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Good day, everyone, and welcome to the FedEx Corporation fourth quarter and fiscal year end 2012 earnings conference call.

Today's call is being recorded.

At this time, I would like to turn the conference over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation.

Please go ahead.

Good morning and welcome to FedEx Corporation's fourth quarter earnings conference call.

First, I want to remind you that we're planning an investor meeting here in Memphis on Tuesday and Wednesday, October 9 and 10.

Registration information will be e-mailed to you in the next few weeks.

The fourth quarter earnings release and our 25 page stat book are on our website at fedex.com.

This call is being broadcast from our website, and the replay and podcast will be available for approximately one year.

Joining us on the call today are members of the media.

During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate.

If you are listening to the call through our live webcast, feel free to submit your question via e-mail or as a message on stocktwits.com.

For example, please include your full name and contact information with your question and send it to ir@fedex.com address.

To send a question via stocktwits.com, please be sure to include a $FDX in the message.

Preference will be given to inquiries of a long-term strategic nature.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

Certain statements in this conference call may be considered forward-looking statements within the meaning of the Act.

Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

For additional information on these factors, please refer to our press releases and filings with the SEC.

In our earnings release, we will include certain non-GAAP financial measures which we may discuss on this call.

Please refer to the release available on our website for a further discussion of these measures and a reconciliation of them to the most directly comparable GAAP measures.

To the extent we disclose any other non-GAAP financial measures on the call, please refer to the investor relations portion of our website at fedex.com for reconciliation of such measures to the directly comparable GAAP measures.

Joining us on the call today are Fred Smith, Chairman, President and CEO; Alan Graf, Executive Vice President and CFO; Mike Glenn, President and CEO of FedEx Services; Chris Richards, Executive Vice President and General Counsel and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO, who is dialing in; Dave Bronczek, President and CEO of FedEx Express, who is also dialing in; Dave Rebholz, President and CEO of FedEx Ground; and Bill Logue, President and CEO of FedEx Freight.

And now our Chairman, Fred Smith, will share his views on the quarter.

Thank you, Mickey.

Welcome to our discussion of operating and financial results for the fourth quarter and fiscal year 2012.

Following my brief remarks, Mike Glenn, as we started to do at the last one of these meetings, will address our economic outlook and yield situation first, and then Alan Graf will offer an overview of our financial results and outlook.

Prior to FY '12, we committed to you that we would increase earnings, margins, returns on invested capital, and cash flows.

And we have done so.

I'd like to thank the more than 300,000 FedEx team members around the world who turned in a world class performance during a very volatile and challenging year.

We had of course exceptional performance by FedEx Ground and the powerful new value proposition at FedEx Freight, and improved yields across all transportation segments fueled these outstanding results.

We also will continue positioning our Company for the long-term.

In this regard, last week FedEx Express completed the acquisition of the Polish company, Opek.

During the fourth quarter, Express announced agreements to acquire companies that serve domestic markets in France and Brazil.

We've also opened scores of new stations in Europe as part of an aggressive organic expansion strategy, and we're very pleased with our progress there.

Let me cut to the chase about FY '13.

We again are stating to you unequivocally, we believe we will continue to improve earnings, margins, returns on invested capital, and cash flows.

And I would add that the earnings guidance that Alan will talk with you about does not include the effects of significant cost reduction programs currently under review that we believe should be announced in the fall.

Let me now turn the call over to Mike Glenn.

Mike?

Good morning.

FedEx's economic outlook calls for moderate growth to continue in the US and global economy.

Our forecast calls for calendar year '12 US GDP growth to be 2.2% and industrial production growth to be 4.3%.

For calendar year '13, we expect GDP growth of 2.4%, and our outlook is largely in line with the consensus economic forecast.

We expect calendar year '12 world GDP forecast to be 2.4%.

It's important to point out that successful management of the debt crisis in Europe and the avoidance of significant tax increases next year in the US are important assumptions in our forecast.

Turning to yield, FedEx continued to do an outstanding job managing our yields.

Excluding the impact of fuel, year over year Express domestic package yield increased over 5%.

The increase was driven by price, rate, and discount improvement, followed by favorable service and customer mix changes.

In the Ground segment, our yield increased 4% including the impact of fuel.

The year over year increase was driven by list rate and discount improvement, followed by an increase in extra service charges.

On the international front, excluding fuel, IP yield increased almost 2% year over year with improvement being driven by weight and rate and discount changes.

And finally, in the Freight segment, excluding the impact of fuel, yield per hundred weight increased 1.5% year over year.

The increase was primarily driven by pricing rate changes.

