聯邦快遞 (FDX) 2002 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the FedEx Corporation second quarter earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Jim Clippard. Sir, the floor is yours.

Thank you [Henry] and good morning ladies and gentlemen and welcome to the FedEx corporation second quarter earnings conference call. I am Jim Clippard, Vice President, Investor relations at FedEx Corporation. The earning release in stat is on our webpage www.FedEx.com. This call is being broadcast from our website and will be available for approximately two weeks. Joining us on the call today are members of the media and keeping with our fair disclosure policy, market professionals who have questions regarding financial and operating performance should ask them during this conference call, rather than in follow-up calls with our Investor Relations Department. If you have followup questions on subjects that are not covered on this call, please e-mail them to us at IR at www.FedEx.com. Also we urge to visit often the investor relations section of our website at FedEx.com to stay on rest of information regarding FedEx. Our website includes certain financial and operating data including our staff growth and we will provide notice of upcoming conference calls and other events of interest to the investors. I want to remind all listeners at FedEx corporation desires to take advantage of the safe harbor provisions of the Private Securities And Litigation Reform Act. Certain statements made by us during this call may be considered forward-looking statements, such as statements relating to management's views with respect to future events and financial performance. Such forward-looking statements are subject to risks, uncertainties, and other factors, which can cause actual results to differ materially from the historical experience will address future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to any impact on the companies business resulting from the events that occurred on September 11, 2001 as well as general economic and competitive conditions in the markets we serve, matching capacity to volume levels, and other factors which can be found in FedEx Corporation and its subsidy areas press releases and filings with the SEC.

Joining us on the call today are Alan B. Graf, Jr executive Vice President and chief financial office, T. Michael Glenn Executive Vice President of Market Development and Corporate Communications, Robert B. Carter Executive Vice President and Chief Information Officer, David J. Bronczek President and CEO of FedEx Express, Daniel J. Sullivan President of CEO of FedEx Ground, and Douglas G. Duncan President of CEO of FedEx Freight. I will turn the floor over to Alan and after Alan's remarks, we will have time for Q&A. At this time, I will turn it over to you Alan.

ALAN B. GRAF, JR: Thank you very much Jim and welcome everyone to the FedEx corporation second quarter fiscal year 2002 earnings call. We had a truly outstanding quarter. Our earnings were even in excess of our own expectations that we gave you on October 29, 2001. And it is really related to outstanding performance at Ground, higher than anticipated revenues from the United States postal service transportation agreement, lower fuel expense, and a state tax settlement at Express. Versus last year our earnings improved due to significantly lower variable compensation approvals, lower fuel costs, much better ground performance, the American Freightways acquisition, and solid earnings at FedEx Freight, and government assistance. Ground was truly a star in the quarter with volumes up an 11% and the expectation for a 16% growth in quarter three. Yields were also up 5% at Ground, operating income was 80 million verus 57 million the previous year and the margin was a whopping 11.8%. Freights operating income was 47 million on a revenue of 487 million for 9.8% margin, which is very strong performance versus all of its competition and certainly in the soft economic environment.

Just to make sure that everyone understands the results very clearly. The $0.81 we reported did include 116 million that we accrued under the Airline Stabilization Act. That was a accounted for $0.24 of earnings. So was out that, payment and approvals that would have had at $0.57 earnings per share. First call was at $0.64 and included $0.20 of earnings per share for the airline stabilization payment in accrual or a $0.44 comparison. So in our view we significantly outperformed our own forecast in what the first call had. I will come back to the $116 million in a minute. Looking ahead, we are fairly confident about the second half of the year. We have given you a range in the second half in total, which has $0.95 on the bottom end and as of this morning, first call expectation for the second half with $0.96. I have split the quarters up for you a little bit because we have some timing issues with some maintenance in the quarter three and we have given you some $0.25-0.35 cent range there. We are expecting continued strong expense management across all of our operating companies. We will have continued excellent growth and profit at Ground. The postal contract will continue to provide us earnings that we do not have in the previous year and we will continue to benefit from lower capital expenditures and the associated ownership charges. In quarter three, we still have a very fuzzy crystal ball. We are expecting very low volumes in the last week of December as we expect many operations to be completely shutdown and serving more of this year than last year. We will have the same favorable fuel and salaries and wages comparison in Q3 versus last year that we did in Q2, and as I mentioned earlier, we probably will have some timing issues with some maintenance costs in the third quarter.

