聯邦快遞 (FDX) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the FedEx Corporation first quarter fiscal year 2005 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, and good morning, ladies and gentlemen.

Welcome to FedEx Corporation first 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 a replay will be available for approximately one year.

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

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

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 express 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 prior year financial results include business realignment costs and tax related benefits 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, General Counsel and Secretary, Mike Glenn, Executive Vice President, Market Development and Corporate Communications, 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.

After Alan we will have time for Q&A.

Fred?

Thank you very much, Jim.

Good morning, everyone, and thank you for your interest in FedEx.

We concluded another strong quarter.

Good earnings and strong service performance across the board.

I want to thank the management team as well as our employees and contractors around the world for their contributions in achieving these results.

First of all I'd like to underscore the importance of the U.S.

Department of Transportation recent tentative award to FedEx Express of an additional 12 frequencies to China.

As many of you know FedEx is the industry leader in China and the Asia Pacific region.

We offer customers greater access to the region with more flights to more cities than any competitor.

The addition of these new flights will strengthen our service offerings between China and North America, Europe and Asian markets.

FedEx will begin 6 new flights this year and another 6 in 2005, providing customers an unmatched suite of services and unrivaled access to international markets.

Currently FedEx flies eleven weekly flights to Shanghai, Beijing and Shenzhen and we are the first and only air express carrier to offer a direct flight from the manufacturing heart of China, the Pearl River Delta, to North America.

China is changing the economic landscape of the entire world and FedEx has been a part of that change for the past 20 years.

In the quarter just ended FedEx volume from China grew 52% from a strong base.

China's economic growth is not only driven by exports but also U.S. exports to China that have grown by 75% in the past 3 years.

The United States is second only to Japan as China's top trading partner now.

We expect to see this trend continue with our expansion plans to serve 100 additional cities in China over the next few years, further opening the doors for our customers around the world.

As to our overall first quarter performance, I hope you agree that these results prove our unique business strategy is paying off.

We believe we are giving our customers exactly what they need, dedicated networks to meet their specifics shipping and business needs through bundled one stop solutions.

Customers from small to large increasingly recognize the value of using FedEx to access new markets, grow their businesses and cut inventory costs.

The global economy is expanding steadily, particularly the manufacturing and industrial sectors giving our business and, more importantly, our customers business more opportunities to grow.

This quarter's earnings show that the international commerce area is a strong driver of FedEx financial performance.

For example, revenue from FedEx international priority increased 25% for the quarter.

Our FedEx international priority average daily shipment volume grew 13% led by strong growth in Asia, U.S. export and Europe.

The decision we made a few years ago to expand the FedEx Ground network is paying significant dividends.

For the first quarter FedEx Ground reported a 16% increase in average daily volume.

This growth is a result of better penetration into the small and medium-size business markets and greater cross-selling of our portfolio of services to larger customers.

FedEx Freight is certainly another bright spot for our business and is one of the biggest differentiators between FedEx and our competitors.

Average daily less than truckload, or LTL shipments as they are known, increased 14% compared to last year's first quarter and FedEx Freight's operating income was up an outstanding 69%.

FedEx Freight continues to dominate their segment of the market and is fundamentally transforming the less than truckload industry.

As we look ahead we expect to continue to grow and expand our business in response to our customers increasing demands.

Capital spending for 2005 is expected to increase to approximately 2.1 billion and Alan is going to touch more on that in a moment.

Strong growth in FedEx international priority is fueling the need for additional aircraft capacity and infrastructure for FedEx Express.

Significant growth at FedEx Freight and FedEx Ground is also driving additional investments in those networks.

Now we'll remain cautious with our growth plans but we also intend to aggressively pursue opportunities that will generate significant returns on investment.

Overall we believe the economic picture bodes well for our business.

The overall growth in the economy is moving at a more sustainable pace and the expansion we believe is broadening.

Low inventory levels are now being replenished and FedEx is moving a large portion of these goods.

In the long-term we see these healthy economic trends continuing.

A healthy pace of consumption and retail growth along with improvement in income and the labor market will provide a solid foundation for the current up cycle.

Now I'd like to reinforce to everyone our unwaivering commitment to improving cash-flow, margins, return on investment and overall shareowner value.

Before turning the microphone over to Alan I would like to take just a moment to recognize the outstanding efforts by the FedEx team in Florida, Alabama and throughout the southeast U.S., in Latin America and the Caribbean during recent hurricanes that devastated so many areas.

