聯邦快遞 (FDX) 2006 Q4 法說會逐字稿

Good day everyone and welcome to the FedEx Corporation fourth-quarter earnings conference call.

Today's call is being recorded.

At this time, I will turn the call over to the Vice President of Investor Relations, Mr. Jim Clippard, for opening remarks and introductions.

Please go ahead, sir.

Thank you, Felicia.

Good morning, ladies and gentlemen, and welcome to the FedEx fourth-quarter earnings conference call.

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

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

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

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

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

I went 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 and its subsidiaries' press releases and filings with the SEC including, but not limited to its reports on Form 10-K and 10-Q.

Please note that we will implement the new accounting rules for expensing stock options this fiscal year, which began on June 1, 2006.

We anticipate that the impact of the adoption of these new rules will approximate the pro forma results presented in our SEC filings.

For further information, please refer to the footnotes to our financial statements in our most recent 10-Q and upcoming 10-K.

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 Developing and Corporate Communications;

Chris Richards, Executive Vice President, 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 Ken May, 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.

Thank you very much, Jim.

Good morning everyone and thanks for joining our fourth-quarter fiscal '06 earnings conference call.

As numbers show, FedEx strongly finished fiscal year 2006 with record fourth-quarter and full-year revenue and earnings.

Our financial results for the quarter and the full year reflect one, outstanding customer service, delivered by our unique business strategy of operating independently, competing collectively and managing collaboratively.

Two, continued growth in our international, ground and freight businesses.

Three, the leadership of our management team and capitalizing on opportunities.

And four, continued expansion of operating margins at are core transportation companies.

In FY '06, we continued to strengthen our competitive position and we announced plans to acquire DTW Group's 50% share of our International Priority Express joint venture and DTW Group's Domestic Express Network in China.

And secondly, we acquired or agreed to acquire Watkins Motor Lines, a leader in long haul, LTL freight transportation in North America.

Now both of these planned acquisitions meet our oft stated criteria for corporate development projects.

We applied strict financial discipline and due diligence to enhance shareowner value.

We made sure that there was a good, strategic fit that was synergistic to our existing operations.

And last, and by far, the most important probably, is that we are very sure that we can manage the cultural issues that are crucial to integration.

We believe that these corporate development plans will greatly benefit our shareowners, our customers, and the entire FedEx team.

Other notable actions during the fourth quarter or shortly thereafter include last week's launch of FedEx Critical Inventory Logistics, an innovative supply chain service that uses FedEx Kinko's locations to help customers manage high-value and time-critical inventory; our raising the quarterly cash dividend 12.5% to $0.09 per share on FedEx Corporation common stock was also notable.

We unveiled a major expansion project for FedEx Express at are Indianapolis hub.

And finally, the announcement that Dan Sullivan, President and Chief Executive Officer of FedEx Ground will retire effective next January 5, 2007, after 35 years with the Company and its predecessors.

In 1983 Dan founded RPS and the ground small package carrier became one of the fastest growing transportation companies in history.

Under Dan's visionary leadership, FedEx Ground provided outstanding service to millions of customers and has become an important part of the total portfolio of FedEx services.

Dan will be succeeded by FedEx Express Executive Vice President, David Rebholz.

I'm very happy to note two recent honors that were earned by the FedEx team.

The latest American Customer Satisfaction index survey rated FedEx number one among all companies rated for this quarter, a testament I think to our goal of making every customer experience outstanding, the purple promise.

And Black Enterprise magazine named FedEx Express among those it considers to be the best companies for diversity, citing the diversity among our senior management.

As we look ahead into FY '07, we see solid economic growth in the United States and international markets, continued growth in FedEx International Priority Express, U.S.

Express Overnight Box, FedEx Ground, and FedEx Freight, and we intend to continue to improve operating margins in our transportation segments.

We will remain focused on improving shareowner value, return on invested capital, cash flow and improving margins.

And on that note, let me turn it over to our Chief Financial Officer, Alan Graf.

Alan?

Thank you very much, Fred.

And good morning everyone.

This morning we are very pleased to discuss yet another very strong quarter for FedEx Corporation.

