Global Shippers - Simon Fraser Universitypoitras/417_Global-Shippers_16-1.pdf · UPS Analysis 3....

Global ShippersGDP Growth from Developing Nations & the Rise of E-Commerce will

Stimulate Demand for Courier & Delivery Services

Introductions

Adam PotvinAnalyst, Shipping & Logistics

• Worked as an Analyst Intern at Desjardins Capital Markets

• Worked as an Analyst Intern at Yellow Point Equity Partners

Nina SysoevaAnalyst, UPS

• Worked as a Junior Accountant for GableCraftHomes

• Case competitor for SFU JDC West’s Finance team

Jordan RaiAnalyst, FedEx

• Worked as a Summer Intern for Ernst & Young

• Case competitor for SFU JDC West’s Accounting team

Marielle ColombAnalyst, Deutsche Post

• Worked at Crédit Agricole(French bank)

• French exchange student

Agenda

1. Industry Overview

2. UPS Analysis

3. FedEx Analysis

4. Deutsche Post Analysis

5. Final Rankings

6. Appendix

Industry Overview

Overview UPS FedEx Deutsche Post

Global Shippers In a Nutshell

Logistics companies provide delivery services of parcels, documents and packages by air, water, and land to customers, who are mostly businesses. Sophisticated distribution and information networks are required so that transportation and delivery is as efficient is possible. Global shippers often own or lease large aircraft and vehicle fleets. This industry does not include national post services, such as Canada Post, nor does it include commercial airlines.

Source: IBIS World

Historical Performance: S5AIRFX (GICS—S&P 500)

Trailing 12 Months Last Five Years

Since Inception of Industry Classification (~27 Years)Last 10 Years

Source: Bloomberg; returns assume dividends reinvested into index

Annualized Return: - 4.05%

Annualized Return: 7.26%

Current Industry Valuation & Performance

Modest Multiples Reflect Modest Growth Expectations

P/E P/Sales P/FCF P/Book EV/EBITDADividend Yield

19.8x 0.8x 34.2x 9.1x 7.1x 2.10%

Deutsche Post 18.8x 0.5x 22.2x 2.6x 6.3x 3.55%

FedEx 14.3x 0.8x 62.5x 2.6x 5.5x 0.70%

TNT Express 0.6x 1.9x

UPS 18.6x 1.6x 18.1x 36.4x 9.5x 3.08%

Yamato Holdings 27.3x 0.7x 1.7x 1.06%

Industry Players Have Struggled

Source: BloombergNote: Multiples are on a TTM basis, except EV/EBITDA which is on a forward 12M estimate

2015-03-15 2015-06-15 2015-09-15 2015-12-15 2016-03-15

TNT Express UPS Yamato Holdings FedEx Deutsche Post

History of Logistics: 2700 B.C. – 700 A.D.

~2700 B.C.

~300 B.C.

~700 A.D

• The Egyptians needed to transport the massive building blocks for the Great Pyramid of Giza. To do so, they needed transport/hoisting equipment. Technology in material handling started at this point as multi-ton stones were transported and assembled on-site.

• The Greeks developed rowing vessels, which greatly bolstered intercontinental trade. This would later benefit Greek armies led by Alexander the Great who needed to incorporate large and sophisticated logistics systems to travel (along with their weapons and families) as far as India.

• The construction of the famous Mezquita Mosque in Spain required the use of procurement logistics to ensure that pillars arrived in Spain in a timely manner. These pillars were sent from all around the Islamic Empire during the Umayyad dynasty.

Source: DHL Website

History of Logistics: 1200 – 1800

• Hamburg, Germany was founded as a place to make sea travel more secure and as a node for shipment of fur pelts and other business goods from other nations. Hamburg was a node within the Hanseatic League, which was an international network of trading partners.

• The first postal service that operated under clearly defined transit times is developed. Letters were delivered from Paris to Spain to Vienna.

• The invention of vehicles, railroads, ships and the use of the steam engine meant that goods could be transported faster and more efficiently than ever. This new economic era presented a world of opportunity in the realm of logistics

Source: DHL Website

History of Logistics: 1940 – 1980

1970-1980

• Military logistics had been refined since WWI. During WWII, logistics was a vital link for troops to receive their supplies, rations, weapons and equipment

• The sea container is invented by Malcom McLean, which changed methods of productions and consumer habits. The sea container could be used to ship goods abroad which acted as a significant boon for international trade and helped create a more efficient and free market and brought about increased globalization.

• Just-in-time logistics is introduced by Japan’s Toyota Motor Company. The purpose was to link logistics to other functions of the operation, with an emphasis on procurement.

Source: DHL Website

History of Logistics: 1990 – Present Day

• Quick Response (QR) and Efficient Consumer Response (ECR) technologies are developed and applied by retailers and wholesalers. Now, distribution centres are responsible for transporting goods instead of merely storing them. This means that companies can now better react to market fluctuations and act more nimbly.

• Supply chain management has evolved to the point where it is now vital to the business processes that link the supplier to the vendor to the end user. Supply chain management is interactive and requires constant monitoring of competing objectives.

• As globalization increases, using logistics to strengthen international supply chains has increasingly become a way for companies to distinguish themselves in a globally competitive environment.

Source: DHL Website

Point-to-Point Model

Source: DHL & Southwest Airlines Websites

Point-to-Point Model

• Was the dominant method of transportation for both the airline and logistics industries until the 1970s

• The protocol is to ship from one node to another directly without needing to be rerouted

• Due to the complexity of handling larger volumes and the inefficient nature of transporting goods on half-empty planes, this delivery model has fallen out of favour for large logistics companies

• Today, this method is primarily used by smaller logistics companies and budget airliners that handle smaller volumes with fewer nodes to consider

• The point-to-point concept is used in a variety of different contexts, including in telecommunications and in computer networking (i.e. peer-to-peer file sharing)

Hub and Spoke Model

Source: DHL Website

Hub and Spoke Model

• In 1955, Delta Air Lines pioneered the hub and spoke model • When the airline industry was deregulated in 1978, this model became

common practice in the airline industry• FedEx would be the first logistics company to adopt this model in the

mid 1970s• The protocol is to ship goods from all nodes to a central location (hub)

where the goods are re-sorted and then shipped to its destination • Hubs can vary in scale; there can be regional hubs and a central global

hub—this is done by UPS for instance• Is the dominant method of transporting goods used today by most

large logistics companies due to the efficiency of the model• Companies in other industries have also implemented the

model, including Lowe’s and Wal-Mart

Point-to-Point

Point-to-Point Versus Hub and Spoke

Advantages Disadvantages

Reduces travel time between nodes Reduces risk of lost shipments Fuel (and subsequent greenhouse gas emissions) is lower per unit

shipped

Hub and Spoke

Company can concentrate and downsize its workforce by having goods sorted at one central location instead of multiple locations—this reduces labour costs

Ensures that flights or vehicle trips are at or near capacity when delivering goods, ensuring greater efficiency and reduced fuel costs

Spokes can easily be created within the model

Advantages Disadvantages

X There is a limit to the number of nodes that can be adequately and efficiently connected

X Has been proven to be a costlier method of transportation for larger logistics companies due to greater overall travel leading to higher total fuel costs and the need for goods to be sorted at each node, leading to higher labour costs

X Any disruption at the hub can cause delays throughout the entire system

X Efficiency of model depends on the capacity of the hubX Route scheduling may be complicated X Requires longer journeys for goods to arrive at their destination

Sources: Global Logistics: Mangan, Lalwani & Butcher; Aviation Knowledge

Market Segments

Who Uses Courier & Delivery Services?

1. Business servicesUsed primarily by bankers, bureaucrats and lawyers, this market segment relies on speedy and reliable B2B service for time-sensitive package delivery. This market segment has risen in importance since the latest financial recession as business spending increases.

2. Retailers and wholesalersThis market segment includes businesses in various sectors including consumer goods, fashion and electronics. A retailer/wholesaler would use a courier to transport raw materials between business locations, for instance. Amazon has contributed a large share of revenue for this segment, as it uses FedEx and UPS for a majority of shipments.

3. HouseholdsSelf-employed individuals may use couriers to delivery various packages. Due to the rise in popularity of e-commerce, individuals/households are increasingly likely to use courier services to trade items in the years to come.

