聯邦快遞 (FDX) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Federal Express Corporation first quarter fiscal year 2007 earnings conference call.

Today's call is being recorded.

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

Please go ahead, sir.

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

I am 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.

We are planning an investor meeting in March here in Memphis, so please save Tuesday, March 27 and Wednesday, March 28, 2007 on your calendar.

We will have more detail about the meeting for you early next year.

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

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

Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially, 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, included but not limited to, its reports on forms 10-K and 10-Q.

In our earnings release we include certain non-GAAP financial measures.

We may discuss these non-GAAP financial measures on this call.

Please refer to our earnings release available on our website for further discussion of these measures and a reconciliation of them to the most directly comparable GAAP measures.

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 General Counsel and Secretary;

Rob Carter, Executive Vice President and CIO;

Dave Bronczek, President and CEO of FedEx Express;

Dan Sullivan, 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.

Jim, thank you very much, and good morning to all of you on the call.

Thank you for joining it to discuss the FedEx financial performance in the first fiscal quarter of FY '07.

FedEx began FY '07 by once again delivering strong revenue and earnings growth.

We are confident we will continue to achieve solid profitable growth as global commerce expands and customers increasingly depend on the unique value FedEx delivers through its unmatched portfolio of business solutions.

Our solid financial results for the quarter are based on four principles.

Number one, a clear focus on understanding our customers' changing needs and responding with innovative solutions; two, a unique business model that adds value through our ability to offer bundled solutions through strategic cross-selling of services and our unparalleled global networks that can flex quickly to take advantage of market opportunities.

Third, management commitment to improving revenue growth, yield management and controlling costs; and last, smart, strategic investments that broaden and deepen the reliable best-in-class services provided by FedEx.

There were several noteworthy events during the first quarter that demonstrate our determination to profitably grow our business and provide shareowner value in the future.

The completion of the 780 million cash purchase of the LTL operations of Watkins Motor Lines, a leading provider of long haul LTL services with more than one billion in annual revenue was one example of the major events in this quarter.

The acquisition of Watkins, soon to be again national LTL, will substantially bolster our transportation offerings.

It creates a reliable single source provider of one and two-day regional as well as greater than three-day long haul LTL services that customers were requesting for sometime from FedEx Freight.

FedEx Express and the Airline Pilots Association jointly announced a tentative agreement on a new labor contract.

Another major event was FedEx Express and United States Postal Service agreeing to extend the contract for domestic air transportation of mail through 2013.

This agreement is expected to generate more than $8 billion in revenue during the seven-year term of the contract.

And FedEx Express was awarded four additional weekly flights to China by the United States Department of Transportation, bringing FedEx Express' total frequency allocations to 30 per week.

This reinforces the FedEx leadership position of operating more all cargo flights to and from China than any other U.S. all cargo air carrier.

We believe these significant developments will greatly benefit our shareowners, our customers and the entire FedEx team.

In addition to these developments I am very proud to report on a few recognitions of FedEx accomplishments.

InformationWeek Magazine ranked FedEx as one of the most innovative information technology companies in the country.

It cited applications that allow customers to easily integrate shipping information into their business workflow, saving time, enhancing productivity and giving their businesses a competitive advantage.

In addition, FedEx was awarded a special honor for the most innovative example of customer intimacy.

In China FedEx was rated the number one express delivery brand and one of the top ten executive brands in China.

The ratings were compiled by China's leading management magazine, Chief Executive China.

FedEx was ranked among the 100 best Latin American companies to work for by the Great Place to Work Institute.

FedEx was judged number one among best employers in Mexico and number four among the 100 best companies to work for in Brazil.

Now as we look further into FY '07 we see the following.

A healthy global economy in major countries with Asia continuing to outpace global growth on average.

Solid activity in the industrial sector and overall business environment conducive to growth with world exports and global manufacturing remaining strong.

A continued rise in online retail sales that translates to the fastest-growing retail sector this holiday season.

And finally, steady growth for our transportation services.

In conclusion, I would like to reiterate our steadfast commitment to managing our costs, increasing our revenues, taking full advantage of our unmatched service levels, information technology, unparalleled global network and broad portfolio of services.

We will continue to focus on improving shareowner value, return on invested capital, cash flows and operating margins.

Now before I turn the mike over to Alan Graf, let me express both my professional and personal appreciation to Jim Clippard who is participating in his last conference call as the head of FedEx Investor Relations.

