聯邦快遞 (FDX) 2007 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 Mickey Foster.

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

I am Mickey Foster, the Vice President 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.

Joining us on the call today are also 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 those who would like to participate.

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

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

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

For additional information on these factors, please refer to FedEx Corporation and its subsidiaries' press releases and filings with the SEC.

To the extent we disclose any 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, FedEx Information Services and CIO; Dave Bronczek, President and CEO of FedEx Express; Dave Rebholz, 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 some Q&A.

Thank you, Mickey.

Good morning, ladies and gentlemen.

We appreciate your joining our earnings conference call for the fourth quarter of fiscal year 2007 just ended.

FedEx delivered solid financial results in FY '07.

Our net income was more than $2 billion, largely because the payoff from our global investments helped to offset the headwind of a slowing US economy.

We remain optimistic about prospects for global economic growth and will continue to invest in projects critical to strong long-term financial performance.

The weakened US market is limiting demand for transportation services, but we expect the economy to show modest year-over-year improvement beginning in late summer or early fall.

We announced today that fiscal year '08 capital spending, the year just begun, will be about $3.5 billion.

That is a 20% increase over fiscal year '07.

This call in that respect is a great opportunity to remind you that at FedEx our focus is on long-term goals that will yield long-term success.

The majority of this capital spending is for future growth with the biggest increases largely due to facilities and information technology needs.

Alan can tell you more about that later.

We are in a leadership position today because of smart and timely investments we have made over many years in the past.

These investments have cut transit times, improved and diversified services and reduced costs.

We intend to stay leaders by continuing to invest in the future despite current economic conditions.

We intend to expand and strengthen the FedEx portfolio of services, giving more options to our customers and more opportunities to FedEx.

In this regard, FedEx Ground is beating the competition with its money-saving, high-quality service and we will stay ahead of the game with investments in network improvements and service enhancements.

Since FedEx Ground was rebranded in 2000, it has more than doubled average daily package volume, nearly tripled its annual revenue and increased profitability almost fourfold.

At FedEx Freight, our acquisition of Watkins Motor Lines allows us to now offer FedEx National LTL service, a long-haul service that strengthens our regional freight offerings.

When bundled with FedEx Express and FedEx Ground, the entire FedEx Freight portfolio adds valuable traffic to our networks.

We have also opened the FedEx Freight Canada providing intra-Canada and transborder LTL services for the first time with our own operations.

We are positioning FedEx Kinko's to become a leader in the office support market by investing in long-term profit and margin growth.

We recently improved our successful print online digital service by collaborating with Adobe to extend its reach.

We plan to open 300 new FedEx Kinko's centers in 2008, bringing the total to more than 2000 by the end of this fiscal year.

I note that we opened over 200 of them in the fiscal year just ended.

FedEx Kinko's will increase its revenue in FY '08.

Now this is in addition to the highly profitable $800 million a year it contributes to FedEx Express and FedEx Ground shipping revenues, which appear in the Express and Ground revenue streams.

Investments abroad have positioned FedEx to take advantage of global macroeconomic trends.

In the past 20 years, we have laid a strong foundation for success in Asia.

We have unparalleled air and ground networks due to many years of acquisitions and internal developments.

FedEx is the leader in express transportation in China.

We also lead in revenue in Hong Kong, Taiwan, Japan and Malaysia.

We launched domestic express service last month in China, the world's fastest-growing economy.

We will spend a considerable amount to build our new intra-China network and add to our intercontinental network.

FedEx now offers end-of-business day cutoff times with next day early morning deliveries to 19 cities in China and that will be expanded shortly.

We have created a day definite service with 24-hour and 48-hour services to more than 90% of China's GDP.

FedEx has a sizable advantage over the competition in China for several reasons.

First of all, we have been in China for more than 20 years.

FedEx has 30 weekly US China Air frequencies, more frequencies than any other US cargo carrier.

We believe we have a strategic advantage with plans to locate our new $150 million Asia-Pacific hub in Guangzhou, the heart of the Pearl River Delta where more than 40% of China's exports are generated.

Now India is another important market and it is among the world's fastest-growing economies with current and projected growth at more than 8%.

Thanks to our investments in corporate development activities there, FedEx is a leader in India's express transportation market.

Europe is an extremely large parcel market and we believe there are tremendous opportunities there and we have a wonderful franchise and a great team in Europe.

We've acquired transportation companies in the United Kingdom and Hungary during the last fiscal year.