4. OtherThis includes third-party logistics and supply chain management companies that are excluded from the business services segment.

Source: IBIS World

Geographical Markets

Where do Courier Service Companies Make Their Revenue?

1. North AmericaHome to the two biggest names in the industry, UPS & FedEx, the U.S. market accounts for 90% of North American revenue and is mainly focused around the express segment.

2. EuropeOperators in the European segment rely heavily on road and rail transportation. Recently, some European nations have relaxed national post systems and have removed various barriers relating to customs, which have opened the door for companies to take advantage of new markets. This is especially true for countries that were previously part of the Soviet Union.

3. North AsiaMore than half of the revenue in this market is from Japan, which has one of the most advanced courier systems in the world, largely attributable to the customer-oriented model that exists there. South Korea and Japan both have high internet penetration, making e-commerce extraordinarily popular. The manufacturing industry for electronics has also led to increased exports via courier from South Korea. While China has potential due to its massive manufacturing base, strong competition, and stifling regulation around letter delivery and road transportation has pushed out some large shippers from the country and has made it difficult for local small operators to expand. China’s express segment is made up mostly of local operators, with China Post as the biggest player in this segment.

4. Other RegionsIndia only accounts for 2.1% of industry revenue, despite it having 15% of the global population—this is largely due to poor transportation infrastructure in the country. However, a growing middle class should eventually overcome this and lead to significant future growth. Southeast Asia and South America have both been exceptional drivers of recent industry demand. Africa still has an undeveloped economy and poor infrastructure, thus its courier industry is served locally.

Source: IBIS World

Revenue Breakdown

Revenue by Market Segment Revenue by Continent

55%29%

Business Services Retailers & Wholesalers Households Other

North America36%

Europe23%

North Asia19%

South East Asia9% South

America6%

Africa & Middle East3%

India & Central Asia2%

Oceania2%

Source: IBIS World

Segments as a Percentage of Industry Revenue

Revenue Segments

Express Courier Services

• Refers to services that are conducted over a relatively short period of time• This means same-day, overnight, or next day delivery

• This relies on cargo aircraft• Relies on the hub system; all freight is transported a central “hub”

where it is sorted and then rerouted to destination• This segment of the industry has become more dominant over the last

five years• This segment is dominated by the big players (i.e. UPS & FedEx)

Service Couriers & Messengers

• Includes ground transportation that and is typically conducted over a longer period of time than the express segment• This usually means that this service is cheaper for customers

• Many operators in this space are relatively small and serve single, local urban markets

• This segment relies more heavily on labour and thus more employees work in this segment than in express

• However, as a portion of revenue, this segment has declined relative to the express segment

Express Courier Surface Courier & Messengers

Source: IBIS World

Revenue Growth

Historical Performance Total Industry Revenue Expected to Grow

• Industry has experienced stagnant growth since the financial recession• Developed nations, especially those in Europe, have contributed

greatly to the industry’s struggles• Industry experienced rapid growth between 2009 – 2011 with greater

activity in emerging economies• Emerging economies have recently experienced a slowdown however,

which has dampened industry growth• Increasing number of people with internet access has also helped

industry grow• However, internet access has acted as a double-edged sword;

many now scan documents electronically instead of shipping documents

Forecasted Performance

• Expected to grow at a modest rate, due to increased global e-commerce and increased emphasis on quick delivery times for manufacturers, such as just-in-time delivery

• Consumer spending expected to rise, but will be partially offset by a continued slowdown in emerging markets

Source: IBIS World

Barriers to Entry

• There is little resistance to entry for small operators who wish to serve small, niche markets, especially where only road transportation is required, from both regulatory and investment points of view

• It is difficult to gain significant market share internationally, given the need for capital investment in aircraft fleets, large delivery trucks, etc. that are required to cover large geographical regions

• There is also much more regulation regarding aircraft fleets

Industry Competition

13.8%4.2%3.2%

Other: 39.5%

Market Concentration

• The shipper market is neither fragmented nor concentrated• The large and developed markets (N.A., Europe & Japan) are

dominated by the large players• Similarly, the large players are primarily focused on serving

these developed markets• The economic slowdown in Europe caused large players were hurt,

while the growth in emerging markets, which are served by local couriers, helped smaller players; these two factors combined to make the industry less concentrated over the last five years

• However, increased merger activity in the coming years should lead to greater concentration

Factors Affecting Competition

• The rise of technology stresses the importance of developing solid information management systems and a strong e-commerce platform

• Countries with nationalized post systems see relatively low competition• Bigger companies can operate at higher margins• Long-term contracts are an important source of revenue; for instance,

electronics companies may choose one company to exclusively deliver its products

• The advantages of signing documents online as opposed to having a physical copy shipped presents an external threat

Major Players

Source: IBIS World

Revenue Stability

• Because of the diversity of clients that operators serve, revenue is stable in this industry

• Increasingly liberalized international trade and the strength of e-commerce has provided downside protection for revenue

• Industry revenue fluctuates about 2% a year

Operating Conditions

Labour Intensity

• Industry operators are expected to invest a mere $0.10 in capital expenditures for every $1.00 that is expended on labour• However, capital intensity has increased recently as companies

have been investing in more efficient aircraft, trucks and technology

• Capital intensity is higher for larger companies as efficient equipment reduces the need for labour

• For owner-operators (those who both own and operate the daily operations of the business—typically smaller logistics companies), work long hours, adding to the labour intensity on the smaller end of the spectrum

Technological Advancement

• There is reasonable change in technology in this industry• The rise of e-commerce has led to enhanced customer service• Bar coding technology has reduced the burden of the truck driver

concerning labels and information that used to be dealt with manually by paper

• Improved tracking systems has meant that customers can track parcels in real-time

• The use of the digital pen is now often used for customers to sign when receiving packages and allows for more efficient data transfer

Source: IBIS World

Cost Structure

Industry Cost Structure Factors Affecting Costs

Purchases: Fuel represents the largest purchase—the lower the price of crude, the lower the cost. Some of the bigger players actually hired “fuel managers” to hedge against rising fuel prices. Purchases can also include transportation costs for smaller companies who don’t own aircraft fleet.

Other: Includes insurance, cleaning, landing fees, among others.

Wages: Increased automation and a higher share of employment from developing nations with lower wages have led to a decline in wages as a percentage of revenue.

Rent & Utilities: These are costs of renting distribution centres, warehouses, and terminal spaces at airports.

Depreciation: Includes the depreciation of aircraft fleet and vehicles as well as communications equipment and computer software and hardware.

Profit Margins: Margins have increased from 6.3% in 2011. Operators in the express courier space see higher margins due to premium pricing for time-sensitive delivery.

Source: IBIS World

Supply Chain

Economic Drivers

Demand IndustriesSupply Industries Global Shippers

• Number of Internet users• Price of crude oil• Consumer spending & trade

• Internet service providers• Computer hardware manufacturing• Aircraft and automobile

manufacturing

• Wholesale and retail trade• Manufacturing • Business activities

Source: IBIS World

Economic Drivers: Number of Internet Users

Internet Commentary

• As alluded to earlier, increased internet access has the negative side-effect of reduced need to courier or deliver items that can otherwise be sent electronically

• However, the positive of increased access to online retail outweighs this negative side-effect• Therefore, # Internet users = $ industry revenue

Internet Penetration by Continent

Africa

With Internet No Internet

Europe

Latin America / Caribbean

North America

Internet Users by Continent

0.60.3 0.3 0.3

Asia Europe Latin America /Caribbean

Africa North America

s)Source: IBIS World

Economic Drivers: Price of Crude Oil

How Crude Affects Shippers

• Given that the primary activity of the industry is transporting goods, a major cost driver (second only to perhaps wages) is fuel

• Fuel costs are largely the result of the price of crude oil; crude oil is refined into various refined products: diesel, gasoline, etc.