And now I'd like to turn the call over to Alan Graf.

Thank you very much, Mike, and good morning, everyone.

Our fourth quarter adjusted earnings per share was $1.99, up 14% year over year excluding a previously announced $0.26 per share aircraft impairment charge at Express.

Despite a global economy that was softer than expected, our FY '12 adjusted earnings per share was $6.59, up 34% from fiscal year '11.

Overall, our FY '12 adjusted operating margin increased to 7.7% versus 6.5% last year on 9% higher revenue.

At our Ground segment, operating margin increased to 20% in Q4, as Ground continued to efficiently manage expenses while improving the networks for quicker deliveries and continued growth.

At Freight, operating margin climbed to 5.8% which is the highest fourth quarter margin since 2008.

Our Freight segment profitability should continue to improve due to volume growth, base yield improvements, and the network design changes that are increasing our operational efficiencies.

The result has been a strong turnaround at Freight that will continue in FY '13.

Express Q4 operating margins declined year over year, primarily due to the $134 million aircraft impairment charge and declining package volumes.

A demand shift toward lower yielding international services also negatively impacted margins.

We anticipate revenue and earnings growth in 2013 despite modest growth in the global economy.

We believe US domestic and global economic conditions will be impacted by the European debt crisis, slowing growth in Asia, and the uncertainty these issues create on the global economy and the demand for our services.

These weaker global economic conditions have driven a shift by our customers from premium services to our deferred products, we expect that trend to continue in 2013.

Our anticipated earnings growth in '13 is predicated on continued improvement in profitability at our FedEx Freight segment and the sustained strong performance of our FedEx Ground segment.

International revenue growth and productivity enhancements at FedEx Express should also contribute to our earnings growth in 2013.

However, headwinds in pension expense will hamper earnings growth in 2013 as a historically low discount rate and our May 31, 2012 measurement date will increase these costs by approximately $150 million.

During 2013, we will continue to evaluate opportunities to reduce costs, improve efficiencies, and adjust our networks to match the anticipated demand.

Initial actions were taken in 2012 as we made the decision to permanently retire 24 aircraft at FedEx Express to better align the US domestic air network capacity to match current and anticipated shipment volumes.

In addition, we remain focused on modernizing our aircraft fleet at FedEx Express by adding new aircraft that are more reliable, fuel efficient and technologically advanced than retiring, older, less efficient aircraft.

These actions will improve margins at Express.

Our capital expenditures for 2013 are expected to decrease to approximately $3.9 billion, with fewer aircraft deliveries in 2013.

We will continue to evaluate investments in critical long-term strategic projects to ensure our capital expenditures generate high returns on investments and are balanced with our global outlook for economic conditions.

Looking at the FedEx Express segment, we expect to increase revenues in 2013 in our international services and improved yields across all Express services as we continue to focus on our yield management programs.

We do anticipate a slight decline in US domestic package revenue in 2013 due to lower volumes.

We anticipate improved operating results due to productivity enhancements, including continued improvement in on-road productivity, air operations initiatives, and ongoing realignment of our US domestic air network.

Express is developing a detailed operating and cost structure plan to further improve its operational efficiency and we plan to discuss this with you in the fall.

Turning to the Ground segment, we expect continued growth in operating income at the Ground segment in 2013 due to volume and yield increases as well as through productivity enhancements, including automation of the planning and execution of pre-load and pick-up and delivery processes.

Ground will also install GPS devices on all trailers and dollies to improve fleet management.

At Freight, we anticipate revenue growth in 2013 from yield and volume improvement due to our unique value proposition.

Freight operating income is expected to increase significantly in 2013 from this revenue growth and from continued improvement in productivity and efficiency across our integrated network.

We will continue to use investments in technology focused on network and equipment planning and customer automation to further enhance customer service levels during 2013.

Looking at the balance sheet, at May 31, 2012, we recorded a decrease to equity through other comprehensive income of $2.4 billion net of tax to reflect unrealized actuarial losses in our pension plan during FY '12 resulting from a decline in the discount rate and mark-to-market accounting.

Despite this charge to equity, our balance sheet remains very strong with cash of $2.8 billion and debt of $1.7 billion.

Our effective tax rate was 35.3% in FY '12, and was lower than FY '11 primarily due to favorable audit developments.

We estimate our effective tax rate for FY '13 will be in the 37% to 38% range depending on the strength and specific country source of our international earnings.

During FY '12, permanent reinvestment benefited our rate by 1.3 percentage points.

We're now ready to take your questions.

(Operator Instructions)

Tom Wadewitz, JPMorgan.

