聯邦快遞 (FDX) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FedEx Corporation third quarter 2004 earnings release 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 , Jackie, and welcome, ladies and gentlemen, good morning.

Welcome to the FedEx Corporation third 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 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.

Heads up everybody, our investor meeting is only three weeks away.

We will hold it here in Memphis on Wednesday, April 7th, and Thursday, April 8th.

If you have not already booked your room at the Peabody and reserved your spot with us through e-mail you need to do that today.

Don't delay, or you may miss out on this informative and fun chance to meet with all of our top management.

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 U.S. domestic economic recovery, the number, timing, mix, relocation costs of replacement personnel required as a result of the company's early retirement and severance programs, new U.S. domestic or international government regulations, the impact from any terrorist activities or international conflicts, our ability to effectively operate, integrate, and leverage the Kinko's business, the impact of changes in fuel prices and currency exchange rates, 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 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 and CFO, Ken Masterson, Executive Vice President and General Counsel and Secretary, Mike Glenn, Executive Vice President, Market Development and Corporate Communications, Rod Carter, Executive Vice President and CIO, Dave Bronczek, President and CEO of FedEx Express, Dan Sullivan, President and CEO of FedEx Ground, Doug Duncan, President and CEO of FedEx Freight, and Mark Blinn, Senior Vice President and CFO of Kinko's.

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.

Fred.

Thank you, Jim.

Good morning, ladies and gentlemen.

Happy St. Patrick's day.

Have you seen from the press release earlier this morning, FedEx posted outstanding revenue and earnings growth in the third fiscal quarter driven by strengthening worldwide economy, improved operating margin at FedEx Express stemming from its international business and savings from its business realignment programs and the successful execution of our business strategy.

FedEx Express International continues to be a strong growth engine.

Revenue and package volume growth in Asia, in particular, is outstanding.

We also see evidence of positive trends in Japan and, to a lesser degree Europe, in real output growth and overall consumer and business sentiment as well as continued rapid expansion in the emerging markets, particularly China.

FedEx Ground and FedEx Freight segments both performed well and we will keep investing in those high-growth networks.

Expectations for growth at FedEx Ground remain bright, particularly as the retail and manufacturing segments pick up.

We're aggressively targeting growth opportunities and FedEx home delivery continues to perform exceptionally well.

FedEx Freight, already the leading provider of regional LTL service, is improving its results with historically high service levels.

I think it's interesting that some people choose to ignore this unit despite it's size and annual revenue now of about 2.5 billion and the fact that it is a real differentiator for our business.

We remain committed to further developing this growing segment of our business.

As Jim Clippard mentioned earlier, Kinko's CFO, Mark Blinn, is on this call today.

I might mention that Gary Houston, the CEO of Kinko's, is away on a long scheduled trip, scheduled prior to FedEx's acquisition of Kinko's.

As noted in the press release we completed the Kinko's acquisition on February the 12th and we're very excited about the benefits FedEx and Kinko's bring to the marketplace.

Through Kinko's we'll be able to substantially increase our retail presence worldwide and offer an array of business services unmatched by any competitor.

The acquisition helps diversify our revenue base, driving better value for our share owners.

It allows us to capitalize on emerging business trends and provide greater access to the FedEx portfolio, particularly for small businesses and mobile professionals.

FedEx is well positioned for growth in an improving economy, in our opinion.

We're very optimistic about our position for the remainder of the fiscal year that ends May 31st.

The US economy continues to strengthen with signs of broadening from consumer led growth to both production and investment led growth.

Forward-looking indicators and recent economic surveys are positive, pointing to continued expansion at least through the next six months.

Growing income, stable consumer confidence, and a slowly yet steadily strengthening labor market has supported the retail sector, though recently strong retail momentum seems to have come from price concession to some degree.

On the wholesale side real demand remains relatively weak versus historical norms.

A continued decline in inventory to sales ratios suggests that a significant portion of increasing sales was from inventory depletion.

There is evidence that an inventory restocking process is beginning.

You may recall that we had started to see signs of this towards the end of our second fiscal quarter.

In recent trends in the LTL segment support our expectation of a turnaround in the industrial sector.

While we're absolutely committed to capitalizing on growth opportunities, we're also committed to effectively managing costs and running with those opportunities.

We're doing what we've said we were going to do and our strategy is showing results.

