聯邦快遞 (FDX) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the FedEx Corporation fourth quarter, fiscal year 2004 earnings release teleconference.

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

It is now my pleasure to turn the floor over to your host, Mr. Jim Clippard.

Sir, you may begin.

Thank you, Holly.

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

I'm Jim Clippard, Vice President Investor Relations with 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 the replay will be available for approximately one year.

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

During our Q and A session we ask that callers be respectful of others who would like to participate and limit their questions.

We're looking forward to seeing some of you next week in Colorado Springs for our technology conference.

Those of you unable to attend in person can join us for a video Web cast of the proceedings on Tuesday morning, June 29th.

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.

For additional information on these factors please refer to FedEx Corporation's and its subsidiaries' press releases and filings with the SEC including but not limited to its reports on Forms 10-K and 10-Q.

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 Web site 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, Mike Glenn, the 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, Doug Duncan, President and CEO of FedEx Freight and Gary Kusin, President and CEO of Kinko's.

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

Thank you very much, Jim.

Good morning, ladies and gentlemen.

I'd like to start by saying simply that we believe fiscal year 2004 was an exciting year for FedEx.

It was also a year of change.

In February, 2004 the FedEx family welcomed a new member with the acquisition of FedEx Kinko's, opening new doors for customers to access FedEx services and adding an exciting new business line in the business services area to our corporation.

We moved quickly to capitalize on this opportunity and last month made FedEx Express and FedEx Ground services available at all 1,100 FedEx Kinko's locations in the United States and we introduced an exciting new branding scheme for FedEx Kinko's.

We also realigned our operations and resources at FedEx Express to better meet changing market dynamics and as a result we've created a more competitive and cost efficient express network.

This process was handled in a compassionate, highly effective manner and is already paying significant dividends.

It's also been a year of sustained and profitable growth for FedEx.

We exceeded expectations in regard to earnings and last month declared a 16% increase in the quarterly cash dividend to 7 cents per share on FedEx Corporation common stock.

I'd like to extend my personal thanks to our entire management team and the more than 240,000 men and women of FedEx whose unwaivering dedication and whatever-it-takes attitude helped us to deliver solid results for our share owners for the past quarter and throughout FY '04.

FedEx is growing profitably across our Express, Ground, and Freight segments.

We're proving the value of our business strategy, operate independently, compete collectively and manage collaboratively.

We expect the newest member of our team, FedEx Kinko's, will share the same experience.

In this past quarter, our earnings were driven by a strong demand for domestic and international services, a solid broad-based economic recovery and successful execution of cross-selling our portfolio to large and small customers.

Total average daily package volume at FedEx Express and FedEx Ground grew a combined 7% year-over-year for the quarter where we saw a return to growth in U.S. domestic shipments and continued strong growth in International Express shipments led by double-digit improvements in both FedEx International Priority revenue and average daily package volume.

Our unrivaled global network makes us the market leader in key locations around the world especially in growth markets like China where we grew greater than 50% in volume year-over-year for the year.

I would like to congratulate the United States and the People's Republic of China on the new Aviation Accord signed just days ago which will stimulate trade flows to and from China.

Approximately $60 billion worth of goods will leave China by air this year and about 61 billion will enter the country by air.

FedEx began operations in China more than 20 years ago and is now the largest international express carrier with service to more than 220 cities with plans to add 100 more.

If we are awarded additional authorities, and I hope -- I'm quite hopeful that we will get those authorities -- FedEx plans to initiate additional services to and from China.

As we announced earlier this month we will be expanding our relationship with the U.S.

Postal Service assuming the role of exclusive service provider for the transportation and delivery for Global Express Guaranteed, the U.S.

Postal Service's premier date-certain international service to more than 190 countries.

FedEx Ground and FedEx Freight showed significant growth as well.

On a historical note FedEx Ground generated quarterly revenue exceeding $1 billion for the first time.

Ground's average daily package volume grew 12% in the fourth quarter, the highest this year.

FedEx Freight continues to be one of our strongest growth engines and a unique competitive asset.

FedEx Freight's average daily less-than-truckload freight shipments increased 11% compared to last year's fourth quarter continuing the positive trend that began back in November.

We plan to continue to invest in both our ground and freight networks to meet growth opportunities over the coming quarters.

And our newest operating company, FedEx Kinko's, delivered a solid performance in the last quarter contributing significant revenue and operating income to our overall results.

And to that end I'd like to congratulate the 20,000 FedEx Kinko's team members that have worked diligently to deliver these outstanding results and to integrate effectively into the FedEx family.

FedEx is poised for even greater growth as the global economy continues to strengthen and broaden in our opinion.

Strong business sales in the U.S. along with increased global trade, a recovering labor market, and healthy consumer and business confidence bode well for continued economic expansion.

We continue to see strong and sustainable recovery across many sectors of the economy including the important industrial and durable goods sectors.

Consequently we believe FedEx has significant operating leverage as this recovery gathers steam and should help drive our earnings in FY '05.