Volumes will still be below the previous year at Express although, the trends there are improving, and in fact we expect to get back to a growth mode late in the fourth quarter and Express in our domestic operations. It is also very difficult engage the seasonality this year due to the state of the economy and of course, weather is always a factor in Q3. In any event, we are extremely well positioned for any economic upturn, and as I said before, the comparisons of Express are going to continue to improve on a year-over-year growth basis. How fast they improve is of course, due to a large degree in the economy recovering at a faster pace than has been so far true to date. Addressing some questions, I know that you have about the $160 million that we have accrued under the Airline Stabilization Act. We have actually received $101 million of cash. The assistance is largely resolved of lost profits on foregone revenues that occurred as a result of the 09/11/01 tragedy. Much of that occurred immediately after 09/11/01 and much of it is attributable to the month of September. To give you a little bit about the concept of what happened with our volume trends. Back at the end of the first quarter in August at Express, our domestic volume was down 6.4% year-over-year and in September, it was down 14.7%. Our yields also declined $0.15 per package in September versus August on a year-over-year basis and that was a significant hitch to our revenue stream. Of course, our airline was completely shutdown and there are expenses associated with shutting down and restarting an airline and magnitude of ours on a global basis. We also saw similar impacts with our IP product, which had significantly greater declines than we had anticipated in September. We will have an additional accrual in December, but we do not expect that to be it all significant in the third quarter. One other point is related to the network expansion fee that we received from the United States postal service. That is not one time good news and in fact we had incurred expenses on a one-time basis to start up our contract with the postal service equal to the amount we booked from the postal service for that. So that was not a one-time good news item it was a complete wash in the quarter.

So all in all again we had an out standing second quarter, we are confident about the second half, third quarter due to our normal seasonality and some timing issues, we are not at clear on but will be managing through that and expect to be in virtue of exit point in Q4 and fiscal 2003. And with that Jim, I would like to open it for Q&A.

Okay [Henry], I want you to instruct the delegation as to Q&A.

Thank you sir. The floor is now open for questions. If you do have a question or comments, you may press 1 followed by 4 on your touchtone phone. If you are in a speakerphone, we do ask you please pickup your handset to minimize any background noise. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again, ladies and gentlemen, if you do have a question or comments, you may press 1 followed by 4 on your touchtone phones at this time. Our first question or comment is coming from Gary Yablon of Credit Suisse First Boston.

Good morning gentlemen and happy holidays.

Good morning Gary.

Two quick ones, if I could. Alan, as it relates to the ground business in terms of margin and revenue margin, it is better than you would have thought three months ago. Could you tell us a little bit about what is going on in the market place and if you look at into fiscal third quarter on the 16% revenue growth, could you give you some color on how much is the expansion you are seeing, a little bit of economy and little bit of market share. How is that kind of part taking out? ALAN B. GRAF, JR: Thanks for the question Gary I am going to turn that over to Daniel Sullivan and I think he can give you terrific answers there.

Okay Gary, good morning. Good morning everyone. I think going forward here is that our growth is just for is really for many reasons and the trend that we are seeing over the last quarter we expect to continue to add customers at home delivery, so our year-over-year comparable will be excellent there. We are still seeing good growth in our small and medium size customer segment than in our overnight Ground segment as well. So I don't think we are getting a great lift from the economy. I do think that we are taking market share though and we are moving ahead as we announce we expect to grow 16% in the second half. I think some of that too is because of last years comparable, we did not have a great December and January last year so we really should look better when compared to that. So overall we are doing well. We had a good peak season to this point both on the Ground and I think we said in the release half our growth is attributable to the home delivery incremental volume.

ALAN B. GRAF, JR: There is also terrific productivity that we are seeing as a result of this very high growth rate and our expenses have performed exceedingly well at Ground and I will ask Mike Glenn to comment a little bit on the power of the FedEx brand.

Gary I am just would add that when we put our sales forces together, one of the things that we anticipated would be that we would a lift obviously because we are making sales calls, introducing our service to more customers, and they have responded extremely well, especially in the small and mid type customer segment to a Ground service kind of FedEx brand. So clearly we have leveraged the expansion of home delivery to introduce new customers who had somewhat of an issue with a smaller coverage area. We have now essentially addressed that and we will continue to expand coverage over the course of the next year and certainly we are going to leverage that from a selling point of view as well. But the customer response to our Ground service has been tremendous.

Is the incremental margin more on the cost management side than on rate increases or is it as little low. ALAN B. GRAF, JR: Well, it is both. We are stimulating our yield with obviously more small and medium size customers and obviously with the home expansion, and we are also gaining productivity and performing, I think, very well particularly in the home area, Dan, do you want to add to that.

I think you are right Alan. The year-over-year improvement is pretty much divided between profit from incremental growth, improved yields and really tremendous productivity improvement in the key operating units such as P&D, One-in-all, and on our docks so it is pretty solid. ALAN B. GRAF, JR: We are still observing home delivery loss slightly lower this year than last year in about the $9 million range. So the opportunity for actual margin expansion once we get the home rule out complete and think to move that towards black is also still there for Ground.

Alan that 9, is that for a quarter or for the year. ALAN B. GRAF, JR: That is for quarter.

All right thanks a lot. ALAN B. GRAF, JR: Thanks Gary.

Thank you. The next question or comment is coming from Donald Broughton of A.G. Edwards.

Good morning gentlemen. ALAN B. GRAF, JR: Hi. Good morning.

