聯邦快遞 (FDX) 2003 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the FedEx Corporation earnings release conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for your 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 very much

and good morning ladies and gentlemen and welcome to the FedEx Corporation first quarter earnings conference call.

I'm Jim Clippard, Vice President of Investor Relations at FedEx Corporation.

The earnings release and stat book are on our Web page FedEx.com.

This call is being broadcast from our Web site and will be available for approximately two weeks.

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

In keeping with our fair disclosure policy, market professionals who have questions regarding financial and operating performance should ask them during the conference call rather than in follow-up calls with our investor relations department.

If you have not done so already, you are running out of time to reserve your spot at our analyst meeting October 1st in New York City.

Please let us know no later than September 24th if you can join us.

You won't want to miss it.

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.

Such 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 could cause actual results to differ materially, from historical experience or from future results express 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 11th, 2001, or any future threats or acts of terrorism, the timing and amount of any money that FedEx is entitled to receive under the Air Transportation Safety and Systems Stabilization Act, the timing, speed and magnitude of any economic recovery during the remainder of the company's 2003 fiscal year, the ability to mass capacity to shifting volume levels, and other factors which can be found in FedEx Corporation's and it's subsidiaries press releases and filings with the SEC.

Joining us on the call today are Fred Smith, Chairman of the Board, President and Chief Executive Officer, Ken Masterson, the Executive Vice President, General Counsel and Secretary, Alan Graf, Executive Vice President and Chief Financial Officer, Mike Glenn, Executive Vice President of Market Development and Corporate Communications, Dave Bronczek, President and Chief Executive Officer of FedEx Express, Dan Sullivan, President and Chief Executive Officer of FedEx Ground, and Doug Duncan, President and Chief Executive Officer of FedEx Freight.

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

Fred?

Thank you very much Jim.

Obviously, FedEx delivered a strong quarter across all of our operating companies.

We're very proud of the fact that we posted a 45 percent increase in net income in a very tough economic environment.

The CEOs of our operating companies and their respective management teams are doing an outstanding job in pursuing revenue opportunities and holding the line on discretionary and capital expenses.

Several highlights are the exceptional growth in our ground business, very strong growth in our FedEx international priority service, incremental revenue from the US Postal Service transportation contract, and FedEx freight solidifying it's position as the Number One regional

carrier.

These results demonstrate, we believe, that our strategy is paying off.

Customers, particularly small and medium-sized businesses, are increasingly seeing the value of the broad FedEx portfolio of services.

We continue to make our vast global network more accessible and convenient and we're constantly looking for ways to make it easier for customers to do business with us and refining our information and technology to remain the best in the transportation industry.

We continue to see evidence of a modest economic recovery, particularly in the international arena.

Moving forward, we intend to capitalize on several growth opportunities.

Strengthening exports from Asia that led to the highest growth rate in our international priority service in five quarters offer great opportunity.

Growth amount in ground, both in the business-to-business and business-to-consumer segments and as Dan will point out, we recently completed the 100 percent build out of our FedEx ground home delivery service.

Also ground in benefit from improved service, better information systems and deeper penetration in the small and medium-sized business market, another sector we intend to exploit.

Third, we see an increasing and ongoing demand for improved supply chain efficiencies on the part of our customers and the adoption of fast cycle distribution methods.

We remain committed to improving our overall financial performance in terms of margins, cash flow, ROIC,

that is an excellent lead in to turn the microphone over to Alan Graf, our Chief Financial Officer.

Alan?

Thank you very much Fred.

Good morning everyone.

We're glad you're on the call.

Let me give you just a few highlights before we go into Q&A and maybe reiterate some of the points that we made in the release.

First, we'll talk about ground.

With operating income of $101 million in the quarter, which was up 41 million or 68 percent year over year on very strong package growth of 526,000 pieces a day year over year, which is up 33 percent.

Ground was able to achieve a 12.3 percent margin on increasing yields and very strong productivity, including

haul cost per mile, better stops per day, better packages for stop.

At the same time, ground was able to increase it's already very high service level.

I should note that home delivery continues to boom.

It's loss was immaterial in the first quarter and we're looking for home delivery to break through to a profit in the fourth quarter of fiscal '03.

Turning to express, you are able to see in the release that we have strong IP volume, up seven percent.

I should note that the Asia line growth year over year is approximately 26 percent up.

We also had strong revenue from our contract with the United States Postal Service.

We had excellent productivity and cost management despite volume declines in the US domestic volumes.

We did have one less operating day at express, on what that short-term fixed cost nature that did restrain expresses' earnings somewhat in Q1.

