聯邦快遞 (FDX) 2008 Q2 法說會逐字稿

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

Today's call is being recorded.

At this time, I would turn the call over to Mickey Foster, Vice President Investor Relations.

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

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

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

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

To the extent we may disclose any non-GAAP financial measures on this call, please refer to the Investor Relations portion of our website at fedex.com for 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; and Doug Duncan, President and CEO of FedEx Freight.

And now our chairman, Fred Smith, will share his views on the quarter followed by Alan Graf, and after Alan we will have questions and answers.

Good morning, everyone.

Happy holidays and Merry Christmas.

Thank you for joining our conference call focusing on FedEx's financial and operating performance during the second fiscal quarter of '08.

FedEx, as most of you know, is truly a global company serving more than 220 countries and territories with unparalleled networks of transportation and information systems.

We are seeing continued international growth.

Our strategic investments have well positioned FedEx to take advantage of macro economic trends and increased activity in important world markets.

In the second fiscal quarter, revenues from FedEx International Priority shipments grew 13%, led by increases from Asia, and U.S.

export.

FedEx international domestic revenues rose as strategic acquisitions gained traction in countries such as the United Kingdom, China, and India.

Our recently launched direct FedEx Express freighter flight between Manchester and the United Kingdom, and the United States is showing good results.

Last week, FedEx Express announced the opening of a new branch in China.

It's an example of China's booming second and third-tier cities.

In 2006, its volume of foreign trade exceeded $3 billion, a 32.6% increase year-over-year, and that's just one example of one city.

The U.S.

economy continues to grow, but it is clearly restrained by high fuel prices, slower growth in industrial production, and a decline in the automotive market.

During the current 12-month period, about a million fewer cars were sold in this country.

There is, of course, a financial crisis and significant turndown in the housing industry as well.

We recognize these challenging macro economic trends and are taking action in the remainder of FY '08 to address these conditions.

We remain, however, confident about long-term prospects for profitable growth in all our business segments.

This is the busiest time of the year at FedEx, and I want to thank our 280,000 FedEx team members around the world for their dedication and hard work in delivering the holidays for our customers.

Because of that wonderful team's outstanding efforts, FedEx set a record for its busiest day on December 17, moving about 11.4 million packages through our global networks.

This year's peak was a particularly strong one for fedex.com.

For the first time, daily shipments generated on-line surpassed the 2 million mark.

In addition to the beginning of our peak season FedEx was busy on several fronts during the second quarter of fiscal year '08.

FedEx was front and center in U.S.

and international relief efforts.

FedEx, along with our partner relief organizations, helped to deliver more than 130 tons of relief supplies in response to disasters in California, Peru, Mexico, and the Dominican Republic.

The Red Cross recently awarded FedEx its Circle of Humanitarians award for contributions and longstanding commitment to the Red Cross.

In October, thousands of FedEx team members continued the tradition of participating in FedEx Cares week, a week-long event benefiting local communities across the country.

FedEx United Way relationship is some 30 years old.

This year we raised $16 million, a record for FedEx and its team members.

For many years FedEx has been known as a good place to work and we are proud of recent recognition for our workplace accomplishments.

Fortune magazine recognized FedEx as one of its 2007 blue ribbon companies for appearing on list its such as America's most admired companies, the global most admired companies and most desirable NBA employers.

FedEx was ranked number one for human resources.

The list, a joint effort of the Hey group and executive magazine ranks the top 50 companies most admired in people management, innovation, product and service quality and management quality.

A magazine for successful female business executives and entrepreneurs rated FedEx as one of the top companies for women.

Before closing, I want to reiterate that FedEx will aggressively manage our costs going forward.

That includes costs related to operations, capital expenditures, and personnel to address the economic challenges facing the corporation.

Alan Graf will provide more information on that in a moment.

I'd also like to remind any of you procrastinators that FedEx is ready to help deliver your holiday gifts on time.

The last day to ship with FedEx Express is the day after tomorrow, December 22, for delivery scheduled before Christmas.

Let me turn it now over to Alan.

Thank you, Fred.

Good morning, everyone.

This morning we reported earnings per share of $1.54 for the second quarter ended November 30, compared to $1.64 per share a year ago.

Overall revenue growth was up 6% to 9.5 billion for the second quarter and was primarily attributable to continued growth in FedEx Express international priority volumes and yields, significant increases in FedEx Express international domestic revenues due to acquisition in the second half of fiscal 2007, and continued very strong volume growth at FedEx Ground.

The profit decline was primarily due to the net impact of substantially higher fuel costs and continued weakness in the U.S.

economy, which is limiting demand for our U.S.

domestic express package and less than truckload freight services.

Lower variable incentive compensation and reduced retirement costs partially mitigated the impact at the higher net fuel costs and the weak economy.

While we have indexed fuel surcharges in place, they cannot keep pace in the short term with rapidly rising fuel prices.

Fuel expense increased approximately 23% during the second quarter of 2008 primarily due to an increase in the average price per gallon of fuel.

We used 306 million gallons of jet fuel in the second quarter.

Our operating income in the second quarter reflected a difficult quarter over quarter comparison as last year's second quarter results benefited from the timing lag that exists when we purchase fuel and when our index fuel surcharges automatically adjust.