Tell me, I know looking at the past notes, you were looking at about an additional three million pounds a day from the post office contract of equity envelope map gives me about 3.8 million, so am I right to exactly grew about 25-30% ahead of expectations. ALAN B. GRAF, JR: Let me address that now rather than later. Postal service has in fact has been exceeding its minimums and we have agreed to an addendum with the postal service with the transportation agreement that went into effect in August and we are accepting additional volume of priority mail in first call mail through the FedEx Express day operation. That addendum is effective for ten months beginning January 1, 2002. It is the same airport-to-airport service that was in the scope of the initial contract, although the postal service will receive a more favorable pricing during this ten-month period for volume in excess of the minimums than required in the original agreement. We have been transporting volumes in excess of the minimums at the request of the postal service since September 2001. So, I think we will have, at least for ten months, higher volumes with the postal service than we had originally announced the transaction.

Is your addendum changed in anyway the requirements to give you a rolling forecast. ALAN B. GRAF, JR: No.

One more quick question and then I will let every one else have a chance. Loss at home I know the home delivery business continues to loose money, can you give us an idea of what the loss was for the quarter and what the operating margin of Ground would like without that loss. ALAN B. GRAF, JR: Well, it lost 9 million in the quarter, I think, that is versus 10 million the previous year. Obviously, we are on a much higher base now, but we are absorbing the expansion and the expansion is now, as you cover the last parts of the geography of the US, are little bit more difficult and obviously require significant investment and have nil packages when we open a month and we will have another expansion this February or we get to about 90% and then next September we will finish out. So it will be difficult to get us to the black until we get that expansion complete.

Sure, thanks, again great job gentlemen. ALAN B. GRAF, JR: Thank you very much.

Our next question or comment is coming from Daniel McKinley of McDonald investments.

I was wondering if you could talk little bit more about the US postal service fee and how is it accounted for and may be, give us an little more geographic flavor on some of the international volumes. ALAN B. GRAF, JR: Well, I will let Dan talk about the international volumes. On the expansion fee, it is just suffice to say that it is a fee that we negotiated with the postal service to cover our start up cost and that simply that we are not making a profit on it, we are simply incurring mostly pilot pay and pilot training expenses to fly these additional pounds on a startup basis and the postal service has agreed to pay us with that so there is no negative impact to the quarter because our expenses were covered by the network expansion team. As to the international I want Dan talk about that.

Before you get on to that on the US postal service fee, is that a reverse, A contra expense reduction and would show up another. ALAN B. GRAF, JR: It is a contra expense and it would be in "Others."

And can you put rough parameters around the size of it. ALAN B. GRAF, JR: Well we really like to talk about individual components, but it is again, relative to size and scope of the company it is not much money.

Great thank you. On the international side,.

The question on the international Express or obviously the postal revenues is all US based.

Which is I was trying to get to the in for the price resource.

We have continued very strong growth year-over-year in Europe. We are about 131/2-14% continuing strong growth there; we are seeing some recovery in the Asia-pacific. We are happy about that. Of course, this is their peak season, but peak over peak we have improved over the last quarter. We are still a little bit slightly negative year-over-year and of course, as we have reported in our release it is still about 6% of year-over-year and total international volumes.

How about the yield in currency

Our yields are holding up well with the exception of some currency in Asia and Europe.

Thank you.

Our next question or comment is coming from Jim Winchester of Lazard Freres.

Yes Good morning. Could you give us an update on your capital expenditure budget for the balance of this year and next year and any adjustments or changes you anticipate in that. ALAN B. GRAF, JR: Well, I think it has been one of the strong points of this company. We have loaded our capital expenditures every year since fiscal 1998. To take you all the way back to fiscal 1998, Express alone spent about two and a quarter billion on expanding this network. Last year fiscal 2001, we spent about a $1.9 billion in total for Express services, Ground, and Freight, and this year we intend to be below that. So while our cash flows are improving our capital expenditure are declining. It is the number one objective of the company is to get strong cash flow positive and despite the economic environment, we are going to do that. We were about a 150 million cash flow positive in the first half of the year.

Okay, could you comment as well on what you anticipate the outlay to be under the US postal service roll out. ALAN B. GRAF, JR: I am not sure I understand that question.

In terms of the your total capital expenditure on the US postal service. ALAN B. GRAF, JR: I am sorry I misunderstood you. There are really, because we have such excess capacity on our day turn we are just simply flying the assets that we already have more and double turning them so there is very little additional capital required to handle the postal service contract.

That is great. Thank you very much.

Thank you. Our next question or comment is coming in from Ed Wolfe of Bear Stearns

Yeah. Hi good morning Alan. Can you give us some guidance on the postal in terms what the revenue and the operating income was like in the quarter? ALAN B. GRAF, JR: I don't think we want to go there, Ed. It is suffice to say that we were earning a very nice margin on that. I think if you look at the domestic Freight year-over-year numbers, the majority of that is explained by the postal service contract. It is difficult to say exactly what we are going to get from them going forward. I think as you yourself pointed out this morning, they have some other operators who may or may not be operating and how they are going to decide how to move some of that. I don't know, but as we announced initially, the transportation agreement goes for seven years and it is little over $7 billion and now that this addendum is going to increase over that.