Let's see, I wanted to ask you about the restructuring in the sense that you gave us some initial information on fleet reduction.

It sounded like in that release that a lot of the aircraft that you were reducing or retiring were actually already parked.

And I think one of the things we're trying to figure out is what's the magnitude of potential capacity take-out that you have?

So I understand you're saving a lot of this for the fall, but I was wondering if you could give us kind of a directional comment on how big is the opportunity to actually take out capacity in domestic Express?

Thank you.

I think we'll wait until the fall to talk about that because it's a comprehensive program and I'm not sure we could do it justice here on a telephone call.

Justin Yagerman, Deutsche Bank.

When you guys think about your networks as they stand right now, especially in Express, in the domestic market how much of what's being moved in the Express market could really find a home in Ground?

And I guess as you've seen this accelerated Ground growth and continue to see strong margin improvement there, Fred, I think you talked to getting to a 20% goal last quarter.

You're there now.

Where does the bogey move to?

So a two-part question.

How much from Express could move into Ground?

And as you get that density, how much better can Ground margins get?

Justin, first, I think it's important to point out that the growth in the Ground segment is largely driven by superior value proposition which is based on a significantly faster network and outstanding service levels.

And the Ground also benefited from some growth in the e-commerce sector.

Having said that, any time you see softness in the economy, you see some mode shift where customers re-evaluate their supply chains and look to see if they could rely on a slower mode of transportation in some cases or the lack of a time definite service.

So we do see some of that.

We work with customers to put their products in the right network that's going to benefit them and of course benefit FedEx as well.

So it's hard to put a specific number on that because it gets down to the requirements of individual customers in terms of what their needs are.

Justin, this is Dave Rebholz.

First of all, let me make the comment that every day we strive for improved margins and service.

And that's not a lost commitment on the entire organization and they buy into it because that's how we grow.

Having said that, there were a lot of headwinds into Q4.

You heard me tease you previously about my boss with me, which is totally appropriate.

The reality here is that we had a lot of good things come together.

We had great revenue growth, as Mike already mentioned on the yields.

We had great volume growth both in Ground and Home, as was evidenced earlier by the additional surcharges we benefited from, and SmartPost.

So we're a healthy proposition.

We will continue to strive for 20% each and every quarter.

I don't know that I can commit that each and every quarter.

What I can commit to is that we will continue to improve our performance both on a margin and service basis so that we differentiate ourselves in the marketplace.

So far, it's playing out very well for us.

David Ross, Stifel Nicolaus.

Can you comment a little bit about the international traffic trends?

Is European Express traffic generally getting worse?

Is Asia might be getting a little bit better?

And then on air freight capacity in Asia, has it been right-sized or are people still pulling planes out of that market?

David, this is Mike.

Let me comment about overall traffic levels, if I can, in the quarter.

Clearly, the softness in the global economy impacted IP volumes with Asia-Pacific being impacted the most during the quarter.

However, I think it's important to point out that the weakness in APAC was largely driven by specific customers in the tech sector and how they handle product launches.

So if you excluded that issue, IP volumes would have been positive year-over-year during the quarter and that's an important thing to point out.

So APAC was impacted the most with the other segments performing much better.

This is Alan.

Europe's actually performing very well through this crisis.

We're very pleased with how that's performing.

I'll turn it over to Dave Bronczek to get his comment as well.

Thanks, Alan, and thanks, Mike.

They're both exactly correct.

Mike commented on the high tech sector.

We had such a big increase in one customer last year in the fourth quarter.

Across the board, we would have actually had an increase in IP volume.

In Europe as is pointed out, I think several times in the last few quarters continues for FedEx Express to perform and outperform quarter on top of quarter.

So we've seen very good results from our European business.

Kevin Sterling, BB&T Capital Markets.

In Express, you talked about the growth in deferred services and does this include a modal shift from the air to the ocean?

Or is it mainly just a shift from a premium air product to a more economy air product?

This is Dave Bronczek again.

Yes, there is a shift into more off our FTN Network.

Our FedEx Trade Network is handling more traffic, specifically out of Asia on the ocean.

But some of the traffic has shifted from international priority into international deferred, and we're adjusting our network to handle that and handle it more profitably.

So I think it is a combination of both.

I think in the larger perspective, over several years now, it's very clear that the door-to-door express segment is growing.

The movement of goods on the water is growing.

And traditional airport to airport commodity air freight is not growing.

If I could just add one other comment, I think Fred's exactly correct.

You're seeing a lot of companies that just have traditional freighters are finding it very difficult out in the marketplace these days with high fuel costs and relatively low yields on their freight.

