聯邦快遞 (FDX) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the FedEx Corporation's second-quarter earnings conference call.

Today's call is being recorded.

At this time I will turn the call over to Director of Investor Relations, Mr. Mickey Foster for opening remarks and introductions.

Please go ahead, sir.

Good morning and welcome to the FedEx Corporation's second-quarter 2007 earnings conference call.

I'm Mickey Foster, the new Head of 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.

Also joining us on the call today are members of the media.

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

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

We will have more detail about the meeting for you in January.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provision 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 Corp.'s and its subsidiaries' press releases and filings with the SEC including, but not limited to, its reports on Form 10-K and 10-Q.

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 a 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 the Investor Relations portion of our website at FedEx.com for a reconciliation of such measures to the direct 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 Federal Express;

Dave Rebholz, new President of FedEx Ground;

Doug Duncan, President and CEO FedEx Freight; and Ken May, President and CEO of FedEx Kinko's.

We will begin with our Chairman, Fred Smith, followed by Alan Graf.

After Alan, we will have Q&A.

Thank you, Mickey.

Good morning.

Thank you for joining our earnings conference call for the second quarter of fiscal year 2007.

Before Alan goes into our financial details this morning, I'd like to thank the FedEx team around the world for its extra efforts in serving our customers during our busiest time of the year.

FedEx had its busiest night in history December 18th, moving about 9.8 million packages through our global network.

In addition, FedEx.com set a one-day record on December 11th with about 1.7 million packages shipped online, another sign of the growth of e-commerce.

FedEx delivered outstanding financial results for the second quarter.

I'm confident about our business going forward as shipping customers increasingly demand bundled transportation offerings in order to take full advantage of global economic trends such as the increasing percentage of high-tech and high value added goods as a portion of all manufactured goods; the continued integration of the world's economy and the growth in world trade; faster, more nimble supply chains and logistics networks; and expanding use of the Internet and e-commerce opportunities.

We believe solid fundamentals and steady growth in demand for our worldwide transportation services will result in positive financial performance at FedEx.

Now to keep pace with these economic trends, FedEx continues to strengthen its unmatched global transportation network, adding significant value and reliability for our customers.

In November FedEx Express agreed to buy its Indian service provider, Prakash Air Freight Private Ltd, one of the largest domestic express companies in the fast-growing Indian market.

Just a few days ago, FedEx Express also acquired ANC Holdings Ltd, a United Kingdom domestic express transportation company, allowing FedEx to directly serve the entire UK domestic market.

I'm proud to call your attention to a couple of recent honors bestowed upon FedEx Express.

It was named the most admired company among international express companies in Asia by the Wall Street Journal Asia.

In its 2006 survey of the 200 most admired companies in Asia, FedEx Express ranked 17th among all companies, 27 places ahead of our closest industry competitor.

Ratings are based on FedEx Express' reputation, quality of products and services, management's long-term vision, innovation in responding to customer needs and financial soundness.

FedEx Express was also named the best company for women by the American Chamber of Commerce in Hong Kong in association with the South China Morning Post newspaper.

Express was recognized for its outstanding achievement in supporting the development of women in business and providing innovative work/life programs.

Now we believe FedEx has a unique economic perspective as a facilitator of global commerce in the context of modern fast cycle logistics.

As we look ahead to the second half of our fiscal '07, which of course ends next May 31st, we see the following -- one, steady performance by a healthy global economy led by continued strong growth in Asia; two, somewhat slower growth in U.S. economy related to adjustments in the housing and manufacturing sectors; three, increasing online sales leading the retail sector during this holiday season.

As I conclude my portion of these remarks, I hope you'll remember our steadfast promise in crisply executing our business strategy in order to increase FedEx revenue, manage our costs, and take full advantage of our unmatched service levels, information technology, our unparalleled global network, and a broad portfolio of services.

We'll continue to focus on improving shareowner value, our returns on invested capital, increasing cash flows and margins.

With the peak season drawing to a close, we would like to wish you and your families a Happy Holiday season and a prosperous New Year.

And to all the procrastinators out there, you have only two more shipping days for FedEx Express to deliver your gifts before Christmas.

And now our Executive Vice President and Chief Financial Officer, Alan Graf.

Alan?

Thank you very much, Fred.

Good morning, everyone, and Happy Holidays.

We certainly had a strong second quarter as evidenced by our $1.64 earnings per share which was better than our previous guidance of $1.45 to $1.60.