True to the FedEx tradition our employees and contractors have done absolutely positively whatever it takes to serve our customers and keep commerce moving despite some of the toughest challenges imaginable.

We've heard many stories among our team members of personal courage and commitment even while they were dealing with personal hardships as a results of the storm.

We are very proud to have participated in the relief efforts with our partnership with the American Red-Cross, transporting many, many thousands of pounds of relief shipments in August and September.

And we are moving almost 100,000 pounds of relief aid to Granada in the next few days.

So on behalf of our employees worldwide I would like to say thank you to each of these dedicated individuals who work so hard to mitigate the effects of the recent adverse weather.

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

Thank you, Fred, and good morning, everyone.

I think you can tell from our press release and Fred's comments that we are very excited about our improving results and the significant momentum that we have developed.

I would like to call our some key metrics for you before we go to Q&A.

For FedEx Corporation revenue growth of 23% during the first quarter of 2005 reflects improvements across all operating segments and the inclusion of FedEx Kinko's.

Competing collectively total average daily package volume at FedEx Express and FedEx Ground grew a combined 6% year over year for the quarter due to continued strong growth in international express shipments and higher growth in ground shipments.

FedEx Freight average daily less than truckload shipment volume increased 14%.

Although our fuel costs increased significantly during the first quarter of FY '05 higher revenues from our jet and diesel fuel surcharges at FedEx Express and FedEx Freight offset these higher fuel costs and there was no material impact to the quarter.

Also during the first quarter we generated 737 million of cash-flow from operating activities and used 391 million in investing activities.

For all of FY '05 we expect capital expenditures of approximately 2.1 billion compared to 1.3 billion in 2004.

The expected year-over-year increase will fund additional aircraft capacity for FedEx Express, primarily to support the IP volume growth, and additional investments will be made in the FedEx Ground and FedEx Freight networks.

I should note here that approximately 75% of our capital spending is for growth.

Also included in the 2.1 billion number is an opportunistic purchase of 8 MB 11 passenger aircraft in excellent condition at very attractive pricing which will not enter revenue service until approximately FY '07.

Turning to FedEx Express, the express segment total revenues increased 12% in the first quarter of fiscal 2005.

Higher IP revenues and higher U.S. domestic yields were the drivers.

During the first quarter IP revenues grew 25% due to 13% volume growth and an 8% improvement in yield.

Asia experienced 21% average daily volume growth during the first quarter led by China with 52% growth, while outbound shipments from the United States, Europe and Latin America continued to improve.

While U.S. domestic express average daily volume declined slightly it was a result of a loss of a corporate customer in a transition from express to ground by another large customer as we continued to compete collectively.

Importantly salaries and benefits increased only 3% in the first quarter of FY '05 at FedEx Express.

Our focus at express remains to improve cash-flow and service, grow internation and achieve double-digit margins.

Fred did a good job of highlighting the ground and freight numbers which were outstanding, so let me move on to FedEx Kinko's.

Of course there are no year over year comparisons as we did not own FedEx Kinko's last year in Q1.

The first quarter at Kinko's is seasonally slow and margins were negatively impacted by that and by costs associated with the ramp up from new product offerings including significant training hours and full integration of pack and ship capabilities.

Costs associated with the integration of FedEx Kinko's will continue through the remainder of 2005 as we transition our stores.

Lastly, recently Government Metrics International advised us that they have given us a global corporate governance rating of 9.5 out of their possible 10.

That puts FedEx corporation in the top 3% of the 2600 companies they reviewed and we are also very proud of that result.

With that, Holly, I am happy to open it up for Q&A.

Thank you, sir.

The floor is now open for questions. (Caller Instructions) Our first question is coming from Edward Wolfe of Bear Stearns.

Good morning, Fred, good morning, Alan.

Morning, Ed.

Hey, just a little more -- can we go into depth with the express volumes, the domestic volumes?

If you want to take one thing that is not as positive as the rest of the things and harp on it, I hate to do that to you as the first question, but if you take a look at them you mentioned the -- the movement of a customer from air to ground.

Can you talk to how much of this is part of the plan to, you know, yields are improving.

You've shrunk the headcount.

Maybe you don't have the capacity to grow this business.

How much of it is it's later in the economy when hopefully we will see an uptick in this volume, it's just not there yet and how much of this is related to that one customer?

Hey, Ed, this is Dave Bronczek, I will start off and then Mike and Fred may want to jump in.

This -- this customer is a very good customer of ours for a lot of years.

Quite frankly, the metrics fit very nicely in the FedEx Ground network.

It's exactly the right thing for us to have done.