Our acquisition in the United Kingdom means we can directly serve the entire country with a broader portfolio of services and we expect to see significant improvements in the overall quality of service.

I want you to know that we are also very focused on controlling costs.

We have significant flexibility in terms of managing compensation because it is largely linked to FedEx financial performance.

We are reducing operating expenses through cost structure improvements, new technology and more streamlined operations.

We have discussed many of these progressive innovative programs at our investors and lenders meeting last March.

In summary, we believe FedEx will stay ahead of the curve.

We are investing in acquisitions that give customers more choices.

We are significantly enhancing our technology to provide innovative solutions.

We are improving the customer experience which drives loyalty.

Our management and workforce are controlling costs and increasing efficiency throughout our operating networks.

Our goal is to come out stronger and more competitive after this economic slowdown and we are on track to succeed in those goals.

Let me conclude with a couple of remarks about our long-term financial goals and again the investments we are making this year.

Our goals are to try and grow revenue at 10% per year to achieve 10% plus operating margins, to increase our earnings per share 10% to 15% per year, to continue to improve cash flows and returns on invested capital.

Despite those long-term goals, it is also important, as I mentioned before, that we continue to invest in our networks and we are doing so in all of our core operating companies; Express, Ground, Freight and FedEx Kinko's.

We think that is the smart thing to do and now I would like to turn it over to our EVP and Chief Financial Officer, Alan Graf.

Alan?

Thank you, Fred.

Good morning, everyone.

Our fourth-quarter results were solid in a low growth economic environment and with fuel prices rising during the quarter, which as many of you know causes a drag on earnings due to the surcharge lag.

Operating margin increased versus last year 20 basis points, up to 11.1% and our EPS grew 8%.

This performance is noteworthy when considering that domestic Express volumes declined 1% versus last year.

Fuel surcharges were lower this year, but jet fuel prices were about flat year over year.

In the Ground segment, which continues to perform exceptionally well, we enjoyed operating income growth of 30% on the strength of an 8% volume increase, a 4% yield increase and improved performance at SmartPost.

Freight operating income declined as regional LTL revenue was up only 1% and National LTL volumes were very soft.

We also incurred reengineering costs at National to improve service and lower the cost structure.

Kinko's revenue declined slightly.

Margins remain low as expansion and employee development and training costs continue.

For the year, revenue was up 9%, EPS increased 11%, and ROIC improved.

So very close to our long-term objectives.

I should note that on the balance sheet side, we adopted SFAS 158, which resulted in a $982 million charge to shareholders' equity at May 31, 2007 in accumulated other comprehensive income.

Under SFAS 158, we were required to write off our prepaid pension asset of $1.4 billion and increase our pension and other post-retirement benefit liabilities by $120 million.

These adjustments net of deferred taxes of $582 million were required to recognize a liability for the unfunded projected benefit obligation in our balance sheet.

These retirement plan changes announced in February 2007 were contemplated in our February 28, 2007 actuarial measurement and reduced the impact on shareholders' equity of adopting SFAS 158 by $1 billion, over $1 billion better off than we would have been had we not modernized our plans.

Looking ahead to FY '08, we have provided earnings guidance of $7.00 to $7.40 per share, which assumes an improving economy beginning in late summer or early fall.

Given that we expect to see continued slow economic growth this summer and fuel prices are going to remain high, our first-quarter guidance is $1.45 to $1.60 a share.

Express domestic volume, package volume and LTL shipments will likely continue to be restrained during Q1.

Strong Ground growth will continue.

As Fred mentioned earlier, we are making significant investments in our global networks in FY '08.

Start-up losses for China domestic as we build and expand the network ahead of traffic, 757 start-up, the China international hub start-up, the elimination of alternate day service at Ground and outlying areas and accelerating lanes, Kinko's expansion in compensation and training programs are but a few of the programs that will have positive impact for us beyond FY '08, but will be an earnings drag during this fiscal year.

We are also investing in productivity and cost improvements.

For example, Express has many initiatives underway, including vehicle asset strategy, airline flight optimization, efficiency improvements in aircraft fuel consumption and maintenance and new and improved tools to better optimize pick-up and delivery in line haul routings and many of those savings are in the guidance I have given you for the year.

These investments, which are absolutely critical to our long-term strategy, will have strong long-term positive impacts on our financial results and help us to achieve our long-term objectives.

Our track record in this regard has been pretty good, particularly in hitting our financial objectives in the last 10 years where revenues have increased 123% and net income has increased over 300%.

