聯邦快遞 (FDX) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the FedEx Corporation third quarter fiscal year 2005 earnings release conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Jim Clippard.

Sir, the floor is yours.

Thank you, Maria.

And good morning, ladies and gentlemen and welcome to the FedEx corporation third quarter earnings conference call.

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

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

This call is being broadcast from our Website and the replay will be available for approximately one year.

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

During our Q&A session callers will be limited to one question and a follow-up, so we can accommodate all of those who would like to participate.

We are planning an investor meeting in October in New York, so please save the afternoon of Wednesday, October 5, 2005, on your calendar.

We will have more detail about the meeting for you later this year.

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's Corporations and subsidiaries and filings with the SEC, including but not limited to its reports on forms 10-K, and 10-Q.

Joining us on the call today are Fred Smith, Chairman, President, and CEO, Alan Graf, Executive Vice President,, CFO, Mike Glenn, Executive Vice President, Market Development and Corporate Communications, Rob Carter, Executive Vice President and CIO, Dave Bronczek, President and CEO of FedEx Express, Dan Sullivan, President and CEO of FedEx Ground, 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?

Jim, thank you very much.

Before I get into my remarks, I would like to express thanks from 245,000 members of the FedEx team to Ken Masterson, our general counsel, for now almost 25 years, who announced his retirement May 31.

Ken's wise counsel and participation on our senior management team has been a major asset of this company.

His successor, Chris Richards is on the call, and the mark of any great manager is to be succeeded by great managers, and he has done that as well.

So we want to express our thanks to Ken Masterson.

We appreciate all of you being on the call this morning and your continued interest in FedEx.

As the release showed, our company posted outstanding financial performance in the third fiscal quarter.

These results which were helped by extraordinary peak shipping season, I think, are a great credit to the FedEx management teams, as well as our valued employees and contractors and associates the world over.

Our service levels and the morale of our folks across all operating companies is very high.

FedEx's strength in the third fiscal quarter proves once again, I believe, that our strategy and unique business model is sound.

The key to reaching this high level of achievement is our FedEx sales teams, who are selling our suite of transportation solutions and unlocking the power of our portfolio with our customers.

Total average daily package volume at FedEx Express and FedEx Ground combined grew more than 10 percent year-over-year for the quarter.

International priority average daily package volume grew 11 percent, with particularly strong growth in U.S. export, Asia, and Europe, while our domestic express package volume grew 6 percent.

FedEx Ground average daily package volume grew 16 percent year-over-year in the third quarter.

And average daily LTL shipments at FedEx Freight increased 9 percent year-over-year due to market share gains and continued strong demand for services.

FedEx Express, FedEx Ground and FedEx Freight each reported solid yield improvement.

This performance reflects strong customer demand across our transportation segments and shows that investments in our expansion have been, we believe, on the mark.

We will continue to invest carefully and expect our capital expenditures in FY '05 will be about $2.3 billion.

Now, earlier this month, FedEx Express extended its leadership position in serving the fast-growing Asia market by launching the express industry's first direct flight from mainland China to Europe, which provides daily service and numerous benefits to FedEx customers worldwide.

FedEx Express also received tentative approval from the United States Department of Transportation for three new flight frequencies into China effective March 2006.

This will provide our company a total of 26 weekly flights to China.

FedEx Freight, once again, helped drive our financial performance as more customers appreciate the added dimension it adds to the FedEx portfolio of transportation solutions.

FedEx Freight is expanding capacity in its larger facilities and opening new centers in strategic locations as it rapidly grows across North America.

In the third fiscal quarter, we recognized the one-year anniversary of acquiring FedEx Kinko's.

We look back with pride on what we've accomplished in this short period of time.

We've begun rebranding the FedEx Kinko's office and print centers, and are well on our way to completing that.

We launched FedEx day- definite ground and time-definite global express shipping services at virtually all 1100 FedEx Kinko's centers in the United States.

We trained thousands of team members, made pack and ship available at virtually all U.S. locations, and executed a very, very successful and novel peak shipping season.