We said we would improve margins and we have.

We're beginning to realize the benefits of our business realignment in Express as evidenced by the improved operating margin at that company where margin improved from 3.2% to 5.3% year-over-year.

Our FedEx Express management team will continue to examine cost reduction opportunities and manage costs and investments prudently.

We'll maintain our focus on high-growth areas as well.

At FedEx Express we're in position to continue reaping the benefits of our industry leading global network.

At FedEx Ground we expect to continue achieving higher growth rates for the remainder of fiscal year '04 and into fiscal year '05.

The expansion of our Ground network capacity remains a priority.

In this regard we recently announced a new hub south of Memphis in Olive Branch, Mississippi, as part of our plan to nearly double hub volume capacity in our FedEx Ground network.

FedEx Freight has also increased capacity in a number of key areas to better meet growing customer demand.

As you can see by our results today it wasn't just the luck of the Irish that helped us deliver a strong quarter.

We have a sound business strategy, and we believe it's delivering solid returns.

That and the commitment of our 245,000 employees and contractors continue to make FedEx one of the most respected companies in the world.

For the third year in a row we were very proud to be ranked among the top ten most respected companies in three separate elite corporate reputation surveys.

Fortune's World Most Admired Companies, the Harris Interactive Corporate Reputation survey published in the Wall Street Journal, and Fortune's America's Most Admired Companies.

Finally, I'd like to reassure everyone of our unwavering commitment to improving cash flow, margins, return on investment and overall shareholder value.

And with that it's a good lead-in for me to turn it over to our Executive Vice President and CFO Alan Graf.

Thank you very much, Fred, and good morning everyone.

We have a remarkable amount of momentum heading into our fourth fiscal quarter and into fiscal year 2005.

Our third quarter earnings is 71 cents per share was 1 cent ahead of our previous guidance range of 60 to 70 cents per share.

With a 210 basis point improvement in the Express segment operating margin the power of our business realignment program strategy is clear.

Extremely strong growth in international priority, with volume up 10% and revenue up 21% in the quarter year-over-year, was also an important contributor to this improvement.

Aside from the strong IP growth, we are seeing accelerating volume growth at both FedEx Ground and FedEx Freight on higher yields.

We have continued our disciplined focus on capital management and are now projecting FY '04 capex in the 1.4 billion dollar range which is $200 million below our last estimates.

With improved profitability and lower capex, our cash flows are improving which allowed to us pay cash for Kinko's while maintaining our credit ratings.

We also saw the operating leverage at Kinko's, developed over the last three years, begun to manifest itself.

Although we only owned Kinko's for 18 days in Q3, Kinko's contributed 100 million of revenue and earnings of 1 cent per share which is why we exceeded our range.

Before purchase accounting charges Kinko's had an operating margin of about 7% in Q3 and that margin will be higher in Q4 before purchase accounting charges.

We are also forecasting approximately 20 million of integration expense in Q4 as we train the current Kinko's team to accept FedEx Ground and Express packages across the network, hire additional FTE's to handle the anticipated increase in package traffic and to pack and ship, and deploy FedEx automation and incur branding and marketing expense to prepare what we are calling our day one launch.

This expense is included in our forecast of $1.15 to $1.25 per share in Q4 and means that our fourth quarter outlook is ahead of current street expectations.

We are also examining our fourth quarter tax rate and may, in fact, see a modest reduction from the 38% rate in Q3.

As many of you know February 29th was our pension fund measurement date for fiscal '05 expense.

Our FY '05 pension expense will increase only modestly as compared to the significant year-over-year increases we have seen the past several years.

This is largely a result of a lower discount rate that will be used for FY '05 than was used in FY '04.

In our fourth fiscal quarter this year we will refinance a substantial portion of the 1.9 billion of commercial paper borrowings outstanding that are related to the Kinko's acquisition.

We intend to file our third quarter 10 Q tomorrow.

Finally, to focus your questions for today, I would remind you, again, of our April 8th analyst and lenders meeting in Memphis when we will discuss in detail, among other things, our Kinko's strategy and the FY '05 outlook for FedEx Corporation as a whole.

As you can tell we are very optimistic and excited about our future with many positive things happening right now, an exciting programs underway.

With that I'd be happy to open the floor for questions.

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.

If you are using a speakerphone we do ask that you please pick up your handset to provide optimum sound quality.