• When fuel costs are high, large shipping operators are able to pass a large portion of this increase onto its customers, which leads to decreased volumes and ultimately, reduced profitability

• Small shipping operators are unable to pass on fuel cost increases to its customers and thus profit margins would shrink

• Price volatility represents a threat to the industry

Crude Oil Commentary

Recent Volatility in Crude Oil Price

• Clearly, skyrocketing oil prices from 2009 – 2011 was not correlated with high industry growth over this time

• It is possible that consistent high oil prices between 2011 – 2014 slowed industry growth

• Recent drastic downturn in oil price should benefit industry profitability

• Today’s price of crude: ~$40/barrel

Source: IBIS World

• The industry is heavily reliant and is quite correlated with global consumer spending

• More specifically, the industry is strongly tied to discretionaryspending and is a function of consumer confidence

• Global consumer spending will likely have increased at an annualized rate of 2.6% from 2011 – 2016E

• However, consumer spending decreased in Europe due to the Eurozone crisis, which offset emerging market growth

• Of particular note is consumer spending in durable goods, given the nature of shipping goods

Economic Drivers: Consumer Spending & Trade

US Consumer Spending By CategoryConsumer Spending

17.40%

16.80%

31.20%

21.70%

13.20%

Housing Services Healthcare Services

All other Household Services Non-durable Goods

Durable Goods

International Trade

• Many emerging countries have relaxed their trade barriers, creating an opportunity for stronger demand in the industry concerning internationally-shipped products

• Free trade agreements and the notion of globalization benefit the industry

• Foreign exchange risk is a threat to some players in the industry; the recent appreciation of the US dollar has hurt shippers whose customers reside outside of the US

Source: IBIS World

Industry Trends: Mergers and Acquisitions

Why Have Mergers Become Prominent in the Shipping Industry?

1. Mergers have become prominent in the developed world (Europe and N.A.) because companies wish to expand the services they offer, like bolstering e-commerce platforms, and acquisitive growth is often perceived as the best way to achieve this

2. Merger activity, including joint ventures, have increased in developing nations where a monopoly on courier services had once existed—offering better service and pricing to previously uncompetitive environments has proven attractive

C.H. Robinson Acquires Freightquote.com (2015)

• C.H. Robinson (market cap: $10.4 billion) acquires privately-held, internet-based American freight broker for $365 million

• Rationale behind acquisition was Freightquote’s proprietary e-commerce platform, allowing shippers to better access lower rates

FedEx Acquires GENCO (2015)

• FedEx (market cap: $39.6 billion) acquires large logistics firm (sales of $1.6 billion) that specializes in handling product returns—handles more than 600 million returns a year

• GENCO’s leadership in “reverse logistics” provided the rationale for the deal

• Price of acquisition: $1.4 billion

Source: Canadianshipper.com

• Number of establishments (physical locations) and enterprises (separately managed divisions) have both dropped off about 10% over the last 8 years due to increased consolidation in the industry• Large players expanded into emerging markets through

acquisition of smaller companies here• Large industry operators have also cut capacity in developed nations,

which has also contributed to the decrease in enterprises and establishments

• Robust growth in developing economies will offset industry consolidation in Europe and N.A. and is projected to lead to a 1.3% annual growth rate in establishments over the next five years

Industry Trends: Employment and Establishments

Employment Trends Degree of Industry Consolidation

Global Workforce Expected to Increase

Historical CAGR = -0.53%Forecasted CAGR = 1.87%

• Increased company restructuring and the exit of some industry players (the smaller companies), in addition to increased automation, have led to a decreased workforce despite modestly growing industry revenue

• Currently, global workforce stands at around 2.5 million workers (includes part-time, temporary, & full-time employees)

• Workforce expected to increase at a rate slightly below the industry growth rate

578,155

Number of Establishments

558,315

Number of Enterprises

Source: IBIS World

Pertinent Regulations – US & Europe

Air Operations Ground Operations

• The U.S. Department of Transportation (“DOT”) regulates the economic aspects of air transportation, including insurance and pricing• International operations subject to bilateral agreements

between U.S. and foreign governments• The Federal Aviation Administration (“FAA”) regulates the safety

aspects of air transportation, including the transportation of hazardous materials and maintenance

• The Transportation Security Act (“TSA”, 2001) regulates security aspects of air cargo transportation

• The Federal Motor Carrier Safety Administration (“FMCSA”) regulates ground transportation as it relates to safety, insurance, and the transportation of hazardous materials

• The Postal Accountability and Enhancement Act (2006) oversees aspects of the U.S. Postal Service (created in 1970)• Has authority over postal rates, product offerings and service

standards• The Motor Carrier Act (1980) deregulated the trucking industry in

easing entry restrictions, and limiting the ability for agencies or collections of companies to set rates

• The U.S. Department of Homeland Security regulates cargo security

Environmental

• Various federal, state and local environmental regulations oversee regulations regarding proper storage, handling and disposal of waste, management of stormwater, underground storage tank, adherence to clean air laws, emissions standards, responding to spills, among others

• The Environmental Protection Agency (“EPA”) assists in governing aircraft noise in the US and there are noise regulations in foreign countries

European Regulations

• The European Union does not allow monopolies in the mail handling industry, which has allowed private carriers to more easily enter that market

• England has decreased its limit on the average weekly hours a truck driver can work from 55 to 48

• Air Carriers must follow International Civil Aviation Organization (“ICAO”) guidelines, which oversee environmental, safety, and security standards

Source: UPS Website

Customs, Tariffs & Industry Associations

Customs Industry Associations

• Custom laws in various countries regulate the import and export of shipments

• The Bureau of Customs and Border Protection oversees customs brokerage (a customs broker “clears” goods through customs) and freight forwarding (an entity that organizes shipments from a manufacturer to a market)

Tariffs

• There are no tariffs imposed on the industry per se, but there are tariffs on the products shipped by industry operators

• The overall lowering of tariffs has led to a surge in outsourcing and offshoring for production of goods

• The Messenger Courier of Association (created in 1997) represents ~500 courier companies in the US and abroad• This not-for-profit promotes the common interests of the courier

industry• The European Express Association represents the courier industry in

Europe• It is divided into committees that deal with competition and

markets, customs, transport and environment, and security

Source: IBIS World

Domestic, 1,309

International, 2,622

Atlantic, 557

Pacific, 799

Latin America, 129

Trailing 12M Freight Statistics

North America Asia Pacific Europe

Total Freight YoY Cargo Revenue Ton Miles Distribution (Millions)

Source: Bloomberg

• A Cargo Revenue Ton Mile is a ton of cargo multiplied by the number of miles it travels

• This data is for the month of December, 2015• Total ton miles traveled for 2015: ~65 billion

Inbound Asia Price Index

Trailing 12M Price Trends

Inbound Europe Price Index

Outbound Asia Price Index

Source: Bloomberg

Outbound Europe Price Index

Trailing 12M Price Trends

East-West Price Index: USA Shanghai to New York: USD/kg

Source: Bloomberg

Revenue Metrics

Revenue Growth YoY Revenue per Employee

Source: CSI MarketNote: As of Q3-2015

Margins

Gross Margin EBITDA Margin

Return on Balance Sheet Items

Return on Equity Return on AssetsReturn on Investment

Stakeholder Growth Trends

Free Cash Flow Growth YoY Operating Income Growth YoY

Balance Sheet Metrics

Capital Expenditure Growth YoY Quick Ratio

Net Income & Dividend Payout Ratio

Net Income Growth YoY Dividend Payout Ratio

United Parcel Service, Inc. (UPS)

Stock & Company Overview

Stock Information

Exchange: NYSETicker: UPS US Equity

Stock Performance Since IPO Key Metrics

Current Price 101.29

Day's Range 100.48-101.60

Bid/Ask 100.10/101.00

52-week Range 87.30 - 107.32

Market Cap 89.5 B

Net Debt 9.6 B

Enterprise Value 99.1 B

Dividend Yield 3.09%

Average Volume (3-month) 3.5 M

Shares Outstanding 883.7 M

P/E (ttm) 18.93

EPS (ttm) 5.35

P/B (ttm) 36.33

Beta 0.94

Next Earnings Date 28-Apr-16

All prices in USD as of 3/14/2016Source: Yahoo Finance

Stock Information

2011-03-31 2012-03-31 2013-03-31 2014-03-31 2015-03-31

5-Year Stock Performance

Stock Information

1-Year Stock Performance

Exchange: NYSETicker: UPS US Equity

2015 Financial Highlights

Revenue 58.4 B

FCFF 5.05 B

Net Income 4.8 B

Adjusted Net Income 4.9 B

Deluted EPS 5.35

Dividends Declared (per share) 2.92

Dividend Yield 3.0%

All prices in USDSource: UPS 2015 Annual Report

Stock vs. Industry Performance

SECTORINDUSTRIALS

INDUSTRYTRANSPORTATION

SUB-INDUSTRYCOURIER SERVICES

2015-03-20 2015-05-20 2015-07-20 2015-09-20 2015-11-20 2016-01-20

1-Year Performance

UPS US EQUITY NYA: NYSE CompositeBIXPRSGT: Global Express & Courier Top Peer Index TRAN: Dow Jones Transportation Average

SECTORINDUSTRIALS

INDUSTRYTRANSPORTATION

SUB-INDUSTRYCOURIER SERVICES

2015-03-20 2015-05-20 2015-07-20 2015-09-20 2015-11-20 2016-01-20

1-Year Performance

UPS US EQUITY BIXPRSGT: Global Express & Courier Top Peer Index

Stock vs. Industry Performance

Company Overview

World’s Largest Package Delivery Company Vision Guided by 4 Transformative Strategies

1. Deploying technology-enabled operations

2. Providing unique and industry-specific customer solutions

3. Expanding global network

4. Serving the needs of end consumers around the world

• Founded in 1907 as a private messenger and delivery service

• Currently headquartered in Atlanta, Georgia, U.S.