We rolled out FedEx consolidated returns at FedEx Kinko's to help e-tailers and catalog companies more effectively handle returns.

We introduced File, Print FedEx Kinko's, a new technology solution created with Microsoft that allows customers to access FedEx Kinko's services and the FedEx Kinko's network from their computer, no matter where they are located.

I think it is also appropriate to congratulate FedEx Ground on the 20th anniversary of its founding as RPS, with particular congratulations to Dan Sullivan and the folks at FedEx Ground who created this marvelous company.

And we are very, very happy to have it as a major part of our portfolio, as FedEx Ground.

Since being rebranded as FedEx Ground just five years ago, this op co has doubled its annual revenue from 2 billion to 4 billion dollars.

Doubled the daily volume from 1.4 to 2.8 million packages per day.

Increased its work force by two-thirds and added nearly 150 facilities.

At the same time, it introduced a wonderful new FedEx Home Delivery service, with particular features desired by the residential delivery market.

And on top of all of that, we acquired FedEx SmartPost, which is now a part of the FedEx Ground Company.

I think you would agree that a smart long-range strategy, careful investing and crisp execution are paying off for FedEx.

I believe these are no doubt among the reasons that FedEx was recognized by Fortune Magazine as among the most admired companies in America and among the most admired companies in the world.

We are also proud for the 8th consecutive year FedEx was ranked among the 100 best companies to work for in America by Fortune and was inducted into its Hall of Fame, a select group of companies that have been featured on the list since it began.

We see several economic trends as we move toward the end of FY '05.

Overall economic growth continues to move towards sustainability, we believe.

Inventory building and CapEx growth are supporting the industrial sectors, and pushing the flow of goods both domestically and internationally.

On the other hand, the recent surge in energy costs is becoming a concern.

This situation if it persists for an extended period of time could slow worldwide economic activities.

In the longer term, continued global integration, and year-over-year growth in the consumer market and industrial production should provide a solid foundation for continued expansion.

We believe FedEx is particularly well positioned to benefit from global economic growth, because of our wide portfolio of transportation services, and our ability to sell unique bundle solutions.

Now, in closing, our focus will continue to be controlling costs, while increasing revenue by leveraging our unmatched services, information technology, global reach, and the most diverse portfolio of services in our industry.

I would also note our resolute commitment to improving share owner value, return on invested capital, and cash flow.

And with those remarks, I will now turn it over to our CFO, Alan Graf.

Alan?

Thank you very much, Fred.

Good morning, everyone.

Obviously, we had a terrific third quarter that we're all very excited about.

With strong revenue growth and we continue to have a lot of momentum going forward.

Fred has already discussed our growth rates, so let me just add that yields were very good as well, and as a result, our operating margins were improved at Express by 190 basis points, at Ground, by 80 basis points, and at Freight by 130 basis points.

I should point out that FedEx Kinko's third quarter is seasonally soft, and we saw sequentially lower revenues from the second quarter.

FedEx Kinko's also absorbed significant amount of costs associated with relocation of moving its offices from Ventura, California to Plano, Texas, continued rebranding, SOX 404 initiatives, and pack and ship startup losses.

Looking ahead, we expect a solid fourth quarter.

As we currently expect to earn between $1.40 and $1.50 a share.

Now, that EPS growth is not as high as was the case in the third quarter, and I would like to address that right now.

First, the year-over-year revenue growth comparisons in Q4 are tougher than they were in Q3.

You may recall that last year's fourth quarter was outstanding, with revenue growth of 21 percent, operating income growth of 39 percent, and overall Company margin of 9.7 percent.

So we had a very high bar, although we expect to beat those EPS numbers this fourth quarter.

Probably the item that will have the biggest impact on our fourth quarter at the moment are rising fuel prices.

As you know, rising fuel prices impact us negatively as our surcharge is at about a four to six-week lag, on being able to catch up, and with the significant run-up we've seen going into the fourth quarter this will have an impact on us and it is included in the range that I have given you.