The business strategies we outlined at that time beginning of fiscal 2004 have significantly contributed to our strong financial performance.

We said we would reduce costs in Cap Ex and we have through the business realignment at FedEx and good controls on capital expenditures.

We said that we would improve margins and we have done so.

We said that we would optimize and expand our unparalleled worldwide express network and we will continue to do that in key markets such as China.

We said that we would position both FedEx Ground and FedEx Freight for growth by expanding network capacities for both companies.

And finally, at the beginning of this fiscal year we added the phrase "manage collaboratively" to our fundamental compete collectively strategy and we believe today that we're better aligned across the FedEx network and that means more success for our customers.

As we look to FY '05 we'll stay the course working to improve our profitability, capitalizing on growth opportunities, and effectively managing costs in line with those opportunities.

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

We remain very committed to shareowner value with particular focus on cash flow, return on investment and margin improvement.

I'm optimistic about our future.

I believe we have a sound business strategy that is continuing to deliver solid returns, and we are at the epicenter of much of the world's economic activity.

And with that I'll turn the program over to Alan Graf, our CFO to provide further details.

Alan?

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

From a financial perspective, we were extremely pleased with the fourth quarter of FY '04.

At FedEx Corporation our operating margin was 9.7%, up from 8.4% in the previous year.

Our net income was 412 million which is a 47% increase on a year-over-year basis on a revenue uptick of 21%.

Those are just simply outstanding numbers.

As we look at the Express segment revenue was up 10%, but operating income was up 38% to $407 million, and the operating margin was 8.6%, a very solid increase from last year's 6.9%.

The shining star that the Express segment continues to be International where International Priority revenue grew 22% on a volume increase of 12% and yield was also up 7%, notably weight being responsible for almost $3 of the $3.50 per package increase in yield.

In domestic we had growth of 2% in volume with a 2% yield pickup.

Again, weight was one of the driving contributors for yield.

And ongoing productivity and cost control efforts were also important factors as, of course, were the results of our voluntary severance programs at Express which saved us almost 63 million in the fourth quarter.

As Fred mentioned, Ground enjoyed our first $1 billion revenue quarter which was up 15% on a revenue basis and 12% on a volume basis.

Margins were 15.1% which are excellent.

Although some of you may note that this is down, that's because the segment now includes a small loss at supply chain services and Ground is carrying higher inter-company charges due to its higher growth rates and transaction growth rates.

In fact, without those higher inter-company charges, Ground's margins would have actually been ahead of the previous year.

And Freight's performance was and continues to be incredible, with revenue up a whopping 21% as LTL shipments climbed 11% on 4% higher yields.

Part of the yield increase was due to fuel and part was to the increasing mix of inter-regional service where we provide a superior service to our competition.

Operating income grew 63% year-over-year, and the margin in the fourth quarter was 10.6%.

Just outstanding performance.

As we turn to Kinko's, we said when we announced the acquisition that Kinko's was going to be accretive immediately, and it was in Q4 adding about 5 cents per share to our overall results.

We're delighted with these results and these are substantially improved from calendar year 2003.

As we had noted when we bought Kinko's we said they were at an inflection point from an earnings standpoint.

We did lower the tax rate for the year to reflect stronger than anticipated international results and also due to tax audits that were closed, or effectively closed, in FY '04.

Cash flows excluding the Kinko's acquisition were again strong and today we have over a billion dollars in cash.

Looking ahead, we have increased our FY '05 EPS range to $4.20 to $4.40 for FY '05, and to 90 cents to $1.00 for the first quarter as we benefit from the full year effect of Kinko's, continued growth in International Express IP, Ground and Freight shipments, the full-year savings from business realignment and continued productivity improvements across the board.

I should note included in this range for the year are continuing purchase accounting charges at Kinko's, $20 million of expected rebranding expense at Kinko's and $20 million of expected SOx 404 estimated costs.

A full discussion of Kinko's purchase accounting will be included in our 10-K.

Cap Ex will increase in FY '05 to the 1.6 to $1.7 billion range, but free cash flow will be strong once again.

In short we have strong momentum and FY '05 is going to be another outstanding year.

And with that, Holly, we'd be happy to open the floor for questions.

Thank you, sir.

The floor is now open for questions.

If you do have a question please press star 1 on your touch-tone phone.

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

We do ask that when you pose your question that you please pick up the handset to provide optimum sound quality.

Once again, that is star 1 to ask a question.

Our first question is coming from John Langenfeld of Robert W. Baird

Good morning.

Nice quarter.

A question for you on the Express side.

If I take out the headcount reduction benefit that you had, I guess we were a little bit surprised that the margin wasn't stronger there.

I mean the core margin ex the headcount reduction was only up about 40 or 50 basis points by our calculation despite 10% top-line growth there.

Are there other costs that are weighing that down, and if so what are they?

Yeah, this is Dave Bronczek.

We had obviously a very good quarter that we were pleased with.