It's improved my yields and my profitability.

It's improved Dan Sullivan's as well.

So when these things happen, and they will happen throughout the years to come I'm sure, that's the reason we have such a nice mix of sister companies where you can move customers inside of our FedEx portfolio that best suits the needs of our customers.

Mike, you might want to add to that.

Well, I would just add one other thing.

Ed, the customer, the corporate customer, Alan, mentioned is in the high tech sector.

It's a customer that we were carrying the traffic in the first quarter of last year and after some in-depth analysis we made the decision that it was not producing the kind of returns that we were looking for and as a result of that we decided to sever that relationship, although we still do carry a lot of traffic for that customer today.

So, we made a conscious decision to exit that business.

So, the combination of those 2 events had a drag in the first quarter which is a bit artificial in that regard.

Obviously we would have had a better quarter had those 2 events not occurred.

One was -- both actually were intentional on our part.

Can you give a sense for, you know, either millions or, you know, a range or percentage points that it cost you in growth do you think.

I can tell you that we would have been positive in the quarter, absolutely, hadn't it been for the 2 decisions that we internally made.

And how much did that improve the ground 16% volume, would it have been 13, 14 without?

Can you give us an idea there?

Dan?

Ed, we would probably be up about 15%, 14.8, 14.9, something like that.

This had about a 1.2% impact on growth.

I think, though, Ed, if you continue to dissect these things you are going to miss the point about competing collectively, driving margins and managing this business for cash flow.

The yields improved substantially at Express, half of which were associated with weight per package and the other half was for fuel surcharge and that's how we are managing this company.

Okay.

Just to the CapEx point, Alan.

What's your sense for longer term as you go out past '05 and you look at CapEx?

I mean, even at 2.1 billion as a percentage of revenue you've got this thing well below where you've historically operated it, where would you expect CapEx to go as you looked out realizing, you know, I know it's tough to look at fiscal '06 and beyond, is there some metric as a percentage of revenue or something else that -- that CapEx we should expect to be in - ?

I don't know there's a particular metric I want to hold us to.

I mean, we've been trying to manage in the 6 and -- 6 to 7%range of revenue but I think 3 things are really important here.

One, as I said early, 75% of our CapEx is for growth.

So we don't have some massive reinvestment that we have to make just to continue to stay in business.

I mean, we are still a relatively young company with long live assets with a lot of earnings power.

Secondarily, the international opportunities for this company are unparalleled and with our additional works(ph) that we are going to have in China and the ability to continue to grow IP significantly which must transverse the U.S. and cause us to have to increase lift in the US as well, we are going to add to that capacity as long as we are driving 35 to 40% incremental margins.

And then lastly our cash flow is still remain very highly positive and we are going to stick with that.

So -- but -- but if we look at a range of revenue, CapEx to revenue sort of 6 to 8% is a fair place to model you going out.

As I said, I don't want to get pigeonholed into a particular number because years may fluctuate depending on the availability of used aircraft, which we believe are very effective for our operations, and when we can buy them and what opportunities we face.

But from a financial metric we'd like to stay in that range.

Okay.

And then 1 last question and I'll let someone else have it.

You've had Kinko's now for another quarter.

You talked about the seasonal impact.

Can you talk as we go out what -- what the real kind of annual margin should look like for Kinko's and how cyclical you think that's going to be?

Sure, a couple of things there.

Sequentially from the fourth quarter to the first quarter I burdened Gary's company with significant additional overhead charges, from Fred's salary in Corporate, which he didn't have in the fourth quarter.

Obviously we are doing rebranding.

We are training people to accept packaging.

We are changing the stores to be able to do pack and ship.

We are consolidating their offices in the Dallas area from California.

There are a significant amount of 1 time events in fiscal 2005 that are going to continue to hold down their true earnings capability as we reposition them for FY '06 and beyond.

And with that I will let Gary describe his business in a little more detail to you.

Thanks, Alan.

We have -- we have a lot on our plate, as Alan said, but I would like to talk about things that we have completed since the acquisition in February.

And we have a lot that's behind us now even as we have a lot in front of us.

We did launch FedEx Day Definite Ground and Time Definite Global Express shipping services in May at virtually all 1100 of our U.S. centers.

We launched a national advertising campaign reinforcing our value proposition with our new tag line, Our Office is Your Office.

We launched and a thing we are very, very excited about that will continue to gain traction in the months ahead is File Print FedEx Kinko's.

That's a new technology solution that we created along with Microsoft that allows customers to access FedEx Kinko's services from their computers no matter where they are.

