聯邦快遞 (FDX) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the FedEx Corp. fourth-quarter fiscal year '05 earnings release conference call.

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

It is now my pleasure to introduce your host, Mr. Jim Clippard, Vice President of Investor Relations.

Sir, the floor is yours.

Thank you, Elsa, and good morning, ladies and gentlemen, and welcome to the FedEx Corporation fourth-quarter earnings conference call.

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

The earnings release and stat book are on our website 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 those who would like to participate.

We are planning an investor meeting in October at Ciprioni's on 42nd Street in New York, so please save the afternoon of Wednesday, October 5, 2005 on your calendar.

Invitations will be e-mailed soon.

I want to remind all listeners that FedEx Corp. 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 Form 10-K and 10-Q.

Joining us on the call today are Fred Smith, Chairman, President and CEO;

Alan Graf, Executive Vice President and CFO;

Chris Richards, Executive Vice President, General Counsel and Secretary;

Mike Glenn, Executive Vice President Market Development and Corporate Communications;

Rob Carter, Executive Vice President and CIO;

Dave Bronzcek, 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 Allen we will have time for Q&A.

Fred?

Thank you very much, Jim, and good morning, ladies and gentlemen, we appreciate your participating in our final earnings call for fiscal year 2005.

By any measure FedEx experienced exceptional business results in FY '05 as we benefited from the execution of our business strategy in a favorable economy.

We reported record revenue and earnings for the year and saw very solid growth year-over-year.

Revenue rose 19%.

Operating income increased 72%.

Net income was up 73%.

We increased our dividend to shareowners by 14%.

We continue to strengthen and expand our networks to improve increased demand to -- to meet increased demand by our customers.

Our strong performance was mainly the result of our unique strategy of operating independent networks that sharply focus on specific markets while competing collectively under the powerful FedEx brand, effectively cross selling a full portfolio of FedEx services and delivering outstanding customer service.

FedEx also finished the year with record results for the fourth quarter.

At FedEx Express international priority revenue rose 14%.

At FedEx Ground revenue was up 17% and average daily package volume grew 9%.

Total average daily package volume at FedEx Express and FedEx Ground combined grew about 6%, and revenue per package increased at both FedEx Express and FedEx Ground.

At FedEx Freight revenue increased 11% and average daily shipments were up 3%.

Once again, the broad portfolio at FedEx service offerings combined to boost our performance.

Well done to our great FedEx sales teams and all FedEx team members around the world for helping post these great overall results.

Moving into FY '06 we note several key economic trends.

We see continued steady economic growth both in the United States and in international markets across many sectors.

The current business environment remains in an industrial up cycle, favoring the flow of merchandise.

The United States and China perform as dual engines of global growth and, in the longer-term, continued global integration and deepening of trade should provide a solid foundation for expansion in our shipping activities.

Now the essence of commerce is exchange and FedEx connects both sides of a transaction while compressing time and costs.

The FedEx we believe is particularly well positioned to benefit from global economic growth and eCommerce because of the wide portfolio of business and transportation services we provide and our ability to sell bundled solutions beneficial to our customers.

We believe FedEx is investing our money wisely to grow and strengthen our independent networks around the world in order to better serve our customers with innovative and leading-edge services.

We will continue to invest carefully and expect our CapEx in FY '06 to be approximately $2.5 billion.

We are highly optimistic about our growth prospects in FY '06, and we expect to achieve double-digit earnings growth with favorable global economic conditions.

As I close my remarks, I'd like to remind you that in FY '06 our focus will be to control or costs while continue (sic) growing revenue and taking full advantage of our unmatched quality of service and information technology, global reach and diverse service offerings.

I'd like to also say that we remain resolutely committed to improving shareowner value, returning invested capital, cash flow and margins.

And now I'd like to turn it over to our Chief Financial Officer, Alan Graf.

Alan?

Thank you very much, Fred, and good morning, ladies and gentlemen, thank you very much for participating on this call.

Fred covered most of the highlights of our fourth quarter, but I would just add a few of my own.

