聯邦快遞 (FDX) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your FedEx Corporation first quarter fiscal year 2006 earnings release conference. [OPERATOR INSTRUCTIONS].

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

Sir, the floor is yours.

Thank you, Ashley, and good morning, ladies and gentlemen, and welcome to the 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 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-and-A session, callers will be limited to one question and a follow-up so we can accommodate all those who would like to participate.

Don't forget our investor meeting on the afternoon of October 5th at [Chipriati] on 42nd Street in New York.

If you plan to attend and haven't done so please let us know as soon as possible.

You won't want to miss this meeting with our top executives.

That meeting will also be broadcast on FedEx.com/us/Investor Relations.

I want to remind all the listeners that FedEx 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 and its subsidiaries' press releases and filings with the SEC, including but not limited to its reports on Form 10-K and 10-Q.

In our earnings release, we show first quarter diluted earnings per share excluding a one-time noncash lease accounting charge, which is a non-GAAP financial measure.

We intend to discuss this non-GAAP financial measure and the excluded charge on this call.

Please refer to our earnings release, available on our website for further discussion of this measure and a reconciliation of it to our GAAP results.

Joining us on the call today are Fred Smith, Chairman, President, and CEO, Alan Graf, Executive Vice President and CFO, Mike Glenn, Executive Vice President, Market Development and Corporate Communications, Chris Richards, Executive Vice President, General Counsel and Secretary, 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 FedEx Kinko's.

Now our chairman, Fred Smith, will share his views on the quarter, followed by Alan Graf.

After Alan, we will have time for Q and A.

Fred.

Thank you very much, Jim.

Good morning, ladies and gentlemen.

Thank you for joining our first earnings conference call for fiscal year 2006.

The first quarter of '06 was remarkable in many ways, but nothing, quite frankly was as extraordinary of the efforts by thousands of members of the FedEx team who served the areas devastated by Hurricane Katrina.

I want to express our concern for all those affected by Hurricane Katrina and our sincere appreciation to all those members of the FedEx team that have helped the Gulf Coast recover from this historic natural disaster.

As of today, FedEx has helped ship more than 900 tons of relief supplies to victims of Katrina through our long-term relationships with the Red Cross, Heart To Heart, and direct relief.

These shipments have included medical and pharmaceutical goods, communications equipment, food, water, bedding, personal care kits, and other vital supplies.

FedEx, immediately after Katrina, opened up in a matter of days, jet service to Lafayette, Louisiana, then we became the first cargo carrier to resume flights to Louis Armstrong International Airport on September 6th.

In terms of our operations now in the area, FedEx service has returned to near normal levels along the Gulf Coast with only the zip codes in the city proper of New Orleans, that are noted at FedEx.com,excluded from delivery.

We have four flights into the New Orleans airport with -- in addition, service into Lafayette and Baton Rouge.

FedEx Ground and Home Delivery in New Orleans have been restored with service to all accessible delivery locations.

FedEx Kinko's is open for business in the region, and is in the process of bringing more locations on-line.

Particularly notable, I think, was FedEx Kinko's support of FEMA operations in the immediate aftermath of the hurricane.

FedEx Freight centers are now open with the exception of the New Orleans facility itself.

Now turning your attention to our earnings report, I'd like to emphasize that FedEx had, in our opinion, an outstanding quarter in terms of financial performance.

We had revenue growth across the board up 10% year-over-year.

Volumes increased in our package and freight businesses.

The yield increases were significant as fuel surcharges kept pace with the increasing cost of fuel.

And I believe we continued to effectively manage costs.

We remain optimistic about the global economic environment, and as a result, as it states in our press release, we're raising our guidance for FY '06 to a range of $5.25 to $5.50.

The first quarter this fiscal year's strong performance resulted from our unique strategy of operating independent networks that sharply focus on specific markets while competing collectively under the powerful FedEx brand, effectively cross-selling the full portfolio of FedEx services and delivering outstanding customer service.

In the first quarter, FedEx also extended our leadership position in facilitating global trade.

In July we announced our plan to build a new Asia Pacific hub in Guangzhou, China at the new Baiyun airport, which will be the center of trade for the Asia Pacific region.

Earlier this month we announced the launch of a new daily eastbound around the world flight offering the first overnight express link between India and China.

These developments are significant given the ever increasing impact of these two economic powerhouses to the world economy.

In the near term, there are economic concerns, but overall we see continued improvements in the global economy.

Trade is deepening, particularly in high value-added and high technology products.

And global trade continues to grow faster than GDP.

Even with the effects of Hurricane Katrina and current fuel issues, we are forecasting U S GDP growth to be 3.5% in calendar '05 and 3.3% in calendar 2006.

