聯邦快遞 (FDX) 2003 Q4 法說會逐字稿

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

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation.

I'd now like to turn the floor over to your host, Jim Clippard.

Sir, the floor is yours.

Thank you, Ashley and good morning ladies and gentlemen.

Welcome to the FedEx Corporation fourth quarter earnings conference call.

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

The earnings release and stat book are on our web page at www.fedex.com.

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

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

During our Q&A session, we ask that callers limit themselves to one question.

If you have additional questions, please rejoin the queue so that others may have a turn.

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

Certain statements in this conference call may be considered forward-looking statements 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 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 timing, speed and magnitude of the global economic recovery, the extent to which eligible employees participate in the company's voluntary retirement and severance programs, new U.S. domestic or international government regulation, the impact from any terrorist activities or international conflicts, the impact of rising fuel prices, our ability to match capacity to shifting volume levels, the timing and amount of any money that FedEx is entitled to receive under the Air Transportation Safety and Systems Stabilization Act, and other factors which can be found in FedEx Corporation's and its subsidiaries pre releases and filings with the SEC.

Joining us on the call today are Fred Smith, Chairman, President and CEO, Alan Graf, Executive Vice President and CFO, Mike Glenn, Executive Vice President, Market Development and Corporate Communications, Rob Carter, Executive Vice President and CIO, Dave Bronczek, President and CEO of FedEx Express, Dan Sullivan, President and CEO of FedEx Ground, and Doug Duncan, President and CEO of FedEx Freight.

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 and, again, please limit your questions to one per turn.

Fred?

Thank you very much, Jim.

We're pleased to report of course that FedEx has posted solid fourth quarter financial results showing strong revenue and earnings growth for the entire fiscal 2003 as well.

For the full year, revenue is up 9%, net income up 17%.

For the fourth quarter, revenue is up 8%, and net income 19%.

Earnings were led by a continued strong growth at FedEx Ground and international Express shipments.

I think it's significant to note that yields for all of our businesses improved.

Grounds revenue is up 18% over the previous year.

And we're very pleased with the expanding scope, speed, information capability, and the overall service levels within our Ground network.

As I think you know, we are investing about $1.8 billion over six years to double FedEx Ground's capacity to meet growth expectations.

We continue to be pleased with the expansion and service levels of FedEx Ground's Home Delivery unit, which was responsible for about 40% of the total volume growth at FedEx Ground.

Home Delivery was profitable for the year, with the number of shippers now at 41,000, about double what it was a year ago.

While volumes at FedEx Freight declined slightly, yields improved leading to a 5% revenue increase.

FedEx Freight continues to collaborate with our other FedEx op cos, most recently introducing ocean Ground distribution from Asia to virtually all of the continental United States helping our customers reduce inventory cycle time and eliminating the need for warehousing and distribution facilities.

FedEx Freight also provides less than container service to and from Europe in conjunction with our FedEx trade networks and our partner in Europe [FRANS MAAS].

Customers are increasingly receptive to our information systems and account management interaction.

As we continue to focus on improving every aspect of our customers' experience, insuring that FedEx in whatever form in easy to do business with, and giving our customers the personalized attention they deserve.

I think it's significant that FedEx ranked first in our industry in customer satisfaction.

In a recent study fielded by the University of Michigan Business Schools National Quality Research Center, and recently published in the "Wall Street Journal".

Our management teams throughout each operating company are doing, in my opinion, an outstanding job of driving growth opportunities and keeping a sharp eye on costs.

We're clearly focused on maintaining industry-leading service levels at FedEx Express as we continue to resize the Express network in line with current volume levels.

As you know, earlier this month we announced that we will offer voluntary early retirement and severance programs during the first half of fiscal 2004.

The estimated annual savings from these programs beginning in fiscal year '05 and beyond is expected to be between 150 to $190 million per year.

I think it is significant that these initiatives continue to reflect our unique ability of being able to expand or contract our independent networks within our operating companies as business conditions and customer demands in those segments warrant.

The simple fact is that today, FedEx is much more flexible and agile with the ability to put the right resources against the right business demand in the right business unit at the right time.

Our sales team is showing signs of continued improvement in their ability to cross-sell broad-based solutions to large and small businesses alike.

I'd like to take that as a moment to thank the men and women of all the FedEx operating companies, my executive colleagues on the call today, and the entire 200,000-plus team of employees and contractors around the world for an outstanding 2003.

I think our folks are the best in the business and I can think of no better example than what they we were able to accomplish this weekend.

Unless you've been on another planet, I suspect you know that "Harry Potter and the Order of the Phoenix" made history in terms of book sales.

And I'm very pleased with the role that FedEx played again in that phenomenon with FedEx Express and FedEx Ground's Home Delivery unit distributing about 400,000 shipments on Saturday alone.