In addition we did things like completing our Yi-Fi rollout.

We have literally invested over 570,000 hours of training just in the last few months to prepare us for these new shipping services in the upcoming pack and ship capabilities that we will begin rolling out around October 1.

So, we have a -- we -- we've been covering a lot of ground.

We're --our rebrand is still -- we are going to be rebranding all of our U.S.

FedEx Kinko's stores by the end of fiscal year '05.

You will see new signs, new looks and feels in all of our stores.

So we've got a lot -- a lot still in front of us but we've covered a lot of ground and are really excited about being a part of FedEx.

Clearly there is a lot going on but just trying to get at that if we looked forward and we said what's a margin without the one time rebranding stuff and then how much of the rebranding stuff should we model for as we go out through the year, any difference from the previous guidance?

I think that we will continue to move towards a operating margin goal of 10% as we think that we can be there along with FedEx in -- in attaining that sort of operating margin as we move forward and get the transition behind us.

So kind of a fiscal '06, fiscal '07 goal?

Hey, Ed, we need to move on to some other questions, okay?

Thank you.

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

Good morning, just a question on Express and LTL, maybe apply it to both.

If you look at the fuel surcharges, obviously you've got a great mechanism in place there to recover the cost.

But, you know, at some point does it become difficult to maintain the 10% type fuel surcharge that we are seeing now and specifically within Express, do you have any sense that that is starting to impact the volumes because that surcharge is so high?

I will answer the express piece first and Mike Glenn might want to jump -- jump in.

But we talk every week with our sales professionals around the country and around the world, quite frankly, and obviously nobody likes the fact that the price per barrel is -- is this high but, quite frankly, everybody understands what the global economics look like and we have had very little push back and people basically understand, you know, where we are with our surcharge.

It's out there in advance and I think that helps our customers plan in advance as well.

Mike, you might want to jump in on that.

I think Dave is right in terms of how it's positioned.

We are straightforward with it.

The number is out there in advance and, of course, people see the prices at the pumps and that certainly helps them understand what we are dealing with.

But we do monitor the situation very closely and it's something that, obviously, we're concerned about and would like to see the fuel prices drop.

And then on the -- the same on the Freight side, Doug?

Well, we are certainly concerned about the -- the fuel surcharge because the customer sees it as part of the total price, so.

But -- but on the plus side, our focus on serving the fast cycle logistics customer is really focused on inventory reduction, still finds, you know, that our -- our certainty of product and certainty of service as a value when they make their comparisons.

So I think we are okay but I still am very concerned about the -- the prices we charge customers.

Thank you.

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

Yeah, good morning, all.

One question, I guess, and this would be I would presume for Dave Bronczek, is the ATA and IXF volumes fell about 17% in the quarter and that's been accelerating through the last several.

I'm just trying to tie that with, obviously, some of the commentary about CapEx and increasing, obviously, your fleet because there's the growth.

I'm just wondering should we expect to see those rates of decline going forward or as you add new aircraft is there a natural balancing that you are going to have to have some degree of IXF and ATA to at least have those aircraft full and then you go through the process again where you will continue to work up the amount of IP versus the amount of freight.

Yeah, thanks, Scott.

That's a very good question.

Obviously, we've had tremendous load factors and very high IP as Fred pointed out at the very beginning, that displaces that lower yielding ATA.

We will always have ATA, we'll always have IXF.

Obviously as we add capacity in Asia, primarily in China, that will open up some more room for IP, quite frankly, but of course it will drag along ATA and I X F. So, we are very, very pleased that we have had such a high load factor of IP but we will always have, I guess, a fluctuation of ATA and IXF percentage wise.

But for this quarter that number is -- is truly outstanding.

Yeah, but, I mean, can that improve any further or as you ad frequencies are you sort of at the load factor, is the load factor actually of IP perhaps drop a little bit?

No, we will add capacity so the percentages might shift a little bit but, you know, going forward again the demand that's -- that's building up out there when we put our aircraft out there will continue to role in a lot of IP to those planes but there will be more room for IXF.

Thank you.

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

Hi, good morning.

Just to followup Alan on the -- on the planes you noted you were adding, are those lease conversions or are those new adds as you expand your China operations?

No, those would be additional aircraft.

Okay, thanks.

Just on the Express margins, I guess my main question here on the Express side, can you kind of just review how well the -- the cost savings are flowing through, what is still expected to come through if there is still any year-over-year benefits?

I think you still have another quarter left, and is there any other programs going on to continue to -- to cut costs at Express to get to your 10% long-term target?