Kinko's will have higher margins in the fourth quarter than they had in the third quarter, but they will be below last year's fourth quarter as we continue to invest in rebranding, training, and other costs.

We are also increasing our advertising and promotion spend, most notably with our NASCAR entry.

And lastly, we will have some startup losses from our westbound around the world flights, which we started earlier this month.

Now, these flights over time will provide very strong cash flow and high ROIC, as we expand our portfolio of services and connect more of the world on a faster basis.

And with that, operator, I would like to open it up for questions.

Thank you. (Operator Instructions) Our first question is coming from James Valentine with Morgan Stanley.

Great.

Thanks.

A great quarter.

A while back, management had had said that they thought that, you know, Ground could grow in volumes in the high single-digit range, and I think, you know, a bit of conservatism back then, but now we've got three quarters of 16 percent volume growth, very impressive, and I guess I wonder if management could walk us through what is causing some of this upside relative to your prior expectations?

Meaning like by market, or you know, where is this coming from?

And secondly, that you talked about ground expansion plan over the next four or five years, in terms of capital, which I think implied about 8, 9 percent growth.

And now that you're seeing the 16 percent growth, can we expect that expansion plan to be accelerated?

Mike, Glenn will answer the first part of that and Dan Sullivan the second.

Mike?

Jim, we've had strong growth at Ground really across the board, but really in the last, I would say 12 months or so, we've had several large accounts that have come on board.

In addition to that, as you may recall, I think we mentioned in the last quarterly call, we had one account where we did some supply chain optimization for the account, and actually moved some volume over from Express to Ground, which was in the neighborhood of 30 to 40,000 pieces a day.

So that in combination with the strong growth that we've seen through the FedEx Kinko's retail channel with our small customers and several large accounts coming over, we have been able to drive stronger-than-planned growth rates.

Having said that, as Alan mentioned, earlier in his comments, as we move into the fourth quarter, we do begin to lap some of those large account acquisitions which makes for a more challenging year-over-year comparison.

So we're very bullish about FedEx Ground.

Customer demand is extremely strong.

Our service levels are outstanding, which makes it really easy for the sales executives when we go in for that bundled sale.

And I'm extremely proud of the ground operations team for the work they've done, because they're making it, quite frankly, a lot easier for us to go in with that strong bundle because of the outstanding services they're providing.

Dan?

Yeah, Jim, just to add a little bit to Mike's comment, we've seen excellent growth through really all of our segments.

Home Delivery has done fantastically well, our overnight service, our small and infrequent shipper segment has seen good growth.

Mike mentioned because of the acquisition of Kinko's and the greater access, the greater reach now had that we have to our retail customers, we're seeing significant growth in that segment, and probably when we made reference back to the high single-digit, we didn't have Kinko's firmly in place at that point.

So we're growing pretty well across all of our major segments, and we expect that to continue, we're still seeing -- we're still seeing excellent volume levels at this point, but as has been mentioned, it will be a tougher comparison here in the -- here in the fourth quarter.

So it sounds like there is no change, it is kind of that 8 to 9, 10 percent buildout going forward in terms of the growth expansion for your network over the next few years?

I think for our long-range outlook, to be conservative, we're pretty much going to stay in that range.

We have not projected that we will spend any more capital than what we have made public at this point, to build out that -- to build out that network, but we still, from, you know, early in '04 through fiscal year '10, it will be virtually a doubling of the capacity that we have in place to process packages.

So we're on that plan.

We're staying on it.

And meeting all our goals there.

Great.

Thanks so much, guys.

Thank you.

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

Great.

Good morning.

Just similarly, then, can you talk about -- you did increase your capital targets.

Can you talk about where you plan on focusing that?

And then since we're allowed a follow-up question, I will just ask it now.

Can you talk about the cost savings plans at Express?

And did any of those kick in during the quarter with the great margin expansion we're seeing at Express?

Alan will talk about the first part of your question and Dave the second.

