聯邦快遞 (FDX) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the FedEx Corporation first quarter earnings release fiscal year 2004 conference call.

At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following today's presentation.

It is now my pleasure to hand the floor over to your host, Jim Clifford.

Sir, the floor is yours.

Thank you, Maria, and good morning ladies and gentlemen and welcome to the FedEX Corporation first quarter earnings conference call.

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

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

This call is being broadcast from our Web site, and a 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.

We are planning an investor meeting next April here in Memphis so please save Wednesday, April 7, and Thursday, April 8, 2004, on your calendar.

We will have more detail about the meeting for you after the first of the year.

I want to remind our 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 early 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, press releases, and filings with the SEC.

Because our financial results include business realignment costs and the benefit from a tax court decision, certain financial information discussed on this call is considered a non-GAAP financial measure.

Please refer to our earnings release, available on our website, for discussion of the non-GAAP financial measures discussed on this call and a reconciliation of the non-GAAP financial measures to our GAAP results.

Joining us on the call today are Fred Smith, Chairman, President and CEO, Alan Graf, Executive Vice President, CFO, Ken Masterson, Executive Vice President, General Counsel and Secretary, 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 have time for Q&A and again please limit your initial questions to one per turn.

Fred?

Thank you, Jim.

Ladies and gentlemen, we're extremely pleased to report an earnings per share growth of 17% from 52 cents to 61 cents, excluding the business realignment costs at FedEx Express and a one-time benefit from a favorable tax ruling as Jim mentioned.

We significantly improved our cash flow, our return on invested capital, and our operating margins and absent the special items I just mentioned, we're doing exactly what we said we would do to improve long-term shareholder value.

These solid results flow from our continued success and cross-selling FedEx customer solutions to those existing and new customers, and I think we're starting to see momentum.

We're equally pleased with our management team's ability to contain and reduce costs while maintaining industry-leading service levels.

We're continuing to adjust the express domestic network in line with expected volume levels.

Earnings were led by continued growth in FedEx Express international shipments, particularly in Asia as we leverage our leading position in the fastest growing markets.

Significantly, FedEx was awarded 13 additional frequencies in and out of Hong Kong and today FedEx Express has more flights in and out of Hong Kong than any U.S. carrier.

In September, FedEx Express launched its first direct flight from Shen Zchen* to our hub in Anchorage, Alaska providing customers across rapidly expanding southern China with next-day delivery to virtually any address in North America.

Next month our customers will enjoy more extensive service between Asia and Europe with six additional flights between Hong Kong and our European hub at CDG airport in Paris.

Yields improved at FedEx Ground and FedEx Freight and operating profit margins at all three major operating companies were up from the previous year before the business realignment cost at FedEx Express.

While average daily volumes at Ground were slightly ahead of last year, we expect stronger growth in the remaining quarters, particularly as shipping demand in the retail and manufacturing sectors begin to pick up in the second half of our fiscal year.

We believe we're a successfully harnessing the unique power of our portfolio.

FedEx Freight in particular continues to contribute as the market leader and the regional LTL industry, and a real competitive differentiator for FedEx.

FedEx Freight provides a vital component of comprehensive supply chain solutions that we bring to the market.

Recently FedEx Freight introduced a money-back guarantee on LTL shipments bringing FedEx Freight offering in line with the money-back guarantees already offered by FedEx Express and FedEx Ground.

I think our management teams continue to do an excellent job of driving growth opportunities while effectively managing costs.

And we believe we're poised to capitalize on emerging growth opportunities.

Today, FedEx is a more flexible and agile company, putting the right resources against the right market demand at the right time.

In this regard, we'll continue to grow our Express business with emphasis on the most profitable sectors particularly international, while effectively managing costs and keeping a sharp eye on margin improvement.

These actions have FedEx well-positioned to take advantage of an economic recovery, particularly since our global network is essentially in place and is ahead of our competition.

We're increasing capacity at FedEx Ground and FedEx Ground's home delivery service in line with customer demand.

Since our last investor call, we've announced the locations of new FedEx Ground hubs in Cincinnati, Dallas, and Hagerstown, Maryland.

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

Despite continued sluggishness in the manufacturing sector, sequential improvement in the overall economy is increasingly evident.

We feel as the economy gains momentum, that will translate into year-over-year acceleration in GDP growth as well.

Stable financial market, accommodative monetary and fiscal policies and general improvement in consumer and business confidence all point to output expansion in the near to intermediate term.

