Investor Relations Officer. Please go ahead.
Thank you, Patrick. Appreciate it. Appreciate everyone getting on the call today. We are going to wait just a couple of minutes just to allow a few more people to get on the call, but I wanted to just let you know that, we are here. So just a couple of minutes, and then we'll come back, see if we can have some more people on the call. Okay, this is Joe Wilkins, and, we're back, and we're gonna go ahead and get started. I'm the Investor Relations Officer for UPS, and just again, good afternoon to everyone, to the UPS Retiree Q&A webcast. Today, I'm honored to have both David Abney, UPS CEO, and also Kurt Kuehn with us, CFO, for the next hour to answer some questions from the retirees' perspective.
The purpose of this call is really to give you an opportunity to ask any question that you might have, related really to... We had an investor conference last Thursday. Hopefully, some of you were able to view that from the webcast, and that brought some questions from that perspective. There's a tab that you'll see on your screen, so you can just type in a question, send it to us, and we will try to answer it within the hour. Just remember that there's not gonna be any new information that's outside of what we talked about on the investor call or the investor conference last week. So it's really a recap and to kind of give you the insights into what we gave the investment community.
So anytime you want to ask a question, you just key in and send it to us, and we'll try to answer it. If we don't get to your question, then the IR team will answer it and send it back to you through email. So before we start taking questions, I would like to turn it over to David Abney for some opening comments.
All right. Thanks, Joe. And, you know, it's really great to have a chance to talk to, such an important group as we have on the call today. Your contributions to our, past successes have certainly laid the foundation for the great progress that we discussed with investors last week. In fact, one of my closing comments, and I'll just quote from last week's talk, was, "Today's UPSers, including our leadership team, stand on the shoulders of those who came before us. And one day, a new generation of UPSers will take this company to places we can only imagine." Now, I can... And that's the end of the quote, of course, but, I can imagine that many of the people that are on this call would have said the same thing as they were, working through their careers.
And, and I know that you owed a lot of your success to the people that were before you, too. And I can assure everyone that that this new generation of UPSers is gonna make sure that they continue to carry that baton. So just getting back, since I took over took the job of CEO, I've been traveling throughout the world, really on a listening tour and listening to our employees, to our customers, to our investors. And during those meetings, I got a chance to stress my three priorities for the company, and I'll just share those quickly with you. And the first one could be summed up in one word, and it's empower. And, and it's really ensuring that our 400,000 employees that we have worldwide, that we give them everything they need to serve their customers.
We wanna make sure that they're inspired, they're empowered, and that they are engaged in running our business. And so that's the first priority. And, you know, at UPS, we're always gonna focus on the people, and that's the first thing that I share. Second is invest, and that's to accelerate the development and deployment of operational technology, as well as also shipper and customer-facing technology. And, you know, our real sweet spot for technology is where we can take package-level detail and other information that we capture from this operational technology, and then be able to transfer that information to offer new products and services to our customer from a customer-facing side. And then the last priority is to grow. And really, when I talk about growing our business, is I talk about creating a growth culture.
As the people on the call know, we're very good, and have always been very good at identifying cost and evaluating what the risk could be. And we're just putting a little additional focus on when we're in this decision-making process to make sure that we also look at how could this affect growing our business in a positive way, or how could it have just the opposite effect? So that's what we're talking about when we talk about growing our business. So last week in New York, Kurt, myself, and other members of the management committee, and a couple of other partners of our company, did spend last Thursday with our investors, and we laid out our strategies for the future.
We did it with a lot of enthusiasm because that's how we feel about our business, and then we gave them a lot of the details on how we would get there. So during that meeting, and especially during my second talk, I talked about the five different types of investments that we were making in our business, and I'll share those with you quickly. First was more capacity, and that's just to ensure that we continue to be able to meet our customers' needs. And this capacity can be the peak capacity that I'm gonna talk about in a few minutes. It can be expanding buildings that we need to throughout the year. It can be staging lots. There's a lot of things to do with capacity other than just the actual expansion of the building.
And then, the second type of investment is greater efficiency so that we can remain the industry leader, and automation and technology are certainly two of the primary examples of how we're going to continue to do that. A good example of that is what we've just recently done in our North Bay facility. We closed it right after Christmas, completely cleaned it out from the inside, took this traditional hub and made it a automated facility, very similar to the automation in Worldport, just obviously at a smaller scale. And then, just recently, in the past few days, opened that hub up again for peak season. And this is something we couldn't do in the past. The technology wasn't fast enough. It was not small enough, but it is now.
And not only have we completed the North Bay facility, we've committed to retrofitting most of our Tier One Hubs over the next five years or so. And then the third is global growth markets and really investing in those places where we see the economy is going to continue to grow and provide opportunities for future generations of UPSers. And two areas we focused on was in China and the southern border between the U.S. and Mexico. And then fourth is the industry-centric solutions, what we call the verticals, where we're focusing on specific verticals to give our customers solutions that are designed around their particular needs. So you've probably heard a lot about our healthcare expansion over the last few years.
