PSA Meeting

March 20, 2016

Parcel Shippers Association National Postal Forum Program March 20, 3-5 p.m. Gaylord Opryland Hotel Nashville, TN Presidential Ballroom A Dress is Business Casual PROGRAM (Note: times are approximate) Welcome and Introductions—Pierce Myers EVP & Counsel, PSA 3:00

Remarks of the Postmaster General & CEO Megan Brennan Remarks of Chief Marketing & Sales Officer & EVP James Cochrane

3:45

Technology Update—Pack Robot Ramesh Ratan, CEO, Bell & Howell

4:00

Competitive Product NSAs—Opportunities for Shippers (Reprise) Dennis Nicoski, Manager, Field Strategy and Contracts

4:15

IMpb Quality Metrics—Update Robert Cintron VP, Data Analytics Juliaann Hess, Manager, Shipping Information Systems

4:30

Legislative and Regulatory Update—Pierce Myers

4:45

August meeting overview—Pierce Myers Special Guest Mark Acton, Commissioner, Postal Regulatory Commission

Parcel Shippers Association National Postal Forum Presidential Chamber A March 20, 2016 PSA MEMBERS Amazon.com, Inc. Dennis Oates Regional Director

FedEx Gound Packaging System, Inc. Barbara Wallander SVP Transportation Systems & Chief Postal Officer

Heida Kay Sr. Program Manager

Steve Zwieg Director, Channel Support Solution

David Greenstein Director

Gavin Tierney Director Product Development and Postal Operations

Bell & Howell Ramesh Ratan Chief Executive Officer

Jackie Makinen Sr. Manager, Postal Programs & Customer Engineering

Pete Jones Director Business Development Colony Brands Bryan Buri Distribution Manager DHL Global Mail John Medeiros Director, US & Domestic Networks

Justin Krawczyk Postal Consultant International Bridge, Inc. Shoshana Grove Chief Executive Officer John Farley Founder

David Loonam VP Domestic Product Management

Doug Caldwell Vice President

Deluxe Corporation Terry Edwards Sr. Manager Transportation Endicia/Stamps.com John Campo VP Government Relations

Kevin Unbedacht President IPSY

Esteban Ochoa VP of Operations

Parcel Shippers Association National Postal Forum Presidential Chamber A March 20, 2016 Newgistics, Inc. Richard Porras VP Postal Strategy and Operations

Parcel Shippers Association Pierce Myers Executive VP & Counsel

Benoit Robinot Senior VP Operations Patrick Allard Senior Sales and Business Development Roger Franco Director Postal Services and Support

Michael Scanlon General Counsel K&L Gates Pitney Bowes Paul Kovlakas Director, Address Quality & Intelligent Mail

Doug Ferguson Director Postal Delivery Operations Marsha Martinez Sr Postal Analysis OnTrac Andy Webber Director of Direct Post Mark Magill VP of Business Development OSM

Herm Curk Vice President

Parcel Partners Jared Starling Founder and CEO Joe Illig Executive Vice President

Bruce Greshan VP of Product Management & Strategy Publishers Clearing House Wendy Smith Asst. VP Fulfillment & Postal Affairs QVC, Inc. Doug King Senior Manager Supply Chain U-PIC

Michele Marasca Director of Marketing

UPS Mail Innovations Oscar Vazquez Director of Postal Affairs Lee Devasier Manager of Postal Affairs Kelli Reid UPS Mail Innovations Postal Affairs Analyst

Parcel Shippers Association National Postal Forum Presidential Chamber A March 20, 2016

GUESTS Mark Acton Commissioner Postal Regulatory Commission Megan Brennan Postmaster General & CEO U.S. Postal Service James Cochrane Chief Marketing & Sales Officer & Executive VP U.S. Postal Service Dennis Nicoski Manager, Field Strategy and Contracts U.S. Postal Service Sharon Owens VP Pricing and Costing U.S. Postal Service Judy de Torok Manager, Industry Engagement & Outreach U.S. Postal Service Robert Cintron Vice President, Enterprise Analytics U.S. Postal Service

Juliann Hess Manager, Shipping Info Systems U. S. Postal Service David Fineman DHL Ecommerce Ed Conrad VP Business Development Complete Management Solutions