• The largest in terms of revenue and volume

Deliver packages each business day for 1.5 million shipping customers to 7.9 million receivers

Operate in over 220 countries and territories

In 2013, delivered 16.9 million pieces per day worldwide, or a total of 4.3 billion packages

Company Overview

Self-Defined Competitive Strengths

• Integrated global network backed by sophisticated optimization system

• A leader in developing technology to enable customers to optimize their shipping & logistics business processes

• Cross-selling small package, supply chain and freight services across customer base – an important growth mechanism

• Strong brand equity and distinctive culture with employee stock ownership tradition dating back to 1927

Industry Focus

• Aerospace & Defense

• Automotive

• Consumer Services

• Government Agencies

• Healthcare

• High Tech

• Industrial Manufacturing & Distribution

• Professional Services

• Retail

Company Overview

Quick Facts

Source: UPS 2015 Annual Report

Fleet as of December 31, 2015

• A global ground fleet of 110,000 package cars, vans, tractors and motorcycles• Ground support fleet of 33,000 pieces of equipment designed to support aircraft fleet,

ranging from nonpowered container dollies and racks to powered aircraft main deck loaders and cargo tractors

• 33,000 containers used to transport cargo in our aircraft

Aircrafts

Vehicles

History & Management

History Timeline

1907-1913

Creating a Messenger

Service

• In 1907, two teenage entrepreneurs created what would become the world's largest package delivery service

• Starting in a Seattle basement with a $100 loan, Claude Ryan & Jim Casey opened the American Messenger Company

• The company fulfilled a range of tasks, from running errands and carrying notes on foot or on bicycle, to making home deliveries for drugstore customers

1913-1918

Retail Beginning

• A merger with Evert McCabe's competing package delivery business helped the company redefine its primary charge

• In 1913, the company shifted its focus to delivering packages from grocery and drug stores to customers' homes, changing its name to Merchants Parcel Delivery

• In 1918, 3 of Seattle's leading department stores became customers, abandoning their own internal delivery efforts, and turning over business to Merchants Parcel Delivery

1918-1930

Entering the Common Carrier

• In 1919, the company expanded beyond Seattle to Oakland, California, becoming United Parcel Service

• In 1922, acquired common carrier service in Los Angeles (manufacturer distributor)

• In 1924, introduced an innovative conveyor belt system used for package handling

• In 1929, began to offer air service through private airlines for the next 2 years, until the economic downturn

• Moved headquarters to New York City

• Jim Casey in the 1920s gave staff the opportunity to purchase company shares

History Timeline

1930-1975

Expansion

• UPS grew throughout the 1930s and early 1940s by acquiring delivery responsibilities for department stores in Chicago, Cincinnati, Milwaukee, Minneapolis, and Philadelphia

• Reintroduced air service, offering two-day delivery to major East and West Coast cities in 1953

• Over the course of 30 years, UPS pursued more than 100 applications for additional operating authority

1975-1990

International Growth & UPS

Airlines

• In 1975, the corporate headquarters moved from New York City to Greenwich, Connecticut

• UPS went abroad, expanding its service throughout the Americas and Europe

• In 1989, purchased IML, a British delivery company, expanding to the Middle East, Africa, & the Pacific Rim

• Deregulation of the airline industry allowed new opportunities for UPS, it started creating its own fleet

• In 1988, UPS won approval from the Federal Aviation Administration (FAA), launched UPS Airlines

1990-1999

Consistent Innovation

• In 1994, to improve cost efficiencies moved headquarters to its current home – Atlanta, Georgia

• Since the late 1990s, UPS invested billions in technology development and infrastructure

• Delivery Information Acquisition Device (DIAD), was developed to upload information to the UPS network

• New services included transportation and distribution for larger shipments via road, rail, air, and ocean

• In 1998 created UPS Capital, financial services unit; bought First International Bank, for commercial lending

• In 1999, UPS offered 10% of its stock to the public for the first time (IPO)

History Timeline

1999-2010

Global Commerce & Evolution

• Full-service business, with UPS Supply Chain Solutions (logistics, global freight, financial, and mail services)

• In 2001, UPS ventured toward retail business – acquired Mail Boxes Etc.

• Opened air hubs in Louisville, Kentucky, and Cologne, Germany

• In 2003, UPS issued its first Corporate Sustainability report

• In 2005, launched the first non-stop delivery service between the U.S. and Guangzhou, China

• In 2005, acquired the interest held by its joint venture business partner in China, giving it access to 23 cities that cover more than 80% of the country's international trade

• Growth through acquisitions in Latin America, North America, U.K., and Poland (air carriers & freight)

2010-2016

The New Logistics

• DIAD V is rolled out to speed package tracking detail between UPS and its customers

• Acquired Brussels-based Kiala and launched UPS Access Point, an alternative to home delivery, allowing UK consumers to purchase goods over the Internet and choose convenient delivery locations

• In 2013, became the first global express delivery company to be wholly-owned in Vietnam

• UPS expanded into the healthcare market, with facilities in China, Hungary, Australia, Italy and North America

• ORION, On-Road Integrated Optimization and Navigation, reduces miles driven by optimizing driver routes will be completed by 2017

History: Takeaways

1. Vertical integration and technological enhancements drive efficiency

2. Growth by acquisitions across different geographies create economies of scale

3. Expansion into markets other than parcel delivery add new revenue streams

4. Employee ownership creates incentives and promotes the culture

5. Regulations across business units affect operations & expansion plans

6. Environmental regulations and CSR are becoming the areas of increasing concern

7. E-commerce and new technology drive competition & growth CAPEX

Management Committee

David Abney, UPS Chairman and Chief Executive Officer• Unanimously appointed by the Board of Directors as Chairman in 2016• Appointed CEO in 2014 (11th CEO in the 108-year history of UPS)• Began his UPS career in 1974 in a small facility in Greenwood, Mississippi, while attending Delta State University• BBA from Delta State University• 2007-2014: chief operating officer at UPS, overseeing logistics, sustainability, engineering and all facets of the transportation

network• 2002-2007: president of UPS International, was involved in a number of global acquisitions• Earlier served as president of SonicAir, a same-day delivery service that signaled UPS's move into the service parts logistics sector

Richard Peretz, Chief Financial Officer• Joined UPS Customer Service in 1981 while attending college at the University of Texas at San Antonio• BBA from University of Texas San Antonio; MBA from the Goizueta Business School at Emory University• Was a member of the team that managed UPS’s Initial Public Offering in 1999• In 2013, became Corporate Controller, and in 2014 expanded his role to include Corporate Treasurer• In 2008, responsible for corporate finance and accounting• In 2003, became International Chief Financial Officer and helped to open operations in China and expand in Poland, Japan and the

United Kingdom• In 1989, was promoted to district controller in the Americas Region as part of the development team for Mexico and Latin America• Serves on the board of the American Red Cross Metropolitan Atlanta Chapter

Management Committee

Jim Barber, President, UPS International• President of UPS International since 2013• Began his UPS career in 1985• Degree in Finance from Auburn University• 2011-2013: president of UPS Europe• Prior served as a UPS District Manager, Region & District Controller, Accounting Manager, and Billing Supervisor

David Barnes, Chief Information and Global Business Services Officer• Prior to being named CIO, Barnes was UPS's vice president, Application Portfolios• Began his UPS career in 1977 as a part-time package loader in St. Louis, Mo.• BBA from the University of Missouri• Held key positions during UPS's global expansion efforts in the late 1980s and early 1990s• Served on numerous technology company advisory boards and non-profit boards including two terms as a member

of the National United Way Board of Trustees; currently serves on the Board of Directors of Ingram Micro, Inc.