Just I understood the addendum right. So starting in January, I guess you have already started even though it becomes official in January you think extra volume, which you give him at overall volume discount including the existing part of that contract? ALAN B. GRAF, JR: No only on the incremental volume, do they get a discount. The basic trend transportation agreement stays the same.

Okay that is a good clarification. ALAN B. GRAF, JR: Yes Thank you for asking.

Dave, on the international volumes I though you said Europe was up 12-13%, Asia was down slightly yet the total pie is down to about 6%, that doesn't seem they add to me what am I missing there?

The biggest problem is US outbound.

Yes that is right.

You know as you can imagine what the economic environment, as it is that US outbound was down double digits year-over-year.

And then, just following upon Gary's original question, your guidance for FedEx Ground going from 7.5% in this quarter up to 16% for the next quarter, that is a big job. Dan alluded to weak comparisons in January and February a year ago, but I am guessing, there is also some customers you signed recently and or your seeing some diversion may in front of a potential exploration of the UPS contract, can you discuss those issues. ALAN B. GRAF, JR: I will tackle the issue regarding the source of volume. The source of volume is customers that we are talking to that bagged the proposition we are putting on the table. We are not in discussions regarding any issues that our competitor may have on a labor front that has not come into the equation, and you know, that is not what we are selling we are selling a strong value of acquisition that meets the needs of our customers and they are responding well to that.

Clearly, what you are selling, I am just trying to say your guidance sequentially is up 45% and I am trying to understand, I am guessing you have some good visibility. So the customers are telling you they are signing up, there is new customers, is that is fair to say or it is existing customers. ALAN B. GRAF, JR: That is fair to say new customers. Dan, could you also talk a little about the improved reliability and how outstanding that is.

Our part time service performance has improved to about the 98% level and we expect that to continue upward as well. We think we have made tremendous improvements on the quality side as well in terms of loss and damage, so the overall service proposition that we are selling now in the market place, I think, could bring us continuous improvement over the past, let us say, three years. So I think our sales force are selling with a lot of confidence and our customer base is buying. I don't think there are lot of sequence to this, we expect again, as I said, the home delivery volume to continue to grow, last year, which were relatively new in the market place and it wasn't significant at all. It is really becoming that. So I think that if we stay on the same trends that we are on today even taking into account finality that is based on the comparables we should be at the market we put in the release that is 16%. So again it is not real magic here. We are not going to see some big up spurt in where we are in today. I think we will follow our seasonal trends, but they should be strong year-over-year.

Dan when do you think that minus 9 million of operating income from delivery breaks even.

Little bit that Alan

I was hoping that you have new point on it. ALAN B. GRAF, JR: We are going to negotiate our 2003 budget on this call, but I am going to feel very comfortable about once we get the expansion complete about making a great run to the breakeven there after and obviously turn into profitable. Lot of leverage in that business, we have seen a lot of improvement in our productivity, it is a fantastic service whose reliability has improved dramatically since we first started this, so I am very excited about sooner rather than later.

When should the expansion be complete ALAN B. GRAF, JR: Next September. Actually, I want to make one more point I make sure you understand from a sale strategy point of view our strategy all along has been to expand dramatically the customer base that is using our Ground service and we are seeing increasing trends almost on a weekly basis on new accounts coming in to the call that are taking advantage of broader portfolio at FedEx services. So it is working just as we had planned and in combination of home expansion and new accounts coming in an increasing rate as yielding the kind of results that we are looking for.

That makes sense. Just one last thing and then I will pass with the time, can you talk a little bit about sequentially through the quarter and in December how the domestic and international volumes at the various products are tracking? ALAN B. GRAF, JR: Each month got better. We, you know, as I mentioned in September in the domestic we were down 14.7, in October it was down around 10, November improved, and I expect the December to improve a little bit and we have given you what we think is going to be. I have also said that I think that Express domestic will be back on a growth plan at the end of the fourth quarter going into 2003 or flat, and that is what in our current earnings guidance that we have given you. So obviously the comparisons get a little bit easier, we also expect the economy to get a little bit better particularly in the second calendar quarter of 2002. So once Express gets back on a growth plan with a great expense management that we have gone and with the destruction and in fact down sizing of that network and there is an awful lot of financial leverage in there from we see the economy back on it fee.

What kind of economy are you assuming in calendar second quarter 2002? ALAN B. GRAF, JR: We would expect that there would be some growth on a quarter-over-quarter basis from the first quarter. The first quarter we expect to be negative versus the fourth quarter.

Okay thanks a lot for the time.

