Episode 15 – Industry Corner Podcast

IN THIS EPISODE: We talk about the first quarter financial results for 2019 and highlights for the recent PostCom meeting

Transcript

Chris: Hi, this is Chris Lien

Anita: And I'm Anita Pursley. Welcome to Industry Corner, a podcast where we share postal industry news to help you stay informed.

Chris: On today's podcast, we discuss the first quarter financial results for 2019 and highlights from the recent PostCom meeting. So let's get into it. Good morning and welcome to the podcast.

Anita: Good morning Chris.

Chris: Good morning Anita, so glad to be here today. Lots to talk about as always and I know you've recently come back from a PostCom Meeting, so anxious to get to that to hear about what was discussed there because PostCom is always such an interesting venue and what an incredible industry association for keeping its members informed. So I'm really glad that we continue to be involved with PostCom and excited to hear about what they shared.

Anita: Oh, there's a lot, a lot of information today.

Chris: Before we get to the PostCom meeting. Let's talk first about the USPS fiscal quarter results for 2019 they posted this on February 8th and as a reminder to our listeners, the postal service's fiscal year begins on October 1st so a little bit different than companies that have a fiscal year that's on a calendar type basis, so you always have to put that into context. But what I think was interesting is some of the details in this. Now, first of all, they reported that the revenue was up 2.9% over the same quarter last year. That reflects revenue of $19.7 billion, but because of the processing costs which were increased by 7.9% for the operating expenses, the postal service report a net loss of $1.5 billion and that's a real concern. A lot of that Anita and listeners is a result again at the volume decline of first class mail. And Anita, my understanding is that the ratio that's typically reported on that for every one piece of first class mail that leaves the system, it takes at least three or more marketing pieces to make up for that. Is that about right?

Anita: That sounds right, Chris. And you know what's troubling about that is first quarter is their busiest time of year.

Chris: It is because that represents what we consider to be the big fall mailing season. So that October, November, December, and as we've talked about before, political mail was up, and that I think is reflected in some good news that they talked about that marketing mail revenue increased by $218 million or about 4.9% in terms of growth, which is good. Almost a 5% growth, or excuse me, 4.9% is the revenue, but the, the pieces are really close. It's 4.8% for the number of pieces or a volume of about 1 billion pieces. And Anita, as we talked about before, a lot of that, I believe, is reflective of political mailings that occurred during that period. Right?

Anita: Right. And then of course, the holiday mailing season. So how about packages? Packages were still up? Right.

Chris: Packages also increased so the revenue increase by $516 million or 8.7% on a volume growth of 93 million pieces, and that's 5.4% compared to the same quarter last year. So we're seeing growth in marketing mail, we're seeing growth in packages. Those are really important for the postal service. But I want to caution our listeners, as we talked about before, while I appreciate the growth in marketing mail, and we see that with a lot of our, with BCC software, it's that ratio that we talked about for every one piece of first class mail, which covers a lot of the institutional costs for the postal service, it takes so many more pieces to be able to cover that with marketing mail.

Anita: Right. And you know, one thing I noticed too is that we've had some real success in controllable income, but this time it was a controllable loss. It's not looking good.

Chris: You know, it was the controllable income from the same quarter last year was $353 million. But for this particular quarter that they recently reported, it was only 103 million. So a third of the cost were controllable. And I think a lot of that reflects really the challenges that the postal service has, which is lower volume but more delivery points. And the delivery points really reflects transportation. And transportation costs are much higher as the postal service is trying to deliver for the customers into the industry. So it's a lot of challenges with the finances here

Anita: That 103 million, Chris was a controllable loss.

Chris: Oh, I'm sorry. You're right, controllable loss for the quarter was 103 million compared to controllable income.

Anita: So it's really a 450 million swing.