Myron Gray, President, U.S. Operations• Began his UPS career in 1978 as a part-time package handler in the Tennessee District while attending college• Completed advanced management programs at INSEAD in Fontainebleau, France and the Yale School of Business• In 2010, he led a strategic transformation of the company's U.S. small package business• Served as the president of the Americas Region, covering Canada, Mexico, Central America, South America and the Caribbean• Held various positions of increasing responsibility in industrial engineering, human resources, business development and operations• Sits on the boards of the Atlanta Police Foundation, the National Urban League, the Federal Reserve Bank of Atlanta

Management & Board Analysis

ESG Scores: 5-Year Horizon Independency of the Board

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Environmental Disclosure Score Social Disclosure Score

Governance Disclosure Score Total ESG Disclosure Score

82%83%

80% 80%

82%83%

85% 85%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

% of Independent Directors Political Donations

1. The Board of Directors is largely independent with only 3/15 dependent members2. A decrease in the Governance score in 2012 is due to a decline in political donations

Management & Board Analysis

Share Ownership Top 5 Insiders

4%3% 2% 1%

Investment Advisor

Others

Pension Fund (Erisa)

Government

Holder Name Title PositionPosition Change

Market Value

Ownership

Eskew Michael Former CEO 250 82 25,158 0.04%Mcdevitt John Former SVP HR 103 10,433 0.02%Finley Teresa SVP Global Mkt 43 4,318 0.01%Nichols Mitch Former Eng SVP 38 3,878 0.01%Barber James SVP & President 27 2,720 0.00%

In Thousands of USD Unless Otherwise SpecifiedSource: Bloomberg

1. Insiders own a low percentage of shares: 0.07% in total, with a large market value at $46.5 million2. Current CEO & CFO do now own a significant stake, former management tends to be insider owners3. The majority of the shares is owned by investment advisors

Share Ownership: Top 10 Shareholders

Holder Name Position Position Change Market Value Ownership Report Date Country

Blackrock 45,973 17 4,635,009 6.66% 2016-03-10 USA

Vanguard Group 43,153 865 4,350,734 6.25% 2016-01-31 USA

Wellington Management 29,550 -642 2,979,191 4.28% 2015-12-31 USA

State Street Corp 26,030 -63 2,624,348 3.77% 2015-12-31 USA

Sun Life Financial I 22,896 -184 2,308,341 3.32% 2016-01-31 CANADA

FMR LLC 18,369 -1,399 1,851,974 2.66% 2015-12-31 USA

Bank Of America Corp. 11,069 -1,574 1,115,986 1.60% 2015-12-31 USA

Franklin Resources 10,505 -420 1,059,079 1.52% 2015-12-31 USA

Wells Fargo & Company 9,673 168 975,203 1.40% 2015-12-31 USA

Northern Trust Corp. 8,891 -1,099 896,439 1.29% 2015-12-31 USA

In Thousands of USD Unless Otherwise SpecifiedSource: Bloomberg

Management: Takeaways

1. Top executives are appointed internally & have been with UPS for decades

2. Management has business background – shareholder friendly

3. The Board of Directors is largely independent at 80%

4. Some of the former executives are insider owners at 0.07%

Financial Analysis

All Financial Statements are in Millions of USDSource: UPS 2015 Annual Report

Selected Income Statement

2015 was a strong year for UPS:

1. Total Revenue slightly up/flat• Caused by increase in the

U.S. Domestic Package• Continued growth in

e-commerce & retail• Offset by a decline in

International Package

2. Total Operating Profit up 54%• Caused by increase in the

U.S. operating profits

Revenue Streams

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Change in Revenue Proportion: 10-Year Horizon

U.S. Domestic Package International Package Supply Chain & Freight

4.3% 1.8% 1.8%

5-Year Total Revenue Growth: CAGR = 3.3%Highest Growth Segment: U.S. Domestic Package

Largest Segment by Absolute Revenue: U.S Domestic Package

By Service Segment

2015 Revenue Distribution

U.S. Domestic Package

International Package

Supply Chain & Freight

$9 B5-Year CAGR:

Revenue Streams

2015 Revenue Distribution

United States International

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Change in Revenue Proportion: 10-Year Horizon

International United States

By Geography

UPS attempted to reshape its revenue streams, expanding internationallyIn 2015, International Revenue declined in its proportion to total & in the absolute terms ($14B $13B)

While expanding abroad, UPS still earns 78% of revenues from the U.S.

1. U.S. Domestic Package Operations

2. International Package Operations

3. Package Operations

Segments: TakeawaysVolumes in all segments – Next Day Air, Deferred, and Ground (83% of total) – were up, allowing to leverage transportation network and leading to improved productivity.

This was slightly offset by higher pension and healthcare costs, contractual union wage increases and the negative impact of fuel. Margin was stronger.

U.S. Domestic Packaging

International Package Operations Volumes were up on 3.2% increase in Exports, slightly offset by 0.3% decrease in Domestic (58% of total). Strong demand from healthcare and diversified vehicles & parts segments.

Operating profit & margin were positively affected by base rate increases, modifications to the fuel surcharge indices and the net impact of fuel. Margin was stronger.

Total revenue within the segment was up, driven by forwarding & logistics sub-segment (62% of total).

Combined operating profit for this segment was up, primarily due to higher operating profit at UPS Capital and our service contracts with the U.S. Postal Service. Margin was stronger.

Supply Chain & Freight Operations

Package Yield Analysis

U.S. Domestic Package:In the past 3 years, yield has largely

stayed flat

International Package: In the past 3 years, yield has declined at an average of 5%

Conclusion:Revenue growth comes from

increasing volumes, not prices

Revenue per Package % Growth (Yield)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

U.S. Domestic Package International Package

Margins Analysis

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Gross Margin EBITDA Margin Profit Margin

Company Margins

• Fluctuate over time

• Recovered since 2012

• Improved in 2015

Consolidated Margins

Margins Analysis

The most profitable business:International Package

U.S. Domestic Package business contributes 63% of total revenue:Important to keep higher margin

Operating Margin (EBIT Margin) by Service Segment

2009 2010 2011 2012 2013 2014 2015

International Package US Domestic Package Supply Chain & Freight

Ratios: DuPont Analysis

Historical Returns ROE Decomposition

2015 8.3% 1.6 15.4 202%

2014 5.2% 1.6 16.4 139%

2013 7.9% 1.5 5.6 65%

2012 1.5% 1.5 8.2 18%

2011 7.2% 1.6 4.9 54%

2010 6.7% 1.5 4.2 43%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ROE ROA

2015 Metrics:WACC = 7.5% ROE = 202% ROA = 66%

Cost Structure

Operating Expenses: Snapshot

Cost Structure

Operating Expenses: Distribution

10,000

20,000

30,000

40,000

50,000

60,000

2011 2012 2013 2014 2015

Salaries, Wages & Employee Benefits Purchased Transportation

Other Operating Expenses Transportation Fuel

Depreciation and Amortization Transportation Maintenance Expense

Occupancy/Rent Expense

Ratios: Credit& Liquidity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Debt/Capital Total Debt/Total Assets

Historical Debt Ratios

Debt has been increasing in the past, since UPS pursues growth through acquisitionsUSP has the highest debt/capital ratio when compared to its close competitors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Debt/Equity Net Debt/EBITDA

Debt Analysis

Debt Schedule

Free Cash Flow

Historical Free Cash Flow Generation

-2,000

10,000

2007 2008 2009 2010 2011 2012 2013 2014 2015

Axis Title

Free Cash Flow to Firm Free Cash Flow to Equity Free Cash Flow per Basic Share

Dividend Payout

Source: UPS Investor Relations Shares Outstanding: 883.7 M

Cash Flow Takeaways

1. In 2015, the company generated strong cash flow from its operations,

primarily driven by higher incomes and depreciation expense

2. Cash was reinvested in acquisitions, facilities’ upgrades, and investments in

marketable securities

3. $5.1 million in debt is due to repayment in 2016, the dividend payout has

been historically on the rise

4. Average FCFF generated is around $5B annually, debt due in 2016 is $5.1B,

with those levels, dividend payout ratio seems high

Comparable Companies

PriceShares

Outstanding

Dividend

Yield (%)