Historically low inventory sales levels reflect high productivity as well as high growth and earnings potential in the economy.

Now, we're confident that FedEx has played a key role as both a facilitator and an enabler in this efficiency gain in our economy, and we plan to continue that vital role moving forward.

In closing my remarks, I'd like to reemphasize our strong commitment to improving our financial performance in terms of margin, cash flow, and ROIC.

I believe the results we've announced today demonstrate that we're making significant progress in that regard.

When we created FedEx Corporation in 1998 we made a commitment to improve shareholder value and I hope you'll agree that we've done that as well.

As shown in our current proxy statement FedEx's five-year cumulative total return has significantly outperformed the S&P 500 and the Dow Jones Transportation average.

And with that, I'll turn it over to our CFO, Alan Graf.

Alan?

Alan Graf, Jr.: Thank you very much, Fred.

Good morning, everyone.

Wow, just a great quarter, so much good news and so little time, I'll try to be as brief as I can.

Importantly we exceeded our non-GAAP range of 52 to 60 cents by 1 cent and exceeded the First Call projections of 57.

We won the engine maintenance case, we won the appeal on the UPS strike money-back guarantee case, we introduced a money-back guarantee at Freight.

Our early retirement and voluntary severance programs at Express are achieving the desired results.

So we're very excited and very optimistic.

As you can see, we're now reporting three segments through the organizational reporting realignments that we think will provide more focus and synergy within our company.

And it's great to see all these segments improve their operating margins, of course excluding the one-time event at Express.

I would like to point out that our second quarter range of 80 to 90 cents does not include any savings from the early retirement and voluntary severance programs at Express.

I'm not sure what our sell side analysts have included in their current projection of 90 cents in terms of savings, but our numbers do not have any savings in them.

I should also point out that our year projections of $3 to $3.15 also exclude any savings associated with these programs and of course they're going to be significant.

My expectation for the second quarter includes year-over-year volume comparisons that we expect to improve at Express and Ground as Fred had mentioned.

And we will generate very strong cash flows for all of fiscal year '04, including the one-time events as we continue to improve our return on invested capital and efficiently manage our expense and capital expenditure base.

And with that, Maria, I'm more than happy to open up for questions and answers.

Thank you. [Caller instructions] Your first question is coming from Jim Valentine of Morgan Stanley.

Please go ahead with your question.

Great, thanks.

Great quarter, guys.

I just had a question about Ground volume growth and you did temper everyone's expectation I think going into the quarter saying that you had very tough comps.

But I recall, I can't remember if this was with a -- on that call or at a prior meeting, but I thought management was saying they were looking for this fiscal year for Ground volume growth to be in the double digit range, albeit maybe just very low double digits.

But I'm just trying to understand if that was the expectation, and you only grew 1% in the first quarter, if we should expect some kind of ramp up?

And then related to that, it's my understanding you recently won a large computer manufacturer contract and I'm wondering if that's enough to move the needle?

Mike, you want to start with that?

Yeah.

Jim, obviously, this was a difficult year-over-year comparison as Q1 FY '03 volume included an estimated 140 to 150,000 daily packages as a result of the threat of the UPS work stoppage last year.

We did retain slightly more than 50% of that volume through the first quarter, but the volume was also affected by weaker than expected inventory replenishment in the retail sector during the quarter.

Retail inventory to sales ratios in terms, in real terms dropped noticeably versus the same period last year, and consequently improvement in retail sales didn't translate into improvement in demand for shipping during the period.

And when there was an increase in shipping, there was some mode shift to LTL and truckload in that sector.

We also saw some slow economic recovery in manufacturing and wholesale trade sectors which are important to Ground and that also negatively impacted our growth.

Our expectations for growth at Ground continue to be strong for the year, and we expect to see those volumes ramping up as the economy improves, particularly as we see shipping demand in the retail and manufacturing sectors improve and the inventory replenishment take place.

And that should begin in the second half, obviously going into peak season, we hope to see some stronger trends, again based upon some improvements in the economy and then in the second half of the year as well.

Alan Graf, Jr.: Just to put a point on it, the Ground segment operating income was up 15% and margin was up a full point to 12.7.

Yeah, I was impressed.

You guys hit my operating income number, it was just the volume growth.

And I guess, should I presume then based on what you're saying, Mike, is that you're going to still move forward with that kind of 10 to 12% capacity growth over the next few years?

