聯邦快遞 (FDX) 2002 Q3 法說會逐字稿

Good morning and welcome to the FedEx Corporation third quarter earnings 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.

on.

I would now like to hand the floor over to your host,

. Sir, the floor is yours.

Thank you,

, and good morning, ladies and gentlemen, and welcome to the FedEx Corporation third quarter earnings call. I'm (Jim Clippard), Vice President Investor Relations at FedEx Corporation.

The earnings release and stat book are on our Web page at Fedex.com. This call is being broadcast from our Web site and will be available for approximately two weeks.

Joining on the call today are members of the media.

In keeping with our Fair Disclosure policy, market professionals who have questions regarding and operating performance, should ask them during this conference call.

If you have follow-up questions on subjects that were not covered on this call, please e-mail them to us at ir@fedex.com. Also, we urge you to visit often the Investor Relations section of our Web site at fedex.com to say abreast of information regarding FedEx.

Our Web site includes certain financial and operating data, including our stat book, and will provide notice of upcoming conference calls and other events of interest to investors. And, on that note, please mark your calendars because we have set a date for our analyst meeting.

It will be in New York on October 1st. We will e-mail details to you soon.

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 made by us during this call may be considered forward-looking statements, such as statements relating to

with respect to future events and financial performance.

Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from historical experience, or from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, any impacts on the company's business resulting from the events that occurred on September the 11th, 2001, as well as generally economic competitive conditions, any impacts on the company's business resulting from the events that occurred on September the 11th, 2001, as well as general economic competitive conditions in the markets we serve, matching capacity to volume levels, and other factors which could be

at FedEx Corporation's and its subsidiaries press releases, filings with the SEC.

Joining us on the call today are Fred Smith, Chairman of the Board, President, and Chief Executive Officer,

, the Executive Vice President, General Council, and Secretary, Alan Graf, Executive Vice President and Chief Financial Officer,

, Executive Vice President of Market Development and Corporate Communications,

, President and CEO of FedEx Express,

, President and CPO of FedEx Ground, and

, President and CEO of FedEx

.

And now our Chairman, Fred Smith, will share his views on the quarter followed by Alan Graf. After Alan, we will have time for Q&A. a

And now I'd like to the mike over to Mr. Smith -- Fred.

Thank you very much for all of you participating on this call.

I'll be brief and turn the mike over to Alan for in-depth comments. But we're generally pleased with our quarterly performance.

We think it was a solid quarter.

As we said in the press release, it was based on robust growth in our FedEx Ground operating company and excellent cost controls, particularly at FedEx Express where we're making more efficient use of our aircraft and air network

, given the expansion of our business with the US Postal Service.

We believe that our strategy, which we announced in New York January of 2000, is demonstratively paying off. Our ground and freight networks have been expanded, and we've improved customer service, and we've become much more competitive across a broad spectrum of transportation services.

We now offer our customers a greater variety of shipping options through common information system and we believe, competitively, we're gaining in the ground and freight segments.

Particularly noteworthy I think is that our sales force is now better equipped and trained to cross sell both express and ground services, and it's backed by a new set of customer automation and tracking tools.

I think a key part of our strategy, which we've stressed over and over of operating independently and competing collectively, is clearly a benefit to us as we've been able to effectively control costs in our express operation while expanding our other core operating companies.

Regarding the economy, we see evidence of a modest economic recovery, although the manufacturing and wholesale sectors, which are particularly important for express, are still lagging the rest of the economy on a year-over-year basis.

We're optimistic that, if and when manufacturing and wholesale sectors begin the recovery, we'll benefit from that.

Again, note that our express network caters to these two sectors in particular, and, if an when those sectors pick up, express volumes should correspond

.

I should note that the recession was largely caused by weakness in these manufacturing and wholesale sectors and any rebound, or sustain rebound from us, will primarily be driven by these two sectors.

As you know, for those you who follow the macroeconomic numbers, the inventory-to-sales ratio has fallen to a seasonally adjusted low level over the past two years, so there should be pent-up demand in the succeeding quarters of this calendar year.

We think there are positive underlying trends in our business. We have noted in the press release continue to have double-digit growth in the FedEx Ground, both in the business-to-business, and business-to-consumer, or home delivery segments.

The high tech and high value-added sectors should fuel express growth when they recover, and we have significant operating leverage and competitive advantage in our intercontinental business since that's largely a fixed cost operation. So growth in international traffic should boost our profits as well.

We're expanding our business alliance with the USPS and that should drive more revenue and margin for the express business. We will re-brand FedEx Freight's operating subsidiaries with the FedEx Freight name, and we believe there are additional sales synergies that will result from that and improve our growth prospects in that sector.

We've seen a continued migration of customers to fedex.com for shipping and customer service issues and that's helping us reduce costs and improve customer satisfaction, and our fedex.com site remains one of the most heavily trafficked sites on the Internet. We believe that increasing demand for supply chain efficiencies, as the economy comes out of the slowdown and the further adoption of fast cycle distribution methods will continue to benefit FedEx.