As to fuel, the year over year impact of fuel price and fuel surcharge had a negative impact of $19 million.

I should also note that you will see in our financial statement that maintenance expense was up significantly on a year over year basis.

That's due to the timing of wide body engine maintenance.

We expect that to be a similar situation in the second quarter, but in the second half of fiscal year '03, our maintenance expenses should be relatively flat with fiscal year '02.

We did incur some additional security costs and insurance costs as a result of the 9/11 event and those will continue and those are in our earnings outlook that we have given you for the second quarter and for the fiscal year.

I should iterate that we are maintaining our fiscal year $2.70 -- $2.77 outlook for fiscal '03.

Turning now to freight, we had an increase in both daily shipments and yields and a very strong nine percent operating margin despite spending six million in re-branding costs.

Freight continues to be an outstanding performer for our portfolio with a very bright future.

As I look at cap ex for the rest of '03, we're going to continue to steadily invest in increasing amounts at ground and freight as those companies are growing and we will hold express about level with us last year.

So for the year, we're in the range of about 1,850,000,000 for cap ex, which will result in yet again very strong positive cash flows for the company in '03.

My last point, many of you have already done this math, but just to make sure that we all have the same math, we did a net gain of $8 million on the insurance settlement associated with the 727 incident.

Had we not had that, we would have reported 51 cents instead of 52 cents.

And with that, I'll be happy to open it up for questions.

Thank you.

The floor is now open for questions.

If you do have a question or comment, please press one, followed by four on your touch-tone phones.

If you're on a speakerphone, we do ask that you please pick up your handset to minimize any background noise and if at any point, your question has been answered, you may remove yourself from the queue by pressing the pound key.

Thank you.

Our first question is coming from Jordan Alliger of Goldman Sachs.

Hi.

It's Jordan Alliger.

Just a -- just a quick question.

On the ground, obviously continuing its very strong pace, can you talk -- you mentioned some of the productivity factors.

Is your anticipation that these types of factors that drove the margin continually higher will sort of persist going forward in roughly the same type of margin level?

And then just secondly, you mentioned

number for coverage just from a definitional standpoint, you roughly gave a sense maybe on a GDP basis what that means for FedEx?

Yes I will.

Let me answer the second one and Dan, I'll turn it over to you to talk about ground.

Our GDP forecast, real GDP on a quarter over quarter basis, for the third calendar quarter would be 1.8 percent.

For the fourth calendar quarter, it would be two and a half percent, and for the first two calendar quarters of calendar '03, we're looking for about a three percent quarter over quarter GDP growth.

Dan, please comment on your great performance at ground.

Yes, the question was about will our productivity continue into the future.

We certainly think so.

We had obviously great volume improvement this year, which helped the overall density and therefore the productivity.

But much of it came from improved operations, better

factor, better route planning, aided by many of the technology projects that we have been investing in here over the past three years, so I'm quite optimistic that as we move forward, as we grow, that we should continue to see those kinds of productivity improvements in our city operation as well as over the road.

Thank you.

Thank you.

Our next question is coming from Gary Yablon of Credit Suisse First Boston.

Morning fellows.

Two questions if I could.

Alan, on the express margin in the quarter, looks like a little over three percent.

I know that's not where you want to go, so could you talk a little bit about how you get to where you want to go and some of the -- some of the hurls you've got to get over?

Well, I'll talk about it from about 100,000 feet Gary, and then I'll let -- then I'll let Dave tell you a little bit more specific.

We definitely had some restraining factors in the first quarter.

Obviously, I mentioned a few on the maintenance.

We've eluded to in our previous conferences and our -- and all of our SEC filings about a problem not unique to us but increasing health care and pension costs associated with the market performance of the assets and the lower discount rate and resulting

chart as for pension.

We did have one less calendar day and that was a fairly substantial impact but, you know, I'm talking about on the edges here.

I mean, we need to get the three to 10 percent.

We obviously have to get back on the growth plane and domestic express and we have to accelerate our international priority growth and continue to manage these costs.

And with that, let me turn it over to Dave and let him give you a few comments on that.

Yes, thanks Alan and Alan's right.

He hit the highlights and obviously the one less day held us back.

The maintenance timing of course that Alan mentioned earlier, the fuel impact -- all that notwithstanding, I mean, we are focused on our cost controls, our headcount, our productivity.

All of our US divisions, in spite of having a little bit less volume than we would have liked, actually beat their productivity on a year-over-year basis.

So we are very focused on discretionary costs, headcount, productivity.

And we're very optimistic going forward.

Our international productivity and our international volumes, obviously, are very strong and continuing to grow.