It is important to note, though -- and I'm sure you can see it -- we had a maintenance charge in the fourth quarter that's a timing event for aircraft engines that was $68 million collectively for aircraft maintenance.

That's higher by a long shot than any of the prior three quarters.

In fact, for the year we only spent $111 million there.

So it was almost double the normal running rate in there.

So that obviously affects our costs in the fourth quarter.

Those numbers go back to the normal numbers.

It's a timing issue.

And if you had a normal quarter for aircraft engines we would have probably been closer to 9%.

John this is Alan.

Another key fact to not only at Express, but everywhere are, the Company's performance was significantly improved, so are the variable compensation and bonus accruals and those affect operating companies two ways.

First, their own programs are substantially higher in terms of expense and then the inter-company charge-backs from services at headquarters are also higher as a result.

So in this improvement that we achieved in the fourth quarter we also added substantially to our variable compensation and rebuilt those programs.

Got it.

Thank you.

Thank you.

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

Good morning.

Great to follow-up on the aircraft maintenance because that was my question as well.

But on the domestic pricing, the domestic yields, just wanted to know, this is including the new -- I'm sorry, you already had the fuel charges.

Is this a sustainable level that you're seeing in the market?

Are you seeing increased competition?

Because obviously on the Ground side it looked a little bit weaker than I would have anticipated.

Last couple of quarters we've seen in the 5 -- over the 5% range.

It seemed like we came down there.

Just wanted to know if, even last quarter had the Ground -- the fuel surcharge removed from it.

So I wanted to see if there something going on at the Ground side and then also the sustainability of the positive on the Express side.

This is Mike Glen.

The pricing environment remains stable, and as you pointed out the Ground fuel surcharge was removed in January so that did have an impact on it.

We are seeing a pickup in our weights in Express which is consistent with an economic recovery, and I do believe we'll be able to continue to manage yields to provide year-over-year improvement.

And on the Ground side, didn't last quarter also have a bit of the fuel surcharge removed from it?

It did.

The fuel surcharge was removed with the January pricing action.

This is Alan.

At Ground also, remember that we continue to grow home delivery, and that's tending to lower average weights a bit.

But that's being more than offset by the significant mix improvement and the mix with HD, with the surcharges in the mix as well as the commercial area delivery surcharge.

So the fact of the matter is the fuel surcharge elimination costs us a dime per package in the fourth quarter, so I think it would look better keeping in that mind.

Very helpful.

Alan, one other question if I may.

On the Cap Ex side you brought down this year's number but yet next year's still staying at the 1.6.

Were there some things that you still need to catch up and spend on that you would have liked to have done this year?

Or could we see that 1.6 throughout the year continue to come down as well?

The range I gave you, the 1.6 to 1.7, is reflective of what we anticipate for the growth that we're going to have.

It's the continued buildout of the Ground expansion, it's adding tractors and trailers to Freight with that unbelievable volume growth, it's continuing to buildout and increase the international capabilities at Express and also continued investments in our technologies, which are varied.

So '04 was probably an anomaly in exactly how low it got, but 1.6 to 1.7 compared to historical versus increases in revenues and as part of our overall cash flow management is easily managed in '05.

Great.

Thanks a lot, Alan.

Thank you.

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

Good morning.

Good morning.

Congrats on a great quarter and a great year.

Mike, we've heard that DHL may be starting to make some minor inroads with some customers in terms of taking share from both Express as well as UPS's air product.

And I guess I was wondering if you could just address in that terms of the market share as well as the overall pricing environment and especially as when we move into the next pricing year when pricing gets set for '05.

And then I guess separately if I could just ask, I'm not sure if it's Alan or David, but the long-term strategy for aircraft replacement -- I think at your April meeting you'd said that you will have to do something there.

We've seen some of the trade journals saying that it looks like you're going to be doing a 737 conversion program.

Just want to try to understand how that could impact the Cap Ex number for the next few years?

Let me address the competitive situation.

First of all there really are no new competitors in the markets place.

As you know, we've been competing with DHL and Airborne for a number of years.

They've just teamed up and really got a new logo.

But we have not seen any inroads into our base either on the domestic express or ground side from DHL.

We do expect them to be competitive on an account by account basis.

That's nothing new.

That's been a strategy that Airborne has used for a number of years and I would expect that to continue under the new DHL leadership.

But we're comfortable with our ability to present a value proposition that's going to be superior to any in the marketplace.

So we haven't seen any inroads to date.

Good.

Jim, I'll jump in here.

We're not prepared to discuss at this point any changes in our strategy for aircraft acquisition and Cap Ex.

However, I would tell you, and I said this in the analyst meeting, whatever decision we make will improve our efficiency and our productivity and our overall efficiency at FedEx Express.

Great.

Thanks, guys.

Appreciate it.

Thank you.

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

Yeah, just two quick clarifications and then a couple of questions.

Dave, when you were talking about the maintenance repairs before you talked about 68 million in the quarter versus 111 million for the full year.