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

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

Please state your question.

Thank you very much.

Good morning, Fred, Alan.

Jim.

In terms of Express volumes, you talked about, Fred, the economy's feeling better in a lot of ways, in a lot of places.

Certainly saw it on international, volumes are picking up on the Ground.

What should we expect going forward in an improved economy?

Is kind of flat Express volumes domestically what we should expect going forward, or is it possible to get that back up to GDP or better, and how do you get there?

Ed, this is Mike Glen.

As you know the domestic express market has not been growing for several years now and we're not extremely optimistic that the market is going to grow significantly in the years ahead.

I do not believe that the express domestic market will grow at GDP rates, it will grow at somewhat less than that.

Having said that, like our other segments of our business we're pleased with the sequential trends that we've seen and we do believe that in the future we will be able to return domestic express into the positive territory.

Our sales strategies are working, the sales tools that we've got out there are really being received well by our sales team, and we're pleased with the trends.

When you look at your fourth quarter guidance, which is taking guidance up a little bit, does that include some positive volume in Express, and also, Alan, does that include any bit of the lower tax rate in there?

Well, as I said, Ed, throughout the third quarter we were very pleased with the trends of the business.

I don't want to get into predicting actual volume growth rates in the fourth quarter but we did see sequential improvement throughout the quarter.

Ed, we're not really planning, from a financial standpoint, much different results in the domestic express volume trends, and my range, depending on where we come out of it, has not yet reflected a potential lower tax rate.

On the Ground side, you've now had, with very difficult comparisons, obviously, two kind of flattish operating quarters and two down year-over-year margin quarters.

Dan, can you talk to directionally when you start to expect to see the operating income pick up again when the comps get easier for you and that kind of stuff?

Well, Ed, I think if you take into account the losses that we are incurring now in the segment at supply chain, that overall our operating margins are very comparable to last year, so we're pretty bullish about the future.

Is there anything in the marketplace that's changing?

I was impressed with the yield, for instance, given the pressure with fuel surcharges going away on the ground.

I know you didn't have that for much in the quarter, but is there anything in the marketplace that makes it a more difficult year going forward?

It feels like UPS is certainly targeting the B2B ground market more competitively.

I think they are.

We're seeing good yield improvement because of our growth in home delivery, extra surcharges because of the mix at home delivery to the total business is up pretty well.

So even though fuel surcharge has gone away we're seeing some good improvement with the extra services.

Thanks, guys, for the talk.

Thank you.

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

Good morning.

Nice quarter.

Alan, could you just clarify, go back to the Kinko's side and clarify what you said.

You said there was 7% margins in Q3.

Was that a full Q3 or just the 18 days that you had and then what's the purchase accounting charge and is that included?

Jon, the 100 million in revenue and the 7 million of operating income before purchase accounting charges was only for the 18 days that we owned Kinko's.

We are still in the appraisal process in developing what the final purchase accounting will be.

So we have a place holder right now but we will be finalizing that during the quarter and will be speaking more to that when we get to the year-end results and will give you precisely what those are.

Under the new rules some intangibles that you acquire in purchase accounting, as you know, are amortized and some are not.

We're working through that.

Thank you.

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

Great, thanks.

Good quarter, guys.

Mike, I was wondering if you could just talk briefly about UPS's January of this year customer rate increase for it's domestic air product, I believe it was the largest they've had since they've been providing numbers to the street, and that's obviously because they've added the new fuel surcharge and they're matching you in the way they're treating that.

Are you seeing any benefits so far as contracts roll over with customers where they're looking at the monthly bill or annual bill for their air business now at UPS and starting to say, hey, on a year-over-year basis FedEx is taking up rates a little less and so it's more competitive?

Jim, I don't think there's been a significant change in the overall pricing environment.

I will say it's firmed up a bit, but as has always been the case what we see tends to be more hand to hand combat, if you will, on the large account sector but I would say it's relatively stable and actually improving right now in terms of the overall pricing environment, and that could certainly have something to do with it.

Thank you.

Your next question is coming from Fran Cooley of Seneca.

Please state your question.

Ms. Cooley, your line is live.

Please proceed with your question.

We'll move on to the next question which is coming from Gary Yablon of Impala Asset Management.

Please state your question.

Hi, guys, how are you?

Good, Gary.

Maybe for Fred or Alan, you've talked in the past about getting the Express business to a target operating margin of 10%.