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USPS Postmaster General Takes Time for PSA at National Postal Forum USPS Postmaster General Megan Brennan took time from her busy National Postal Forum schedule to visit with PSA members at the March 20, 2016 PSA meeting. The PMG told the PSA group that the USPS has expanded its NPF schedule – beginning with a Saturday night MTAC reception followed by Area Focus Group meetings on Sunday -- in an effort to increase its engagement with customers, which she said has been one of her key objectives over the past year. “The USPS has challenges,” the Postmaster General told the PSA group, “but the issues we face are not unsolvable by any stretch.” The PMG recognized PSA executive director Pierce Myers as a “staunch advocate for the parcel industry,” who she said has been at the table with the USPS looking at legislative and growth issues. “This is an exciting time for the industry,” Brennan said, “we will leverage some of the same strategies we used to grow our package business to the mail business, to improve visibility and transit time.” She said the USPS will continue to change and improve to better serve customers and provide the visibility they need. The PMG said the USPS has worked to become very transparent over the past few years in terms of new visibility tools to drive service improvements and operating efficiency. “We need to keep mail affordable,” she said, “and we understand the competitive nature of the package environment.” She said the USPS is committed to going after its share of the package market. In response to a member question on the status of legislation, the Postmaster General said the USPS has focused in the past year on trying to gain consensus among the stakeholders, including the mailing industry, management and labor organizations, and others, to focus on some high value key provisions, starting with resolving the USPS’ long-term legacy costs, which she acknowledged that the USPS has not paid for the past couple of years. She said the USPS will “decide later this year if we will pay it,” for this year. The PMG said the issues focus around the USPS retirees and health care/Medicare. She said about 27% (80,000) USPS employees are not enrolled in Medicare, but the USPS has paid over $29 billion into Medicare, so its employees should benefit from that. She said that while the theory makes sense, the change would have a big impact on the Medicare trust fund. She said the USPS should be treated like any other self-funded government entity. “The rollback that occurs April 10 will have an adverse impact of about $2.1 billion a year going forward,” the Postmaster General told the PSA group, “and we need to close that gap.” She said the USPS still needs to continue to drive out costs and grow profitable revenue, it is not just asking for legislation to help it. Brennan noted that since the Senate hearing, there has not been much progress on the legislative front, but there are many larger public policy issues at play on the Hill, and it is also a

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Presidential election year, so there are a “number of headwinds in front of this.” “We remain resolute to keep pushing these provision,” she said, noting that they are not all inclusive and any compromise leaves “something on the table,” but the USPS is trying to identify and work on core provisions with high value, to generate broad support. The Postmaster General responded to PSA member question about the USPS plans to replace its aging delivery vehicle fleet by saying the USPS is looking at what its next generation vehicles should be. “We have been replacing them over the years,” she said, “at a rate of about 10,000-15,000 per year.” She said the LLVs have exceeded their life expectancy by far and the USPS accordingly is looking at its next generation delivery fleet and has issued an RFP. She said 15 suppliers are currently participating in the technical review phase for production of prototype vehicles and said the USPS anticipates announcing the results by late spring/early summer. “We will start with research, looking at multiple vehicle types, multiple vendors producing vehicles, testing them in different climates and geographies, and work through the process,” she told the PSA group. Brennan said the USPS is looking at multiple types of alternate fuel vehicles, and will pursue a very deliberate process as it works through the RFP. She said the process is about a five-year time line and the number of vehicles the USPS can deploy in a given year will depend on its capital and the manufacturer. In response to how the USPS plans to accommodate the anticipated ecommerce package growth going forward to ensure sufficient available capacity, the Postmaster General said it is having discussions with its business partners around the growth in ecommerce end-to-end and last mile, and will make capital decisions around technology and where it should be deployed. She said growth in DDU have driven the USPS to invest in scheme-less sortation equipment so it can better leverage its flexible workforce. She said that “hyper-growth” is a “good challenge for us all to have,” and said the USPS does not anticipate that abating. But to keep it in context, she noted, the USPS delivered 4 billion packages and 100 billion pieces of mail last year. Jim Cochrane, USPS Chief Marketing & Sales Officer (CMSO) also fielded concerns from the PSA group around the January 2016 pricing changes. He said he personally would have rather seen the USPS increase Priority Mail rates 2-3% a year for the past few years, than 9% all at once, noting that the USPS could lose 150 million packages as a result of the stiff increase. “But we went 3 years with moderate price increases,” he said, “with only CPI increases on the Market Dominant side and no price increase for mail this year.” “Packages are an important part of our mix,” he told the PSA group, but noted “we made only a penny a piece on Parcel Select Lightweight in 2014.” Cochrane said that the USPS’ costs for parcels “were not static,” and said that he could argue all in the room made more than the USPS did on that parcel volume. He said Priority Mail revenue per piece and profit per piece both dropped during that period as well. He said the USPS is seeing softness on First-Class Mail parcels as well, and noted that some parcel shippers sell against the USPS’ FCM prices, buying down to Parcel Select Lightweight, which

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causes the USPS to lose on average $1.20 per piece. He said the USPS would like to get to the point where the price increases “are not so painful,” but it also “wants to make more than a penny a piece.” He said that leaving a price point between FCM And PSLT was a strategy so as not to upset those business models, and allowed customers to pick the best choice in terms of balancing service and cost.