Ken, the -- really, the capital plans are just a little bit higher than what we've been talking about.

And if you take a look again at the growth rates in Q3, you will see why.

I mean, it is essentially to handle the additional profitable volume that we are attracting in all of our transportation networks.

I should say that about a third of it is replacement capital, and two-thirds is for growth.

So, you know, when the networks are up and running.

They don't have a lot of maintenance capital required for them.

We are acquiring some aircraft in advance, because we have a used aircraft philosophy.

And sometimes you have to buy them when they're available, and then mod them had when you can.

But again, as terms of a percent of revenue, we're still in a very low range compared to where we had been historically.

And all of these capital investments come with very high ROIC.

Yeah, Ken, this is Dave Bronczek at Express.

We've, obviously, had a good quarter with our 190 basis point improvement.

If the ongoing cost initiatives that we've been working on now for several years.

Obviously, our business realignment program has been lapped now.

This is the first quarter that we're actually beyond that year-over-year.

That's been very successful for us.

So we've put our productivity in the field, cost controls in with the business realignment and all of our other expense initiatives in place, and of course, when we had the revenue then take off at Express on top of our costs going down so significantly, that's where the tremendous results came from.

Thank you.

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

Good morning, gentlemen.

The question that I'm amazed that I'm the third guy here and it hasn't been asked, is why the acceleration in the domestic Express volume?

That's outstanding to go to 6 percent volume growth.

It looks (indiscernible) load driven.

Can you give us some insight into what is pushing that from what I know what everyone else's expectations, mine were only 1 percent volume growth.

Mike?

As Fred mentioned in his comment, Donald, we've seen very strong performance by our sales team across all segments, and I'm particularly proud of that, because we've been -- invested a lot of time and energy into that.

You know, everything from our sales education programs, to the tools that we're providing are really beginning to hit the mark there and that's helped a lot.

And they are doing a very effective job of presenting the bundle to our customers and this is a sequential issue we've been seeing strengthening.

I will be honest with you, it is a bit stronger than I anticipated, going into the quarter, however, I'm pleased with it.

And we've seen very strong growth coming from some of our larger customers in the deferred sector.

So that's driving some of it.

And I think we're going to continue to see solid growth, although I think it is going to be be hard to continue to sustain these levels over time.

Because I might call to your attention that the industry itself is still not growing at near the rate that we're growing right now.

So the domestic express industry is still a low growth segment, and we're not projecting that to change.

We're very pleased with our performance, but that would be difficult to -- excuse me, sustain over a long period.

To be a little bit more precise, Donald, this is Alan, we will have growth in the fourth quarter but it won't be at the level of Q3.

Again, I preface my remarks earlier about a tough year-over-year comparisons.

Sure.

Let me just add one thing, Donald.

You know, Mike commented on the Ground service level had that has been outstanding.

It has been outstanding at Express as well.

We've had great performance in our customer churn, our retention rates have been remarkably good, and have been now for several quarters but that's been a big part of it as well.

That's an important point that Dave mentioned.

That's a major focus for us, and we've seen a couple of points improvement there, in terms of customer retention.

And that's something that we focus on all the time, and you may have heard us in the past talk about this whole customer satisfaction, customer experience issue.

The primary objective of it that major initiative for us is to improve our customer retention and we're certainly seeing those results as Dave mentioned.

Thank you.

Our next question is coming from John Langenfeld with Baird.

Good morning.

A couple of questions.

First, with the Express side and the margin expansion, you kind of highlighted some general thoughts there, in terms of leverage.

Can you talk anything about specific type initiatives you have in place to improve the productivity and reduce the costs?

I know there is -- the low hanging fruit is gone but maybe some -- one or two specific ideas that you're working on would be helpful.

Sure.

Yeah, thanks, John.

We're working on it all the time but there is a major initiative at Express right now.

And I've been out in our field operations for the past several weeks, and months, and there's a lot of cooperation between all of our divisions in the field.

There's some overlap.