Thank you. Our next question or comment is coming from [Mardi Besko] of US Banc Corp.

Can you help to quantify the increased use for the online Express service and also the improvement in selling two smaller medium sized customers? ALAN B. GRAF, JR: We are not getting into the specifics. I would just say that since we launched the www.FedEx.com and the online savings program we have seen the volume going through the site almost double, so its is doing extremely well ... our customers are responding to it. It is becoming the preferred way of interacting with FedEx in our small customer segment, which is exactly what we want it to do. We wanted to see channel migration out of our call center environment which is a lower cost transaction for us and it adds value to the customer we are seeing success there and we are also seeing incremental volume. So we are pleased across the board with how www.FedEx.com is performing for us and clearly with over 2 million unique visitors accessing www.FedEx.com each month it is a tremendous asset for a company.

I should also add we now our www.FedEx.com is available in 14 languages and is processing a million package-tracking request per day. So that is incredible about the size and scope of the www.FedEx.com, which is a great tool for us and for our customers.

The only thing I would like to add is that our whole ray of automation tools that we provide our customers both FedEx.com and the other tools ... the software only tool that we have the automation platforms and servers that we provide our customers are doing a great job. They have all been updated to provide the full array of the services for our company and really I think are meeting the needs for our customers.

And also could you discuss the operating loss in the other revenue section? ALAN B. GRAF, JR: Well, I guess, it is a little confusing when we get into other because in the previous year Viking was in other this year it is not. There are some corporate expenses that get booked into the other and then they get allocated out in the next quarter due to the timing of operating company closes and the corporate close. So there is really nothing of any materiality that there is inside at the Viking profitability and revenue is out from the previous year and there are some corporate expenses in there, but nothing that is of a material in nature.

Okay right Thank you.

Thank you. Our next question or comment is coming from Scott Flower of Salomon Smith Barney.

Good morning Alan. I wondered if you might help us when we look at the variable compensation will you actually be having incremental accruals to catch up the first half now that obviously this quarter was good and your outlook is a little clear and positive to the second half I am just trying to get a sense of and I understand it will be in your guidance ... are you actually getting some accruals or catch up from the first half where it perhaps that was not being accrued on variable compensation as we look at 3Q and 4Q. ALAN B. GRAF, JR: Scott that is a very good question. I am surprised to say that with our current earnings guidance we have assumed a significantly lower amount of variable compensation for fiscal 2002 in whole versus fiscal 2001 and fiscal 2001 was significantly below fiscal 2000. So if the economy were to boom I am going to ball these numbers through the roof, we would not only beat the numbers that I have given you, but we will also add to our accruals. We use variable compensation the way it is supposed to be used and that is when things are good and the shareholders are being rewarded so is management and when the economic times are tough we reduced our bonus levels and in fact it made very little accrual at all for bonuses at Express services in headquarters very little and anticipate may be some but certainly not to the levels of the previous years at this point

Okay and then in terms of the expense control and I know that this may relate to the services piece, but the inter company line item sequentially was lower. Could you help us a little bit about what thing are going on in terms of the inter company allocations that in terms of the cost control with respect to what gets allocated to the unit is helping to drive that lower because it obviously shows up it Ground it shows at Express obviously it is good cost control, but I was wondering if you might be able to elaborate a little bit on that. ALAN B. GRAF, JR: Sure absolutely. I mean we have a very strong focus on making sure that whatever we do at headquarters or at services is value added for the operating companies and it is providing them a return. The operating companies have a large say on what they once might spend on and what they don't want money spend on. We have reduced our headcount obviously as I mentioned earlier with the lot of variable compensation there are very little accruals for any of those people at this point, but one thing we have not done Scott is that we have not reduced our sales, marketing, advertising and promotion. We have stuck with that. We think that is the right thing to do and we believe that is actually paying off right now in a big way. So it is largely the result of very solid expense management and restrain and only doing very high immediate return project.

And then just two very last very quick ones. Despite the volumes being lower I noticed that this may be a net that fuel consumption at Express is up something for the tune of 10% and I guess those two items to me wouldn't seem like they are going together ... obviously I know that you tried to manage the network down with volumes and yet consumption was up something to the tune of 10% and I am just trying to better understand that relationship.

ALAN B. GRAF, JR: It is all those postal service pounds are flat in the day.

Okay. I mean wouldn't those be on air crafted in large parts for operating or not. ALAN B. GRAF, JR: We have not directly directed the way. So, it works out on millions of pounds a day of additional weight through the network and that increases the fuel burn.

Got it. And the last question I will let some one else to have it. In terms of what you might have seen initially is incremental from the postal service as well as going forward and at some point it have relationship to the fact the FAA is now restricting first class mails to only one pounds in less that billing space and obviously there is some ridge that the postal service is now determining different alternatives to move and obviously year wonder a good alternative.