USPS Chief Marketing Officer Says USPS Bullish on Packages and Mail Jim Cochrane, USPS Chief Marketing and Sales Officer (CMSO) told the PSA group that the USPS is shifting as a business to a combination of mail and packages. “We’ve always done packages,” he said, “but are seeing significant growth.” He echoed the Postmaster General’s comments that some of the things the USPS did with packages it also can apply digitally to mail, such as tracking data, etc. “We want to see the National Postal Forum become more package-centric,” Cochrane told the PSA group, though he noted that the USPS is “bullish on both packages and mail,” and takes neither for granted. “We were a monopoly at one point, but not really anymore,” he said, noting that “direct mail is a competitive product with digital aspects.” He said there is no arrogance within the USPS about being a monopoly, and competitiveness has to be foundational to its strategies. He said the USPS will continue “to do what we do best,” despite headwinds and tailwinds that cause it to continually adjust. “We have a good sense from our discussions with you on where the market is going,” Cochrane told the PSA group. He said the USPS is laser-focused on costs, and has used DSS and PASS to scale with volume fluctuations. He noted that the USPS initially saw PASS as a revenue assurance tool, but found it could leverage employee flexibility and use non-scheme trained employees to sort parcels, which it could not have done 3 years ago. “We’re not done making capital investments in your business, which is our business,” the USPS CMSO told the PSA group. He said there is still much opportunity for parcel growth but that the USPS “has to fight for every package every day.” “We need to be relentlessly focused on execution, doing it well, and driving out costs,” he said. On the topic of IMpb and parcel data, Cochrane said it has been a “tough road,” but the USPS will continue to work with parcel mailers on the data quality and timeliness issues. “Victory is when the data is good enough that we don’t need to assess any surcharge,” he said. Cochrane said that mail needs to go through some reinvention, and there is a rare opportunity to take mail to the next level “if we move fast.” He said it could be set up as an important part of ecommerce. The USPS Informed Visibility (IV) implementation will help to start marrying data and delivery to an “experience,” he said. The possibilities are endless on how

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to leverage the digital aspects of mail, Cochrane told the PSA group. “We want to predict delivery within a one0hour period for mail and parcels,” he said, “and that will be gamechanging.” In response to PSA member question about what parcel mailers should plan on in terms of USPS price changes for the next few years, the USPS CMSO said that “consistent pricing is one of the things we need to deliver.” He noted that the 10-year price cap review is coming up this year and said that “one thing that has happened in the nine years of the price cap – it’s been reliable.” He said packages have seen more inconsistent price changes with spikes, then nothing, then big hits. The USPS’ package delivery competitors publish price increases annually, he noted. For January 2017, Cochrane said parcel mailers should plan for something between CPI and the average 4.9% that the USPS’ competitors use.

A Day in the Life of a Parcel Ramesh Ratan, CEO, Bell and Howell, walked the PSA group through “a day in the life of a parcel,” which highlighted game-changing innovations that he said can drive new value in the economics of supply chain and logistics. While the USPS was talking at the NPF about applying parcel learnings to mail, Ratan said, Bell and Howell looks to do the opposite – using automation. He noted that letters and flats processes have become highly automated, with inserting machines, labeling/coding of mail, sortation, etc. all being performed by automated equipment at very high speeds. “We take technology that operates at speeds of tens of thousands of pieces per hour,” he told the PSA group, “and start applying that to parcels, which is changing the game.” The life of a parcel often starts with an online order, Ratan said, followed by the “pick” process where lots of automation and innovation are being seen. The “pack” process follows, and automated solutions such as Bell and Howell’s CartonWrap are bringing new efficiency and labor reduction. Ratan said the solution was developed to solve labor problems and increase speed, but it also solved the dim weight issues by optimizing packaging size based on the contents. He said that multiplying all the improvement numbers for each step of the process now seeing innovation and automation, and the total is about a 10,000 time improvement. “It’s an exciting time to be in the parcel business,” Ratan told the PSA group.