We are now ready to take your questions.

(OPERATOR INSTRUCTIONS).

Donald Broughton, A.G.

Edwards.

Good morning, everyone.

Hello?

Good morning, Don.

Oh, good.

Make sure you could hear me.

A couple of quick questions.

I was looking at the FedEx Ground numbers, 17% operating margin.

You cited the lower legal costs.

How much -- can you quantify that for us so we can get kind of an idea of what the core improvement was there?

This is Dave Rebholz, if you want me to take that, Alan.

Fine, Dave.

The issue is is that the previous quarters' legal fees included a lot of discovery relative to the class actions that we explained at the last investors meeting.

We had the benefit this quarter of having gotten through the bulk of those expenses.

That does not mean on a go-forward basis we won't have a quarter or two where discovery costs pick up.

But it was substantial on a year-over-year basis and it is clearly one of the key benefits to the margin for this quarter.

You know, Dave, I look back and you hit that bogey of 17% operating margins in Ground in the fourth quarter of your fiscal '02 and '03, but you haven't hit it since.

Given that you have got larger scale, is it reasonable to expect that this is actually an attainable number on an ongoing basis when you don't have those kind of legal fees?

It is more than that quite frankly.

First of all, fourth quarter is one of our strongest quarters.

Number two, we had some very good gains relative to the, as already mentioned, to the SmartPost performance by changing some of the network inputs and taking advantage of the yield that we could get with customers who further inserted into the network.

So we got a nice pick-up there.

Clearly, we have a nice pick-up from the yield in Ground and home delivery as the relationship to the rule changes with dimensional rating.

So the combination of those gave us a very strong quarter and on a year-over-year basis, quarter four of last year had some very draconian cost controls in place that allowed us to show this level of performance.

So 17% would be on a high level.

Don, this is Alan.

Let me just add that of our increased CapEx in '08, 40% of that increase is going to Ground facilities and Ground IT infrastructure as we continue to accelerate lanes and grow the business and the growth is dramatic, particularly in this economic environment, to hit these growth numbers, I think is a real tribute to the service that is being provided and it is resonating very well with our customer base.

No one can argue you are not stealing share, especially when the competitors are all showing down volume numbers in that segment.

One other quick question for Doug Duncan and then I will let someone else have the floor.

LTL showed a really solid pricing gain.

Revenue per hundredweight went up another 11% in the quarter.

Prior to the Watkins acquisition, you were showing 7.5% to say 9% revenue per hundredweight increases.

How much of this 11% increase is length of haul and how much of it is absolute price increase?

So basically what is price and what is mix here?

Can you give us some insight to that?

Donald, a significant part of that is the additional length of haul yield that Watkins brought to the network.

However, I will tell you in the Ground segment, our yield improvements are still substantial.

We are retaining the general rate increase that we took.

The Freight segment -- sorry.

We are retaining the general rate increase that we took.

We still have very favorable contract renewals, which I think is the best way to measure it.

So we are still negotiating solid increases with our contract customers as they come due.

So the yield market, while we are taking a little less growth, I think we have done a good job of protecting our yields in the Freight segment.

Ken Hoexter, Merrill Lynch.

Great.

Good morning, Fred, Alan and team.

Fred, it sounded like you were saying that despite the slowing economy and slowing use of transportation, you felt that there would be a little bit of a pick-up in the summer and maybe even into the second half of the year.

Can you kind of extrapolate on what you are seeing that leads you to give that positive an outlook?

Well, there are a couple of things here.

First of all, we have a lot of confidence on our economic team -- Gene Huang and his economists.

There has been a significant inventory draw-down over the last several quarters and we believe that that will begin to turn around in the late summer or the early fall.

In addition to that, we obviously have a very good view through our various networks such as the trans-Pacific trades, the Ground network in consumer purchases and so forth and we base that statement on some of the trends that we are beginning to see that would support Gene's analysis.

So that is why we made that statement.

Now having said that, obviously the big wild card in this whole thing is the price of fuel.

You can't take hundreds of billions of dollars out of the US consumers' pockets, which are then not recycled through our economy, and not have an effect.

And for many reasons, the price of fuel is now approaching $70 per barrel.

The Congress as we speak is debating an energy bill and we are very hopeful that they will take aggressive action and not water this effort down because this price of fuel is a major issue to the US economy.

So that is a wildcard, but based on our analysis and what we are seeing in our trends, we make that statement.

