聯邦快遞 (FDX) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the FedEx Corporation second quarter 2004 earnings 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 the presentation.

It is now my pleasure to turn the floor over to Mr. Jim Clippard, Vice President of Investor Relations.

Sir, the floor is yours.

Thank you.

Good morning, ladies and gentlemen and welcome to the FedEx Corporation second quarter earnings conference call.

I am Jim Clippard, Vice President of 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 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 be respectful of others who would like to participate and limit their questions.

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

We will have more details about the meeting for you after the 1st of the year.

I would like 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, 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 timing, speed and magnitude of the U.S. domestic economic recovery; the number, timing, mix and relocation cost of replacement staff required as a result of 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 S.E.C.

Because our financial results include business realignment costs, 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 a 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, 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.

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.

Fred.

Thank you very much, Jim.

FedEx posted second quarter earnings that were consistent with our growth plan for this fiscal year and we continue to improve our cash flow.

Earnings were driven by higher yields at FedEx Express International and our Ground and Freight networks, growth in FedEx Express International and FedEx Ground volumes, and improvement in the cost structure at FedEx Express.

We are extremely pleased with our management team's ability to contain and reduce costs while maintaining industry leading service.

We continue to right size our Express domestic network in line with expected volume levels and management will continue to examine cost reduction opportunities for fiscal 2004 and beyond.

Growth in FedEx Express International shipments, particularly in Asia remain a bright spot for FedEx as we increase our leading edge in the fastest growing markets.

FedEx business, for example, in China is growing at a rate of more than 40%.

We plan to increase our presence in China by establishing a new regional headquarters in Shanghai, adding about 100 cities during the next five years to the more than 220 cities currently served, and increasing employment in China from 1500 or so to about 2,000 by the middle of 2004.

Average daily volume at Ground for the second quarter was ahead of the first quarter growth rate.

This is once again, I might remind you affected by year over year comparisons for 2003 due to volume added because of the threatened UPS work stoppage that year.

At FedEx Freight, both revenue and operating income levels increased last year and yield improved by 6%.

Operating margin improved to 10%.

We expect continued revenue growth across all of our business segments in the remaining quarters of FQ '04, particularly as shipping demand in the retail and manufacturing sectors begins to pick up.

We believe our company is very well positioned for growth in an improving economy, signs of recovery in the U.S economy, continued to strengthen.

Retail sector is supported by growing income, consumer confidence and the prospect of an improved labor market.

However, the recent snowstorm in the northeast could dampen otherwise robust holiday sales as reported.

Continued decline in inventory to sales ratios through our fiscal second quarter suggests that a significant portion of increasing sales was from inventory depletion.

This is not much different from what we saw during our first fiscal quarter.

However anecdotal evidence from Purchasing Managers National and some regional surveys suggest that the inventory restocking process may have started to turn positive near the end of our second quarter.

At this point, on a year over year basis, real growth in manufacturing has just turned positive and real growth in wholesale has been very weak.

Both the labor market and the economy should stay on a sustainable growth path if the inventory replenishment cycle is able to run its course without disruption from outside factors.

Expectation for growth at Ground remained bright as we aggressively targeted new growth opportunities and as the retail and manufacturing sectors began to pick up in the second half of the fiscal year.

We are starting to see early signs of a transition from consumer led growth to both production and investment led growth.

Going forward we intend to capitalize on growth opportunities while controlling our costs.

International Express, Ground and Freight are leading our revenue growth.

We maintain our focus on high growth areas and invest in high growth business opportunities.

The FedEx global network is essentially complete.

It is unmatched by competitors and it is ready to maximize International Express growth in the future.

As I mentioned, we intend to take full advantage of our leading position in key markets such as China.

We expect higher growth rates for the remainder of FY '04 and FedEx Ground while maintaining excellent service levels.

We are expanding capacity and capabilities in line with our customers needs, FedEx Freight as many of you know is the leading provider of regional LTL Service now.

We are investing there in improvements to enhance service to customers both domestically and international.

Positive news from Europe and Japan, in real output growth, as well as consumer and business sentiment and continued expansion in emerging markets, China in particular, indicates a global expansion cycle, the cycle is being established.