In closing, let me remind you we'll continue to control costs, grow our revenue, and take advantage of our unmatched level of service, value-added information technology and unparalleled global network and broad portfolio of services.

We remain resolutely committed to improving shareowner value, return on invested capital, cash flow and margins.

And now I'll turn it over to our Chief Financial Officer, Alan Graf, who does not have a cold.

Go ahead, Alan.

Thank you, Fred, and good morning, everyone.

We are obviously very pleased with our results in Q1 of fiscal '06 and our outlook for the rest of the fiscal year.

Our businesses have performed extremely well, and we have increased our earnings forecast for the year to $5.25 per share to $5.50 per share, which includes the 79 million one-time noncash lease charge.

On a pro forma basis, excluding that charge, which better reflects our underlying performance, our range would be $5.40 to $5.65 per share, which is up $0.20 from our guidance we gave you at our last call.

There are several call-outs that I would like to highlight for you before I open it up for questions.

First, the earnings and operating performance of our freight segment was outstanding in the first quarter.

Operating income increased 31% from last year on a revenue increase of 11%.

And the operating margin was a whopping 15.1%.

Second, Express grew domestic volume over 4%, and IP revenue increased 13% year-over-year.

Without the lease charge that I mentioned previously, margins were improved on a year-over-year basis.

Grounds revenue grew 14% with volume and yield up about 6% each.

The margin did decline due to losses at SmartPost and technology and capacity expansion investments.

Now let me turn to the lease accounting charge.

During the first quarter of 2006 a one-time noncash charge of 79 million, or $0.15 per diluted share after variable compensation effects was recorded, which represented the impact on prior years to adjust the accounting for certain facility leases, predominantly at FedEx Express.

The charge related primarily to rent escalations in on-airport facility leases.

Based on an extensive review of our leases during the first quarter, we determined that a portion of our facility leases had rent escalation clauses that were not being recognized appropriately.

Because the amounts involved were not material to our financial statements in any individual prior period, and because of the cumulative amount is not expected to be material to 2006 results, we have recorded the cumulative adjustment in the first quarter, which increased operating expenses by 79 million.

Turning to Hurricane Katrina, in August of 2005, Hurricane Katrina devastated certain portions of the Gulf Coast region, where each of our business segments has operations.

While we took precautions by relocating aircraft and equipment, we suffered damage to a limited number of facilities and some of our equipment.

Because only three business days in the quarter were affected by the storm, our results of operations for the first quarter were not significantly impacted.

We continue to pay all of our employees and independent contractors and are providing housing assistance where it is needed.

Lastly, one caution about the guidance that I've given you for fiscal year '06 is the impending impact of Hurricane Rita and its potential negative impact to fuel price and supply and the economy in general.

With that, I'd like to open the floor for questions.

Thank you.

The floor is now open for questions. [OPERATOR INSTRUCTIONS].

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

Please go ahead.

Good morning.

We've got a high level of confidence in you and it was nice to have that confidence rewarded this morning.

I usually don't flatter and say nice quarter, but a very strong quarter.

We saw acceleration in the Express box volume and an even stronger acceleration in envelope volume.

What in particular did you -- do you think is driving that incremental volume, and can you give us an outlook on how the volume trended through the quarter?

Donald, we have had a concerted effort underway to cross-sell our services and to leverage the value proposition of the full FedEx bundle which includes Express, Ground, and Freight.

We've had a lot of success in specific target opportunities with our worldwide and corporate sales teams, and we've seen strong growth coming out of our field team sales as well.

I think it's a very disciplined approach to the market which we have taken which has proven to be very successful on the bottom line.

And how did it trend through the quarter?

We're very satisfied with the trends in the business as a whole, so we continue to expect to have positive results going forward.

Thank you.

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

Please go ahead.

Good morning.

Nice job in the quarter.

First off, how would you characterize the pricing environment?

I know you've made some comments recently.

Could you just talk about that domestically?

Well, the domestic pricing environment, I think, has firmed a bit since we talked last time.

We continue to see some aggressive pricing on a target account basis, on an account by account basis.

That's not unusual.

That's been that way for a very long time, and we certainly would expect that to continue, but I would say overall that the pricing environment has firmed a bit since we last talked.

Okay, great.

On the Ground side, I know you've got the expansion going on there, a little bit slower growth, but when do you expect the positive year-over-year margin expansion to resume?

Let me hit the volume first, then I'll talk to -- I'll let Dan Sullivan touch on the margins.

We did see a little bit softer growth rates in the volume and Ground starting about the middle of the quarter.

I am happy to say that we've seen that reverse a bit here lately and trend back up, but the volume softness was really two primary issues at play.