Because that's what you hope to continue to see in terms of volume growth?

That's our plans at this point.

Okay.

Great.

Thanks.

Thank you.

Your next question is coming from John Langenfeld of Robert Baird.

Please go ahead with your question.

Good morning.

Express.

On the Express side, margin improvement there, what sort of head winds did you have from pension and healthcare?

This is Dave Bronczek.

We did have a margin improvement as you noticed, if you exclude the business realignment costs.

In our salaries and wages, of course, is the pension and healthcare, and that is by far and away the largest increase in that number.

So we did have some drag in pension and healthcare in the first quarter.

Is that like a 50 basis point drag on that?

It's the lion's share of the increase year-over-year in that category.

Okay, great.

And then on the International Priority, on the volume growth side, where did that come in relative to expectation, up 3%, deceleration from Q4 in last year.

What were your expectations there and what are they moving forward?

Well, again, we're pleased with the overall revenue growth, that's the key factor for us, it grew 12%.

The volume grew 3 as you pointed out, 9% of it came out of Asia.

But again we're focusing on our yields and overall revenue growth.

We're pleased with that and I'm also pleased to report that the U.S. international segment actually grew as well.

So overall we're very pleased with International.

Very good, thank you.

Thank you.

Your next question is coming from Ed Wolfe of Bear Stearns.

Please go ahead with your question.

Good morning, everybody.

Fred, you talked about that sequential improvement in demand was obvious, and just looking at the volumes both Ground and Express, it's not so clear from the current results.

So I was asking, I want to ask if you could give a little more flavor what's making it seem obvious to you?

Maybe that's a September event or is it something to do with the particular behavior of certain customers?

Well, I think it's some of all of the above.

We obviously are now in the second fiscal quarter and we're seeing the traffic levels.

Number two, we have, I think, one of the best economists in the economic forecasting units in corporate America, and they're confident.

Gene Wang in his outlook that we're seeing pick up to some degree.

And then third, we are hearing from some customers that they're beginning to see stronger demand.

I think a very big element in this, going back to Jim Valentine's question, was the point that Mike Glenn made about inventory to sales ratios.

We saw in the first quarter there, particularly in Ground and Freight as well, a real pause there.

I think it was sort of the echo of the Iraqi war to be quite frank with you when a lot of orders were stopped.

But I do think based on what we've seen, that that's begun to turn around a bit.

We'll see here this quarter.

But that's why we said what we did.

So, where you stand, fiscal second quarter, Express volumes which were up one and change and Ground which were up less than one should both be up is your guesstimate at this point?

Yes.

Okay.

And just in terms of yields, the Express domestic yields were negative for the first time in a while.

Is there something going on differently in the marketplace?

How should we look at that or is it a mix issue?

It's -- the pricing environment has remained fairly constant over the last six months or so, albeit aggressive.

There's been no real change in that, and it is a little bit of a mix issue.

Can you describe what the mix issue is?

It's the mix between envelopes and boxes.

And can you describe the growth of those two, and how the mix has changed?

Well we don't break out segment growth, but we've seen a bit stronger performance in the envelope sector relative to our expectations.

Alan Graf, Jr.: Ed, this is Alan.

Really Mike is right on point, the biggest driver in this quarter versus a year ago quarter is rate per pound.

And that's the competitive pricing environment.

Is some of this also more letters related to mortgage refinancing?

Well, I wouldn't characterize it in one particular sector.

It's a combination of the manufacturing weakness that I spoke of relative to Ground and the wholesale trade sectors being a little bit weaker than expected, and the volume in the letters and the envelopes being a little bit stronger.

But it's not -- I wouldn't characterize it as a mortgage refinancing issue.

Okay.

Thanks a lot, guys.

Thank you.

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

Please go ahead with your question.

Morning, guys, how are you?

Morning, Gary.

First, I want to just sneak in a couple.

Fred, could you tell us a little bit about, we're seeing acceleration of movement of production of goods to Asia, China specifically.

Let's look out three to five years.

How does it change what you do, both in what you obviously would originate overseas what kind of growth that could be and to the extent those products have final destination in the U.S., what could that do for you in your Express business or possibly in your Ground business?

How might all that hash out, in your opinion?

Well, I think FedEx of all of the companies that you can think of is poised to take advantage of the trends you just mentioned.

We have a very, very strong franchise in China, we're limited in the number of frequencies that we can fly.