Alan mentioned Asia.

I should also point out that Europe is in the solid double-digit margin -- range for volumes also.

So we've got our plans and we're going to execute to those plans.

And we will have, Gary, particularly in the second half, we'll have margin expansion on express in the second half.

That's imbedded in our $2.77 guidance.

OK.

Could I just -- just to follow up, you put out guidance for fiscal second quarter.

I'm sure it surprised everyone in creation.

Could you give us a few bullet points as to how you get from A to B?

From first quarter to the second quarter?

Just -- or year-over-year, whichever.

We're going to get that the same -- from A to B the same way we got there in the first quarter.

Yes, I think -- I think we're, you know, we've got a lot of momentum.

Obviously, the ground numbers are phenomenal.

We have in the release, and Dan can comment on this, that, you know, while certainly there was some diversion from the Teamsters discussions with UPS management in our quarter, as you can see, it wasn't the amount of packages that a lot of people had suspected.

And also, we are retaining a significant portion of that going forward.

So obviously, ground's performance is going to continue.

The productivity and exchange ratio for additional volume to lower cost is terrific there.

We're enjoying improved densities, et cetera.

Freight continues to do a terrific job.

I believe they're the only LTL company that's increasing shipments and yield at the same time.

And we're expecting continued good performance there.

Express margin is going to expand, particularly in the second half.

We'll have a little better economy.

We'll be back on a growth plan in our domestic franchise.

We will not have the year-over-over fuel restraint as we get back to November, when we put in the dynamic surcharge a year ago.

The year-over-year comparisons will be much better.

Maintenance will be significantly less in the second half.

Productivity will be improved immensely as we can take on this additional volume with essentially no additional FTEs and no additional capital.

So, you know, we're ready for some significant momentum here.

We just need the economy to improve.

And as I said, modestly, I described that earlier.

OK.

Thank you.

Thank you.

Our next question is coming from John Larkin of Legg Mason.

Yes, good morning, gentlemen.

A couple of quick questions here.

One relates to the Labor Day weekend demise of Consolidated Freightways and any positive impact that that may have on either FedEx Ground or FedEx Freight.

Let me turn that over to Doug Duncan, who can describe that perfectly for you.

John, good morning.

The demise of Consolidated Freightways was not a surprise.

We had had some contingency plans for that eventuality well in advance of that, and we have picked up substantial volume since that has happened, obviously, in the regional markets and some in the long-haul market.

Dan, anything from ground?

We've really seen no increase in business because of the CF bankruptcy, at this point.

OK, thanks.

And then one final question regarding the mix of the US express business.

If you look at overnight box, overnight envelope and deferred, it looks like US deferred was actually up four percent, which looks pretty strong.

Overnight box, you know, essentially flat, maybe down just a bit.

But overnight envelope had a fairly significant decline of six percent.

Is there some kind of a secular substitution effect going on there that would cause overnight envelope to show the biggest decline?

Let me direct that Mike Glenn.

The growth trends are consistent with the improving economy.

We would expect to see strength in the deferred sector prior to the overnight sector, so that's very consistent with the economic outlook that Alan described.

There are two issues going on in the envelope business.

One is, as expected, as electronic communications expand, the typical letter transactions that may have gone in the past in our envelope business, fairly migrate out of that.

That's not a surprise to us.

And in the envelope sector, while prices are pretty rational and continue to be that way, that's where they're the most competitive in that sector.

And from time to time we just elect not to participate.

That's very helpful.

Thank you.

Thank you.

Our next question is coming from James Valentine of Morgan Stanley.

Hey, guys.

First I was wondering if maybe someone could just talk about the impressive numbers at ground, in terms of 33 percent growth, and if that seems sustainable at that rate into the next two or three quarters here.

Or was, you know, a portion of that because of UPS' troubles, or risk of a strike, and therefore, that number may come down a little bit, and still be obviously positive, but just not as positive?

Well, I'll -- Jim, this is Alan -- I'll definitely have Dan comment on that further.

Obviously, with the law of large numbers, you can't maintain the percentage growth rates.

You have to start kind of focusing more on the absolute package growth.

And while we may not hit 526,000 in the second quarter, we'll be fairly close to that -- Dan.

Yes, Alan, I agree with you.

I think that several of the things that we're doing should help us sustain excellent double-digit growth as we go forward.

Our home delivery growth trends have remained very, very strong and above our expectations.

We're seeing now our year-over-year performance from our larger customers, especially in the retail and manufacturing sectors, has picked up.

Our overnight segment growth has been excellent.

As you mentioned earlier, we continue to grow in the small shipper segment.