Even FedEx Freight got into the game by delivering significant quantities to bookstores in advance of the weekend.

Moving forward, we're encouraged by a number of trends.

Although we expect the U.S. economy to remain sluggish in the first fiscal quarter, we do expect to see year-over-year improvement in the second half of fiscal 2004.

We believe the fundamentals are in place for economic acceleration in the United States beginning early next calendar year, mainly coming from an improving overall financial market, the recently approved tax stimulus package, improved consumer confidence, and historically low sales-to-inventory levels.

The ingredients for increased business spending at long last are falling into place with some of the influences and capital spending moving in the right direction, and the user cost of capital following.

As I'm sure all of you know, both are historically conducive to growth and this should be no exception.

There have been some ups and downs with equipment and software, industrial and transportation equipment, but information processing equipment and software have registered five consecutive growth quarters.

I'd like to make a point that we have an outstanding economic forecasting unit inside FedEx that gives us, I think, an awfully good view of the world.

Now, before I turn it over to my colleague, Alan Graf, I'd like to re-emphasize what he will also say, that we have been very focused on pursuing growth opportunities for each of our operating companies but at the same time, working hard on cost containment, and we believe that we are exceptionally well-positioned, poised, if you will, to benefit from an improving economy, particularly at FedEx Express.

I'd like to re-emphasize our strong commitment to improving our financial performance, our margins, our cash flow, and our returns on invested capital.

For those of you who followed the company for some time, I hope you'll recall that when we created the new FedEx, in 1998, we made a commitment to improve shareholder value and I'm happy to report FedEx's five-year cumulative total return has significantly outperformed the S&P 500 by 105%, and the Dow Jones transportation average by 120%.

So I hope you can agree with us that we've lived up to our word.

Going forward, I want to assure you we intend to continue to try and maximize shareholder value, and I'm confident that the direction that has allowed us to perform so well in the past few years will also serve us well going forward.

We think, quite simply, we have an excellent strategy and we will continue to benefit from it in the years to come.

And with that, I'll turn it over to my partner, Alan Graf, our Chief Financial Officer.

Alan?

Well, thank you very much, Fred.

We're obviously very thrilled about the performance of the company and the operating companies in the fourth quarter.

With an 18% growth in EPS in a very difficult economic environment.

I think we're hitting on all cylinders and as Fred said, we are very well poised for tremendous profitability and cash flow growth as the economy improves.

Fred covered most of 2003, so I'm going to focus my comments looking ahead to make sure that there's not any confusion about our numbers and our guidance can be cleared up today.

In the release, we've given you the same guidance that we gave you in the last release, so we're holding our ranges. 52 to 60 cents in the first quarter and $3.00 to $3.15 for the year.

Those are non-GAAP numbers.

They do not include the net impact of our voluntary severance and early retirement programs.

Which on a net basis will reduce our earnings anywhere from 25 to 30 cents a share.

The actual GAAP numbers for the year will be between $2.70 and $2.90.

First Call has a variety of different earnings outlooks with some analysts excluding the net charge, some including it, and some excluding the gross charge.

And adding in the benefits.

So don't be misled by these First Call results as compared to what the company's giving you, and we are giving you both GAAP and non-GAAP measures and explaining why we are talking about non-GAAP measures.

I should add that we have a little additional first quarter guidance here about the current state of the economy, and the fact that our June volume trends at Ground and Freight are tracking slightly below what management's expectations are.

We're still holding the ranges, but we'd like to see a little bit more traffic at those two units, and we expect that we will have better growth as the year goes forward.

Please also remember that comparisons at Ground in the first quarter of fiscal '04 are tougher due to last year's threat of Teamsters action at UPS, and a softer economy, and also as you look at percentage growth rates, remember the numbers continue to get bigger, and therefore, holding the same percentage growth rates on a year-over-year basis that we had been delivering at Ground are going to become increasingly more difficult because of the numbers being bigger.

Lastly, you may notice that our debt levels are higher on the balance sheet.

That is because we have fixed the purchase option for four-MD11s that are currently under operating, that had been under operating lease, and because we have fixed those purchase price options which is a good financing move, they now are capitalized leases and have been put on the balance sheet.

That explains the entire year-over-year increase in debt.

There was no increase in interest-bearing debt in fiscal 2003, in fact, our cash flows were very strong.

With that, Ashley, we're happy to open it up for Q&A.

Thank you.

The floor is now open for questions.

If you have a question or a comment, please press the number 1 followed by 4 on your touch-tone phone.

If at any point your question has been answered you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question, that you pick up your handset to provide optimum sound quality.

Once again, to ask a question, please press the number 1 followed by 4 on your touch-tone phone at this time.