We would love to see the number of flights that we can operate expanded and we are working hard with both the U.S. and the government of China to try to accomplish that end.

It's in the best interest of both parties.

Secondarily, I believe one of the things that you'll see in the next few years is a significant increase in the demand in China for U.S. goods going back.

As China develops more of a middle class and more purchasing power, many of the higher value added products that we make will find a home there.

And it's interesting to note that China to Europe trade is much more balanced than it is in the United States.

So we get it both ways.

We carry stuff west as well as east, and as Dave mentioned, as we saw for the first time in a long time, U.S. exports actually on the positive side last quarter.

So that's going to be terrific.

Then in the case of Ground and Freight, there too, we have a lot of opportunity in the international sector, because as our FedEx trade networks moves items in by sea, or companies move items in by sea on their own, both Ground and Freight are wonderful networks to [inaudible] added products to their destination.

So we're very bullish on China and what it means for FedEx.

And I think, contrary to the current sort of controversy on it, I think longer term it's going to be very good for the U.S. as well.

If I could just ask a yield question with regards to Ground, some of the things that went on in the quarter is stronger yield than us and maybe some others expected, maybe for Mike or for Dan to just give us a sense of how you see that in, let's say, 3.5 or 4% GDP, if that's the case over the next year or so.

I'm sorry, Gary, your question was how does yield relate to the GDP?

Yeah, what do you see for yield?

Was something a bit unusual in the quarter, yield was strong, was it stronger than you thought in the Ground business and where do you see those trends going out the next couple years or at least year or so?

Well as I've mentioned before, we've not seen any significant change in the pricing environment in the last six months or so, it does remain aggressive.

Having said that, due to assessorial charges and the fuel surcharge and some other issues that make up our yield, we were able to have a positive yield performance and we would hope to be able to continue that.

Okay.

Thank you.

Thank you.

Your next question is coming from Jennifer Ritter of Lehman Brothers.

Please go ahead with your question.

Good morning.

A couple questions on the net business realignment costs.

It looks to me like they're a little bit higher than you guided for last quarter and could you comment on whether that's less cost savings than you were hoping for or a higher charge?

Alan Graf, Jr.: This is Alan, Jennifer.

I'll start out and then I'll turn it over to Dave.

As I mentioned in my opening comments, we're very pleased with the progress of the program.

And as we said, we now think we're probably going to be at the higher end of the range at this point.

There's still a significant amount of time for the early retirement and the voluntary severance elections to be made and of course we won't know since the voluntary program until we get to the end of those dates.

The higher the take rate, the higher the cost but the good news there is the much higher is the return.

I should add that at Express there's a complete restructuring going on and realignment and in all the benefit numbers that we talk about we're really only just talking about salaries and benefits that are going away.

We're not including in there what we think will be some significantly added productivity as a result of this.

And maybe Dave could touch on that a bit.

Thanks, Alan.

You're absolutely right.

The program has been very successful, people are very pleased with it.

We're actually very pleased with it as well.

We're at the higher end of the range;

I think Alan correctly pointed that out.

Of course that means going forward we have more savings which is a good thing.

We have reorganized Express in a number of ways that we'll talk about at the meeting coming up in April.

It's very positive.

There's a lot of movement within Express for different people with new opportunities.

But the main issue is the early retirement is going very well, the early -- voluntary severance is as well.

The dates just so you know them, the close date is September 30th for the early retirement, and November 30th for voluntary severance.

Alan did correctly point out that we're ahead of some of our targets, we're probably at the higher end of the range right now.

Great.

So the charge this year will be a little higher than maybe we originally thought but the cost savings in '05 will be a little bit higher as well?

Yes.

Okay.

Then just one other point, Alan, which is you mentioned the consensus estimate out there of around 90 cents for Q2 and said that might include some cost savings but your Q2 guidance does not include cost savings.

I was under the impression cost savings from these programs would not occur until Q3 as the earliest.

Should we think about some cost savings as early as Q2?

Alan Graf, Jr.: The lion's share will definitely be in the second half, but the way some of these take rates and departure dates have shaken out, there will be some cost savings in the second quarter and we'll quantify that for you when we come to our next meeting.

But you should not think that they're going to be significant, they will be significant in the second half.

Great.

Thanks very much.

Thank you.

Your next question is coming from Scott Flower of Smith Barney.

Please go ahead with your question.

Yeah, good morning all.