I think it's important to note that we grew domestic Express volumes 2.4%, absorbed the impact of escalating jet fuel prices, grew Ground by 222,000 pieces per day, continued rebranding and organizational changes at Kinko's while sequentially improving margins, and continued very strong revenue and earnings growth performance at FedEx Freight.

Our balance sheet at the end of FY '05 shows a significantly stronger position than at the end of FY '04 as we repaid nearly 800 million in debt during the year and maintained a cash balance of over $1 billion.

I get a lot of questions about S-Ox 404 and, although we still have some work left before auditors can finally sign off, I fully expect we will have a clean opinion with no significant efficiencies or material weaknesses.

I'm extremely proud of the 1,200 of my teammates who spent nearly 100,000 hours to fully comply with the spirit and regulations of S-Ox 404.

Our goal was and is not only to comply with the law, but also to build upon a process that will further enhance a strong controlled mindset across all of FedEx companies today and in the future.

Looking forward to FY '06, we have provided an expected EPS range of $5.20 to $5.45 per share, which is slightly below street expectations for the year.

This is the first '06 guidance we have provided and calls for a 10% to 15% increase in earnings per share.

In this range we will absorb significant pension cost increases as we have lowered our discount rate nearly 50 basis points.

We will also absorb continued startup losses on our international route expansions.

We expect jet fuel prices to remain high, which will have elasticity impact on Express demand.

Again, we expect strong positive cash flows and improvement in our return on invested capital.

Lastly, I would point out to you that several years ago we committed to manage this enterprise for better cash flows, continually improved earnings and continually improved return on invested capital.

We have delivered.

For the five-year period ending May 31, 2005 our total cumulative return to shareholders is up over 150%.

This is significantly above the Dow Jones U.S. transportation return of 41% during the same period and, of course, far outpaces the cumulative negative 9% return of the S&P 500 during the same time frame.

And we are extremely proud of that performance.

Elsa, we are now ready for Q&A.

(OPERATOR INSTRUCTIONS).

James Valentine, Morgan Stanley.

Thank you.

First I guess my questions on Express.

I was wondering if you could just highlight -- if we look at Express operating income, it only grew about 5% and Ground only about 9%.

And I'm wondering how much of Express was hurt by around-the-world flight and how much Ground was hurt by SmartPost.

And if there were any other headwinds that would have caused these operating growth rates to be slower than we had seen earlier in the year?

Jim, I will go ahead and start.

This Dave at FedEx Express -- Dave Bronzcek.

You're right; our operating margin last year in the fourth quarter was, as you know, 8.6%.

It's 8.4% now.

We did by design put in the westbound around-the-world, that it connects, of course, our fastest-growing market in the world, China, back through Europe.

And of course, we did have the startup costs that, of course, you would expect us to have there.

I can tell you that the business plan that we put in for the revenues are right on track, and we're right on schedule for that performance on that international leg that Alan pointed out earlier.

Was there another headwind that caused the slower growth rate?

Jim, it's Alan.

At Express, of course, with the lag in the fuel surcharge and the escalating fuel prices sequentially from Q3 to Q4 there was certainly a drag there as well.

But it becomes very difficult to other than analytically talk about the static impact of that.

We believe that at these very high fuel prices and the surcharges that result there is definitely elasticity.

It's very hard to manage when you're this close to a quarter that just ended or measure -- that also had an impact as well.

But we can improve to 10% to 15% growth in EPS in '06 without a significant improvement in Express' margins in '06.

We will continue to march towards our double-digit profitability there.

And I'll let Dan Sullivan answer his question a minute, but to Alan's point on the lag in the fuel surcharge, if you look at our whole year, of course you know this by now, that we went up to 7.3% up from 6% last year on our margins and we're on our steady march towards our double-digit growth.

Jim, this is Dan.

As you know, SmartPost was not in our portfolio last year.

We did experience modest losses in the fourth quarter, but we're doing a lot with that organization to expand the network, expand their hub capacity, significantly improve service, penetration to the local post offices, those kinds of things.

There's no question we have to work on yield improvement and line haul costs, which we will do as we're bringing that line haul operation in under the very efficient Ground line haul operation that we have today.

So we're very confident for the long-term at SmartPost, but it did have an impact on our financials this quarter.