Jim, you are a great professional and it has been my pleasure and honor to work with you and I know Alan will have a lot more to say about it in a minute.

Alan.

Thank you, Fred.

And good morning, everyone.

Today we are delighted to report yet another quarter of significant improvement in our profitability.

At FedEx Corporation revenue increased 11% to $8.5 billion while operating margin improved to 9.2%, which is a 70 basis point increase from last year's adjusted margin of 8.5%.

When I use the term adjusted, I am talking about excluding the lease accounting charge from the previous year.

Earnings per share increased to $1.53, which is a 22% increase from last year's adjusted $1.25.

We are very pleased with our continuing improvement in financial performance as we manage our expanding portfolio of services and networks.

At FedEx Express operating income and margin improved dramatically led by a 17% increase in international priority revenue.

IP volume was up 6%, and yield increased a strong 11%.

Increases in the fuel surcharge contribute about one-third of the yield improvement while rate per pound, weight per package and exchange rates also contributed to the yield increase.

Operating margin at Express was 8.3%, up 130 basis points from last year's adjusted margin, excluding the lease charge.

Last year's adjusted margin was 7%.

At Ground, terrific volume growth of 13% was a major factor in a 16% revenue increase.

Operating income growth of 6% was somewhat restrained by an increase in legal expenses versus the previous year.

Freight was also a solid performer with revenue increasing 14% and LTL shipments up 8%.

Segment operating income increased 11%, and the operating margin at Freight was a solid 14.8%.

At Kinko's both revenue and operating income declined slightly from last year as service improvements and expansion initiatives continued.

As we look ahead, let me echo Fred's comments on the economy.

There was certainly a little slowing, but nothing I would characterize at this point as a headwind.

We are expecting U.S.

GDP to grow over the rest of our fiscal year in the neighborhood of 2.7%.

Our revised guidance for the second quarter and the rest of the year includes approximately $145 million of onetime compensation to our pilots that we will incur upon ratification of a new four-year contract.

This charge will reduce second quarter and fiscal '07 earnings by approximately $0.20 per share after variable compensation effects.

I should note that these signing bonuses and other upfront compensation are onetime items that will not affect our ongoing operations.

Accounting rules do not allow us to record these expenses until they are probable and can be estimated which will not incur until the contract is ratified.

All other aspects of the contract, such as future pay increases, were contemplated in our original guidance so the total incremental impact of the new pilot contract on our earnings guidance is $0.20 per share.

Excluding the impact of the upfront pilot compensation we are increasing our earnings guidance for the fiscal year by $0.05 per share.

Generally I am feeling very comfortable and optimistic about our business going forward.

Lastly, let me take a moment to also salute my partner, Mr. Jim Clippard, our VP of Investor Relations.

Today is Jim's last earnings call before his retirement on November 30th.

Beg as I have, he has finally decided to go play golf.

Jim's enthusiasm, professionalism, leadership and above all integrity have been the catalyst in bringing our Investor Relations program to world class levels.

No matter the situation, Jim's demeanor always remains upbeat and positive, and he is a lot of fun to work with.

Jim, Bravo Zulu, my friend.

Let's now open up the call for questions.

(OPERATOR INSTRUCTIONS) Ken Hoexter.

Good morning, it is Ken Hoexter from Merrill Lynch.

Jim, just thank you very much for your great help over the years.

My question is on the Ground side.

I saw that costs kind of spiked on the purchase transportation side a little bit larger.

Just wondering if that is where or where did your legal expenses and should we see those legal expenses continue, and if there's any other reason for that Ground expense side to really climb up that high.

Alan, you want me to handle that?

Please do, Dan.

The legal fees are in other, so you can also see from the release that that spiked up, as well.

Those fees are mostly related to the independent contractor class action.

We expect that they will continue in the second quarter but nowhere near at the same rate.

And then dissipate significantly in Q3 and Q4.

Now the purchase transportation was up 19%, but volume up 13%.

We had some settlement increases in that as well, but the main reasons for the cost increasing there were fuel supplements paid to contractors and the increase in our SmartPost business, which was up significantly.

So when you look at the major costs there, the growth of the settlement to our both P&D and linehaul contractors offset by productivity, we are in pretty good shape.

It was fuel and SmartPost.

Great, and then my follow-up question I guess is a little bit bigger picture, but it seems like you've cut your GDP target slightly for the rest of fiscal '07, yet you're raising guidance.