Just a couple of quick questions.

One was, I wonder maybe if Dave Bronczek could give us some sense of if you look at the international picture give us some sense of the regional strength, Asia, Europe, U.S. export, what some of those growth rates were in the quarter?

Sure.

We don't break them out by region.

Other than we broke out Asia for you, I suspect.

But as I mentioned, U.S. international outbound grew this quarter, that's very positive going forward for us.

Asia grew at 9%, again, overall revenue is up 12%.

Europe grew as well.

Across the board we've have very good success in growth in just about every region of international.

We're focused on revenue growth which is why our yields are up, even though the volume only looks like it's up 3%.

We're very pleased with the overall strategy in the growth and of course coming out of China in the overall numbers for Asia, they continue to be very strong.

Okay.

And then, just maybe one quick question for Mike Glenn.

Are you, and I know you may not break this out but, with mortgage refinancings slowing with the backup in interest rates do you foresee that that will have going forward some impact on the envelope traffic that we're seeing?

Well, as I mentioned before, the mortgage refinancing was not the driving force behind the change in our envelope phenomenon.

So our strategy is not going to be affected by the change in mortgage rate financing.

Obviously some of our customers are in that business and that could have an impact.

But we didn't see a huge spike in envelope volume as a direct result of mortgage refinancing.

Great.

Thank you.

Thank you.

Your next question is coming from Art Hatfield of Morgan Keegan.

Please go ahead with your question.

Thank you.

Morning, gentlemen.

I just have one quick question and if you addressed this, I apologize.

But with the realignment of the business units, initially, Alan, is there going to be any costs related to that?

And after you realign are you going to be able to see any hard dollar savings because of the realignment?

Thanks.

Alan Graf, Jr.: Art, no, there will be no costs associated with the realignment, in fact, just the opposite.

We did this to provide focus and get more synergies because we know that they're available and we expect to significantly improve the returns of those smaller units as a result of the new realignment.

So it should be a benefit and I think we'll see some of that in the second half.

Thanks.

Thank you.

Your next question is coming from Donald Broughton of A.G. Edwards.

Please go ahead with your question.

Good morning, gentlemen, good quarter.

I wanted just to maybe help get a little more granularity on the yield question.

I mean, we've watched you produce some very healthy gains in yield from Express and quite frankly in the same time frame, the Brown team has been losing yield for its Express.

There wasn't any meaningful deterioration here but, we didn't see the kind of 3+% yield improvement in Express that you spoiled us with.

We know you won the Del contract.

Did the addition of that larger shipper skew the overall yield or to put it another way, if sans the Del business, would we have seen this Express yield continue to improve in that 3% range?

Let me address, we don't speak about large customers specifically, but we had one large account that is really handled by multiple opco's and is not a traditional, not the traditional way that we move a package through the system.

For example, we've got supply chain moving some line haul here, we've got Express handling the delivery only function, so that does skew the yield and it would have a negative impact during the quarter on our yields.

Having said that, the bigger issue is what I mentioned earlier, we've got the mix issue with stronger envelopes than anticipated and weaker boxes due to the weakness in the manufacturing sector than anticipated and that's the primary driver.

Thank you.

Your next question is coming from Jordan Alliger of Lazard.

Please go ahead with your question.

I just wanted to ask, do you still feel comfortable with the expectations you talked about last quarter regarding the level of Ground margin sort of being roughly comparable to year ago levels?

And then just if you could just mention what the fuel surcharge impact was, if any, in the quarter?

Thanks.

Alan Graf, Jr.: I'll let Dan Sullivan talk about Ground then I'll come back and take the fuel surcharge.

Our margins were actually up better than a point year-over-year, and as I've said before, I think that we can sustain double-digit margins going forward.

Our productivity has improved, we've got great cost control, and our yields are solid.

So I'm quite bullish on margins as we progress through this year and into next.

Alan Graf, Jr.: Hi, Stan, after the fuel surcharge there was a small benefit in the quarter versus the previous year's quarter but I wouldn't characterize it as being material.

Thank you.

Your next question is coming from Ken Hoexter of Merrill Lynch.

Please go ahead with your question.

Hi, good morning.

Just two quick questions, sorry about my voice here but can you quantify the impact of the 12% international gain from currency gains, what percent of that 12% was attributed to currency?

And then secondly, you announced a CAPEX reduction to your estimates.

Can you talk about what's causing the, or where you're pulling back on spending?