I think this bodes well for continued expansion in our international operations.

I have noted industrial production is expanding in Japan and customer sentiment is improving in Europe.

As you know, we are in the midst of our peak holiday season.

This past Monday, December 15th, we experienced our busiest day of the year when FedEx Express and Ground networks handled nearly 7.5 million packages.

Before closing on that note, I would like to take the opportunity to thank FedEx employees, associates and contractors around the world for their hard work year around and especially at this time when they all go the extra mile to serve our customers.

And by the way, if you still haven't shipped those last presents, you are still in luck.

You have until Tuesday to ship FedEx Express for delivery before Christmas.

With that, I will turn it over to our CFO and EVP Alan Graf.

Alan.

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

Good morning every one.

I think with Fred's comments and our very detailed press release, we really covered a lot of the waterfront, so I will limit myself to four points this morning before we turn it over to Q&A.

First , in discussing our realignment costs, I should note that we have increased slightly the total amount of realignment costs we expect because we have added a couple of additional realignment and reduction of overhead at FedEx Trade Networks and FedEx Services.

The savings resulting from these have increased as well with 135 to 145 million in the second half, and the tail wind going into fiscal '05 of savings is 235 to 240 million.

This program has a very high return on investment.

The cash cost associated with realignment are approximately 225 million which means our pay back is slightly less than one year.

That's part of our operating leverage going forward.

When you combine that with a continued improvement in our revenues, we have given you an outlook for the second half that has very significant increases in our earnings per share, our operating profits and our cash flows.

In fact, we are going to now spend somewhat slightly less than 1.6 billion on Cap Ex.

So when you take those in combination, the strong operating leverage, the reduced fixed costs associated with our business realignment, we are going to generate very significantly strong free cash flows in the second half and into fiscal '05.

My last point has to do with Ground's operating margin in the second quarter, which is a decline on a year over year basis.

I wouldn't let that guide you about Ground earnings capability going forward or its performance.

In fact, we had some significantly increased intercompany charges this quarter versus the previous year, which were a little bit abnormally low for several reasons.

But as Ground's growth continues, it is absorbing a higher percentage allocation of marketing, sales and IT services and, at Services, we are rebuilding our bonus programs to get back to target and so those costs are higher this year than last.

Had those increases not occurred, Ground would have actually had an expansion of it's operating margins.

And Ground will do very well in the second half of '04 and into '05.

With that, Operator, those are my comments and we would like to open the floor for Q&A.

Thank you the floor is now open for questions.

If you do have a question, you may press 1 followed by 4 on your touchtone telephone at this time.

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

We do ask, if you are using your speakerphone, to pick up your hand set to provide optimum sound quality.

Once again to ask your question, please press 1 followed by 4 on your touchtone telephone at this time.

Your first question is coming from James Valentine of Morgan Stanley.

Please state your question.

I had a question about your domestic overnight air volumes.

You know, the economy grew at a pretty strong rate here for the calendar third quarter, and yet you saw your overnight domestic air volumes down 2.4%.

I guess that was probably the biggest disappointment in the quarter.

I wonder if you could address this vis-a-vis any market share issues that are taking place.

Jim, this is Mike Glenn.

We have not seen any significant changes in market share, any material changes in market share overall.

It is important to note that we do not see any growth in the Express market in general, and that's been the case for really the last couple of years.

However, as Fred said earlier in his comments, we are seeing some evidence that the inventory cycle may have started to turn positive towards the end of our Q2, and we believe that that could have a positive impact on us going forward.

Having said that, the overall impact from the inventory side though was still negative.

Mike, wasn't that segment though in terms of overnight domestic packages up 1% in the fiscal first quarter?

Are you including envelopes in that?

Yes, envelope and box.

I am trying to say, according to my numbers it was up in the fiscal first quarter, now it is down 2.4% , so I am trying to figure out why there would be a decelerating trend given that it looks like the economy is picking up.

Well again, if you're including envelopes in that, I think that will sku those numbers at bit.

The real issues is the inventory cycle that we're talking about.

And so we believe that if we continue to see some replenishment there, we will see positive numbers.