Chris: Exactly. So anyway, I encourage our listeners to take a look at this. Again, it's just a short brief that went out on February 8th I think the three things that I take away from it, Anita is one that overall volume was down in the $1.5 billion as a result of that because of the first class mail decline, but marketing mail continues to grow as well as packages and that the postal service needs to continue to find ways to control costs when I think one way that they can do that is workshare discounts and so the relationship between the postal service and the supply chain, particularly of mailing service providers, we need to continue to find ways to remove those costs from the postal service, that cost avoidance and then reflect that as postage discounts that the mailing industry can leverage to be able to do more for mail preparation to ensure that we get timely, predictable delivery of the mail.

Anita: Well, I've got some good news from the PostCom meeting. Can I get started?

Chris: Yeah! Let's jump into PostCom. Let's talk about that.

Anita: Okay, well, you know, Sharon Owens, the VP of Costing and Pricing, she was a real highlight of our study day and she highlighted the 2018 Annual Compliance Report. Which I think you and I both studied pretty carefully and then she talked about flats, drop ship discounts, and also an evaluation of their product offerings. So there's a lot of information that she shared. Let's see. Highlights of the ACR, the Annual Compliance Report. You know, kind of going back to what you were saying on the financial side, she pointed out of course that they're losing their economies of scale. So their mail processing costs are increasing, transportation is increasing, city delivery, rural delivery. So their costs were up on average in 2018 3%. Those were pretty much the highlights, but she said that operations is working really hard to address the declining workload by you know, moving out equipment, redoing schedules and so forth. But it really is exactly what you said, less mail to more delivery points. Then she went into talking about flats. I wrote an article for the Mailing Systems Technology about the flat situation because now standard flats and periodicals are both in the 60% category 68.6 for marketing mail and periodicals are at 67.5 for cost coverage. But what's interesting is she admitted what we had heard back in a user group meeting that they're investigating combining all non-saturation flats into one product. So we would essentially have non-saturation and saturation and people in the audience were accusing her of just rearranging the deck chairs cause it really doesn't solve the problem. If you do that then you end up with a non-saturation product at 88% costs coverage. So it still isn't above 100%. But she said that they're really taking a close look at their pricing and operational offerings and she also mentioned drop shipping where they would look at saturation, non saturation and then drop ship and non drop ship. So Tom Foti is going to be leading a redesign effort of their product offering and really take a look at some interesting ideas that hopefully will bear fruit. But anyway, I said we had some good news and that was on the drop ship side. You know how we had the SCF letters where the postal service was passing through much more than the avoided costs.

Chris: Right. And they had to adjust that in the industry was concerned about what that's going to do with the supply chain. Are we going to bring more mail to the NDCs and things like that?

Anita: Exactly. Well she said that just as the industry had predicted that since transportation costs are rising, then essentially the avoided costs are actually rising as well. So she said that she didn't see any need to radically change drop ship incentives going forward on either flats or letters.

Chris: Oh, interesting. Okay. So that's an interesting part of the equation, right? So as transportation costs go up that means that the cost that we are helping the postal service to avoid also are increasing because they grow proportionally. So really in effect what you're saying is that that deficit, or actually excess, I should say, that was driving more of this aggressive adjustment in the discounts. It doesn't have to go is quite the way they planned and we may be able to level out here faster than what we had hoped. Right?

Anita: Exactly. So that was really, really good news. Also, she talked about the fact that they are conducting a few operational tests. She called them limited and she didn't reveal anything about it, but she said that they're preparing to brief the Board of Governors on the results of their first operational test. And then they're also looking at relaxing some mailing standards as a result of a second operational test. So they're doing some innovative things and she talked a lot about how they're working with the Board of Governors running by their business cases and then coming back to the industry for input and then going back to the Governors to let them know what the industry feedback is and so forth. So going to be much more transparent. I think we might hear about these operational tests results sometime in the spring. And then as I said, Tom Foti is leading an effort to redesign their product offerings. So I don't think we're going to see anything significant in 2020 but just the fact that they're really thinking outside of the box and looking at their product offering with a new set of eyes. I think that's excellent.