Operating

Margin (%)

Profit

Margin (%)

Market

CapNet Debt

Enterprise

Debt to Cap

United Parcel Service Inc 101.42 883.70 3.08 13.14 8.30 89,625 9,608 99,233 85.19

FedEx Corp 143.07 275.62 0.70 3.93 2.21 39,432 3,505 42,937 32.65

Deutsche Post AG 26.56 1,212.75 3.55 4.05 2.60 32,210 1,292 33,502 30.91

Yamato Holdings Co Ltd 21.54 425.16 1.06 4.94 2.69 9,158 (934) 8,224 19.16

TNT Express NV 8.64 548.90 nm 0.55 (0.72) 4,745 (262) 4,483 9.20

Comparable Companies

EBITDA EV/EBITDA EPS P/E

2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017

United Parcel Service Inc 9,745 10,420 10,953 10.2x 9.5x 9.1x 5.29 5.77 6.24 19.2x 17.6x 16.3x

FedEx Corp 6,905 7,592 8,315 6.2x 5.7x 5.2x 8.91 10.55 11.92 16.1x 13.6x 12.0x

Deutsche Post AG 4,333 5,437 5,792 7.7x 6.2x 5.8x 1.82 2.15 2.34 14.6x 12.4x 11.3x

Yamato Holdings Co Ltd 973 1,008 1,037 8.4x 8.2x 7.9x 0.82 0.86 0.95 26.3x 25.0x 22.8x

TNT Express NV 239 335 594 18.8x 13.4x 7.5x 0.18 0.26 0.39 47.0x 33.1x 22.0x

Median 8.4x 8.2x 7.5x 19.2x 17.6x 16.3x

Mean 10.3x 8.6x 7.1x 24.6x 20.3x 16.9x

Min 6.2x 5.7x 5.2x 14.6x 12.4x 11.3x

Max 18.8x 13.4x 9.1x 47.0x 33.1x 22.8x

25th Percentile 7.7x 6.2x 5.8x 16.1x 13.6x 12.0x

75th Percentile 14.5x 11.4x 8.5x 36.6x 29.0x 22.4x

Consolidated Balance Sheet: Assets

Goodwill:In the U.S. Domestic Package segment was related to the acquisition of Coyote

In the Supply Chain & Freightsegment was related to acquisitions of Poltraf, Parcel Pro, and the Insured Parcel Services division of G4S International Logistics

Consolidated Balance Sheet: Liabilities & SE

Statement of Consolidated Income

Statement of Consolidated Comprehensive Income

Statement of Consolidated Cash Flows: CFO

Statement of Consolidated Cash Flows: CFI & CFF

FCIAcquisitions: Poltraft Sp. in Poland, and Parcel Pro and Coyote Logistics Midco in the U.S.Marketable Securities:Purchases & sales of marketable securities due to rebalancing of investments

CFFAdditional Debt:Consisted of euro-denominated senior notes and facility bonds associated with Pennsylvania airport, and commercial papersShare Repurchase Program:Extended to $10.0 B with no expiration date

Valuation Results & Recommendation

0 25 50 75 100 125 150 175 200 225 250

2016 P/E Method

2016 EV/EBITDA Method

2016 P/CF Method

Analyst Concensus

52-Week Range

Share Price

Football Field Diagram Valuation Summary

2016 P/E Method 111.14

2016 EV/EBITDA Method 73.56

2016 P/CF Method 93.30

Analyst Consensus 107.00

Average $ 96.25

Downside given average projected price:

5.0%Upside given analysts consensus:

1) Does not incorporating dividend yield2) As of 3/14/20163) Current Share Price = 101.29

Recommendation: HOLD

FedEx Overview

Financial Snapshot

1 Year Performance

5 Year Performance

10 Year Performance

P/E Ratio

FedEx Vs. S&P/TSX Composite

Company Profile

• Frederik W. Smith started Federal Express in 1971 to bring innovation to the shipping industry

• Provides a diverse portfolio of transportation, e-commerce, and business solutions

• Air, ground, and sea networks span over 220 countries and territories

• Headquartered in Memphis, Tennessee

Mission

FedEx Corporation will produce superior financial returns for its shareowners by providing high-value-added logistics, transportation, and related business

services through focused operating companies.

Growth Strategies and Long Term Goals

Growth Strategies

1. Grow core package business

2. Grow internationally

3. Grow our supply chain capabilities

4. Grow through e-commerce &

technology

5. Grow through new services &

alliances

Long Term Goals

1. Achieve 10%+ operating margin

2. Increase EPS 10%-15% per year

3. Grow profitable revenue

4. Improve cash flows

5. Increase ROIC

6. Increase returns to

shareowners

FedEx Express

Provides rapid, reliable, time-definite delivery to more than 220 countries and territories, connecting markets that comprise more than 90 percent of the world’s gross domestic product within one to three business days

Strategic Goals• Efficiency of Staff Functions and

Processes• Modernizing our Air Fleet• U.S. Domestic Transformation• International Profit

Improvement• Targeted Growth and Yield

Management

FedEx Express

FedEx Ground

FedEx Ground is a leading North American provider of ground small-package delivery services, providing service to the U.S. and Canada.

Includes:

• FedEx Home Delivery

• FedEx SmartPost

Strategic Goals• Maintain Industry-Leading

Operating Margins by Leveraging Our Seven Core Strengths

• Offer Superior Service through Innovation

• Invest in Technology and Automation

• Manage Yields• Expand the Network

FedEx Ground

FedEx Freight

FedEx Freight is a leading U.S. provider of less-than-truckload (LTL) freight services across all lengths of haul.

Includes:

• FedEx Custom Critical

• FedEx Multimodal

Strategic Goals• Provide Superior Service and

Options for Customers• Improve Speed• Invest in Technology and

Automation• Become the Most Profitable

LTL Carrier

FedEx Freight

Frederick W. Smith

• Chairman, President, and CEO

• Responsible for providing strategic direction for all FedEx Corp. operating companies, including FedEx Services, FedEx Express, FedEx Ground, and FedEx Freight.

• Education• Bachelor’s Degree – Yale 1966

• Founded FedEx in 1971

Alan B. Graf Jr.

• Executive Vice President and CFO

• Responsible for all aspects of the corporation’s global financial functions, including financial planning, treasury, tax, accounting and controls, internal audit, investor relations, and corporate development

• Member of the five-person Executive Committee

• Education• Bachelor of Business Administration –

Indiana University• Masters of Business Administration –

Indiana University

• Joined FedEx in 1980

Christine P. Richards

• Executive Vice President, General Counsel and Secretary

• Responsible for ensuring that FedEx Corporation’s global activities are in compliance with international, federal, state and local government regulations, and is responsible for international and domestic legal, security and government affairs for the corporation and its subsidiaries.