The inventory correction should begin to turn around a little bit late summer or in the fall.

That's helpful and if I can do my follow-up on -- Alan, can you talk about the scale of the China expenses on the roll-out of the domestic network?

I guess what we might see over the next four quarters.

Have we seen the peak in this -- the fourth quarter or should it peak out in the first or second quarters?

Then also can you tell us what the benefit in Express this quarter was from the A380 sale or elimination contract?

All right.

Well, in China, we have very aggressive plans, Ken and you know, we are already providing two-day service to over 200 cities.

We are going to be moving very quickly to add cities to our time definite next morning service.

We hope to get by next month up to 28, time definite next day service to more than 50 cities and you might guess, we are picking the largest ones and they have the most people and we are talking about a significant amount of opportunity here.

So I think that with the plan that we have is about as aggressive as we can possibly do it.

So that means that we are going to continue with the sort of losses in the first couple of quarters here of '08 that we had in the fourth quarter of '07.

I expect those to start narrowing in the second half and frankly don't see any reason at all why we won't have some profit in domestic China in FY '09.

Let me add -- this is Dave Bronczek.

Let me just add that the business plan was outstanding.

Eddy Chan and his team in China and there in Shanghai did a great job.

Alan is right.

It is 28 cities that will be time definite, 200 cities day definite.

They have called on thousands and thousands of potential new customers for this service and we are very, very excited about the upside going forward.

David Ross, Stifel Nicolaus.

Good morning, gentlemen.

I have got a question I guess on going back to Freight, Doug, if you could talk a little bit about the integration costs?

I know that -- heard a little bit in the quarter.

Can you talk about I guess what they are for, whether they are just for rebranding and systems because our understanding is that the actual network, the old Watkins, are not going to be integrated with the legacy FedEx LTL network?

David, the rebranding is obviously going on and doing very well.

Actually we rebrand the trailer every 42 minutes at the moment.

So you should see a lot of them out there and that expense is in there.

The network and reengineering -- we have had to move some of the hub locations for correct positioning to produce the on-time service that we are going to have.

This network has been a relocation of some of the drivers.

We have had to install the technology.

We have put the handheld -- integrated the handheld technology in every drivers' hand at FedEx National.

All the hubs and the major locations all have the dock computers now to enable us to run this on-time network.

So the integration of all that technology, as well as positioning the drivers and the hub resources and the expansion of some of the hubs so that we can move and process the freight every night on a very timely network to reach our 99% on-time delivery metrics is what we have been going through.

And it is largely done.

We've still got a few more tweaks to do, but the efficiencies at National, the productivities at National right now are at record level.

They are producing service levels they have never seen before, so it is all working.

We just need a little more volume into the pipeline and this company will perform exceptionally well.

So if we get that uptick in the economy, plus the great new value proposition we are bringing to the long-haul market, I think you will see this company do very well.

Sounds great.

If I could just have a follow-up question maybe for Ken on Kinko's.

You talked about $800 million in Express and Ground revenue coming from the Kinko's network, which is great, but I guess I am wondering how fast, if you want to look at a same-store sales basis maybe, you are getting packages into the store year over year.

Well, David, we don't release package numbers, but I just will let you know that we are very, very pleased with the expansion efforts.

Our customers, we are getting a lot closer to them.

We are very, very pleased especially with Ground -- the penetration in that market because we know we are picking up share as we get closer to those customers.

So the expansion effort is working out very well.

We are pleased with the numbers so far.

Thomas Wadewitz, JPMorgan.

Good morning.

First question is on Express margins.

Alan, if you could give us a sense -- a couple different pieces what worked against you in margins in the quarter.

I guess fuel is something you mentioned.

If you could give a sense of the magnitude of that.

You integrated the joint venture from China, so I think that could have caused some noise in the margin, a sense of that and then maybe just in terms of softness of the economy.

If you could give us a sense of order of magnitude of those and then how they might affect going forward.

Well, Tom, obviously you hit the three right on the head.

I mean clearly when fuel prices are rising, it is very, very painful to Express to pay jet fuel.

About half of it is spot price and the surcharge has an average of about a six week lag, so that was painful.

From when we gave you previous guidance for the corporation to where we ended up, certainly we had lower domestic volume and a little bit weaker yield than we had anticipated back in March.

That was a big impact.

We knew the China start-up losses what they were going to be and we basically hit that plan straight on.