Alan Graf, Jr.: Well, keep in mind that there are two components to currency.

Obviously there was a benefit on the revenue side from exchange rate, but also because we worked so hard to balance our exposures, there's also a negative impact from an expense side.

So when you combine the impact of the two, there was no material impact to the quarter whatsoever as a result of currency and that's the way we like it, quite frankly.

And we're going to continue to keep it that way.

As to ongoing CAPEX, we've lowered it a bit mostly because of timing.

We're managing capital as well as we ever have and we are only authorizing a very high return on investment projects at the moment as we continue to improve our ROIC and generate strong cash flows.

Thank you.

Your next question is coming from Gregory Burns of JP Morgan.

Please go ahead with your question.

Greg Burns, CFA: Hi guys a couple quick questions.

Alan, on the domestic air piece which improved year-over-year versus year ago against a tougher comp, was there anything in the month-over-month trends to make you more optimistic going forward?

I mean, you talked about economists and projections but I'm curious on a monthly basis, month-over-month, did you see an acceleration throughout the quarter or not?

Alan Graf, Jr.: Well, let me just answer it this way.

Our domestic Express business, Fred and I both have commented that we expect the year-over-year volume in the second quarter to be better than the year-over-year in the first quarter.

And this quarter was the first time in 10 or 11, after you smooth for 9/11, that we've had an improvement.

So although, you know, it's not a big number, it's a plus number.

And for us, that's just terrific because as we improve productivity and right-size Express that growth has a very high contribution margin to the bottom line.

And that's why we're so optimistic going forward.

Thank you.

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

Please go ahead with your question.

Yes, good morning, gentlemen.

I think Fred early on mentioned that you are starting up 13 more frequencies into and out of Hong Kong and then I gather another six from Asia over to your hub in Paris.

What kind of a percentage increase in capacity does that represent?

And will that effectively accelerate your International Priority shipment growth here over the next couple of quarters?

I'll ask Dave Bronczek to speak to that specifically.

You're right, it is 13 frequencies out of Hong Kong, seven of them go back into the Philippines into our hub there for intra-Asia which is growing very handsomely and the other six go as Fred pointed out to Europe.

It's not a big incremental percentage increase to the overall network, but it's significant in that part of the world.

Thank you.

Your next question is coming from Joanna Shanti of Goldman Sachs.

Please go ahead with your question.

Good morning.

I was hoping you could just talk a little bit about the changes since Airborne has been bought up and they're starting their own integration, we can get our own view on pricing, I was just thinking more on the customer side.

Is there any confusion from the customer base that you can see that you might be able to manipulate?

And secondly, just on your general comments on the economy, the inventory to sales ratio could be read as kind of a negative view on sentiment on the economy.

If you can just comment on your read on why the inventory to sales ratio should be so low and why it shouldn't be a negative read?

Well , regarding your first question relative to Airborne, just from viewing it from our perspective, I think, do think there's probably some confusion in the marketplace.

Having said that, we've seen no material change in terms of customer behavior relative to inquiries or things of that nature but there has been some confusion at least in terms of what we've seen but no impact on our strategy whatsoever.

I think the inventory to sales issue is one of caution due to coming out of the Iraqi situation.

I think retailers are very cautious and even though retail sales were going up, we're taking advantage of that to further deplete inventories.

As we pointed out, as we see that improve in the quarters ahead that should bode well for us.

Thank you.

Your next question is coming from Jeff Kauffman of Fulcrum Global Partners.

Please go ahead with your question.

Thank you very much.

My first question on CAPEX has been answered.

Let me ask a differently, first of all in the stat book that you've released, has that restated for the new business alignment so historically we could go back and make comparisons?

Alan Graf, Jr.: Yes, Jeff, it has.

Okay, thank you.

Alan, what are you going to do with all the free cash?

I mean, you've reduced the capital spending $100 million, you're buying back stock, is there a new place this cash is going to go?

And if you purchase all your 6 million shares of under authorization here, are we going to see a net reduction in shares outstanding as a result because this quarter you bought back a million and change yet shares outstanding are about the same.

Alan Graf, Jr.: Well, it's a terrific question and it's a great problem to have.

But at the present time we're going to continue to buy back shares to prevent additional real dilution.

You'll see some increased number of shares as a result of a higher stock price and what that translates into the result of dilution of the outstanding options.

But as options are exercised we buy those back in the open market to prevent dilution.