You don't think there's any kind of market share issue vis-a-vis UPS having double digit air volume growth, maybe there's a shift, something going on there?

Well to be perfectly honest with you according to our numbers our revenue and volume share in the overnight package segment is stable.

It depends upon-- there are clearly different definitions of the market out, there depending on which competitor you are talking to, but our analysis of the overall package market for calendar Q3, we are showing stable impact on volume and revenue, no material change.

Okay, great, guys, I appreciate it.

Jim, this is Fred Smith.

This is something that I think this gets very confused when this business is reported upon.

The Express market is really, as you well know, composed of three segments.

One, the document segment.

Number 2, the overnight box segment, and, number 3, the deferred box segment.

Of course, that doesn't include international, which is the real growth story there.

And the gains that have been reported in the main, by UPS; correct me if I am wrong here, Mike, I think, are in the document sector.

And our market share in that sector has remained constant.

That's correct, and also, I believe, UPS benefited from some recapture of volume that was at risk last year, due to the labor negotiations.

So, but primarily the growth is coming in the document sector.

Okay, great, thanks, guys, appreciate it.

Thank you.

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

Hi, guys, how are you doing?

A quick question with regards to the Ground business.

Dan, could you talk a little bit about how you see those growth rates?

And talk to us about how you see the year playing out in that marketplace?

And maybe, Alan, if we could get some clarification of how we should think margin going forward vis-a-vis some of the reallocations going on.

Good morning, Gary.

As you can see, our growth was up 3% in the quarter, obviously difficult year over year comparisons, as Alan mentioned.

We did have good growth in our home delivery segment, overnight segment and with our small shippers, I expect that to continue.

And although we are still an aggressive pricing environment, I expect improved growth rates here in the second half with a little less of a difficult comparison as we go forward.

We have an excellent peak season, setting new records, so we are reasonably optimistic over the next several months.

Just before talking about margin, just, Dan, if I could follow for a second.

You have talked about double-digit for the year in volume.

That still feels pretty good for you?

Well, I am not sure we are going to, with the first half, I am not sure that we are going to reach that for the year, but, again, I think our growth rates can improve as we go forward.

Okay.

Thank you.

Alan Graf, Jr.: Gary, to answer your question about margins, you know, again, I would point out my initial comment of how, if you just do the math, about the outlook here for the second half versus the previous year over all.

I am pretty ecstatic about where we are going to be and particularly going into '05.

So I am real pleased with where Ground margins are, particularly with our growth outlook.

I think they are perfectly designed at the moment.

You quickly talked about your capital plans for the next the couple of years for Ground?

Well, we are still very aggressively expanding the Ground network, and we are not backing off of our program that we announced here 18 months or so ago, and we will continue to go on that path.

There are a lot of opportunities for Ground that are being pursued, explosive growth in home delivery, and I will let Dan maybe pick up on that a bit.

Yes, Gary, we still have building out our network according to the plan that we mentioned last year.

So significant capital over the next six-years will be targeted toward that expansion.

We should be in the, you know, 300 to $350 million range, I think, over the next few years, again, depending on our growth and our capacity needs.

But our plan is, again, targeted to meet what we expect our growth to be over the next several years.

We will see significantly high ROIC on that capital investment.

So, again, we are really well positioned and really like the outlook.

Okay, thank you very much.

Thank you.

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

Please state your question.

Yes, good morning, gentlemen.

Just a couple of quick questions.

Wondering if, not maybe in specifics, but could you give us at Ground, some sense of how are the progressions are going relative to home delivery versus past losses breaking into the black?

And give us some sense of the progression there, because obviously that has been, in the past, a drag and obviously as you ramp up volumes that should continue to be a good news story in terms of the contribution?

Alan, do you want me to grab that one?

Alan Graf, Jr.: Sure, Dan.

That's fine.

Scott, as I said, we continue to grow quite well, solid double-digit growth at home delivery.

However, our unit costs there are considerably higher than in our Ground network, largely because of density issues.

So as home delivery becomes a greater portion of the total, it does have a short-term impact on our cost structure, for instance, purchase transportation, I am sure you saw was up 9% this quarter over last, and that had something to do with it.