I think Mike would say that our pipeline for incremental ground growth is also very strong.

So, we did pick up 140 or 150,000 a day due to the fear of a work stoppage at UPS.

However, as the press release said, we've maintained a substantial portion of that, and I think we will maintain a majority of it through the rest of the fiscal year.

So, you know, as long as all of those things are, continue to move as they have now, I'm, again, very optimistic about the growth of the business in the future and of course the productivity, good cost control will remain in place.

I can promise that.

Yes, I would just reiterate that, Jim.

We're seeing even better than I'd budgeted and Dan had hoped for in terms of productivity.

I think it's spectacular across the board, and that's going to continue.

Good, good.

And at good margins, too.

Maybe someone could just talk about the post office agreement.

I mean, good to see you got it, and it's been -- the supplemental agreement, I should say -- it's been extended.

Just given the fact that the airlines seem to be talking to the federal government about trying to put packages over a pound back in their belly space, and the fact that this contract only goes through May, I'm wondering if there's, if we should read anything into that.

Is it, though, maybe it doesn't get extended beyond May of next year.

Well, this is Dave Bronczek.

Let me just comment on that.

Of course we put in the press release that we've extended the addendum from October to the end of the fiscal year, May 31st.

And we would expect to see the same kind of volumes now going throughout the rest of the fiscal year.

The only thing I would add to that, that obviously is in the press release, is the relationship and the working relationship we have with the post office has been excellent.

They are very pleased with the service and fairly, pretty much right now the going-forward strategy we have with them is just working the contract and the addendum, and the current level of pounds will continue through the rest of the fiscal year.

Well, beyond that, the risk of the airlines getting back into some of this business is still unknown?

Yes, I'm not sure I'm going to comment on that.

OK.

Great.

Thanks, guys.

I would comment on it, Jim.

This is Alan.

We give a lot better service.

You know, we're in the business of ...

Oh, without a doubt.

I don't think anyone would question that.

Well, we're in the -- we're in the business to move things, not people.

So, therefore, our network is specifically designed for their needs.

And it's going to be very difficult for them to have the same service and the same rates from anybody else.

Right.

Good.

Great.

Thank you.

Thank you.

Our next question is coming from Jim Winchester of Lazard.

Yes, good morning.

I've got two questions.

First is on the international volume, which was really eye-popping in the quarter.

Could you comment, number one, on regional trends?

Could you comment on the composition, whether you're seeing any shift in composition of the type of products and mix of products you're moving?

And finally, if you could give us an update on sort of the trend you're seeing in traffic as of mid-September.

And the final -- the second question, I guess is, could you quantify the maintenance expenditure that you had in the first fiscal quarter, which, as you mentioned, was partly offset by that insurance gain?

Thanks.

Yeah, this is Dave again.

I'll comment on the regional trends first.

Asia, of course, is growing very solidly at 26 percent.

It is increasing its IP, displacing freights, which is exactly what we want on our planes, and the load factors are very solid and strong coming across the Pacific.

Europe is solid, double-digit growth rates continuing for, I believe now the fifth consecutive quarter.

So the strength in Europe and Asia continues.

Canada has also seen significant strengthening in its growth.

And the US outbound has also improved, albeit not in a positive number yet, but we're very close.

So I would say that what's happened is that the volumes continue to grow.

They continue to grow with our most profitable product, international priority.

And we're very pleased with how that performance has gone.

As to the maintenance question, in our financial highlights, we show the large element of expense at FedEx Express up $47 million or 19 percent.

And as I said, that will probably be very similar in the second quarter, moving to flat year-over-year in the second half.

And the vast majority of that increase is wide-body engine maintenance timing.

Right.

It's a scheduled timing event that is exactly what Alan pointed out.

The second half of the fiscal year turns to flat.

OK, and just as a final follow-up to the question on the international side, I was kind of surprised to see the comment on some displacement because of the tight capacity conditions on the water, some displacement of select freight to the air.

And I was wondering if that is continuing at this point, and, you know, whether you would comment on what type of cargo that represents.

I'd say there's very little of that, as what's on the water is really not high value and doesn't lend itself to ...

Exactly.

... to our network, but ...

Right.

... we do have capabilities at our freight and ground companies to move that traffic once it hits a port, and we are actively pursuing that.

OK.

OK, great.

Thanks.

Thank you.

Our next question is coming Ed Wolfe of Bear Stearns.

Good morning, guys.

If you could comment a little bit about, you know, you're doing such a wonderful job right now of managing volumes and yields, this quarter with the strong volumes, the yields on the ground were down a little bit, but clearly, you know, nobody can complain with the way that's working.