During the quarter revenue increased 10% and operating income increased 6% including charges from the new pilot agreement which include bonuses and other upfront compensation of $143 million.

Without those charges, margins would have increased significantly over last year.

As noted in the release, the second quarter benefited from strong growth in IP volume and yield at Express, outstanding volume growth of 14% at Ground, and declining fuel prices.

And I want to talk a bit about fuel prices morning.

Fuel price volatility and the resulting surcharges positively impacted the second quarter as prices fell faster than the surcharges due to the timing lag in setting in the surcharges, as we've talked about on numerous occasions.

That did benefit our second quarter.

Conversely I expect that the third quarter will be negatively impacted by this same timing issue, most notably at Express.

Last year's third quarter benefited from the timing lag in setting the surcharge and this year the opposite is going to occur.

Let me give you an example of this December.

You may recall that last year we capped our Express surcharge at 20% and this December the surcharge is 11.5%.

But this year, as the surcharge is declining significantly, jet fuel prices that we paid for December usage are actually higher on a per gallon basis that last year.

Again, this is strictly due to the lag in setting the surcharge, so the second quarter benefited, the third quarter will be penalized by this timing.

But for the year we are tightening the full-year earnings per share range to $6.35 to $6.65 versus the previous guidance we gave you of $6.30 to $6.65.

So we remain on track to have the year that we communicated to you last quarter.

We expect to have good momentum in the fiscal year '08 and we now look forward to your questions.

(OPERATOR INSTRUCTIONS).

Jordan Alger, Deutsche Bank.

Just a question.

Even putting aside the fuel in this current fiscal quarter, which obviously was down year-over-year, it did appear when you made the adjustment for the pilot charges of $143 million that whether it be wage growth or some of the other expense line items seem to be extremely well contained.

I'm just sort of wondering if you could touch a little bit more detail on some of the things you might have been doing on that front, particularly even on the wage side.

Let me just say that, as Fred mentioned in his overview, this company and this management team remains highly focused on the investments that we make whether they be expense or capital, looking for very high returns or not making them.

We continue to do that.

We've improved productivity across the board.

We're very proud of these results and we're going to continue to do that, so it's just a focus and one that we're going to maintain.

Great.

Thank you very much.

Ken Hoexter, Merrill Lynch.

If I could switch over to the freight for a second, just a little bit weaker on the operating income side for this quarter and I just wanted to know, I guess maybe Doug, what you're seeing in the marketplace.

Are you seeing -- you mentioned in the release a deceleration month-to-month but yet it was still growth.

And also, there was a gain on a property sale within that division.

Can you kind of detail a little bit about that?

Ken, this is Doug.

Several things going on here.

First of all, the original FedEx Freight regional LTL network continued to have growth in the quarter.

Although it decelerated month by month, it was still positive growth.

And in looking at the trucking indexes I see out there, it looks like to me the actual trucking market is actually negative year-over-year growth.

So I think we're still gaining significant market share in the regional LTL business and we get that from a number of sources.

So I'm very pleased with that, although it's not the growth rate we had hoped it would be.

On the other side of the coin, we finally got the keys to Watkins and rebranded it FedEx National LTL.

We're going through a lot of integration costs there in bringing that company into the FedEx network and basically hope to launch a new engineered schedule network in early '07, so there's a lot of work going on behind the scenes there, which is additional cost.

And of course, Watkins -- we haven't been able to reengineer that one yet to the value proposition that will enable us to grow market share in that network like we're doing in the original FedEx Freight network.

But we'll have that done shortly and I think we can grow market share there and mitigate some of the slowing trucking economics in that unit as well.

Any comment on the gain that you mentioned in the quarter?

The gain was we built a huge new facility in Sacramento, 50 acres, 170 doors, a huge expandable hub out in the West Coast and we sold the other unit.

It's not significant when you look at all the other prices that we paid to beef up the infrastructure around the country.

So it is a gain in there, but it's insignificant when you look all the other expenses we're putting in in the infrastructure.

Jon Langenfeld, Robert W. Baird.

Can you just talk a little bit about domestic Express and the volume contraction there?

How much of that is -- just qualitatively, how much of that is still the culling of unprofitable business and anniversarying that versus the weaker external environment that you referenced in your prepared remarks?

This is Mike Glenn.

Virtually all of what you're seeing there is the impact of the revenue management that we began approximately a year ago.