So versus guidance, previous guidance, it was not a factor, but versus the previous year, it was.

Looking forward to '08, again with the caveat that we keep talking about is that we get some pick-up here in the fall in the economic environment, there is no question Express is operating income and margins are going to increase in '08.

Dave?

Well, that is right.

All three points obviously affected our margins.

You saw that we still hit double-digit margins in the quarter.

We are on a strong path to keep increasing those operating margins.

As Fred has pointed out and Alan, obviously we are looking forward to a pick-up even if it is a slight pick-up in the Express segment of the business in the fall.

Our cost controls have been excellent.

As you can see in our salaries and benefits line that were flat.

Our revenues are still growing at 4%.

So we are well-positioned as Alan pointed out to increase our margins and keep marching down this path of double-digit profits.

Okay.

And then my follow-up is on the International Priority line.

I think in the prior quarter, you had some softness in Asia outbound.

This quarter, you identified Europe and Latin America.

Did you see Asia bounce back?

And I guess also how important is stronger IP growth in terms of what you can do on the Express margin side?

Well, let me answer that in the middle part of your question on Asia.

Yes, the answer's yes.

Asia did bounce back and slightly less growth than Europe, although ahead year over year.

In fact, all the regions around the world were positive growth on revenue year over year.

But you are correct that Asia did bounce back and that is a very good sign for us along with US outbound continuing to grow.

Edward Wolfe, Bear Stearns.

Good morning, everybody.

Good morning, Ed.

Hey, Fred, kind of a longer-term question.

As you look out on your capital spending priorities and where you want to invest at the [theaters], let's call it Europe, China aircraft, how do you think about the priority between those three and how long do you think we are going to be in this kind of raised CapEx period as you go out?

Well, Ed, you are basically talking about what goes on in the strategic management committee.

We do a lot of arm wrestling in there to prioritize what we are going to do.

The facts of the matter are that in all of our four operating companies, we have big opportunities and as Alan mentioned in the fiscal year that is upon us, the one we are now in, '08, the increase in CapEx is basically driven by new facilities and IT investments.

It is not driven by aircraft.

I think some people mistakenly thought that was the case.

Now we will run along here in the next couple of fiscal years at CapEx levels that have been a bit higher than in the last few years, but as a percentage of revenue, we think over time that they will decline as some of these networks are built out.

A good example of that and it is a small version of it is FedEx Kinko's.

I mean we have a bow wave of expense, 200 some odd stores last year, 300 stores this year.

The stores aren't profitable from day one; although they are running ahead of the projections that we had.

We are putting a lot of investment in the customer experience and in our teammates' training and compensation.

Then we have this fabulous product, which is one of the reasons we acquired FedEx Kinko's, our digital print online, which is where the world is going as opposed to the traditional copy service and we are investing very heavily this fiscal year in that service.

So FedEx Kinko's, as I mentioned at the investor and lenders meeting, in FY '07 will rock along at breakeven more or less, slightly above or below the line and then in FY '09 as that bow wave of expense from those network expansions begin to turn positive, you will start to see some real numbers drop on the bottom line and that is even without regard to the transportation revenues that are produced through the FedEx Kinko's channel that we've mentioned.

So that is a small example of what is going on throughout the company and I think in FY '09 and' 10 that you will see CapEx as a percentage again to drift down again.

It may rock along at these levels.

777 is coming in I think in -- is it '09 or '10 -- calendar '09, fiscal '10, but that is sort of the way we see it.

All right.

As a follow-up, can you just talk a little bit about the Airbus benefit, what expense line that was in and is that all in the Express in this quarter?

And I am just guessing there is no more of that coming or is there more to this settlement that we could see as you go out?

Ed, this is Alan, thanks.

Ken, I apologize.

I skipped over that one when you asked it earlier.

When we executed the settlement agreement with Airbus in March, part of the settlement agreement provides us to receive credit memorandum with a stipulated value of a certain amount to be provided over time and utilized for future purchases of Airbus goods and services.

We still remain a huge operator of Airbus equipment.

So the number that we talked about and reported today went completely to Express and went to expense reduction and it is something less than the total nominal credit memos because of the time value and because we are not certain we will be able to utilize all of them.

So that is our best estimate today and we will be reevaluating that periodically as things change.

William Greene, Morgan Stanley.

Hi, good morning.

I am wondering if we can talk a little bit about -- despite the elevated CapEx levels that you have, I still have you producing a fair amount of free cash flow.