• Education• Bachelor’s Degree - Bucknell

University 1976

Robert B. Carter

• Executive Vice President, FedEx Information Services, and CIO

• Responsible for setting the technology direction of the FedEx applications, infrastructure, networks, and data centers that provide around-the-clock and around-the-globe support for FedEx product offerings

• Serves as co-CEO and CIO of FedEx Corporate Services

• Education• Bachelor’s Computer and Information

Science – University of Florida• Master’s Degree – University of South Florida

T. Michael Glenn

• Executive Vice President, Market Development and Corporate Communications

• Responsible for all marketing, sales, customer service, and retail operations functions for all FedEx companies

• Serves as president and co-CEO of FedEx Corporate Services

• Education• Bachelor’s Degree - University of

Mississippi• Master’s Degree – University of

Memphis

Future Outlook

• Enhanced retail network

• Increasing locations

• Increased services

Customer Convenience

• Improving margins

• Add flexibility to domestic and international operations

Fleet Modernization

• TNT Express

• GENCO

• BongoAcquisitions

Business Risks

Business Risk

Capital Intensive

Intense Competition

Regulatory Environment

Oil Prices

Financial Analysis

Balance Sheet (Assets) 10Q

Balance Sheet (Liabilities) 10Q

Balance Sheet (Assets) 10K

Balance Sheet (Liabilities) 10K

Income Statement 10Q

Comprehensive Income Statement 10Q

Income Statement 10K

Comprehensive Income Statement 10K

Cash Flow (Operating) 10K

Cash Flow (Investing) 10K

Cash Flow (Financing) 10K

Cash Flow (Operating) 10Q

Cash Flow (Investing) 10Q

Cash Flow (Financing) 10Q

Stock Forecast

Recommendation

Deutsche post DHL Trading sign : DPW : GR

Trade on Xetra Stock market in Frankfurt

Created in 1924

International since late 1990s

Net sales : € 59 bn

480,000 employees in over 220 countries and territories

Headquarter in Bonn, Germany

Deutsche Post American Depository Receipt

Overview UPS FedEx Deutsche PostOverview UPS FedEx Deutsche Post

1Month Performance DHL : DPW : GR

Market cap : 28.5 Bn €

Dividend indicated Gross Yield : 3,55%

Shares outstanding : 1,213 M

One year return : - 16,01%

P/E : 19.27

EPS : 1,22€

1-Year Performance

5-Year Performance

History

• Franz von Taxis in considered the founder of the modern postal system. By the mid-16th century, his successors had set up a courier network covering all of Western Europe.

• Post stations became crucial focal points in the development of village and cities

• Elector Friedrich Wilhelm issues postal regulations establishing regular postal service between Berlin, Munster, Osnabrück, Kleve and Konïgsberg(Thirty Years’ War)

• The decree grants private individuals (merchants) the right to have their mail transported by the electoral postal system.

1815• Foundation of Danzas by a lieutenant in Napoleon’s Grande Armée in Alsace : the postal company could deliver mails within 24 hours by 1885.

• Danzas became a part of Deutsche Post in 1999.

• An international agreement on reciprocal transport of mail is signed by 22 nations in 1878 which will become a UN specialized agency in 1948 : Universal Postal Union.

• Approximately 6 million postal employees in over 700,000 postal facilities around the world currently provide more than 6 billion people withsome 440 billion postal shipments per year

• In 1876, Chancellor Bismarck united the post and telegraph administration of the German Empire into one top-level administrative body

History

• DHL is founded by Adrian Dalsey, Larry Hillblom, and Robert Lynn.

• First, they transported cargo documents from San Francisco to Honolulu by plane.

• Creation of a new sector of industry : international air express service that is to say rapid transport of documents and cargo papers by plane

• DHL became a wholly owned subsidiary of Deutsche Post in 2002

1971• DHL expands its network at high speed. Following expansion in the Far East and in the Pacific Rim (1971), DHL also begins offering services in

Japan, Hong Kong, Singapore and Australia (1972) and later in Europe (1974), Latin America (1977), the Middle East and Africa (1978).

1979• DHL adds parcel delivery to its list of services. Until this time, the company offered delivery of documents only.

1986• DHL enters into a joint venture with the People’s Republic of China, making it the first express company to operate inside of China.

History

1989• Law concerning the structure of Posts and Telecommunication of July 1, 1989 : organizational and regulatory changes

• 1990 : East German Deutsche Post in incorporated into Deutsche Bundespost

• Three companies emerged from Deutsche Bundespost (among them, Deutsche post) and they are converted into stock companies underprivate law. Gradually shares are offered for sale (from the federal government) to private shareholders.

• Deutsche post started to innovate its distribution process.

• Two strategic acquisitions : Air Express International ( international airfreight) and Danzas (logistics provider). Deutsche Post acquires a dense transport network and an impressive of value-added services

• 2000 : Deutsche Post AG goes public.

• Progressively, Deutsche Post acquires DHL from Lufthansa Carga (1998-2002)

• 2002 : STAR program : value creation and integration became the guilding principle across all functions, units, locations and employees

• DHL is launched in America and in the Asia-Pacific region.

• 2005 : European relaunch

• 2005 : acquires Exel for 5.5 bn € (110,000 employes in 13 countries)

• 2006 : acquires Williams Lea (document management and mail services)

2010• Launching of its digital letter the E-postbrief (reliable as a letter and as fast as a e-mail).

• 2012 : expansion in Asia.

• 2013 : entry into the German long-distance bus market

Recent Acquisitions

No acquisitions in 2015Two acquisitions in 2014 In 2015, Deutsche Post has 139 subsidiariesin Germany and 658 abroad

Corporate Strategy 2020: Focus. Connect. Grow

Presented in April 2014

Defines the group’s strategic priorities for the coming years

Goal : become the company that defines the logisticsindustry

- Focus : Continued expansion of logistics services in the world’s emerging markets (85 % of revenue coming fromlogistics business by 2020) and secure letter business in Germany

- Connect : training for all employees, internal exchange of know-how (customer-oriented strategy), increasequality

- Grow : Expansion in growth markets (emerging markets) and segments (parcel business, e-commerce) by organicGrowth (30 % of revenue stemed from emergingmarkets by 2020)

Connect

Corporate Responsibility

• Corporate responsability report since 2003

• Deutsche Post publishes its first Environmental Report under the title “Naturally networked.”

• Greenhouse gas efficiency as a key indicator : in 2015 improved to 25 index points

• 2004 : Deutsche Post presents the first Human Resourcesand Social Report in the company’s history, entitled “The Individual, Creative Force of the Company”.

• It focuses on the content and goals of the Group’s humanresources strategy as well as the tasks and accomplishments of its employees.

• Employee opinion survey as a key performance indicator : active Leadership achieves an approval rating of 72 %

Shareholder Structure

KfW Bankengruppe is a public bankwhose capital is held for 80 % by the Federal Republic of Germany and for 20 % by the Länder.

Products Being Produced

Deutsche Post DHL

SupplyChain

Global air, ocean and

road freight

25,7 %

Express

Corporate0,1 %

Four services on a equal basis in percentage of sales Deutsche Post’s strategy : • Develop international segments

• Sold of fashion logistics business in France (2013)

• Sold of Exel Direct and Llano Logistics(US) (supply chain division)

• Concentrate on fast-growth areas• Offer specialised, Full-line solutions for supply

chain• Wine to China • Concentrate on niche areas

(pharmaceuticals logistics)• Multi-hub strategy for the asia pacific region

• In 2007, moved from Manila to Hong Kong.

• Focused on its facility in Shanghai• Invest in facility expansion

Mail : Post, E-commerce, ParcelPostal services :

61 million letters delivered every working day (Europe’s largest postal company)

• Deliver physical, hybrid and electronic letters and merchandise

• Special services : cash on delivery, registered mail, insured items, E-POST

• 62 % of market volume (market : €4,4bn)

Targeted and cross-channel advertising :

- Dialogue marketing services to allow advertisers to efficiently reach specific customer target groups (end-to-end services : advertising mail, telephone and e-mail marketing).

- 13,1% of market (market : €16,5 bn)

Sending mail and merchandise internationally :

- International dialogue marketing services

- Mail and light-weight merchandise shipments (B2C)

- 15% of market (market : €6,6bn)

Worldwide portfolio of parcel and e-commerce services :

- Offer a dense network of parcel acceptance points in Germany (Parcelcopter and car drop delivery services, parcel box units for apartment building to send and receive)

- Marketplace : Allyouneed.de and AllyouneedFresh.com, DHL Multibox (online grocery shopping segment)

- 2-Mann-Handling service for sending larger and heavier items ordered online

- 43,7% of market (market : €9,5 bn)

Express

• In more than 220 countries and territories

• 2,5 million customers

• Pre-defined delivery service : Time DefiniteInternational

• Industry-specific services (Medical Express transport solution with thermal packaging for temperate-controlled, chilled anf frozen content), collect and return (high tech industries)

• One of the latest innovation : in 2015, DHL introduced the LifeTrack App, the first cold-chaintracking mobile app designed for the pharmaceutical industry

Global Forwarding, Freight

DHL Global Forwarding:

- By air :

weak market environment

Strong competition

DHL still Air freight leader

- By ocean

Slight grow and low freight rates (surplus capacities)

Second global actor (behind Kuehne + Nagel)

DHL Freight:

mostly concentrated in Europe

The European road freight market stagnant in 2015(low oil price no longer supporting market growth,volume increase due to the slight economic upturnin Europe)

Second-largest provider behind DB Schenker

Responsible within the Group for air, ocean and overland freight transport : two distinct services :

Supply Chain

• Customised logistics solutions for clients• Including warehousing, transport and value-

added services, even recycling• All-inclusive services• Standardised solutions and local knowledge• DHL is the global market leader (Europe and

North America) : hold 7,4 % of contractlogistics market (2014) (market value : €176 bn)

• Market really segmented : top ten playersrepresent 20,3 % of the market

• Some industries concerned with supply chainservices : life sciences & healthcare sector, automotive sector.