I'd like to point out that our management team, as demonstrated by this quarter, remains very committed to improving our earnings, our operating margins, our free cash flow generation, and our returns on invested capital.

Our employees, contractors, and associates have done an outstanding job during this period of time and we're very proud of the fact that, due to their efforts, we were recognized as one of the top 10 companies in Fortune Magazine's world's most admired companies, as well as being among the top places to work.

So with that, I'll turn it over to Alan Graf that will deal with some of the highlights and headlines I just gave you in more detail.

Thank you, Fred. Good morning, everyone. Just a couple of finer points here on the third quarter.

We continued our excellent cash flow management as our free cash flow remains positive, and we continue to invest only in the highest return projects across the whole spectrum of our operating companies.

As we look ahead to the fourth quarter, as we said in the release, we're staying with our range of 70 to 80 cents a share.

We do expect continued strong ground performance to continue, both in volumes, yields, revenues, and operating profits. Express earnings, as we said in the release, will be slightly restrained as we are expecting slight volume declines year over year.

As Fred mentioned, the manufacturing wholesale sectors of the economy continue to be weaker and the economy, as a whole. We should also note that our cautiousness is also guided by the fact that five of the last seven recessions have been double dips.

Until we can see strong recovery in manufacturing wholesale, which we know will happen, we just don't know when, we still, therefore, believe our fourth quarter volumes could be down slightly year over year.

One other point, I think, before we go into the Q&A has to do with our auditor change.

As you all know, we announced that Ernst & Young replaced Arthur Andersen as the independent auditors for the company upon the completion by Arthur Andersen and its

report on the financial statements of the company for the fiscal quarter ended February 28th, 2002.

The appointment of E&Y was made after careful consideration by the board of directors, the audit committee, and the management of the company, and includes a very extensive evaluation process.

The decision to change auditors was not the result of any disagreement between the company and Arthur Andersen on any matter of accounting principals or practices, financial statement disclosure, or auditing scope, or procedures.

I'd like to note that Ernst & Young

the company's outside auditors, Arthur Andersen has provided many years of quality service and has demonstrated a high level of professionalism.

We have a detailed transition plan in place with E&Y and our FY '02 full-year earnings release, and our 10-K and proxy filings with be made on schedule. Beyond that, we're not going to have any further comments about our auditor change, and I would ask you to please limit your questions to the earnings and strategy of the company going forward.

With that,

, we'd like to open it for Q&A.

Thank you. The floor is now open for questions.

If you have a question or a comment, you may press one, followed by four on your touch-tone phone at this time. If, at any point, your question is answered, you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order they are received. We do ask that, while posing your question, that you please pick up your handsets to provide optimum sound quality. Please hold while we poll for questions.

Our first question is coming from

of AJ Edward.

Please state your question or comment.

Good morning, gentlemen -- good morning, gentlemen.

Yes, we're here -- we're here

.

OK, great. It looks like a phenomenal quarter, especially in the ground performance.

Congratulations on that. But the only thing I'm concerned for, I'm sure many of us, is yield on express.

At first

, it looks that the overall yield per package was down 1.7 percent, which is actually I think the worst performance we've seen out of you since 1995. I'm trying to break this out.

I'm looking at it, both on yield per-pound basis. Maybe you could add some granularity here. It looks to me like the yield degradation only came out of smaller pounds per package

pounds per packed, is what, 10.7 percent?

And what you got actually paid per pound was up 4.4 percent. Can you give us some guidance on what's happening there?

And what we should expect in coming quarters?

There are really key components to that.

First, and most notable, was a decline in fuel surcharge. Last year during the quarter, we had a four-percent surcharge in place during the entire quarter.

This year in December, it was two percent, and January was one percent, and in February there was no fuel surcharge. So that's one of the major components.

The other is we have seen an average weight-per-package decrease of about seven percent versus the previous year which is normal during economic tough times and we hope that will rebound in the future.

Actually, our yield per pound is on the up-tic and helped to offset those two factors that I just mentioned.

may want to add to that.

cm:

, we have seen, as Alan mentioned, the primary drivers being fuel surcharge and average weight per transaction, but we feel very good about our ability to manage in this economic downturn relative to our rate situation.

We've had firmness in our rates and we expect that going forward, but it's not been enough to offset the decline in the fuel surcharge and the decline in average weight per package.

But we think we're doing a very good job of managing our pricing during this downturn in the economy.

You also -- if I can just ask one follow-on, you said the USPS contract was being expanded.

Can you give us a little bit more color on that?

Yeah. This is

; we signed an addendum to the contract when we added more weight beginning in January and that'll last for 10 months in the expansion of the addendum.

Can you give us an idea of how much was expanded?

It's probably -- it's probably not relative to go into the pounds or that at the moment, but it's an expansion actually that we have been handling in the past.

So we just basically adopted a new addendum to the contract from what we had been handling.

So the volumes you talked about, how it was expanded before, are -- have just been formalized by contract?

That's correct.

Fantastic. Again, congratulations on the new quarter, guys.

Thank you.

Our next question is coming from

of McDonnell Investments.

Please state your comment or comment.