I think that this is probably correct. I also think that some of the capacity has shrunk in the commercial networks here in the United States. So we are picking up extra pounds in a lot of lanes. ALAN B. GRAF, JR: Let me also just say Scott that the service at FedEx has given the postal service ... it is incredibly more reliable and most efficient than what they had in the past, it is saving them millions and millions of dollars and that develops a great working relationship between the teams there. So it is a terrific value for them too.

Great. Thank you.

Our next question or comment is coming from [Steve Jacobs] of USA Bank Corp Piper.

Hi good morning. It is USA Bank Corp Piper Jaffray. Good morning Alan, how are you doing? ALAN B. GRAF, JR: Good Morning. We are pretty happy.

Good you should be. See I have two quick questions. On the Freight side on trailing 12 I have calculated roughly the margin at 8.4% and EBITDA margin at 12.9 using the last four quarters. Going forward on that could you comment on where do you think these margins are moving to or what your goals might be? ALAN B. GRAF, JR: Well I will let Douglas Duncan talk about his company and the job that he has done, but again I want to ... before turning it over to Douglas ... I think we are the market leader now on LPL you know it is a great addition to the our portfolio or services you know we are getting cross selling between Express, Ground, and Freight and have done a great job of managing. The American Freightways acquisition has been terrific. It has exceeded my expectation. It has been very accreted and even in this very tough market its performance has been outstanding. I will let Douglas take the ball.

Yeah. Good Morning. I really like to focus on the last two quarters because that is when we had the FedEx network together and reporting that in and both of those quarters have been just short of 10% margins, which I think in our business is exceptional. We did have some soft volumes to deal with this time this quarter and I think we did a phenomenonal job of anticipating that and managing our cost to that. I think we have done a very good job of maintaining and improving yields even with the lower volumes and I think that produces the profit margin that you are seeing.

Obviously I understand that going forward the last two quarters are going to be pretty indicative of the kind of margins you expect going forward then?

Well, we obviously are going to have the same cost control measures in place in the two quarters going forward. I would say that sequentially January and February are seasonally slow months for us.

Now Alan, the question on the home side, you made a comment that you will be starting to add more shippers, again in the first part of next year, so I am wondering if you can quantify that in anyway and then secondly, in terms of getting to 100% coverage by September of next year, how many more facilities or terminals do you need to open up?

Well, I will let Dan to take the second part, you have got specific outline that must be approved by the FedEx Ground board level, and Dan, do you want to take that second please?

Well, we will open up the 31 operations in February of 2002 and another 47 in September. So we are going to have 78 more operations. Most of those are in smaller markets and will be co-located with exciting ground facilities where we have capacity. We have a total amount of about 294 or 95 operations when we are complete to get to virtual 100% coverage, about half of those are co-located, and half of those are standalone businesses.

Okay.

Back to your first one. I don't know if we don't want to talk about the specific customers and other than what we introduced or we have already said, which is, we are expanding the home delivery option, it has got great reliability and tremendous value and we have got a lot of customers who are very excited about this.

Okay. Thank you very much.

Thank you. Our next question and comment is coming from Greg Burns of J. P. Morgan.

Hi guys. Just a quick question, may be for Dan on the ground. It sounds like you guys are happy with the ground service improvement, handling procedures etc ... does this expansion of service and better handling etc ... does this give your customers, some of your air customers more opportunity to transfer volume to the ground operation and do you think in effect you are cannibalizing some of your higher price products by essentially improving the ground product?

I think, that we have been able to provide high levels of service does give customers confidence to divert some volume, but at this point, that diversion has been really nonmaterial. We have seen some of it, where customers want to buy down in the market place, because of cost reasons, but we don't think that is terribly widespread at this point. But certainly those that want to make the move I don't think have been disappointed.

Let me add to that. I know my ground well as well as Dan. Dan's team and our team and of course the sales folks with Mike worked hand-in-hand in walking over some of the accounts that obviously were lower operating profit margins for express and much better for ground and that's worked very well, I mean the transitions have been good, the IT crossovers have been good, and I think the customers in the main are very pleased.

I now would say in any general economic downturn you are going to see more of this type of activity where the customers are putting their own cost savings measures in place. But I don't think it has been out of the ordinary in terms of what we would say and I think there are some wonderful things for FedEx corporation today, that we have an alternative for the customers to use inside our network, which has been the case in the past economic downturn. So, we believe we are positioned very well to deal with them and leverage the broad portfolio of services that we have to meet the requirements what ever they may they.

Just I want to put one last fine point on to the extent that we are moving lower yielding less profitable traffic out of the Express network creates capacity in express networks for higher yielding more profitable traffic when the economy turns and that has been our objective ever since we did the caliber acquisition.

And just a pull up, I mean, it is clearly in the industry trend, budgets are under pressure and to the extend inventories are higher and customers may want to ships at lower transit times, but I just want to clarify this, is that your feeling Alan and Dan that essentially that option would have been much more challenging from a service perspective, say three four quarters ago and that the service gap has narrowed, so that it may be an easier decision ... is that fair?