Our first question is coming from James Valentine from Morgan Stanley.

Please go ahead with your question.

Great, thank you.

I just had a question for, I think Dave Bronczek, or Alan, in terms of your initiatives to try to free up some additional space, able to get better utilization at the Express division that you talked about last quarter, and I'm wondering how much of the labor cost improvement had to do with that, and I guess an update on the program in general, to try to squeeze more utilization out of the Express assets.

Hi, Jim, this is Dave Bronczek.

Obviously we had a very good quarter at Express, as Alan mentioned.

We are freeing up more space at Express.

We did have one less operating day so some of the expenses in the salaries and wage line would be due to some of that, obviously though that would hurt our profitability for the quarter.

We would have actually had a better quarter.

But as you and I have talked about in the past, and I've said on this call before, we're working on our field productivity, we're doing a great job there, our FT's are coming down.

Ken May and Bill Low and Dave Repoltz are doing a great job with the project that we've had going forward now for 12 months.

So we continue to free up space, it's all through attrition.

Out in the field, of course, the early retirement and voluntary severance here in Memphis and in the field and staff groups is helping us on the cost as well.

But I would say that we're in very good position going forward.

We've achieved really all of our goals and objectives and our productivity continues to improve.

Great.

Thanks so much.

Thank you, Jim.

Thank you.

Our next question is coming from John Langenfeld from Robert W. Baird.

Please go ahead with your question.

Good morning.

One question for you on the head count, the voluntary head count reduction.

Could you provide some tangible specific examples of where the head count reduction is coming from and then how that work is associated -- that was associated with that head count will be reduced or eliminated?

Sure.

This is Dave Bronczek again.

Obviously, we've carved out the couriers and mechanics and pilots and front line people with the customers are not included in this process, but everyone else pretty much across the board is.

We've been going through this process now for over a year.

Laying out the jobs, the work that we can avoid or eliminate.

And of course we have put that range of eligible people out to the public.

We feel very confident that the ranges that we've given you in the past are where we'll be or maybe slightly even better than that.

We're working the process through and we don't have the specific numbers, we won't have them in total until the end of the second quarter until the eligibility actually takes effect.

But we're very pleased with how it's going.

The internal reaction has been extremely positive as it has been externally.

So I think things are going very well.

John, this is Alan Graf.

Also I should add that we've been getting tremendous productivity with our front-line work force and now we're going to ask our fixed, more white collar work force to be increasingly more productive, we'll reducing spans of control, and we'll be eliminating work that's not vital for the organization.

All this in an effort to get Express to double-digit margins.

Great.

Thank you.

Thank you.

Our next question is coming from Helane Becker from Benchmark Company.

Please go ahead with your question.

Thank you very much.

Hi, gentlemen.

Alan, could you expand a little bit on the international operations, you kind of glossed over them or maybe Fred commented that the international is strong but didn't really go into very much detail.

Could you just give us an indication of volumes, Asia, U.S., Europe, Asia, and so on?

Well, we continue to have very strong growth in our global operations at Express for the quarter.

IP was up 6 and grew up 6.5%, led by [APAK] which was over 16, in Europe, which was 12.7.

The greatest value generator for FedEx Corporation is the Express international operations where we plan to have continued growth in 2004.

And because we have a fixed cost network basically in place, all that growth has very high contribution margins to the bottom line and it's probably one of the things we're most excited about looking forward in 2004.

I'll ask Dave to add to that.

Hi, Helena.

Alan's right, Express international had a very good quarter again, our growth rates in revenue were actually 16% in the last two quarters they had been 15 and 16% respectively.

So we've had, you know, very, very good quarters led by Asia, and Europe, as Alan mentioned.

Let me say, I picked up a wrong number, I apologize.

Europe's growth rate was 7, Canada's was 12.7 and Asia-Pacific was 16-plus.

Okay.

Thank you very much.

Thank you.

Our next question is coming from Karen Ubelhart from Government of Singapore.

Please go ahead with your question.

Just, can you, on your $3.00 to $3.15 number, I may have missed it if you said it.

What are you assuming on the cost savings?

Are you assuming the 100 and 130 you talked about in your release?

Or are you assuming a portion of that?

What is in the $3.00 to $3.15 assumptions?

The $3.00 to $3.15 excludes both the cost and benefits.

Okay.

And then the tax rate for next year?

We're comfortable that 38's about the right number.

Thank you.

Thank you.

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

Please go ahead with your question.

Yeah, good morning, all.

Just a question about the postal service broadly.

Obviously, there have been lots of testimony in the Blue Ribbon Commission, and I guess some testimony actually suggesting that the postal service should remove from competitive services.