One is, growth rates from our existing customers was a bit slower than we anticipated, just due to general business trends and on a segment by segment basis.

Again, we saw a little softness.

The second issue is our new business pipeline was a little bit below our expectations.

I think that's primarily due to the disciplined approach that we took to yield management, which is certainly showing in our yields relative to the competition.

Balancing volume growth and yield management is always a challenge.

Sometimes you turn the dial a little bit too much one way or the other, but we're confident that we can achieve our growth expectations in the future while maintaining excellent yields.

I might also add that we continue to track volume retention and customer churn rates on an ongoing basis and are pleased to see continued improvement in this area, especially in the gRound area, which can be attributed to the excellent service that we're providing and the great relationships our sales teams have built with our customers.

And I'll let Dan address the margin issue.

I think Mike hit all the points on growth.

I would just add that our two-year growth rate is not too bad at all, and really tracking the last several quarters at 23, 24% increase.

We are starting to see, as Mike said, some firming in our volume.

We got off to a good start in Q1, kind of fell off in the middle of the quarter, but we're starting to see that improve, expect it to continue through this quarter, which should provide good momentum in the second half of the year.

Of course, we are building in the capacity to handle more volume than we have right now, and that's why we did have here a short-term impact on earnings because of -- especially three new hubs that we have brought on line, and, of course, with that all the people, the new schedules, those kinds of things.

So it really has a profound impact on the overall network.

When you look at the segment margins, though, SmartPost really has even a more significant impact on the year-over-year comparisons.

SmartPost was not in our numbers last year, so as Alan said, we are experiencing losses at SmartPost, but good year-over-year growth and I'm quite optimistic for the future at SmartPost.

We've got a lot to learn about that segment, but we're doing -- we're building out that network, we're improving service, we're increasing our penetration to the local post offices, so I think ultimately we'll start to see that turnaround at the same time.

So we need the growth that we've just talked about to cover the expansion investment, and I think Mike and I both agree we're going to get it.

Thank you.

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

Please go ahead.

Great, thanks.

Nice quarter, guys, and glad to hear that we're getting some good price discipline here.

Your Express division had very impressive margins when we take out the charge.

I was wondering if Dave could take us through what helped on this, specifically what cost initiatives are coming through here, or efficiency efforts, then following through on that, Dave, are you seeing any air customers shift their business over to Ground given the fact that you've got about a 13% fuel surcharge going to 15, and Ground is only at about 3%?

Thanks, Jim.

Thanks for the compliment as well.

Our team did a great job as you pointed out in Q1.

You probably can see it, but if you don't have it in front of you our FTE's grew slightly less than 2% while our volume grew 5%.

So it's our continuous effort of more productivity, cost controls, all the issues that we've talked about in the past, they're paying off in a big way and obviously going forward min of the guidance it's good news on the Express front.

I can tell that you Mike and his sales team and our Express people and Ground and his people are working these bundles, and as you can see in our volume growth, the growth is coming in box traffic, which is great, our yields are good, the revenue is up on our domestic business in total by 8%, and in total for all of Express by 11%.

So we're having great success here in the United States on our costs and productivity initiatives, and our growth continues in International.

So you add it all up and we're right on track where we said would be and actually a little bit ahead of our margin improvement plans.

How about this fuel issue?

Is that causing any customers to shift some of their business?

This is Mike.

We've seen some shifting from Express to Ground for sometime now.

I would say that we have not seen a material change in that trend as a result of fuel.

I think customers are very aware of fuel prices, and I think the way that we manage a fuel surcharge structure is rational in their minds, we provide good communications about that, and obviously the price they pay at the pump certainly helps them become even more keenly aware of what fuel prices are doing.

So we have not seen a material change in any of our trends, either on a customer by customer basis or on the business as a whole, although it is something that we watch on a regular basis.

The only other thing I'd add, Jim, we obviously are known for our great service, but we're running the highest service performance in the United States we've had in six years.

Thank you.

Your next question is coming from David Ross of Legg Mason.

Please go ahead.

Last Friday crew members at Polar Air Cargo went on strike.

I was wondering if you guys are seeing any benefit from that.

this is Dave Bronczek.

We haven't really noticed that much at the moment.

It's only been two days now, I believe.

So really nothing that we've noticed.

okay.

Then I guess, follow-up question, if you could just break down the yield improvements at Ground.

You said that yield improved 6%, primarily due to hire extra service revenue, GRI, and then the fuel surcharge.

Can you give a sense how much each of those contributed to the yield?

Mike, you want me to handle that?

Go ahead, Dan.

A little more than 40% of the yield improvement was due to the fuel surcharge.