Fred, not trying to pin you down on time line but could you give us some kind of color on kind of how you see yourselves getting there?

Is it sooner than you might have thought a year ago, longer, what are some of the bumps in the road you need to get over, what are some of the incremental opportunities?

Well, we are committed to that goal as we publicly stated before, and secondarily we think we're on track to doing so, and third, the real story at FedEx Express, of course, is our unparallel inter-continental network and the growth in both volume and revenue year-over-year.

This is just a huge marketplace and the incremental contributions for each additional IP shipment are very, very substantial and over time international will become a bigger and bigger part of FedEx Express operating results, tempered only by, of course, our investments in the network which are incremental at this point in that the basic network is already in place.

So we're very confident that over time and we don't see any bumps in the road, we just think it's execution and continued exploitation of the endeavors we've already got underway and I'll ask Alan to comment a bit more on it.

Yeah.

Gary, there are a lot of reasons but let me give you six.

Express's margins are obviously going to increase significantly again in FY '05.

First of all we have the tail wind from the business realignment which the savings were only in one half of fiscal '04 and will be in for the entire year in '05.

We have significantly lower pain, if any, from pension expense, which Express has been bearing a significant burden on the last three years.

We have very strong IP growth with incremental margins in the 35 to 40% range.

We have a wonderful relationship with the United States Postal Service with continued strong volumes from there.

Obviously the Kinko's retail strategy in our pack and ship is going to attract a significantly higher amount of high-yielding packages into our network than ever before.

And then lastly our capex management that has been so strong over the last couple of years is going to result in lower ownership charges and particularly depreciation and lease expense above the line.

So as I said, we're optimistic, we're right on target, we're right where we thought we would be and it's going to continue to improve.

Thank you.

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

Good morning, gentlemen, how are y'all doing?

Great,Donald.

Well, Doug Duncan can live in anonymity no longer.

Talk to us about the increase in shipment weight at FedEx Freight .

What do you think is driving that?

Is it more large shipments?

Is it overall increase in shipment weight?

What's happening there?

We have seen an increase in the largest size shipments but to a large extent that's being balanced by some growth in some other sectors, too.

I mean, we're really focused on fast-cycle logistics and as a result of that we do see, with a lot of our customers, smaller more frequent shipments going out to source just-in-time inventories but we've also seen a big increase in our distribution business where customers run truckloads of business into our distribution centers for final distribution and those are much smaller shipment sizes.

So we're having balanced growth in all of those sectors and so it has kicked up the shipment size 1%, but I think to look at the average you miss really what's going on in the entire market.

Thank you.

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

Please state your question.

Good morning, gentlemen.

I was just wondering if I could get some color.

Maybe you talked about this before, about the level of the supply chain services losses that are incorporated in the Ground unit and what is going on in terms of cauterize the bleeding relative to that.

I'm just trying to get a sense of what is that contributing in terms if the margin degradation, as Dan has already sort of said on an apples to apples basis the Ground package business has got margins that are comparable year-over-year.

Scott, this is Alan.

I'll start then I'll turn it over to Dan.

We used to carry supply chain losses in our Services Corporation, and charge out those losses as, in fact, sales expenses, if you will, to do additional services for customers to attract their package business.

We've made the conscious decision to put that under Ground and have strong operating management take that over, transform it into a much more focused company that will be providing additional services for customers to get a significantly higher amount of packages into the Ground and Express network.

I don't want to reveal competitive hands here and get a lot of detail but that's essentially the difference.

The loss was immaterial, but it did reflect poorly on the overall ground performance and that's why we called it out so specifically.

And, Dan, you might want to add to that.

Yeah, well, that's exactly right, Alan.

All I can really add to it is the losses at supply chain are really attributable to a decline in revenue levels as we did have certain contracts terminate during the quarter.

We're also continuing to really adjust our portfolio, concentrating aggressively now on pursuing business that delivers Ground and Express packages and Freight.

We've really positioned the company, though, with a new fulfillment transportation management suite and we're developing new products and we've significantly reduced the headcount, I believe we're down about 39% year-over-year there, and eliminated certain other overhead costs.

I think we're in good shape structurally.

It's a question of more growth now with the target, as I've just said, on incremental growth in our existing networks.

So I think we'll see this thing start to move as we go forward.