For the fourth fiscal quarter ending May 31, our earnings per share were up 25% year-over-year to $1.82.

Our margin expanded 130 basis points to 10.9% and we generated very strong cash flows and significantly improved return on invested capital.

The net cash provided by operating activities exceeded cash used in investing activities by over $1.2 billion.

During this quarter, we also demonstrated some very strong earnings leverage.

Starting with Express who achieved a 10% operating margin which is 160 basis point improvement versus last year on a revenue growth of 10%, just outstanding performance.

Ground grew revenue 15% and at the same time expanded margins to 14.6% which is a 60 basis point improvement.

Freight's revenue grew 15% as well, and operating margins increased an astronomical 330 basis points to 14.6%.

Kinko's performance continued to be constrained as we invested in training and additional employees to improve quality and customer service.

Kinko's is also gearing up for an extensive expansion program to provide more points of access and improve customer convenience which will improve our returns over time.

As for the FY '07 outlook, we're providing initial guidance of $6.45 to $6.80 per share for fiscal '07.

This includes $0.15 per share of expense resulting from the adoption of the new accounting rules for stock option and other share-based payments.

I should note $0.05 of that will occur in Q1.

We will spend about $2.9 billion on capital investments of which 75% are for growth activities.

As Fred mentioned, we will also invest $1.2 billion for the acquisition of Watkins and our joint venture partner in China.

All of that is easily affordable as we have almost $2 billion of cash in the bank.

We have a well funded pension plan which covers our accumulated benefit obligation in the U.S. plans, and $10 billion of assets.

All in all, we're looking forward to another strong year in FY '07.

Now we're happy to take your questions.

(OPERATOR INSTRUCTIONS) Ken Hoexter of Merrill Lynch.

Great, good morning.

Just want to talk about the Domestic Express, obviously, great to see the 10% margin, but it looked like volume slowed just a touch from over the past few quarters.

Can you comment on what the trends are that you are seeing in the marketplace?

Do you expect that to continue?

I know historically you have said that you grow slower than GDP.

I just want to see why kind of the slowdown recently?

This is Dave Bronczek, then I will turn it over to my colleague, Mike Glenn here.

You saw that in the breakdown of our numbers you saw that the deferred part of our Express business was off by 9% driven however on the yield aside by up 11% part of what we've been talking about for the last several quarters on our yield management program.

Overall, our revenues in the United States grew 5%.

You can see that U.S.

Overnight Box and U.S.

Overnight Envelope were both at that 7% and of course offshore we were growing at 15%.

So we're pleased with the process that we put in place and the outlook going forward.

Mike?

Thanks, Dave.

As Dave mentioned, Ken, we have been focused on revenue management across the portfolio and I think it certainly contributed to the positive results that we have seen at Express.

We got much more aggressive in this regard a few quarters ago and we will continue to have some difficult comparisons as a result of that until we cycle around to have more reasonable year-over-year comparisons.

Having said that, our sales team is focused on quality revenue growth and we think we need to continue with that path and feel confident about our ability to provide balanced growth across the portfolio.

Great, and if I can squeeze my follow-in then in on a different subject on CapEx, it looks like you actually didn't get as much CapEx spent this year as you originally targeted.

Just wondering were there any delays in some projects that you would have liked to have had?

Are you pushing some more of that into '07 or is there just not the need to spend the capital as fast as you thought?

Can you kind of delve into that a bit?

Ken, this is Alan, we certainly slowed down the Ground expansion a bit, pushing some of the '06 planning into '07; '07 is now a bigger number than otherwise would have been the case.

But generally speaking, aside from that, it would just be the normal variations that you have on a capital plan, and what quarters you actually spend it in.

As I said, most of our capital spending, three-quarters of it is for anticipated growth needs.

There's only 25% needed to run the day-to-day operations and to replace equipment and computers as we go forward.

So that number is also adjustable depending on economic outlook.

Edward Wolfe of Bear Stearns.

Can you talk a little bit about what is going on on the yield side in IP?