Is there any appetite at all for share repurchases?

As we talk from time to time with our Board, well actually at every meeting about our financing strategy and our outlook, that is always a debate and we think we have many opportunities to continue to invest in the business and get shareholder value that way.

Having said that, I am not going to sit here and rule out any potential stock buyback, but at the moment, we still have availability from our previous plan and we have not bought shares back in a long time and have no immediate plans to.

Okay.

And then in terms of the Express business, if you look at kind of the industries that you serve, was there any one that sort of stood out in terms of either particular strength or weakness?

This is Dave Bronczek again.

No, not really.

It is generally what you would expect across the board in the Express segment.

So nothing that stood out in a very negative way or a very positive way.

Mike, Glenn, are you on the line?

Mike is traveling and he is on the West Coast.

You want to amplify on that?

Yes, the strength in the industries were largely manufacturing non-durables business and professional services and wholesale non-durables.

Those were the industries that drove the greatest share of growth.

Jon Langenfeld, Robert W.

Baird.

Good morning.

On the international export side, looking at revenue share, which of the major markets do you think you are tracking ahead and which behind your competitors in terms of growth?

Well, I think we are doing very well in Europe.

We have had a very good year there.

US international outbound has been exceptionally strong as well over the last several years.

I think we are tracking ahead there.

We are doing very well in our business model in Asia-Pacific, so I would say we are very pleased across the board, but I think Europe and the United States.

Okay.

And then in terms of DHL.

They are obviously showing some positive volume growth here in the US.

Are you feeling that at all yet?

This is Alan then I will turn it over to Mike.

My answer to that is no.

Mike?

No, we are not seeing any material change in their performance relative to the FedEx performance.

They tend to define volume growth in a different way than we do.

They tend to group Ground, Express and US export altogether when they report their volume growth numbers in the US.

We obviously break those out differently.

So on an apples-to-apples basis, we are continuing to outperform the competition.

Gary Chase, Lehman Brothers.

Good morning, guys.

Just wanted to drill down a little bit on some of the segment margin stuff.

Alan and maybe Dave, last quarter, you noted in Express that volume had kind of slowed a little bit quicker than you anticipated and there were things you were working on the cost side.

I was just curious if you got most of the benefit from those initiatives during this quarter or whether you still have some adjusting to do to catch up with the declines there?

This is Dave.

I will start off first.

At the end of the third quarter, you are correct, we saw the softening as Fred and Alan have talked about go into the fourth quarter a little bit stronger -- weaker I guess you would say.

So we put a lot more discretionary freezes on things.

We have done a very good job on our productivity and our FTEs in terms of managing those areas.

Yes, we put a bigger emphasis on cost and in Q1 this quarter, we are as well.

So that's what gives us some optimism for a strong year going out.

If we get that little bit of rebound in the United States economy, that would be very good for us, the way we have been managing our costs down.

But it is not sounding like it was a big drag in the quarter then.

It sounds like you responded to it pretty well.

Well, I would say given the fact that we had a 20 basis point improvement year over year in a completely different economic environment, absolutely our productivity and cost initiatives are working very well at Express and the good news is, as I mentioned in my monologue at the beginning here, was that there is more to come in '08.

I mean we have some things that are getting ready to kick in that I think are going to take us to some new levels in productivity in the areas that I mentioned.

So that is factored into us going forward.

We are not looking for any growth in domestic Express volume the whole year in fiscal '08.

We just think the economy is just not going to get strong enough for that to grow and with the fuel price surcharge that we have to put on, it's driving a lot of Express packages through the Ground network, which is fine for us as long as we manage our costs.

The only other thing I would add to that is that is correct and we do feel very optimistic going forward.

I guess the fuel issue hurt us a little bit more than we had anticipated in Q4.

Scott Flower, Banc of America Securities.

Good morning, all.

Just a couple of things.

I was wondering and I think you mentioned this briefly, Alan, but I just wanted to maybe get your comments or Mike Glenn's.

It looks like if you adjust for the fuel surcharge, yields have been very solid domestically both in Air and Ground and I just wanted to get some sense of how you view the competitive dynamic and the yield environment.

It seems as if everyone has behaved in a very disciplined and solid fashion despite some of the softening in the marketplace.

Scott, this is Mike.

I would say there has not been a material change in the pricing environment.

Obviously, it remains competitive, especially on an account-by-account basis.

But if you look at the overarching pricing environment, I would say there has not been a material change.

Okay.

