“The Future Of Packages” Jim Cochrane Manager, Package Services

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“The Future Of Packages”

Jim Cochrane

Manager, Package Services

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•Market Trends

•The New Law

•Re-Designing Products

•Transformation Strategies

Agenda

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► Market is generally soft both domestically and internationally

“It seems to us that the economy is headed for a soft landing” — Rosalind Wells, Chief Economist for the Retail Federation

“We anticipate another good year despite a slowing U.S. economy,"

— UPS' Chief Financial Officer Scott Davis.

“The outlook among the parcel carriers is that domestic economic growth is slowing in the first half of 2007”

— William Greene, Financial Analyst for Morgan Stanley

Market Update

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► Highest Published Increases In Over 10 Years

► Lightweight And Residential Continues To get Hit Heavier Than Published Rate Increase

► Subtle But Significant Changes In Discount Methodology

► Surcharges, New Ones And How They Are Enforced Continues To Drive Revenue

► Elimination Of On-Demand Rates

► Adjusted Net Minimum

Market Update

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20% 20% 20% 22% 27% 30%

73% 70%

80% 80%80% 78%

0%10%20%30%40%50%60%70%80%90%

100%

2002 2003 2004 2005 2006 2007 Proj.

B2BB2C

B2C Shipments On The Rise

Market Update

6

►B2B Is Stagnant

►As Noted - B2C Is Growing

►Packages Are Getting “Lighter”

►Online Retail Growth Is Replacing Manufacturing Segment Decline

What’s Fueling The Growth?

Market Update

7

► Over 70% Of Packages Travel Less Than 700 Miles

► Significant Shift From Air To Ground

► Accessorial Surcharges Are A Strategy To Generate Revenue As Well As Yield

It Also Allows Our Competitors To Suppress Their Actual Rate Increases

Market Update

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The Right Products & Features

-15.8

-9.7 -9.2

-11.6

-5.4

-12.1-12.3

-6.9-4.9

-3.1-1.4

-2.9

0.6 1.3

4.0 4.05.7

2.2

-0.9

-3.3 -3.1

-0.2 -0.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

% SPLY 8 Qtr Moving Average Growth Rates

Total Express Mail Volume

FY 2002 2003 2004 2005 2006 2007

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-17.0

-12.6

-8.6 -9.0

-13.4-15.1

-14.0

-10.3

-0.3

-2.7-4.9

3.2 2.5 2.6

7.56.1

4.1

10.2

1.4 0.7 1.1

-5.3

-2.8


% SPLY 8 Qtr Moving Average Growth RatesFY 2002 2003 2004 2005 2006 2007

Total Priority Mail Volume

Market Update

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-2.8

1.5

-9.2

-2.3

3.3

6.9

12.3

2.4 2.8

0.1

-4.7

2.3

-1.4

3.3

7.8

3.3 3.5 3.5

-3.5

-0.9

1.1

-2.7

0.8


% SPLY 8 Qtr Moving Average Growth Rates

Total Package Services Volume

FY 2002 2003 2004 2005 2006 2007

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► Service► Convenience► Price► Visibility

Segment Service Convenience Price Visibility

National/Strategic 1A 4 1 3

Premier/ Large 1A 3 1 4

Consumer/SMBS 1A 1 4 3

Customer Buying Criteria

Market Update

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Reasons Shippers Change Carriers

* Morgan Stanley/ Parcel 2006 Annual Best Practices Survey

Market Update

13

Shippers Rated Carriers Less Favorably

Biggest Complaint About Primary Carrier *

1 Pricing

2 Surcharges

3 On-Time Delivery

4 In-Transit Damage

5 Difficulty Working With The Carrier

* Morgan Stanley/ Parcel 2006 Annual Best Practices Survey

Market Update

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In Addition To Base Rate Increases, Competitors Continue To Add And Raise Rates On Surcharges

Note: The table above does not include fuel surcharges.1 Based on Competitor’s accessorial charges published before each rate change.

Surcharges Are Intended To Increase Package Contribution - They Are Rarely Discounted

Calendar Year

Approximate

Percent ChangeIn Competitor’s Total

Average Surcharge Amounts

Increase In

Reported Number

of Competitor’s Surcharges

1

2003/2002 2.48% 32004/2003 18.94% 72005/2004 14.87% 32006/2005 15.46% 3

2007/2006* 19.34% 4

2007/2002 109.29% 20

* Estimate

Market Update

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Competitor’s Rate Increases 2002 - 2007

PublishedActual

CommercialActual

Residential

YEAR Increase 1 - 5 lbs. 1 - 5 lbs.