After several quarters of decelerating yield trends in international and down if you took out the fuel surcharge comparison, all of a sudden they swung up 8.5% as you reported the yield and our calculation up over about 5.5% net of fuel.

What has changed in that marketplace?

I will start, this is Alan.

Mike can add to it.

In this particular quarter, we saw significant improvements in the weight per package and also the rate per pound higher than we've seen in a while.

And while fuel surcharge helps, exchange rate actually went against us a bit.

So very strong performance in yield, but with weight and rate per pound driving that number.

And is that the economy or is that something you're doing specifically?

Is that certain regions of the world?

Can you give a little more color on what is driving that weight and rate?

This is Mike.

The revenue management strategies that I'm talking about aren't exclusive to domestic Express.

They go across the portfolio, so we look at these issues and we try to manage our revenue to ensure quality revenue growth.

Tom Wadewitz with JPMorgan.

Hi.

Good morning.

If I could ask I guess a follow-on on the international side, you have had the expansion around the world's flights which came in throughout the year and also had seen some acceleration to volume growth in IP the last couple of quarters and it appears to have slowed a bit in the results in fiscal fourth quarter.

I wonder if you can give us a sense of whether this is the type of growth rate we should look for going forward?

And perhaps why that growth may have slowed in this quarter versus the last couple of quarters?

Yes, this is Dave Bronczek.

Obviously, we started last year as westbound around the world in March and we started the eastbound around the world in September so we will be lapping those quarters.

And obviously we have had very good trends to what we forecasted on the revenue front from both of those major investments in our international business.

As Mike said, we had a 15% revenue growth for international in Q4, very strong, very positive. 9% of that was on the yield front.

We have opened up, as you can see, in some of the follow-on statistics, our freight is growing as well.

So we're very pleased with our international performance, not only in Europe and Asia but in the United States.

Alan, as a follow-up, can you give us any thoughts on trend in Express margins looking at fiscal '07; can you sustain some of the strong momentum you've had in Express margins in fiscal '06?

Can that continue in '07?

Well, we certainly are looking for an improvement in the Express margins in '07 over '06.

Remember that we are on a plane, if you will, to get to 10% for an entire fiscal year.

I think if you look at where we have been, including this fiscal year, and you trend that out, that's sort of the line and I'm feeling where we could be, recognizing that we continue to make significant investments for the future.

So while the around the world flights are both going to improve significantly in '07, they will still be a drag.

What we do with China and the timing on when we can get a hold of that and begin domestic operations is going to have an impact as well.

So improvement and we will see how soon we can get to the 10% for our entire fiscal year.

Jon Langenfeld of Robert W. Baird.

Good morning.

Continuing on the international front, when you look at the volume growth there in the mid single digits, how do you look at that relative to your competitors?

I mean UPS out there growing midteens.

Is a double-digit volume growth rate sustainable by FedEx?

Well, I think there are a lot of factors that go into volume growth, obviously, we have a much larger base of volume in certain segments which com into play.

You have capacity constraints that we have to deal with on certain lane segments.

So I think you have to focus on the revenue growth that we have been able to deliver which has been very consistent, and not get so hung up on individual client growth.

We're very bullish about our international business and our as evidenced by our willingness to continue to invest in that with eastbound/westbound around the world, as Dave mentioned.

So we are quite confident that we will be able to deliver consistent volume growth and more importantly, quality revenue growth.

And is the economy when you look at it from an international side, do you see any change there?

One of the things I notice is that your freight volume international freight volume is down as well.

I think that is the first time in a while we have seen that negative.

Is that economy related or is that capacity related?

Yes, let me jump in here.

This is Dave Bronczek.

On our all-up freight, we're growing very nicely about 12% or 14%.

You are right, on the international freight side, it was slower because we've displaced a lot of our freight with quite frankly, higher margin and higher yielding IP and IP PFS traffic there.

Jordan Alliger of Deutsche Bank.

Yes, hi.

Good morning.

Just a question, in terms of the active revenue management which you guys are involved in now, and you've talked about-- I'm just wondering -- I know it's going to take a while to overlap the cost, but how long does this process go on?