And then the other question is I am just wondering on China and I think you alluded to this in the analyst meeting in Memphis, obviously you had different scenarios and I guess from the context of the comments you made today, as well as some of the CapEx, it sound like you are going at this as hard as you can in terms of the ramp and to the extent that the growth there -- the hockey stick or the ramp later is sooner and faster.

Is that a fair way of thinking about how you are approaching the China network situation?

This is Dave Bronczek.

I can tell you that we are going into the China market very aggressively.

We want to -- we have a lot of good feedback from our customers that want this product and service offering and we are optimistic.

So yes, I would say that we are going into the market as we had planned, but it is aggressive.

David Campbell, Thompson, Davis & Co.

Yes, Allen, I wanted to ask you if the growth in domestic deferred shipments which has not grown recently, is that any indicator of future -- is that any positive indicator of future growth in the Express business in general, or the economy in general?

Have you seen that in the past where that sort of leads the recovery in the Express business?

David, I will answer that first and then I will kick it over to Mike Glenn.

You are referring to the 2.5% growth that we had in deferred and that was very good news for us in the fourth quarter and helped us significantly.

Mike, you might want to talk about the market in general.

Well, David, as we have said for some time, we don't anticipate any material growth in the domestic Express sector, and it has not been a growth market for some time.

We look at the total parcel market.

We expect it to outpace GDP by roughly a half a point or so.

So as we see strengthening in the GDP going into the fall as Fred mentioned earlier, we would look for the parcel market to obviously pick up.

But we are not looking for any material growth in the domestic Express sector.

I will say that our sales team is doing a terrific job in revenue management and making sure that we have strong revenue growth despite relatively flat volumes.

And typically what you do see is a bit of a pick-up in the deferred sector before you see strengthening in the overall parcel market.

So first, we would look for growth primarily out of Asia and then more or less moving up the food chain and then secondarily, some growth in the deferred sector.

So we do view that as a good sign, but as I mentioned earlier and has been referenced earlier in the call, we don't look for any material growth in the domestic Express sector for this fiscal year on a volume basis.

Okay.

And my follow-up question is in Asia, the Asia export markets, were they stronger in May in terms of increasing -- increasing in March and April?

I would say, David, that the overall Q4 was a pick-up across the Q3 performance that we were very pleased with.

May was a little bit stronger if I recall than April -- than March and April.

Thank you very much.

Jason Seidl, Credit Suisse.

Good morning, gentlemen.

Two quick questions.

One, if I look at the IP volume growth here, it was a little bit over 2%, still in positive territory.

How much of that volume growth was related to ANC?

Jason, this is Alan.

I would say very little.

Very little?

Okay.

Perfect.

Follow-up question -- Doug, you mentioned that volumes were soft in the regional LTL market, but very soft in the National.

Could you give us a little color in terms of pricing in both regional and National please?

Well, Jason, it is always a competitive market.

We have lots of competitors and it is always very competitive.

It is probably a little more competitive than it has been in the past because I think the overall market volumes in the LTL business are down.

So everybody is competing for lesser volumes, but all in all, I'll look at our yields and the way we have performed, I can't tell you things are irrational because we are still getting great contract renewals as I talked about, we are retaining the general rate increase.

Clearly in the -- you have got companies moving into different sectors.

You have got regional companies trying to get into the long haul sector.

You have got long haul trying to get into the regional sectors, but I am very happy with our position.

We are approaching it so that we will give each market the absolute best service product that they demand in each of those markets and I think over time, we will perform very well with that.

But it is very competitive because the market is down, but certainly not irrational.

All right.

Thank you.

Edward Wolff, Bear Stearns.

Yes, just one clarification, Alan.

When you said the benefit from Airbus was in Express, what line item in expenses is it in?

It is buried in other, Ed.

It's buried in other?

Buried in other.

And if it is not in the salaries side of thing, it feels like you guys did a very good job of managing that as a percentage of revenue.

That was the key Dave was hitting earlier about what we have been able to get done here in anticipation of that slow growth domestically.

Really a great job by the Express management team.

So that is something that I am guessing you are going to keep pretty tight until you get more conviction with the economy and we should expect that to keep going.

Ed, that is exactly correct.

And we planned it that way for all of FY '08 and we started to see some of the something as Fred pointed out.

In the beginning of the third quarter right after January and the Chinese New Year and obviously continued into the fourth quarter and we have a lot of plans on the cost side.