Yes, the answer is yes to both of those questions.

We have continued savings from the business realignment.

You saw the number.

I assume in the release that we sent out, we've said publicly that the numbers between 230 and $240 million were right on track for that.

We are very pleased with the program.

It's been well-received.

It's around 3600 employees we've mentioned before.

Beyond that and so, yes, you will see more of that in the quarters to come.

But beyond that we have significant cost programs in our system on improving productivity, efficiency in the field, in our fleet networks.

We review this constantly and we are very optimistic that we have a -- a good plan going forward.

Thank you.

Our next question is coming from Kirk Moulder(ph) of RCM.

Good morning, ladies and gentlemen.

Can you just kind of help us get a little better sense as to some things we should look at from Kinko's to define how well you are succeeding in the integration?

Mike Glenn, why don't you answer that and then, Gary, jump in.

Well, clearly we want to be continue to drive our small and infrequent users into the retail network and it's going to be important for us that we complete the rebranding in this fiscal year which we are on target to do.

That will actually start in ernest coming up here in the months ahead.

We want to rollout our pack and ship capabilities.

We believe that will enhance our value proposition and we think customers will see a tremendous value from a price perspective and a service perspective as they go into -- to Kinko's to transact with our transportation companies.

We also believe there is a tremendous opportunity to leverage the FedEx brand in the document space.

We're -- we're, obviously, the market leader when it comes to the physical transportation of express documents and we believe that can be transferred to the digital movement of documents with the File Print to Kinko's.

And I'll let Gary talk about some of his core business issues.

Yeah, I think I'd add that -- that a lot that you can -- that you'll be able to see and measure will literally be in what we -- what you see when you look at our branches from the exterior signage to how we merchandise and speak in our front windows, the way our -- the uniforms that our people wear.

I think you'll see us evolve and by the end of fiscal year '05 into the sort of FedEx look and feel that everyone has come to expect from FedEx companies.

I think that's the -- that's the major -- that's the major part of the branding issue.

Then the other -- the other parts of our business, we continue to penetrate and will -- and have targeted the large commercial customer space as an area where we can -- where we have major opportunities that continues to grow very dramatically.

We continue in the -- to grow our business in the sign and graphic space.

We opened a free standing sign and graphic center in Austin, Texas, in this quarter, that's off to a very fast start.

And so we continue to develop our local market business within 3 miles of each of our locations with an outbound local sales force that's tied to each branch.

Those are our big -- those are our big initiatives to drive business into the small local, small office/home office market as well as the large commercial market and in an environment that will really say more, will look and feel more like FedEx by the end of fiscal year '05.

If I were to think about the transition from Kinko's stores to what they were before FedEx bought them to what they are going to be, how far along in terms of an inning, maybe, are we in terms of that transition?

Well, again, the look and feel we expect to have done by the end of fiscal year '05.

We are making very large investments right now in our people, in our systems and in our infrastructure, which is what Alan referred to earlier, to really convert us into more of the FedEx mold.

And that will be ongoing.

I don't think we will ever stop doing that.

But that -- that is -- that is a real focus now and that's where our investment is going during this fiscal year.

This is Mike Glenn, if I had to put a number on it I would probably say we are 30% along the way.

A lot of work that we have done, obviously, is behind the scenes in preparing for a lot of the changes that I talked about and that Gary has talked about.

We are accepting packages at all locations, now, both Ground, Express, domestic and international.

We are rolling out our return services.

We are rolling out pack and ship.

But a lot of the things that are actually visible to the consumer will be taking place between now and the end of this fiscal year.

So, it will be -- it will be much more apparent to our consumers as we roll through the fiscal year that the transition has actually occurred.

And the number of packages that we are taking over the counter at FedEx Kinko's is growing every week and they are higher yielding than our average packages and producing more profit..

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

Good morning.

Great quarter, guys.

I'm just wondering if we can have some thoughts here about the 2005 price increases given that we won't have this conference call again until after they have been announced in November and what I'm trying to understand is, obviously I wouldn't expect an exact number but, I'm trying to understand if you think the environment is stronger or weaker than, I guess, prior years and if you can kind of break that down between air and ground it would be really helpful.

Gee, Jim, would you like to sit in on our business planning sessions as well.

Sure.

We are not going to talk about anything specifically on pricing.

I will let Mike talk about the environment in general but it's way too early to the talk about pricing decisions.

Jim, I think the pricing environment has remained relatively constant.