We are paying a dividend and we'll continue to review that.

We'll pay down debt as it comes due.

And you know, we'll build a little war chest at the moment.

And we'll go from there.

But it is a terrific problem to have and one that I've spent 24 years on the other side of.

Thank you.

Your next question is coming from David Campbell of Thompson, Davis and Company.

Please go ahead with your question.

Thanks.

Most of my questions have been answered but one thing is jet fuel consumption down in the quarter despite the pickup in domestic Express volume.

Is that decrease sustainable when the volume growth improves?

This is Dave Bronczek.

You're right, we have seen a reduction in -- it's mainly by design and we've consolidated some of our flights in the United States and taken some of our flights off of different point networks in our U.S. network for some of our different hubs for efficiency and of course for -- to increase our productivity and efficiency overall.

So that is something by design that we've achieved.

Just one more example of how well the Express management team is finding ways to reduce their costs and improve their service.

I do want to make one more point to capitalize on that point, the service is running at all-time level highs as well.

Thank you.

Your next question is a follow-up question from Jim Valentine of Morgan Stanley.

Please go ahead with your question.

I was wondering if maybe we could get a little more color on international.

Forgive me if I missed it, I think you may have addressed it partially.

But you had about 3% year-over-year growth in international volumes, 9% in Asia.

You saw U.S. growing back to growth again, and I'm trying to get the math to work.

It seems like if Asia's up and the U.S. is up and presumably transatlantic is up, there's some growth there, that we'd see more than 3% growth.

I guess does this feel right to you guys in terms of where we're at where the economy, where the dollar is or would you expect there would be better growth?

Is there maybe some market that's not growing as fast or even shrinking?

Alan Graf, Jr.: Jim, obviously the European union, some of the big powers over there are in recession so we've seen some reduction in our growth rates in Europe from what we have seen in the past.

And we'll probably have seen a little bit of a deceleration in Canada as well.

So that's how the math works out.

But we're still very bullish on international and it remains by far the number one long-term value driver for our shareholders, is how well we perform in the Express international arena.

And that's where we think we have the greatest opportunities.

This is Dave Bronczek.

We actually grew in the U.S. international outbound area, which is very positive for us, but not at the 3% levels that we would like to, and overall have grown.

But again, we're focusing on the overall revenue growth primarily we're very pleased with that 12% growth there.

Thank you.

Your next question is a follow-up from Gary Yablon of Credit Suisse First Boston.

Please go ahead, sir.

My question was answered.

Thank you.

Thank you.

Your next question is a follow-up from Ed Wolfe of Bear Stearns.

Please go ahead, sir.

Can I get a clarification?

Did Dan address the question or Mike, of what you would think a normalized Ground volume growth rate going forward should look like?

I talked about the drivers between the Ground growth and that we, as the economy improves and obviously as we see improvement in inventory to sales ratio and strengthening in the manufacturing and wholesale trade sectors that we do expect it to improve.

And over the long-term we're still planning in the 10% range for capacity expansion.

Thank you.

Your next question is coming from Donald Broughton of A.G. Edwards.

Please go ahead with your question.

My question's been answered.

Thank you.

Your next question is coming from Greg Burns of JP Morgan.

Greg Burns, CFA: Hi guys.

A question on FedEx Freight where yields were up nicely certainly above the industry average and yet your shipments were also looks like down more than I would have expected given your lower cost structure.

Is there a conscious strategy in place at Freight to sort of prune out some lower margin business there?

In other words, are you essentially going for price at the expense of shipment growth there?

Doug Duncan will take that one.

Greg, I wouldn't describe it as pruning but I think our approach to the market is clearly we're going after that market segment that is executing fast cycle logistics where they're using rapid reliable transportation to help take inventory out.

So we've built a network that gives the best reliable on-time service, not sometimes but every day.

We've now backed that up with a money-back guarantee to make that decision easier.

So frankly, those customers find a lot more value in the freight product that we bring to market.

So I think that's what you're seeing, not any intentional pruning.

Greg Burns, CFA: Great.

Maria?

Yes, sir.

I think we'll cut it off there.

And if anybody else has any other questions they want to follow-up on, give myself or my team a call and we'll handle it later in the day.

I'd like to thank all of my colleagues here for their participation and I'd like to thank all of you for being on the call and asking some terrific questions.

Thank you very much.

Thank you.

This does conclude today's teleconference.

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