This is Mike let me handle that. I would say not so much from a service point of view. Although, we are clearly seeing improvements in ground service that our customers have responded very well to, I think the bigger issue is our ability to address the automation issues that Rob Carter spoke of earlier to provide a full portfolio of services having a single phase or well trained sales organization as well as a customer service single point back just to our customers. So clearly after we are through with the key elements of our single point contact strategy for our customers we are very well positioned today to deal with this and much better than we were a year ago. But I do want to compliment the ground team. They have done and are doing a nice job of improving service as they continue to do improvement program in place and we expect that to continue.

Just one more point to put an explanation point on this, I guess that at Express, even though our traffic revenues are down, our operating profits are up 14%, and our margins are 8.1% up from 6.8 from a year ago in the second quarter. So we have done a good job of managing our costs in transitioning some of the right accounts over.

Right, certainly no argument on the cost control of this kind of economy, just on that subject followup Alan, can you just talk about what the volume looks like from a different shippers ... [_____] telecom financial, automotive ... are other sectors that are showing more strength, more signs of possible acceleration, others that may be lagging. Can you give us some flavor over there?

Well, [_____] is still you know significantly below what the levels were before we went into the economic malice, that we are in. At this point, we have not seen a pickup there. We certainly anticipate one, but again I think that is going to be driven by the economy as a whole. So back to my very original comments here, we are believing that the economy will stay in a negative growth mode in the first calendar quarter of 2002 and switch to a growth mode in the second calendar quarter and I think we will start seeing some pickup at that point.

In terms of the different sectors, there is no real disparity between the types of customers you have handled ... have some seen more declines or less of decline than others.

This is Mike. There has been no significant change over the last quarter in terms of what we are seeing over the key economic sectors.

Great, thanks a lot.

Thank you. You next question or comment is coming from Vincent Chin of Merrill Lynch.

Good morning gentlemen. Just quickly, operating margins are up nicely, but I am wondering but if the weak branding costs of all will come out and training costs of all will come out in the margins then may be perhaps give even further benefit in terms of margin expansion going forward from this cost coming out of the system.

There are still some cards, but they are not material anymore. We still are having some re-branding costs, but they were very diminished in the quarter and going forward you are right those will not be there any more. That factor ended the guidance I had given you for the next of the year.

Okay, and how about ... how is the drop of boxes going on in the post office. Can you give us some update on how those have been working out for you?

This is Dave again. We are very pleased. We have completed phase I. We have worked through with the post office and that is of course 5000 drop boxes in 5000 of the prime locations at the post office, and the volumes are at the end of the expectations. We are moving forward with phase II which is another 5000 and that will start on January 15.

Okay great. And with this type of the economy hoping for a rebound, can you comment a little about you going forward. What you think and where you think how rationale you will be?

Well the pricing environment remained rationale. Well are seeing in Express, in terms of yields, is related to the weight per package. We have been able to increase the yield per pound, which is a very important metric. And of course ground yields you have seen those that they perform very well during this period as well. So, you know it is expensive to run a global aviation network and we have to be compensated accordingly, and we continue to work very hard on that. But again the decline you are seeing a slight decline, you are seeing a yield at Express is totally related to weight per piece, which is again a phenomenon of the economic environment.

Okay great. Thanks gentlemen.

Thank you. Our next question or comment is coming from Helane Becker of Buckingham Research.

Thanks operator. Hi Alan ... just two questions. One to clarify, in terms of your productivity at ground, how many employees are dedicated in that operation now? I did not see it into your staff book ... I saw FTE for Express. I do not see a similar number for ground.

Dan?

You are talking about our total head count?

Yeah.

That is about 24,000 people now.

And how does that compare to last year?

About 8%, I believe, and most of that, and infact all of that really is at home delivery ... in terms of anything above the incremental volume.

I actually have a question about the Postal service Alan and I am sorry to ask, but I don't understand something. In terms of the incremental business, you really from day 1 you are carrying incremental business, because this contract as I recall started on August 31, and you know sort of the events of September 11, forced you to do higher volumes, why are you only pricing this on an incremental basis for the first 10 months of the year?

Well ...

Are you are assuming for volumes after October?

Lets go back to the original agreement, which was a seven-year agreement for over $7 billion of transportation revenue, which had a certain amount of pounds, that we committed to the postal service that is committed to us at a minimal level. Additional pounds that were tendered to us and had been tendered to us are now committed as opposed to just tendered to us, because we can manage it better and so can they. As we look at our cost structure and as they look at what their needs were, we had negotiations and we arrived at a price for only those incremental over the original minimum pounds and for only a 10-month period. Because we have the assets available and because we have the capacity in our day turn, that's fine with us. When we get to next October, we will see where we go from there, I mean, I am hopeful that they will continue to love the terrific service at a lower cost and better reliability than they can get from anyone else and we will extend that.