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NSAs for USPS Competitive Services Products Dennis Nicoski, USPS Manager, Strategy and Contracts, discussed the development of Negotiated Service Agreements (NSAs) for Competitive Services products. Since 2006 when the Postal Accountability and Enhancement Act (PAEA) was signed into law, there are different sets of rules for how the USPS deals with Competitive Services products versus its Market Dominant (monopoly) products, he noted. To date, there has been only one Market Dominant NSA formalized, Nicoski said, which rewards catalogs for volume growth. Nicoski noted that the Market Dominant NSA process is more public in terms of the information contained in the PRC filings, but it typically takes 15 days for the PRC to review and act on an NSA request. The USPS reports on NSA performance to the PRC on a quarterly basis, he said. The NSA process starts with an NDA between the USPS and NSA party. Then information is obtained about the customer’s volume, weights, preparation, etc. There are lots of “nuggets” in the data, he said, that can help substantiate the NSA. The data feeds into models that allow the USPS to estimate for a customer’s profile and costs. Potential NSA components do not just include pricing, Nicoski told the PSA group, other components might be transportation, returns, hybrid solutions between different products, payment, packaging, transit time, blended prices, custom cubic prices, flat rates, etc. Nicoski said customers should take many factors into account to determine their carrier selection, including package size/weight (dim weight charges), surcharges, impact of address changes, fuel surcharges, etc. and perform an apples-to-apples comparison. In response to PSA member questions around Parcel Select Lightweight opportunities, Nicoski said there are currently no Parcel Select Lightweight NSAs in the marketplace and the USPS needs to be careful about how it would approach it. It’s important for the USPS to retain a degree of balance in the marketplace, he said. When asked about a potential combined NSA for Parcel Select Lightweight and Parcel Select, he said there has not been one in the past, but “never say never.” “If it would provide adequate cost coverage for the USPS, we could look at it,” he told the PSA group. Nicoski said the duration of the NSA approval process is about 45 days from the initial discussion to getting it to the PRC.

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Cintron on Parcel Services and IMpb Metrics USPS Vice President of Enterprise Analytics Robert Cintron told the PSA group that the USPS Enterprise Analytics group is looking at parcel growth and issues from the standpoint of how they can help the organization. He said the USPS still has not solved package pick-up, despite a year of working at the initiative, but it is getting closer with another effort being pilot tested to understand reverse engineering dynamic routing for package pick-up. The USPS has put a lot of investment into Surface Visibility, Cintron said, which is an essential part of its Informed Visibility platform. “Where is my package?” is the nature of many complaints, he said, and visibility needs to draw together the pieces to connect pieces with trays, containers, sacks, etc. Dynamic tools are being provided to the USPS operations teams and it is moving to predictive workload for letters, flats and packages. “We want to put as much information as possible in front of our operations folks,” he told the PSA group. Cintron noted that the USPS at last year’s NPF had said it wanted to predict delivery of packages within an hour, and it is now in the high 90’s in terms of its ability to do that, and is tweaking to get to an even higher level of accuracy. He told the PSA group that having the address information before the package is processed at the DDU is essential to the USPS achieving that goal. He emphasized that the USPS is not looking at a list of 50 quality metrics for which it plans to assess non-compliance surcharges, it is more like 7-8 key metrics it needs to focus on. He told the group that the USPS is seeing some mailers who delve into their address quality data finding easy solutions to the address/11-digit ZIP requirements. But there are many addresses with missing delivery points, he said, so the USPS will keep working through the issues. He said it appears performance is above the national target set for July, and the MTAC Workgroup will start taking a look at the thresholds for 2017. “We have time to get there,” he said. John Medeiros said that parcel shippers want to go where the USPS wants to go in terms of quality metrics because they see the benefits, but there are some sticking points. Achieving an exact DPV match is one of the issues, where currently for letters/flats they achieve a discount for complying with Move Update address requirements, but for parcels it will be a penalty for non-compliance, so the incentives are reversed. There also may be potential for duplicate assessments, or penalties out of proportion for the quality issue.

Legislative Update Pierce Myers, PSA Executive Vice President and Counsel, provided the group with a brief update on legislative developments. He said things are somewhat on hold, and noted that the USPS can’t make the Medicare changes on its own, it would require a change in the law. That is one of the biggest things we are trying to accomplish in legislation, he told the PSA group, noting that the exigency price issue has been

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sticky with the industry divided over it. PSA and others have said the exigency could be left in place permanently, in return for foregoing regular price increases, until completion of upcoming PRC review on the pricing regime, then go from there. Of the $32 billion that the Postmaster General said the USPS’ key legislative provisions would bring, $24 billion would be from cost reductions resulting from adopting private sector best practices for providing and funding postal retiree benefits. It is hard to predict what will happen with legislation at this point, he told the PSA group. But the cost reductions that can only be achieved though legislation are so significant they must be pursued regardless of the outcome of the rates issue. PSA will remain at the center of these efforts and discussions.

PSA 2016 Meetings The next PSA meeting will be held at Amazon’s facility in Wisconsin on August 17-19, 2016, with a Friday evening social outing/dinner event being considered. More information will be provided as details are finalized.