Do you think going forward, as some freight works its way back towards UPS and there's opportunity to keep some freight longer term, that we could see sort of a change where you give up a little volume for yields compared to where you've been the last couple of years?

Can you talk directionally about that?

Yes, Dan, while you're

that a bit, Ed -- this is Alan -- actually the net yield at ground was up year-over-year by a nickel.

It was -- real rates were up significantly.

We did have a little bit of a weight decline.

And the fuel surcharge was a bit lower.

Now, we did have an improved mix from the higher yield home delivery.

And we're very pleased with the overall exchange ratio that we're getting, because the productivity on new packages and the incremental margins on those is very high -- Dan.

Well, Alan, I think you, you know, you covered the waterfront on that.

That's exactly why the yields were not as strong as we've seen in prior quarters.

I think -- you know, it's a competitive pricing environment out there, and that we should see yields in about this range going forward, at least that's as much as our crystal ball tells us right now.

But the real rates did hold up year-over-year.

They've declined a little bit quarter-over-quarter.

So I think we'll be in this range, Ed, for the next couple of quarters.

Thank you.

That's helpful.

In terms of the postal service raising rates and switching to distance-based pricing on June 30th of priority mail, can you tell in your deferred air and your ground if you're seeing some of that?

And is that part of the story here, as well?

Ed, this is Mike.

We have seen nothing material there.

I mean, I think the main issue is that we're two years into our new go-to-market strategy.

And our sales force is really significantly gaining in productivity.

And I think we're benefiting from that.

They know how to present our portfolio of solutions, which is the broadest in the industry.

And we're presenting solutions to customers that they like.

And I think we're benefiting from that.

The pipeline is strong, as Dan mentioned.

And we expect to enjoy solid growth rates going forward.

I should also add that, although we are operating independently, we are competing collectively.

And you really can't look at each operating company's yield, because when they go to the customer, you know, we're presenting a package, what's best for FedEx Corporation.

And we're going to see a lot more of that going forward.

Alan, can you give a little bit more guidance to the 75 to 85 cents guidance for the quarter?

If volumes were up 33 percent on the ground, and a small percentage of that was diversion, what's sort of the range of ground volume, and also express volumes that you're -- that are in your numbers?

Well, I think I'm not going to say any more than I have, Ed.

I did say that I thought on an absolute basis, we would be close to the 526,000 pieces at ground, maybe a little bit less.

It's awfully, you know, early.

Peak will be in November and we're looking for a very strong peak.

We have capacity to handle peak, by the way.

And that's been a question in a lot of people's minds.

And then, we are looking for a little bit better economic environment.

And remember, the year-over-year comparisons at express last year included 9/11, when we weren't even flying for about three days.

So, obviously the comparison is much easier.

We do need a little bit of better economy than we have at the moment, and that's why you have a 10-cent range there.

In terms of fuel, can you talk about as we're in September and going forward the indexes are coming up?

Would you expect that in this quarter, assuming fuel level about where we are right now, that fuel would be a net positive, negative or sort of neutral at this point?

Fuel at these levels will be a net negative year over year.

As you know, our surcharge lags.

And it wasn't until November of last year that we actually got the dynamic surcharge in place.

So, right now we're looking for the year over year fuel to be a negative.

If fuel prices stay where they are, we'd be looking at a November surcharge of about four percent at express.

So, a significant increase from where we had been over the summer.

OK.

One last question.

You mentioned about having an easy comparison in the quarter a year ago because of losing the two days with the impact of September 11th.

You did receive the $116 million payment as part of that.

As you look back from where you are today going back, is it your view that the $116 million was awash, that it offset your expenses or that it -- in that one quarter might have over-compensated or under-compensated?

We believe that, first of all, last year's over with and this year in the 75 to 85 cent range we're dealing with what we're dealing with.

Obviously there's no assistance.

Last year we believe we would've earned that $116 million that we booked had 9/11 not happened.

So, it was a net was to zero in our view.

OK.

Thank you very much for your time.

Great quarter under the circumstances.

Thank you.

Our next question is coming from Stephen Jacobs of US Bancorp.

Good morning.

Good quarter.

A question on the freight side.

Have you seen any competitive response with regard to your 900-mile service?

I'm thinking someone like a Conway with their extended service lane.

Doug.

I'm not aware of anybody that got that 900-mile reach.

That's a product for specific customers that can meet the opportunity we have in our daylight line

that worked.

It's a specialty product for large customers, especially that distribute and can pick and pack overnight.

And we've had some success with that.

We've grown some customers to that.