So the question that was asked earlier is the capacity coming down, to some degree that's correct with these all freighter parts of people's businesses and companies in general.

That's exactly correct.

Helane Becker, Dahlman Rose.

Can I just please ask a question about Europe specifically?

When you say that Europe is doing well relatively speaking, are you talking about within Europe or are you talking about Europe outbound, Europe inbound, Asia-Europe?

Can you just like put some color onto that?

Thank you.

Helane, this is Alan.

Then I'll let Dave go.

Okay.

As we've been talking about for several quarters now, we have a very aggressive organic expansion going on inside Europe.

And so we're gaining new customers and new business every day as a result of that expansion and it's working very well for us.

So really across the board, we're very pleased with how well that management team is executing.

As you know, we bought the company in Poland, bought the Company in France.

So despite the turmoil over there, we probably are a little bit more bullish on Europe than others as a result of what we've been doing.

I'll just add my comments.

Europe in general is very profitable.

They're doing exceptionally well.

They have a very focused, detailed plan on improving service, opening up markets, adding salespeople.

We're actually opening up one station per week in Europe very, very successfully.

On the international side, it's growing and profitable as well.

So really across the board to Alan's comments, we're doing very well in Europe.

Ben Hartford, Baird.

Dave Bronczek, maybe could you talk a little bit about utilization trends in -- between the two networks.

If I look at domestic Express versus international Express or IP, can you talk a little about utilization relative to one another, and then maybe where each stand against the historical benchmark?

Yes, I'll be glad to.

For example, in the domestic flight hours, I'll use that example, we actually are down 3% or 2,000 hours per year, year-over-year over the fourth quarter.

On the international side, our international pounds are actually up.

So IP and IP Freight are up.

So even though there's a shift into some deferred, actually we're flying more pounds.

So we're actually reducing and looking at our domestic network closely to match more of the volume to the weight and to the lift.

So there is a shift.

It may not be apparent to you so I thought I'd point that out.

The same is actually true on our global FTEs.

On the global FTEs, we actually have been acquiring some companies that are fitting in very nicely for our quality service and worldwide coverage expansion.

On the other side, because of the domestic volumes coming down slightly, we're adjusting the FTEs there.

And again, for example, our US domestic FTEs have come down 3% in the fourth quarter and that's over 2,600 FTEs.

While they may be growing in some other parts of the world like India and Europe and Asia, so we are always looking at this balance.

Bill Greene, Morgan Stanley.

Alan, at the Investor Day two years ago you gave some aspirational targets about EPS trajectory versus previous recoveries.

So we're running a little bit below trend, but not materially so.

But I'm curious, the cost initiatives that we potentially could see underway here, particularly at Express, do you think those are enough to get you back to that trajectory or is improving macro really required here to hit those aspirational goals?

I think couple years ago, Bill, we were looking at GDP for the US and global to be better than they've actually been.

They're moderate, they're not strong.

And I think for our aspirational goals, we needed a little bit stronger growth than what we've had and what we're actually looking for.

So having said that, we now realize we've got to adjust the networks that we built for higher GDP growth than we're actually seeing.

So right now the opportunity I think is good.

We are ongoingly taking out costs as we speak.

And we'll come back to you in the fall with some more things that we're going to do to continue to do that.

And I think that will be two-thirds of the issue.

As the economy improves at some point, we have a lot of leverage in these networks and very small improvement on GDP percentage point growth comes to the bottom line very rapidly.

So that will provide us with the other third towards our aspirational goal.

So it's sort of two-thirds, one-third.

Brandon Oglenski, Barclays.

Just a real quick one on the guidance and then maybe longer-term on the same issue.

Can we just know what your fuel estimates are for your guidance range?

And then it looks like when we've seen jet fuel cross $3 threshold, we've seen a pretty big degradation in Express package demand globally.

Is there any enthusiasm that you guys are seeing in the marketplace that maybe if we can keep oil prices around where they are right now, you could potentially see better growth rates ahead?

I'll take the first part, and then I can turn it over to Mike for the second.

As we say, every release we come out with that the current guidance is for fuel prices to be stable where they are.

Now, whether or not that will hold will remain to be seen.

And let me turn the demand question over to Mike.

Thank you, Alan.

I think it's important to note that fuel prices are just one component of the equation.

Clearly, the economy and the moderate growth that we're seeing is the bigger issue, and I think customers in general are being fairly conservative in terms of how they're managing their supply chains until they see a little stronger growth.

But certainly, lower fuel prices will help.

And just to remind everybody, it's not so much price changes as how rapidly they move up and down because we have the six week lag between the surcharge and the into plane costs.