Also noted that the Freight volume line this quarter did decline, I'm just wondering on the longer term issue, how do you see that?

And in short run is some of the market share losses that the postal service is sustaining actually blowing through some of the wholesale business that you're doing with them?

This is Dave Bronczek again.

I'll just tell you that we meet every quarter with the postal service and their executive management team, the relationship couldn't be better, the service is outstanding.

They're obviously like us with some of their deferred freight, seeing a little bit of a slowdown and that was in that line that you mentioned for Express just to point out the majority of that line was our F3 or our 3-day deferred product in Freight.

But I can't comment any further on the postal service going forward in terms of, you know, their outlook and so forth.

I can tell you that -- and I should point this out, we're only into our second year of a seven-year contract with them.

And of course we extended the addendum on top of the main agreement throughout the rest of this fiscal year.

Great.

Thank you very much.

Thank you.

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

Please go ahead with your question.

Good morning, this is actually David Mack.

I had a question for you guys in terms of fuel so in the previous quarter, it helped you by roughly $25 million, what is the current atmosphere in terms of surcharges?

Is it helping or hurting and what kind of outlook do you guys have?

David, this is Alan Graf.

I would say that again because of the lag factor in our fuel surcharge, and because of the very wide range we have, we had 4 cents a gallon ranges before we moved the fuel surcharge, depending on where we fall in those four-cent ranges can have a significant impact on whether we're going to have a benefit or going to have a penalty on a year-over-year basis for fuel.

We've designed it so that we don't have over the long run any differences that over the long run we pass through exactly to the customer what we see, good news and bad news.

But we do have volatility quarter to quarter and that's why we pointed it out in the press release.

So at the moment, it's very difficult to say what exactly will happen in the first quarter with the exception of that we do have now fully a dynamic international fuel surcharge around the world which we did not have fully implemented in last year's first quarter so we probably will have some benefit from that in Q1 and that's in our guidance.

Okay.

Thank you.

Thank you.

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

Please go ahead with your question.

Good morning, guys.

Just a brief two-part question on the head count reduction.

Number one.

If you get close to the November 24th deadline and you haven't seen the numbers that you expect, how quickly will you implement the nonvoluntary portion of a head count reduction program?

And number two, what contingencies do you have if you begin to have people, your more qualified and better employees begin raising their hands and opting to take the early retirement or the voluntary severance?

Well, we've addressed both of those.

Number one, all indications are that the voluntary programs are going exactly as designed.

And they will achieve their stated objectives.

We're very confident in that.

And secondarily, we have fenced off some areas where we require key technical or professional work that we can't readily replace.

So I'm very comfortable that the results of this are going to obviously improve our margins going forward, and second, there have a terrific environment at Express for expansion for the folks who are still there in terms of their ability to get promotions and make additional contributions.

So it's absolutely working as designed at the moment.

This is Fred Smith here.

I just want to emphasize something that Dave said earlier, this program wasn't put together overnight.

It was designed over a period of a year with a lot of research, a lot of interviews, a lot of help from some folks that had helped companies manage this thing before.

So we're very, very confident that the two issues that were raised there are not going to be issues.

Okay.

Thanks.

Just one last comment that I would make again, this is Dave Bronczek, the reaction inside FedEx Express has been very, very positive.

I don't think it could have gone better and we constantly communicate to our work force, we're on an FX TV call right after this call, but the feedback not only here in Memphis but throughout the country, and I've traveled throughout the country, has been very, very positive.

Thank you.

Thank you.

Our next question is coming from Greg Burns from JP Morgan.

Please go ahead with your question.

Thank you.

Hi guys.

I just want to take a look at the international, the IP numbers was a very strong volume quarter but things have been slowing, Alan and I'm just curious whether there may be a currency offset.

Obviously, currency is helping you on the revenue there, but I'm wondering whether the change in the currency may be affecting freight flows and I'm curious whether the particularly the U.S. outbound piece, which may have been a little weak, whether that's starting to see some response to the currency?

The U.S. outbound was a little weak in the fourth quarter.

We work very hard to balance our revenues and expenses in all the various foreign currencies that we deal with.

Through pricing, through the way from our revenue standpoint and also our contracts for expenses.

For example, all of our flying is dollar denominated.

Having said that, we did have some benefit in the fourth quarter as a result of the weakening dollar and our strong offshore operations.

It wasn't what I would say material, and it is a little bit weaker in growth rate than the third quarter or the second quarter, and that's the result of the same thing that we've been saying, is that we have just not seen the global economy improve and we're not expecting it to from where it is certainly in the first quarter and maybe part of the second quarter as well.

That being said, and I mentioned this earlier, this is Dave again, in three consecutive quarters now for FedEx international we've had a growth rate in revenue, which is key for us of 16%, 15% and 16%.