However, we remain profitable there, and our expectations for this year is significant improvement over last year.

And then two other very quick ones, there's been a lot of discussion in the press about your expanding relationship with the Postal Service, whether it is with Wnet or some of the peak season capabilities you are offering the USPS.

I wonder if perhaps Dave Bronczek or Alan could expand on - just give us a flavor for what else you might be doing for the Postal Service.

Okay.

Thank you, Scott.

First of all, we have a great relationship as you probably know by now, we have a review meeting with them, we just came out of one this week in Washington.

The relationship is very strong, the service is excellent.

There are some things we are considering together, you may be referring to the last mile, we worked on an agreement with them together to get some traction in that regard, Scott.

I think there is some other strategic opportunities that we have going forward that probably we'll talk about in future quarters.

But, yes, as you know, we have the addendum to the contract that is going well.

I think just business in general, from our point in view has exceeded all of our expectations with the Post Office.

Great.

And then the last quick question, maybe, Alan might give us some conceptual framework.

I know that obviously the head count programs are going well at Express.

You may not have details you want to share with us, but can you conceptually, maybe this is also Dave, conceptually give us some ideas of other things you are looking at on the cost side relative to Express?

What other things that you may be looking at from a conceptual standpoint that you may roll out later in '04 and '05?

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

I will turn it over to Dave about Express.

I will tell you that in every area of Fedex Corporation we are increasing our already high diligence in attacking fixed costs, and I think we have done a terrific job, I think our track record here is very good.

The tailwind going into '05 is incredible.

I mean those costs are out and revenues are going to go up.

So we are getting more efficient.

We are throwing overboard anything that isn't specific high ROIC that are directly attributable to the customer experience or generating volume growth, and that is happening in every aspect at Fedex Corporation.

And Dave can give you a little bit more color on Express where we have obviously taken the most action.

Yes, thank you Scott.

I am very proud of our management team at Express, it's obviously going very well.

The business realignment program has been received overwhelmingly positive.

The going forward management team is getting in place now, they are very aggressive, very dynamic.

I spend a lot of time in the field.

I can tell you it is not just a head count issue we have been dealing with, it is every aspect of our business.

It is the adjustment in our airline system, it is significant cost improvement there, productivity out in the field, our trucking network, our Cap Ex reductions, our discretionary expenses are down.

We are really going after it in a very aggressive, positive, optimistic way.

I am very pleased with our management team's progress and I am looking forward to an excellent FY '05.

Great.

Thanks very much.

I will turn it over to others.

Thank you.

Your next question is coming from Jon Langenfeld of Robert W. Baird.

Good morning.

Just a follow up on that last question.

Would the cost reductions have -- be of the same magnitude as what we saw just in terms of head count reductions.

Would you envision any other big move like this past one in the near future?

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

No.

There is nothing with that sort of magnitude.

The $430 million range or so, in our outlook at all.

You know, I think we have taken the big actions here.

But the point is, we are not encouraging -- we're encouraging everybody to not stop, you know, this is a way of life now.

Yes.

Alan Graf, Jr.: I think that we have been very successful in getting our culture to accept that.

And so we are going to see continued productivity improvements everywhere.

That is what everybody's number 1 focus is.

Having said that, we are not sacrificing one iota on service.

We will continue to invest heavily in service, our sales and marketing, in brand building programs where we are continuing to get high ROI's, so we are not going to take any service degradations whatsoever.

In fact, we're going to improve it.

Okay.

Good.

And then one - one final question.

Your competitor had noted at the end of October broad based strengthening throughout it's client base really here in the domestic side.

You kind of touched on that a little bit, but could you provide a little bit more color on what you are seeing across the different customer segments and if you are seeing that same sort of broad-based strengthening?

Alan Graf, Jr.: Well, from 100,000 feet, in our outlook, we don't generate those sort of terrific improvements in earnings and cash flow and operating profit on a year over year basis, just on costs alone.

So we are looking for improved revenue growth here in the second half.

Mike?

Yes, I would characterize it as not necessarily broad-based, a little bit more targeted in terms of strengthening, I do believe it will be dependent upon an improving inventory replenishment cycle as we talked about earlier.