As you know, last year we did not have a fuel surcharge in place.

Another -- roughly another 40% of the increase comes from extra services revenue and we've also seen some pretty good real rates year-over-year that fill out the rest of that 6%.

So it's really those three components.

Thank you.

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

Please go ahead.

Thank you.

Good morning, guys.

Good morning.

The mix seems to be changing a bit.

This is probably the closest between Express and Ground volumes, the disparity between the two, in years.

Ground had been growing, and that disparity had been widening with Ground growing faster and Express less, and now we see Express starting to accelerate and Ground decelerate a bit.

Can you talk a little bit towards how much of this is by design, how much of this is what the economy is providing because the economy's strong, how much of this might be what the competitive field is affording, and how you expect this to play out as we go forward a little bit?

Ed, I would -- this is Mike.

I would say that the combination of all of those issues.

However, on the Ground side, with the slightly lower growth rates, I would say it's been more of a management issue and -- than it has been any economic issue or a shifting of overall trends.

The Express market is still growing slower than GDP, and the total parcel market is growing about at GDP rate.

So I don't think we've seen any major changes in the economic trends driving it.

As I mentioned, there were two primary factors in the quarter that resulted in a little bit lower Ground rates than we were anticipating.

One would be softness on a segment by segment basis.

Specifically in the brick and mortar retail, we saw a greater level of a softness there than we anticipated, and then the second issue was one of really turning the dial on the balance between volume growth and yield management.

And that's something that we have to deal with on a regular day to day basis.

We feel like we've got a good management system in place to do that.

But perhaps we overcorrected a bit in the quarter and we'll make sure that we have that right balance going forward.

And we work with Dan Sullivan and his Ground management team from an operating perspective to maximize bottom line performance on volume growth and yield management on a weekly basis.

So this is something that we have to turn the dials one way or the other all the time, and maybe we overcorrected a bit, but it's certainly not an issue long term, and we feel like we can strike the proper balance given our expansion plans.

This is Alan.

Just to add a little bit there, when we gave you the range for the first quarter, we were frankly not expecting the domestic Express growth rate to be quite as high as it was.

We had frankly expected to see a little more elasticity as a result of a pretty high fuel surcharge, but again, I think it's a great tribute to our sales force and marketing team that they know where to go and how to sell the value that we've got here that propped that growth rate up.

It is the first time we've had a growth rate like in that quite some time, so we were pleasantly surprised.

I think, going forward, as Mike was saying we expect Ground volume growth rate to pick up a bit, and so I don't think you'll see quite the same comparison going forward as you just saw.

And would you expect Express now in your guidance for the quarter to continue where it's at, or accelerate or decelerate from here?

Well, we'd like to see it continue where it is, Ed, but we're not planning on that.

As I've told you many times, we take a more conservative planning approach when it comes to our Express volumes, for the reason that I mentioned before, in that we're seeing the Express industry grow at a lower rate than GDP, not much above flat, as a matter of fact.

We'll go into that a bit more at the analyst meeting in October, to talk about some of those trends, but we take a bit more conservative position on Express.

Now, obviously we've moved it up from where we were when we started the quarter, but we still are taking a more conservative stance when it comes to Express.

This is Fred Smith.

Let me reiterate, Ed, what I've said on this call many times.

There is no domestic and international Express business any more.

It is a global market.

Production that used to be in Arizona, is now in Guangzhou.

Parts and components for hybrid automobiles are made in Japan and China and Mexico.

So part of the problem, I think, is to parse the Express numbers because of the way we have to report them in the domestic and international.

It's much more useful, I think, to look at the Express marketplace as a whole, as a global entity.

And, Ed, this is Dave Bronczek, one last thing to add, when we meet on these sales initiatives, that's Mike and his team and Dan and his team at Ground and Freight and all of us at Express we look at these customers in total, to Fred's point.

So the bundling in total aspect is really been very beneficial for us at Express, in total.

Thank you.

Your next question is coming from John Barnes of BB&T Capital Markets.

Please go ahead.

Hey, thanks.

On the LTL yield, could you give us a similar breakdown, where the yield improvement came from, percentage -- of from the surcharge and general rate increase, that type of thing?

This is Doug Duncan.

We don't break that out because we've had -- fuel surcharge has been so long in place today for us that it's really inextricable from the yield.

We manage yield in total, and many of our customers will negotiate hard on the fuel surcharge side and not the base rate, and others will negotiate very diligently on the base rates and not on the fuel surcharge.

So breaking that number out really isn't constructive or helpful.

We have to manage that yield in total, and I think we've done a good job of it.

We can give you a little hint.

We are doing more inter-regional in our mix, which tends to raise the rates, and that's been helpful for us as well.