Christian Wetherbee, Citi.

Maybe talking a little about the underlying assumptions within the first quarter guidance just strikes me as a little bit softer than maybe the trend would suggest.

I guess maybe if you could give us a sense of what you're seeing so far in the month of June and particularly on the domestic Express side, if volumes look like they're trending in line with what we saw in the fourth quarter, if they're kind of better or weaker?

Christian, I would say they're trending more in line with what we saw in the fourth quarter.

And I think it's important to point out that in the first calendar quarter, the Express overnight market declined 1% in volume.

But if you exclude the strength in the lightweight e-commerce sector, the decline was certainly more in line with the numbers that we reported.

We've been fairly selective in pursuing lightweight e-commerce, residential delivery, overnight Express traffic.

I think that's one of the main reasons why our yields, excluding fuel, have improved over 5% relative to the market in general.

So we'll continue to balance our volume and yield management activities, but I would say certainly more in line with what we've seen.

And if you just consider the pension and employee cost headwinds and the higher tax rate than we had last year, that also plays into headwinds for the first quarter, which is why we're working so hard to get to the fall timeframe to get our cost structure better acclimated to the volumes we're seeing.

Jeff Kaufman, Sterne Agee.

I was thinking about it, Mike, you gave the view on industrial production for calendar '12 but not for calendar '13.

I'm assuming it's 3% or stronger.

When was the last time you saw 3% to 4% industrial production growth and declining domestic package volumes?

Is there that much inventory in the system that customers can manage it that more tightly or is it something else?

We're not seeing declining domestic package volumes.

You keep segregating the Express from the Ground.

It's one basic market.

So it's important to focus on that.

Jeff, let me add, we've had all the way back to, if you look back to Q1 of '11, it was 4.4%.

In Q3, it was 5.3%.

So as Fred pointed out, if you look at our parcel traffic as a whole we performed quite nicely relative to the market.

We've been gaining market share in that regard.

But clearly, customers are managing their supply chains relatively conservatively given the moderate economic outlook.

Ken Hoexter, Bank of America Merrill Lynch.

When you think about cost cutting, are you willing to cut into the service levels, or just so we understand, is that inviolate in terms of the larger picture in terms of service center and aircraft domestic cuts?

And then on the international, if you see IP growing so slow, are there any opportunities to stall the 777 deliveries any further?

Let me jump in here and answer both questions first, and then Fred may want to follow up on that.

But in terms of the fleet for international, as you probably are aware, we moved some of our 777s back when we announced the 767s prior to this.

So we actually have done some of the fleet adjusting already which is actually why some of our CapEx might be better in FY '13.

Give me your first question again, Ken.

I got it, Dave.

I'll handle it.

It's Alan.

Ken, several things here.

First, we continue to work on our fleet.

We continue to work on the size of the Ground network.

I think it's important to understand what Mike said.

It's one market.

So our growth there is pretty strong.

And so we have opportunities here, but be sure that you understand, we are going to improve service levels in every transportation segment while we reduce our costs.

This is Fred Smith here.

I think that it's very important to understand our philosophy in that regard.

We have people come from all over the world to study our management system which we call quality driven management or QDM.

And the facts of the matter are that improved service levels actually decrease costs.

They don't add to cost.

Because they take out rework, mistakes, lost customers, and so forth.

So we are very committed in FY '13 to doing the same thing we've done for the last 30 years through the use of our quantitative management systems to steadily improve the customer experience, not degrade it at all.

Let me add to Fred's comment because he's exactly right.

At FedEx Express -- I'm sure Dave Rebholz and Billy at FedEx Freight and Ground are the same.

We've now had 12 consecutive years of improving service at FedEx Express, our world class service.

In FY '13, it improves again, once again, to the 13th year.

On top of that, we have cost initiatives that are prudent and they're in the plan and we are going to talk about them in October.

So we're going to be doing both and the two go hand in hand.

We'll be accelerating days savings in Ground.

We'll be adding to our first overnight product, our Saturday zips.

We've got a lot of service enhancements across the board that will be coming in, in FY '13.

We have an e-mail question for Bill Logue.

It's a two-part question.

What's the average age of the FedEx Freight fleet currently, and will we see FY '13 Freight CapEx in the same level as the FY '12 level of $340 million?

Again, as far as the age of the fleet, we're slightly above our normal historical trends.

As you saw, we made a good investment here in FY '12 in the fleet and we will be making a very similar investment in FY '13 going forward.

So we're happy where we are.

We had an opportunity with the -- when we put the networks together.

So we're in good shape from our fleet perspective.

And again, most of our capital will go towards replacements.