And sort of tying into that, how do you balance sort of the revenue management where let's say less volume is going through the Air Express business, domestically, relative, for instance, to the issues that may or may not arise on an aircraft utilization standpoint?

In other words, do you run into -- how do you balance sort of the revenue management with making sure the airlines have sufficient business in them?

Let me just say that our revenue management strategy is an ongoing process and has no beginning and no end.

It is an ongoing process that we will continue to work and flex as we need to.

I work very closely with the CEOs of the operating companies to ensure that we are delivering a balance between volume growth and yield management to ensure that we hit our margin and our financial targets.

These discussions take place on a weekly basis.

Our CEOs of our operating companies participate in our revenue management committee meetings which happen on a weekly basis so they are very much in tune and very active in the process of making these overall revenue management decisions.

So we have not had any challenges in that regard and think the process is working quite well actually.

Yes, just to add some more color to that, our overnight traffic that we fly on a our planes, obviously, the capacity is -- we have very strong load factors in our capacity there.

Where we have been working the yield management process primarily is in the deferred side of our network.

Okay, thank you.

Art Hatfield of Morgan Keegan.

Good morning, guys.

Alan, just a quick clarification.

I may have misheard you on your CapEx number.

You had said $2.9 billion for '07.

Did you say that that included the 1.2 that you are spending in China and on Watkins?

No, that would be additive to the 2.9.

Okay, good.

And next, can you give us some sort of indication of kind of how volume growth is going through the Kinko's chain at this point in time?

Ken May, do you want to talk about that?

We continue to pick up share through our retail network.

We're very pleased with the volume growth both on Express and Ground, and so those continued to grow and we're very happy with the growth rates.

Could you give us any indication of what the magnitude of the growth is you're seeing?

Well, I'll just leave it at this, that it is double-digit growth rates.

We don't release the figures but we are experiencing in the teens and we're very pleased with that.

Part of our decision to significantly expand the Kinko's network is driven by the fact that we're doing so well on the package acceptance side there and we expect that to continue.

Jason Seidl of Credit Suisse.

Good morning, gentlemen.

First question for Doug Duncan.

Doug, some phenomenal numbers out of FedEx Freight.

Could you take us through some of the volume patterns in the quarter and is there anything specific you are seeing on the yield side out there in the marketplace that would give us cause for more optimism going forward?

Jason, when you look at our results, all the fundamentals are all very solid.

The industrial economy seems to be solid.

We have been able to really push out on the differentiation in the market with money-back guarantee and advance notice and all of that is being very well-received.

And our operators are doing a good job of taking the market share that we're gaining and reflecting that in the growth and density and really coming in with much higher efficiencies.

So when you look at value proposition that we are giving the fastest cycle logistics market, it is a value-add that they are willing to pay for for the speed and certainty that they get and the differentiation and the operating efficiency.

It all just comes together and it's all just very strong at the moment.

And getting back to part of my question, could you take us through some of the volume trends in the quarter?

Obviously, this was our biggest quarter of the year from a year-over-year growth rate, and it was pretty solid and even all through the quarter.

So if anything, we are on an accelerating trend at the moment.

David Ross of Stifel, Nicolaus.

Good morning.

Just a follow-up on those freight questions a little bit, pricing seems very firm out there right now and the volumes you were talking about are also accelerating.

How much of that is the market share growth you were talking about versus just the underlying industrial economy being strong and overall market growth?

If you could divide up the volume, that would be great.

We grew shipments average daily volume about 8% and tonnage about the same.

I think the LTL market, in general, is growing at about the rate of industrial production which is roughly half of that.

So I think you could make a rough abstract guess saying that half of it is market share growth and half of it is coming from the economy.

Okay, great.

And if I could ask just one question on FedEx SmartPost, now that a very large parcel consolidator has been out of business for a little while, what have you seen on that side?

How profitable is it?

What are you seeing on the volumes?

Dan, do you want to take that?

Sure will.

We have seen excellent growth at SmartPost and of course these are not in the ADB numbers that we released today, but since the bankruptcy, again, we have seen great growth.