Just wondering where do you see more of that robust picture?

Is that continued improved cost cutting at Express or is there something you see more robust on the outlook than you had before?

We are just giving you what we are using internally in our estimates about U.S.

GDP growth.

Again, with the strong volume increases at Ground and the really spectacular performance of international priority we expect those to continue, and that is factored into our rest of the year outlook.

As I said a little bit of a slowing but the characterization and the headwind is just not there for us right now.

Jon Langenfeld, Robert W. Baird.

Dan, on the Ground side what is driving the acceleration of the volumes really over the last couple quarters?

I think it's certainly a lot of things, value proposition, faster network, excellent service, more information to our customers faster.

I think we have an excellent sales team that have done a great job of positioning our business.

Our ability to bundle with Express and now Freight has been a real driver of growth for our Company.

And our retail business, because of the Kinko's expansion, is also growing at excellent rates.

They're off a low base, but still doing very well.

So it is pretty much across the board; we see excellent growth in the core, residential business is up nicely, our multi-weight business is also growing.

So it is pretty much across the board, no one single thing that is causing this excellent growth that we've seen.

And maybe a follow-up on that.

I think if you aggregate yourself and UPS and the Post Office and look at volume growth, particularly in Ground, but really overall U.S. package, it continues to grow in excess of GDP growth.

Do you see that continuing?

Is that just a move towards more service sensitive freight?

Mike, do you want to handle that?

I have my views on it but you're the expert.

John, let me just say that we continue to believe that the Ground business as an industry segment will continue to grow at or above GDP levels.

We are not as optimistic in the domestic freight sector.

But again, we don't really look at the domestic freight sector in and of itself.

We look at our global network from an Express segment.

But if you just isolate the U.S. we would see Ground growing faster than the GDP overall and Express growing somewhat at a slower pace.

Tom Wadewitz, JPMorgan.

Good morning.

I have two questions for you here.

On the air Express side volumes were a bit, a little better than we had expected and deferred still down but a little better, a little slower climb.

In the overnight they were a little bit softer and I am wondering if you can give us any thoughts on the trend there.

And then with respect to Express margins, continued strong margin improvement, is that something that you think is possible to sustain given your constructive GDP outlook?

This is Mike. (Inaudible) and I will turn it over to Dave to talk about the margins.

We have seen improvement.

We are moving into a period where our comparisons will be a bit easier as roughly a year ago when we began implementing more direct and assertive revenue management actions at Express, primarily targeting the deferred sector.

So we are beginning to lap, if you will, that initial concept, those actions and going forward our comparisons will be somewhat easier (inaudible).

On the margin growth we continue our march toward our double-digit stated commitment (inaudible), and we're very confident that we will achieve that.

Components of that obviously are excellent cost controls.

We have global growth around the world led by of course international revenue growth and every region of the world continues to grow.

And of course our revenue management program has been very effective for us and for FedEx Ground as we bundle our accounts and see where the best network is; the cost versus the revenue component.

So revenue growth around the world, revenue management, and of course our excellent cost controls.

Dave on the cost control it was notable that the headcount in Express was down over 3% year-over-year.

That is a change from what we've seen the last couple quarters where it was closer to flat or just up slightly.

I wonder are there specific cost actions that you've taken there or what would be driving that and presumably that would continue for a couple quarters in terms of the reduction in headcount.

That's a great question;

I was going to talk about that later in the broadcast.

We had excellent cost controls but I should point out if you look at our intercompany chargeback number it is high because we moved to services, our customer service organization.

So the real number is more like 4.5 or 5% mostly led by benefits in our salaries and benefits line, over a 10% overall revenue growth so still excellent.

But the FTE decline is primarily because of that.

Ed Wolf, Bear Stearns.

Two questions, one a follow-up on the Ground.

You talked about the legal fees.

Why do you think those are going to go away Dan?

It seems like there is a lot of litigation and it seems to be getting larger on the independent contractor; why do you think that is going to become lesser?

And if I take a look at the other expense where that is, the estimate is if you take away volume growth about $17 million or so for legal fees in the quarter.

Is that a fair guess?

Well, I'm not going to quantify exactly what the fees were, but it is a substantial portion of the increase in that area.

We just got a lot of activity in this quarter in the independent contractor class-action area.

We expect that that will lighten up some in Q2, and then our projections are it will be pretty much back to normal in Q3 and 4.