We will begin to work our way out of those more difficult comparisons after this quarter, so what you're seeing there really is the impact of those actions.

So do you see the economic slowing within Express?

The numbers you're looking at, what gives you the thought that the environment is slowing?

Anything in Express?

As Fred mentioned in his opening remarks, the housing and manufacturing sectors are leading the slower economic growth that we're seeing right now.

Having said that, we're very comfortable with our ability to manage the portfolio and continue to drive revenue growth across our Express, Ground, and Freight companies.

So we're quite confident in our ability to manage the portfolio and continue to produce outstanding results in the quarter ahead.

This is Alan.

Let me just add that we're fine with the way the domestic Express volume is performing.

If you take a really hard look at the Express performance and take out those one-time pilot charges you'll see the unbelievably improved performance at Express.

Again, it's great productivity, strong cost management, and in the case of IP we grew 6% in volume and 6% in yield and that was on stronger weights and rates -- and exchange rates and not on fuel surcharge this time.

So we're extremely pleased with the performance of Express.

Let me just add -- this is Dave Bronczek -- to Alan's point and Mike's.

Obviously the international performance has been very strong.

This is the same game plan we've had now for many, many quarters.

Great performance on the yield front, high international growth, tight cost controls, great productivity.

The earlier question was on the FTE.

You saw that we only grew about 0.5% on FTEs.

That's by design.

We had a very good second quarter.

Alan, you had commented last quarter that this environment -- during the last quarter you said this environment is a good environment for FedEx, 2.5% type GDP growth.

Do you still feel like you're there domestically with that type of environment?

Absolutely.

I'll let Mike, who's our sort of co-chief economist, give you his overview of the economy.

Fortunately we have Jean Wang, who's one of the brightest minds in the world, on our staff.

We follow and listen to Jean, he's usually right.

But we're perfectly happy the way the economy is performing.

It's a little bit slower than it was a year ago, but having said that, just take a look at Ground and IP growth rates.

We're pretty positive.

Mike?

Thanks, Alan.

I'm very proud of our sales team in terms the results they're producing in this economic environment.

It's a comfortable economic environment for us.

As we suggested earlier, it's not quite as strong as we saw in the first half of our fiscal year, but we believe it will continue to produce very solid results going forward and our operating companies are doing a fabulous job providing great service for our customers.

It makes our job in the sales team a whole lot easier when you've got great service to sell, and so we're quite confident in our ability going forward.

Thank you.

John Barnes, BB&T Capital Markets.

Back on the LTL business, the integration costs associated with Watkins, can you give us an idea how much will carry over into next year?

Not dollar amount, but did you incur 10 or 20% of them in this quarter and the rest of them carry over into out quarters, or was the bulk absorbed in this quarter?

This is Alan.

Let me start, give you some corporate overview there and then I'll turn back over to Doug.

We have not yet completely finalized our purchase accounting for Watkins, but we have a substantial charge every quarter in amortizing the intangibles that we have assigned to Watkins and that was a very big penalty.

It had nothing to do with operations, it's solely an accounting function in the quarter, and that will continue for the rest of this year and into the next couple years in terms of charges.

And secondarily, remember that National -- formerly Watkins, was operating in a lower margin environment when we purchased them and that we had told you it was going to take us some time to do some re-engineering and get those margins back up and that we're in the process of that.

And so, I'll let Doug give you a few details on that.

John, I think the bulk of the integration -- well, we've got the onetime write-up so assets and whatnot which is part of the purchase accounting.

But indeed that being aside, the integration cost is going to be heavy for the next several months because we've got the IT integration, we've got the sales and marketing integration, we've got the rebranding which we're going to do the bulk of in this fiscal year.

The Canadian operation that we acquired was -- gave us a wonderful footprint but it's very small.

We're making huge investments up there, actually putting in a whole new IT system to support our FedEx Freight Canadian operations.

That gives us direct operating processes in Canada, so we had a number of equipment issues that we had to do rentals and purchase transportation as we converted a lot of contractors to employees before the purchase.

So all those are kind of the next few months issues and then they'll be behind us.

Net-net the entire margin decline in the freight segment in the quarter can be attributable to the National acquisition.

That's not a surprise.

We knew that, and that's fine.

Going forward we will improve that and you'll see the margins start to improve.

Okay, that was what I was getting at, okay.