We're very pleased with that.

Okay.

I guess I've always thought of this, I hear the revenue's strong but volume perspective, I've always thought of this as a double-digit trend line growth.

Is that a, long-term, is that an aggressive assumption now in your view or do you think that's still reasonable?

I would say that in this economic environment, that might be aggressive, but as the economy just gets a little bit better on a global basis, that's a very reasonable estimate for us.

Great.

Thanks a lot.

Thank you.

Our next question is coming from Dan Hemme from Prudential Securities.

Please go ahead with your question.

Thank you.

I hate to beat a dead horse on Express margins but you made a fairly solid commitment in achieving double-digit margins in the third quarter release.

My question is really timing.

Considering some of the cost containment actions facilities, aircraft and other items, what do you see as the trajectory of improvement going forward and can we expect other announcements regarding structural change?

Structural change, no.

I think we're in very good shape now in terms of all the things that we've done with reducing capital expenditures and putting off some of our expansion plans until we get back on a growth pattern.

Trajectory is up.

As to timing it's going to be very dependent on the economy improving.

But I'm very confident that we will get to double-digit margins at Express.

I'm just not going to put a specific time line on it, but with an upward trajectory, we feel pretty comfortable.

Having said that, we're having significant increases in our pension and healthcare costs in fiscal 2004.

We've lowered our -- this is the Ed Wolfe comment, we've lowered our return on assets in our pension fund by 100 basis points and that's had a significant impact on our cost and we'll have more to say about that in our 10-K.

And so those will be, you know, in 2004, at least restricting us a bit.

As we turn to 2005, the cost of our voluntary severance and early retirement programs will be behind us, our benefits will be in full bore, the economy should be better, and I would think that in fiscal '05 we'll have a very good, you know, tail wind towards getting those double-digit margins.

Thanks very much.

Thank you.

Our next question is coming from Ed Wolfe from Bear Stearns.

Please go ahead with your question.

Thanks for the setup, Al.

You're welcome.

Can you, just as a follow-up to that, what's change in your assumed discount rate, if there is one?

And then I have a question on restructuring.

We're lowering the discount rate about 12 basis points based on our models and the availability of highly rated corporate debt out there to match our liabilities.

Remember, our liability tail is significantly longer than most any other company you would look at which calls for longer term securities, which carry a general higher interest rate.

So we'll be just below seven there.

We'll have a lot more to say about this in the 10-K, you'll see a very thorough, maybe somewhat lengthy discussion of all of our pension plans and all our assumptions.

Thank you, I appreciate that.

On the restructures side, if I take the middle of the guidance for the annual savings in '05, let's call it $170 million, and I assume 100,000 employee, I have 1700 jobs, which would be an assumption that something like 12% of the 12% are going to take the head count reduction.

Am I thinking about this right that you're thinking somewhere between 10 and 15% are going to take the voluntary retirement?

Well, we don't want to go into specific numbers other than to let you know Ed, that we have a range that we are pretty confident that we're going to hit and we have an organizational structure behind that that will work with no backfill.

Okay.

Thank you.

Thank you.

Our next question is coming from Jordan Alliger from Lazard.

Please go ahead with your question.

Hi, morning.

Just a question, as you sort of think about your forecast, can you give a sense for what your economists are looking at in terms of how it helps you construct that $3.00 to $3.15 range in terms of U.S. economic performance?

Thanks.

Mike, why don't you --

For the year, we're expecting relatively little growth in the first half of the fiscal year with strengthening in the second half on average for the fiscal year somewhere in the 2.9 to 3.0 GDP growth.

Jordan, that's on the revenue side.

I can tell you we have not nearly loaded that sort of a level into our expenses.

So we are very, very leveraged and if we get that kind of growth, that will be very -- you know, that would be very positive for the bottom line, no question.

Just to make sure, the 2.9 to 3% that's roughly over the full fiscal year?

That's right.

Okay.

Thank you.

Tends to be more back-end loaded.

Thank you.

Our next question is coming from Stefanie Koch from Merrill Lynch.

Please go ahead with your question.

Good morning.

Can you give us the number of FTE's at Express, I guess for the quarter?

Thanks.

The total number of FTE's throughout the world is 118,000.

So I think Ed Wolfe actually had it really pretty close, I think he said 117.

Okay, great.

Thank you.

Thank you.

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

Please go ahead with your question.

Yes, good morning gentlemen.

A question regarding the slowness that you appear to be seeing in the month of June in the Ground and Freight businesses.

Has that slowness been accompanied by any intensification of rate pressures in those two areas?

Let me direct that to two places, let me let Dan Sullivan talk about Ground, cognizant of what I said earlier about tougher first quarter comparisons on a year-over-year basis and after Dan, we'll turn it over to Doug Duncan to talk about Freight.