So we've done a lot of analysis on this, and we just got hit hard in a lot of areas in this quarter and had a significant impact on our margin.

On the pilot side, as my second question, you've made obviously you are talking about $0.20 as the makeup for the bonus payments for the last couple of years when the pilots were working under the amendable.

But according to the terms of the contract the first year they have a much higher wage increase, about 9%, then the remaining years at 3%.

Is that 9% already baked into your estimates and your guidance as you go forward?

That's not part of the onetime in any way, is it?

That's right, it is baked into the numbers that Alan had referenced earlier.

And just if I can talk about this for one second on the pilot contract, the tentative agreement obviously you know about.

The ratification process is the following.

They are taking their votes from September 18 to October 17.

Hopefully we will have a successful vote count and we are hoping to sign the contract with our pilots by October 31st.

Helane Becker, Benchmark.

Thank you very much, operator.

Hi everybody.

Jim, congratulations and best wishes.

We will miss you.

My questions are this.

Can you please, Alan, quantify the impact of Watkins on the second quarter and going forward and how we should think about that?

And my second question is with respect to the China route, maybe Fred, can you talk about how your growth in China has been going and what you see happening over the next year or so in those markets, in the Asian markets?

Thank you.

I'll start and I'll pass over to Doug Duncan on Watkins.

First of all we are excited, great management team and outstanding employees that we're bringing into the FedEx Corporation fold.

The process of closing and getting things done went extremely smoothly.

I'm delighted to say that they will be adding a significant amount of revenue, and I would expect it to not have a material impact on '07 but it certainly should be slightly accretive.

We are going to do some rebranding and some other things, and the outlook is great.

Ill let Doug give you a little more color.

Helene, we finally got through the closing process and got the keys to the front door and there is certainly no surprises.

The surprises we got were all positive.

It is a great culture.

The employees are enthusiastic.

I think they will come onboard very, very quickly.

The management team is excited.

Customer response has been probably greater than we anticipated.

And of course once we got in we got a chance to look at the customer base and frankly we were surprised it was very, very little overlap of the customers.

So it gives us a great opportunity to cross cell.

So I think we will be able to grow this business very quickly, and the customer demand for that long-haul service at a value price with reliability I think is growing quite rapidly.

I am going to ask Dave Bronczek to comment on China because that operation is under FedEx Express.

Okay thank you.

We obviously have an excellent management team in China led by Eddy Chan who is headquartered now in Shanghai.

The westbound and the eastbound around the world flights that we put in a year ago are performing exceedingly well.

We are very pleased with that progress.

There is more demand there.

We meet with multinational companies from around the world and have been very recently.

There is more demand for our service, our excellent connectivity around the world.

We are happy to receive four additional frequencies that puts us up to 30 as Fred mentioned earlier.

We will continue to see growth and strong growth out of China.

And all of Asia.

Great.

Thank you.

Jordan Alliger, Deutsche Bank.

Good morning.

Can you maybe just touch a little bit on sort of the core pricing environment that you are seeing in the various segments?

Thanks.

That's the first question.

This is Mike Glenn. (Inaudible) any change in the pricing environment as compared to the last two quarters, so I would characterize it as stable relative to last few quarters.

Okay, and then on the LTL freight side if I saw it right it looked like weight per shipment was kind of about flat.

Obviously seeing good growth in the Ground Express business, I'm wondering has there been any lightening up of freight volume or freight trends on just looking at the weight per shipment to be aware?

Obviously the weight per shipment is down slightly, but not meaningful. 8% shipment growth is just phenomenal, well ahead of our really plan, and of course 8% yield growth is solid and in that of course is fuel surcharge.

But we have also done a very good job of holding on to the general rate increase and our contract renewal continued to be solid with good increases.

So we are still in a competitive environment as we always are but you look at these results and I can't say the pricing environment is anything but good.

Gary Chase, Lehman Brothers.

Good morning.

Best wishes to you, Jim.

Dave, question for you.

I think last year as part of the commentary during the call you said that a 10% margin in Express on a full-year basis in fiscal '07 was feasible.

You didn't say you'd get there but you said it was feasible.

And I think you said one of the swing factors was the performance of around the world flight, given the comments that you just made and answered to one of those questions, should we still think that 10% margin is a feasibility?

Obviously will exclude the 100 million or so in pilot upfront.

The answer to the question is we are determined, and we are marching towards that 10% double-digit margin as I mentioned before we are confident we will achieve it.

