UPS UCR brochure

Delivering Value \\\\\\

UCR is simple, transparent, and powerful Our business requires a sizeable As the saying amount of capital. We renew our goes, “It takes fleet and facilities, purchase money to make equipment, and parts. Growing our money,” UCR tells network capacity, gaining market us whether or not share, buying new equipment and we our creating opening new facilities all require capital – which is either borrowed, value for directly invested by, or retained on shareholders: are behalf of our shareholders. We attract capital by promising to we creating deliver an adequate return to money from their shareholders. If we don’t, they will invest elsewhere. money?

What is UCR? UCR - UPS Cash Return - is a financial measurement system. UCR measures the value we create – value for customers, value for shareholders and value for UPS employees. More than a measure, UCR helps us focus on best efforts to grow our business and maximize our long-term profit. How? By making smart decisions today and everyday about how we invest and utilize our resources. So, UCR is also a management tool – something that helps us do our jobs better and run our business more effectively.

How is UCR calculated? UCR captures the true value we create for shareholders. • UCR is EBITDA minus a charge for the pre-tax weighted average cost of capital (WACC) • WACC is a grossed up to be consistent with EBITDA. Think of it simply as a combination interest paid to bondholders combined with the return investors expect from our business. • Simply put, UCR is EBITDA minus one additional expense for the capital invested in our business To determine UCR in dollars, we start with our revenues, then deduct costs such as labor, equipment maintenance, D&A, and pension service to arrive at Operating Profit. We then add back D&A, which gets us to EBITDA. From this we deduct the required return on the Gross Invested Capital we used to deliver that EBITDA. UCR EBITDA Minus Capital Charge Illustrative Example of UCR calculation ($ in millions): $1,000 ($900) Revenue - Operating expenses: include labor, equipment, D&A and $100 $100 maintenance costs $200 = Operating profit + D&A $50 = EBITDA $950 $1,000 Net working capital: include accounts receivables, payables, etc. 9.0% + Gross PP&E: include aircrafts, vehicles and facilities ($90) = Gross invested capital x Pre-tax WACC $200 = Capital charge ($90) $110 EBITDA - Capital charge = UCR This hypothetical business unit used $1 billion of investor money to create $110 million of value for the Investor.

How is UCR different from other measures? UCR is different from other performance measures because it provides a complete picture on value creation. Traditional performance measures like Operating Profit, EPS, and ROE, unlike UCR, do not consider the total cost of the investments required to run the business and generate growth. Not even FCF can match up with UCR. FCF can lead to underinvestment in the business because it charges the full cost of investment in the first year the investment is made, while UCR encourages profitable investment because the cost is spread across the entire life of the investment. UPS has used Return on Invested Capital (ROIC) to measure our business success. UCR has three significant advantages over ROIC. 1. Use of Net vs. Gross Invested Capital in ROIC may cause managers to sweat assets since the asset’s costs decrease as they age. On the other hand, UCR encourages managers to replace decaying assets at the right time, since it shows all assets at their original gross cost. 2. UCR is in dollars terms not percentages. We subtract a charge to account for the real cost that we have to earn on our capital from investors, similar to the monthly payment one makes on their home mortgage loan. By measuring the cash, we generate in excess of the required return, UCR goes beyond the efficiency focus of ROIC to better reflect not just the quality of our returns but the quantity of capital we employ. Growth and efficiency drive UCR. 3. When used as a threshold for next dollar of investment ROIC may discourage investment in lower return projects from businesses that are already returning significantly higher than their cost of capital- thus leaving money on the table by not utilizing full value creating potential of such businesses. Even worse, ROIC may encourage value destroying investments from worst performing businesses as long as the next investment destroys less value. In the UCR framework it doesn’t matter where you start, it’s the improvement that matters. Up is good, down is bad. It’s that simple.

Why should we care about UCR? ? First and foremost, improving UCR over the long-term will result in a higher UPS share price • UCR will help us measure and more importantly manage the business and our resources better by directing capital to areas that create the most value. • UCR will encourage expansion into new areas that deliver high returns, while forcing us to withdraw from the areas that destroy value. • UCR will help us improve pricing: allowing us to unlock significant value from our existing operations. • UCR at its best will make capital freely available across our business, but at the same time make it extremely expensive because you have to earn a return on the capital. • UCR will provide a sense of ownership for all employees at all levels of the organization. Bringing more meaning to each decision that employee makes: making them feel more like an owner of UPS. Perhaps most important, by improving UCR UPS will become more successful, which benefits all of us as employees. Our jobs become more secure and career opportunities improve. Achieving financial success through UCR will help provide better service to our customers, resulting in more business, and more value creation.

Who is responsible for improving UCR? ? Everybody! Every UPS employee can be responsible for improving UCR. Each business decision we make can improve UCR. UCR is a useful tool to determine value creating potential of an investment. Business units will use UCR to measure their year over year financial success. Plans will be evaluated and updated based on the implications on UCR improvement. UCR is a simple and transparent way to achieve our company’s goals.

Don’t forget our mission ? \\\\\\ Grow our global business by serving the logistics needs of customers, offering excellence and value in all that we do. Maintain a financially strong company with broad employee ownership-that provides a long-term competitive return to our shareowners. Inspire our people and business partners to do their best, offering opportunities for personal development and success. Lead by example as a responsible, caring, and sustainable company making a difference in the communities we serve.