Congratulations, guys, on a good quarter. I was wondering if you could give us a little bit of flavor of the international regions, or on the world in terms of the relative improvement or degradation.

This is

again. The regions around the world are improving a little bit in the European theater.

It's low double-digit growth, still. We're very pleased with that. Asia's recovering a little bit on a year-over-year basis.

The weakness still remains in the US export. But, overall, I would say we're very pleased with our Canadian, Latin American, Europe, and Asian performance.

We're working very hard on our US exports in that traffic.

Great. Can you also do on the vertical industries?

, can you explain that a little bit more what you mean?

Which industries might be stronger or weaker relative to recent quarters?

It's the basic same issues that are driving our domestic situation, the whole industrial, specifically, high tech in that sector. You know, the durable goods sector within those overall economic sectors are the issue that are -- that's driving the results.

Great. Thank you.

Our next question is coming from

of Goldman Sachs.

Please state your question or comment.

Just a couple of questions. First, in terms of the US postal contract, can you give sort of an update as to, you know, are the contract economics, as you sort of mapped out internally, tracking where you thought?

And I don't know if you can, but -- or will, would you be able to break out sort of the volume and revenue perhaps attributable to it? That's the first question.

, we're not going to break out any revenues or profitability for any individual customer at any time. I will say that, if you look at the FedEx Corporation operating highlights, and you take a look at the average daily freight pounds in the US, you'll get a fairly good idea of the impact of the postal service contract.

The economics are better than we initially had envisioned and that's partially because of the additional amount of weight that we're able to carry through the postal service, as well as our management team in express being, frankly, brilliant in their operating the line haul network and reducing the costs associated with it.

I just want to add one thing to what Alan said.

That's correct. We have more efficiencies that we can gain with some of the additional volume on point-to-point line haul that we haven't implemented yet but we're working on.

We've been meeting with the Post Office executive team. They're very pleased, they're very satisfied with the service, and we're pleased with where our performance is.

I would only add that, on the retail side,

transport fees, we're moving forward.

placed 3,000 more drop boxes this quarter, so that'll move that 5,000 number up to 8,000.

OK, thanks. And, just as a follow-up question; sort of looking at your FedEx Express thoughts on volumes, you know, the down slightly on the

and the international, and, you know, the cost cutting that you guys continue to successfully do, would you be able to venture some thought as what of margin leverage you'd expect sequentially as we go from the third quarter to the fourth quarter.

I would imagine it'll bounce back fairly sharply, but I'm just curious, based on sort of those packaged characteristics, what you guys may be looking at?

, you know, obviously, in the long term, the financial leverage is incredible.

The question here in the near term, though, is that we're still thinking that we're going to have continued volume declines.

So as

, and Fred Smith, and I have all alluded to, what we're waiting to see is the turn in manufacturing, particularly the high tech piece of that, as well as wholesale, which is the first leg of the distribution systems, to turn, which will then drive growth at expressed domestic and then we'll start to be able to really harvest some of the leverage that we have built into that network.

OK, thank you, guys.

Our next question is coming from

from Bear Stearns. Please state your question or comment.

Good morning. Can you give us an update, Alan, on where we are on the field surcharge? Is the field surcharge back in place now?

And, if so, how much and when did it go in?

One of the -- one of the things, of course, we deal with in a volatile fuel environment is the fact that our surcharge lags by about an average of six weeks the actual cost that we're incurring.

So, for example, right now, in the month of March, at Express, we have a .5 percent surcharge. Yet our fuel costs are obviously spiking up much quicker than that, due to the fact that the price per barrel are that the $24, $25 range.

And April is already fixed at one percent, based on the February index. So, right now, depending on how March comes out, we'll set a -- probably a higher rate than that for May.

And where were you in the last quarter in February, January and December?

Four percent -- December through May.

And January and February were where?

Four percent. Every month.

Last year.

No, no. But this year.

Didn't it come off and you were at, I think, one...

As I said earlier, two percent in December, January -- one and February -- zero.

OK. That's what I was looking for. All right.

Also, it feels like the government's not going to step in and pay the premium on whole insurance as that comes off next week. Is there a sense that those costs are going to go up and can you give us sort of a sense of how material that is?

Actually, it's been extended for -- the war risk coverage has been extended for another 60 days from March 20 through the May timeframe.

Oh, congratulations, then.

Can you give us a sense of the cost in May if it doesn't get reincorporated? And how much is it -- sort of -- how much, going forward is this a cost?

You know, what was it historically? Can you just give us in a ballpark range?

Well, historically, prior to the 9-11 event, aviation war risk coverage was essentially a throw in for the whole coverage. It was a very nominal amount of charge.

Maybe, for us, a million, $2 million a year. You know, who knows what's going to happen with the marketplace and what will happen between now and May and whether or not any of these other efforts will get off the ground.

So, it's certainly an issue. But I don't have an answer.

OK. A question for

, if he's there.

, can you give us a sense on your volumes -- the guidance is that volumes will still be a very strong positive 16.

But, obviously, a bit -- a little bit less year over year than you just put up at positive 21 percent. Just tremendous results.