Obviously the one wildcard that we've been dealing with is the increasing fuel cost.

As I mentioned before we are hopeful that those fuel prices drop to get back down to a more manageable fuel surcharge but, you know, I wouldn't expect anything significantly different than what we've seen in years past.

I mean, obviously, as Alan mentioned, it's premature to talk about that but the pricing environment is pretty stable.

Okay, good, good.

And just one other question.

If we look at the -- the strong earnings here in the quarter, at least from our relative to our expectation a lot of it was driven from FedEx Freight which just -- it's -- it's testament to putting all the companies together and the synergy you are getting there.

I guess the one concern I'd have is, also being a trucking analyst for many years, is that the LTL sector is probably the most volatile of any of the businesses that you operate in and that, you know, when you have a really good year inevitably it leads to a year or 2 down the road ultimately you have a really bad year in the LTL business and I'm just trying to get my hands around why you guys think your business model might be different here in terms of being a premium product.

Jim, this is Doug.

Clearly we are benefiting from the expanding industrial economy, so that's working in our favor.

But I would also draw your attention that I think we are growing substantial market share based on our own initiatives.

I mean, September 15 was our anniversary of introducing money back guarantee for the first time in the LTL industry.

That's gone largely unmatched because I think people are afraid of the financial consequences and we continue to grow market share based on that money back guarantee.

I mean, we would -- we work with FedEx operating companies.

We are actually selling the Express freight product through our sales organization now and I think that's positioned us as a freight solutions based sales organization where we can offer total solution and not just a one trick pony, and obviously the regionalization, customers moving to fast cycle logistics, getting into -- continue to grow into next and second day distributions.

That continues and that's right in the wheel house of our business and where we've made the investment.

Thank you.

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

Morning, great quarter, guys.

Hey, Alan, I just want to make sure that if Jim gets to sit on business planning meetings I would like to be able to too.

I just got, actually, 1 followup to one of Ed's questions.

I just kind of would like to get a character -- characterization of how you guys look at these -- or -- or what stage you're at with some of these customers that are switching from air to ground.

I understand how that benefits you but is this something that we should look at as an ongoing process or over the last few years you probably have been be able to switch the larger customers that should be at ground, that's been done, and we won't see larger degradations to the growth rate at express over the couple of years.

Art, I am going to let Mike give you some more details.

In our view our numbers, our assessment of the domestic express market is that it is not growing.

And in particularly if you look at the envelope sector with the reduction in the amount of financial traffic that has happened here over the last 6 months or so.

The market itself is not growing.

I think part of that is the terrific job that FedEx Ground has done in extending its overnight reach, it's two-day lanes and improving its service reliability so dramatically that the value there with the information capabilities we believe is really unmatched.

So, the days of the, you know, huge growth of the domestic express market itself are probably over but I would say, as we discuss often around here, that when Motorola used to have a domestic express shipment, it's now an international express shipment.

Where it might have had an origin or destination in the U.S. it now has a origin offshore and a destination in the US or vice versa.

So, you are not only seeing domestic express go to ground, you are seeing it going to the international segment and package count which is why I continue to stress you have to look at this as one big network competing collectively operating company.

And I will let Mike give you a little more detail on the express market.

Art, if you'll recall about 2 years ago at our, not the most recent analyst meeting but the one before that, I indicated that we did not see significant growth opportunities in the overall express market and that comment was received with quite a bit of surprise by a lot of people.

But the fact of the matter is the situation has played out pretty much as we expected.

We have not seen material growth in the express market.

As a matter of fact if you look at the last few quarters there's been no growth at all it's actually been at a decline and we performed pretty well in that regard in the U.S., speaking specifically about the U.S. market.

But, as Alan pointed out we view the express network as a global network and we -- that's the way we manage the network.

And packages that we are moving, you know, from 2 points in the U.S. are now moving from 1 point outside the U.S. to a point inside the U.S.

So, clearly we want to maximize profitability in the U.S. network and I think the actions that we've taken are consistent with that, but we look at our express network as a global network and are managing it that way.

This is Fred Smith.

Let me make a couple of comments here because I think it's very important for our shareowners to understand this.

As Dave and Alan and Mike have all pointed out, the express business over the last few years has undergone significant change.

There's been a lot of electronic incursion on what was formally physically transported.

We believe that would be the case for many, many years.

We have a great product in that sector in File Print FedEx Kinko's, it's growing like crazy.

As Gary mentioned we are very optimistic.

But those high growth document and envelope scenarios in the past in the express are not going to be the case going forward.