Okay, is this incremental volume do you think include a volume front, [_____] having shut down recently or is that all built into the original plan.

It is difficult to say. I think you have to talk to postal service about where they are diverting this volume from.

Okay, and my last question ... revenues from FedEx.com shoots up in Express, right?

Yes, that's correct. Well, it depends on what services, I think Rob can explain on FedEx.com.

Well, actually this is Rob Carter again. We actually have a pretty nice breakdown in the ground, international express, and domestic express being moved to FedEx.com. It is not all express ... there is certainly some ground and some home in there as well.

Okay, all right. Thanks for your help.

Okay.

Thank you. Your next question or comment is coming from [Mike Teazly of ABB&T].

Hi guys. Actually this is [AB&T], but congratulations on the quarter. Most of my questions have been asked. I have a couple of followups. Looking at ground and a terrific margin improvement in performance you are seeing in a last couple of quarters, where ultimately do you see the margin going, you know, may be long-term where would you like to see grounds margins and how fast, or when do you think you can get there?

Dan, are you there?

Do you want me to answer that?

Please.

I think that we should see continuous improvement in our margin's as we are to reduce the loss and the overall margin at home delivery. I think I have said in the past that that division is doing well. We are starting to show a positive margin on the incremental business and so, we should continue to improve that, obviously again, our margins on a quarter-by-quarter basis are cyclical depending on business levels, but I see no reason why we should not keep this up. We have had excellent productivity improvement again as we have mentioned, which is significantly helping in this quarter, and I expect that will continue as well. So, as the home delivery loss found their margin is positive we should we should see that accrue to the total of FedEx ground company.

Okay good. And Alan, real quickly go back on the postal service, I think in the past, you had guided us, kind of a revenue run rate of about $450 million for fiscal year 2002. Is that about the same run rate we are looking at now?

Now, we have just given you the total over the seven-year period.

Oh, you did expect the same run rate?

Again, I would just ... I would look at our FedEx express domestic freight numbers, the year-over-year increase is largely the postal service contract and that will give you some guidance as to this.

Okay, I think I heard no more government assistance benefits next quarter, is that right.

The airline stabilization act specifically only covers the period from September 11 through December 31.

Okay.

So, as I said most of our losses occurred in the month of September and while there may be some in December they will not be significant.

Okay and then just one more final house keeping point. What are the total numbers of drop boxes you have out there at the post offices now?

That's about 5000 at the post offices.

And you are looking for 5000 more rolling out in January?

Starting in January, yes.

Okay, great job in the quarter. Thanks.

Thank you very much.

Thank you. Your next question or comment is coming from Gordan Alliger with Goldman Sachs.

Yeah hi just a couple of quick questions. I don't recall serving indication on the groundside that the yield direction, which obviously continues to be very good ... would you expect that to continue, obviously the volumes look strong, just a question specifically on the yield direction.

I will be happy to handle that Alan.

Yes please Dan. Thank you.

I think that you should see that the yields will increase as we go forward through the rest of the fiscal year, we have the rate increase in January that will help that. We are starting to see as we grow home delivery some decline in the average weight per package that has pushed the yields down a bit. But, in general, it will be pretty good. We will lose the ... we are reducing our field surcharge in January as well that will have some impact on that. But, in total we should see it continue upwards for the next quarter or two.

Thank you. And just another question, obviously a good job on the cost side for this quarter. FedEx express, sort of, had a margin roughly at 8% or so and in that unit there was a tax thing in there. But by and large give or take around 8% in what has been a bad economy and difficult volume environment. Does that suggest sort of an ongoing normalized basis that is, sort of, a benchmark we could look at, and going forward once we normalize the economic growth with obviously the seasonality excluded.

Well, we need to get express to double-digit margins, that's the objective. That is not going to happen till we get back on a growth plan and that's not going to happen till the economy recovers, but those will happen. The most value added we can get right now was that we have got the ground and freight networks pretty rightly sized and they are managed very, very well, both expected to grow and we will grow those and making investments to grow those. On an incremental express packages, either domestic or international right now the highest value added thing we could do in terms of generating cash flow. So, we still are shooting for double- digit margins at express and we are very focused on that.

And just one thing to add to what Alan said. We had a year-over-year decline of about 6% on our US based variable and it is about 5000 people through attrition primarily. So, we have done a very good job in the quarter. It would have been better then that if we had not added several 1000 people for the US post office agreement.

Okay great. Thanks guys.

Thank you.

Are you hearing [Enrique].

Yes sir.

This is Jim. I think we have reached the point where I think we need to draw it to a close. Anybody else with questions can E-mail us on IR or give us a call. And ladies and gentlemen, thank you very much for being on the call today. We appreciate it and clearly on my part my staffs part we appreciate the help of everybody here in the room. Thanks again and we will see you in the next quarter. Bye, Bye.

Thank you ladies and gentlemen for your participation on today's FedEx corporation conference call. You may disconnect your lines at this time and have a wonderful day.