If you combine that with the aggressive expansion plan that we have been talking about for a long time, which is right on schedule, right on plan and necessary to meet the projected growth rates for FedEx Ground this year and beyond.

So those two pieces by far more than make up the difference in the year-over-year change in margin in the segment.

Great.

Thanks a lot, guys.

Appreciate it.

Jon Langenfeld, Robert W. Baird.

Good morning.

You comment in your -- when you look forward on guidance and in terms of the pricing competition.

Can you just characterize that both within Express and Ground?

Are you seeing the same sort of levels of pricing competition?

This is Mike Glenn and yes, let me say that while the pricing environment overall on a macro basis remains rational; we certainly continue to see aggressive competitive pricing targeting specific accounts.

That's not anything particularly new; although we do see aggressiveness in that sector, again, targeting specific accounts.

Having said that, we remain very confident in our ability to manage package yields over the long-term.

One of the great advantages we have is our ability to put together a value proposition that really maximizes the networks that FedEx offers and really put volume in the right network to maximize profitability.

So our ability to do that and the tools that we have in front of our sales organization, we're very confident in our ability to manage yields over the long-term.

So the minimal yield growth on the domestic base, that's going to apply to both Ground and Express?

Well, in Express yields were impacted by stronger anticipated growth from our larger customers who are using a higher mix of deferred services.

We have also seen a slight decline on average weight per package relative to our expectations.

But again, we remain confident in our ability over the long haul.

Okay, and then just a second question with regards to international flight.

Is this something, in terms of the startup expenses and the drag on earnings, is this something we're going to see over the next several years as you roll out additional flights, primarily out of Asia?

Jon, this is Alan.

You're certainly going to see in fiscal '06, and we've got plans for some additional expansion.

But again, we can do this because we can absorb those startup losses and still manage our earnings and our cash flows through improved positions.

And so, because these flights take anywhere from -- these routes take anywhere from 24 to 36 months to become profitable, we think now is the time to start them.

Having said that, once they reach profitability these provide high double-digit returns for the foreseeable future and will be very lucrative.

Thank you.

Ed Wolfe, Bear Stearns.

Good morning, Fred, Alan.

When you look at the decelerating volumes reported in international Express or in Ground, how much of that do you attribute to the economy slowing a bit?

How much of that do you attribute to maybe be a better competitive response in the near-term?

And how much of that has to do with other things outside of that?

On a volume basis we feel we've got still strong momentum in our sectors.

As we reminded you in the third quarter call, we anticipated the lower Ground percentage growth rates in the fourth quarter because we had a very difficult comparison.

I would call your attention to the two-year growth pattern in Ground and you'll see we've got very strong performance there and we expect to have strong performance in FY '06 there.

In all of our sectors we're growing faster than the market; whether that be Express, whether that be Ground or international.

So I think we're performing extremely well relative to the market and are optimistic about our ability to hit our targets in FY '06.

So I hear you saying that the comps are more difficult, but has the world slowed down a little bit?

Well, clearly we've had -- if you just look at the GDP numbers and what we're anticipating going forward, we've had a slight decline.

I think the higher fuel prices are obviously making customers rethink how they manage their supply chains and there's some affect there.

But we're comfortable with our ability to hit our growth targets in FY '06, as Alan mentioned earlier.

Were there any changes in the growth rates year-over-year taking seasonality out as you look from March all the way through June right now?

Has the world decelerated or accelerated as we've gone out through the quarter?

The real issue if you, again, look at Express, our Express performance is quite strong leading up and going through the fourth quarter.

Again, the bigger issue with Ground is the difficult comparison that we had in the fourth quarter which we anticipated and talked about at last quarter's call.

So is it fair to say that throughout the quarter the volumes year-over-year got a little bit less because the comps got tougher?

That was the primary reason.

We did see a little softness in the direct marketing sector.

The retail -- our retail industry.

But that was minor.

And just as a second question, in the $1.10 to $1.25 guidance assumptions can you give what your volume and yield assumptions are in that?

Well, --

I'm guessing you've got some.

Yes, I could have, but I'm not going to.