But, no, I've not seen a competitive response at this point.

OK.

Thanks.

Second question on ground.

The 260 basis point improvement in operating margin, Alan, could you give a little flavor in terms of how much of that improvement is due to home delivery breaking even versus the operating efficiencies coming out of ground?

Very little to home delivery.

The lion's share of that is obviously the much stronger revenue on the package growth and the outstanding productivity, I think, Dave and I've covered that pretty thoroughly.

Sure.

OK.

Thank you very much.

Thank you.

Our next question is coming from Daniel McKinley of McDonald Investments.

Good morning, gentlemen.

Very good quarter.

I wondered if you could do two things, one give us some feel, if possible, about the vertical customer segments where you are seeing the better demand and where it might be weaker, and then, second, if you would talk about Europe in terms of the postal services over there and potential strategies as discussions of mergers pick up.

Mike, you want to take the first one there.

Yes.

I would answer that question in a broad terms by saying those industries that are largely ground intensive are leading in terms of economic recovery in the industry such as high tech continue to lag in economic recovery.

Having said that, we do see some positive signs, which lead us to the economic forecast that Alan mentioned earlier.

But clearly the heavy express intensive industries are lagging in terms of the recovery.

Great.

We'll have for you on October 1st we'll have some looking forward discussions, talking about how we see the markets in general, how we intend to pursue the opportunities that we think that we have in front of us.

I don't think we'll go into any strategic discussions of that.

And, Dave, might want to just quickly talk about our relationship with

.

Yes.

I just would comment that our team was just in Europe and we have an excellent relationship with

, as you know, and things look very bright going forward.

We have very good service and very good cost metrics with

.

Right now we're very optimistic that we have a good, longer-term solution in our networks over there because of

.

Thank you.

Thank you.

Our next question is coming from Helein Becker of Buckingham Research.

Thank you very much, operator.

Alan, are you going to talk about what you're doing in India and the Middle East on October 1st, or could you address some of the new service offerings you have going on over there that I guess recently started or are in the process of starting?

Well, we certainly are going to, but Dave can talk about it today as well.

Hi, Helein.

We'll give you more detail obviously October 1st.

There's a lot of really good things happening over in the Middle East, in India specifically.

As you know, we have a new operation in India.

We have more of our own in-house customer service and sales and marketing customer facing people now, a lot more branding in India.

And I think we're going to be very successful with this strategy going forward, but we'll give you more detail on it in October.

OK.

And then, Alan, I'm not sure I understood your answer to a question before about the guidance.

I know you said it was a big range, but when you look at where you are today versus where we were a year ago after the events of September 11th, is there any way you can on an apples to apples basis do the comparison.

It is apples to apples.

Well, it is apples to apples, Helein, because what we reported in earnings last year included the government assistance and was the numbers that we would have earned had 9/11 not happened.

OK.

So, the comparison really is a true comparison on a year over year basis.

And in the range, we talked about maintenance and fuel, how restrained express, some continued strong ground growth and great performance at freight, the reason there's a 10 cent range really is whether the economy the tick up to the sort of numbers that I described in the calendar quarters or not.

So, the better the economy the better in the range we'll be and vice versa.

OK.

And in that guidance I think you said it's everything, right?

It's higher pension costs, higher health costs, higher maintenance costs.

I mean, you're really putting the kitchen sink in there.

Absolutely.

OK.

Thanks very much.

Thank you.

Our next question is coming from Scott Flower of Salomon Smith Barney.

Good morning, gentlemen.

Just wanted to follow-up on two items that had been broached previously, but just wanted to get a little elaboration.

Obviously the IP numbers were quite good, and you've mentioned specifically the different regional growth rate.

It seems from some of the macro data, and it's not specific perhaps to Express, which is why I'm asking the question, that Asia has slowed a little bit on exports in August.

And I'm not clear on September.

And I just want to get a little bit of sense as have you seen any effect from perhaps pre-shipping or earlier inventory build and are seeing some trends in August and September that are positive, but perhaps not as positive as the very strong 26 percent growth?

And then I had one other follow-up on the postal service.

OK.

Scott, let me direct that to Dave.

Yes.

I would just answer that question, Scott, that we are -- the volumes are strong.

They continue to be strong.

We haven't seen any slowing down in August obviously.

Those are in our numbers for the first quarter.

The customers are very, very pleased with our service, and we continue to see that kind of growth rates going forward.

In general, Scott, we're just not seeing inventory build-ups at this point.

OK.

And then just the other question -- and these are just clarifications -- and it may be more just that I'm reading the release too finely.

But it talked about incremental U.S. postal service transportation agreement services.