Fleight

European Air Transport Leipzig is DHL’s Airline (100% subsidiary of DHL express).

EAT has :

• 11 Boeing 757

• 14 Airbus 300-600 freighter aircraft

• More than 750 pilots, maintenance engineers and specialists

The total DHL fleet capacity is of more than 250 aircrafts (170 dedicatedjet aircrafts and more than 80 feeder aircrafts). It serves over 500 airportsvia 20 regional hubs and three global hubs in Leipzig, Cincinnati and Hong Kong.

What’s more, they use third-party providers to expand the capacity of the fleet as demand requires.

Deutsche Post develops new means of transportation more eco-friendly(Iveco Electri Daily lorry).

Revenue by Operating Division

Firm Cost Structure and Revenue Composition

EBIT margin by segment Unit : % of EBIT over sales, weightedaverage 2011-2013

DHL has spent 3% of its consolidatedrevenues to improve its service.

Nevertheless, Express and Mail are the most profitable segments (8% EBIT margin). They altogether represent 48,4% of DHL sales.

Each segment representapproximatively 25 % of sales

Capital Expenditure by Segment and Region

Capex breakdown by segmentUnit : % of share, weightedaverage 2011-2013

Capex 2015 : € 2,02 bn (+7,9%) • € 1,800 in property, plant and

equipment (€54 million in aircraft, €109 million in IT equipment, € 179 million in transport equipment)

• € 224 million in intangible assets(excluding goodwill)

Deutsche Post is mostly investing in Germany (domestic market)

Deutsche post invest a lot in SupplyChain, then Global air, Ocean and Road Freight (purchase of new aircraft or trucks)

Geographic Sales

Germany31%

Americas17%

Europe32%

Asia Pacific 16%

Other regions

Percentage of sales (geographicallyspeaking)

Geographic sales : • Deutsche post is focused on Europe

(63% in Europe)• Starts to develop other regions and

products segment. ( due to Europe crisis)

Costs:

Revenue 2015 : € 59 230 M

Flexibility has a price …Just-in-time services (maintenance, …)

Corporate Structure

DHL is a German stock corporation.

Deutsche Post has a dual management and supervisory structure.

In the supervisory board :

• Shareholders’ Representatives : 10 persons

Among them :

- Werner Gatzer, Federal Ministry of Finance

- People from Danone S.A, Deutsche Lufthansa, Deutsche Postbank …

• Employees’ Representatives : 10 employees

- Among them, 6 women

Management

Board of Management are appointed by the SupervisoryBoard and are responsible for the management of the company. The Board of Management currently consists of six members.

Observation about the Board of Management:

- Management fully committed to DHL (Long termorientation)

- Management in its fifties

- One woman only

- 2 members came from McKinsey&Co, one from Booz (consulting experience)

Management- Board of Management

Dr Franck Appel

Chief Executive Officer.

- Born in 1961

- CEO since Feb. 2008 until Oct. 2017

- Msc in Chemistry (University of Munich) in 1989

- PhD. Neurobiology, ETH

- McKinsey & Co from 1993 until 2000

- Started as a Managing Director in Deutsche Post in 2000

Ken Allen

- Born in 1955

- Member from Feb. 2009 until July 2020

- In charge of the EXPRESS Division subdivided in regions (Europe, Americas, Asia Pacific and MEA).

- Diploma in accountancy

- A lot of experience abroad

- Entry into DHL express in 1985

Jürgen Gerdes

- Born in 1964

- Member since July 2007 til June 2020

- In charge of post, eCommerce and Parcel.

- University degree in Administration with Deutsche Post in 1987 (Münster University)

- Joined Deutsche Post AG since 1984

John Gilbert

- Born in 1963

- Member since March 2014 until March 2017

- In charge of Supply Chain

- Bachelor in Operations Management, Syracuse University, NY in 1985

- MBA George Washington University in 1990

- Worked for Booz, Allen & Hamilton (6 years), DCB & Company (2 years).

- In DHL since 1994

Mélanie Kreis

- Born in 1971

- In charge of Human Ressources

- Member since October 2014 until October 2017

- Graduated from the State University of New York at Stony Brook with a master’s degree in Physics in 1984

- Got a diploma in Physics, in the University of Bonn, Germany

- Got a master of business administration for Insead, France

- Worked in McKinsey & Company, Inc, Germany for 1997 until 2000and for Apax Partners & Co, Germany and Uk.

- IN Deutsche Post DHL from 2004 until today

Lawrence A. Rosen

- Born in 1957

- Member from Sept. 2009 until Aug 2017

- In charge of Finance and Global business services

- Graduated from the University of michigan in 1981

- Got a Bachelor in Business Administration of the University of NY in1979

- Started to work in the USA, then Germany, France…

- In Deustche Post since 2009

Financial Analysis€m Assets 2015 Liabilities 2015

Non-currents Assets 16,901 Equity 14,979

Currents Assets 16,952 Provisions 5,490

Prepaid expenses 200 Liabiities 13,546

TOTAL 34,053 34,053

Selected Key Figures SELECTED KEY FIGURES

2013 2014 2015

Revenue €m 54 912 56 630 59 230

Profit fromoperating activities (EBIT) €m 2 865 2 965 2 411

Return on sales1% 4,6 5,2 4,1

Consolidated net profit for the period2 €m 2 211 2 071 1 540

Free cash flow €m 1 669 1 345 1 724

Net debt3€m 1 499 1 499 1 093

Return on equity before taxes % 26,7 26,3 19,7

Earnings per share4€ 1,73 1,71 1,27

Dividend per share € 0,80 0,85 0.855

Number of employees6 479 690 488 824 497 745

Financial Statements

Looking closer to liabilities : - 3 M of bonds (22% of liabilities)- 8 M of liabilities to affiliated companies

(65%) - Low level of debt due to banks (< 0,1%)

Income Statement

Compared to an annualdividend of 0,85€

Cash Flow Statement

Recommendation

Final Rankings

Rankings

None of the three companies are particularly attractive for a growth investor, however we find them all to be large, durable businesses.

1. FedEx: FedEx’s foray into Europe through acquiring TNT Express will likely help it keep its market share growth momentum alive. It’s continuing to replace its airfleet with younger planes and its cost-cutting measures, which began in 2012, have made this a turn-around success story.

2. Deutsche Post: Deutsche Post is dealing with possibility of stolen market share from Amazon as the e-commerce retailer contemplates building distribution centres on DHL’s home turf in Germany. There are also mixed reviews on the company’s work environment. However, the company’s currently strong foothold in Europe, solid management team, and what was arguably their best operational quarter in Q4-15 make this a (reluctant) buy.

3. UPS: UPS will no longer enjoy the economies of scale it had over its primary competitor, FedEx, what with FedEx’s TNT acquisition. As well, UPS’s operating statistics, particularly EBITDA, have proven to be volatile relative to FedEx—it’s current EV/EBITDA is also the highest in the sector.

Deutsche Post - Appendix

Cost structure and revenue compositionFree cash flow and capital expenditureUnit : billion euros; %

FCF have been volatile last five years. The capex ratio has been between2,2% and 3,2% of sales.

Total equity increased

German Stock Corporation – how does it work ?

How to fill a DHL plane up

Firm cost structure and revenue compositionFree cash flow and capital expenditureUnit : billion euros; %

German Stock Corporation – how does it work ?

How to fill a DHL plane up

Ratings

Fictch Ratings : BBB+

Moody’s Investors Service : A3.

Less :

- Exposure to global macroeconomic trends in the logistics businesses

- Structural mail volume decline in the Post- eCommerce- Parceldivision

- Huge competition

Sales Growth and Margins

Consolidated EBIT and EBIT margin.

FinancialsFree cash flow and capital expenditureUnit : billion euros; %

German Stock Corporation Structure

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