But as Alan said, it has had a negative impact when you look at the Ground segment in terms of our margins and profitability.

Thank you.

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

Good afternoon, or good morning.

Just want to talk about the international business real quick.

The currency contribution, if there was any, on the different currencies, then just talk about the strength of the international volumes kind of on a sustainable base.

Is there certain trends in certain regions, I know you mentioned Asia in the release, but can you talk about what you're seeing more specifically there, then as well across Europe and such?

Thanks.

This is Alan, Ken.

One of the great things about our international business is that we are largely able to balance our currency situation with expense offsetting revenue and also react very quickly from a pricing environment to adjust prices based on the way those exchange rates fluctuate.

So in this particular quarter we actually lowered the rate per pound about equal to the benefit that we got on the exchange rate on a per IP package basis.

So there was no material impact directly related to the exchange rate.

As for the overall outlook I'll turn it over to Dave Bronczek.

Hi, Ken, this is Dave Bronczek.

We are very optimistic about our continuing growth in international.

We had, as you saw and Fred had mentioned, growth of 21% overall for all of international priority revenue.

Asia is leading the way, you would expect that to be the case.

They are in the mid 20s.

I should point out that China is probably close to growth rate of 50%.

Europe's in the teens, which is very, very strong for us there.

Latin America is close to double digit growth as well.

And very significantly, our U.S. international outbound, that had been just only slight growth in the last couple of quarters, has jumped up significant to 5% growth.

So that's helping driving a lot of our profits, and, of course, our continuing growth around the world.

So the outlook is extremely bright for international for us.

Thank you.

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

Yes, good morning, gentlemen.

I think Fred alluded to the fact that you're beginning to see more synergies by having an owned LTL carrier amongst of your range of service.

I was wondering if you could share with us an example or two of how the LTL operation has led to additional business in Express and perhaps Ground and vice versa.

Well, I'll ask Doug Duncan to comment more on this in a moment, but one example is a project which we initiated over a year ago to cross-train our Freight sales force, which numbers in excess of 600 people, to be able to offer our express freight product as well as the LTL product.

And we have had very good success with that and the two quarters now that that program has been rolled out, and I'll ask Doug to comment a little more on it.

Obviously we've been working with the services organization on specific customers and we've been able to bundle the service for certain big customers, but this last effort, Purple Skies that Fred talked about, is our first real mass market effort where we have trained and turned our entire sales force selling the express air freight product.

They appear to be very good at it.

The customer decision make that we're already dealing with on a day-to-day basis seem to be the same ones making the air freight decision so we're very, very pleased with the results and we believe there are some other opportunities to do the same thing with other freight type services within the company.

This is Mike Glen.

I would just add that as we go in and work with larger accounts, one of the things that we'd try to do is on a consultative basis maximize their supply chain and how they move goods through the supply chain and with the addition of FedEx Freight in our portfolio obviously it gives us a suite of services that ensures that we put the right package and freight shipment into the right network to deliver the requirements of the customer at the most economical way that we possibly can.

It's an important strategic advantage for us and obviously we're delighted to have FedEx Freight in the portfolio.

Thank you.

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

Please state your question.

good morning.

I apologize for asking this, because I know someone else asked it, but I missed the answer.

Can you talk about currency briefly and how it impacted international rev per package?

Jennifer this is Alan.

There was really no material impact to the quarter from currency.

We adjust our prices based on currency fluctuations and we, in fact, have lowered the rate per pound on an IP package almost the equal amount of the exchange rate benefit, so it was a wash from a revenue standpoint in the quarter there.

Thank you.

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

Please state your question.

Good morning, guys.

Two quick things, both on the realignment.

Number one, the success of the realignment that you've seen so far in the margin improvement at Express, has this convinced you that maybe you were so successful at it the first time maybe there's another opportunity to take a swipe at maybe extracting some further costs from the Express business?

And second of all, along those lines, given your commentary about not seeing Express volume growth trending above GDP, do you feel like another realignment or rationalization of the Express network is necessary to achieve your target goal of 10% margins at the Express unit?

Thanks.

This is Fred Smith.

I'm going to make one comment and then I'm going to turn it over to Dave.

FedEx Express has an enormous growth opportunity, and it is in the international sector.

I've said that, Alan's said that, and Dave Bronczek has said that.