And then Alan, your comments in your press release, just talking about the benefit from the timing lag that exists between when you purchased fuel and when we indexed our fuel surcharge, can you just kind of elaborate a little bit, just remind us of what that lag is and kind of what the difficulty is in overcoming that?

Sure.

In order to give our customers visibility to what their costs are going to be, we build the surcharge essentially on average six weeks before we implement it.

So what fuel prices we are experiencing through the month of -- during the month of December will be the fuel surcharge that we will implement in February.

Because of the volatility of fuel prices, we're going to have these quarterly year-over-year timing issues that we now have seen here in the second and third quarter.

And so on a quarterly basis the benefit in the second quarter and the penalty in the third quarter are both significant to the quarters, but for the year it's not material whatsoever.

And over time these will all even out, and so that's why we stress we're continuing to maintain our range for the year and the biggest difference between this quarterly call and the previous quarterly call is simply the volatility in these fuel prices and the way we set surcharges.

Very good.

Thanks for your time.

Helane Becker, Benchmark.

Just -- Alan, could you just address -- or maybe somebody could address Kinko's.

You guys were investing a lot of money this fiscal year and kind of bringing that up to FedEx standards.

Can you talk about how that's going and how the new stores are working and the reception you're getting from customers and so on?

This is Fred Smith.

I'm going to turn it over to Ken here in just a minute, but I wanted to make a couple of strategic comments about FedEx Kinko's.

First we have a very good strategy which we have tested over the last year or so and are very pleased with the concept.

And you're right, we are going to put a lot of effort into rolling these stores out because it's an integral part of our small customer and retail strategy.

The bow wave of those expansions are expensive; however, the amount of traffic that we are generating through our FedEx Kinko's stores benefits both Express and Ground significantly.

So even though FedEx Kinko's gets only a transaction fee for the Corporation is a whole, it's very beneficial.

And the reality is as we ramp up and expand these stores at an even faster rate, FedEx Kinko's is not going to be a contributor in earnings of and by itself.

And for the next two or three years you can just expect FedEx Kinko's to sort be around the breakeven, a little positive, a little bit negative as Ken puts a lot of investment into the store and to our folks training and one thing and another.

But we're very happy with the strategy of FedEx Kinko's.

We do report it separately, which we think is appropriate.

Now I'll ask Ken, can you put a little flash on the compact cars and the rollout and stuff like that?

Sure, Fred.

Here's what we're doing.

When we purchased this company we were pursuing more of a commercial print managed services strategy, and that business tends to be a cost of capital business.

So we have gotten away from that and moving toward new targeted customers, which are multiple professionals, small and medium businesses and conventions and hotels.

Which interestingly enough really help FedEx because in the retail environment those are FedEx's most profitable transportation packages.

We are -- over the last six months we've reorganized our sales force, we've had them selling the new value proposition now for a few weeks.

We've moved our marketing responsibility over to FedEx services and they're just doing a good job of leveraging their resources.

As far as the compact cars go, our initial business plan had us opening up 75 of these during the first half of the year.

We actually opened up 86.

They were opened on-time or early.

They were under budget and they are exceeding our pro forma revenue projections and doing very well on the packaged side is well.

So we are very pleased.

Our plans are to open another 125 of these out through the rest of the fiscal year.

And as Fred said, the benefits for FedEx Corporation are much broader than you can see on just the FedEx Kinko's P&L because we are a channel for packages and we're very pleased with that package volume coming through that channel.

Okay, great.

Thanks for the color.

And I'd also like to mention that anybody who would like to go to FedEx.com and click on our office button there and look at the FedEx print online capability, that's really one of the slickest capabilities available for business.

It's a real innovation and I think all of you would enjoy it and you'd have a much better understanding of FedEx Kinko's capabilities by taking a test drive of FedEx print online.

Edward Wolfe, Bear Stearns.

A couple things.

Alan, in your guidance you talked about fuel being a big benefit this quarter and then it swings against you.

And you gave fourth-quarter guidance of 198 to 213.

What's in your assumptions for fuel surcharge and fuel cost and those guidances.

Since fuel has such an impact as we get out to that next quarter I'm guessing you had some assumptions that you plugged in there.

We do, Ed, and it's generally what we always do, which is if I was able to forecast fuel price I'd have a different job.

And unfortunately I'm not able to do it, so our current estimate is that there will not be a significant or a material impact in the fourth quarter year-over-year in those numbers.