Okay, Alan, our volume trends have been somewhat flat, slow really due to the economy and especially in the retail sector where of course we have about 35 to 40% of our business.

So growth rates there have been about one half of the growth in the rest of our business.

Retention overall has been good, but we really haven't been able to add new business at the same rate we've seen the existing business growth rates fall off a bit.

Yields, as we announced, have been very good, better than 4.5% in the quarter for a lot of reasons.

Obviously we've been growing with -- in the small shipment sector, that's helped our yields year-over-year, our real rate increases have been solid as well, extra services are up and we had some help from the fuel surcharge.

So overall, we're looking good and feel confident with the yields but as everybody has been saying, we need to get a little economic boost here, increase in consumer spending and start to move our business with our existing retail customers.

Doug, talk about Freight?

Yeah, John, this is Doug Duncan.

Clearly, the retail segments which we serve as well and the industrial segment is not very strong at the moment.

Our strategy is to maintain our yield and to adjust our costs to lowering volumes which we have done.

As far as more competitiveness, we're in a very competitive business but I'm very pleased with the yields we've achieved and I think it's because we're really focusing on the customers that are executing fast cycle logistics with a real dependence on next and second-day deliveries.

Thank you.

Thank you.

Our next question is coming from David Campbell from Thompson Davis.

Please go ahead with your question.

Alan, most of my questions have been answered but I'm really impressed with your FedEx Express profit growth in the fourth quarter, and that seems to be on the other hand where the greatest concern is on the cost side, and hence your having your voluntary program to reduce costs.

Is there something non-recurring in that gain in the fourth quarter?

Or am I getting too optimistic about it?

What's going on?

Well, you know, general trend as I said before, is going to be up with the caveat about the economy obviously needs to improve.

When you have an operating entity that's getting productivity gains with declining volumes, and has been now right-sized for the current volume levels, you know, the opportunities are endless from additional volume growth.

And the productivity gains have been nothing short of spectacular in terms of the field operations.

And those are in place now and the company can handle significantly increased volumes with not a lot of capital expenditures.

It has a very nice growth rate in its international operations which had very high marginal returns.

So this is not a one-time thing.

This is our commitment to get to double-digit margins at Express and as I said, we're not going to put a time frame on it but we're going to get there.

Okay.

Thank you.

Thank you.

Our next question is coming from Jeff Kauffman from Fulcrum.

Please go ahead with your question.

Thank you very much.

You know, Alan I was joking with an economist recently that this will be the fourth year that everyone's planning on a strong second half, and I think clearly we'd all like to see it.

I guess one of the questions I want to ask is to dig a little deeper into Jordan's question.

Mike, can you tell me, looking at your industry groups, you talked about retail being a little sluggish, I think there was a mention about industrial being sluggish.

Where is the sluggishness more consumer-driven, according to your customers?

Where is the sluggishness more because inventories have just built up and it may take a little bit longer to kind of wash through the backlog?

Before Mike answers Jeff, let me just say that while I agree with you about fourth year in a row, this is the first time we've had significant action in Washington in terms of tax and people can argue about the relative benefits or not, but this company happens to believe that there will be some benefits resulting from that economic package that the President and the Congress passed and that is a difference that we haven't seen in the past and that we're expecting to get some benefit from.

Having said that, I'll let Mike now answer the rest of the question.

I think it's in all our interests if you're economists are right, so no argument there.

Thank you.

The real issue that's impacting us at the current time, as Dan mentioned and Doug mentioned also is really in the retail sector, the feedback that we're getting from that sector is that inventory levels are at a very low level and replenishment should begin sometime soon, which would we would view as a good sign.

Certainly that would help us in the latter part of the first quarter and certainly going into the second quarter.

We would like to think that we're going to start to see the strengthening of the economy around our traditional peak time and of course if that's true and retail begins to pick up at that time which would be consistent with the holiday season, that would be a very good sign for us.

But right now, the issue that we'll dealing with is really in the retail sector and it's more to do with inventory levels being very low at a store level.

Okay.

Mike, you've been through a couple of these downturns before, I think I asked it on the last call, what's been different about this one?

Well, if you look at overall GDP, it's been at a reasonable level it just hasn't come, the growth hasn't come from the sectors that drive our business as much in the Express area, and of course it's been held up largely by the consumer.

So it's the makeup of the GDP that's different that's affecting our business more than it is overall GDP number.

Okay, guys.

Thank you very much.

Thank you.

Our next question is a follow-up question coming from James Valentine from Morgan Stanley.

Please go ahead with your question.

I was wondering if maybe Dan talked a little bit about the sustainability of the Ground margins.

