聯邦快遞 (FDX) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to your FedEx Corporation second-quarter fiscal year 2006 earnings release conference call.

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

It is now my pleasure to turn the floor over to your host, Jim Clippard, Vice President of Investor Relations.

Sir, the floor is yours.

Thank you, Ashley and good morning, ladies and gentlemen and welcome to the FedEx Corporation's second-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 of those who would like to participate.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

Certain statements in this conference call may be considered forward-looking statements such as statements relating to management's views with respect to future events and financial performance.

Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements.

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

In our earnings release, we provide an estimate of our full-year diluted earnings per share, excluding a onetime non-cash lease accounting charge recorded in the first quarter.

This is a non-GAAP financial measure.

We may discuss this non-GAAP financial measure and the excluded charge on the 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 earnings per share estimate.

To the extent we disclose any other non-GAAP financial measures on this call, please refer to the Investor Relations portion of our website at FedEx.com for a reconciliation of such measures to the most directly comparable GAAP measures.

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 and General Counsel and Secretary;

Rob Carter, Executive Vice President and CIO;

Dave Bronczek, President and CEO of FedEx Express;

Dan Sullivan, President and CEO of FedEx Ground;

Doug Duncan, President and CEO of FedEx Freight and Gary Kusin, President and CEO of FedEx Kinko's.

And now, our Chairman, Fred Smith, will share his views on the quarter followed by Alan Graf.

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

Fred.

Thank you very much, Jim.

Good morning.

We appreciate you joining our earnings conference call for the second quarter of fiscal year 2006.

Before we discuss specifics of the quarter just ended, I would like to first recognize the outstanding efforts of hundreds of thousands of members of the FedEx team around the world who are going above and beyond to serve our customers during the busiest time of the year.

Thanks to their hard work, FedEx experienced its heaviest daily volume in history, Monday night, moving 8.9 million packages and tens of millions of pounds of freight.

We are also proud to report that FedEx.com set a one day record this week with more than 1.1 million shipments generated online.

Another sign of the growth of e-commerce.

In addition, I would like to thank FedEx team members for their dedication and service to our customers, which once again landed FedEx among the top 10 companies with the best corporate reputation as judged by the annual Wall Street Journal, Harris Interactive Corporate Reputation Survey.

Results of the survey were released earlier this month and this is the third consecutive year FedEx has been ranked as a top 10 company in terms of corporate reputation.

It's especially gratifying to note that this year FedEx is number one in customer service.

Again, a great tribute to the members of the FedEx team.

Two other publications recently recognized outstanding performance by our company.

Fortune honored FedEx as a Blue Ribbon Company for appearing on five of the magazine's Exclusive Lists, including its list of best companies to work for.

Something we are very proud of.

Human Resource Executive Magazine listed FedEx as number two among 50 companies most admired for our HR.

Congratulations are also in order for Rob Carter, our Chief Information Officer, whom InformationWeek named Chief Information Officer of the Year earlier this month.

On behalf of all members of the management team, I applaud every FedEx employee, owner/operator and agent around the world for their terrific efforts for making every FedEx experience outstanding.

A simple statement of the purple promise.

In the second quarter of FY '06, FedEx earnings growth was stronger than expected due to sharp improvement in operating margins at all of our transportation companies.

This improvement stems from one, a disciplined approach to pricing and revenue management, two, solid customer demand for our broad portfolio of transportation services, three, solid economic growth and four, strong productivity gains.

As the world's largest air cargo company, the trends we see in FedEx Express reinforce confidence in our business strategy.

We see continued year-over-year economic growth in the United States and Asian economy.

The expansion in economic activity appears solid.

Globally overall, output growth remains at satisfactory levels.

Business orders remain strong and the labor market is improving steadily.

We expect the restocking of inventory will support the industrial sector of the economy in the near term.

Momentum of business activities heading into the new calendar year is consistent with a midcycle theme.

The fundamental driver of world trade and investment, global supply chain management, is firmly in place and in fact, it's deepening.

Our strong performance in executing our business strategy, along with our optimism about global economic conditions, has led us to increase our earnings guidance for FY '06.

Our Chief Financial Officer, Alan Graf, will discuss the increased guidance later in the call.