Okay.

So, Doug, a lot of the carriers I've talked to have always said, hey we negotiate these two things very separate, we don't let fuel surcharge hit us on the general rate increase.

You're saying the exact opposite, that your customer base does manage the two as a total transportation cost?

Believe me, I would love to keep it totally separate, but customers tend to have a mind of their own, and they negotiate with different ideas and different strategies.

We're in business to serve the customer not to tell them how to run their business.

thank you.

Your next question is coming from Coralie Witter of Marsico Capital Management.

Please go ahead.

Hi.

Two questions regarding second quarter.

In the guidance that you've provided, are you assuming, or are you seeing currently, any benefit from perhaps greater package growth as a result of the disruption from Hurricane Katrina to companies' transportation needs, and then secondly, how should we think about the impact to margins from the additional frequencies to China being added this quarter?

Thanks.

We haven't seen any material impact from the change -- from obviously the disruption in the operations on the coast.

Our team has done a fabulous job getting back up and running.

What it's going to do for the long term, it's very difficult to say at this point.

It really has to do with how quickly people get back into New Orleans and begin to open up business.

It wasn't a huge market for us coming out of New Orleans so I think we've recovered quite nicely.

What are the long-term impact, I think it's still difficult to say, and I'll let Dave Bronczek comment about the --

Thank you for asking that question.

Obviously Asia and pacific and Europe and our global business is doing very well.

We did add, in the first quarter, our westbound around the world that of course, came out of the United States, went into Asia and came back around to Europe.

That was in the first quarter results.

It opened up capacity, capacity that we needed, that we were quite frankly constrained.

In September of this quarter, September 7th, we added what we call eastbound round the world, which was very significant for us.

It starts in China, comes out of that very high growing marketplace for us into the United States where we needed capacity, and have great demand there, and into the United States to Europe, then, back to India, and India to China, which is very significant for us.

It's a very big trading lane, and that flight started September 7th.

We're very pleased with the performance of both the westbound and eastbound.

Thank you.

Your next question is coming from Jason Seidl of Credit Suisse First Boston.

Please go ahead.

Thank you, good morning gentlemen.

Last quarter you mentioned a potential pressure from increased fuel costs and obviously the increase in Katrina really didn't hit you this quarter, but I'm sure you're experiencing it right now yet we're raising guidance here, but warning on Rita.

At what sort of inflection point should we think about margin pressure on terms of fuel and energy.

That's an excellent question that obviously we don't have a crystal ball to quite read as clearly as we would like to.

As I mentioned earlier we have been pleasantly surprised about the elasticity up to this point not being quite as strong as we had perhaps first thought.

We're obviously in territory that we've never been before.

I think if we would stay in this $65 to $70 price I think we're going to be all right.

I think when we start getting up to higher surcharges than we have in place today, and I'll let Mike comment on this more specifically, it's unknown territory, and it's going to be an interesting balance there.

Hopefully we won't see the impact from Rita that we could, but I thought it was important for us to let you know that our guidance does not include $100 a barrel fuel for sure.

I think Alan has hit the high points.

We take a look at this fuel surcharge issue on a weekly basis, understanding the feedback that we get from customers and we take that into account on our decisions, and having said that, as long as we stay in the range of where we are today I think we'll be fine.

If we get too far north of here, certainly it would be a greater level of concern.

Fair enough.

Thank you, gentlemen.

Nice quarter.

thank you.

Thank you.

Your next question is coming from Tom Wadewitz of JP Morgan.

Please go ahead.

Yes, good morning.

My question for you is, looking at the Ground market, I guess this is probably for Dan, where do you see the greatest competitive pressures, I guess?

Is it from UPS on the Ground side?

Do you actually see the Postal Service as a more effective competitor the last few quarters than they've been in the past?

I know you mentioned your own decision to adjust the dial on yield, but I'm wondering if you could talk about the competitive aspect on the Ground side.

Well, certainly our principal competitor is UPS, no questions about that.

We meet them just about with every customer.

We don't see a great deal of competition from the Postal Service.

In fact, we're really partners with them, especially on the SmartPost side of the business.

Very little from DHL at this point, seeing minor transition of volume to them and a lot of that that has gone over has come back.

So it's really -- it's really UPS, and I think Mike correctly characterized the pricing environment out there.

It's aggressive, but we would say overall has stabilized here and more rational in the last several weeks.

And then one follow-up on that, if you look at where your growth has come from, and where you expect it to come from going forward, is Home Delivery a pretty important aspect of that, and is that -- if that becomes a larger percentage, is that a negative effect on your margin expectance, or is that not really something we should think about in terms of the way ground margins are performing?