Can you tell, at this point -- last quarter you said you really didn't think much of this was freight being diverted away from UPS. Can you tell, at this time, if you're seeing any of that around the

?

Well,

, thanks for the comments.

Right now, we still don't think that diversion from UPS is material at this point. Our customers aren't making any specific reference to a possible work stoppage during the buying process.

So, I'm sure it's influencing some people somewhere, but we're not seeing, again, a material amount of volume, based just on that condition.

Are there any particular parts of the country or types of customers that you're seeing show up now, that are switching over?

Is there any -- you know, are people siting that there's a more complete product or the multi-way product? Or, you know, why is the volume picking up so dramatically then?

Well, obviously, as we expand home delivery, we're getting a tremendous boost there -- one third of our absolute volume growth in the third quarter was from home delivery. We've also expanded our overnight lanes and have had significant growth in our -- in our business levels there.

We're probably up 25 percent year over year. And we continue to make good inroads with the focus on small and medium sized customers as well.

So, you really have to put all that together. But those three segments, really, are the most important to the tremendous growth that we've seen.

And as has been said before, by Fred, certainly, our sales force has become much more effective in this -- in this fiscal year and have done a tremendous job in selling FedEx ground. And I think we've improved our whole value proposition here, if you will, as well, with -- again, with the expansion and better service and quality.

Thanks. Alan, one last one and then I'll turn it over.

You had an up earnings quarter. The guidance is for an up earnings quarter next quarter.

I guess, at some point, you're going to have reinstall profit sharing, it looks like, at the Express side of things. What are you expecting and, you know, is the board looking at any kind of plan and what's sort of the direction of how profit sharing might look in fiscal '03?

We have -- we have started to accrue some variable compensation at this point in this year as we are now ahead of our plan. And we're working on the fiscal '03 business plan at the moment.

And so, anything I would say about '03 would be inappropriate because we're building the plan.

I want to go back to your last question -- two fine points.

One is, while 16 percent is lower than 21 percent, the denominator, obviously, continues to grow. So, it's still a phenomenal growth story at ground.

And I think

would like to add something about the growth rate there, too.

The only thing I'll add there,

, to what

already said -- we do have a significantly improving value proposition with the expansion of home, the expansion of the overnight lanes.

But also, as part of our technology strategy to improve ease of use through fedex.com for the small customers and our software only capability and our other automation platforms. As you know, that was a key part of our strategy to put a single point of access for our customers.

And, as we've made enhancements, you know, in those customer automation platforms, we've seen a very positive response from customers, especially in the small and mid sized customer segments.

Just a quick follow up, Alan.

What did you accrue in fiscal third quarter for profit sharing?

As you know,

, we don't break out our large elements into individual pieces.

But that's the only quarter that you accrued for so far this year?

As you know,

, we don't break out individual...

Thanks for the time.

...pieces of our large elements.

Thanks, guys.

Our next question is coming from

of Morgan Stanley. Please state your question or comment.

Hi, guys. I just want to echo again -- good numbers for the ground.

If I could shift just for a minute over to Express. And I know anytime we try to compare you guys to your biggest competitor that the fiscal versus calendar quarters can throw things off a little bit.

But if we look at your domestic overnight package was down seven percent in terms of volumes, whereas they were down a little less than one percent in the December quarter.

In between that and then international, the same thing, where we saw you guys down about eight percent this quarter and they were up about eight percent.

I'm just trying to understand, in the air, what -- kind of what's going on there in terms of market share -- both domestically and internationally.

Before

takes that question, let me just say that FedEx Corporation is not about market share. It's about generating cash flows and return on investment capital.

And getting compensated fairly for the value and the utility that we provide our customers, no matter which operating company that we're talking about. So, I'm much more focused on improving earnings in cash flows than I am market share statistics.

And, having said that, I'll let

make some comments.

The point I would make there is there is a difference in the makeup of our businesses, relative to the segments that drive growth.

We're far more dependent on the dutiable sector of the durable goods sector of the economy, specifically in wholesale and industrials. And more, specifically, the high-tech sector.

We don't have a stronger presence in the consumer sector of the economy which, as you know, is certainly driving this growth and was the primary reason for the adjustment in the fourth quarter GDP, up to 1.4 percent.

Right now, in the manufacturing sector, for the month of December, we saw declines in year over year sales from an overall economic point of view of almost eight percent.

And in the wholesale sector, almost five percent. Whereas, retail was up 4.3 percent overall.

So, the makeup of our business is significantly different, in terms of what drives growth. And that's why we're so confident as we see improvement in these two key sectors.

And, specifically, in the high-tech sector, that we're going to reap the benefits of that.

And

, you would use that both for the domestic and the international rationale?

Yes. That's the key issue. The only other point I would make regarding international is how we report business is somewhat different in terms of mixing domestic -- I mean, excuse me -- international express and freight traffic.

And that comes into play a bit.

OK. And if I can just follow up.

Alan, I commend you for your point about not focusing on market share, but returns. Can we talk about that a little bit because your aircraft -- your cap ex for aircraft, I want to say, off the top of my head, is running something like 700 to 800 million a year.