I ask in conclusion that you remember our steadfast commitment to crisp execution in managing our costs, increasing our revenue and fully leveraging our unmatched service levels, our unmatched information technology, our unparalleled global express network and our broad portfolio of services that we offer.

We will continue to focus on improving share owner value by improving returns on invested capital, increasing cash flow and improving margins.

As the peak season draws to a close, all of us at FedEx wish you and your families a happy holiday season and remind all you last-minute shoppers that through tomorrow you can still ship FedEx Express and have your gifts delivered before Christmas.

And now let me turn it over to Alan.

Thanks very much, Fred.

I would like to add a little color to help your understanding of our continued terrific performance and the $0.20 per share increased fiscal year 2006 earnings guidance range.

Productivity improvements, yield management and volume growth drove operating profit growth and margin expansion at Express, Ground and Freight.

It's important to note that for FedEx Corporation, net fuel and exchange rates were not significant in the quarter.

At Express, we achieved the highest Q2 margin in a long time, reaching 8.9%.

Revenue increased 11% to $5.4 billion.

International Priority revenues increased 14% with volume up a strong 8% and yields increasing 5%.

We also had an 8% increase in U.S. domestic package revenues at Express with volume up 1% and yields up 7%.

As to the 1% volume growth at domestic Express, it was intentionally constrained as some Express deferred traffic shippers were offered options to either move their shipments to FedEx Ground, FedEx Home Delivery and FedEx SmartPost, which remain in the Express network at more compensatory rate levels.

While many customers elected to move to the FedEx network that better matched their needs and some chose to stay at Express with higher rates, there were some customers who chose to leave the FedEx networks altogether.

Express segment operating income increased 43%, to $476 million.

Daily Express freight pounds increased 8% and yields improved 11% on higher rates and to a lesser extent fuel surcharges.

At Ground, segment revenue increased 11% and segment operating margin improved 100 basis points to 12.5%.

On volume growth of 4%, very stringent cost controls and strong field productivity.

I should note that volume growth accelerated at the end of Q2 and has continued to accelerate in quarter three and will be stronger in the second half of fiscal 2006 as compared to the second quarter growth rate of 4%.

Ground segment operating income increased 21% to $163 million.

At Freight, segment revenue increased 14% to $932 million and operating income increased 32% to $135 million.

Segment margins improved 200 basis points year-over-year to 14.5% led by LTL shipment growth of 5%, yield improvement of 8%, continued strong system productivity gains.

At Kinko's, operating margin declined largely due to less than planned growth in our nonpackaged and shipped services.

This was due to increased competition and copy pricing, the introduction of a new point-of-sale system that negatively impacted field productivity and the hurricanes that occurred at the beginning of the quarter.

For FedEx Corporation as a whole, as a result of our continued optimism about our networks, the economy and business conditions on a global basis, we raised our annual guidance by $0.20 per share versus the previous guidance we had give you.

Our expectation for the economy is real GDP growth of 3.6% in calendar year '06 and a stable field price environment.

Lastly, our balance sheet continues to improve as all measures improved significantly on strong cash flows.

And with that, operator, I am happy to open the floor for questions.

(OPERATOR INSTRUCTIONS) James Valentine, Morgan Stanley.

Great, thank you.

Great quarter, guys.

We were expecting fairly strong volumes in the quarter for Express because of DHL's problems (indiscernible) the number of shippers who shifted over.

Alan, you said that you would expect volumes to pick up here in the second half of the year.

So I guess I am wondering to the extent you did win volume, it sounds like you think you're going to keep it and that it's not going to go back.

Jim, let me make sure that we get this very clear.

At Express, the volume growth was 1% but it was intentionally constrained as we managed for profitability and not for share.

And at Ground, the 4% was a little bit lower than we would like in the quarter.

But it has accelerated and should be significantly better here in the second half of fiscal '06 and I will let Mike Glenn start and then let Dave and Dan add color to those comments.

Yes, and by the way, when I was referencing to the stronger numbers than we were expecting, I was just talking about overnight Express -- domestic Express.

Jim, let me comment on the Express volumes.

Overall, Express volumes were in line with our expectations during the quarter.

One of the things that we elected to do during the quarter was to exercise some revenue management initiatives, which constrained the growth as Alan talked about.

We dealt with a number of very specific accounts to improve our overall yield performance.

A lot of this volume went over to a different service at FedEx such as SmartPost, which is part of the overall e-tailing pre-shipping promotions.