You will continue to hear about healthcare, retail, especially specialty retail, and aerospace is another industry that we've identified. And then, if you wrap around those four types of investments, the fifth one that I talked about was One UPS, and it's just our commitment to remove any barriers that would prevent UPS from operating with the agility, the energy, and really the customer focus. So One UPS is, in the eyes of our customers, we want to appear seamless to our customers. We want them to be able to deal directly with their direct contacts, and then through that, make sure that we operate as one company, One UPS. So a couple of specifics that I did cover in the meeting. One was about Orion, and we did identify savings of 7-8 miles per driver.
Our expectations for the savings that we would see would be between $300 million and $400 million when fully implemented throughout the U.S. So this optimized dispatch is really the way of the future. We've had a lot of success. You guys know how hard it is to pull seven or eight miles out of an average route, and that's what ORION's been able to do. I also finished by emphasizing our long-term priority of returns to shareowners. Since we've been a public company, we've returned more than 100% of our net income in the form of dividends or share repurchases and more than $50 billion so far. By 2019, we expect to return more than $80 billion, so $30 billion on top of the $50 billion that we've done so far.
So before I turn it over to Kurt, I did hope you had a chance to review the webcast and see the materials we presented in New York. But we did think it was important to take a little bit of time to speak with you, our retirees, and answer any questions that you have. Before we do that, though, Kurt will recap the financial targets that he talked about last week. Kurt?
Great. Thanks, David, and good afternoon, everyone. It's great to get a chance to communicate, even if it is via the wire. But glad that you can be on. And as we said, we will open this up to typed in questions, and they will be anonymous, by the way. So ask whatever you want. The point here is to try to address issues that is of interest to everybody. So we did have a good investor conference in New York. It was actually our first conference in three years, so it had been quite a while. Couple of things like the TNT negotiations and extended labor discussions that delayed it, but it was good for us to get a chance to get up there and face the, you know, the investors.
There were about 130 investors there in person, and about 500 people watching the webcast from around the world, really coming together to hear what's happening at UPS. It was a great opportunity, since it's been a few years, to really unload all the numerous initiatives and added capabilities that we've created over the last couple of years. You know, it is a great opportunity to educate investors. It's also, I find, as we put these things together, a great opportunity just to have all of us kind of stop for a minute and look at how much is going on, how many different areas that UPS is advancing, and also look, you know, realistically at how have we done over the last few years. So it's both a kind of a waste...
Milestone to stop and say, "How are we doing?" And then it's even more so, it's a look into the future. We did look briefly at our results since 2011, and had kind of mixed results there. We certainly didn't grow as fast as we'd hoped. The big, continued expansion in global trade slowed down, but the domestic business performed pretty well, and our returns to capital and shareowner distributions were right on target. But then looking into the future, what we talked about, it started off with Dave Barnes, updating everyone on the broad array of advanced technology that we have, both on the operational side and on all the customer side. He had Jack Levis, who's our the primary manager that drives our Orion routing and scheduling there.
And as David said, we shared some incredible numbers on how that technology is helping our drivers learn better ways to deliver their routes. We also talked briefly about a program called Edge, that's going to help to automate our inside building processes using volume predicted coming in from the vehicles before they hit the building. Geoff Light then came in, our new Product Development Manager, and talked about how we take all of this operational flexibility and convert that to customer benefit. And things like, certainly, My Choice, which has been a huge benefit, over 11 million people registered there.
The new rollout of our Access Points network, which started in Europe, has over 12,000 locations in Europe and is now starting to be populated in the US, is just a great way for us to lower our cost, eliminate Send Agains, and add a level of convenience for consumers. So a lot of good stuff, and it was, we took actually almost two hours, I guess, with, you know, these, kind of dog and pony shows of this technology, and it was very well received. So it was clear that, you know, on all fronts, operational, customer, technology, we are pushing the envelope and really creating some, very new concepts in the market. So that was a good opportunity for us to talk about technology and B2C.
Alan Gershenhorn then came in and talked a little bit about how our go-to-market strategy is evolving, and are really with a focus on solutions. And this has been developing over the last 10 years or so, but our Customer Solutions group really is a state-of-the-art group that goes and solves customer problems. And in addition, the other real change in our strategy has been focusing much more on industry verticals, with very specific bundles of capabilities that are relevant to healthcare, to technology, to the aircraft industry, all kinds of different areas, and retail, certainly with all our B2C focus. So kind of an area where we can create this One UPS and bring multiple capabilities.