We never gave you a date specifically but part of obviously the success will be our international performance, the strong growth, the strong margins there and just to put the eastbound and westbound into perspective, they are performing just like we hoped they would.

This is Alan, let me just say that if you (indiscernible) of Express' margins over the last several years you can pretty much determine from that when we think we are going to go into past the 10% mark and then go on from there.

We're not stopping at 10.

Secondarily, the around the world flights are performing very well but they still are a drag on this fiscal year and will be a drag on this fiscal year although it won't be material.

And they well both turn in as profitable in fiscal '08 which is another reason why we will continue to improve Express' margins.

A question for Dan.

I'm wondering if the market growth in Ground, the first couple of fiscal quarters you had, you were comping against lower growth rates in the year ago period.

Do you think the double-digit growth is sustainable in the second half of the year, fiscal year, on the volume side?

I think it is.

We are off to an excellent start here in September for Q2.

I would say Q3, Q4 over against much tougher comparisons that will be high single-digit or low double-digit.

But if I had to bet right now I would say we will be at that low double-digit rate Q3 and 4.

Donald Broughton, A. G. Edwards.

Good morning, gentlemen.

Jim, again congratulations and I look forward to helping you make good on Alan's edict to go out and play some more golf.

The two big surprises for me in the quarter were that the Express yield continued to be extraordinarily strong, and the Ground and the Freight volume; is Express yield a function of mix or can you give us some more insight into what's happening there?

And also the follow-up would simply be what drove the extraordinarily strong volume growth freight?

Obviously we continue with our yield management activities at Express.

We had a combination of product mix which was slightly beneficial.

We also had a nice improvement in rate per pound, and then obviously you had fuel surcharge in there as well.

But the main focus for us in the domestic Express sector is managed growth while focusing on revenue management activities, and we are real pleased with our performance there.

From the Ground perspective I think the main thing, and Dan emphasized this earlier, FedEx has a business strategy that is working exceptionally well right now and our sales team has a very solid plan for growth.

They are doing an excellent job at understanding the unique needs of our customers and crafting solutions that really leverage our portfolio and allows us to deliver this balanced growth while having outstanding revenue management activities.

So I think that is the issue.

Gary Yablon, Impala Asset Management.

I didn't have any questions.

I just wanted to say Jim, thank you for all your help over the years.

You've been one of the highest quality people I have worked with in about 20 years looking at transportation.

The company has been blessed to have him there, and I wish you all the best.

Take care.

David Campbell, Thompson Davis & Co.

Jim, congratulations.

I know you will do well, whatever you do.

Alan, did you ask, did you include lower fuel prices in your estimates of earnings the rest of this year, or what sort of estimate, what sort of assumptions are you making there with fuel?

I don't know, David, what do you think we ought to use?

I would use about $1 a gallon.

I mean you got to be optimistic.

It is a little tongue in cheek but obviously the rapid slide and the per barrel price has not yet fully been reflected in jet fuel costs.

We don't know whether it is going to stay at the level it is at, around 61 a barrel or go back up.

If it stays here there obviously will be a little benefit in the second quarter at Express because their fuel surcharge lags and the October surcharge is already set.

But the magnitude of that, we have some estimates in here, but it could be, swings could continue depending on what happens with price per barrel.

So fortunately we have a surcharge that we can pass along and that is what we're doing, and so what our views are are in the numbers I have given.

The second part of that question is more important probably, and that is the impact on the air Express business, which is been hurt for some time now by higher fuel charges.

Isn't that more of a benefit?

That is if prices, fuel prices come down obviously the surcharge will come down, be less expensive to use air freight.

There's no question about that, David, that as fuel prices come down and the surcharge decreases, that enhances the value of Express transportation services and makes customers less likely to consider alternatives, so we are happy about that.

Having said that, with FedEx's broad portfolio of services regardless of the situation we have the right set of services to meet their needs, whether fuel prices are high or low.

So we feel we're well-positioned regardless.

Scott Flower, Banc of America Securities.

Good morning, all.

Just curious, I know you all looked at things globally and you're comfortable with your GDP outlook.

Have things firmed a little bit from a U.S. standpoint in September?

It seems as if August is a little bit of a weakness spot for the economy.

I am just trying to get a sense at whether, as you look at the progression in first quarter and how you see things now, whether you're comfortable with things, maybe it firmed a little bit on the long side, I know you said it is not a headwind so I am assuming so.

I am very confident through peak and through the rest of this calendar year.