Just trying to understand the full maintenance costs for the year are 320, or whatever they are.

What is the 111 and the 68 in the quarter?

What are the additional maintenance expenses you were talking about?

I gave you the aircraft engine maintenance, and I just wanted to point out that the fourth quarter was a heavy maintenance quarter for us.

Historically we have been running much less than that in Q1, 2, and 3.

What was that number like a year ago fourth quarter?

Year-ago fourth quarter, well, it was less.

It was probably in the $40 million range, if I remember correctly.

But it's up, again, primarily because of timing of aircraft engines, and, of course, that's a year-over-year number.

Is 111 million a pretty good run rate if we went out and looked at next year and the year -- so 27, 28 million a quarter is a fair number?

We've been running around $100 million for the last couple of years.

Plus, Ed, this is Alan.

Remember that as we analyze both growth and replacement aircraft, that's a very big impact in our decision-making process.

Engine maintenance on 727s is very costly.

So, you know, we have the ability to manage that, depending on the strategic decisions we make.

One other thing, Ed, and it's important to point out -- don't forget that we have a higher utilization now because of the Postal contract that we put in several years ago.

Okay.

And then a second follow-up was, Alan, you talked about the variable compensation as a piece of this.

Can you talk about the percentage of pretax for variable comp this quarter versus a year ago?

I don't want to get that fine with it.

I just would point out that that's in our salaries and benefits and that had an abnormal effect on this year but we're now where I think we need to be in terms of hitting our targets and so it's built into the 420 to 440.

Fair enough.

When you look at June so far, 3 weeks into the quarter, is there any change or acceleration or slowdowns in anything that you're seeing?

We've had a couple of weaker, or not weaker, but low-end kind of retail forecasts from Target and Wal-Mart recently.

Are you seeing any slowdowns in retail for instance or any other areas?

Well, from a 100,000 foot level, I closed my opening remarks about momentum, and we are maintaining our momentum.

And I'll just go around the table.

I think it's a good question.

We'll start with Dave.

I can just tell you, Ed, it's a good question.

International continues to be exceptionally strong.

We're very pleased with where we are in the first several weeks of June.

It continues to be the same kind of trend we had in the fourth quarter.

The same is true in our U.S.

Express domestic business.

We're very pleased with that as well.

So from an Express point of view, we're very pleased.

Dan Sullivan.

Yeah, our growth rates improved through the fourth quarter and continue to be very strong here so far in June, so we're very happy with that.

We saw in the retail industry a good run-up year-over-year in Q4.

And from what I can tell so far here in the first three weeks, that is also staying in place.

So right now, so far so good.

Doug Duncan.

Yeah, our year-over-year growth rates have accelerated every month since January, and June is following that trend.

Gary Kusin.

At Kinko's our commercial business remains very strong.

In fact, exceeding our expectations, but our retail foot traffic has dropped in the last couple of weeks.

I don't assign anything to that other than it's just dropped a tad in the last couple of weeks.

I feel like I'm at one of your weekly meetings now.

They're tougher than that.

Fred, you made comments in your initial remarks about the China air rights and the potential there.

Can you just give a little more detail longer term what the opportunity from the air rights are and what that might allow you to do over time?

Well, as I said in the remarks, we've been in China a long time, and we have a great management team in China, and we have significant expansion plans for the country representing its fantastic growth and its unique position as one of the world's great manufacturing centers.

So as we are able to obtain these authorities, and of course, I think there will be adequate authorities out there to do what we would like to do.

If not, we will contest them, and think we'll make good cases, but we have lots of very detailed plans.

I don't think Dave Bronczek wants to tell you what those are right at the moment because it would not be competitively smart for us to do it, but we think China is a huge opportunity for this Company.

Dave, you want to add anything?

Yeah, I do want to add to that.

Ed, I was in Asia Pacific just last week and I met with the whole Asia Pacific team.

I can tell you there's great optimism out there, especially with Eddie Chan and our great team in China.

Fred's right, I won't tell you our strategic plans other than to tell you we have a lot of very exciting plans to expand and to grow our business there.

So, in other words, you can make use of the slots?

Yes, indeed.

Thanks a lot, guys, for the time.

Thank you.

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

I'd like to focus on Freight real quick.

We were looking really for average weight per shipment to go up more with the hours of service benefit like some of your competitors were reporting.

Your average freight weight per shipment was only up 2.3%.

Volume was still better than we expected.

Can you give us some color on exactly what's happening there, Doug?

Well, clearly the hours of service change has chased some of the 5 and 6,000-pound sized shipments out of the truckload sector and back into the LTL sector where frankly, it used to be.

But you know we're focused on the fast-cycle logistics business and our customers are not taking those 5,000-pound shipments and moving them into our network on a one-for-one basis.

When they put them into the LTL network they're now making them smaller shipments and shipping them more often and making better use of inventory.

So it's not a one-for-one relationship.

These logistics professionals are maximizing their inventories against the economies of using LTL.