And that constrained our volume growth, as you mentioned, but that was intentional and had a very positive impact in our overall base yield improvement, excluding the fuel surcharge during the quarter.

Again, from an overnight perspective, the volume was essentially in line with our expectations.

Okay, great.

And in terms of the deferred volumes, we heard of at least one large customer who shifted away from deferred to somebody else's ground product.

Was the weakness there because it looked like it was fairly weak, was that one or two, three customers that made those decisions or was it a broader-based, kind of a larger population of customers that chose to move away from deferred?

There is not a large population, Jim, and those actions were initiated by FedEx as a part of our revenue management and we dealt with those and obviously we would have liked to have kept the volume in the FedEx network but understood what we were doing very specific actions in line with our overall revenue management program.

And so we were initiating those actions and understood the desired outcomes.

Jim, we also had a customer last year who had a specific product a year ago that was in our deferred network that does not have that product and that shipping this year and that also added to the decline.

On a one off basis year-over-year, it is weaker than the trend because of that.

Alan, just let me add one more thing.

This is Dave Bronczek.

If you look at the overnight -- if you look at the overnight volume of our US and our international volumes combined, our volumes actually grew 4.7%.

It is our deferred volume that by design, that Alan and Mike pointed out, was down by 6%.

But on purpose, we moved that traffic out of our networks so it could be more profitable.

Great.

Thanks, guys.

Great quarter.

Donald Broughton, A.G. Edwards.

Good morning, gentlemen.

Merry Christmas.

To a certain extent in the past year, the Brown team has used price as a weapon to stave off a rate at which you have been stealing marketshare from them.

It really kind of appears that your response is that not only you're not going to match their price cuts but you're going to become more aggressive in raising prices.

Since I have argued for some time you're not a cost structure story but a yield story, I am delighted to see it.

But please tell me am I making a gross oversimplification or have you really just become more focused on yield than volume, especially in your Express division?

Mike Glenn, why don't you answer that?

Donald, I would say that our focus is on revenue management, and by that I mean balancing the mix between volume growth and yield improvement to optimize financial returns and I think that is exactly what you saw during this quarter.

Going forward, we're optimistic.

We've got a strong new business pipeline.

Our customer attrition rates are improving due to the excellent service that our Ground and Express companies are providing.

We think we've got a favorable economic environment overall.

But revenue management is the focus as we talked about during the analysts meeting in New York and we have got to strike that right balance.

Mike, let me just add to that.

This is Dave again.

That is exactly right.

At the Express division, we're focused on revenue management coupled with our productivity and our profitability.

If you look at the overall 4.7% growth in my overnight international and domestic package volume, my FTEs only grew 1.6%.

Thus the high productivity and obviously the focus on profitability.

Does that answer your question, sir?

Yes it does, thanks.

Jon Langenfeld, Robert W. Baird.

Good morning, all.

International side saw the volume growth reaccelerating here from the recent quarter.

I am assuming you're going to continue that with the new flight rights coming on.

But how is the profit drag been on those new flight rights?

Has it been as expected, better or worse?

Well the -- this is Alan, John.

We still have some drag from the westbound and eastbound around the world flights.

They are improving daily in terms of their profitability.

They will be in a loss position for the rest of this fiscal year.

And by next fiscal year, they should be in a position to start turning around and adding to cash flows and to the bottom line.

Yes, we did see some acceleration in our year-over-year IP growth rates.

We have a fantastic service; we have terrific people and there is a high demand for it.

To add again to what Alan said.

It is right on track to our plans, actually probably doing a little bit better on the revenue side.

We added the westbound and the eastbound as you all know, opening up more capacity our customers are demanding.

And we're very pleased with where our international growth rates are and we look for them to continue.

Is there enough capacity there to be able to support double-digit volume growth if that should occur over the next 12 to 24 months?

Yes, we have plenty of capacity.

We're looking at additional capacity in the '07 business plan in line with what our customers want to see for where their growth is around the world.

Ken Hoexter, Merrill Lynch.

I just what to come back on the Express side, the strength that you talked about accelerating a bit on the U.S. overnight side.

Last quarter you mentioned that some of it was due to just this point of the cycle you tended to see it and obviously with the integration issues at DHL in September; we should see some more volumes flowing from there.