Chris: That is fantastic news. You know, so two thoughts on that. First of all, Tom Foti, great guy, you know, really listens. Again, another one of those individuals that I've just always been so impressed with that actively listens to the mailing industry. He doesn't shut us off. He wants to hear what we have to say and I'm pleased to hear that he's working with the industry collaboratively for what these changes may provide and taking some time with that too. We don't want to rush this. We want to make sure that we do this correctly because the last thing we want to do is rush into some major changes again and then find out we've got unintended consequences. And then the other thing is that boy, what a great place for Sharon Owens to be, VP of costing. Every time that she gets up and talks or shares information, I'm just so impressed with her knowledge and just being forthright with the industry in that partnership. So really am glad that we're working with Sharon Owens on this.

Anita: Right. Hey, one other thing she said that I thought was really interesting was, Saturation SCF flats in the last rate case was an unintended consequence. And they were hit with somewhere between 8 and 9% increase in the last rate increase and she apologized for that. She said that they're now setting up some sort of a flag so that they see the outliers in any rate proposal. So hopefully those surprises will be fewer and far between going forward.

Chris: Yeah, I think there were some people in attendance at MTAC that kind of warned that, “hey, this might happen”. Maybe I'm wrong on that. Maybe it was more focused on on some of the letters and things like that. But again, I'm glad to hear that maybe there's some checks that'll go into this because that's the problem is the, the balance of the workshare discounts and all the variables that are involved with it. Mail is complicated and one little push or pull on some of these variables can really affect how the industry is going to respond.

Anita: Right. We pull one lever and then another one gets really hit hard.

Chris: Exactly, exactly. And I think that, you know, whether or not that truly is elasticity from an economic curve or not, I think it's truly as a reflection that this industry is very tuned in with what drives postal discounts and how to leverage those to, as I said before, to optimize mail preparation for the ultimate timely, predictable and delivery the mail. Now I understand. Mark McCreary provided some information too. Right?

Anita: Right. That was his first presentation, I believe, in his new role. Well he talked about seamless acceptance and I think this is gonna be a hot topic going forward because he said that he anticipates publishing a federal register notice in March with a 30 day comment period. And it's going to mandate that mailers with DMUs and bulk mail acceptance units with 90% or greater full service will be required to go seamless. You'd have to be on a parallel until September 1st and then full seamless by March of 2020. And I think what's disturbing about that is because the figure that he showed on one of his slides was that today only 38% of mailers are on seamless. So why? If there's so many benefits, then why is this figure so alarming? It's so low. So obviously there was some followup discussion and mailers in the room were saying that, hey, it's going to cost our companies money to participate. Risks go up. And so there isn't this, hey, let's jump on the bandwagon. So I think Mark's going to be surprised at the feedback that he gets on this proposal.

Chris: Well, they need to look at this. And you know, the acronym that comes to mind here, Anita, is FUD. Fear, Uncertainty, and Doubt. And unfortunately I think that's part of what sort of has been looming behind with this seamless acceptance. Yeah, there's a lot of benefits with that, but you know, when we hear comments like, you know, once you go in you can never come out, you know, seamless acceptance is like the Hotel California, right, of mail entry. And that's really unfortunate because there are some benefits to seamless acceptance. It's an interesting concept because the whole point behind this is that for those mailers that consistently prepare effective mailings and are able to induct that to the postal service in a more seamless approach, they should be able to be measured, or judged on a broader scale, not on each individual mailing. It should be spread out over that period of time, recognizing that, hey, sometimes things happen on a very small percentage, but judge me on the totality of what I'm doing for that measurement of time. So I think that that's a good thing. But still again, hearing that there was cost for companies to participate, and that there's risks associated with that. I think the first thing that Mark needs to do after listening to the industry is start cataloging those concerns, that FUD, and then speaking to each one of those as they come up. I will say also that some of the things you shared about that that for those that have DMUs, Detached Mail Units in 90% full service. That I think is pretty consistent with the messaging that Pritha had been sharing prior to the change now with Mark leading that initiative, so I didn't hear anything that's brand new. Maybe the dates are a little bit new and in terms of putting stakes in the sand, but I'm interested also to hear what the industry's concerns are with this. Seamless Acceptance makes sense. We've got a lot of customers that are on that so let's get it all fleshed out so we can figure it out.