I think that -- I don't know that we're seeing a deceleration in the world economy to kind of add on a little (indiscernible);

I think it's more of a leveling off.

It's also a lot of large numbers.

I have specifically pointed out the package growth that Ground had, which was very significant of 222,000 pieces a day, and we are pushing right up against our expansion plan.

And we are expanding that network very rapidly.

Dan and his team have done a marvelous job of keeping that quality significantly improved.

In fact, they're going to take another several thousand routes and take a day out of them in fiscal '06.

So I don't see anything that's -- that I'm waving a flag that says the economy is bad.

I just think it's going to push on the way it's been.

Ken Hoexter, Merrill Lynch.

Good morning.

I just wanted to follow-up on the CapEx climbing as well.

It looked like the CapEx was a bit lighter in this quarter.

Did you slow any of the growth at Ground because of -- you usually have been targeting double-digit growth, you saw 9% growth, did you slow some of the investments down this year because of that?

Because I think you were targeting 2.3 billion instead of 2.2.

And then you've increased next year.

What is involved with that?

Where's the money going?

No, there are no slow downs.

Quite the contrary.

We are absolutely pushing up against the Ground expansion plan if not maybe going to go a little bit past it because of our expectations for the outlook for Ground.

Obviously when you spend as much capital as we do there are timing issues where things can fall in from one quarter to another, one airplane delivery can make a big difference.

But generally speaking, our CapEx is significantly less intense than it was in years past, and we're going to try to stay in that 6% to 8% of revenue range and think we can do it and still grow very profitably.

So nothing particular there.

Great.

Then I just want to understand -- the commentary on GDP was a slight decline.

Was it a decline or slower than expected?

Let me just start off with that.

If you just look at it from previous quarters on a year-over-year basis, it's obviously leveling off, and it's slightly lower than where it has been in previous quarters.

But again, within where we thought it was going to be.

Ad also, look, a $60 barrel is one thing, but jet fuel has escalated way faster than the price of oil.

And that definitely has an elasticity impact on Express in terms of both product mix where you select a second day versus an overnight, and the amount of weight that's in a package as people look for ways to obviously minimize their transportation charges and so that is having a very big impact.

And we expect that to remain high in '06.

If we could get jet fuel back down to where it was a couple years ago I think you'd see a significantly different picture here.

But since it seems to have only increased since the end of the quarter, I guess you want to just focus on Ground for a second though.

It looks like you're increasing the comps as we go through the next three quarters.

And I think you threw out, Alan, you expect it to get even back to the double-digit level with UPS -- so are you seeing UPS' competitive response in the marketplace, or is this -- could we see below double-digit growth in the next couple quarters?

Dan, do you want to take that?

Well, I think as Mike said, there's no question that the marketplace, although we think rational on a macro basis, is a bit more competitive than it has been.

But we're confident that we can attain double-digit growth as we go forward, and we've tasked our sales teams to do just that.

That's their goal.

So I think Mike and I are fully confident that that's where we're going to be through the course of this year.

Donald Broughton, A.G. Edwards.

Good morning, gentlemen.

Let's talk about freight for a second.

UPS' purchases of overnight, Yellow's purchases of U.S.

Freightways, what kind of challenges/opportunities do you see for your FedEx Freight division?

This is Doug Duncan.

Well, I think the fact of the matter is that it's becoming clear to everybody that fast cycle supply chains really require and utilize of the regional next and second day delivery that can be delivered with certainty and reliability.

And yet we've been aggressively working that strategy since 2001 when we put FedEx Freight together.

We've had great success with it.

So I don't think it's any big surprise that this is a big part of the supply chain.

These are not new competitors, they're competitors we've dealt with in the past, but obviously they'll be -- we'll have to deal with them in the marketplace.

The other question I had -- that I what to be a little bit more direct on -- I think we've all talked about it a little bit already -- but from conversations with shippers we know UPS is beginning to use some small single digit discounting in an attempt to lure back some customers it's lost to you.

You've said you don't want to get in another price war, at least insinuated that you won't.

We haven't had any shippers tell us they've received any discount offers from you and the yield improvement says you certainly haven't discounted significantly.

But it doesn't say your pricing is accelerating either.