Longer term, this is Alan, I hope we have the opportunity to invest more in Freight for its growth, but also for technology changes on energy efficient engines and hopefully 33-foot trucks.

The second part of the question here for Bill is -- with the best OR performance for Freight since 2008 at 94.2%, what further OR gains from technology investments like GPS initiatives at the dock and dolly level and customer automation initiatives can we expect?

This is from William Flynn of Potomac.

Two important issues for us in FY '13.

First and foremost, number one is on our network design.

We've learned a lot in the last 16 months, and obviously every opportunity we get we continue to adjust it.

And as you saw in our release, we're making some significant adjustments in July designed to improve our efficiency.

So we're excited about that.

At the same time, we'll be speeding up about 6,000 lanes with that same move.

So very important change for our network in July.

It's also designed to give great and improve our customer service.

And as far as technology, again, '12 and '13, important years for us as we transition to our Eden project which basically automates a lot of our pick-up and delivery and dispatch opportunities, as well as our dock and yard which come on-board later this year which really enhance and make our dock movements and dock and yard interface much more automated and much more efficient for the network.

So we're in a very good phase of our roll-out and expect to see very positive results from both those initiatives.

Donald Broughton, Avondale Partners.

This question is for Bill as well.

We saw 4% increase in volume and 4% increase in pricing on Freight.

If you had your druthers, would you rather have a little bit more of volume or a little bit more of the yield in order to optimize your profitability?

Donald, this is Mike.

I'll comment first, and then let Bill add anything he'd like.

The advantage that we're in right now is that customers really value our differentiated network and the value proposition that we have.

They like the choice of priority and economy, and our sales team's doing a great job helping customers understand how these services will assist them in managing their supply chain.

I think we're in a very good position right now and that we can balance the volume and yield growth to the benefits of the operating Company and we are being selectively aggressive where appropriate and then managing yields where also appropriate in terms of improving existing customers' operating ratio and things of that nature.

So I'd say we're in a pretty good spot right now in terms of the strength of our volumes and our ability to manage yields as we go through FY '13.

Don, I'll just add on that.

Again, great job by Mike and his team bringing on some very good volume for us at the appropriate yield.

As we move down to '13, as I tell the team internally, it's three objectives.

Number one is continue the yield improvement, which obviously is -- we're very laser focused on that.

More volume at the right yield, and then as I mentioned earlier, the network design is really important to really move this volume efficiently through the network to put it to the bottom line.

So the team is very engaged on it.

Let me just add, Donald, that one of the advantages of our revenue management committee where our sales and marketing team works with the operating companies on a weekly basis is we can actually fine tune the strategy as we go through the quarter and the year.

So there will be some periods where we have a little bit more volume focus and there will be some periods where we have a little more yield focus.

So that's the advantage of working so closely together with our revenue management team as we're always in sync with the operating company on what's going to benefit them most.

Scott Group, Wolfe Trahan.

So I've got a quick thing I want to clarify on the guidance and then a longer-term question.

So in terms of the guidance for fiscal '13, are you -- I know the broad restructuring, there's no savings in there, but are you assuming any fuel and maintenance savings from the aircraft retirements already announced?

And then on the longer-term question, it feels like some carriers are benefiting from tech launches and others aren't.

What's your sense at what's driving changes in carrier decisions from customers like Apple and is there anything strategically you think you need to do to be better positioned for future tech launches.

I think that's two questions, but I'll answer the first one.

Yes, there will be some savings from the retired aircraft, but remember our depreciation at Express is going up because we shortened the lives on the ones that we did not retire.

So they should about offset each other for the year.

You're going to get a significant improvement as we continue with this fleet modernization program.

This is a very big part of achieving double-digit margins at Express.

As to the product launches, let me comment on this briefly and then ask Dave Bronczek and Mike Glenn to weigh in on it because we've mentioned this over the last couple of years.

This is a very big strategic issue in what's going on in the, quote -- air cargo market -- end quote, defined in the broadest sense.

And the segments, as I said earlier, are the Express and the traditional door-to-door commodity air freight.

The important thing at FedEx in terms of product launches is that we benefit from our scale.

We have 100 long-range wide body airplane.

So our ability to put up additional capacity for those episodial launches is much easier than it is if you're a smaller carrier, and that's going to continue I think for some period of time.

Mike?

Dave?

Let me just comment that I think the product launch decisions move much further up the supply chain than just looking at the transportation.

Clearly, when there is more flexibility on the manufacturing side, there's certain companies that want to use forward deployment models.

When the schedules are much tighter, obviously they use more Express type models.