Certainly, the high point of the show was David coming back in and talking about his vision for the future and his, those five key areas of investment that, that he talked about, and that resonated very well. In fact, I had a few investors talk about those five, the specific areas that we are doubling our bets of, you know, hammering down on continued operating technology, expanded capabilities, growth markets. So a lot of good strategies, I think, that gave our investors something to track over the next few years. So after all of that, then it was my role to come in and kind of bring all these together, since I'm the numbers guy, and talk to them a little bit about our expectations for the next year, and more importantly, for the long term.
Also talk to them about what it is that makes UPS so unique in being able to generate the high cash flow and returns to capital, the great business model of all products on board. So as our long-term targets that we talked to was to, you know, for us to be a company that should be able to grow our revenue at 5%-6%, grow our operating profits at 8%-11%, and our earnings per share growth of 9%-13%. So all in all, a good long-term target of 9%-13% earnings per share growth. Then if you cap a nice, healthy, 2%-2.5%, maybe even 3% dividend on top of that, you get a very healthy return for shareowners.
So we also talked about, as you know, as David mentioned, that we are continuing to have the discipline to return close to 100% of net income each year back to shareowners. In fact, we announced a $15 billion share repurchase over the next five years, and do expect to grow dividends. So a great story on cash. We continue to be operating this company like we did when we were private, thinking of it as our own money, and that kind of mindset has not changed at the company. And as a result, when we do make investments, they generate high returns. But the real, the most important message beyond the numbers was that we are a company that is eager to invest in the future, and that we are investing in the future.
And if you look at the sum of all the activities and all the initiatives and all the areas that we're building our growth plans, it, I think it made all of us in that room optimistic about the company. So that's the positive. On the downside, there was a bit of a mixed reaction. I think Wall Street clearly loved the long-term message and was very impressed with the initiatives, but they were hoping for a little higher earnings growth next year. They would assume. They assumed that, we'd be able to bounce back and just knock it out of the park, once we get through with peak this year. But clearly, some of the initiatives we talked about are going to take 2-3 years.
ORION still has another couple of years to roll out, and, you know, we've just got a lot of things that we're working towards. So we targeted a 10%-15% earnings per share improvement next year, which is nothing to sneeze about, but you know Wall Street, they're never fully satisfied. So that was perhaps took a little bit of glow off the conference, but I think over time, the real long-term message is sinking in. Certainly, as we talk with some of our long-term investments, they're thrilled to see us focusing on the future. And there were a number of analysts that, although they had to highlight the fact that they're taking their models down a dime, that's what you hear from the sell side. They got to talk about the earnings per share.
When you dig in and really look at them understanding where UPS is heading, it's, it's pretty positive. Here's one good summary that highlights all the different areas we're working to enhance our B2C profitability that Ken Hoexter of Bank of America wrote. So I'll just read you this paragraph. "UPS has been working to reduce the cost of B2C distribution. It's increasing its ORION rollout, adding Access Points for retail drop-off, increasing synthetic density through its Synchronized Delivery Solution, growing My Choice, and automating its terminals. Given these investments, it aims to bend the cost curve to serve B2C down 40 basis points over the next 5 years." So they got the message that, you know, this is a game of a lot of small numbers adding up to big numbers, and all of these initiatives should lead to a great outlook for the company.
So all in all, a pretty positive reaction for the market, and although they were a little disappointed with 2015 guidance, I think they came away reassured that UPS is a company that is making conditions, not being victims of them. So anyway, I'll stop yakking a little bit here, and we'll turn it over to questions, 'cause I see we're getting a pretty good queue of them here. So bottom line, though, is the message of the conference, and certainly our message to you guys today is that you know, UPS is in great shape.
We got a bright future in front of us, and certainly the past efforts of all of you on the call and the current efforts of all of us here have helped to position this way, and that the investor conference was a strong statement about our capabilities and our being committed to investing in the future. So at this point, Joe, I'll turn it back over to you, and we'll open it up for the emailed questions here.
Thank you, Kurt. Thanks, David. Thanks for those opening comments. And as Kurt said, we will, we'll move into questions now. And just, you know, there's a screen on, on your screen, there's just a place just to type in questions. So just, keep them coming, and as I said, if we don't get to them on the call, we will definitely get back with you from the IR perspective. So we do have a question here. The first one, David, I think this one's probably for you. It says, "Are we really ready for peak season?
Okay, so the answer I'll give you is, yes, we absolutely are ready. It's also a question that I think I have gotten over the past year at every format that I can recall. Last December 26th is when we started peak planning for this year, and we put together a peak planning committee that I was in charge of originally, and now Myron is running that committee. We just had our last update review today, just an hour or so ago, and there were absolutely no projects that were in danger of not being completed, that we are on our peak readiness plan. We've added 49 additional sorts. You may have read some of those, and in time for peak, we'll have 47 expanded, new or temporary facilities around the country.