You might think it is low-hanging fruit but it is very significant to us.

And fairly significant dollars as well in terms of productivity efficiency.

From our air operations to our hub operations to our ramp operations, and our field station operations, there is a lot of synergies that we're going to gain here going forward.

And it is a big initiative for us.

It is improving overall service levels, and field productivity and overall profitability.

Is that within Express or across multiple divisions?

That's everywhere.

Okay.

And then the second question, just in terms of the losses on the around the world flight, how long till that breaks even?

And then is that -- I mean is that kind of what to expect as some of these new rights come on, that they will start at a loss position or -- ?

When you make these initial investments, you're going to have losses as you start up.

And in the past, we've said some of these major initiatives like these are 18 to 24 months.

I think this one is more like 18, maybe even shorter before it reaches break-even but the losses are going to really only have an impact to a large degree here in the fourth quarter, and they will start to mitigate next fiscal year.

Thank you.

Thank you.

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

Good morning.

Just to talk more about the Express volumes.

When you culled the network, if you will, and started your plan a couple of years back about reducing the infrastructure and not planning for growth in Express, you couldn't have envisioned, I'm guessing 5 to 6 percent volume growth like this.

You know, assuming growth around GDP, so it moderates a little bit, I would think that there is some leverage in the fixed cost network.

Can you talk a little bit towards that about what the leverage and -- in the network and where that would come from, if you maintained volume kind of above where expectations had been over the longer term.

Well, obviously, we still have economies of scale in this business, Ed.

Remember, that we are expanding what you are referring to as a domestic network, to handle additional international priority traffic that has an origin or destination inside the United States.

So any additional domestic, pure domestic volume that we get has a very high contribution margin.

So we're not building it for the domestic so to speak.

We're doing it for our global network.

And so yes, there is a significant amount of leverage in there, but again, I want to caution you, I don't think we're going to maintain the kind of growth rates on a domestic express business that we had in Q3.

Yeah, Ed, let me comment a bit further on that.

If you look at just calendar quarter four of 2004, that is only the second quarter in the last eight quarters where the Express industry has shown positive growth.

So this is an industry, as I have been saying for sometime, that is relatively flat despite GDP.

Now again, we did see some positive growth in the industry in the fourth quarter, and we performed extremely well.

But when you have a two-year trend like that, it is difficult for us to get overly optimistic about the market going forward, so we think it is prudent to plan conservatively, although, you know, I work hand in hand with Dave on a weekly basis, looking at this, and we don't have any concerns right now.

I mean, we're still trying our best to bring on volume, and he is still doing a great job handling it.

So hopefully we will grow faster than the market as we have been doing, and go from there.

[multiple speakers] Let me just say -- let me say one other thing.

Given the bigger volumes that we've seen here, in the quarter, yes, margins have been -- were much better year-over-year, but they weren't out of line with what we've seen without the big volume push.

We got the big -- ramp up in volume this quarter, and we didn't see a massive kind of flex and margin improvement in Express.

And my question was, if you continue to see -- I understand, and it is prudent to plan for less, but if you continue to see upside volume, would we start to see that over time?

Is there a reason why maybe in the first quarter of unexpected volume, it is harder to manage that down in the margin?

Two things Ed.

One, 190 basis points is one hell of an improvement year-over-year.

I'm not sure what you're talking about.

We're very proud of that.

And the other point is that as we've said we are marching to double-digit margins at Express.

We continue to be ahead of our own internal plans in that regard and everything is on the table to get there, and we're confident we are going to achieve it.

Let me answer the first part of your question.

I think it is important to point out.

Mike said it at the beginning and I know we've talked about it in the past.

With our bundled strategy and the great networks that we have at Express and Ground and with Mike's sales force and so forth, we have customers inside of our organizations that actually can move from one organization to another to level out our costs, and actually increase our profitability, as some accounts shift now from one operation to another, and we bring on higher yielding, more true express network freight into existing cost structures.

That's going to continue to keep driving profitability at Express and Ground.