Ground volume looked like it reaccelerated as well.

Is it fair to say that you guys feel like you're stealing market share away from someone, the Ground team or others again?

We're very pleased with our growth.

Our customers are responding well to the total portfolio that we're putting in place and I would add that Freight is a very important part of that.

We'll just see how the market grows and how we perform relative to the competition.

But I would just say that our sales team is doing a great job and Ground is doing a great job delivering high quality service and customers are responding well.

Dan, would you tell them how many lanes that you improved by a day in fiscal '04, for example?

Well, over the last 18 months we've taken one transit day out of 41% of our lanes over which 50% of our volume travels.

I think I talked about that at our analyst meeting.

And just in June we reduced service by 1 day on an additional 15,000 lanes.

So we're doing whatever we possibly can to speed up the network and improve value for our customers, and it's working.

And I think it's really helping with our growth and improving our share.

That's a great stat that I remember you talking about at the analyst meeting.

When you go ahead and change your published stats, do you see pretty quickly a marked customer response?

Do you see an improvement routed through those lanes?

I think with a lot of our savvy customers we might get them to move more quickly.

But it takes a little more time than that.

Our sales team has to get out there and demonstrate that to our customers.

We don't really put out press releases or that kind of thing.

We do post our Web site -- our service map -- so that again, customers that are focused on speed of transit can find those changes on a ready basis, but it takes some time, I think, for it to really get to the marketplace.

Great.

Thanks, gentlemen.

Thank you.

Our next question is coming from Helane Becker of Benchmark.

Thank you very much, operator.

Hi, gentlemen.

Hi, Helane.

Alan, this is my question for you.

In terms of the tax rate, I saw the explanation that you gave for the fourth quarter, and you talked about going forward now, we're at 38%.

So is that -- was the '04 number just an anomaly, or was it related to something that we should be aware of?

Well, I think I mentioned two of them, Helane, one being continued improvement in International lets us fully use the taxes that we pay offshore -- almost fully use the taxes that we pay offshore to credit against our U.S. bill, and that lowers our effective rate.

We had some audits that were closed and almost closed.

And then go back to the first quarter where we had the engine maintenance case victory, and that was a one-time event as well.

So, on an ongoing, normalized basis, 38% or so, 38.25, 37.75, that's the range we would normally be in.

Okay.

Great.

And then on the balance sheet, did you say -- and maybe I missed it -- what your long-term debt, your principal payments are for this year?

No, I didn't mention what the principal payments are for this year, but with a billion dollars in cash and very, very strong cash flow generation ahead in FY ‘05 we're in terrific shape.

We'll continue to work down the leverage from the Kinko's acquisition very rapidly.

And we are very, very strong from a financial flexibility standpoint.

Okay.

And then my last question is on Kinko's.

Is that a seasonal business?

You know, like 5 cents contribution in the fourth quarter was unusual, or is that a run rate that we could think about as the contribution that they would be normally?

Well, let me take that, Gary, and then pass it to you.

The point I was making about Kinko's in the fourth quarter is that even after covering the interest charges associated with the debt and the purchase, it was accretive to earnings.

And we always think that that's a very important thing to talk about early on in acquisitions is that we're not making these acquisitions to sacrifice short-term profitability, we're actually adding to it right away, which is why we like the Kinko's acquisition so much.

In fiscal '05 it's going to be a transition year for Kinko's.

As we think about what we're doing with the rebranding and the rolling out of the pack and ship capabilities, the expansion of the network, the package acceptance capability for Express and Ground packages, and with the training and the equipment that that entails, it's a transition year here for Kinko's.

So we're going to invest heavily in those things, and they will, of course, have a natural drag on the operating margin in Kinko's during FY '05.

But the business is strong, and I'll let Gary talk about that specifically.

Thank you.

Yeah, there really is not seasonality.

There certainly is not retail seasonality at Kinko's.

To the extent there's seasonality, it really runs much more along the timing of corporate America than anything else.

July is really our worst month of the year because most of our business customers are on vacation, although it's not that much worse than our other months.

And October is typically our best month of the year which is when corporate America is big into their meetings and financial planning efforts.

So we really are not seasonal in any retail sense in that November and December are big months for us, because they're really not.

Okay.

Thank you very much.

Thank you.

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

Good morning.

Alan, a quick clarification on the benefit of your voluntary severance in Q4.

What was the number and then what is it expected to be for fiscal '05?

I think the term I used was about $63 million.

And the fiscal '05 range is the one that we've continued to mention all along which is about 230 to 240 for the full year, and that's embedded in the 420 to 440 range I gave you.

That's going to obviously, at least in the first half, going to be a very important part of our first-half year-over-year comparisons.

And then as a follow-on to maybe Helane's question, your comments on Kinko's, is it too early to get a read on what successes you're having getting ground shipments and air shipments through all of the Kinko's locations so far?

Well, we rolled that out -- this is Mike Glenn.

We rolled that out just recently.