And I'm just wondering, did you do anything incremental for the postal service besides the line haul?

Are you doing anything beyond that, or is it just that you handled the year over year increase in volume?

And then the other question -- and this would just be the follow-up on Dave Bronczek's earlier comment -- that we should more or less expect through the rest of this year that volumes should be comparable to first quarter levels?

Let me answer the post office question first.

The addendum that we put into the original contract had the higher weights back in March, and we said that it would run until October.

So, the press release commented that that same addendum would now run at the same levels all the way through the rest of the fiscal year to May 31st.

OK.

We have -- you know, we have a great portfolio of services and we're happy to continue to discuss those with the postal service as we go forward.

But right now, what we have is what we have, so we're continuing to have very strong revenues from that for the rest of the fiscal year.

OK.

Thank you.

Thank you.

Our next question is coming from Greg Burns of J.P. Morgan.

Hi, guys.

Most of my questions have been answered, just a couple quick ones.

Alan, on the economy you're -- in your core express business the volumes have been getting better quarter over quarter, obviously against easier comps.

I'm just curious have you seen anything in the shipping days?

You've had some pretty severe inventory scale backs.

I'm thinking primarily of your technology customer base.

Have you seen anything from a rate of change perspective on some of your large customers in that sector that would believe you to think things are getting better or less worse?

Very little change.

You hit on a very important point that Mike Glenn will discuss October 1st in great detail.

In the economy and its improvement, what we're seeing is that the express intensive businesses are not improving as rapidly as the ground intensive businesses.

And that's very reflective of our growth rates at our express and our ground companies, and high tech of course in particular.

And we'll have more to say about that in October, but at this point, no, very little change there.

Does that -- just following-up with that, have -- if you think that's more of a longer term trend, would you -- would we start to see that in your cap ex plans?

I mean, how does that -- it sounds like you're pretty cautious on that.

What would we see in terms of cap ex?

Well, again, we're going to have an awful lot to say about this in a week-and-a-half.

We do not think that there is a mode shift.

We simply believe that the express intensive businesses are simply the ones that have been punished the most in this recent recession and this slow recovery.

So, as those businesses perform better, Express has a terrific amount of leverage in those businesses to improve, but at this point we're not seeing that leverage.

OK.

And then just following-up on the ground, obviously very strong volume number.

Related to the diversion from UPS, are you confident that you have the right number?

In other words, are you basically determining based on where -- what your customers told you they were doing, where the volume came from?

And then what's your confidence level?

In other words, do you have contracts with penalties that would penalize your shippers if they moved back to UPS?

What gives you that conviction level?

Have you tied these people up into your deals that makes you think you'll keep 90 percent of it or so.

This is Fred Smith speaking.

We gave you the best estimate we have based on probably 300 years of professional experience represented by our management team.

It's not in our best interest to go into that kind of detail.

But I will just say this, that the ground reliability, despite a 33 percent increase in volume, improved year over year from its already high level.

So, the services are fantastic, the rates and values there are terrific, the FedEx brand is making a big difference, and it's a terrific service.

So, we're going to keep growing it.

And with home delivery now covering 100 percent of the country.

That last barrier to some customers has been removed, and we're very excited.

And we do have capacity.

We will be adding to it.

But the capital intensity of ground is significantly less than express.

And at the moment, the ROICs are thrilling.

Great.

One final question, Alan, on the guidance.

You had a tax credit, I think, in the year ago second quarter.

Is there anything in terms of one time in nature in that guidance in either tax credit that you can see or gains or sales or anything?

Or is that essentially a pure operating guidance number?

That's a good question.

It's a pure number.

We have in our projections no special one-time events, not to say that something might not happen, but we don't see anything right now.

So, it's pure -- a pure guidance number.

Thank you.

Thank you.

Our next question is coming from John Barnes of Deutsche Bank Securities.

Hey, good morning, guys.

Two quick questions.

One, can you quantify for us the loss at the home delivery business in the quarter and give us a little bit of an outlook for that division going forward?

And then my second question is from a timing standpoint in the out years, should we be looking for wide body engine maintenance to occur at this level in the first and second quarter of every year going forward, or can you provide us with a little bit of insight as to when that's going to occur in the out years?

Well, I'll take the second one and then I'll turn it over to Dan for the first one, and he can discuss that with you.

No, we' think engine maintenance and aircraft maintenance in general is oftentimes volatile.

There's no particular patterns over time.

It depends on how much we fly them and -- a lot of this is just simply a confluence of events.

It will be volatile, but it will not particularly always be loaded in the first half of the fiscal year.