No, Home Delivery has been really our principal growth segment now for the last several years, there's no question that we continue to bring more and more residential business on, both at Home Delivery and at SmartPost, and you're correct in that the cost structures are different, higher at Home Delivery, because of the nature of that part of our operation.

So it does have impact on margins, but we have to overcome that by continuous improvement in the commercial side of the business, which we're doing.

We -- year-over-year, we are continually improving our productivity that is offsetting any of the margin change that we might see at Home Delivery.

And by the way they're getting more and more productive at the same time, growing, obviously contributing on the top and bottom line.

So overall, been great for us.

And an important part of the bundle that Dave has talked about, now that we are obviously everywhere, have good density there, are providing high levels of service.

They're very important piece of the total, and really not looked at as so separate any more at the FedEx Ground in total.

Thank you.

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

Please go ahead.

Good morning.

The LTL freight business is becoming a bigger part of the overall portfolio.

The quarter was very, very strong this quarter.

Just curious if you have a sense for some of the outlook looking forward for that business, because obviously at margins of 15% you're certainly well into the upper end of the range for an LTL truck.

I'm just curious your perspective on that looking forward.

This is Doug Duncan.

We are -- a lot of it is attributable to the fact that we're focused on customers that are executing fast cycle logistics, where we can bring certainty, reliability to a marketplace that's had inconsistency in truck service in the past, so that has really endeared us to these customers who are trying to shrink the supply chain.

And the fact that we're bringing value enables us to manage yields a lot better.

The economy, the industrial economy, in our projections, remains strong, but we've got a lot of things that we're differentiating ourselves in the market which will add growth on top of the economic side of it.

We introduced Money Back Guarantee, which still largely has not been matched.

Recently we launched Advance Notice where basically customers can sign up so that you don't have to track and trace anything, if we're going to miss a delivery we're going to tell you proactively that we're going to miss a delivery.

We've got some other things in the mix to further differentiate ourselves in the marketplace.

So we see good growth ahead, both in the industrial economy, but also in our ability to continue to take market share in this LTL business.

Just as a quick follow up, and I might have missed it, when you were talking about the FedEx Ground piece, did you indicate when you start overlapping some of these expenses from the technology and the SmartPost so that, that margin could start to go up again?

I recall from previous discussions that the thought was you might see some margin improvement this year in Ground, however slight.

I'm just wondering if you have an update on thoughts there and the timing of the overlap.

Dan.

Well, first of all, at this point we're looking at SmartPost as a separate business, and integrating it as much as we possibly can in Ground in terms of our line haul operations, all of our administrative areas, and a lot of the -- a lot of our information systems, which ultimately we think will provide a lower cost structure at SmartPost and allow us to get that business profitable.

As far as ground margins are concerned, I am still optimistic that we are -- we will improve those through the year.

Again, we talked about what we think will be a little bit of boost on the top line, which will help that, our productivity is good, and forecasted to improve again through the year, so I think we're going to have a very representative, if not slightly improved year when it's all said and done.

Thank you.

Your next question is coming from Scott Flower of Citigroup.

Please go ahead.

Good morning, all.

Just a couple of quick questions.

I was wondering if either Mike or Dave could give us some flavor, when you look at the international pie, how the different regions perform, Europe, Asia, U.S., outbound export in terms of rates of growth versus the average that we see for IP.

Thanks, Scott.

I'll start off and let Mike fill in.

All of the international regions around the world were in positive growth territory, led by Asia and U.S. international outbound, and that's very good news for us.

Europe had a solid quarter but as I mentioned, all of our regions around the world contributed to that growth rate of 13% in the revenue and six on the volume.

U.S., international and Asia led the way.

And then I guess the other question I had, I know that one of the themes that's been coming through, obviously in the discussion today, is that yields and such have been firming somewhat.

How much of that is seemingly due to the fact that obviously one of your major competitors, named DHL, seems to be more inwardly focused and seems to be trying to get their arms around their own operations versus broader trends in the marketplace.

I don't think that's a material impact on the overall rate environment.

As we've said in the past what we've seen is very aggressive pricing on an account by account basis.

I think that's firmed up a bit, as we've said.

Having said that you're always going to seeing agressive pricing on an account by account basis, and there's a lot of reasons for that.

There could be capacity coming out of has given market or market which a competitor wants to price into.

There are all types of reasons why you'll see that.

Volume growth rates out of a specific market aren't up to a level where a company would like to see them, so there are all types of factors that come into play there, but we are pleased that we've seen some firming and hope that will continue.

Thank you.

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

Please go ahead.

Hi, good morning, it's Ken Hoexter.