We seem to see improvement, I mean, I'm adjusting last year's for the one-time event, we saw pretty good improvement here in the fourth quarter over last year, I'm trying to understand how important or how critical is getting top line growth in order to see that margin improvement or are there still areas of productivity enhancements or just things you can do to go in and fine tune the operation.

I presume you've been very much in a growth mode and many companies that are in that situation when their growth slows, they then start to focus on refining the operation and trying to improve margins.

I'm just trying to figure out, you've been exceeding our expectations for a few years here on margin improvement, I'm just trying to understand it that's over with or if there's still more to come?

Well, I think, Jim, that we can continue to produce solid double-digit margins for the foreseeable future.

There's no question that the top line is critical for us as well as improving our yields along the way.

That's a huge driver.

But through the introduction of technology-based projects that we've had here through the last few years, we've continued to be able to improve our productivity and make real gains year-over-year on the bottom line through real productivity change in the business.

So that's been just spectacular for us.

As well, we keep close handle on every other cost that we have, including our head counts.

And because of our models, can adjust pretty well to varying volume levels.

So right now, for instance, where we've seen our volumes a little bit flat where we're holding cost, we're not adding people or other expense.

So that's kind of how we manage the business.

But I am still confident that we, as Mike said, if the economy picks up here in the second half, we will continue with good double-digit growth and I think be able to sustain industry-leading margins.

So I'm confident for the future.

That's great.

Along those same lines, do you think that given the current pricing environment, that if we don't see firmer pricing in the industry, that there's a possibility those margins could start to head back the other way or is that not really a near-term risk in your mind?

The yields you mean?

Yes.

No -- yeah, I guess yields.

Yeah, I think we are in a very aggressive pricing environment as far as Ground is concerned especially with our corporate worldwide customers, we've seen some offset to that by excellent growth in our small shipper segment and as you can see here, our margins are up very nicely year-over-year and even sequentially from Q3.

So it's obviously important, we manage yield every day, Mike and I are constantly talking about that and making changes to the way we approach the marketplace.

But so far so good.

Great.

Thank you.

Thank you.

Our next question is a follow-up question coming from Ed Wolfe from Bear Stearns.

Please go ahead with your question.

Yeah, just a couple of cleanup questions.

I'm piggybacking on Jim's question, Dan and Dave, last quarter you talked about UPS being a little bit aggressive on the pricing side, since then we've seen very strong yields from both them and from you in this report.

Is there a sense that things are stabilized on the pricing front, getting more aggressive or is it just a different pricing dynamic that people are pricing products more individually per company and the world is changing in the business a bit?

Well, I would say that maybe it hadn't escalated since the last time we talked but from my perspective it's still pretty aggressive.

It's on an account-by-account basis but overall, we're confident in our ability to management yields.

We think people are responding favorably to our value proposition.

And we've been able to again improve our, in fact improve our real rates year-over-year which is very encouraging.

Holding on to our extra services, and the fuel surcharge helped a lot.

We're seeing a bit of a decline in our weight per package and that because Home Delivery has a lower weight per package and becomes a greater part of our mix to offset some of the positives that we've seen but still a good year-over-year result and a good result from Q3.

So I think it's aggressive but again the small shipper growth is helping and we've just got to manage it day by day.

Dave, on the express side, is there a sense that the competitive environment's changing one way or the other?

Yeah, this is Dave and Mike may want to answer more of this question but I wanted to say something Dan had mentioned, and it's very important, the value proposition is the key to this whole thing and of course our ability to bundle our Express with our Ground and of course Freight, has helped us tremendously.

The portfolio that the customers get from FedEx is much broader, much better, much stronger so that's helped us in our yields improving at Express.

I would just add that really echoing what Dan said, the yield environment, any time you get into a relatively soft economy is going to be more aggressive especially in the larger accounts on an individual account basis and that's really what we've been seeing.

And then Alan, in the quarter, was there any benefit from either military charter flying or from just general charter flying with a reduction in passenger aircraft particularly in April related to SARS?

We have had an increase in our charter revenue and our charter operations are very nicely profitable, significantly obviously there wasn't any military flying a year ago in the fourth quarter there was in this year's fourth quarter and it continues into the first quarter and it's in our guidance.

And is there any way to give kind of a range of how much that benefited those two things for you on the charter side?

Versus a year ago?

I would say that because it's such a small part of our overall operations, on the margin it probably had a nice little contribution at Express but if you really cost it out over all, it probably is, you know, in the low-single digits of profitability.

But we really don't look at it that way, we look at it as the ability to better utilize our assets and spread out more of the fixed costs associated with it.

So not a big material impact in the quarter.

And in the fiscal first quarter, are they continuing or are either or both of those starting to drop off a little bit?