We're just slightly unprofitable at SmartPost at this time, but we are investing in infrastructure in the network to grow it out to take advantage of the growth we have already got and that that we expect going forward.

So I'm very pleased with the overall performance of SmartPost at this point.

Gary Chase of Lehman Brothers.

Good morning, guys.

Just a question on the outlook where you mentioned particularly relative to Express, growth in international and in Overnight Box, not mentioned are letter and deferred.

Was just curious if there is any market segment color around that or if that is just sort of what you anticipate in terms of further revenue management initiatives that you have been talking about?

Well, a lot of it is driven by the revenue management that I talked about earlier.

Obviously, the letter market is driven quite heavily by mortgage financing and refinancing, and we need to be careful about that particular segment as interest rates grow up.

But I would say overall, it is driven by revenue management strategies.

Have you seen anything yet in the volumes that you are seeing by customer segment or is it just sort of the you knew you wanted to be a little bit more conservative on the outlook there?

No, I think it is very -- our outlook is very consistent with where we think we need to be, given the balance between volume growth, yield enhancements that are required to hit our financial goals.

Helene Becker of Benchmark.

Thank you very much, operator.

Hi everybody.

Alan, did you say what your pension contribution for this year would be?

No, I did not say what it would be.

And you know, that is obviously a very fluent number, depending on markets, interest rates, performance of the assets that we have.

But I would say for '07 we're looking in the range right now of $450 million or so.

But again, I reserve the right to change that depending.

Okay, and then just on one other question on the balance sheet, I see that the current portion of the long-term debt is up to 850.

Can you just go through what the components are because it looks like on a year-on-year basis the long-term debt came down quite a bit, but it looks like it just moved up to a current portion.

So maybe you could just take us through what is up for the next year on financing?

There are several pieces of it.

Some of the debt that we used to purchase Kinko's is going to mature in fiscal '07.

We have capital leases that continue to have components that mature every year.

So it is just an ongoing, normal part of our operations, and it is easily affordable for us to handle that repayment.

We paid down overall debt, year-over-year, what was it, Alan?

It was about $370 million.

Obviously, with the cash balances that we have, and the cashflow we expect to generate, I'm not worried about the checkbook this year.

[Scott Flower] of Banc of America Securities.

Yes, good morning all.

A couple of quick questions.

I was just wondering, when I look at core yields trying to adjust for the changes in the fuel surcharge, it looks as if things on base pricing, understanding there may be mix in there, are getting firmer and I'm just wondering whether Mike Glenn or Dave Bronczek or others could comment whether is pricing just getting firmer in the marketplace?

Scott, I would say that we have not seen a material change in the overall pricing environment over the last several quarters, and I would say that that would probably remain consistent in FY '07.

So I would say we have not seen a material change in the pricing environment.

Okay.

Let me add something to that too.

I think this is important.

We talk about revenue management as though we can sit here at headquarters and dial dials and make it happen.

The fact of the matter is we've got a world-class salesforce, highly professional, knowledgeable and extremely effective who in my view are second to none who are making this happen every day.

Okay, and the other question is obviously including fuel surcharge, the nominal numbers in terms of increases are quite high now, obviously there aren't a lot of alternatives, but are you seeing any affect as yields grow so quickly on elasticity?

Well, I don't think there is any question that customers make decisions based upon fuel surcharges and things of that nature.

Having said that, with the breadth of the FedEx portfolio if they elect to make those decisions we have all of the services that they need to manage their business based upon any issues that they face at any given time.

So clearly, we see on a customer by customer basis as fuel surcharges increase, some make the decision to push some of the traffic down to a more deferred service type, but again, something we are very comfortable managing going forward.

(OPERATOR INSTRUCTIONS) David Campbell of Thompson, Davis & Company.

Yes, good morning, everybody.

I wanted to ask if there is any explanation for the international package growth slowing down from roughly 10% in the third quarter to 6% in the fourth quarter?

Is there some particular regions of the world where the growth was slower?

Yes, this is -- no, there is not really -- the fourth quarter obviously for us is our biggest quarter so on a year-over-year basis it would be a harder comparison.