We're operating on Black Friday, a full operating day. That's something that, that we have not done in the past, but with Cyber Week, things have just changed so much. That's such a heavy day that we had to make that decision. So our focus was really around four areas, and it was capacity, which I've already talked about. It was around visibility, making sure that we have much more visibility of the packages that are coming into us from our shippers. And, it was about, communications, and, and really, it was about those areas combined. And, and then the fourth one is the forecasting, the ability to work with our customers and be able to build very credible forecasts so we can plan, around our business.
...One change that, you wouldn't be too familiar with when you were here is that we have a Control Tower, that's in place this year, especially. Well, it's in place now, but especially during the week of Christmas. And the role of this Control Tower is, one, to make sure we do what we need to do to answer our customers' needs during this important time. But the other is that we make sure that we maintain the integrity of our network.
So if that means that, that we work with our customers to move volume around to the weekend before Christmas or, or whatever adjustments we need to make with them, and then in an extreme case, we would, have to, if there was unforecasted volume, and if we didn't think we had the capacity, then we would not take that additional unforecasted volume, if that was our remaining choice, to make sure we maintain the integrity of the network. But the purpose of this is not to push volume away, it's to work with our customers on how to find ways to bring their volume in. So we're real excited about that. And I can tell you that our entire team is ready for peak, and you hear that throughout the company.
Thank you, David. Appreciate it. Here's a question, Kurt, I think for you. I think at the conference, you talked about making a $1 billion contribution to pension. So the question comes in is: What was the comment Kurt made about the pension plan during his speech, and will it affect my retirement?
Great, yeah. Well, rest easy, whoever it was that sent in this question, that your pension plan is in good hands. And, you know, due to the nature of pension accounting, when interest rates get very low, then the present value of the benefits goes up, and so the funding levels in the plan look worse. And so it is. We thought it prudent to put another $1 billion into the plan. We'll be making that contribution, you know, later in the quarter. And so if anything, the pension plan will be even more solid. And so, you know, that, clearly, that is a top priority for us, maintaining a strong balance sheet and really, you know, supporting the, the viability of that, the plan, and it is in good shape.
Great. Okay, thanks, Kurt. We'll go back to David. Here's a question for you: What do you think will be your legacy at UPS?
All right. Well, I think I've been in the job now for a little over two months, and I'm already talking about legacy. But, the first and the more generic answer, and then I'll get more specific. The more generic answer is the answer that many of you would have said throughout your career, and that's to make absolutely sure that we leave UPS better positioned for continued success than when we took over, whatever our positions were. So, I heard that when I was a young person here at UPS from people such as yourselves and those before you, and we will continue to take that view. To get more specifically, you know, we look at what are the opportunities and challenges that this generation of UPS is facing.
There's basically two that that I talked about in the conference, and I'll talk about now. One is global expansion. You know, the economic growth of the world over the next 10 or 15 years is gonna occur in a lot of places that just a few years ago, many Americans would not even be that familiar with. And so this emerging market is just a great opportunity for us. Two specific areas that we talked about was China and and Mexico. And then the other one is dealing with this world of e-commerce that we're facing today. You know, e-commerce is now... and/or, or global B2C is now 45% of our business, and it is growing.
And you compare that to when many of you were at the company, and so this is a big change for us, a big challenge, but it is also an opportunity. And that's why you hear us talking about access points and Orion and UPS My Choice, and all the adjustments we have made. I really believe that how UPS responds to e-commerce is, and along with the emerging markets, is just the key to our future growth for this generation. So. And then, of course, how do we get there with these two challenges? And it's technology, it's our people, and so really, we'd want to be measured in for all four of those areas. But that's the two huge areas of opportunity that we have.
Thank you, David. Appreciate it. Here's one that, that came in. It says: Recently, there were articles about UPS working to time multiple packages to be delivered on the same date, thereby delaying some packages. How does this help our customers that want quick delivery? I understand more packages per stop, reducing expense for UPS, but not why the customer would embrace that program. I think they're talking about SDS, Kurt.
Right.
I think I'll let you take that one.
Yeah, and that was a, a new concept that we, talked about, that, we've been doing some, pilot research on a selected basis. And that, one of the things we've seen is that, there's a-- as the web gets to be more and more accepted, it's beginning to be used for a lot of replenishment or fulfillment of supplies. Think of routine pharmaceutical deliveries that, you know, maybe you get a subscription every three months, and whether that comes within a day or two isn't a big deal. So this is what we're trying to do, is work with some of our largest shippers to see if they wish to collaborate, to give us a window, let's say, a week within a certain package can be delivered.
And then what we do is we sample that address every day in our own network, and if there's a match-up, then we notify the shipper to go ahead and fulfill the delivery. So we're not slowing down anything that the shipper doesn't want to have deferred. So it's really those shipments that don't have a defined date. It may be the lowest cost shipping option, where it's 5-8 days delivery. So all we're really trying to do is to monetize that time window and plan so that we actually go from a 1-piece residential stop to a 2-piece residential stop. It's a tremendous win, win, win.