And so far the operations have run smoothly.

We have not begun aggressive promotion of the network yet, but we -- our plans are to begin letting customers know that ground package acceptance is available at all locations.

Here in the very near future we will be expanding those services to include pack and ship this fall to get ready for peak season.

We anticipate a robust response from our customers.

We're tracking right where we want to be.

Mike, is it fair to say the next data point would be at your next financial release that we could talk more about what successes you're seeing or no?

Well, again, that's going to be shortly after we begin promoting the network.

But, you know, we're seeing good solid results so far, so we won't have any issues talking about it in a little more detail.

Our plan is to continue to add service.

I will say that the Kinko's team members have done an outstanding job getting ready in a very, very short period of time.

If you think about the time lines that we're dealing with here, we closed this transaction at the end of the calendar year, and we began immediately planning for package acceptance.

And we're already accepting packages, and we'll be rolling out additional services in the months ahead.

So they've done a fabulous job, and our research tells us that customer experience has been very positive, so we see nothing but accelerating trends there.

Dan, this is Dan Sullivan.

We're seeing our volume build pretty much every day out of Kinko's with more and more stores participating.

So, we're very excited about what's to come here for the rest of this quarter certainly.

Good.

And then one last question.

The $20 million of rebranding costs is only a partial cost -- is that correct, Alan?

And what's the total all-in investment you're making this year?

Well, we're going to be, you know, some of the signage and things of course will be capitalized and everything else.

But we're going to try to get as much of the rebranding done in FY '05 as we possibly can.

We think it's very important as this is going to be our retail channel and so we're going to move very quickly.

There will be some additional rebranding costs that will flow on beyond '05, but they will be significantly lower charges after that.

The bulk of the rebranding in the United States, and for that matter North America, will be done in FY '05.

We still have some international work to do, which may filter into FY '06.

But the bulk of it will be done in FY '05.

Great.

Thanks very much.

Thank you.

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

Good morning.

Great quarter.

I just had a quick question on currency.

Would you remind us, I know it helps your revenue number to a certain extent, but is most of that netted out because your costs internationally are higher as well and your operating income number is virtually unchanged, due to currency?

There certainly are pluses and minuses associated with that.

Exchange rate did help yield for IP -- for example, provided about half the increase in the year-over-year yield.

But then the expenses were offset by that in many of our offshore locations which were denominated in foreign currency.

So we work very hard and have the capability through pricing and expense management to balance our positions on a global basis, and that's always in the forefront of what we're doing.

So the overall currency benefit for the quarter, I don't believe would be material.

To the profit line.

Okay.

And then I apologize if you went through this already, but would you just comment quickly on Kinko's -- this 140 million of other expense?

Is that, when is the purchase accounting and the headquarters, pack and ship costs -- all of that?

Did that happen this quarter, or are we looking for that to happen next quarter?

I'll talk about first then turn it back over to Gary.

We're going to have a detailed discussion of the purchase accounting, which is very complex, in our 10-K.

But suffice it to say as you revalue assets and you realize that you have two types of intangible assets, those that you've amortized and those that you don't, those tend to increase the ongoing expenses although they're noncash for Kinko's versus what they were before we owned them.

And we did have full purchase accounting charges in the fourth quarter in the 7.5% margin and those will continue for the foreseeable future.

Gary can talk about the expense items.

Gary?

Sorry.

We had a $5 million rebrand expense in this past quarter, as well as what Alan suggested, we had a full purchase accounting in this quarter, so without these reorg and rebrand expenses our operating income would have been 10%.

And we do expect to see, over the next 12 months or the next 4 quarters, we will have rebrand expenses in each quarter as we roll out our new signage and everything surrounding our new FedEx Kinko's name.

Okay.

Great.

Thanks.

Thank you.

Our next question is coming from Joanna Shatney of Goldman Sachs.

Good morning.

Can we break apart the Ground revenue growth a little bit?

Is there a huge disparity between the home delivery growth rates and the core business?

Mike, do you want me to handle that?

Yeah, that's fine, Dan.

The home delivery growth rates were tremendous.

They really are our growth engine at this point and probably account for between 30 and 35% of our total growth.

But we also saw excellent improvement in our overnight service with growth in our small shipper segment and in our retail as well.

So the growth that we've experienced has pretty much been across the board but with a good deal of it coming from home delivery.

As we continue to grow through all of '05, how much can we narrow that profitability difference between the home delivery business and the core Ground business?

Well, there's a pretty large disparity in margin between the home delivery division and the total business.

However, we have been profitable for a long time now at home delivery and are improving margins on a regular basis.

So I am very confident that we're going to see that business in the 7 to 8% range in the short-term and see what we can do to get it to double digits a little bit further out.

Okay.

I want to go through some of the plus and minuses.

You've been great.

You gave us rebranding of Kinko's, you gave us the cost savings, the Sarbanes-Oxley costs and the purchase accounting will be in the 10-Q for Kinko's.