Secondarily, as the value per pound of certain technology items have gone down it makes more sense for those to move on a time certain ground cycle than in a time certain express cycle.

And as Mike mentioned there both of those we anticipated, as Wayne Gretzky said, hopefully skated to the puck with the acquisition of caliber and rebranding of RPS and the FedEx Ground and more recently the FedEx Kinko's situation and even before that our determination to expand our express franchise -- franchise into a global network which is absolutely unprecedented.

Our -- our system in Asia and across the Atlantic is just outstanding and we today, as Alan and Mike mentioned, are substituting what used to be domestic express packages for IP packages at a revenue exchange rate of at least 4 to 1.

In otherwards we get 4 times the revenue for that express shipment internationally and incremental margins that are very, very substantial.

That is why Dave Bronczek has told you that we believe confidently we can move express into double-digit margins.

And -- and we are definitely putting a lot of resources and effort at the moment into being able to expand that international express franchise because it is so lucrative.

Alan mentioned that we had bought 8 MD11s which are opportunistic purchases.

It takes sometime to get them engineered and converted.

They are listed as CapEx here in the short run but they really will not come on stream until FY '07.

In addition to that we have a small number of MD11s which will go in service in FY '05, late this year, and in FY '06 to exploit the IP growth that Dave described to you and these new China frequencies.

So the understanding of what's happening in the express business is -- is very, very important for our shareowners and we are very excited about it because we -- we think our express franchise is a huge growth opportunity and all of the things that have happened have been anticipated and we think that we are ideally positioned with our portfolio of services to meet the market needs as they go -- go forward.

And I apologize for taking a little time on that but we get a lot of questions that indicate there's a bit of confusion on that so I felt it was important to elaborate.

Thank you.

Our next question is coming from Jordan Alliger of Deutsche Bank.

Hi, morning.

Question: Given what appears to be a step up in activity from DHL, whether it be through CapEx, advertising or simply seeing more of their trucks riding around the streets, what, if anything, are you doing now to deal with what looks like this potential competitive threat?

And are you prepared to fight back, whether it be through advertising, pricing, et cetera, should this start to increase once they get their infrastructure in better shape over the next few years?

Jordan, this is Alan, before I turn that over to Mike I'm just curious as to whether getting that money, if they are not subsidized by their German mail monopoly to do all these things.

Secondarily, their service levels are not even remotely approaching anything that FedEx Ground, FedEx Express can offer.

And thirdly, you know, we are not exactly wilting lilies here, so let me turn it over to Mike.

Jordan, we -- we have seen a lot of activity in the marketplace, more from an advertising and promotion perspective, however, as opposed to a sales perspective.

We see them pop up from time to time in bid situations and -- but -- but the fact of the matter is they've had no material impact on our growth plans at all up to this point.

Now, obviously if they continue to invest at the rate that they are, you know, we will just have to see how that plays out.

But the fact of the matter is they don't have a value proposition that is remotely close to what we have.

Not here in the U.S. and not globally.

So, unless they make huge investments in their infrastructure for many years to come we see that we've got significant competitive advantage over them from the standpoint of -- of our domestic value proposition and our global value proposition.

So, obviously we are going to continue to watch the situation closely as we would with any competitor but their value proposition is not remotely close to ours.

Thank you.

Thank you.

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

Yes, good morning, gentlemen.

Just wanted to dig into the ground growth which was quite impressive on the volume side at 16%.

Could you maybe give us a little color on where you think that is coming from.

How much do you think is due to the resurgence of the economy, how much do you think is due to the increased volume that is due to the Kinko's acquisition that you are pulling across those counters?

And then how much do you think is market share capture?

Mike, you want to start and then Dan?

Well, we've had some success in terms of capturing market share.

There's no question about that.

I think we've had balanced growth, strong growth from our small and midsize customer segment and, as Alan mentioned, we've seen sequential growth are on a week by week basis coming through our FedEx Kinko's network.

But, we've also been successful with some large corporate accounts which is stimulated our growth for this year.

So it's been balanced in that regard.

We continue to see strong demand for FedEx home delivery service and we are very excited about the acquisition of Parcel Direct because that's going to open new opportunities for us to further penetrate that residential delivery market.

Dan?

Well, Mike pretty much covered it.

We have seen excellent growth across all segments especially at home delivery, our overnight service is up at a greater rate than the total business levels.

Good growth, as Mike said, in the small and infrequent shipper area.

And the -- the retail segment now because of Kinko's is up substantially but off a -- off a very low base.