So I just want to see what is the breakdown from what you see as the time of the economic environment versus what is just spillover from DHL and is that stuff sticky?

Well, again, this is Alan and I will turn it over to Dan.

When I was talked about volume acceleration, I was referring to Ground and the 4% that we saw in the second quarter where our growth now was substantially better at the end of the quarter and is substantially better now into the third quarter and we expect it to remain that for the rest of the year.

As to Express, as Mike and I both discussed, we're managing that growth for yield and profitability.

So let me turn over to Dan to talk about the Ground prospect.

Yes, I don't know how much I can add to that, Alan.

We did have a disappointing October, far below what our expectations were, but that has picked up late in November, the last two to three weeks in November and we are having an excellent peak season.

I think a late peak season and that probably explained some of the slower growth than expected in Q3.

But with everything that we have put together in terms of our pipelines and service levels, we fully expect that that will stay in solid single digits through the rest of this quarter and into the fourth quarter.

So, again, much better second half expected than first half as far as growth is concerned.

Mike, do you want to talk a little bit marketshare?

Well, as we've talked about, the primary focus that we have is more so on the revenue side of the house, managing revenue shares as opposed to volume share.

Obviously, we watch both very carefully.

Ground volume was below our expectations during the quarter.

But even at this rate, we're growing faster than the market.

And we anticipate continuing to do that as has already been discussed.

On the Express side, again, very specific actions taken and as we talked about during the last earnings call, we did not anticipate the Express market to continue and our performance in the Express market to continue at the rate that it was going because we knew these actions were underway.

And we expect that the Express market will continue to perform overall below GDP as we talked about in New York at the analysts meeting.

But again, revenue management is really the watchword for us at this point.

Great, if I could get my follow-up, sticking with Dan on the Ground side.

Can you kind of detail some of the projects that you're putting in place to get the Ground volumes up and since they are staying a bit below your target, does that revise your CapEx forecast of that 10% growth to meet capacity growth?

Well, we have built out the network to expect high single digit, low double-digit growth and we have cut that back where we could so our CapEx forecast for this year has been significantly reduced at this point.

But again, for the long term, I think we are going to do just fine.

As far as where our growth is coming from, we're not going to change our strategy.

We're totally focused on the company.

We are obviously a strong brand.

The bundle is very important to us.

We think we have a faster, more reliable service, more and more scanning, more information to customers, improved quality.

So again, I am quite bullish that we're going to do just fine in the marketplace and continue to increase our marketshare, as Mike has mentioned.

I might add one of the driving factors behind the Ground number in the quarter was volume from our existing customers was a bit lower than we anticipated.

A couple of factors involved there.

One, as Dan has already mentioned, we saw a little bit later peak than we anticipated.

And secondarily, there were some changes in how these customers managed supply chain.

Some of this traffic that we expected to go into the parcel market went LTL.

We hope that those will revert back to previous trends.

But again, regardless of that, we're seeing momentum in the quarter.

Tom Wadewitz, JPMorgan.

Yes, good morning.

I think my questions are -- or my question is on the cost side and the timing for trying to take this action on deferred.

How should we think about your cost savings you get from taking out the deferred because I tend to think of the overnight product as being more of the constraint and it's not that clear to me how you take out capacity or reduce costs as the deferred volume comes down.

I guess if you give a thought on the cost side performance going.

It does, at least versus my model, your cost performance was strong across quite a few different line items and I want to get a sense of whether you think that continues?

That is an important strategic question.

First of all, to the extent that we have capacity in the domestic Express network to handle International Priority shipments at a much lower cost that have significantly higher yields, that is a terrific contributor to our bottom line, as we have said.

Our contribution on additional International Priority revenue is somewhere around 30%.

This is Fred Smith here.

Let me talk about -- answer your question in a little broader sense and then ask Dave Bronczek to flush it out.

We are very confident that we can continue to improve our margins in our Express company.

And that it is going to result from a combination of upstreaming the traffic, yield management and excellent cost and productivity controls.

And there are several levers that Dave and his team have that they can be pulling on at any one time and it doesn't lend itself to a short answer here on the conference call.

But as Alan mentioned a second ago, one of the great things that is going on is we are taking the same resources, the same pickup and delivery folks, the same lift and sort capability and using it to move International Priority traffic through the U.S.-based network.