One other thing.

I'll just add to this.

I've said this almost every call, over the last two years.

For all intents and purposes, there isn't any domestic and international Express business.

It is one business.

Things that we used to carry off of Phoenix are now out of Shanghai.

And things that used to be off of Silicon Valley are now off of Guango (ph) and so forth.

And so I think, it is important to look at the overall results and the overall traffic level.

It's much more important to get focused on one of those parameters or the other, if you really want to understand what's going on.

Thank you.

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

Yeah, hi, good morning.

The question is, I know you mentioned in, I think, in the release that with the timing, fuel had a benefit, I guess, on revenues and operating income.

Curious, if you could talk about that, just maybe so we could get a sense for, also, how the underlying price in the industry is going, what's say, at the deferred and the envelope piece, where yields were probably not as strong as the box, yet volumes were stronger in these two areas?

Thanks.

Jordan, this is Alan.

Remember, that again our surcharge lags, so on a static basis, as fuel -- as oil prices are declining, we do better, and as they're increasing, we do worse.

Over time, it all evens out.

And that's what happened in the third quarter, is at the beginning of the quarter, we were in a declining price environment and our surcharges were just catching up.

It is only one component of our overall yield strategy and pricing strategy.

And we don't manage it on a static basis.

We consider how high the fuel surcharge price is, as we look at other things like discounts and additional charges for additional services, and we manage that all together.

So rather than to specifically just discuss fuel, we think that could be misleading at times and so we just give you a general trend.

The point is, is that we benefited in Q3, we will have a -- at least at this point, it looks to be -- it will be a negative in Q4.

Second question was?

You were asking about the mix issues with the deferred and the envelopes?

Versus the box, right.

Yeah.

We see mix shifts from time to time, especially as we're changing economic cycles.

I have to tell you, with the tools that we have, we're confident that we will be able to manage through that, on a surgical basis and will not have any change in strategy from an overall pricing perspective going forward, and we're confident we will be able to deal with that.

Okay.

Thank you.

Our next question is coming from Scott Flower with Smith Barney.

Yeah, good morning, gentlemen.

I guess a couple of questions.

What is -- could you give us some sense of how you see trends now?

Obviously, I know Alan has articulated the issue about comparisons and that's well noted.

But I want to get a sense, are trend lines in the different businesses of Express, Freight and Ground running on what they had been in your fiscal third quarter?

Is there any shift up, shift down?

Just trying to get some broad sense of the economy, versus what you noted as your comparison issue in the fourth quarter?

We'll have Dave, and then Doug, and then Dan comment on that.

Thank you, Scott.

At Express, the trends continue to be very solid, very strong.

International continues to be moving forward in a very significant way, especially out of Asia, and Europe, obviously led by China.

The United States, U.S. outbound has been exceedingly strong.

One of our strongest quarters in many, many, many years.

Our U.S. domestic costs continue to improve.

Our overall outlook continues to get better as we march our organization onward to the 10 percent margin.

We're very bullish at Express.

Freight, Doug?

Yeah, I think as Fred said, our economist continues to believe we're still in the expansion mode in the industrial economy and our business would confirm that.

In the third quarter, we did start to lap good growth numbers last year, but if you look at it over a two-year trend, our third quarter was bigger than any of the others, and from a growth standpoint.

Dan?

Yeah, we're like the others, enjoying what we feel is an excellent economy at this point.

We experienced really consistent growth rates during the third quarter, and continuing to experience strong volume levels here as we enter the fourth.

But as I mentioned before, I think our comparisons will be a little more difficult as we get through this quarter.

We will just have to wait and see on that.

But volume is good.

Okay.

And then just a quick follow-up.

Could you give us some sense of where are you in the cycle with Kinko's in terms of a couple of things.

One is how is its core business performing?

And then obviously, if you can give us some sense of where you are through the rebranding/pack and ship initiative, so we can get a sense of where you might normalize?

Understanding you've given us some flavor for how you see fourth quarter coming out.