I think we all understand what confidence in your ability to manage pricing over the long-term means, but can you translate that into a more declarative statement?

Such as "we won't get into a price war", or even more strong, "we'd even be willing to lose volume before we'd cut pricing".

Let me just say this -- it's our intention to manage pricing and balance that with the cost of providing the service to deliver on our 10% to 15% improvement in EPS, and that's our commitment.

And we are confident we can do that and we intend to do that.

Listen, you see skirmishes all the time in the marketplace and they heat up a little bit from time to time, and they decelerate from time to time.

Just as we have one competitor heating up a little bit we have another competitor that seems to be pulling back a bit.

So these ebbs and flows happen.

This is nothing new to us.

And we're going to manage the pricing environment and the cost structure, as Fred pointed out earlier and as Alan point out earlier, to keep this thing in balance.

And that's just what we're going to do.

I would say relative to the Ground growth rate, Dan is right -- we're holding our sales team accountable to double-digit growth.

But I think it's -- let's not forget that we've had extremely strong growth in Ground, in fact higher than our original plans called for.

And as we move out into the future the law of large numbers is going to catch up with us, and we're ahead of where we thought we would be.

So that's our objective and we're going to hold our sales team accountable for that.

But as we continue to grow the law of large numbers does catch up with you.

I think the important thing here is we continue to grow our Ground business three and four times the overall market growth rate.

So our performance has been extremely strong even in the fourth quarter despite the fact that the percentage growth rate was 9%.

Scott Flower, Smith Barney Citigroup.

Good morning, all.

I was wondering if I could get some sense on the international division.

I know we approach this a couple of different ways, but that obviously the IP volumes were a little slower this quarter, but I also noticed that actually freight pounds were up.

Now was that solely due to the new around-the-world flight that you alluded to, or in general have you found that some of your displacement activity is maybe not finished, but in certain lanes you've hit your right load factors of packages versus freight?

This is Dave Bronczek.

You're right, the westbound around-the-world flight, of course, has added to our freight revenue and freight growth pounds.

I can tell you that all our divisions around the world are growing.

They're growing very nicely, very solidly.

Yes, we have more opportunity to grow the IP and more on the freight side.

So I think going forward you'll see both of those growing and continuing to grow.

And then I guess just if I could get some color on the Kinko's integration costs.

I know that obviously you had a good dose of that this year.

But I guess I'm just trying to get a sense of and in your release you noted that there will be some more to do there next year.

But if I can get some order of magnitude of what you actually spent in FY '05 and sort of how that may stair step down into '06.

Gary?

I'm not really sharing any numbers, but the bulk of the integration activities are behind us, although we still have costs associated with our international rebranding with things like getting all uniforms out to over 20,000 team members in the U.S.; that has not been completed yet.

So we do still have integration activities that are going to flow into fiscal '06.

But I think if you read the sentence you saw that it's really costs associated with expansion and integration activities.

And as we get the integration more and more behind us, we are going to turn our focus more and more towards very rapid expansion going forward.

And that's really the big thought there.

Jordan Alliger, Deutsche Bank.

Good morning.

With the world apparently slower, or at least leveling off, it's always our thought that the volumes, especially domestically, are important in terms of boosting productivity so that you can get margin moving again.

And we've sort of moved past the initial stages of the economic recovery and we're maybe more into the middle of the cycle and the air Express volumes really haven't done much.

You've done a great job of improving margin with various cost reduction efforts, etc., but how do you reaccelerate any margin momentum in a slower world -- domestically?

First of all, you made the comment that -- I forget how you phrased it -- that we haven't made much progress.

Our domestic Express volumes are growing.

No, I said you made a lot of progress.

Well, the Express franchise will continue to improve its margins as a greater and greater percentage of the Express business comes from the movement of IP in our global network where we have a very high incremental contribution.

Now, as Alan and Dave both mentioned to you, we put in a new Express freight or flight, and the start-up cost of that come right off the top, come right out of margin.

But we will continue to make progress towards our goal, as Dave Bronzcek mentioned, of double-digit operating margins in Express.

And we are very confident that we can do that.

Dave do you want to --?

This is Alan, Jordan.