There is no other major restructuring required, in our opinion, to achieve our margin given the significant growth in the international sector and the incremental profitability of that traffic.

Having said that, all of our management teams, which are all outstanding and I include in that the fabulous people that we got at Kinko's as well, are focused on doing things that affect the margin on the cost side of the business, and in that regard I'll just turn it over to Dave.

Thanks, Fred.

We obviously have been very pleased with the business realignment going forward.

We have all of our people in place now.

We've right sized our organization.

It's very lean now, very productive.

We obviously have a number of other major cost initiatives on productivity, efficiency out in the field, facility consolidations, our airline network, our ground trucking network to make it more efficient and they've all been in place now for a year and they're all working very nicely.

So we're very pleased with our structure and our cost and our revenue growth opportunities that Fred pointed out earlier.

Thank you.

Your next question is coming from Jordan Alliger of Lazard.

Please state your question.

Morning.

A couple quick things.

One, can you talk about fuel and the fuel index?

Obviously it's, in general, been working well.

Fuel costs continue to go up, the index does as well.

Can you comment on customers' digestion of that?

And then secondly, on the competitive front can you, perhaps, comment on what you may or may not be seeing in terms of increased activity at all from the DHL Airborne combination?

Jordan, this is Alan, and I'll take the easy part of that.

There was no impact whatsoever year-over-year from fuel price on a static analysis basis.

The surcharge is working well, in terms of covering the increased cost of essentially jet fuel.

As you know Ground did remove their surcharge in January for fuel and so they had a little bit of a negative impact, but that was offset by a little bit of a positive one at Freight, and very diminimus at Express.

However, that's the pure static financial analysis of it.

I'm going to turn it over to Mike to talk about the impact of a 5.5 to 6% surcharge on elasticity and demand.

I would just simply say that one of the benefits that we have is this clear visibility to the fuel surcharge and, of course, it tracks directly with the fuel prices.

I think customers in general understand that fuel prices have been going up and that FedEx can't simply digest those nor can the competitive market simply digest those.

So the visibility that we give our customers to the fuel cost and its impact on our business has helped us manage through that and I don't see any change in that in the foreseeable future.

Regarding the competitive impact of the DHL Airborne merger I would say it has been immaterial to date and we have seen no major impact other than what we had traditionally seen in the market competing with Airborne.

Thank you.

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

Hi, guys.

Two quick questions on the overnight mix shift.

Is what we're seeing there just sort of continuation of the electronic trend as regards the envelope or is there anything in sort of the customer base that financial services might have been weaker, stronger, or something like that?

And then on the FedEx Freight side it looks like you're adding capacity.

I'm curious whether we should assume then that growth rate will accelerate at that division.

Well, anytime you see a shift in terms of the volume mix and overnight and two-day and three-day and beyond, it has a lot to do with the economic situation.

As people try to lower their cost of operation in a down economy they tend to gravitate towards slower forms of transportation, and when the economy's recovering they tend to be the last to firm up.

So I think there's clearly some of that.

Having said that, we've known for a long time in the document sector that the digital transmission of documents and the Internet is going to have an effect on the document business and that's one of the key strategic reasons why we were so interested in Kinko's.

As I said long time ago, we're the leader in the physical movement of express documents and Kinko's is the leader in the digital movement of documents and we think there's a lot of synergy in leveraging those two networks to allow us to compete very effectively in the digital movement of documents.

This is Doug Duncan.

We've got a lot of things coming together at Freight.

Obviously putting the companies together, our focus is a lot more external today than internal.

Most of the distractions are behind us and we're really focused on the market.

Our kickoff of money-back guarantee has been a phenomenal success and it's gone largely unmatched in the marketplace so we continue to sell a differentiated product, and, of course, the economy has helped, too.

So clearly February was the strongest growth month of the quarter for us and we continue to accelerate into March.

So, yes, we do expect volumes to accelerate growth.

Thank you.

Your next question is coming from Dan Hemme of Prudential Equity Group.

Please state your question.

Hi, good morning.

Also relating to Kinko's, has there been in your short tenure of ownership any change in disposition to the opportunities described in our last update at the acquisition?

Secondly, Alan, you alluded to longer term expectations of more than the 7% margins.

Can this unit get to a double-digit margin?

Thanks.

Well, no, there's been no change at all in what we want to do with Kinko's and we're going to reveal all that on April the 8th.