Dan, just on the capacity growth at Ground are you still looking for the 10% growth even as you face some of the tougher comps on the volume side?

Secondly, on SmartPost, what happened after the acquisition that's caused it to become a money loser as opposed to the break even business I thought it was when you guys acquired it?

In the first part I really do feel that even though we've had a bit of a downer on Ground turn growth rates largely because of year-over-year comparisons that we can grow Ground at high single-digit to low double-digits, and that's certainly what Mike and I work on every day.

So I think we can get it back to that point, and really that's what we're -- that's why we're building out the network to handle that volume over the next several years.

As far as SmartPost is concerned, we have been building out the network, so we've been -- we've invested in that business, we've had to also go through a complete transition of all of their information systems, human resources, all of their work processes, almost a total remake of that operation, and we're also in a very competitive price environment there, which has lowered our yield some, which are also a bit of an issue in that segment.

So with all -- with all that going on we are seeing losses there, but again, as I said earlier, I'm bullish that we're going to be able to improve that business through this year and ultimately get it profitable.

This is Alan.

Also, don't look at SmartPost static losses alone without understanding the true value of what it adds to our portfolio.

Offering -- having a SmartPost offering also brings with it additional Ground and Express packages that SmartPost doesn't get credit for in our cost accounting and revenue sharing calculations inside the Company.

So even though it's incurring some losses it's providing value to overall FedEx Corporation bottom line.

Great.

I would add that the Ground team has done a great job of leveraging our pick up and line haul network which has brought a tremendous amount of certainty to that network, which provides a greater value proposition and we're optimistic about the service going forward.

Great, and if I could just have one follow-up on Kinko's, I guess it's been over a year now that you've -- since the acquisition.

I would guess by now the rebranding costs start to fade away.

When can we -- if I recall your original margin target, 8 to 12%, I thought that was over time, but should we start to see that ramp up, or are there still costs from rolling out the additional package services at the stores that are going to keep margins depressed for maybe the rest of the year or so?

Gary?

Sure, well, our first and third quarters are usually our lowest margin quarters.

But I do think we had -- we've had softness in the first quarter and I think we'll continue to see it in self-service copies that is being replaced a lot by our rapidly increasing package acceptance for both Express and Ground.

The reason our op income results in Q1 were lower, though, is that we're really teeing up some new product offerings, and had some increased costs with professional fees related to that, both the internal technology part and the product offering -- offerings that we believe are going to further compliment the increased package acceptance that we had, and we'll have more to say about in that our investor conference and moving forward, but we're really transitioning what we do to create a much better bundle for the FedEx customers.

The business services we provide as well as creating more points of access for these customers.

So that's where the increases in expenses have come from.

I think long term we're still going to hold on to that 8% or greater margin objective or operating income objective.

Same point on Kinko's.

About portfolio management and the amount of traffic that's coming through the FedEx Kinko's network that's contributing to the Ground and Express success, and the way we account for that, and also Gary's mentioned new products and also we need to expand our footprint globally at FedEx Kinko's more rapidly and we'll be talking to you more about that going forward, too.

Thank you.

Your next question is a follow-up question coming from David Campbell of Thompson Davis.

Please go ahead.

Yes, hi, good morning, the international business has been continued to be very strong, particularly in the Asia Pacific region, but your growth hasn't changed.

It was 6% in the May quarter, 6% in the August quarter, in terms of packages, despite the fact you've been adding flights and capacity and new services.

And I'm just curious, when will that produce some new better growth?

Of there some offsetting service reductions in other markets or something that's going on here?

Two points, David, then I'll let Dave take it over.

One, we grew revenue at 4%, so we're managing the profitability line more than the growth line.

We had very strong yields, which was part of the overall program here.

We need to do that to help fund the investments for the east and westbound round the world flights, which, as I mentioned before, take a couple of years to develop their true IP potential.

They are largely freight flights when they start out, with good load factors, but still not enough IP on there, so, this is conscious on our part to grow what we think is the most balance between investment and cash flow producing.

Dave?

So Alan is exactly right, but I should add that the westbound around the world only just started this past quarter.

The eastbound round the world that I have talked about, that has had tremendous demand, and we have a great need for the capacity, just started September 7th of this quarter, the second quarter.

We've been balancing our international business around the world for high revenue and high profits, and now we have the capacity in the lanes that we need it the most.

So we're very pleased.

Okay.

Thanks.

My other questions have been answered.

One more question, that is, the difference between the $79 million charge mentioned in the first paragraph of the press release and the $75 million charge later on for the first quarter, is that just because 4 million of that charge was related to the first quarter?

No, it's because 75 million is at Express, 79 million is at Corporate.

Thank you.