Can you just talk pension expense, incrementally year-over-year, pension and post-retirement expense if you lump them together, how much you expect variable compensation expense to be year-over-year, if there's any currency impact -- it doesn't sound like there is.

And then can you just also give a little bit more color about what total profitability for Kinko's can be?

How close can we get to double digits in '05?

Well, as, you know, the last one, as Gary mentioned, they'd be running at double digits except for the rebranding and the purchase accounting costs which are going to continue in '05 as are some additional things like pack and ship and expansion.

You just can't go put a pack and ship in every Kinko's without some relocations of the equipment, some buildouts, some capital investments, et cetera, et cetera.

As to pension, as we said earlier, the pension increase year-over-year is going to be significantly mitigated from what we've seen in the past.

We're expecting about a $30 million increase in '05.

That's because the fund has performed so well since we made the very large investment in last fiscal year.

And as interest rates continue to rise, we have a very long tail on our liabilities -- average duration of our liabilities in our pension fund is almost 20 years, which I can't think of a huge pension fund that's got one that long.

So, it has a big impact on our costs as well.

So hopefully the year-over-year large pension increases are over with -- we'll knock on wood with that.

Post-retirement health and other charges, you know, will continue to grow much as they have in the past.

We don't fund any liability that doesn't have a qualified plan and allows a tax deduction.

And then variable compensation expense year-over-year?

Well, we're all hoping that we beat the heck out of our business plan and it actually goes up.

But we have to beat our business plan to have it go up.

So if does it go up it would be good for us and good for you.

Just in terms of the capital spending investments, I know these were kind of in your plan, but are we still on track for getting incremental leverage of 35 to 40% out of the International business in '05 with the Cap Ex?

Absolutely.

Thanks.

Thank you.

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

Hi, guys.

A couple of questions on volumes.

If I heard right, did the Express overnight business month-over-month accelerate throughout the quarter or was it steady?

This is Dave Bronczek.

I think it grew pretty steadily.

But it has been growing now for the last 3 consecutive quarters if you go back and check, which we're very pleased with.

It also grew in yields.

So our volumes and yields grew together, and, of course, combined we're up 6% on revenue for Express domestic which is very good for us.

Right.

Now you're definitely picking up momentum.

I guess I was a little surprised to see deferred again outperforming by such a wide margin given where we are in the economic cycle.

Any thoughts on that?

I mean, are we ever going to get to a point in the economy where because of inventories, et cetera, we can get better performance relative to the deferred?

Or do you think this is just a permanent structural situation you're looking at?

Well, if you look at our deferred revenue growth, it grew at 7%.

If you look at our overnight box growth on revenue, it grew at 6%.

And our envelopes actually grew at 3%.

So if you look at it, it's not that big of a disparity between our overnight boxes, which we're really focusing on, and our deferred.

Mike, do you want to add to that?

This is Alan.

Just remember we're selling a bundle and we're optimizing our customers and we're using Freight, Ground and Express to get that done.

And it’s -- Dan Sullivan has an awful lot of overnight lanes now at Ground.

He's working very hard to make that a better value proposition.

So as you look at it, and as I mentioned earlier, you've got to really think about International Express being the biggest value driver for FedEx Corp., and then Ground freight and Kinko's following that, and the domestic business -- we don't think we're going to go back to the old days for that market and then particularly our growth is going to be what it used to be.

Mike?

Yeah, I would just add to what Alan said.

We take a consultative approach, with selling to customers and want to go in and analyze their supply chain and really take advantage of the portfolio that we have to bring them the greatest value proposition we possibly can to lower the cost of their overall network.

So we think we have a tremendous advantage in that regard with the less-than-truckload capability we have, the multi-weight freight capability we have at Ground, our overnight 2-day freight capability Express, and then add on top of that our tremendous U.S. domestic ground and Express package capabilities -- we truly do have the full portfolio covered, and we try to bring value to customers in that regard.

And I think that's one of the keys to the growth that we're seeing.

So if I hear you, Alan, it's more revenue game -- the yield game and sort of flat box volumes don't bother you, if you're capturing revenue in other buckets.

Is that a fair summary?

As I said at the analyst meeting, we don't anticipate the Express market to rebound to a point where it's growing faster than GDP.

It's still going to be a relatively low-growth sector.

Having said that, we're pleased with the momentum that we've been experiencing, but it's not going to be the growth engine that we've seen in the past.

And that's why we're so enthusiastic about International which truly is great engine for us.

And, of course, we're seeing tremendous growth in Ground and Freight as well.

Thank you.

Our next question is coming from Kurt Muller of RCM.

Good morning, ladies and gentlemen.

Can you just help me understand something?

Fuel as a percentage of revenues fell in the quarter versus year-ago even though your fuel surcharges lagged and fuel was rising during the quarter.

Can you help me understand a little bit better, please?

I don't really look at it as a percentage of revenues.

Remember that the less fuel intensive business that's growing the fastest is Ground.

The second less fuel intensive business growing the fastest is Freight.