So the same customer for one product launch might use one model and then use a different model the next product launch simply because of activities going on much further up the supply chain.

So the good news for us is we have the flexibility to work with these customers regardless of the model they elect to go with and that's what we've been doing.

Let me just add, this is right in the wheel house strength of FedEx Express.

When customers move into the interior of China, for example, we're right there with them.

And with 777 aircraft now we can fly nonstop to Europe, nonstop back into the United States hubs.

We have two hours to sometimes three hours later pickups which is very significant for these customers and get the earliest delivery with our first overnight you can get it by 8 am.

So it's right in the strength in the wheelhouse of FedEx Express.

Chris Ceraso, Credit Suisse.

I have a question about the domestic Express business.

Do you see that business as being past the point of maturity and now into a decline phase?

And if so, what do you think that means for the potential margin in Express?

Do you still think you can get to double digits at some point and how do you do that?

I think that's a difficult question to answer at this stage, largely because of the moderate economic activity that we're seeing.

If we were seeing more trend-like economic growth, I think obviously the domestic Express business would benefit.

Having said that, we manage the organization as a portfolio, and we're constantly working with customers to make sure we're putting the right product in the right network.

But clearly, I think once we see more trend-like economic growth, that will be an easier question to call.

This is Dave Bronczek again.

At Express, we look at this as a global business for Express.

The United States is just one more region of the world.

So as the regions develop offshore and as the growth continues in the higher yielding IP products and so forth, the combination of all of it including our cost decisions in the United States and our growth decisions in international -- yes, we see Express into double digit margins all up collectively.

I think it's important to focus on the longer term strategy which we've mentioned several times over the years, but let me just reiterate it.

Our portfolio of our operating companies was put together to complement or execute, I guess would be a better way, this strategy.

And that was to produce at FedEx Ground the market leading, fastest, and most efficient ground parcel company, and we have largely done that.

It is a formidable competitor now in the marketplace and the results show that.

For many years now, we have felt that the Express market was a global market.

Many of the products that 10 years ago we might have moved in the, quote -- domestic Express market -- are now moving internationally from a foreign origin point to a domestic location or between emerging markets.

So our strategy was to increase substantially the international revenues of Express, and as Dave mentioned, the United States is just one -- an important and a big one, but one node on that international network.

The only thing that's basically changed in our strategy is that because of the policy decisions around the world, international growth has been lower than we had anticipated.

And some of the customers in the international marketplace not dissimilar to FedEx Freight or for that matter FedEx Ground with its FedEx SmartPost service, they opt in times of low growth for the more economical, slower service, and we've seen a significant growth in the Express segment in the international economy packaged service, international economy Freight service, and international economy distribution service.

So Dave Bronczek and his team are right-sizing Express and modernizing Express to meet the revised outlook for global growth, but we are firmly convinced that we can get Express to double-digit margins because of the significant contribution levels of the international traffic as it moves through the network regardless of its origin and destination.

Put a different way, again, I think it's unfortunate to some degree that we have to report domestic and international in Express because we don't look at it that way.

It's one network.

We haven't added a pound of, quote -- domestic air lift capacity -- in years.

The capacity in the United States is driven by the movement of intercontinental traffic that's moving through the network to and from the hubs and on to an international destination or from an international destination to a US destination -- from an international origin to a US destination.

So I hope I've clarified that again.

It's very important to understand that we're quite confident that given any sort of growth rates in the international marketplace, that we can achieve those goals for Express, as Alan Graf said a little earlier, on a two-thirds/one-third basis.

Peter Nesvold, Jefferies.

I have a longer-term question for Fred.

Fred, I've heard you speak a few times in the past about how ocean freight is becoming more of a competitive substitute to international air freight.

In the past, when FedEx has made really big bets or big calls like that, you've acquired something.

And sort of Asia comes to mind, the Ground business comes to mind, LTL.

When you look at FedEx Trade Networks today, do you feel that you have sufficient capacity in that business in order to really capitalize on this bigger and longer-term trend?

Or do you need to do something strategically bolt-on perhaps an ocean freight, in order to really capitalize on this long-term trend?

Thanks.

Fortunately, we're in the position that we don't have to make any acquisitions in any sector.

We have selectively made some great bolt-on acquisitions.

We've got a great corporate development group.

Alan and I both have described to you the criteria we use for acquisitions.

We'll do so again in October, but we're very disciplined in that regard.

But to go down the list again, we just have a wonderful Company in the United Kingdom we bought several years ago.

We've got a great team down in Mexico that we acquired through an acquisition.

We made two terrific acquisitions that fit like a glove in Europe we think, with TATEX in France to be closed here shortly and Opek which was just closed.