So does that assume fuel just stays at a flat price where it is, or you just went in and said we assume no year-over-year impact in what we're doing?

It's more the year-over-year impact, Ed.

It's the relationship of the surcharge to the price as opposed to absolute levels.

Okay, and then a separate question.

It looks generally that volumes were very good and accelerated across the Board versus where you were last quarter year-over-year despite comments that parts of the economy are a little bit weaker.

When I look at yields they're a little bit decelerated both on a gross of fuel and our estimates net of fuel.

Is it fair to say that maybe you guys are taking some share and you always do that balance between volume and yield, that the balance is coming back towards volume a little bit?

As we look out should we think of that as the way you're operating right now?

Ed, this is Mike.

The yields have been impacted by a little bit of a weight issue, a little bit of a mix issue.

When I say mix I mean a customer mix issue -- seeing slightly stronger growth from our larger customers.

And those are really the two issues that are driving the yields that you're seeing.

Having said that, obviously growing our ground business at 14%, that's much stronger than the market as a whole is growing.

As we've stated, the total parcel market, Express and Ground, grows roughly equivalent to GDP with the Ground market growing slightly faster than that, but nowhere close to 14%.

So that in and of itself would imply that we're taking share in that segment.

We don't believe the domestic Express market is growing materially, so we're right in the ballpark of where the domestic Express market is, so we're holding our own there.

And again, as we lap these revenue management actions coming into the third and fourth quarters, we are a bit more optimistic in terms of our overall growth there.

Donald Broughton, AG Edwards.

A couple of quick questions.

Certainly the first- and second-quarter volumes at Express had some tough comps because of the strong volumes posted last year.

Does your guidance for third quarter and for that matter for the full year include the assumption of positive year-over-year domestic Express volume or should we expect that to continue to be mild to negative as the domestic economy continues to have some soft spots?

Donald, it's Alan.

Again, I wouldn't get too excited about whether it's flat or up a percent or down a percent.

I get much more excited about IP and how we're managing our costs and delivering improved margins.

I think that's really the more important strategic question.

Let me just go off on a tangent here.

I just saw a headline put up by CNBC that FedEx's outlook disappoints.

I want to remind everybody on this call that we have the same outlook for the year that we had last quarter, so be careful about the talking heads.

We have the same outlook.

We're going to have a strong year.

We're very excited about the momentum that we're developing.

Without a doubt, Alan, the results speak for themselves, the margin, the expense containment, the yield improvement are all there.

I'm just excited about the potential for taking all that and seeing a little bit of positive volume comp with the possibility that that might hold.

Let me ask one other quick question and then I'll let somebody else have the floor.

Average weight per Express package jumped up to 7.9 pounds.

And I understand that part of that increase is a more normal seasonal pattern.

Is there anything else going on?

Is there hopefully anything that might give us some economic insight?

Donald, this is Mike.

Obviously as we broaden our portfolio and include freight and the parcel businesses, they traditionally are strong in other segments that Express has not been as strong in.

So if we bundle our services and further penetrate those market segments, we should see a positive impact on Express weights and that's part of our strategy.

And again, our sales and marketing teams have been doing a good job executing that.

Good deal, fair enough.

Again, congrats on a good quarter, guys.

Jason Seidl, Credit Suisse.

Good morning, everyone, and Happy Holidays.

A couple quick questions here.

If we look on the deferred side, obviously you're starting to push up against easier comps, but are you guys seeing any switch from people moving from sort of the over night to the deferred market or is that not going on?

I don't think there's been a material change in the trends that we've seen over the last several quarters, so I wouldn't read too much into that.

I think obviously as economic times get a bit softer we have been seeing -- and have for many, many quarters now -- some switching between deferred services and Ground to leverage the broader portfolio of services.

And quite frankly, we've been helping customers to make the best decisions that are in the best interest of their supply chains in that regard, but not from overnight to deferred.

That's nothing material.

Okay.

And a follow-up question; could you guys give some more color on peak season this year?

Did you see it starting any earlier?

Has it followed through the normal seasonal package pattern?

This is Mike again.

I think one of the things that we're seeing in spending a lot of time with our peak season shippers is actually the peak is a bit delayed relative to what we have been seeing historically.

As more business moves to the Internet, consumers tend procrastinate a bit more.

So on the Express side of the business, we tend to see a bit weaker peak and then much stronger as we move towards Christmas, not that significant as it relates to the other segments.

Okay.