If we see that on a sustained business we will certainly benefit from that.

Alan Graf, Jr.: We haven't really talked about International, but the International revenue growth story at Express is really a terrific story where significant amount of value is being added, very high marginal returns for the foreseeable future on each incremental revenue dollar.

So that is a very big value added story for us.

Thank you.

I will just jump in here and add to what Alan just said, it is a very, very important point for FedEx Express's performance in operating profits.

In every region of the world our growth rates were positive this past quarter.

As Fred pointed out, China is growing over 40%.

APac is leading the way with very, very high growth rates, but so is Europe, so is Canada, so is Latin America and so is the United States now.

We are very pleased with that performance.

Thank you.

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

Hi, Fred, hi Alan.

With the 3600 workers that have accepted the reorganization, I think in your statute you list 191,000 FTEs for the full Corp.

What is the head count for the Express division right now?

Could you just repeat that question, Ed?

What's the head count for the Express division, Dave?

Oh, the Express count is actually down on a year over year basis.

We are probably averaging right around 100,000 employees.

With that kind of, you know, almost 4% of the head count being down, are there some dislocations early on, you know, where maybe a whole group took the severance where you didn't think they would and you have to move some people around and that kind of stuff?

If that's the case, what do you think the timing is until you are kind of running on all cylinders?

Okay, yes, that is a very good question.

As I mentioned before Ed, I am out in the field, have been for the last several weeks, in fact last two-months.

We are relocating some people into some open areas, we're managing that process extremely well, we're giving opportunities to people that quite frankly were waiting for the opportunities to move forward, very aggressive, dynamic people, I might add.

I am very impressed with that.

We are managing that process.

Our front line operations management team is going to be firmly in place around the end of January, but a lot of the people that took the business realignment program are not leaving the company until after the first of the year.

Alan Graf, Jr.: Ed, this is Alan, we will be hitting on all cylinders in Q4.

That's fair.

On the Ground side, switching over, I know several people have commented on, this but it is the first quarter in six where the OR is down year over year and you had an extra day in the quarter, operating day.

Are these changes in allocation of costs, with the Express and some of the other businesses, ongoing, and should we expect, it's still a stellar OR but should we expect OR's to be down off of tough comps for a couple of quarters going forward?

Alan Graf, Jr.: Well, it is a great OR.

What I'm really looking at, and what Dan's really working hard is how much cash flow are we generating?

Some some cases we will take a little bit of OR on a couple of customers to increase the revenue and the total cash flow performance, particularly, you know, at 13.8% range.

Allocations that are done here, we talked about in the past, we do them several ways, where there are direct costs, we allocate them directly.

But when it comes to sales and marketing, you know, it is essentially allocated on a revenue share basis.

And the fact of the matter is, Ground has been outgrowing domestic Express so it is taking a little bit higher of those allocations by design, and that will continue for the second half.

But having said that, we think Ground's performance in the second half is going to be very strong.

Dan.

Yes, Alan, I agree with you.

And also, Ed, as Alan pointed out in his prior remarks, last year we had a fairly significant reversal of some of that allocation.

So when you are looking at the year over year change, it is fairly significant, and we would have had improved, significantly improved margins year over year had everything pretty much stayed the same.

But we are pushing forward here.

We think we will sustain solid double-digit and improving margins as we move forward our business.

I think as home delivery continues to grow, and improve density, that's only going to help us.

So the rest of our cost structure is firmly in line with increases in volume and inflation and we are operating, I think, very solidly at this point.

Production, by the way is also up year over year and significantly contributing to our profitability.

How much of the year over year decline is related to a tough comp and how much is reallocation that is ongoing, would you say, just rough percentages?

Alan, I don't know, do you want to get into that kind of detail or --

Alan Graf, Jr.: I don't know, there is, just about half and half but I haven't really analytically examined it.

The direction, that's fine.

Then one last question, Alan, on the pension side you paid a payment of $320 million.

Are there any other payments you see in the second half of the year under the pension?

Alan Graf, Jr.: We have the luxury of not having to do anything.