2002 3.50% 3.90% 4.08%

2003 3.90% 4.67% 4.64%

2004 1.90% 1.91% 6.06%

2005 2.90% 4.71% 5.80%

2006 3.90% 4.57% 7.57%

2007 4.9% 5.50% 5.56%

TOTAL 22.89% 28.02% 37.85%

AVERAGE 3.82% 4.67% 6.31%

Competitive Prices

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Net Minimums Reduce Discount & Drive Up Cost

2007 Competitor Ground Commercial with 20% Discount - Actual Discounts

Wgt Zone 2 Zone 3 Zone 4 Zone 5 Zone 6 Zone 7 Zone 8

1 0% 2% 5% 9% 13% 15% 17%

2 1% 7% 15% 17% 20% 20% 20%

3 2% 11% 19% 20% 20% 20% 20%

4 5% 14% 20% 20% 20% 20% 20%

5 11% 15% 20% 20% 20% 20% 20%

Competitive Prices

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Weight/ Zone L,1,2 3 4 5 6 7 8

Flat $ (2.00) $ (2.10) $ (2.23) $ (2.41) $ (2.65) $ (2.73) $ (2.84)

1 $ (2.00) $ (2.10) $ (2.23) $ (2.41) $ (2.65) $ (2.73) $ (2.84)

2 $ (1.90) $ (2.15) $ (2.00) $ (1.73) $ (1.95) $ (1.68) $ (1.65)

3 $ (1.14) $ (1.56) $ (0.65) $ (0.01) $ (0.06) $ 0.45 $ 0.66

4 $ (0.65) $ (1.13) $ 0.11 $ 0.93 $ 1.01 $ 1.80 $ 2.14

5 $ (0.40) $ (0.66) $ 0.85 $ 1.97 $ 2.18 $ 3.12 $ 3.63

6 $ 0.03 $ (0.37) $ 1.66 $ 2.44 $ 2.18 $ 3.15 $ 3.53

7 $ 0.26 $ (0.02) $ 2.52 $ 3.02 $ 2.94 $ 4.25 $ 5.04

8 $ 0.66 $ 0.40 $ 3.36 $ 3.68 $ 3.71 $ 5.20 $ 6.30

9 $ 1.11 $ 0.85 $ 4.24 $ 4.31 $ 4.53 $ 6.10 $ 7.61

10 $ 1.42 $ 1.30 $ 5.03 $ 4.97 $ 5.38 $ 6.89 $ 8.80

11 $ 1.83 $ 1.64 $ 5.67 $ 5.60 $ 6.26 $ 7.59 $ 9.92

12 $ 2.22 $ 1.99 $ 6.27 $ 6.21 $ 7.16 $ 8.29 $ 10.97

13 $ 2.57 $ 2.34 $ 6.91 $ 6.90 $ 8.02 $ 9.03 $ 12.04

14 $ 3.00 $ 2.70 $ 7.52 $ 7.48 $ 8.69 $ 9.69 $ 13.09

15 $ 3.39 $ 3.04 $ 8.15 $ 8.16 $ 9.42 $ 10.38 $ 14.22

3.50% FUEL SURCHARGE INCLUDED

$1.85 RESIDENTIAL SURCHARGE INCLUDED / NO DISCOUNT

USPS Rate Advantage

Competitors Rate Advantage of $1.00 or Less

2006 Priority Mail Vs 2007 Competitor’s Ground Residential

Competitive Prices

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2007 Priority Mail Vs 2007 Competitor’s Ground Residential Weight/ Zone L,1,2 3 4 5 6 7 8

Flat $ (1.40) $ (1.50) $ (1.63) $ (1.81) $ (2.05) $ (2.13) $ (2.24)

1 $ (1.40) $ (1.50) $ (1.63) $ (1.81) $ (2.05) $ (2.13) $ (2.24)

2 $ (1.45) $ (1.30) $ (1.40) $ (0.73) $ (0.69) $ (0.53) $ (0.40)