But I think some of these orders were placed a few years ago. And given that the economy has slowed and 9-11 and so forth, I'm just wondering if, when you can finally get out of or have more, I guess, discretion as to how much capacity you bring on, and given the mix of your business being faster growth in the ground, is it possible that that number goes down to a 400 million or 300 million?

I mean, could they -- could that be a pretty low number for fiscal '03 or fiscal '04?

Well, as a way of background, let me say that I think we've done a pretty fabulous job of managing our capital expenditures in our aircraft down to the extent we can without doing things that are stupid.

I should note that in fiscal '98, we spent, you know, 2.35 billion in capital, as a company, which was a much smaller revenue base. And this year, we're going to spend about a billion seven.

I think it's been one of the great stories about our company is our ability to reduce this to the extent possible.

You're right. Aircraft decisions are many, many years in advance.

And most notably, the

, which was made eight years in advance of the delivery. So, you have to take some calculated risk with your aircraft decision because they are very long-term in nature.

Having said that, you know, we have a lot of ways to manage this and have been managing very efficiently and effectively. We've taken out of service a lot of old

.

We had the

write off at the end of last year.

We've had the Swiss Air

that we're not going to take delivery of.

So, I'm very happy with the way we've managed it. I hope we don't go down to 400 million because that says that we won't get back on the growth track at Express.

And so, I hope that we keep, you know, that we're able to, dictated by profitable growth, keep our capital expenditures in the range they've been in. And I think, you know, hopefully, it will look a lot like '02 in that regard.

OK. Great. Thanks, so much.

Our next question is coming from

of ABN AMRO. Please state your question or comment.

Good morning, gentlemen. Two quick questions. One, I was wondering if you could help me out how volume growth proceeded through the quarter at both Express and at Freight.

Also, a question on your shares outstanding. I know you guys have been buying them back, but, you guys, it looks like it picked up a bit from the previous quarter.

Is that because some of the options have been kicking in?

On the first question, we don't think it's appropriate to discuss monthly data.

There are a lot of anomalies and things that occur in a quarter that would probably be misleading. As we said, we expect the fourth quarter, although down, to be down less than the previous quarter.

So, we think we're getting back on track in that regard. As to the number of shares outstanding, when your share price runs up, you get more dilution from outstanding options that haven't been exercised.

OK, guys. Thanks.

Our next question comes from

of US Bankcorp Piper Jaffray. Please state your question or comment.

Regarding ground, could you give us a little more detail as to exactly where some of the core B-to-B volumes came from? Was it mostly from new customers or from existing customers?

Or was -- are you still seeing some conversions from Express volumes to ground?

Let me kick that to

in Pittsburgh.

OK, Alan. Well, I think, on an absolute growth basis, we're getting a significant uplift from our existing customers, although the rate of growth with those -- with our business space isn't near reflecting the overall growth in the business. Again, we are seeing some good increases from new customers, obviously, in home delivery, in the overnight segment -- and in the overnight segment, as well.

And, again, many additional small shippers. We're up a tremendous number of absolute shippers in that small and medium sized segment.

Are you still seeing a conversion going from Express to ground?

Well, you know, there's -- when there's a downturn in the economy such as what we've been through, we're going to see some mode shift.

I mean, some customers are buying down. However, we really haven't quantified this, if it is a factor.

I don't think it's a -- really, a driving force in the growth that we've seen this quarter.

OK. And regarding the Express business.

I mean, have you been seeing any signs of an improvement in pounds per package just over the last month or so. We know that, for the third quarter it was down, but are we seeing any type of improvement or stabilization in that?

In Express, you talking about or...

Yeah. For Express -- the pounds per package.

I don't think we'll -- you know, it's the same reasoning and logic we've been having as a theme of this call, really. And we're not going to see that until we see the recovery of the manufacturing wholesale sectors.

OK. And, regarding the agreement with the post office, beyond the recent agreement that you signed a couple months ago, do you expect any additional volumes or share gains to come over the next few months or next several months?

Well, I'll let -- I'll let

maybe give you more detail on that.

All I can tell you is that it is truly a win-win relationship. We're doing a fabulous job for the post office and please feel free to ask them.

I think we're saving them an awful lot of money and improving their reliability greatly. I believe we have the only network capable of serving them fully.

And so, since the relationship is good, you know, we think it continue.

?

No, I'd just add to what Alan said. That's correct.

They're very pleased with the service. And, of course, we have set up a quarterly review together to look at different options.

They, of course, have more business that they would like to let us look at handling for them. At the moment, we're still in the process of making sure that the system form and the line hall is in place that is providing the excellent service we've given them so far.

So, I think the answer is yes. There's more opportunity and we'll work through that on a quarterly basis.

All right. Thank you.

Our next question is coming from

of Salomon Smith Barney. Please state your question or comment.

Good morning, all. Just a couple of quick questions. And I know that the FedEx rate is a much smaller unit and, obviously, you're going down the path toward rebranding to get the full benefits there.

Can you give us any sense of what the costs of that program might be? Obviously, for FedEx ground, it was more substantial.