We are not required to make any additional contributions to the pension plan.

It is fully funded.

You know, you tell me what the discount rates and the markets will look like at our measurement date of February 28th and then I will tell you exactly our impact on our FY '05 expenses.

You know, but for the last several years we have had 80 to $115 million year over year increases in pension at FedEx Corporation, and I am very confident that's not going to occur in '05.

You know, there's a possibility it could be better.

There's a possibility it could be flat.

We will just have to see when we get there.

As for cash flow, our timing last year of the initial $835 million that we put in at February 28th was about at the market bottom.

So fortuitously that has done extremely well and our pension plan is in terrific shape.

So assuming there is not a dramatic change in the discount rate, is it fair to say there's probably not a big payment coming this year into the pension fund?

Alan Graf, Jr.: I would say more likely than not that there won't be a big payment.

Thanks a lot, guys, for the time.

Thank you.

Your next question is coming from Brad Davis of Merrill Lynch.

Please state your question.

Hi, it is Ken Hoexter for Merrill Lynch.

On the Ground bonus plan, you said it sounded like there was a big change in the second quarter and you won't see one going into the third quarter of the second half of the year.

Could you just follow up with that in a little more detail?

Well, depending on where you are in management, and which operating company you are, you will -- you have a relatively large amount, for example, in Fred's and my level, a significantly large amount of our bonus is tied to overall corporate performance versus our original objective at the beginning of the year.

And the fact is, we have not been paying our target bonuses, this year we are on track, and so those approvals are higher.

It is relatively impactful at the top of all the operating companies and the decline, as you get deeper into front line management.

So it is a significant increase on year over year basis.

Frankly our management team hopes that it continues in the second half but those are always factored into our outlook.

Was it just -- any adjustment in the second quarter or are we going to see this continue in the third and fourth quarter?

No adjustment.

I mean we are tracking to our objectives and our targets.

So as long as we continue to do that, we will have higher variable compensation accruals in the second half, but again those are factored into our outlook.

Okay.

The same with pension costs, is this adjustment in the second - You said it sounded like it was higher than expected in the second quarter, obviously you made the payment.

But is there any increase from your current run rate expected in the second half of the year?

No, our pension costs for FASB purposes are fixed through May 31.

They'll be adjusted then beginning in June.

Thank you.

Your next question is coming from Jordan Alliger of Lazard.

Please state your question.

Hi, two quick questions, one, given the recent list increases that have been put out there, can you give some early sense for your view on yields as you move through the fiscal year?

Secondarily, realizing there are some snowstorms, could you perhaps give a read on to your views of the peak Christmas season relative to expectations at this point?

Thank you.

Alan Graf, Jr.: Jordan, the pricing environment, albeit aggressive, we should be improving with the list price changes we made earlier, certainly should have some opportunity to have a positive impact on overall yields as they are implemented in the early part of the calendar year.

So we do expect that to have a positive impact on yields.

Thank you.

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

Please state your question.

Good morning, I am trying to reconcile your old guidance with your new guidance.

If I look at your old guidance of 3.00 to 3.15 per share and using growth savings in '04 of 130 to 140, and I wanted to take the widest range possible for that, I come out with an EPS range, I think, after tax of 3.27 to 3.77 per share.

And so I am trying to reconcile, if my math is right, that with your new guidance, which has more cost savings, but a little lower on the high end of that range in terms of EPS.

Is my math right and if it is, is the core business a little less positive than when you last gave guidance?

Alan Graf, Jr.: The guidance is relatively the same, as it was, and we will be happy to take you offline and go through that with you, Jennifer, but we are relatively the same guidance.

We have just shifted to what you all are using as the convention which is to include savings and to exclude costs, which is what First Call does, so we are trying to match that up, and that's what we have done here.

Okay.

Thank you.

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

Please state your question.

Hi, guys.

Quick question just on the list price increases.

You guys have always been very disciplined in price.

And just looking at the, if I recall, the list price increase on the Express was a little lower than the one that UPS went with.

I am curious, I assume that was done on purpose.

Is that a reaction to either your volume growth in the Express divisions or is there a strategy here and just what is the overall pricing environment as you see it?