Gentlemen, thanks for the time as always.

Tom Wadewitz, JPMorgan.

My question I think for Alan is if you could give us just a little more color on the guidance and the fuel impact.

I know you've talked about this a bit, but is it fair for us to say the let's say $0.20 a share impact versus consensus in the fiscal third quarter is largely due to fuel and that's about right?

Or if we think about being something like $0.20 to $0.25 a share impact from fuel timing, are we overstating it and there's some impact from slowing economy or other factors in that third-quarter guidance?

Tom, I'm just going to iterate what I said before.

The net fuel impact of surcharges and the prices we pay were significantly positive in the second quarter, significantly negative in the third quarter, and not at all significant for the entire year.

So what you've seen here is us maintaining our guidance for the current year with the second quarter outperforming and the third quarter underperforming as a result of the timings of the fuel.

Okay, so it's all fuel, it's not other factors?

Then the second question or the follow-up.

You did this acquisition and seeing Europe.

I don't think we've seen you do these small acquisitions before.

I'm wondering if that marks a meaningful change in strategy and whether we would expect more of these small acquisitions to come in or is this not really a change in focus on Europe and it's really a one-off?

That would be a strategic question so I think I'll go to one pay grade higher.

This is Fred Smith here.

Let me say a couple things and then turn it over to Dave Bronczek, CEO of Express.

First I'd like to remind everyone that we have a very clear set of criteria for corporate development projects.

One, there has to be real synergies between our business and the acquisition, and that is clearly the case here.

Two, there must be compelling economics.

We don't kid ourselves and try to overpay and we've got to be able to see the synergies and the benefits to the Company or we won't do it.

And then third, which a lot of companies don't pay that much attention to, but we do significantly, and that is there's got to be a cultural fit and Dave will add some more color to that.

The other thing I'd like to mention is even though we don't break it out, Europe is an extremely profitable division for FedEx.

We have a great business over there and a great management team and we don't feel compelled to do anything in Europe other than what we're doing.

But obviously if we see corporate development opportunities that fit those three criteria, we'll take a look at them.

Now with that, Dave, why don't you --.

Thank you, Fred, that's an excellent lead-in.

First of all, the cultural fit of ANC Holdings and FedEx Express in Europe is outstanding.

They have a tremendous dedication to their customer base.

The employee commitment is outstanding.

They have an excellent network similar to ours.

The combination of their network, their people, their customers combined with ours gives us a broad reach in the UK and able to serve that market more directly in a much broader sense.

So it's a very, very nice fit for FedEx Express in Europe.

Okay, thank you for the time.

Gary Chase, Lehman Brothers.

Just a couple cleanup ones and then maybe a question on ground volume.

The press release mentions Katrina recovery.

I was just wondering if that was a significant item and where it would be.

As well, I think last quarter you mentioned that you had some litigation expenses in the ground segment that you expected to continue into this quarter.

If memory serves, that was around $20 million.

Any color around whether those continued and whether the magnitude was similar?

This is Alan.

I will give Dave Rebholz some time to think about his answer on legal costs.

I would not characterize it as litigation totally; it's legal expenses.

In terms of the insurance settlement, it was across all of our opcos.

It was not significant, but we felt it was important to mention that it was a onetime benefit to the quarter.

And since we outperformed our previous range, we felt it was appropriate to mention.

This is Dave Rebholz.

Let me comment first on the legal expense.

They did negatively impact us in the current quarter, but were significantly less than first quarter's run-up.

We do expect as we stated in the previous release that we expect third and fourth-quarter legal expenses to continue to taper down in the direction they are this quarter.

So we are making some headway there.

I will make one comment about the volume and the growth rates at ground.

We experienced excellent growth as obviously noted by the number, and those same double-digit growth rates are now three quarters running.

And we would anticipate both third and fourth quarter to have relatively the same strength.

We've been performing well in all sectors, and we think we're going to come out of this holiday season with the high level of service that we have that will give our salespeople something to sell and keep us running those strong double digits.

Could you actually elaborate a little bit more on that?

Because you mentioned in some of the prepared remarks that at least on the industrial side, you felt like things were going to be a little soft here.

Yet as you point out, the comps get tougher and you're talking about sustaining this volume growth, so that would mark an acceleration in what you're seeing.

Can you shed a little bit more light on what is driving that?

In relative terms, we've been making headway across the board to all of our product portfolio, including our SmartPost business.