Obviously, I would assume it would be less. But can you give us an ballpark on what rebranding costs might be, relative to that unit?

, this is

. The rebranding of FedEx freight will be between $40 and $45 million, depending on how we're able to schedule it. But that will actually be across four different fiscal years.

Probably, actually, over 36 months.

OK. And then, just a couple other questions.

On the

unit I noticed the cost per FTE bumped up to about 5.8 percent. Admittedly, last year, in the third fiscal quarter, it took a three percent or so down-tick

I'm just wondering what is going on relative to the cost per FTE? Are you finding that either your benefit costs to healthcare or otherwise are starting to kick up?

Could you give us some flavor relative to the cost per FTE at the

unit and what the dynamic is going on there?

Well,

, there's, you know, any number of dynamics here.

I mean, obviously, when you have lower volume -- and it's been our management decision to not have layoffs -- you know, that's one factor. Our productivity has continued to improve, but it hasn't been able to completely offset the volume declines.

Like every other company, we -- we're looking at increasing healthcare and pension cost, particularly the result of the market's performance here of late and the lower discount rates that we have to use to set up our pension

expense. So, all those factors are coming into play.

It's something that is a very top of mind of the entire management team that we're going to continue to work on and get that turned back around. But again, that's going to also be a factor of how quick the economy and the manufacturing

recover when we get back on the growth plan.

And just one follow-up on that,

-- in your last fiscal 2Q 10-Q, you talked about an initial outlook toward fiscal '03 pension cost. Has there been any refinement in what the level of increase in that might be for the next fiscal year?

We're working on that now as part of our business plan. You know, I'd say that, you know, we had left you with the impression of a $90 million to $100 million increase in '03 over

-- over '02. <

And I would say that's still in the -- in the range -- in the neighborhood. <

OK.

And, you know, we'll have more to say on that later.

We have not finalized that for next year at this point.

Just two other very quick questions -- one, I noticed, obviously, and I know that

mentioned it and I'm aware that obviously in a slowdown there is a focus by some customers to trade down and also that played out in

and

. <

Are you seeing any evidence that customers, though, beyond the cyclical swing to perhaps lower-priced alternatives may also be reevaluating exactly where the sweet spot is in moving goods and that either the deferred and/or the ground option is one that they're just looking at so much harder because ground service is so much better?

, this is

.

I think customers are obviously continuing to reevaluate their supply chains to insure that they match the right service with the right product need. And that plays right into our strategy with the broadest portfolio of services to meet those requirements.

Having said that, it's very difficult to determine what the long-term effects of this economic downturn are going to be, and I don't think we'll be able to understand that until we see approximately four solid quarters of economic growth and have a chance to take a look at that.

But, you know, we're delighted with our strategy and our ability to meet our customers needs with outstanding services in the small package, international, and freight sectors matched with our international expertise.

And we think we're best positioned to take advantage of an economic upturn regardless of where it may come.

But you haven't heard anything specifically from customers about wanting to use either more deferred or ground just longer-term rather than just "We want to save some money today."

Nothing that's any different than what we saw -- have seen over the last several years where customers are obviously reevaluating their supply chains on an ongoing basis, both in the international sector and the domestic sector.

We're very confident as the economic situation gets better in the two sectors that we've talked about -- wholesale and manufacturing -- that our express benefit -- express service is going to benefit from that.

Last question -- I'll let someone else have at it -- there's been some discussion that the -- whether it's the stabilization board or the DOT is re-looking at some of the airline payments that were made in last year.

And I'm just wondering have you heard any feedback whether there might be some true ups in the payments that were made in last year. And I'm just wondering have you heard any feedback whether there might be some true ups in the payments that were made by the government to the different carriers and you obviously being among them?

, you know, we submitted what we believe was the appropriate

application. And we're going to stand by that.

And we've received about 85 percent of our claim to this point, and we'll just see where it goes from there.

But I mean have you heard any feedback that the government is even thinking about that or no?

There have been some questions, which I think

be appropriate back and forth about what was in the filing and some details.

And we expect that we will be going through that process.

OK. Thank you very much.

Thank you.

Our next question comes from

of J.P. Morgan. Please state your question or comment.

Hi, guys.

Most of my questions have been answered, but just a quick one on the mix shift, Alan, at

.

You guys saw seven percent declines in the overnight box and envelope, and deferred was flat.

Now, I'm just curious -- I mean, we're fairly late into the decline in the economy, and I would have thought that a lot of the substitution from overnight to deferred would have played itself out so that you would be seeing sort of similar growth rates.

Am I missing something there or are people still, even at this late stage, substituting overnight for deferred?

Again, I would just point you to the manufacturing and wholesale sectors of the economy which have not recovered which

volume is highly dependent on.

And

the answer.

But, again, just following up on that, I mean, shouldn't we see with inventories

the economy, shouldn't we begin to see more similar growth rates if inventories are about as low as they can go?

Any day now. I just can't tell you exactly when.

OK.

And then, a quick follow-up question on the

is you mentioned service times and

gave us some explanation, but I'm just curious.