I think it's -- you need to be cautious in looking at the absolute list price increase versus a total impact of the pricing actions.

One of the things that we did, when we made the announcement is tried to match our cost to the service being provided.

As a result of that, we adjusted some surcharges.

So if you, in addition to going up on a list price basis for domestic Express and USX by 2.5%.

So if you look at the aggregate price change, it is certainly more consistent with what we have done in the past.

What we did in this case is target the pricing action, with changes to surcharges to better match cost to the service being provided.

Thank you.

Your next question is coming from Andrea Sowicki(ph) of Toupow(ph) Capital.

Please state your question.

Ms. Sowicki your line is live, please proceed with your question or un-mute your line.

We will move on to to John Larkin of Legg Mason.

Please state your question.

Yes, good morning, gentlemen, I had a question, on the International export business.

It sounds like Asia and China continued to do very nicely for you, the new Shanghai operation, allowed that to continue going forward.

Not exactly clear though on what is happening in Europe.

I would guess that Europe is just now starting to look a little bit better.

It -- I also wanted to see whether or not you all are planning to capitalize on the potential inclusion of the Eastern European countries into the European union?

Thanks for the question, John, this is Dave Bronczek.

Actually, Europe has been performing exceptionally well for the last three consecutive years.

They continue to perform well.

They had a very high growth rate in revenue.

Their volume growth rate was 6% plus, and that does include, the European division, does include Eastern Europe, and has for the past several years.

So we are very pleased with Europe's performance of course APac, Asia Pacific continues to lead the growth rates.

Thank you.

Your next question is coming from Heline Becker of Benchmark.

Please state your question.

Thank you very much, operator.

Hi, gentlemen.

In terms of the snowstorms that we have had recently, I think Mr. Smith, you commented that that may have put a damper on some retail sales, but up here we were hearing news reporters urge people to stay home, order online and ship via FedEx.

Can you discern out whether there was an increase in business above what you would have expected on the few days after the storm?

And then also for Mr. Smith.

Could you just update us on stuff that's going on in Washington, for example there is a lot of stuff with respect to pension reform, there is the ongoing lawsuit with A star.

Can you just give us an update on where things stand as you have a leadership role there?

Thank you very much.

Well, let me just hit the top line, and then ask Mike Glenn and Ken Masterson to comment on those in more detail.

Regarding the snowstorm, I think, basically, what I was trying to communicate there was that on a year over year basis, that weather pattern may have some effect on the retail sales as they are reported, and may make this Christmas a bit less than was originally anticipated.

Now, as far as FedEx is concerned, obviously the increased use of the internet to buy things online, is an important issue for us.

Our Ground home delivery unit is very robust in its growth levels, so I am sure we did benefit to some degree, in the house, not going out of the house and going online.

But I will point out to you that with our broad portfolio of services, we really don't care what point the customer buys the item.

I mean, we are happy to take it into the store, the big box store, on a FedEx Freight truck.

We are happy to move it to the FedEx Ground system or across the ocean.

So it is hard for me to break that down, but I didn't mean to imply there that that was a big, a huge issue to us, only that in the retail sales area, the snowstorm might have some effect.

On the Washington situation, we are actively involved in a number of fronts.

We are particularly interested in the Congress permitting the Treasury to issue regulations on portable pension accounts, which is held up, and we have issues up there of one sort or another all the time.

Now, let me ask oh -- ask, Ken, why don't you go on and comment on the regulatory matter on the A star.

As you know the A star hearings are completed.

We're awaiting a decision, we don't expect it until after the first of the year and we are looking forward to hearing on that.

On the other matters in Washington, Fred mentioned the legislative activity, there is a tremendous amount of activity there, particularly given the election cycle, and we are heavily engaged.

Is there anything else specifically you had in mind on that?

Thank you very much.

Mike, do you want to comment any further on the snowstorm?

Well, I would add what Fred said, over the weekend in the northeast when we saw the severe snowstorms, we did see a quick burst in volume as reported from some of our major internet customers.

Having said that that was offset by a in decline in traffic on the retail side.