3 $ (0.99) $ (0.66) $ (0.50) $ 0.89 $ 1.19 $ 1.55 $ 1.81

4 $ (0.35) $ 0.17 $ 0.56 $ 2.43 $ 3.06 $ 3.55 $ 4.09

5 $ (0.00) $ 0.79 $ 1.50 $ 3.77 $ 4.68 $ 5.37 $ 6.13

6 $ 0.48 $ 1.23 $ 2.56 $ 4.94 $ 4.68 $ 6.00 $ 6.63

7 $ 0.76 $ 1.68 $ 3.47 $ 5.72 $ 5.69 $ 7.40 $ 8.54

8 $ 1.01 $ 2.25 $ 4.26 $ 6.53 $ 6.71 $ 8.65 $ 10.25

9 $ 1.26 $ 2.85 $ 4.69 $ 7.36 $ 7.78 $ 9.85 $ 12.01

10 $ 1.42 $ 3.40 $ 5.13 $ 8.22 $ 8.88 $ 10.99 $ 12.40

11 $ 1.58 $ 3.89 $ 5.62 $ 9.05 $ 10.06 $ 11.14 $ 12.72

12 $ 1.77 $ 4.34 $ 6.02 $ 9.66 $ 11.26 $ 11.34 $ 13.07

13 $ 1.97 $ 4.69 $ 6.51 $ 10.30 $ 11.72 $ 11.63 $ 13.19

14 $ 2.20 $ 5.00 $ 6.97 $ 10.98 $ 11.99 $ 12.39 $ 13.74

15 $ 2.39 $ 5.34 $ 7.45 $ 11.21 $ 12.07 $ 11.98 $ 13.67

3.50% FUEL SURCHARGE INCLUDED

$1.85 RESIDENTIAL SURCHARGE INCLUDED / NO DISCOUNT

USPS Rate Advantage

Competitors Rate Advantage of $1.00 or Less

Competitive Prices

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The New Law & Package Business

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First-Class Mail Periodicals Standard Mail Single-Piece Parcel Post Media Mail Bound Printed Matter Library Mail Special Services Single-Piece

International

Priority Mail

Expedited Mail

Bulk Parcel Post

Bulk International Mail

Competitive – 11%Market-Dominant – 89%

FY 2005 Revenues

Two Product Categories


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Pricing- Market Dominant Products

► Future Price Increases Tied To Consumer Price Index (CPI) By Class

► USPS To File With PRC 45 Days Before New prices Become Effective

Implications:

► Annual, predictable Increases

► Productivity Improvements Are critical, Since Costs Like Fuel And Health Benefits May Rise At Rates Above CPI


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Pricing- Competitive Products

► New World- Allows The Postal Service To Compete Fairly In The Market Place.

Must Cover Costs

PRC Decides Cost Coverage & target Contribution To USPS

► Governors Set Prices

► Implied Income Tax To Postal Service MD Fund

Implication:

Ability To Respond To The Marketplace By Creating Products And Pricing That Better Meet Customer Needs.


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Re-Designing Products

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Services (today) Range (Days) Weight Price Features

GXG (Doc) 2-3 Up to 70 lbs $55.75

Guaranteed Track and Trace

Insurance - $100.00

GXG (Non-Doc) 2-3 Up to 70 lbs $61.25

Guaranteed Track and Trace

Insurance - $100.00

Global Express Mail 3-5 Up to 70 lbs $31.15

Guaranteed – 5 CountriesTracking (major countries)

Insurance $100.00

Airmail Parcel Post 4-10 Up to 70 lbs $25.80

Indemnity up to $270.00Insurance available

Limited Visibility

Economy Parcel Post 28-42 5 to 70 lbs $24.50

Indemnity up to $270.00Insurance available

No Visibility

Global Priority Mail 4-6 Up to 4 lbs $23.25

<24 inchesNo InsuranceNo Visibility

Airmail Letter Post 4-7 Up to 4 lbs $21.40

< 24”No Insurance No Visibility

Economy Letter Post 28-42 1 lb to 4 lbs $9.55

< 24”No Insurance No Visibility

Japan Shipping Options – 3 lbs.


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Old Services

Global Express Guaranteed (doc)

Global Express Guaranteed (non-doc)

Global Express Mail

Airmail Parcel Post

Economy Parcel Post

Global Priority Mail

Airmail Letter Post

Economy Letter Post

Services Today

Global Express Guaranteed

Express Mail International

Priority Mail International

First Class Mail International

Product Enhancements


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Simple, Relevant Product Offering ► Leverage Domestic

Supplies ► New Flat Rates

Express Mail International Flat Rate Envelope

Priority Mail International Flat Rate Envelope

Priority Mail International Flat Rate Boxes

Picture of new boxes


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ServiceFY2005 Revenue

FY 2005 Volume Strategy (Migration Flow)

Economy Parcel Post $80M 3MEliminateMigrate to Air Parcel Post

Economy Publishers $18M 14MEliminateMigrate to ISAL or Air Letter Post

Economy Books and Sheets $1.9M 493K

EliminateMigrate to ISAL or Air Letter Post

Economy Letter Post $23M 4M

EliminateMigrate to air letter postGlobal Priority Mail and Air Surface Lift

Economy Registered Service $225K 30K Migrate to air registered service

Recorded Delivery $3K 1K Eliminate

Aerogrammes $174K 246KMigrate to Air Letter Post

Simple Relevant Product Offering


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Packaging To Add Value►Flat Rate Box