Your next question is a follow-up question coming from Jon Langenfeld of Robert W. Baird.

Please go ahead.

Asked and answered.

Thank you.

Your next question is a follow-up question from James Valentine of Morgan Stanley.

Please go ahead.

Great, thanks.

Kind of circling back on the Ground margins, because I think we're trying to parse out the impacts from the SmartPost, new technology, the three new hubs.

Can you give us some thoughts, maybe on, did -- would Ground margins have improved year-over-year if we take that out, or at least been flat?

If we don't look at the SmartPost impact, pretty much all of the change at Ground specifically, which we have not been breaking out, is attributed to the investments that we have been making in the expansion project as well as the network that goes along with it to serve those other nodes in the network.

Not only the three hubs but several other terminals that we've put in place as well.

Okay.

And switching over to Kinko's, can we get some kind of thought on when we think the integration costs will go down to -- basically when will they become immaterial?

It's not just integration.

The integration is getting about ready to lap in the training and everything else.

It's now new product development and expansion that will start to have an impact on those, but their margins -- FedEx Kinko's margins will improve from where they are at the end of the year.

I think we'll be back on a better track, and remember, Q1 and Q3 are very seasonal for Gary.

Thank you.

Your next question is a follow-up question coming from Ed Wolfe of Bear Stearns.

Please go ahead.

Sure.

Hey, I was just wondering, kind of a big picture question, maybe for Fred, with all of the hubbub in the news recently about Deutsche Post and Excel and possibly UPS and Excel what are your thoughts longer terms about your needs to be in both the forwarding and the logistics market, and has that changed as a result of the consolidation you're seeing out there?

Well, Ed this is something that we've thought a lot about over a lot of years, and we'll talk more about this as the investor conference, if you like, in October.

But as I think excel's numbers indicate very clearly, there's not a lot of economies of scale in big logistics and freight management companies.

As I recall, their margin -- operating margin is something like 2.5%, or thereabouts, and they clearly are the biggest in contract logistics and they're very large in ocean and freight management.

DHL Danzas, I believe, has margins even lower than that.

Now, when you look at that business, you have to ask yourself, is there a lot of opportunity for scale, and strategically is there an opportunity for bundling the higher margin small shipment business with contract logistics and freight management?

And I think Excel's numbers showed in the various financial presentations, they made something like 14% of their accounts or thereabouts, had some level of overlap.

And if you drew a third circle there and looked for overlap in the small shipment business, I'm not sure what that would be, but here's the one thing that I can say conclusively.

There are lots and lots of companies in the freight management and contract logistics business.

You come here to Memphis where our headquarters are, there's acres and acres of them around the airport here and so forth.

And they're very good entrepreneurial companies that are often focused on a particular account or a particular segment, and now with our two major competitors very vertically integrated in these two areas, we look at that as a -- to some degree, a real advantage, because we have the opportunity to leverage all those hundreds of small focus companies as partners and customers, and we get a lot of revenue from people like that.

So we've carefully evaluated that.

As you know we're in the freight management or cargo business with a FedEx trade networks.

It's a great little company, it's part of our Express segment.

Perhaps Dave Bronczek can talk about it more in October.

Our Supply Chain Services group is very focused on a couple of high segments and we think -- high-growth segments and where there is a lot of synergy between the small shipment business.

So as we've said before that's the way we lack at the business, and we'd rather put our time and attention into higher margin endeavors that we think have real scale opportunities and greater growth opportunities.

I know there's a contrary point of view, but I would just say that landscape is littered with reports about what a wonderful opportunity the logistics business is over the last five to seven years.

Ryder, on and on down the line.

And so that's the way we see it.

I appreciate it.

Sounds like you haven't changed much in your thoughts there.

No.

Just another quick question for Dan.

Is there a sense when you would expect to see the Ground margin as reported with smart mail and the other issues, when would you start to expect to see that margin year-over-year show improvement again?

Well, I think that -- I think in the second half we should start to get it pretty much closer.

We should make marked improvement at SmartPost.

At least, that's our projections right now.

We should get it a lot closer.

I think in '07 we should definitely start to see improvement on the combined, on the segment margin.

Ashley --

yes, sir.

I think with that I'd like to draw the meeting to a close.

I'd like to thank all the ladies and gentlemen on the call for joining us and all of my colleagues here in Memphis and in Dallas and in Pittsburgh for being with us.

I need to make one closing comment, or reminder, to remind the audience to refer to the Investor Relations site on FedEx.com for a reconciliation of the non-GAAP financial information used on this call with the comparable GAAP measures.

If you would do that I would be very happy.

And with that, thank you all very much, and we'll talk to you in the future.

Thank you.

That does conclude today's teleconference.

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