It was a little bit of a squeezing the balloon effect but we did see a burst in volume there as a result of some internet traffic.

But obviously it was not the same when the weather got better people got back out and did shopping in the more traditional ways.

Thank you.

Your next question is coming from Elizabeth Soude of Dow Jones.

Thank you.

I had mentioned -- I am curious you mentioned you are increasing capacity.

I am curious how much you are increasing capacity and where?

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

We were referring to Ground.

I will let Dan Sullivan be a little more specific.

Yes, Elizabeth.

We announced last year that over the next six years we would virtually double capacity of the Ground network to around 5 million packages a day and invest about $1.8 billion.

Doing that, the centerpiece of the expansion is really in the expansion of hub capacity, approximately 9 or 10 hubs will be added during that time to the 27 that we already have in North America,.

And then obviously, we will relocate or expand our other satellite buildings as we need to.

So it is a very aggressive program that we think is in line with our sales projections over the next several years.

Elizabeth, we will continue to expand our FedEx break network as well.

As you know we have been actually been downsizing our domestic FedEx Express network.

Our International network is in good shape in terms of it's size but with the growth we are seeing we hope that we'll be expanding that in the not too distant future, although it will be at a more in a bite size fashion than in the past and we have had to put a lot of capacity --

Thank you.

Your next question is from Jeffrey Kauffman of Fulcrum Global Partners.

Please state your question.

Okay.

Thank you very much.

Fuel expense came in a little higher than I was looking for.

A little closer to 95 cents a gallon.

Can you address the impact from both the currency standpoint in terms of international yield, versus what was reported, and from a fuel surcharge standpoint in terms of the net fuel expense?

And then in addition, when I was looking at the tax line, it looks like you came in about 34.5, 35% again, on a reported basis, a GAAP basis, what should we be thinking about in terms of a tax basis on a pro forma basis?

Alan Graf, Jr.: Well, the pro forma tax rate is going to be, you know, around 38.0 percentage here in the second half in each quarter, which means per year about 37.5, given the first half, the first quarter adjustment we had from the maintenance ruling.

So we don't see any changes in that for the rest of the year.

We did benefit from exchange rate, within our yield, but also please remember that we had a significant amount of costs offshore that are foreign currency denominated.

We do that by design so that we can better balance our currency exposure, so there was net/net some benefit overall from currency.

And the same with fuel, although fuel, you know we had the dynamic surcharge which UPS has adopted, we think, almost identically to ours all around the globe.

That has a lag impact in it.

So overtime it should be a wash.

There are some quarter over quarter differences and we had a net benefit in the quarter, all up at Express, Ground and Freight of about $25 million.

Thank you.

Your next question is coming from Donald Broughton of AG Edwards.

Good morning, gentlemen.

I am looking for the International results, and admit I am a little confused here.

I heard you say Europe was up 6%, yet I see I.P. was up 4%.

I am under the impression that Asia was stronger than Europe.

Alan Graf, Jr.: Donald, you are missing U.S. outbound, which is the big number, and the U.S. outbound had a positive growth but it was less than 1%.

Thank you.

Your next question is coming from Alexandra Zorta of Goldman Sachs.

Yes, thank you.

My questions have been answered.

Thanks.

Thank you.

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

Hi, Alan and every one.

Mentioning Japan, the improving economic outlook there.

That is a country that has contributed, I would imagine, very little growth to your system over the last five-years or so.

Is that true, and, what percentage of the International business is Japan?

How significant is it if Japan begins to grow again as it hasn't done for a long time?

David, this is Dave Bronczek again.

I think that is in main correct, Japan hasn't been growing, their economy I should say.

It has not contributed a lot to our performance in Asia Pacific in the past, I think it is a good sign for the future, I am optimistic about that for the future.

I don't think it changes the overall general direction of Asia Pacific that much, other than possibly slightly improving it.

But it is true that the economy is improving, and that is good news for us.

Operator, at this point, I think we have made the rounds of questions, and I think we'll call a halt at this point.

I want to thank all of you ladies and gentlemen on the call for participating.

And all of my colleagues here at FedEx.

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.

I'll have to put out an email.

I forgot to remind them to mark their calendars again.