I would just say that your premise is wrong.

We don't have to have growth to continue to get improved productivity at Express.

We're doing it every day.

We are improving our technological capabilities.

Our IT team is unbelievable.

We are rolling out new tools to our couriers.

We are redesigning our routes, and there is a lot of continued engineering that we are doing to improve our productivity even if domestic growth was flat.

So we are going to get continued productivity regardless of growth rates in Express.

And as we always say and continue to say, I think at every analyst call I've ever had, the incremental margin on an additional IP package is thrilling.

And that is going to continue to remain.

Even if the growth rates are a bit slower in '06 than they were in '05 in IP, we'll still see significant improvement to the bottom line.

So that's how it's going to happen.

Just a real quick follow-up.

Can you give some sense for now the domestic versus international operating margin at Express?

I know the incremental margin at international is much higher, but if your baseline margin is now 8% or so for total Express, or maybe a little higher, is it safe to say international is somewhat above that average, I guess, maybe double-digit and domestic is somewhat below that?

We manage it as a global network, and that is really not relevant any longer.

I think you're just trying to do mathematical averages to arrive at some projection for what you think Express's margin is going to be in '06.

But things that we do in the domestic Express flight network are attuned to what is happening with the international flows of traffic.

So those things are boring (ph) and becoming less meaningful as international continues to take a larger and larger percent of the total Express revenue base.

The real issue is the topside where you have got 3X times average daily package revenue greater in IP than in domestic.

And it's growing faster.

So therein lies where all the juice is.

Tom Wadewitz, J.P. Morgan.

Good morning.

I've got a question here for you in terms of your guidance.

You've talked a bit about the margin side, and you think there is still room for some improvement there.

Have you assumed margin improvement at Ground and Express in the guidance you've given, or should we look at that as being a source of some potential upside to the guidance if you're able to get some of that margin improvement in fiscal '06?

Well, as we've said now -- this will be the third time -- we're going to improve our margins at Express in '06.

Ground we think we will continue to improve margins, although I'm very happy with where Ground's margins are, as is Dan, and as long as we continue to grow we're going to have huge cash flows resulting from these investments and don't necessarily think we have to push margins there.

Gary's working very hard at Kinko's to get his up, and Doug's are up at Freight.

So, I think everything is looking very good for '06 and a 10% to 15% improvement in EPS I think is pretty good at $60 a barrel crude prices.

Okay, and then one follow-up question.

In terms of the competitive environment, is there less competitive pressure internationally and also potentially some room to see a reacceleration of the growth rate in IP?

It's obviously competitive across the world.

Clearly we've seen a bit more activity here in the U.S. of late, but it is always competitive.

We have a strong set of competitors, and that's good.

That keeps us on our toes and ensures that we're exceeding customer expectations.

But there's no doubt that we've seen a bit more aggressiveness here in the U.S. of late.

Do you think there's room to see that volume reaccelerate or should we consider that maybe staying at a similar growth rate looking forward?

Well, I think that depends upon a lot of factors starting with the overall price of oil; if it remains high at the $60 level we have a fuel surcharge index implemented around the world, and that will certainly have an effect on that.

A lot of it has to do with the economy, if we continue to see it stable around 3.2, 3.3, somewhere around in that range.

There are a lot of factors that could come into play here, but those would be the two biggest.

David Ross, Legg Mason.

I wanted to touch on FedEx Freight a little bit.

With the Yellow and UPS acquisition recently with several bankruptcies in the sector again as well as expansion of the smaller regional and interregionals, I wanted to know overall what your view is of capacity in the LTL sector.

Well, I can always speak to the capacity in the FedEx Freight network, and we've taken a very long-term approach to expanding this network to meet our growth goals.

We've expanded the fleet.

We've added a new interregional line haul network.

We continue to expand our facilities around the country; that's getting harder and harder to do so we have to take a much longer view.

But we're doing that, and we're meeting all of our growth projections.

So as long as we continue to have the kind of margins that we have, we're happy to invest in this business and to prepare for the future.

So I don't see anything on my screen that says we're going to have capacity constraints in the LTL business.

We're preparing for it and I think we'll meet them.