That is the reason on almost every call I have pointed out to you you have got to look at Express as a worldwide network even though we have to report it as domestic and international.

It is really a single network.

Dave, do you want to --?

Well, that is exactly right, Fred, and obviously everybody on this call knows that for several years now we have been working on a multiple attack front on marching our operating margins to 10% and we're very pleased with where we are.

Last quarter this year of course we were at 6.9% margins.

Now we're at 8.9%, up 200 basis points.

But it's our international focus for international growth and profitability.

It's our yield management programs in the United States.

It's our cost programs in the United States.

We have detailed plans and execution models that we go through every week and we are very pleased with where we are on all of the levers that we look at for the profitability slide.

So it is a good question and yes, your right, we're doing better than probably you thought we were doing on our cost.

But we are right in line with where we want to be with our costs.

Jason Seidl, Credit Suisse First Boston.

Good morning, gentlemen.

If I can go back to deferred a little bit.

Your yields on the U.S. deferred side were much higher than we had anticipated.

Does that go back to what you were talking about in terms of your revenue management?

That's exactly the issue that's driving it.

Should we expect that to continue going forward for the next two quarters?

Well, obviously, the shift in volume that we have seen will continue going through the third and fourth quarter.

Now in terms of exercising these tactics, we will do that from time to time as the business needs are there.

But this is just part of an overall revenue management strategy and really is that walking that line between balancing yield improvement and volume growth to insure that we maximize financial returns.

For my second question, also, in your outlook, you mentioned you deferred some promotional advertising expenses to the second half.

Can you quantify that with a number?

It wasn't material.

But it was just to give you a little bit of an idea of part of what was the impact on the second quarter.

Okay, so we shouldn't expect there to be any sort of a drag in Q3?

What we moved to the second half is in our new guidance.

Ed Wolfe, Bear Stearns.

Good morning.

You've talked a lot about revenue management on the call.

And it would seem that the market is allowing you to improve your yields.

The volumes have been a little lower on the domestic side and on the international slide, it seems the opposite.

We saw your volumes step up this quarter and the yields come in a little bit.

Is that a fair assessment that that is what the market is affording you?

And can you talk about the competitive market just relative to each other?

If you had to say it's a little bit more competitive in one product versus another, Ground or air, international and a little bit less competitive in one.

Could you give us a sense of that?

Well, I will start out.

The market is competitive and always has been.

And there have been a couple of comments relative to one competitor that was experiencing some issues and the opportunities that might be afforded FedEx as a result of that.

And that is correct.

Having said that, we have been very selective in pursuing those opportunities primarily due to the yields that are attached to that business.

And when we take on new business, the first and foremost objective is to make sure that we are getting compensated accordingly for the outstanding service that we're providing.

We continue to pursue opportunities, but we pursue them with our eyes open and I think that is the issue that we are dealing with there.

But the market remains competitive.

And it's competitive both on a domestic Express, domestic Ground and international basis.

And clearly a bit more competitive internationally this last quarter.

But again, that is -- I think if you look at the bottom-line results, we have done a good job of managing and balancing our volume and revenue growth to deliver the financial returns that we did.

As a follow-up, can you talk a little bit about what the fuel impact had on the quarter as you look at it, as you see it in the different productlines as well?

It was really insignificant through the quarter.

It's an important thing going forward.

We're talking about in our guidance, fairly stable fuel prices.

We paid in the second quarter about $2.23 per gallon in jet fuel, which was significantly higher than the previous year.

But we also had a substantial fuel surcharge at Express.

The second half, we're looking around $2 and if it is steady then the surcharge will work perfectly and won't have any impact on the second half either.

I'll say the fuel surcharge at Express was certainly at the high end of our comfort range.

But again, we made a very informed decision there regarding the potential elasticities involved in that and I think correctly sized that up.

Having said that, we're delighted to see that the fuel surcharge for January is going to be about 50% of where it is now.

Scott Flower, Citigroup.

Yes, good morning all.

Just a couple of quick questions.

The envelope traffic continues to be fairly solid, up 6%.

I know that Mike in the past and the last call had told us to be a little careful and not try to overextrapolate from current trends.

I'm just trying to get a sense is that one off customers, is that comparisons or are you just seeing a little bit more robustness based on your business mix and different customers that are more envelope intensive?

I think it is the latter, Scott.