I will say that I recognized early on that there was a lot of operating leverage that hadn't been developed over the last two or three years and Kinko's financial performance is significantly higher now than it has been in the past and I'm going to turn it over to my partner, Mark Glen, and let him just talk about that a little bit.

Thank you, Alan.

We've seen opportunity in existing products that are higher margins, for example in signs and banners, and in some of our commercial solution opportunities that are really taking hold and getting traction.

And then looking forward one of the things that Alan had mentioned earlier in the pack and ship, that is a high margin opportunity that we see the synergies and the relationship with FedEx that will really stem and, well actually, really foster the growth in revenues taking that to the operating margin line.

This is improvement on Kinko's on its own, before we combine it and integrate it with FedEx.

And, again, we will be talking about that on April the 8th.

Thank you.

Your next question is coming from Helane Becker of Benchmark.

Thank you very much, operator.

Alan, could you tell us what your pension expense for fiscal '05 will be then?

I can't tell you specifically at the moment.

We still have a lot of work to do.

We've got a lot of sign-offs to get, et cetera, but we've been running 80 or $90 million year-over-year increases in pension expense and it's going to be significantly lower than that.

It's going to be very modest at most.

We'll probably lower our discount rate from what it was in '04 , as I mentioned earlier.

Return on assets have been fantastic, as you know we highly funded it.

So it's exceedingly well funded and I think we're going to be in very good shape there.

I don't think it's going to be an issue at all.

Great.

Thank you very much.

Thank you.

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

Hi.

Thanks very much.

Most of my questions have been answered.

I would ask about Kinko's revenues.

Looks like they're tracking on the core of the revenues that the company had before you acquired them.

Are there any short-term boost to their revenues that could occur from new store openings or FedEx expansion plans?

David, first of all, they are tracking ahead of their historical revenues which I knew was going to happen before we even announced the acquisition and we will discuss the rest of that on April the 8th.

Thank you.

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

Please state your question.

Good morning.

Sal Vitalli for Jeff Kauffman.

Could you please describe the general trend in labor costs and more specifically any anticipated wage and salary increases slated for fiscal fourth quarter '04 and into fiscal '05?

This is Alan.

Obviously we want to be competitive.

We have a team of over 240,000 professionals around the world that we're extremely proud of and we're going to be very competitive in our pay and I think it's going to follow along with the market and it's going to fit very nicely into our business plans going forward and should not be an issue whatsoever.

I might also add that with the pension expense significantly reduced, the burden on the salaries should come down.

We continue to manage very carefully Workers' Compensation and healthcare and hope to see some improvements in productivity in those areas as well.

So not an issue.

Thank you.

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

Thanks.

Second question here in terms of kind of the longer term strategy with international in that UPS and DHL have been adding fairly comprehensive international freight forwarding divisions, and I know you've got your trade networks, but seems to be they're adding much more comprehensive solutions.

And where I'm talking with the customers they're telling me that they like this, they have the bundled product.

The fact that FedEx doesn't have a large comprehensive freight forwarder does this put you at a competitive disadvantage or are your customers fine with unbundling the products?

Well, this is Fred Smith speaking.

To date we have not seen any significant issues in that regard.

If that market goes in that direction we do have FedEx trade networks which forms an outstanding base to be able to offer those types of products.

I should mention in reply to also the question before about the synergies between Freight and our other operating company.

In addition to our Freight sales force being trained to excel express freight we're also going to train them to sell LCL business.

So the ability to offer the kind of services that you're talking about is not rocket science and the footprint to do so is well within our capabilities.

I might ask Dave Bronczek to comment.

No, I agree, Fred, we haven't had any problems in dealing with our big accounts around the world.

We have a great network and we actually have lot of relationships with a lot of forwarders all around the world and a lot of the airlines as well but, that being said, when we have a bid for a business we will respond in all levels of that customer's bid.

We keep our planes flying regardless.

Passenger loads, we hit the schedules and we carry an awful lot of international freight, Jim, so I think that's the point.

I'll also tell you, we ain't lost one customer because of that, not a one. 21% growth rate in IP suggests that it's no issue.

And if it is, again, we have the capability to respond.

Jackie, I think with that we'll call a halt to today's proceedings.

I want to express our appreciation to everybody for being on the call and remind the audience that our analyst meeting is April 7th and 8th, and we look forward to having you there.

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.