We've had great strength in the residential business.

Certainly our Home Delivery product portfolio is the perfect solution for those people who are going direct to consumers, and that growth has been very strong.

As was mentioned earlier, Kinko's, which is a good retail mix, has been strong performance as well.

In particular, coming into the latter part of this peak has been terrific.

So it has been across all segments.

We haven't seen a particular weakening in the manufacturing segment as a result at this time.

Okay, thanks, guys.

Art Hatfield, Morgan Keegan.

Thanks, all my questions have been answered.

Scott Flower, Banc of America Securities.

I wondered -- maybe a question for Mike Glenn and Doug Duncan.

Obviously there are lots of moving parts and pieces with mix and fuel surcharge and obviously, at least on the Express and Ground side, you put out list price announcements.

But I also wanted to include LTL.

Could you give me some sense of how you see the yield and pricing dynamic in the marketplace?

As you all noted, the U.S. economy is still growing, but perhaps not as quickly as in the past.

And I'm just trying to get a sense of how you see base and core yields and in the competitive environment both air, ground parcel and then in the LTL world.

This is Mike.

I wouldn't say there's been a material change in the last several quarters regarding the pricing environment that we've been competing in.

Obviously we feel pretty strong about the pricing environment given the level of rate change that we'll be implementing at Express and Ground.

Fairly consistent with what we've done in the past at Express, a little bit higher than what we've done in the past at Ground.

And so far just general communications with customers, no significant pushback at all.

So again, feel pretty comfortable with the pricing environment, not a material change from what we've seen in the past.

And I'll turn it over to Doug.

Scott, in the LTL numbers obviously 11% growth in yield looks strong.

A lot of that has to do with the addition of FedEx National and the longer haul business.

But we continue to have very strong yields in the original FedEx Freight regional business.

I mean, is pricing still positive?

Because there's been obviously lots of discussion between some of the pre announcements at other Nationals, etc. -- again, you're in a different class in terms of your business mix and service performance.

But it just seems that the LTL and trucking environments are seeing notable rate deceleration in the current environment.

You wouldn't see that in our numbers.

Our contract renewals are still very strong, getting our year-over-year increases and the general rate increase we took, we've still held the preponderance of that.

So our core yield at the original, original FedEx Freight is still very strong.

Great.

Thank you very much.

David Ross, Stifel Nicolaus.

I just had a question on the online shipments in the BtoC business.

You mentioned that you had 1.7 million Internet orders December 11th.

I want to know how that compared to last year.

And then not just on the peak day but overall for the season how much the BtoC business is up.

First of all, let me just clarify, when you say Internet orders, those are packages being shipped through FedEx.com, those are not packages that FedEx receives as a result of Internet shopping and web-based shopping.

I think we continue to see an increase in volume coming through that channel.

It's a bit difficult at least to date to say exactly what the year-over-year growth is in that segment, but I don't think there's any question that we're seeing an increase.

And I think that's also one of the reasons why we're seeing the Express peak get closer and closer to Christmas, which obviously presents some operational challenges, but our Express team is doing a great job managing through that.

And the BtoC business -- or I guess the FedEx Ground Home Delivery, is that coming in better or worse than you guys had expected at the beginning of the quarter?

Well, we're doing a terrific job across the board at Ground and show strong growth rates across the board.

Again, I think that's a combination of the broad portfolio of services and meeting a customer's individual supply chain needs.

It's a great job by our sales and marketing team and excellent service on the part of our Ground team.

Thank you.

David Campbell, Thomson Davis.

Three months ago you said the cost of the pilot settlement would net out at about $100 million I believe.

Is that still the number to use including changes in incentive compensation?

I think what we said there, David, was we were adjusting our forecast for the fiscal year by $0.20, which is what we believed the impact to our previous guidance was at that point.

And the number that we have now given you is actually a $0.25 impact, which is a year-over-year comparison which is the full contract including ongoing pay that was not in the prior year numbers.

But the vast majority of that $0.25, $143 million of operating expense, as we noted in the release, is for one-time signing bonuses and other upfront costs.

Okay, thanks, that helps.

And can you give us any estimate on the number shipments or yields for ANC in the February quarter or what it has historically been for ANC?

Well, I think we gave you -- in the press release we gave a revenue number.

And since we don't break out regional packages or P&L, we're not going to start that today.