Your recent GRI of 5.6% put in place, is that holding better than last year?

Well, I don't have a direct comparison, but when I look at our year of numbers being up 11% I think you'd have to say that customers have been very accepting of our fuel surcharge numbers.

The general rate increase has gone in very smoothly.

Our contract renewals each year continue to be very strong.

So I think given the value proposition that we bring and their ability to use the LTL business in fast cycle logistics I think it actually is a bargain in the supply chain and yields are holding accordingly.

David Mack (ph), Jay Goldman & Co.

I had a quick question on the FedEx labor side.

When I look at packages per FTE I actually had a -- it was about flat year-over-year which is the first time you've seen that trend in a while.

Is there anything you guys are looking at in terms of addressing that, trying to increase the efficiency on the labor base or is this the run rate we should look for?

I'll be glad to answer that question for Express.

If you look at our numbers, we had a total revenue growth of about 9% around the world, of course includes the United States and our salaries and benefits only went up 3.8%.

So we're happy with that kind of a ratio.

Also I would just add that as our workforce at Express handles relatively more international shipments at 3X the yield, again, I have to go back to the revenue leverage that we have.

That's also much more important at the moment.

David, on the Ground side, both our T&D and line haul productivity are up nicely year-over-year.

The FTE counts you may be picking up do now include headcount for SmartPost; it wasn't in the base in the prior year.

Great.

Thanks a lot.

Dan Moore, Scovis (ph).

Just a question on the FedEx Freight side.

And I know a couple of questions have been asked already, but with respect to the yield could you give us a better sense of what yield improvement was during the quarter stripping out the effect of fuel surcharge?

Dan, I could do that but we don't because it would give you a number that wouldn't tell you anything.

Customers more and more are negotiating both on the fuel surcharge side as well as the base rate.

Some are more concerned about the base rate, some are more concerned about the fuel surcharge and we manage it in total for the total yield.

So it's all over the board as to what customers negotiate for.

This is Alan, I'll add a little bit to it and that is we've been very pleased with the interregional growth, which has higher yields and, frankly, higher margins for us.

We have the best service by a factor of a day or two in many cases, or more.

And we've also seen a better mix in our 3% growth rate this fourth quarter than the previous year.

So we're growing our shipments, very few people other than us are, at significantly higher yields because our service is so superior and our reliability is the highest.

Just one other question to add on there.

Obviously you guys are investing in the business, as you mentioned earlier, you're expanding your geographic footprint incrementally each quarter.

If I were to adjust for that growth on a year-over-year basis you talk about shipment count being up around 3% this past quarter.

Adjusting for that growth, though, would suggest that almost on a same-store sales base growth was kind of flat maybe or close to flat.

Comparisons get a little bit more difficult in the back half of the year.

Strategically how are you going to be a doing the back half of the year in terms of managing the all-important volume versus pricing dynamic?

What geographic expansion are you talking about?

Adding a little bit here and there, you're investing in the business, so --

The reason I asked that question, we serve virtually every address in the United States, and we have not made any material geographic additions.

Do you want to address the volume thing, Mike?

I'll let Doug address the issue from the Freight perspective, but Fred's correct.

Our investments are to improve the speed of the network and the information intensity of the network to provide greater value for our customers.

But it's not an issue where we're covering a significantly higher percentage of the population; that's not the investment.

The investments are to speed the network, to provide greater information intensity and things of that nature to improve the value proposition.

And at Freight our investors have been to grow the existing markets we're in with the growth that we've had.

We're at 3% growth this quarter, last year the same quarter was 14% growth, which is unheard of in the trucking business.

So we have grown this network, we're growing market share, and I think we continue to grow.

And that's why we're investing in the business is we have some good growth forecasts for this year and beyond in the LTL business.

David Campbell, Thompson Davis.

On the capital expenditures, how much of that is Ground, how much of that is for aircraft or can you give us any sense of that magnitude of the Express versus Ground cost?

Well, the big dog in the hut, David, is Express.

And as we grow international and domestic packages we have to invest to be able to handle those.

We have to invest at the appropriate rate.

And by far the majority of the capital expenditures in '06 will be for Express.