They've continued so far in June and I believe we don't know about July and August contracts at this point.

This is Fred Smith here.

Let me make a comment about this because I've asked this exact same question, Ed.

I think where we come out is that SARS has been sort of a neutral for us.

On the one hand, there's been a reduction in underbelly lift from passenger carriers.

On the other side of the coin, there have been a number of our customers who have had plant closings and other reactions on the ground from SARS.

So our management team has reported consistently to me and I'll let him amplify on it if he wants, and Dave Bronczek here in a second, that it's been overall pretty much a neutral.

Secondarily on the charter side of the house, the reason that we engage in the charter business is not because it's a very big business, is it's a very good way for us to productively have the necessary spare aircraft that we need, and have some contingency aircraft out there.

So we don't look at it as a big business off and by itself, and as Alan said, the numbers are small.

Dave, you want to --

Yeah, Fred.

You're right on both counts.

We had had some slight increase in Freight from military contract charters, SARS has probably been a slight increase for us as well.

Fred is right that there's been less belly space capacity from the commercial planes but net-net it's probably only been a slight pickup for us so both have probably been positive but only slightly.

Thank you very much everybody, that's helpful.

Thank you.

Our next question is coming from Donald Broughton from A.G. Edwards.

Please go ahead with your question.

Good morning, gentlemen.

Hi, Don.

You have historically been predicting that you'd see the yields on Express get better and better as Ground was [INAUDIBLE] and will continue to see those yield gains for Express, in fact, quite frankly from an absolute and percentage basis, it's one of the strongest gains you've had, historically.

Why aren't you crowing more about more?

Does that mean it's not sustainable or what's going on here?

Don, this is Alan.

In the fourth quarter, the domestic yields were at 52 cents, 43 of that was fuel surcharge.

Okay.

Base yields were up, rate per pound was up but weights have been declining.

And I think that's, Mike Glenn will tell you that's another sign of a less than strong or weak economy.

And until we can see those weights go back up, and our mix change to be more box growth and less envelope growth, there really isn't a lot to crow here about because the fuel surcharge is designed to be neutral.

Fair enough.

Thank you.

Thank you.

Our next question is coming from John Langenfeld from Robert W. Baird.

Please go ahead with your question.

A question for Doug on the Freight side.

Just given the freight environment that's out there.

How are shippers going to stomach the price increases that you have out there that you recently announced?

I know they're consistent with previous years, but could you just give some flavor to what the reaction is and how you anticipate the flow-through on that to work?

Well, John, if you describe the freight industry in general, it's hard to give you and answer.

But the customers that are out there that we serve that we've designed this network to serve, recognize that the real cost savings is in inventory, it's not in transportation.

So the people that are executing fast cycle logistics that are absolutely dependent on next-day fulfillment and in some days second-day fulfillment for inventory replenishment and stock replenishment, they're excepting of reasonable increases.

So I think that's why our yields are where they are and they've been good for some time.

It's not necessary that we're raising rates but we're attracting more of the customers in that fast cycle logistics area and that becomes a bigger and bigger part of our mix.

Also remember that, this is Alan, that when we have a general rate increase it applies to about 45% of Freight's revenue, it's not contractual.

So you already have a built in dilution if you will on the ability.

So just don't apply 5.9 to their total revenue to get to the answer.

Right.

And also with Doug's -- with the strategy that we have at FedEx Freight, which is, you know, overnight and two-day, we're going to get a lot of premium less than truckload freight in that system because it does have the intended result for the customer in significantly reducing their overall inventory and transportation costs when you view it on an end-to-end basis so it's a great value.

That's another reason why a lot of it can stick.

Good, And then a second question in terms of head count reduction, future initiatives, I know you basically just started this one.

But are there other initiatives in the pipeline that would be of this magnitude depending on how this one goes obviously?

But as we look out over next two to four years could we see additional programs like this one, the voluntary head count reduction?

I think we're on the expense side, we're in terrific shape.

We can manage if the economy stays at the level that it's at.

I think we can manage to the earnings range that we've given you with no additional actions.

I believe that this results at Express will be exactly as designed and we'll see significant productivity improvements from our fixed cost structure in terms of an organization.

And that will focus on growth.

We'll have Express right-sized, we're increasing Ground's capabilities as we previously announced, and we're just very confident about our ability to deliver to the bottom line going forward and we don't need to do much of anything else.

Ashley, this is Mr. Clippard.

I would like to call an end to the questions at this particular point in time.

I appreciate everybody being on the call this morning and my colleagues here at FedEx for participating.

I wish everybody a good week and we'll talk to you each of you later.

Bye-bye.

Thank you.

That does conclude today's teleconference.

Please disconnect your lines at this time and have a wonderful day.