But again, we really focus on the topline all-up revenue and of course that grew pretty consistently at 15%.

I think we have been growing at that rate for the past several quarters now.

Right, but all regions of the world had the same growth rate or there is different growth rates?

Well, I would say that the same trend is in place, Europe and Asia have led throughout the whole year.

It is still the case in Q4 and the United States is strong as well.

Rick Paterson of UBS.

Good morning.

What was your volume growth rate out of Asia and out of China for the fourth quarter?

We don't break down specific lanes of the world, but all-up again the revenue was 15% led by 9% on the yield and 6.3 on the overall volume and led by Europe and Asia.

No follow-up?

Donald Broughton of A.G. Edwards.

Good morning, gentlemen.

Great quarter.

Exceptionally strong number, operating margin, especially.

I'm assuming the integration of Watkins we're going to see continued revenue growth there, but scoring 14.6, 15% operating margins isn't in the near-term plans that we will see a little bit of margin impression as Watkins is integrated.

Is that a correct assumption?

Can you give us a little guidance on what to be looking for on that line?

I'll start and I'll let Doug clean me up here a bit.

Certainly, we are not going to -- we will see a little bit of dilution of that overall margin number once we get a hold of the Watkins operation, clear all the regulatory hurdles and begin the integration process in fiscal '07.

As we've said, there is not going to be a material impact to FedEx Corporation from that acquisition in the fiscal year.

However, over time, as we integrate, reengineer and rebrand Watkins, we're going to see significant improvement in what they earn on their margins as we change, I believe, the long haul, less-than-truckload industry.

And so, over time, we expect to get very strong results from Watkins.

Doug?

Yes, Don, obviously we have got some work to do once we get Watkins in the fold.

But as Fred said, this is going to be a phenomenal cultural fit and we have got a pretty good track record at integrating these companies and there is such a huge customer opportunity in the long haul sector.

So I really think we will improve that company very rapidly as we integrate it and it is a very, very strong cultural fit.

So it will fit right in and I think given the track record we have had of integrating companies I think we can bring this one up to speed pretty quickly.

Given your track record, Doug, I have no doubt that you can produce that.

The question is, do you see any structural reason why long haul, LTL, can't produce -- you can't produce the same kind of operating margins with that business that you produce with the regional LTL business?

Well, having just completed a quarter with 14.6 margins, which is just way out there for a trucking business, I am not willing to sign up for that and we don't even have the keys to it yet.

But it will be a very good business and I think we will improve upon it and have much the same track record there that we have had at FedEx Freight within time.

Jon Langenfeld of Robert W. Baird.

Alan, just looking at the guidance, obviously a very strong first quarter.

You are expecting the balance of the year would indicate a significant deceleration.

It that just your conservative nature or are you seeing something in the economy that gives you more caution as you move into the second half of the year?

Well, we always try to give you our best feelings in guidance.

We're not trying to be intentionally conservative.

I recognize several of you have pointed out that our track record has been that we have overdelivered, but again, I think part of that is just the unbelievable execution that we have been providing.

Did I expect to have a 14.6% margin in freight in fiscal '06 sitting here a year ago?

Absolutely not.

Did I underestimate the capability of our salesforce to do this revenue management?

Maybe a little bit.

This is where I think that we're going to come in with for the year and I think if you adjust that range for the $0.15, or you adjust last year for what would have been $0.14 for stock options and other share-based compensation, that is right in our wheelhouse of double-digit earnings per share growth.

And as long as we can continue that, I think that as a management team we're being very effective.

Okay, that's fair, and so nothing on the economy side other than the headlines and the speculation that may be out there, there is nothing you are seeing in your business today relative to a weakening economy?

No, not at all.

As Fred said, he's remaining optimistic, as we all are.

Our planning purposes, we're looking at a fiscal '07 GDP year-over-year growth of about 3, 3.2.

So you know, obviously it remains to be seen whether that will hold, but right now, I would say we're definitely on track.

Edward Wolfe of Bear Stearns.

Yes, a follow-up and first of all, congratulations, Dan, on the retirement news.