Clearly, we have had some stronger results from some individual customers that we brought on in the past and we expect that to continue.

Okay, and then I guess the other question I had and I know you have addressed this partially by a late peak season in Ground.

But given that you were doing some yield management on your deferred traffic and a lot of those alternatives you were offering to customers in addition to staying at higher yields in Express were going over to Ground.

Is any of your greater comfort as you look toward second half the fact that you have moved some of those customers over to Ground and they may not have hit for the full quarter but they will be in the volume stream as you look toward the second half?

No, that's not really a huge factor in terms of what we see for Ground.

As a matter of fact, a little bit to our surprise, a lot of the Express volume that we saw move actually moved into SmartPost as part of a promotion for free shipping in the e-tail environment.

So it really didn't show up in the Ground network as you might anticipate.

And we're not counting on that going forward.

What we're counting on is a good solid pipeline.

As I mentioned before, I am delighted that our attrition rates, our volume attrition rates continue to improve in both Express and Ground and general economic conditions.

So it is just managing the business.

I'd also ask Dan to talk a little bit about our wonderful SmartPost product and the growth opportunities that we're seeing there.

Yes, we saw excellent growth quarter-over-quarter here at SmartPost.

We are expanding the network to meet demand, improving service, increasing our penetration to the DDUs, or local post offices.

So I think it's an important part of the overall FedEx bundle helping both Express, Ground and Home Delivery services.

I think ultimately, we're going to have an excellent service and a profitable one as we go forward.

To this point, we have not released volumes at SmartPost but they are pretty strong and we're having an excellent peak season there as well.

Jordan Alliger, Deutsche Bank.

Hi, quick couple of questions.

I understand the revenue management side of the equation.

I guess sort of two questions offshooting from that.

One, sort of why now in the earnestness as we go into the peak season when presumably there is a lot of opportunity from a price standpoint and then secondly, given the yield management, what is the Ground volume growth that you need or expect to see the coming quarters, so to speak, in light of the fact that the capacity expansion, give or take about 10% a year?

In other words, what is the level of Ground volume growth that you need to see in order to feel comfortable with your productivity and cost initiatives on the Ground side?

Well, I don't think it is worthwhile, quite frankly, for us to go into that level of detail.

I think the numbers speak for themselves.

We have raised the guidance, which implies that we're going to have substantial growth at our companies and I don't think as a general rule, we give answers about forecasted future volume growth with the specificity that you have requested.

Dan basically told you what he is building out for and we have mentioned that Ground growth rates increased substantially in the recent weeks.

So I believe we have to leave it at the fact that we are raising our guidance, which again implies solid growth rate and revenue management.

One final question, one final point here that I think is very important.

Revenue management is not just account specific; it is traffic specific.

And as average shipment weight goes up, revenues per transaction go up.

A large part of both Express and Ground cost structures are based on transactions, not weight.

So as average weights go up, that tends to go to the bottom line at a disproportionate rate.

And I think, finally, I would like to say that this phenomenon about moving certain traffic into the SmartPost network is a direct result of what is going on in the e-tailing business.

A lot of the e-tailers are finding out that they can stimulate their business by having no shipping fees.

So they like very much the very, very good value proposition that we offer in FedEx SmartPost.

We give an exceptional product with good information visibility at very low cost.

So I think it is important to talk about those sort of macro issues, and I hope you will forgive us because we just don't want to get into handicapping exact percentage gross for the quarters ahead, but they are reflected in the quarterly guidance we have given.

I will give you handicap, Jordan, that you say why now?

Actually, we have been doing this -- this company is totally focused on return on invested capital, improving our cash flows, and we are not after marketshare for marketshare's sake.

So this is an opportunity for us to improve those cash flows and return on invested capital, and that is exactly what we're doing, moving the resources to the right place.

As to Ground's growth, we are perfectly capable of managing our CapEx there to what we see as growth.

We still are on our expansion plan that we have talked to you about and we may move in a couple of quarters, but we still are overall confident in that.

So, hopefully, that helps.

Thank you.

David Ross, Stifel Nicolaus.

Good morning.

This is probably a question for Doug.

I wanted to talk a little bit more on the freight segment.

You talk about yields up 8% year-over-year.

I wanted to know if you could break down the mix of that a little bit, in terms of what the weight per shipment trends were, like the haul trends in the segment?