And yes, the salaries and benefits line that relatively looks flat is something we are managing very closely and we are very proud of that.

Okay.

And then another follow-up, on the Ground yields, they look very strong, up over 4% and that seems to have accelerated.

Can you talk a little bit about the Ground yield environment and what is going on there?

Mike, do you want to talk about it?

Well, again, Ed, I would just say that our sales team has done a very good job from a revenue management perspective.

We have covered a lot of the tactics at the investor and lenders meeting in terms of what we are doing to make sure that we have got a very balanced performance from a volume growth and yield management perspective.

I would say that our team is doing a terrific job.

Obviously we have got industry-leading growth rates on the volume side and we have got industry-leading yield growth rates.

So it is really a very effective job by our sales team and the team that manages our pricing environment and our revenue management committee.

So we are very pleased with what is happening from a Ground volume growth and yield management perspective.

And I would add that last year, we did not have dimensional weight surcharges at Ground; we do this year.

That had a big impact in this yield versus last year's yield.

John Barnes, BB&T Capital.

Good morning.

One question on the domestic Express business, you talked about a move of some of those moves to Ground.

I'm just kind of curious your thought.

How much of that do you think is permanent and how much of that do you think could come back into the Express business with a little strength in the economy?

And then the second part of that is given the sluggishness in Express and I think you have tempered your comments about the growth potential of that business longer term and have talked a little bit more about it being a more mature market, does that change your plans at all in terms of investment in Express and especially with regards to kind of the 727 replacement program?

I will answer the last part of that question first.

No, we are excited about the 757.

That will be very positive for our profits out going forward as is the 777.

In terms of the market and the shifting of the business, Mike, you might want to weigh in on that.

Well, our job is to build solutions for customers and we have introduced a tremendous amount of service enhancements in the Ground network, speeding up the network, improving the information intensity of the capability in the Ground sector.

So wherever we can meet a customer's needs with Ground service capability, we will do that.

So some of it has been self-induced.

Some of it has been due to the economy, but our job is to put solutions together that meet customers' needs.

We don't anticipate a lot of rebound in the Express sectors.

We talked about earlier we are planning for essentially no growth in FY '08 from a volume perspective.

Having said that, we do see some opportunity to increase revenue growth in the domestic Express sector.

Having said that, if we do get a rebound in the economy and for example we work down the bubble in the housing market and autos begin to pick up and things of that nature, we could see some modest growth in the domestic Express sector, but we don't anticipate a lot.

One last point on this is that, again, sometimes when you try to decomp Express in the domestic and international, you forget that IP is growing very nicely and we have pick-up and delivery and line haul operations throughout the US that are handling many or most of those additional packages today.

So we still will be making investments in the physical network in the US to handle our growing international business.

Okay.

All right.

One follow-up on the 75 and the 777.

I am not saying that -- the question wasn't would you not pursue the program of replacing those aircraft.

I am just curious at all would you look at maybe smaller number of planes if Express didn't show more potential?

I am just kind of curious from a CapEx standpoint.

No.

I think right now we are very tight on our long-range outlook with the number of airplanes that we have on order and have sourced and have to put through [mod].

And again, these are very high ROI capital investments versus the alternative, particularly the 727.

All right.

Very good.

Thanks for your time, guys.

This is Fred Smith speaking.

I have said this now for several years and I'm going to say it again based on the comments that just went on.

I continue to be a bit disappointed that we can't get across there is really no domestic and international Express network.

It is one marketplace and the people that use the Express system for all intents and purposes look at the world as a market.

So they are moving production facilities to China and then from China to Vietnam where we have a wonderful business and a great country manager and then maybe back to Mexico and so forth.

So to focus on "domestic and international" and this is the point that Alan just made, a very, very big part of our uplift in the "domestic" Express business is simply moving intercontinental traffic into and out of the hubs.

So there is no diminishment of the requirement for lift in the United States.

It is being driven now by the prior and subsequent movement of International Priority and that is why there is such a high ROI as Alan mentioned on the 757 as you can replace the 727s, the 757 operates for less cost, but carries more traffic, it's much less fuel intensive.

It is also environmentally a lot better.

So that is why that is a very high ROI project.

It is a "domestic" airplane, but it is an integral a part of our intercontinental network as the 777s are.

Okay, thank you very much for your participation on the conference call today.

Please feel free to call anyone on the Investor Relations team if you have any additional questions.

Thanks again.

That does conclude today's call.

Again, thank you for your participation and have a good day.