As to home delivery, I mean, it was an immaterial, extremely small amount.

Dan, you want to comment any further?

Well, as you say, it was very small, under $2 million.

We expect to have modest losses here in quarter two and three.

Obviously -- and we opened 50 more facilities with low density.

We're going to suffer some from that.

But we are really confident about posting a good profit here in quarter four, and we should stay there from then on.

The growth has been good at home delivery, as I've mentioned before.

Productivity just tremendous.

Our people have done a fantastic job in operating that division.

And the service really is excellent as well, in fact runs at a tad better than the total system.

So, we're very, very pleased with that and it's been -- the service overall -- the product overall well received by our customers, and our customer base has been growing really every month.

So very, very happy with the progress we've made there.

All right, very good.

Thanks for your time guys.

Thank you.

Our next question is coming from Tom Albrecht of BB&T.

Good morning.

Couple of different questions.

What is your approximate capacity utilization within the domestic air fleet now?

And what would you consider to be an optimal level?

And if down the road you cannot attain that optimal level, would you consider shrinking the domestic air fleet?

This is Fred Smith speaking.

Let me just say, you brought up a very good question here, and I think to some degree maybe it's because of the fact that we have a portfolio of business, sometime the outside folks hone in on one particular element, to the exclusion of the whole.

Obviously we would take whatever steps are necessary to try to achieve the objectives that we've laid out to you, which is to continue to improve margins, return on invested capital, and free cash flow.

And if that means shrinking the domestic air fleet, of course we would.

If it means growing the domestic air fleet, we would do that too, provided we could do those things that I just mentioned to you.

So obviously if we've got a great quarter going with ground, we can take a bit more risk on express, or vice versa.

So we react to the reality of the marketplaces as we see them.

Now obviously we did not know that the high-tech industries were going to go into this type of a tailspin.

Had we known that, we probably wouldn't have brought on -- well I know we wouldn't have, we would not have brought on the air capacity that we currently have.

We did reduce some of it, if you recall, when was it Al, a year ago ...

Third quarter ...

... of fiscal '01?

Fourth quarter of fiscal '01, and took a calculated risk that we were going to be able to achieve those objectives, and it was in our best interest to go on and finish out a string of modifications.

Because that capacity will become more in balance in the years to come, based on our market outlook and forecast of the express intensive businesses, we don't think we'll have to do that.

And we think we can improve the margins and returns on express.

So it's a long answer, but I think it, the question indicates a misunderstanding of what our management team is committed to do.

So we would obviously shrink that air fleet if we didn't have a, have a need for it.

We don't think that that's the case, as we look into our marketing forecast, and we have very, very good and detailed information on our customers and markets.

I appreciate the overview of an answer, but do you have sense as to how much below an optimal level you are?

Setting aside the kind of broader view of portfolio view plus profitability view.

Well I'll let Dave answer the specific question on express, because he's got a specific number for you.

Yes we're running our network, and Fred is right, as you remember we ended up turning back the 19 MD11s from Swiss Air and we've done a lot of things in that regard.

But we running about 85 percent of our network capacity right now, and we're doing a very good job of shrinking the hours that we're flying, our domestic hours in our network are down significantly, and so as we flex the volume back up, we aren't going to need an incremental increase in too much of our capacity.

We have it in place.

Yes, I think if I'm not mistaken in the fiscal year that we're currently in, we're adding on, I can't remember how many airplanes we're adding this year.

Do you know

?

In FY '03 off the top of your head?

Yes Fred it's about 13, 11 to 13 airplanes.

Yes, it's about a dozen airplanes this year, and I think next year, in the fiscal year '04, it goes down to two to four.

So you see the capacity starts to come much more in balance next year based on the, what we did before the dot com, tel com, high-tech meltdown.

Also we're retiring 727s at a very rapid clip.

As they're also a way to manage this.

Hopefully no more of the retirements the way we did down in Tallahassee I might add, but.

Right.

Different question.

What's the approximate mix breakdown in terms of revenues between home delivery product and the core ground product within FedEx ground?

I would just say you have the data that we've given you, and that's all we're going to talk about.

We think that is a very competitively important number, and I don't want Atlanta knowing it.

OK.

Thank you.

?

Yes sir.

This is Jim.

I think we have, we've almost run an hour here.

We have, I think we've gone through the range of questions, and in the interest of letting the market get open and people get back to work, we're going to close it off here.

And we appreciate ladies and gentlemen everybody's participation.

Thank you very much.

Thank you ladies and gentlemen for your participation.

This does conclude this morning's conference call.

You may disconnect your lines at this time, and have a wonderful day.