David, this is Doug.

You came in garbled.

Can you say that one more time?

Okay, I will pick up the headset if that is better.

I wanted to know if you could talk about the yield improvement in FedEx Freight a little bit and what the mix trends were in terms of weight per shipment and length of haul in the quarter?

Well, the weight per shipment was up 3%.

The yield in total was up 8%, and the length of haul I don't think was significantly changed year-over-year.

You know, the portions of that, the breakdown of that is a good portion of that yield increase was the fuel surcharge going up.

But we also have had a good general rate increase we took on 5-16 and we have been able to retain that, and we have had excellent contract renewals with year-over-year increases in them as well.

So overall, we're very pleased with the yield management numbers.

Excellent.

If I could just ask one question on your growth in shipments over the Internet.

You talked earlier about the 1.1 million shipments over the Internet earlier.

I know some of that goes through Express, some Ground, and some SmartPost now.

Where do you see the growth rates trending in that segment and how much of a piece of your business is that from the volume side?

Well, the volume that you're seeing coming through FedEx.com is really the channel through which the volume enters our system, and I think that is a tremendous tribute to the ease and flexibility and ease-of-use of FedEx.com as a way for customers to access our services.

So it is so easy now, you just kind of point, click and ship as we say, and customers really do like that and all of the features that are included in FedEx.com.

So we anticipate that volume through that channel to continue to improve over time as we continue to make enhancements to the channel.

Art Hatfield of Morgan Keegan.

Good morning, guys.

Alan, I just got one question, and hopefully I word this right for you.

But you had mentioned that your expectations for calendar '06 are for GDP growth of 3.6%.

I understand the guidance you have given is really just for the first months -- first five months of '06.

How closely tied are you to that 3.6 number, meaning can you adjust your cost sufficiently enough say if GDP comes in at 2.5%, to be able to still feel comfortable about making your estimate targets?

Art, that is a great question.

We are right in the middle of our fiscal '07 planning process right now.

That is the stake in the ground that we have right now to develop our marketing and revenue forecast.

This company over the last several years has become nimble in its ability to manage its CapEx and its costs, and if growth would decelerate to that level, we will very easily be able to manage down to that.

We would not be able to easily manage down to a decline or a recession but we would certainly be able to manage to it to a certain degree.

So within a relative range of the 3.6 on the downside, we're very able to do that.

On the upside, we just handled almost 9 million packages on Monday, which is a 40% increase from what our normal average day is.

We were able to do it with very high service levels.

So on the upside, certainly we can handle that very well and that would be a real plus to the '07 numbers.

Great, thank you.

That's very helpful.

Helene Becker, Benchmark.

Thank you very much, operator, for taking my question.

Hi, everybody.

Just a couple of questions.

Could you, more on the international side, could you just talk about the China routes.

Maybe, Fred, could you talk about how that is developing in the system and are you getting more China routes in March of '06?

And what kind of growth rates you're seeing and kind of expecting to see there?

Thank you.

I'm going to ask Dave Bronczek to answer that because he is much closer to the China operations which belong to him.

I just wanted to say that the westbound and the eastbound around the world flights that we already put on this year, of course with all the additional route authorities that we receive is helping tremendously.

We're anticipating more rounds of talks in more frequencies.

We have a lot of utilization that we are anticipating for those routes.

I can tell you that we're opening up more points in Asia.

The eastbound around the world flights that we have put on in September were significantly important because they came right out of China right back to the United States where we actually were at capacity constraints.

Westbound went around the world the back way of course through India and into Europe.

So they have been very significant for us.

They are opening up the capacity.

If you look at the numbers specifically, you can see our freight pounds went up 21%.

And a lot of that is because of that capacity we put on.

Okay.

Great.

Those really were my only questions.

Thank you.

David Campbell, Thompson & Co.

Yes, thanks.

In the international business, could you just say where was the best growth and how were your U.S. export business in the second quarter?

This is Dave Bronczek again.

I can tell you that the strong growth in revenue, almost 14.5%, came from the United States, Asia and Europe.

Our three kingpin regions around the world performed exceptionally well.

So did the U.S. exports, right?

U.S. exports, Asia in general and Europe.

That's right.

Thanks.

And second question is, the SmartPost business, that stays in the Express revenue category or stays in the Express network, it just basically increases your average weight per shipment?