I think probably the first calendar quarter of 2007 will probably be a little bit weaker than it was in the previous year, and it will be a tough comparison, but if that would mean that fuel prices will probably stay down, that would help some.

So it's a mixed bag of across the board in terms of just how strong it could be.

But again I think I want to emphasize headwind is not a term that is appropriate for us.

A 2.7% U.S.

GDP growth is a fine environment for us to continue our profitable growth, and that is reflected in our outlook.

Okay and then the second question really I guess relates to FedEx Freight.

Understanding that Watkins would be margin dilutive just on its starting point because it's not at the same level and may never get to the same level just based on the differences in the business.

I'm just wondering how we should think about FedEx Freight's core business coming in with such high margins.

Is that reasonable to expect maybe some slight deterioration in those margins as we go throughout the year just based on where we are in the cycle?

Or do you think you can keep the same sort of peak level of margins you've been able to continue to grow for the last several years?

Scott, the regional margins continue to be very strong, and they are strong because we have a unique value proposition.

We are really giving speed and certainty to customers, executing fast cycle logistics better than anybody else, and I am amazed but still to this day largely our money-back guarantee has not been matched by anybody out there.

So that continues to be strong.

Watkins, we've got a tremendous opportunity to give the customer something they wanted and never had in the long haul sector.

So I think we've got the same opportunity in that sector to create a value proposition, a planned delivery with reliability and be the low-cost producer so I think we've got lots of opportunity in that sector, as well.

Now having said that, Watkins will not come on as strong a margins as FedEx Freight has had, so it will have some impact to decline our earnings, but I still think the opportunity there is tremendous, and we will get there pretty quickly.

We're going to spend a little money on rebranding.

We are going to spend a little money on S-Ox compliance and those kind of things that in the rest of '07 will certainly cause the freight segment's overall margins to be diluted a bit.

But it is just a bit, and I think after we get to fiscal '08 and we've got it fully integrated and up and running at full speed, I think it will be a very positive addition.

Ken Hoexter, Merrill Lynch.

Good morning, I just had two follow-ups.

One is what would be the impact of [.TN] on the Express margins as you close that in the back half?

And then secondly, I thought the pilot contract was not retroactive, so I'm wondering why the charge?

Because I thought you said the 9% increase this quarter was not included in the onetime charge.

So if not being a retroactive contract I am wondering what the charge does entail.

Thanks.

The charge entails signing bonus and some pension and health retirement account charges that we will have to take as soon as the contract is signed.

I thought we made that clear but I'm glad you asked the question so we can clear that up.

As far as .TN goes won't have a big impact this fiscal year at all on Express, but obviously should be very positive as we go forward.

It is also going to depend on once we have complete ownership just how rapidly we expand and we will be balancing all those decisions.

Jon Langenfeld, Robert W. Baird.

Two follow-ups.

First, on the overnight box and global segment can you refresh our memory why the comparisons were so strong from last year, which I am assuming is the primary contributor to the negative growth this quarter?

And secondly, why is the intercompany cost on Express, why is that up so significantly this quarter over last year?

John, on the volume side let me say that it was approximately a year ago we implemented a strategy, a revenue management strategy that we continue to execute today and will continue to do so going forward.

As a result of that we moved some volume out of the Express network.

Some of that volume, a small percentage of it, less than half of it went into the Ground network.

But we made a specific decision to move some volume out of the Express network to enhance our yields and our profitability and that is the issue because of the timing of when it was implemented that causes the issue on the comparisons that we were talking about.

It was mostly E2.

Having said that, there was some overnight that went along with that.

I thought I made it clear earlier but maybe not; the intercompany chargebacks went up 42%.

We moved from FedEx Express managing customer service, our big customer service organization, to Services that charges back those costs to the whole portfolio of companies at FedEx.

That is primarily the issue.

Gary Chase, Lehman Brothers.

Good morning, guys.

Just a quick question on a, a nit on the interest expense line.

Was there anything unusual there for the quarter?

Looked low.

Take a look at the balance sheet, a lot of cash, so interest income was strong, and that is the big difference.

Thank you.

Operator, I think we probably have reached that point where we need to call it a day.

I certainly want to express my appreciation for the opportunity to have served FedEx and certainly hope it has been helpful to those of you out there that we deal with day in and day out.

I look forward to working with you or seeing you or talking to you or playing golf with you in the future.

Good luck, and we will call it a day.