We lower cost, we're able to give a little bit of that back to the customer, and we're able to offer, you know, a better value overall, and it certainly does a great job on improving our density.
Right. Thanks, Kurt. That's that whole concept about bending the cost curve, right?
Absolutely.
We keep trying to drive it down. Here's, I think, a follow-up question, David, for you from, kind of talking about peak. It says, "Is there a concern that we are moving back to the days that the fourth quarter does not deliver a good profit, due to increased costs, to manage the increased volume to support our service standards during the fourth quarter?
You know, I remember some of those days. And we have been able to turn that around to where, December and the fourth quarter has certainly been a very profitable time period for us. Last year, with all the situations that came in, the compacted peak, the weather and the volume surge from an e-commerce standpoint, we didn't have the success that we wanted, and the focus this year has been making sure that we do have that success. So if anything, we dedicated this year to the year of the customer. We had to prove to our customers that we can deal with peak and deal with it in the way that they're accustomed. And so we really haven't focused on concepts such as peak season surcharges and things like that.
We've really focused on building the infrastructure and making sure that we can handle the peak surge. We've also said, including in the past couple of earnings calls, that if we see that this is more of a permanent issue, that the cost of handling this surge is going to return on a yearly basis, then we have said that we're certainly prepared to look at different avenues of how we would pass that cost to where we would get paid for the value that we provide. It's too early to make any statements on that as far as what we're gonna see this year. We're gonna have a successful peak, and we will go from there.
But we are prepared, if necessary, from a Revenue Management standpoint, to make sure that we continue to have the profitable fourth quarters that we're used to.
Yeah, David, that's one case where the good old days weren't the good old days.
Here's a kind of a comment and a question that says, "Great to hear UPS is maintaining its current level of profitability for now and in coming years. David's five key areas backs up our level of commitment to maintain our current levels." And here's the question. It says, "Without being specific, is UPS continuing to look at acquisition targets or other areas to significantly increase earnings?" Kurt, if you could take that one.
Yeah, sure, and certainly, we can't be specific, so my apologies for, for not talking too much that way. But, you know, I think the way to look at it is that the majority of the growth of this company has typically been through an organic growth strategy. But that doesn't mean that there haven't been numerous acquisitions. We did, I think, 16 acquisitions as we, as we spread our network across Europe. During the, you know, the beginning of the, of this first century, we did 35-40 acquisitions to build the SCS capability. Most of those acquisitions were small or medium-sized, and so that's the most likely scenario for UPS. It is targeted small to medium-sized acquisitions.
Just this year, we did a healthcare acquisition that had temperature control, and we announced i-parcel, which is a global e-commerce play to help us target global B2C. So that's the most likely scenario, is continued targeted small singles and doubles on the M&A front. And clearly, we continue to look at everything that's out there and to see what, you know, what do we need to compete. And 9 times out of 10, the best solution when we're talking M&A, is a small one that we can then hook up to the company and then let our customer base grow into it. So there will be M&A. Certainly, we're going to keep our M&A group busy as can be, but certainly, we're not relying on large M&A to juice the numbers.
Thanks, Kurt. I think this kind of goes to the next question, along with, you know, possible acquisitions, but the question is, is: When is international going to become a bigger part of the company? David, I'll turn that one to you.
Okay, and if you go back to the 2011 long-range plan, we certainly expected international to be a growth engine at that time. And of course, there were some things that happened that affected that, obviously, one of which was the economic situation in Europe. And even though we've been able to grow our business quite successfully in Europe, it has certainly affected the yield and some things there. And then second, at the time we made those plans, global trade was running, like, 1.6, 1.7 times GDP, and we expected that to continue. And in 2000, 2012, and 2013, that really slowed tremendously. So that would have affected some of our international growth.
In the plans for the next five years, we've said that we were going to grow international at a higher revenue level than our domestic business, and I expect that we will. This focus that we're putting on global expansion on the emerging markets. So we've got a lot of growth potential. I've told you, it's one of the two key points of opportunity that I believe that we have, and whether it's organic or inorganic growth, that will be probably a combination. But absolutely, in the next few years and throughout the next X number of years, we will continue to see international growth as part of our overall business.
And clearly, David, we're continuing to see just great growth in our small package business in Europe, where transborder shipments are growing at 10% or more. You know, there's probably a lot of you on the call that have some memories, both fond and otherwise, of us building the network in Europe, and that's been one heck of a great success for us.
Thanks, Kurt. The next question, in fact, this comes up consistently when I'm out speaking with investors. In fact, today, we had investors in, and it's the Amazon question. And, you know, even today, we got the question about drones, you know, and from that perspective, the question is not specifically about drones, but it is about Amazon. So it says, you know, "Is all the talk of Amazon looking at other delivery options of concern?" So it's really, is it friend or foe when it comes to Amazon? I'll turn it to you, Kurt.