David, the SmartPost business is in the Ground segment.

And the yields and the volumes are not included in what we externally report, only the results.

David, just to clarify, the volume traveling through the SmartPost network tends to be the lighter packages.

James Valentine, Morgan Stanley.

I have a question on Express' labor costs.

There was some mention about productivity and it's clear with the margin improvement that some came from that area.

But when we look at overall Express labor costs per piece, they were up about 3% and that is the highest inflation we have seen in that area for six quarters.

Is that mostly due to the mix change, the fact that you had more overnight and less deferred or is there something else going on there with the labor costs per piece?

Jim, it's Alan.

A couple of things there.

Obviously our pension expenses and our health care costs were up year-over-year.

We have a new incentive plan where we're investing in our employees to increase more productivity, which has a very high ROI right now.

A win-win across the board and that is also in there as well.

So I think it is something we are managing through and there is nothing there for you to worry about in terms of our future.

Just let me add one more thing, Jim.

If you look at our overall revenue at Express, it grew 11.1% and salaries and benefits combined only grew 4.6%

So some of that revenue growth was fuel surcharge?

Right, absolutely.

But what we're really investing in here is to try to hire and maintain the absolutely best employees, which we think we have.

They are doing an outstanding job.

So all I know is the new incentive program and then pension costs are what pension costs are.

As you know, they are very difficult to predict.

February 28th is our measurement date.

Whatever interest rates are at that point will determine what '07 looks like.

When you look back over the last six quarters, they have been averaging, your labor expense per piece, about 1% and now 3%.

Any thoughts on which number is better to use going forward?

Not really.

I would just say that our expectation is we're going to continue to improve Express' margins and that will mean we will have more productivity.

We have got Rob Carter.

He's not the CIO of the Year for nothing who is everyday inventing new more productivity tools for our workforce to use so they can work a lot smarter.

New roof planning at Ground and Express is helping.

So we will manage our employee costs in line with our revenue growth and we expect to improve overall margins.

Jon Langenfeld, Robert W. Baird.

Another question for Doug.

I don't want you to fall asleep over there.

But obviously you have done a great job on the Freight side.

If you look at the quarter, can you give us an idea on how trends progressed both on a volume and a pricing -- from a volume and a pricing perspective as you move through the quarter?

On the pricing side, I would say it has been firm all through the quarter.

So really no change there.

It's a competitive market but I have not seen any changes in that.

On the volume side, it definitely accelerated all through the quarter.

November was our absolutely strongest quarter for volume.

You're talking about that relative to a year-over-year growth basis?

Yes.

The year-over-year growth basis was much better in November than it was at the beginning of the quarter.

Excellent, thank you.

Jordan Alliger, Deutsche Bank.

Hi.

Two just real quick follow-ups and I apologize if you said it.

Did you indicate how much and which line items that deferral of advertising and promotional expense was in and then sort of secondly, you noted the Ground volume acceleration and I am just wondering if you could give some sense for where it accelerated to?

Thanks.

In terms of the advertising and promotion, it is not material to any large element of expense.

But it did add a couple of cents per share more or less in the quarter.

So I just wanted to make sure that you understood that.

I will turn it over to the other for the Ground question.

As we mentioned, it started accelerating in the latter part of November and into December.

I will be honest, it is difficult to say at this point and we don't comment on forecast or volume projections in the future.

But we hope that the trends that we're seeing in December continue into January and February but we just have to wait and see on that.

And again, you would attribute the slow start to really sort of a later peak season push from shippers than you would have expected?

That is certainly part of it.

The other part, as I mentioned, we saw some relative weakness in our existing customer base.

Some of the larger shippers were not shipping at levels.

As a matter of fact, we are actually down versus where they were last year for a variety of reasons and we did not anticipate that and that was a key driver.

But I think with the stronger pipeline that Mike mentioned earlier, we should do pretty well headed into January and February.

But we have seen significantly increased volumes here in December and last couple of weeks in November.

Ashley?

Yes, sir?

This is Jim Clippard.

I think with that, we will call an end to the call today.

We appreciate all of you ladies and gentlemen being on the call.

Thank you very much and for your questions.

And we will be working with you throughout the quarter.

Good luck and have a happy holiday.

Bye.

Thank you.

That does conclude today's teleconference.

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