But needless to say, I think the ANC acquisition is terrific and I expect once we get the full impact of the synergies and the Express business plan, it will be a very positive impact for our international performance and for the shareholders of FedEx Corporation.

Okay, thank you.

Very good numbers.

Neal Deaton, Stephens Inc.

I just wanted to ask you a quick question.

Obviously your results in FedEx freight include the Watkins acquisition.

If you were to strip out Watkins, do you know what your core regional LTL tonnage growth would have approximated?

Well, we gave you the average daily shipments were positive for the FedEx Freight regional network, which was less the Watkins acquisition.

It did decelerate month-to-month, but was still positive in every month during the quarter.

So I think you'll find that we're still gaining significant market share in the FedEx Freight regional network because we're frankly selling a different value proposition with money back guarantee and a lot of different services.

And we'll soon have that same advantage in the National network and we'll be able to begin to take market share there as well.

Okay.

And one other question along those same lines with regards to the yield.

Looking at what the yield's been in the past couple quarters, it was obviously a lot higher here, which includes the Watkins and the longer haul shipments.

Is it fair to say that the yield or pricing was around what it's been the last few quarters, stripping out Watkins?

Looking at the original FedEx Freight, just the regional LTL business, our yield numbers were very strong, which means we didn't have very little change in fuel surcharge at all because, if you'll recall, last September and October we capped the fuel surcharge because we weren't going to penalize our customers for the temporary shock of the Katrina oil spike.

That was not the intent of our fuel surcharge.

So our contract renewals and what we've held onto for the general rate increase in our base rates has been very strong at FedEx Freight, but I'll remind you again, a lot of that is because we're selling a different value proposition than most of the market.

Right, okay.

That's helpful.

Thanks for your time.

Robert Raiff, Centurion.

Satish Jindel, S.J.

Consulting Group.

Dave Rebholz, I have a couple questions for you on the Ground side.

You mentioned about a 14% year-over-year average volume grew with the increased online shipping that Mike Glenn just mentioned.

Can you give us some guidance as to whether the commercial volume is growing faster than the Home Delivery as to if the Home Delivery is more than 14 and commercial is less or vice versa, first part of it?

Well, the Commercial is solid double-digit, but there's no question in the Home Delivery we're seeing lots of strength which is indicative of the retail business or the consumer business -- as is our SmartPost productline has substantial growth this year -- or this quarter.

So we haven't seen a decline in the commercial, as I mentioned earlier, but we have seen stronger growth in that BtoC type of customer.

And the follow-up on here is, you have a new pricing system for your DIM charges on the Ground side.

Can you provide some indication as to do you expect that to be neutral to be (indiscernible) or do you expect it to contribute to the bottom line as a result of that change from the OS1, 2 and 3 to more of the Express type linear system?

It will be accretive in the second half of the year.

It -- well, I think that's just the best way to leave it at this point, but it will definitely be accretive.

And one more if I could.

With you having both the parcel and LTL services in one family of FedEx, FedEx Ground has had a multi-weight service that for a long time was positioned against LTL with some of the benefits when there was no LTL part the Company.

With the much larger LTL network there, how is that service of multi-weight being positioned against LTL to make it easier for customers to know when to use LTL versus multi-weight?

I'll let Mike comment if he would like on the sales positioning of the product, but it's finding the right customer with the right set of packages.

We do not compete against our Freight sister company.

I will say that the growth in the multi-weight has got very strong growth in this quarter.

Satish, I would view them complementary as opposed to competitive.

You're talking about different business practices that drive a lot of this.

Obviously multi-weight is on the lower end of LTL.

You're talking about skidded versus non-skidded freight and how it comes to us.

So we position them in a complementary fashion and believe it's actually strengthened our portfolio as a result of doing that.

Doug Duncan may have a comment about it.

Satish, this is Doug.

We've actually educated our sales force and freight network to be able to show customers the difference between multi-weight and LTL so that they can pick the right network.

That's the real advantage that FedEx brings to the party here is you can buy only what you need and not more than what you need and optimize the network.

Wonderful.

Thanks very much.

Great quarter.

This does conclude today's question-and-answer session.

At this time I would like to turn the call back over to Mickey Foster for any additional or closing remarks.

Thank you very much for your participation in FedEx Corporation's second-quarter earnings release conference call.

Please feel free to call anyone on the IR team -- Jeff, Elizabeth, Steve, or myself -- if you have any additional questions.

Thanks again.

This does conclude today's conference.

Thank you for your participation.