$577 Million Since Launch$227 Million In Sales FY 07

►Flat Rate Prepaid Envelope Growing AdoptionOver $34 Million Since Launch

►Priority Mail ShoeboxGrowing Mid-Market Segment Regular And eBay Versions


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Customized & Co-Branded Packaging

New Parameters Are Being Set:

► Customized Packaging- Was $500,000 Will Be lowered To $250,000

► Co-Branded Packaging- Was $500,000 Will Be Lowered To $250,000

Example: Flat Rate Box #2 Minimum Quantity Would Be 12,000 Boxes Equivalent To Around 8 Pallets

Minimum Acceptance Amounts For Co-Branding Any Of The Standard Priority Mail and Express Mail Products

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►The Last Major Change Was in 1995

Changed the Eagle on the Logo

4 Color Process to 2 Colors

►We’ve Changed

Fresher, Cleaner Look

Dual Use: Domestic and International

Reduced Supply Chain Management Costs

Certified Cradle to Cradle


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► Significant Steps Were Taken To Improve Environmental CharacteristicsWorked with Vendors to Analyze our

Packaging Composition

Changed Inks, Chemicals and Adhesives Used in Manufacturing

Redesign for Simplicity and to Minimize Ink

Reduced Label Dependence

Significantly Reduced Toxins, with No Increase in Cost.


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Earned Cradle to Cradle Certification

► Materials Earned Cradle to Cradle Certification for Eco-effectiveness

► First And Only Firm to Receive This Endorsement for Packaging

► Packaging to Feature Cradle to Cradle Logo


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Old Packaging Design New Packaging Design


34

New Packaging DesignOld Packaging Design


35

Transformation Strategies

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Customized & Co-Branded Packaging

New Parameters Were Set:

► Customized Packaging - Was $500,000 Will Be lowered To $250,000

► Co-Branded Packaging - Was $500,000 Will Be Lowered To $250,000

Example: Flat Rate Box #2 Minimum Quantity Would Be 12,000 Boxes Equivalent To Around 8 Pallets

Minimum Acceptance Amounts For Co-Branding Any Of The Standard Priority Mail and Express Mail Products


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$0

$20

$40

$60

$80

$100

$120

Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept

FY04 FY05 FY06 FY07

Revenue Growth Online Postage

Mill

ions

Improve Convenience

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0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept

FY05 FY06 FY07

Carrier Pickup Volume

APO/FPO

SCAN

3.7 Million

Improve Convenience

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ONE Barcode

Is Scanned for All

Packages

Shipment Confirmation Acceptance Notice

Improve Convenience

40

E-VS Update

► 9 Live Shippers

18,555 Manifests Submitted YTD

►61 M Parcels

►$74.8 M Revenue

► Extended Mandatory Implementation Date

► Technical Support

Improve Convenience

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► Priority Mail & Express Mail

We Know That World Class Service Is Essential

Service Scores Are The Highest They Have Ever Been

► Parcel Select

Service Is Already At World Class Levels.

DHL/UPS/FedEx Last Year Trusted USPS To Deliver Over 300M Packages

Time In Transit

Improve Customer Service

42

Package Visibility Project - Goals

► One Intelligent Bar Code On Every Package

► End To End Visibility On Every Package

► Bar Codes That Tell Us More About The Package And Shipper

► Intelligence From Bar Codes Is Used To Manage And Grow Our Business

Improve Visibility

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Where Are We?► Intelligent Mail Device (IMD)

210,000 Of 303,000 Deployed Through April 07-Full Deployment Sept 07

► APPS

Completed Deployment Of 75 Machines

Lifting Images Now – In PTS

60% Of PM Goes Across APPS

► SPBS

44 Retrofitted With Barcode Scanners

Total Of 226 Will Be Installed By End Of FY07

► Surface Visibility Will Nest These Events in PTS

Intelligence/Visibility

Trailer Depart

Trailer Load

U.S. MAIL

1025679

TrailerArrive U.S. MAIL

1025679

ContainerLoad

TrailerUnload

Surface VisibilitySurface Visibility Data Data CollectionCollection

Make It Intelligent

Improve Visibility

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We Will Continue:

► To Design

►To Enhance

►To Research

►To Educate

►To Create A Marketplace Position That Is Compelling And Meets Customer Needs

Documents

“The Future Of Packages” Jim Cochrane Manager, Package Services