But I just want to get a sense of where we are in the process of getting the investments done there, versus what is going on at their core business.

Gary?

Sure, thanks.

First of all, on our rebranding.

We're about two-thirds of the way through with changing out the looks of all of our stores, and you will recognize it when you see our stores with the new purple FedEx Kinko's signage out front and signage throughout the store .

So we're about two-thirds.

We plan to be completely through with our rebranding by the end of May.

We're still on target.

So that by the end of the fiscal year, we will have the rebranding behind us.

In our core business, we still are enjoying very good growth in our commercial segment.

In fact, it is -- it's probably accelerating.

So that's probably the strongest part of our core business, although our international business, we're still enjoying double-digit growth, as we are in our signs and graphics business.

So our core business is still -- is still very strong.

Thank you.

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

Hi, guys.

Very strong quarter.

Pretty much across the board.

But just wanted to understand what is going on at FedEx Freight a little better.

I mean you're clearly taking share, you're also getting very good yield.

So it doesn't look like you're using price as a weapon.

How are you guys doing it?

Are customers looking for a bundled solution, and are you essentially going after customers that want one-stop shop?

Or you just touch on how you're getting such good yield growth and taking share at the same time?

Doug?

Greg, I think it really comes back to our focus on our customers that are executing fast fast-cycle logistics.

They are the ones that have to have next and second day fulfillment.

We built a network that brings a certainty to truck transportation that Express brought many years ago.

It serves that market very well.

We've added the money back guarantee to help market it, and that's gone very well and it has gone largely unmatched.

And frankly, the FedEx brand kind of gives us instant credibility in selling this fast-cycle market because that's what we do as a company.

So put those things together, and I think that's where we're taking share, we're improving margins, and growing yield all at the same time.

Which is pretty amazing to have all three of those going in one direction.

Are these customers making decisions on FedEx Freight independent of other FedEx decisions?

Well, there's a lot of collaboration going on.

We get a lot of help from Mike's sales team and getting in customers that we're not in today.

We even take the package people into the freight customer.

So there is a lot of that going on.

We're also selling in our sales organization the Express Freight product and have had very good success in driving volume in Dave's business, and it really positions us as to being a solution sales organization, not just a one-trick pony like most of our LTL competitors are.

And Alan, just one follow-up question on the margin at FedEx Express .

I mean, I hear you on the surcharge, but it looks like a huge benefit.

I mean your surcharge versus a year ago was basically double.

Currency always seems to help.

The dollar seems to be a one-way bet these days.

But it looks like if you strip out some of that stuff, that your margins were only up 50 bips or so.

Am I overstating surcharge?

And you mentioned the offset.

Are you assuming that surcharge will be a negative year-over-year comp in the fourth quarter?

The answer to your second question is "yes".

Right now, with 56.46 this morning and going up, the price of oil, it will be a negative year-over-year, no question about it.

Yes, it did benefit us in Q3.

I think you're way overstating it but it did have a benefit.

And again, don't just look at it on a static comparison, because we're using it in our overall pricing strategy as well.

Thank you.

Our next question is coming from Helene Becker with Benchmark.

Thank you very much, operator.

Hi, everybody.

Hi, Elaine.

This is my question.

You don't want us to take your comments and interpret them as -- you think these are your peak earnings?

Do you?

I mean, we're not seeing a peak here.

You think they can continue to grow, right?

This is just a particularly tough comp coming up and then we go back to normal growth?

Or how should we hear what you're saying?

Well, our strategy and what we have been delivering is to grow our earnings and cash flows by 10 to 15 percent a year.

We're in the middle of our fiscal 2006 planning cycle.

And we will talk, obviously, more about that when we get to the fourth quarter results.

But yes, we expect to have continued earnings and cash flow growth.

I was just pointing out why our range in the -- that we have for the fourth quarter doesn't have the same amount of growth as it did in the third.

Okay.

And then my follow-up question for Fred, are there plans to redo the dividend again with an eye towards increasing it since your cash flows are so positive?

