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By Keith Schoonmaker, CFA | 11-08-2010 11:53 AM

UPS: Logistics Can Help Drive Higher Returns

UPS' Mike Jones looks at how expanding the scope of the firm's supply chain management business should help UPS extend its streak of high returns on invested capital.

Keith Schoonmaker: Hello. I'm Keith Schoonmaker, Morningstar's Transportation Analyst. We are here today with Mike Jones with Investor Relations of UPS. Mike thanks for coming.

Mike Jones: It's my pleasure to be here, Keith.

Schoonmaker: At Morningstar, we look for companies that have the ability to persistently out earn their cost to capital for years to come. We consider these economic moats. Wide-moat UPS has earned nearly double its cost to capital for years in the past. The firm's competitive advantage is principally its barriers to entry, which are staggering from its massive network of trucks, aircrafts, sorting facilities, information technology and know how.

I'd like to hear from Mike a little bit about how the company has evolved over the years. Mike, as we're entering the 103rd year of UPS operations, what can you tell me about the Company at this point in its life?

Jones: Yeah. As you say, Keith, we have been around for over 100 years now, and I think that really is a big contributor to it. If you look at the network that we've built, we are constantly focused on improving the operational efficiencies within our network. And you look at the other things as we continue to reinvent ourselves. And I think that's the most exciting thing of working at UPS. I have been here for over 20 years and that's really the exciting things we continue to reinvent ourselves.

For example, when we opened up and started to do business in Europe in the mid-'70s, built out our airline, became a largest airlines in the world in the mid-'80s and we just continued to go from there and really start to build out into other transportation modes including distribution, logistics, freight forwarding, ocean, air, trucks. So, again, that's one of the exciting things. As we continue to do that, that really enables us to continue to generate these operating margins and returns that are well in excess of our cost to capital.

Schoonmaker: Mike, I've heard the CEO, Scott Davis, say all freight onboard, an expression he has used before, and as you mentioned, the company now has not only expressed in ground, but has entered other avenues like logistics.

We at Morningstar are big fans of logistics models since these are very asset-light businesses in general and produce sky high returns on invested capital, sort of the opposite end of the spectrum where we would traditionally think of an airline operating. UPS's current ad campaign emphasizes this aspect of the company. Can you tell me more about why the company is placing such an emphasis on logistics?

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