On the -- on the improved service, could you comment just in terms of --

, is it -- is it -- is it transit times, is it zip codes, and just sort of outline specifically what service -- is it geographical expansion, is it better handling of the ground product, earlier windows?

Just maybe, you know, the top two or three things you're doing there. And also how much more service enhancements are left, particularly on the B-to-B side or do you feel like you've rolled out pretty much most of the service enhancements at this point?

I think we've done all of the above in terms of your question.

But primarily we have been able to speed up our network. We've spent a lot of time re-engineering the whole line-haul and hub operation to get that done.

And we've made some significant improvements there and feel we have a real competitive advantage in that area.

And then, secondly, we have performed well against those new transit times with, you know, on-time performance in the 98 percent range.

So, we've been -- we've been very pleased with that.

We're always looking at how we can improve efficiencies in that area of our business, both in the satellite as well as the hub and line-haul operations to take time out of the -- out of the package cycle and improve service.

So, I would expect that we can continue to see improvement for the foreseeable future.

Great. Thanks a lot.

Our next question comes from

of

. Please state your question or comment.

Operator -- hi, gentlemen.

Just a couple of questions to follow up on one of the other questions with respect to pension -- Alan, do you manage the pension funds for all your employees including the pilots?

, the -- we have a retirement plan investment board which has the fiduciary responsibility for those funds, of which I'm the chairman. And we hire outside managers -- give them allocation targets and ranges, and manage the managers.

OK. So you -- and you -- but, to answer the question for the pilots specifically, it's, "Yes."

Yes, we do.

OK.

And then, my other question is with respect to your aircraft. I know you were talking about the way you've managed the capital spending and you've done a really good job there.

I'm just curious at this point, as we look forward to fiscal '03 and '04, how many new aircraft are you planning to put into service at this point? Did you -- did you answer that part of the question?

Let me jump in,

, while Alan is looking. You can actually see that information on the

because we give you a line-up there of the years to come and airplanes that we think we're going to be

at that point in time by model.

OK.

But it doesn't talk about how well we can manage it if, you know, dependent on how high a growth rate we have in '03 for the year, you know, we can -- you know, if our -- if we have too few or too many, we have the perfect

managing that.

One of the great things about the

program, although we've downsized it significantly, is that, you know, we have those plans, we can put them through

and get them into service very quickly if we need to.

Well, that's what I thought. How many aircraft -- because don't you have

aircraft sitting in the desert at this point that were sort of ex-United and American planes?

Yes, we do. And those were part of the write-off that we announced in last year's fourth quarter.

OK, good. Just seeking to get that clarified.

Yes, ma'am.

Thank you. I appreciate it.

And then my last question is with respect to the airline stabilization compensation, is that it now on a go-forward basis? We don't expect to see any more money from them?

That's correct.

OK. And on maintenance and repairs for the quarter up 13 percent, was that in line with what you were expecting?

Yes, we had told you, I think, that the second half of the year, we were going to have more maintenance events than the first half of the year. That'll probably continue here in the fourth quarter, although we're -- again, I think we're doing a very good job of managing that appropriately.

And, you know, some are calendar and some are usage-based. And we'll manage that appropriately.

OK. Thanks very much.

Our next question is coming from

of U.S. Bancorp.

Please state your question or comment.

Good morning.

What impact has

relationship with GM impacted

?

Well,

is in -- for those of you who don't know, is a direct point-to-point expedited carrier that is highly dependent on the auto industry.

And as the auto industry has suffered, so has

revenues. Although we don't break it out separately, it is one of the factors in our

category this quarter on a year-over-year basis.

Having said that, it's a variable cost model.

and his team are doing a great job of managing that.

It's still profitable, and we could have some pickup from that company in fiscal '03.

So you're saying you haven't seen any impact from

success at General Motors?

I think it's more the auto industry in general.

OK.

And then over on the freight side,

filed bankruptcy. Is there -- is there any impact there with regard to freight and on a more -- you know, national basis? I would guess that your competition is looking to become more price-aggressive on the freight side. Could you comment there?

This is

,

.

With the closure of

, we did pick up some business in the northeast that's been one of the most recent expansion areas for

.

So we were well positioned to serve customers in that market.

We're seeing this quarter we had

better trends -- better business trends across all of our companies and I think it has to do a lot with taking some market share.

But understand, we're in an industry with

thousands of small competitors. It wouldn't show up as one individual competitor.

And then what are you seeing in terms of pricing? Is it more aggressive? Is it pretty much unchanged? Any thoughts -- any comments there?

Well, you can see in our -- in our numbers, our yields are up five percent year-over-year for the quarter, which I am extremely pleased about.

I think we have managed our downturn strategy very well to protect our yield while we managed to lower

volumes, and I think we're doing a good job there.

OK.

And the last question -- any update in terms of when

will break even or any comments on what kind of operating loss it's currently running at?

, you want to take that one?

Yes,

is performing very well. We were able to reduce our loss in this quarter versus last year by about $5 million, which was -- which was good.

So, as we've said in the past, we expected fiscal year '02 to come in with the same loss as last year. I think we will be

to that

15 to 20 percent range.