Yeah, Joe, as you know, we looked real hard at trying to have drones, you know, delivering packets during our investor conference. And it just, we didn't think the safety was very good. But since Amazon got 100 million of free advertising with a couple of $50 drones, we figured maybe we could. But seriously, no, you know, we don't talk in detail about specific customers, but yeah, clearly, the Amazon is a big question. And, we, you know, Amazon is a great UPS customer. They have a long history of, of growing with us and trusting us and meeting their commitments. And, but they're also growing pretty rapidly and, and have an absolute passion to meet customer needs.
I think, you know, our goals are to run as fast as we can to stay ahead of customer needs. That's why you've seen us embracing, you know, a wide array of solutions. David mentioned reinvesting in the business. So, you know, we don't-- our goal is to make it so that our large customers don't need to do too much on their own, and I think we're doing a pretty good job on that front. So there's a lot of press about next year, same-day delivery and couriers and all of that, and the delivering groceries and all of that. We think that the substantial opportunities, though, lie in our traditional services, and things like next-day local delivery from local retail outlets.
We're all working very fast to stay ahead of our customers in the retail space, and it's been a great growth platform for us.
Thanks, Kurt. Here's another question, another part of our business, supply chain and freight. We talked a lot about the whole value stack and things of that nature at the investor conference. Here's a question, David, I'll pose to you. It says, "What is the plan to grow the ocean and forwarding piece of the business?
Okay, good question, Joe. Especially appropriate to me, since back in 2001, I got to lead the Fritz acquisition, the first of the two acquisitions we did from a freight forwarding standpoint. And when it comes to forwarding, freight forwarding, we really look at in order to manage our customer supply chain needs, what capabilities do we need to have? And certainly, forwarding is one of those capabilities. Ocean right now is a huge opportunity. There's been a lot of shipments that have moved from air to ocean in recent years, and we've made a lot of progress in this area, and it's been a growth spot for us, and we think it will continue to be so.
From an international air freight, from a North American side, I can tell you the business has grown well for us, too, and, and we're able to utilize our strong network, based in Louisville and and throughout the U.S. When it comes to international air freight, there are some particular pressures going on at the moment throughout the industry, and a lot of it is due to capacity out of Asia, and not as much from a freighter standpoint, but it's certainly from a passenger carrier standpoint, where they have these huge aircraft now, wide bodies, that have, real large belly spaces, and that has really taken, increased the capacity out of Asia into the U.S. and into Europe.
So that is an area that we're studying closely and analyzing and being very careful over the next year or so. And so we will continue to look at our options and make the right adjustments as we go.
Thank you, David. Here's a question, turning kind of to the finances. Kurt, I'll pose this one to you. It says, "A number of our analysts have the opinion that UPS has a high level of debt. What is the strategy for debt management and debt-to-equity ratio as interest rates rise?
Yeah, it's, you know, I think in general, the strong balance sheet remains one of the great attributes of UPS and debt. So I don't agree with the statement, if analysts do say it, that we have a high degree of debt. We have a very strong, solid credit rating from both S&P and Moody's. You know, the debt we do have is on the balance sheet, unlike some of our competitors that have a lot of off-balance sheet leases. And, you know, we trade, our bonds trade among the highest in the world as far as the very narrow credit spreads and the premiums that investors require to own our debt. So if anything, we get criticized more for being too conservative and not levering up the balance sheet.
That was one of the questions I had in our breakout session. So rest easy that your, you know, your nest egg is in a good, strong basket.... That's been our historical legacy. We did move down from a triple A rating to a double A, but we still are very cautious and careful with our investments, and the cash flow of this business continues to be very strong, which is one of the thing investors love. So but we do continue to look at, you know, where we are. Certainly, the pension plan has some impact on the equity. When rates get volatile, it has some impact. But the core cash flow capacity of this business remains strong.
We target Funds Flow from Operations to be at least 50% of our total debt, and that, as long as we're able to achieve that, our ratings will remain strong. So we're able really to have a trifecta, to have a very strong balance sheet, to repurchase $15 billion of stock in the next 5 years, and to you know, generate a very strong and growing dividend. So we think right now we're in good shape, and I wouldn't trade balance sheets with certainly anybody in our industry.
Thanks, Kurt. And I think I'm going to come back to you on a question.
Okay.
The Affordable Care Act is in the news. It seems like it's been in the news for several years and with the election here just recently. So the question is: how is the federal health plan going to affect UPS?