We have a great Company in Brazil.

We've had a long-term relationship.

Now in the sea freight area, we have got a wonderful team that's headed by Fred Schardt, and Fred works for Mike Ducker and Dave Bronczek.

And I think the deployment of FedEx Trade Networks over the last few years has been one of our great success stories that I'm not sure has gotten the recognition that it should.

But they are a formidable competitor that's achieved scale, very quickly, and Dave you may want to comment on that because it's growing at very rapid levels.

Well, it really is, Fred.

And we're seeing the combination of that great team that Fred Schardt has in place not only in Asia, but around the world.

And we're capitalizing on that with our tremendous international global powerhouse where we're gaining customers in that bundle almost weekly now.

So we think that there's a big opportunity to leverage exactly your question, Peter, and the strength of that network going forward, but if there's opportunities in the future, we'll always take a look at them.

But right now we're very confident that we'll continue to grow and grow profitably there.

But you're exactly right.

Sea freight has gotten a lot better over the last few years and you're seeing more daily sailings.

You're seeing better reliability from the container carriers.

The information systems are much better and right at the top of the list is the information system we developed for FedEx Trade Networks.

It's got that high quality FedEx IT capabilities.

The customers love it and that's why we're closing a lot of that business.

And of course on the US side, in particular, the FTN product and the more economy-minded shipping or the lower value per pound shipping fits like a hand in a glove into FedEx Freight and FedEx Ground.

So we have a compelling value proposition there and there's no requirement to make an acquisition.

Obviously, we're always looking for opportunities, but we have no requirement to make an acquisition to be successful in a that area.

But think it is a high growth area and a high ROIC sector.

And that's one of the reasons that Alan and I both continue to say we're confident we can improve our returns on a go-forward basis, is in part because of the FTN activity.

David Vernon, Sanford Bernstein.

So we're hearing a lot about demand for economy types of services in the international market.

And that seems to be a little bit at odds with some of the investments you're making operationally to do a lot of the nonstop flying from Asia.

Is that something you guys are looking at as part of the broader restructuring or is that an investment that you think is still going to pay off from a service perspective?

Let me mention a couple things and ask for Dave to weigh in here.

Two or three years ago our strategy was built around adding 777s as fast as possible into the international marketplace and pushing our MD-11s into the domestic marketplace.

The way the market has evolved and given the opportunity to do a mutually attractive transaction with Boeing on the 767s, what we've done is to acquire 767s which are very efficient relative to the MD-10s and very accretive to Express' earnings and to continue to move the MD-11s into the -- or use the MD-11s into the international system.

And the 777 nonstop flights are flown in those markets that need the IP service and the terrific improvement in cut-off times you get from nonstop service.

And we're doing more of that this year.

But the MD-11 is still a very good airplane, particularly when you come off of Asia and go over our Anchorage hub, you don't need the 6,000 nautical mile range.

So we've adjusted to what the customers want.

And we, just like in Freight, have two flavors of ice cream, the Priority, which is best-in-class, and then the Economy, which is terrific as well.

And what you're talking about is the Priority service is late cut-off times, next morning delivery to every address in the United States, and the economy service is a day or two longer to any address in the United States.

So they're both terrific services and the 777s do the former without equal, and the MD-11 is a good work horse for the international.

So that's what's changed is 767s replacing MD-10s in the domestic business rather than MD-11s, and the MD-11s staying in the international marketplace where they're perfectly adequate for moving the International Economy product line.

I hope I -- Dave, you want to add anything?

Fred said it exactly right.

You're going to see a nice overview of this discussion in October.

We're very excited about it because the MD-11s are a perfect airplane for what David, or I think the questioner asked us about for that deferred traffic in international, the super express freighters on the 777s are perfect for a lot of the high tech sector and a lot of those customers that want overnight.

So we have -- beyond what we're going to talk in the United States in October, we're going to talk about our whole international overview and we're very excited about that opportunity because we think we have a lot of leverage there.

We think we'll make a lot of profits there.

And we have a lot of opportunity to grow there.

So we're going to be showing you that as well in October.

And that is all the time that we have for our question-and-answer session today.

At this time, I would like to turn the conference back over to Mickey Foster for any additional or closing remarks.

Thank you for your participation in the FedEx Corporation fourth quarter earnings release conference call today.

We look forward to seeing you at our investor meeting here in Memphis on October 9 and 10.

Please feel free to call anyone on the investor relations team if you have additional questions about FedEx.

Thank you.

Thank you.

That does conclude today's teleconference.

We do thank you all for your participation.