There has been a lot of news lately about the different court battles and different noise on the independent contractors on the ground side.

Could you give us an update on where that stands and what you expect over the next twelve months or so to come out from that and if you're doing anything different as a result of some of those suits?

Let me as Christine Richards, our General Counsel, to comment on it first from the legal perspective, and then Dan to comment on it from the operating perspective.

Good morning.

The appellate review of the California case, Estrada, is proceeding as planned with the briefing schedule going along.

We don't anticipate a decision on that in this calendar year.

The multidistrict litigation in Indiana is in the initial discovery phases and that is moving along as you might expect with good progress.

I do want to emphasize that ground has in place a number of practices and policies in the way it handles both its treatment of its contractors and its treatment of its employees that assures that we have the operating environment that creates a workplace that we are all proud of and that are consistent with meeting the needs of our businesses and our customers.

We do have a very sense extensive contractor relations program, which we have beefed up in the past few years, and we have in place a kind of protections for all of our employees that you would expect in a company of this quality.

So for instance, should an employee or a contractor have concerns at this point in time, they have a way to address those concerns through an anonymous hotline that we have had in place for several years.

We feel very confident in our ability to defend all of this litigation and we do appreciate that there is a tremendous amount of management time spent in working through this process.

This is Dan.

Thanks for the comments and to add onto what Chris has said, first of all, the litigation issues that she has addressed have had no impact on our business.

Our productivity continues to improve.

It is better than it has ever been.

The vast majority of our independent contractors want to be just that.

They enjoy what they are doing, they are growing their business, they are building equity in their business, they are providing higher levels of service than ever.

So obviously, the litigation is an irritant to us.

Chris and her team are doing a fantastic job with that, but as far as the operating side is concerned, it really is business as usual.

So we are obviously pleased from that perspective and the overall reaction of the our contractors, which as you know, we had have in place since we started the business in 1985.

So there is no proactive move to try to make them look a little more independent or something like that that you're taking?

Or you expect you need to take over the near term?

No, there is no proactive move at all.

They are independent contractors, as I said, they invest in their business, they expand their business, they hire their own employees, they can let those employees go as they want.

I mean they don't look at all like an employee.

Chris mentioned that we have, over time, invested in our contractor relations area.

We have a senior vice president in that group that reports to me, and they really are the advocate for our contractors to ensure that they are treated just like that, and if they have any issues that they are well vetted here at headquarters.

Jason Seidl of Credit Suisse.

Just a quick follow-up here regarding Kinko's, you said there were some extra trading costs in the quarter.

Can you quantify those for us?

Jason, we've spent several million dollars retraining every employee in the organization.

We're not through with that, but we're doing everything we can to instill that purple promise that Fred mentioned into the organization.

Kinko's, when we bought the company did not have a training department so we have put up a training department and are in the process of focusing on improving that customer experience that people love, see when they come into our branches as well as continuing to integrate the two companies.

And you said that will continue going forward.

How many more quarters do you expect this to continue?

Well, this training organization is going to be in place from now on.

It's going to be one of those things that we never quit training our employees and so those costs are going to be in there.

But we think we're going to get a return on that by reducing our turnover.

Our turnover when we acquired the company was too high and we're seeing that come down as a result of investing in our employees.

Okay, thank you.

David Campbell of Thompson, Davis & Company.

Yes, I wondered if there are any other extraordinary or nonrecurring expenses in the rest of the Express unit in the fourth quarter?

No, nothing material, David.

That is a true, good operating margin that Express earned of 10%.

Okay, I think that about answers all of my questions.

Thank you very much.

Edward Wolfe of Bear Stearns.

Mr. Wolfe, your line is open.

Please check your mute button, sir.

Hearing no response, Mr. Clippard, I will turn the conference back to you.

Thank you very much.

Thank you very much, ladies and gentlemen, for joining us today.

I want to thank all of my colleagues for their participation.

Our colleagues in Las Vegas are up extremely early this morning.

For that, we are grateful.

So thank you all, and have a good day.

And that does conclude today's conference call.

We do thank you for your participation.

You may disconnect at this time.