Well, most of the impact is in the past, and clearly, we’ve had to pay some increases for expanded coverage and benefits that have added cost to UPS. There’s no question. So at least the outlook right now, we do not see a significant additional increase, and you know, we continue to offer very attractive benefits. We think that’s part of the value proposition. We did get some favorable language in our, you know, contracts that have allowed us to have a one-year period to fully vest healthcare benefits. So especially for part-timers, that, in a period in which they may not stay that long, it’s a way for us to really save our benefit dollars for our longer-term employees that cross over that one-year threshold.
So we're managing today, and barring any other dramatic changes in regulations, we should be in pretty good shape.
Thanks, Kurt. Here's a question that around competition. So David, I'll pose it to you. It says, you know, with our present cost structure, how does it stack up against FedEx, and do you feel confident that we can compete with this company? Also, international, the same thing for DHL overseas.
Yes, and I'm absolutely confident that we can not only compete, but compete very well with either one of those companies. And we'll just start with FedEx, and we know from a Ground perspective, they have a lower overall cost structure. But when you look at the way we run our business, which is an integrated network, so we take advantage of our air and Ground, then our margins are by far much better and have been for as long as I can remember, much better than FedEx. About 500 basis points, and that really hasn't gotten smaller. We've been able to maintain that, and we will continue to do so. And it's about efficiency, and it's about all the things that we talked about today.
It's also about providing value to our customers and, and focusing on the overall picture, not just cost, but cost, revenue, the service that, that we provide. From an international standpoint and, and DHL internationally, I'd say exactly the same thing. DHL has got a big presence internationally, but, we've been much more successful financially than, than they have. We have the highest international margins in the business, and at the same time, we've been growing our business, especially in Europe. So can we stand still? Absolutely not. The initiatives that I've talked about today are the things that will take us into the future, and, I would much, much rather be in our position with our strategic initiatives than I would either one of those other two companies, obviously.
Thank you, David. Kurt, this is gonna come back to you. This is on earnings per share. If you look at what we guided to for 2015, we said earnings per share were gonna be 10%-15%. I know you talked about this, you know, the dividend yield of another couple to 2-3%. But the question is, what would push you to the top end of your earnings per share target range?
Great. Well, you know, we do put out a range, and certainly, the longer out farther out it is, the broader the range. So our guidance for 2015 is a reasonably broad range, between $5.45 a share and $5.70 a share. On a percentage basis, it's not that huge, ±2.5%. As we look at market conditions, that's certainly a piece of it. You know, even though we're masters of our own fate, we do live in the global economy. So the U.S., we're assuming that, you know, there's a reasonably stable recovery. We are seeing a pickup in the industrial and manufacturing base in the U.S., which would certainly be a good thing for us.
You know, we're doing a lot of work to generate good profits out of B2C, and it's hard work, but clearly, a pickup in B2B growth would be very beneficial. So that would be one thing that would go to the bottom line pretty substantially if this industrialization of the U.S. continues. Another issue is just our execution. You know, we've got to operate effectively. This year, as David said, was the year of capacity and preparing for peak. You know, more than trying to milk every penny out. So certainly, if we can continue to operate well, then, and we're effective on the execution, that would be great. And also, you know, our success during the fourth quarter, this continued just explosion of e-commerce.
We're looking for 11% volume increase between Thanksgiving and Christmas. And so our ability to, you know, harness that growth, but also process it efficiently is a huge priority. So effective peak season operations, and then also, as David mentioned, also continuing to look more critically at revenue management during that time period. Because if it is the world we're in, where, you know, the ratio of peak season to the rest of the year remains high. Today, it's, you know, our average peak day is more than 60% above the average of the rest of the year. You go back five or six years, that was only a 40% jump. So those kind of structural changes in the business will require revenue management also to support it. So really, those three fronts will, will get us there. Dave, you got some thoughts also?
Yeah, just and macro conditions certainly will play a role, but just like anything else, it's more about how we respond to the conditions or the hand that we're dealt. And UPSers are certainly used to responding and making the adjustments. And these strategic initiatives that we've talked about earlier, you know, a lot of what can determine how high or low we are in that range will be on how we execute those strategic initiatives. And that's why we have such a focus throughout the company, and that's why I'm confident about the future.
Thank you, Kurt. Thank you, David. Here's a question for you, Kurt. It says, "you know, how much of the $15 billion in stock repurchases will be used to retire stock? And, you know, what is it used for MIP and options? Well, how does all that work?
Yeah, great, good questions, 'cause there certainly are some companies that announce share repurchases, but all it does is dilute very rich option programs. Or they announce a big share repurchase, and when you check back a year or two later, it never happened. One of the things that we have built, I think, good credibility on, is announcing repurchase campaigns and actually reducing the share counts and committing those dollars. And so, I think that has the Investor Relations group has done a good job of building credibility that way. And the outlook for the next five years is the same, that, you know, we make currently very low use of options, just restricted to really the highest echelon of senior management. So there's very little option drag in the current share count.