We still, I believe, will incur some loss next year, and hopefully the year beyond that, we'll be at break-even or better.

OK. Thank you very much.

Our next question is coming from

of

. Please state your question or comment.

Good morning, everyone.

I just wanted to ask about your other expenses were down $60 million year-to-year.

Do you have any -- give me any detail on what expenses were down?

As we've said many times,

, we're not going to break out large elements and talk about individual pieces, or we'd probably be here for months.

OK.

And what happened to the rate increase this January? I thought that would offset the drop in the surcharge.

There are two primary factors,

, as Alan mentioned, that are driving that. One is the decline -- the seven percent decline in average weight per piece.

The second is the fuel surcharge and the rate increase that we -- that we put in place was not sufficient to offset that.

Having said that, as I mentioned before, we're very pleased with our overall management of our discount programs and our pricing policies in general as evidenced by the overall rate per pound

when you exclude those two issues.

So ...

It got diluted -- it got diluted by continued decreases

average weight.

Average weight and the reduction in the fuel surcharge.

All right. Right. And obviously, you need a manufacturing upturn to increase that weight. That's the big question.

That is the big question, and hopefully we'll begin to see that, you know, in the months ahead.

Right. You don't see it necessarily in the heavy freight trucking operations. Is there any indication that that has turned up before

or is it running pretty much the same trends?

The general consensus right now is that from just an overall economic viewpoint is that we'll begin to see some upturn in the third quarter of this calendar year.

I think the question is whether that's late in the quarter -- the third quarter -- early in the quarter or whether it's delayed into the fourth quarter.

Obviously we would like to see it sooner rather than later. And the only concern we have right now is whether we see a double dip or not, which Alan referenced earlier. And in the last several economic downturns, we have seen a double dip.

And we're being very careful to make sure that we're prepared to manage through that if that occurs.

But obviously, we're very hopeful that we'll see an upturn early in the third quarter of the calendar year in those two sectors.

Right. I'm hearing that air freight express business was up in March in general, but you don't -- it doesn't sound like you think that that's happened.

talk about individual months,

.

No, but I mean for your quarter, you're suggesting a two percent decrease, right?

Which is better than the third quarter that we're talking about today.

Correct.

OK, thanks. That's very helpful.

? Not

.

? Operator?

Yes, sir?

Let's take another question. And I think we've pretty well run through the gamut.

You want one last question, sir?

Yes.

OK. Our final question today is coming from

of

. Please state your question or comment.

All right. Good morning.

I just want to go back to the question on salary employee benefits.

OK, you mentioned -- I think -- I thought you had mentioned last quarter that the incremental cost in '03 could be as much as 200 million. But setting that aside -- correct me, if you will -- is that going to be predominantly concentrated in FedEx Express?

And secondarily, do you see line items within the costs that you can continue to drive down to offset that increase?

And further -- I guess further to that point, you've been running roughly about 42 percent of revenue on salary employee benefits in the Express segment.

If you could, you know, can you give us some guidance on sort of where you see that -- if that number will go back up to the range we were seeing pre -- sort of, 2000, which was right around, I guess, 44 percent or so?

Thanks.

, the 90 to 100 million I was referring to earlier was strictly pension expense.

OK.

And that would be at Express services and headquarters mostly.

All of our operating companies are feeling double-digit increases in their medical coverages, and that'll be something that we're going to have to manage.

As to the percentages that you're talking about, certainly that's going to depend a lot on the amount of revenue that we're able to grow. And that gets back to the theme of the call as to when we're going to see and how fast we're going to see the upturn in manufacturing wholesale.

We certainly hope to manage that number down and improve our margins. It's just a question of when that's going to happen.

OK. And the $200 million figure -- that includes -- was that -- first off, was that correct? And secondarily, what -- that was including presumably medical coverage and other items beyond pension.

We had approximately $100 million increase this year in pension, and we'll probably have another one next year in pension, more or less.

So the 200 million was only referring to our pension costs over a couple-year basis and had -- we didn't break out anything else other than that.

As you know, we're required to specifically identify in our filings what our pension assumptions are and what are costs are there, so we do break that out and discuss it.

OK.

And finally, you've -- I guess you've answered

the volume is obviously going to be a key factor in how the various relationships on the expense lines will develop over the course of the next year.

But as you look down at the other line items, you know -- fuel -- we had perhaps been more optimistic on a couple months back. But some of these other line items -- do you see any specific areas where you can essentially try to counterbalance or offset the increase on -- the relative increase in salary employee benefits?

The biggest management level that we have is the revenue growth, and the second one is to holding the line on salaries, wages, and benefits. The rest of them are important and we manage the hell out of them, but there's not a lot of great leverage one way or the other in those particular categories.

OK. Very good. Thank you very much.

OK, ladies and gentlemen, we appreciate very much your participation in the call today. I know there are probably a couple of you still in the queue. Give me a shout after the call is over, and we'll handle your questions.

I'd like to express my appreciation to all the attendees around the table here today for their participation. And again, thank you very much, and we'll see you next quarter. Bye-bye.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.

END