Anita: That's right and I believe Idealliance and PostCom are surveying their members to understand what the objections are. I know undocumented is a huge one. And so I'm sure we'll hear about that… Chris, I just gotta tell you we have so many acronyms, but this is the first time I've heard of FUD.

Chris: You gotta be kidding. I've heard it for many years. Yeah, FUD… Fear, Uncertainty, and Doubt

Anita: So we can say, “OH, FUD!”

Chris: Right, exactly. That's exactly right. Yeah.

Anita: Okay. All right. So anyway, so mark went on to talk a little bit about the conversion from CAPS to EPSs, and someone in the audience asked, “so what exactly does CAPs retirement mean?” And uh, I first I thought it was kind of a funny question, but it really just means that you can't open up new accounts in CAPS. It's going to be around until, you know, everything is converted over to EPS. But anyway, there's a clarification that only the customers who have all eligible products that are supported by EPS will need to migrate by April 1st so if you have any other products like EVS or Parcel Return Service or Merchandise Return Service, all of, you know, there's a long list of products that are not supported by EPS yet. So if you have any of those and you're not required to convert, you can convert. But then of course you have to maintain two systems.

Chris: Right. Okay. And that's going to be complicated,

Anita: Right? A little bit. And then he talked a little bit about the new Business Customer Gateway. We've been hearing about that for awhile and the pilot is scheduled to launch on April 1st and he did say that the reason for the delay was that there's been a lot of turnover, contractors leaving for other assignments, other jobs, and just regular turnover. But that's scheduled to launch on April 1st

Chris: Alright, a little bit longer than what we were hoping. I know a lot of people were anxious to see the new BCG and be able to interact with that because there's some challenges with the existing Business Customer Gateway.

Anita: Exactly. But the last thing I wanted to report on is Dave Williams, the new governor, and he recently toured a mystic logistics facility. I think it was Sharon who agreed that they're talking to the governors about the middle mile. So I think that was interesting too. But nevertheless, going back to this and he's very, very interested in the postal service collaborating with the industry on transportation. So PostCom and Idealliance are going to be forming a working group to take a look at all these opportunities where the industry could collaborate with the postal service.

Chris: That's great. That is good news. You know, and you're right, it kind of calls back to what you and I heard from Governor Williams when he talked to us at the WILDS lunch back in December, right?

Anita: It was November.

Chris: It was November. Okay. So even earlier. Right. Well, you know… heh. No, that's great. I'm glad to hear that they're looking into that because that's that particularly with transportation, that's an area where I think the industry has an opportunity to be able to help the postal service, particularly with that Middle Mile as you talked about. So. Well that's great. Anita. Some really good highlights from PostCom. That and so glad that you are on the board, with PostCom staying actively involved with that. It's a really important industry association for us. You mentioned Idealliance and they've got a conference coming up in a couple of weeks as well, right?

Anita: It's next week.

Chris: It's the next week. Okay. So it'll be interesting to sort of hear what's shared at that particular event. I think it's really, really important and hopefully we've demonstrated over the years to stay involved with the industry through these industry associations because even though it's only several weeks, apart between the PostCom meeting and the Idealliance meeting, the conversation, the membership, the atmosphere can really change the conversation and the dialogue. And it's important for us as your industry advocates to stay in front of what's going on with these changes. Be active at the table, having the conversation, asking those questions and again, representing you, our valued customer. So Anita, I'm glad that you were at PostCom looking forward to hear what is shared at the Idealliance event.

Anita: Right. And then we have MTAC at the end of February, so a lot going on.

Chris: Boy, three important events. Again, thank Anita for sharing. Anything else?

Anita: No, I think that's it.

Chris: All right… Well thank you listeners. We're really glad that you tuned in today's podcast, for our valued customers. Thank you for your business. We look forward to hearing from all of our customers now with the recent acquisition of the former Satori Software technology and as always visit our web page. Give us a phone call. We want to know how can we help? Thanks everyone. Have a great day.