In general, I guess, this $15 billion, as you look forward, spread over the next 5 years, it'll differ based on what the stock price is. The more expensive the shares, the less shares we retire. But we should see a 2%-2.5% reduction in share count every year. So if you look at where our share count is today, we are substantially less than the share count we had when going public. And so we do expect to continue to see a decline in the number of shares, thereby increasing all of our pieces of the pie. That's really how this math works. And there is some certainty for MIP, but the majority, a significant majority of our repurchases are to reduce share count.
Thank you, Kurt. Here's a question, David, I'll pose to you. It says: "What gives you confidence that you will deliver on your long-term expectations?
You know, well, one, we certainly have confidence. There's no doubt about that, and, and it's based on a few things. One, our growth strategy is sound. We're expanding our footprint, we're expanding our capabilities, we're expanding the value that we provide to our customers. Two, we have this strong balance sheet that Kurt's talked about, and, the ability to invest, and not only have the ability to invest, but, expect to continue to see ROIC of 25%-30%. Third is our technology, the focus we've made on technology, where we are bending that cost curve and improving service, and the key is to make sure that we're appropriately compensated. And if you look at our most recent quarter, all three business units, improved operating profit and, and feel confident that that will continue.
So yes, we have confidence we'll make those long-term expectations.
David, here, here's a question. I'm gonna come back to you on this one, and it's really about the USPS. What do you think about the USPS rate reductions as it relates to the business?
Well, you know, UPS, USPS, they kind of position as, as much more being neutral. But when you take a look at the way they adjusted the different rate cells, they are definitely focusing on small package and, especially the shorter distances, small package, and, offering some big discounts in some of those areas. And, and, you know, their focus, and they've had some success, has really been at the bottom of the, of the market. And, for those customers who are only concerned about the cost and, and not about the, the service that we provide and the value that we provide, they will have some, some success there.
But it's always been so much more than just, the cost, and it has been about the value and the service we've provided over the years, and it will continue to be. You know, the one area that we're focusing on with USPS, is with the Postal Rate Commission. We really believe that they're taking monopoly revenues. And they're cross-subsidizing their small package products. And that's something that we think needs to stop. We know it's against the law, and we're gonna continue to point out. And if they were to have to fully allocate their cost to every package, like a business would have to do, then they'd be losing money on every package. So that is one of the things we're gonna continue to address with the government.
Thank you, David. We got time for one more question before the 4:30 time. And Kurt, I didn't write this one, but, you know, being 30 years with the company and lots of my eggs in one basket, you know, I could have written this one. And the question is: "What are the plans for the dividend going forward?
Well, great, Joe, rest easy. I think the dividend is in good hands and pretty well protected. So if anything, since going public, you know, we have substantially increased the focus on the dividend. I know some people had a concern way back that we might be so focused on share price alone, that we'd divert all funds. But, you know, you look since going public, we've actually tripled the dividend. And, you know, it represents a heck of a nice added boost, an extra 2.5% in a time period where, you know, interest rates are less than that, and so it is an important component. Sometimes when people do price comparisons, they forget how powerful that compounding dividend can be.
So, in general, you know, we don't lock in an exact policy, but the expectation is that dividends should continue to grow more or less in line with earnings. So if we're able to achieve these targets, then, we'll be looking at a healthy dividend for as far as I can see out anyway.
That sounds positive, Kurt.
It does.
Thank you. Hey, before we close out, I want to turn it back over to David for some final comments.
Okay, thanks, Joe, and thanks, Kurt, for participating today with me. And thank you each of you that have taken the time to dial in to hear from us today. I hope that each of you have learned some things maybe that you weren't aware of about your company and about the future direction of your company. And I also wanna thank you for everything that you did in the past to pave the way for this present generation of UPSers. And just wanna give you this final assurance that the generation of UPSers who's running this company today are absolutely committed to the present and the future conditions of UPS. So appreciate your time, and we're gonna have a good peak season and look forward to talking to you in the future.
Thank you, David. Appreciate both you and Kurt being able to be available today to answer questions for the retirees. This is the final of our questions, and any questions that we weren't able to get to, we, as I said, we'll respond to and from our team and get back to you. And we value the opinions of the retirees, and so you'll see on your screen, there's a little button for a survey. So we would appreciate if you could give us some feedback, so as we continue to bring you communication from our senior leadership, that we'll understand exactly from your perspective what you're looking for. And with that being said, also, from HR, we have Joe Finamore here today, and Joe is really your representative from the retirement community.
I just wanna give you his email address, and it's Joe Finamore, and it's-
J-O-J-
It's just J-F-I-N-A-M-O-R-E @ups.com. His first name is Joe, but it just starts with a J. F-I-N-A-M-O-R-E @ups.com. So again, thanks for your time. Appreciate it, and have a great day. We'll talk to you soon.
Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.