But we are very excited about what we've seen here this quarter and what to expect from Kinko's going -- going forward.

So, things are -- things are going very well on the -- on the sales front.

We think that will continue.

Dan, maybe you want to just to add a little bit about how you are getting ready for peak and what you are expecting?

Well, we are expecting -- we're expecting a very large peak and, of course, it's all hands-on on deck now.

With the growth of -- with the growth of home delivery, we expect that we will bring on 7,000 resources to insure that we provide high levels of service during that -- during that period.

But we've got a couple of years under our belt.

We are obviously excited about the opportunity to -- to move the -- move the business and I think we will be ready.

But December will be a barn burner and especially as we close in on those 2 weeks before Christmas we will be well over 3 million packages a day on a regular basis, we believe.

Thank you.

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

Good morning.

Just want to check in on Kinko's.

I went back to my notes from the analyst day you had in April and we were talking about long-term margins of 12% and today I've heard 10%.

I just wanted to clarify that I guess, long, long-term we are still looking at 12%?

Matter of fact we said -- we said 8 to 12% is what we said and -- so we are right in the middle of that range.

Thank you.

Our next question is coming from Helene Becker of Benchmark.

Thank you very much, operator.

Hi, everybody.

These are easy questions because I think the hard ones have already been asked.

Alan, can you say of the 11% increase in FTEs what percent is attributed to Kinko's?

Vast majority of it.

Okay.

I mean we're -- we are flat to down at Express which is of course the largest employer in the group.

And the other growth at Ground and Freight is strictly related to the increased volume and I might add those productivity levels have been tremendous.

We are adding significantly fewer relative FTEs per volume transaction than the average had been before that and that's generating significant incremental profit.

Thank you.

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

Great job, guys, very solid quarter.

Actually all of my questions have been answered.

Thank you very much.

We have time, I think, for one more, Holly.

Thank you.

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

Hi, guys.

Glad you could squeak me in.

A couple of quick questions.

On LTL I believe you guys were capacity constrained a couple of quarters ago and had recently added capacity.

Just curious, do you have enough capacity there to sort of continue what we saw in terms of share gains in growth and also, Alan, there's a lot of talk about the secular changes in Express and Grounds.

I'm curious, is there anything in the verticals, i.e. retail or tech, that may have exacerbated that -- that differential this quarter?

Well, this is Doug.

The LTL business has never been capacity constrained to my knowledge.

We've been taking a long-term view of capacity and I think our ability to grow the way we are growing now had a lot to do with the investments we made last year.

You may recall we bought several properties out of the CF bankruptcy which helped our cause to get us up to speed and take us down our long-term facility plan.

We continue to work very closely with a -- an apprentice work force where we train dockworkers, good workers to become drivers.

So that when the volume hits us we've gone trained drivers to put to work and can go to part-time employees replacing those people on the dock.

So, I think we've taken a very long-term approach to -- to growing this business.

We are not capacity constrained.

We are pushed a little.

We are working a lot of over time and working a lot of long hours, but to this point we have not -- we've not had to turn down a thing we wanted to handle.

Right, I think that's important.

Doug hasn't turned down one customer for capacity reasons because his planning group is so strong and they saw this coming and were ready to handle it unlike many of his competitors who publicly said if they could get more drivers and trucks and doors they would make more money.

That's not the case here.

And I'll let Mike answer the second question.

I'm sorry, Greg, your question was about how the tech sector is impacting Express?

Be that in the different verticals that may be exacerbating the spread between air and ground right now.

Well, I think clearly Fred pointed out earlier that -- that in some of the key sectors that we are talking about what we are seeing is as the value per pound comes down the Ground value proposition with Time Definite service certainly becomes appealing.

There is a certain value per pound threshold --

Day Definite.

Day Definite, I'm sorry, there is a certain value per pound threshold where express transportation comes into question as to whether it's the best way to get the product from -- from manufacturer to consumer or is ground the better -- the better choice.

So, we work with customers in these vertical sectors to determine the best solution to meet their overall needs and that's why we think we've got a tremendous advantage is we've got the networks that allow us to do that, whether that's LTL, whether that's ground, whether that's domestic express or global solution.

So we do see inventory replenishment going on and we are benefiting from that but clearly there are some choices being made.

-- any closing comments?

Holly, Holly?

Yes, sir.

Yes, I want to thank everybody for their participation in today's conference call.

We certainly appreciate your being with us this morning and we look forward to working with you during the following quarter.

Thanks very much, everyone.

Thank you.

This does conclude today's teleconference.

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

Thank you.