Alan?

Helane, we discuss dividends with our Board of Directors at every May Board of Director's meeting, and it will be on our agenda, and I would not want to put words in my directors' mouths at this point.

Thank you.

Our next question is coming from David Campbell with Thompson Davis.

Yeah, hi, I'm David Campbell.

The ground rates should help in the fourth quarter, they will help (ph) in the fourth quarter by the surcharge, only effective January 1, so your guidance includes a greater increase in the ground rates in the fourth quarter than the third quarter?

Dan?

Yeah, our yields will improve in Q4 over Q3.

Largely because of the fuel surcharge now in for the three-month period.

Okay.

Thank you.

And on this Freight side, the improvement in profitability was very good, but seemed to be a lot less than the previous two quarters.

Is anything going on there?

Is that a cost problem?

Doug?

No, David, this is Doug Duncan.

You know, the third quarter is our worst seasonal quarter for volumes.

The last week of December and January and February really declined, and we have to manage costs at a time where we're trying to expand capacity at the same time.

So frankly, 130 basis points up, I thought was very good.

And also in a time where we get hit with a lot of weather.

So I'm very pleased with the performance we had, and I think it was great.

Thank you.

Our next question is coming from Rick Paterson with UBS.

Good morning.

Are you able to quantify the number of packages that Kinko's fed (ph) into the Express and Ground networks?

Absolutely, we are.

Could you share that with us?

Absolutely, we're not going to. [Laughter]

Worth a shot.

Thanks, Rick.

Thank you. (Operator Instructions) Our next question is a follow-up from Ed Wolfe with Bear Stearns.

Yes, guy, two questions.

One is your large competitor, one of them, obviously had a very difficult last quarter when they reported.

Have you seen any change in their behavior in the marketplace, particularly domestically, ground or air over the last couple of months in terms of either pricing or being more aggressive on sales or any other activity since that report?

Mike?

Ed, I would characterize the pricing environment as a bit more competitive than it has been.

And specifically in the last couple of months.

Having said that, as historically is the case that is more on a customer by customer basis and not a general market trend.

But there is no question that we've seen a bit more activity in terms of aggressiveness in pricing on a customer by customer basis, from both of our primary competitors here in the U.S.

And are you seeing that mostly on the ground or is it on the air as well?

Both sectors.

Okay.

And then a second question, you've talked for a lot of years now about getting that Express margin towards 10 percent.

Can you give us a time frame now?

We're getting to point where you're getting closer and closer.

When should we start to see that Express margin at 10 percent and maybe talk about some of the metrics how we're going to get there?

I think what you said is right.

We're getting closer and closer and I think it is just executing.

We've got a fantastic intercontinental network up in place and that's growing very rapidly and it's got very high contribution margins.

We're managing our productivity and our costs in the U.S.

We're investing capital as wisely as you can.

Mike's team is out doing a great job with our sales and marketing initiatives versus the competition, and it is just a matter of executing now.

Let me just add to that, Ed.

When you look at the numbers, and I know you have them in front of you there, the salaries and wages and benefits line this past quarter for us grew at 5.8 percent.

Our revenue globally grew at 12.4.

Those are good metrics to keep marching down towards.

And are there any obvious facilities to consolidate or people to consolidate?

I mean is there any -- obviously nothing as large as what you did over the last couple of years.

But is there anything that you have kind of a checklist that you continue to look at?

There is no big consolidations but there is a very significant synergies between all of our Express organizations out in the field, that I mentioned at the very beginning, and not to mention our collaboration with ground and with Mike's sales organization in terms of making sure that the right packages are in the right network for profitability.

Maria?

Maria?

Yes, sir.

This is Jim.

I think we will choose this point to close off the discussion today.

We appreciate very much, ladies and gentlemen, your participation in the call today.

Thank you very much.

And we will be in touch.

Bye-bye.

Ladies and gentlemen, thank you for your participation.

This does conclude today's teleconference.

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