We got Kinko's in there that doesn't burn fuel.

So it's really not a relevant question for the way we operate this business.

A little fuel.

A little fuel.

Okay.

But they're little trucks.

Wind power.

So you've got to go back and look at it by segment and then you've got to understand what the surcharges are or not as well as those year-over-year comparisons, and I think you get a lot better view.

Our fuel surcharge tends to lag the market a bit.

Keep in mind that there's a little bit of catch-up in there that we have to do.

Thank you.

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

Good morning all.

Actually, maybe a couple of questions for either Dave Bronczek or Alan.

I noticed on the International freight traffic, that that fell off about 13%.

Now, I know that you all, for a long time, obviously had a conscious strategy of mix managing what goes in the aircraft.

But that seems to be a steeper decline if I look at a trend line basis in other quarters.

And I'm just wondering what happened in terms of the International freight volumes?

Was it just a stronger displacement quarter, in terms of more IP, far less freight?

What went on there, if I can get some color?

Scotty, you hit the nail on the head.

We had the 22% growth in International revenue.

That IP growth is displacing ATA freight pounds.

It's airport to airport, the ATA -- it's the lowest yielding product we have.

So from our perspective this is very good.

When I showed the airplane at the analyst meeting and how we were trying to move our higher yielding traffic into that plane, that's exactly what happened in Q4.

Thank you.

Our next question is coming from John Barnes of Credit Suisse First Boston.

Hey, good morning, guys.

Kind of a longer term question.

You know, with this new agreement with China, there's been a fair amount of speculation as to what you guys will do in terms of an express hub in Asia, potentially abandoning Subic and things like that.

Without getting into too much, you know, you don't have to tell me your exact plans.

But just as you go through this process, and if you open anything in China, what is the approval process, how long does it take, and, you know, if you were to do something regardless of your other facilities there, when would something be up and operational for you in that network?

Let me just start off by saying that we're not looking to abandon the Philippines.

We've been very pleased with our hub at Subic Bay and we've extended the agreement we have there.

All that being said, we're looking at all of our options.

They're all very promising in the whole Asia Pacific market -- of course, that includes China.

We've been doing a lot of work as you probably know and it's been written in the past at looking into China specifically.

So, we're working all of the issues right now to make the best decision for FedEx Express.

I can tell you we have a lot of options.

But I did want to make that point that we're not abandoning the Philippines.

This is Fred Smith.

Let me just amplify something that Dave said.

Things tend to be put into more simplified form sometimes when the press is writing about them than is actually the case.

In Europe we have three hubs.

We have very big hub at Charles de Gaulle in France, we have a very substantial operation in Sansted and we have a very substantial operation in Frankfurt.

So, it's really one of emphasis.

In the Pacific, we have a very big hub in Japan -- a huge operation there, which we got when we acquired Flying Tigers many years ago and have built upon.

We built the hub in the Philippines at Subic Bay.

It's a great hub.

The only problem is, the runway's too short.

And they have exhumed Clark from the volcanic ash, so we may have to move over there, just because of aircraft performance.

So, similar to Europe, before it's over with I am sure that we are going to have some sort of hub operation in China.

But at that point, then, similar to Europe, it's just a matter of emphasis -- how many flights are routed through China, how many through the Philippines, how many through Japan, similar to the decisions that we make in how we route things through our three European hubs.

So I hope that clarifies it, because it's not an either/or situation at all.

Holly, we have time for one more.

Thank you.

Our final question is coming from David Campbell of Thompson Davis & Company.

Yes, thank you.

The growth in the overnight envelope business in the quarter, that's quite different than the previous two quarters that they've been decreasing business there.

Has Kinko's contributed to that growth or is there some other reason for that growth?

Kinko's has not had a material impact on the overnight envelope business during the quarter.

As I mentioned, we just rolled out full package acceptance capabilities at all Kinko's.

Having said that, keep in mind we had drop boxes and counter operations -- either one of the two -- at all Kinko's locations prior to that, full service counter operations at about 135.

Having said that, we had some success in the document market during the quarter and that's being reflected in the numbers.

And it's sustainable, in your opinion?

Well, I mean, that's questionable overall just because the document market is susceptible to more conversion to electronic means, and that was one of the driving forces behind our acquisition of Kinko's.

As we talked about, Kinko's does a wonderful job of electronic document management and we feel one of the key values is our ability to transfer the brand equity we have in the physical document movement to the digital document movement.

So you're going to be seeing more in that regard and we think we're well positioned, even though there's no significant growth in the envelope market in the physical sector, there's strong growth in the digital sector and we plan to take advantage of that through Kinko's.

Okay, Holly.

Ladies and gentlemen, we appreciate your participation today.

I want to thank my colleagues for being with us and participating.

And we hope you have a chance to really analyze the results.

And if any follow-on questions you have, please give us a call at our IR numbers.

Again, thank you very much, and have a great day.

Thank you.

This does conclude today's teleconference.

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

Thank you.