But we are significantly increasing the CapEx for all of our other networks at the same time because of the growth that we see.

So there's no change in the patterns really from what you've seen in past historical for us.

Thanks.

And on the non-operating income, is there anything unusual in the quarter that would not be continuing in the future?

No.

No items -- okay.

And one last one, and that is international package growth.

Can you give us how much of -- how was the growth on imports versus exports in the fourth quarter?

I'll just -- obviously we don't break out all the regions around the world, but I can tell you that the Asia-Pacific region and Europe continue to be very strong.

And very strong is our U.S. international outbound.

Mike, you might want to add to that.

I just want to comment that we've probably got more balance right now than we've had in quite some time.

So we're pleased with the balance in the network.

(OPERATOR INSTRUCTIONS).

James Valentine, Morgan Stanley.

I had two questions on currency and pension and going -- or coming out of '05 we estimate ballpark you probably had about $40 million of benefit of currency because of the weakening dollar, now that it's strengthening I guess we're going to assume going into '06 that that isn't going to be there.

And I wanted to get your thoughts as to if you think we're in the right ballpark.

And then pension -- prior to this call we thought your pension cost would go up about $100 million.

And I haven't run than 50 basis points number yet, Alan, through my numbers, but is the $100 million the right order of magnitude?

The pension is going to be in the $60 to $65 million range for the U.S. pension plans.

And as to the currency, it's not a material impact on the quarter or the year.

And again, remember, we adjust prices based on currency fluctuations.

So it disappears much like the fuel surcharge analysis does in the same way.

It's very dynamic.

But currency did have some benefit, but it was not material.

Okay.

Can I just ask Mike Glenn a question?

Mike, given that UPS now has bought overnight, I was just recalling back the conversation we had back in January about I think it's called the Triple Edge program, is that right?

And I was wondering (multiple speakers).

Well, the name of the program really doesn't make that much difference, but I understand what you're talking about.

I guess my question is can you walk through -- seeing that you've owned LTL now five years, how much demand you're getting from customers now and kind of where you guys are at in integrating a bundled product for customers.

There's clearly opportunity to incorporate LTL into the entire value proposition along with Express and Ground and we're beginning to take more and more advantage of that.

I think the great part about what we're seeing is that tremendous investments that Doug has made in the freight network over the last few years to where it is now today truly an Express like service -- it's time definite, it's information intensive, it's got a money back guarantee.

So that works terrific in terms of fitting it into the portfolio and the overall value proposition.

So we're seeing more and more momentum in that regard.

Jon Langenfeld, Robert W. Baird.

Don't want to beat a dead horse here, but just wanted to --.

But go ahead.

I just want to clarify some things.

A year, two years ago you talked about double-digit margins in Express over the next few years;

I think most kind of interpreted that as fiscal '07 plus or minus.

Now you have the rising costs on the fuel side, the international startups which will obviously continue here for the next couple of years.

Jon, you are beating a dead horse.

Is that goal still realistic?

Yes.

So you're still on -- you think you're still on track for what the (multiple speakers).

I never said '07, you did.

But we are going to get to double-digit margins at Express, and if you look at our track record and plot it out you can get pretty close.

Are you on track with internal goals?

Absolutely.

Jon, this is Dave Bronczek.

I can tell you we're absolutely on track, we're very optimistic, we've got great productivity and cost controls in place with our revenue growing in the U.S. and the international.

The answer is yes, we're right on track.

And then the last question, what's behind the range?

The range looked a little bit larger for the first quarter than typical.

Is that just trying to judge where fuel ends up or are there some other variables in there?

It's totally fuel volatility.

Each quarter is going to be very difficult with the volatility of fuel and even more volatile the price of jet fuel.

And that's why the range is so wide and stand by.

If crude goes to 40 we have a different answer, if it goes to 80 we have a different answer.

I would now like to turn the floor back (multiple speakers).

I think we'll call a halt there.

And I want to think everyone in the listening audience for participating today and I want to thank my colleagues around the table and in Dallas and in Pittsburgh for participating as well.

And we look forward to working with you in the quarter to come.

Thank you.

This does conclude today's teleconference.

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