During the second quarter of fiscal 2008 we experienced just the opposite effect as fuel prices significantly increased throughout the quarter while changes in fuel surcharges for FedEx Express and FedEx Ground lagged these increases by approximately 6 to 8 weeks.

Looking at our segments and starting with Express, revenue for the quarter was 6.04 billion, an increase of 6%, and operating income was 531 million, an increase of 5%.

Our shining star during the quarter was international priority.

IP revenues grew 13% on volume growth of 7% and yield improvement of 5%.

IP volume growth during the second quarter was due to increased demand in Asia with double-digit volume growth there resulting from continued expansion of our services in the important Asian markets.

IP yields were favorably impacted by exchange rates as well as higher weights per package.

Increased international domestic volumes were driven by acquisitions in the second half of fiscal 2007.

U.S.

domestic package and U.S.

freight volumes decreased during the second quarter.

In addition to higher net fuel costs and the softness in the U.S.

economy, continued investment in domestic express services in China also restrained earnings in the second quarter.

In October of 2007, calendar 2007, we announced a 6.9% average list price increase effective January 7, 2008, on FedEx Express U.S.

domestic and U.S.

outbound express package and freight shipments and made various changes to other surcharges while we lowered our fuel surcharge index by 2%.

Turning to Ground, for the second quarter revenues were 1.7 billion, up 12%, but operating income was 173 million, down 10%.

Revenues at Ground increased during the second quarter due to 8% volume growth and 3% yield growth.

Average daily volumes at FedEx Ground rose in the second quarter due to continued market share gains in our commercial business.

Yield improvement during the second quarter was primarily due to the impact of a general increase and higher extra service revenue primarily through our residential additional handling and large package surcharges and dimensional rating.

Operating income and margin were lower primarily again due to the independent contractor incentive programs, higher net fuel costs and investments to continue to expand our capacity to meet the growing demand for our services.

We look at Freight in the second quarter.

We reported revenue of 1.24 billion which was up 1%, but operating income of 79 million which was down substantially by 43%.

Simply stated, less than truckload shipments declined 6% year-over-year as demand for services in the LTL sector has been severely restrained by the weak U.S.

economy, and we expect this weakness to continue into our third fiscal quarter.

Turning now to guidance, ongoing weakness in the U.S.

economy and high fuel costs will continue to restrain our results.

These factors will be mitigated by revenue growth primarily from international priority services at Express, and increased volumes at Ground.

We expect earnings to be in the $1.15 to $1.30 range in the third quarter compared to $1.35 a year ago.

And for the full year, we are still holding our most recent guidance of $6.40 to $6.70.

This outlook does assume relative stability and fuel prices and no additional weakening in the economy.

We are looking for economic growth in the 2.25 to $2.5% range.

Our cash flows and liquidity remain very strong.

We will continue to make significant investment to expand our network and broaden our service offerings, particularly through our international investments.

Our planned investments for 2008 are focused on support for long-term volume growth, including additional and expanded facilities and new aircraft, improvements in service level, and improvements to productivity including updates and enhancements to our terrific technology capabilities.

Capital expenditures during the first half were higher than the prior year, primarily due to increased spending at Express for facility expansion and spending services associated with the addition of new location it at FedEx Kinko's.

However, in light of the impact of the weak U.S.

economy on demand for domestic package and LTL services, we have reduced our 2008 capital target down 11% to approximately 3.1 billion.

We'll continue to examine this as we go through the remainder of the year.

FedEx Kinko's will slow the rate of expansion of new locations in fiscal 2009 and will balance store expansion efforts with initiatives to improve the customer experience at existing stores.

We are employing significant cost containment and cost targeting initiatives across all of our business segments to manage near term expenditures but we will continue to pursue strategic projects related to our long-term growth plans.

We do remain optimistic about the long-term prospects for all of our business segments.

In general, operating productivity has improved significantly and I want to join Fred and the rest of the management team in thanking all the men and women here at FedEx for their very hard work and dedication during this extremely busy peak season where we are achieving very high service levels and are satisfying customers every day.

And now, the team will be happy to answer your questions.

Thank you.

(OPERATORS INSTRUCTIONS) We'll go first to Tom Wadewitz with JP Morgan.

Yes.

Good morning.

I think the question that stands out to me the most is on your guidance, and it appears that in maintaining the full year you have very aggressive guidance for fourth quarter.

I don't know if this this is precisely backing into it, but something like mid teens growth, 16% year-over-year growth in fourth quarter following third quarter being down year-over-year.

And I'm wondering if could you explain to us, are there some significant cost take-outs that affect fourth quarter and provide that optimism?

Is it demand really picking up?

Is it China Express?

What's really behind that, and how much confidence do you have that you're going to see that fairly sharp turn in earnings in fourth quarter?

Tom, I think there's a couple reasons worth noting here.

One, we are expecting to see very similar results at FedEx Ground's volume and FedEx Express' international priority volumes in the third and fourth quarter, and that will be part one of why we believe fourth quarter will be improved so much.

Importantly, at Express, if fuel prices remain stable, the effect that we've had here in the second quarter is going to reverse significantly in the fourth quarter, and we will get back most of or all of what we lost in the second quarter year-over-year in the fourth quarter.

So fuel will be a very big positive in the fourth quarter and continued IP and Ground growth.

As far as costs, we are being a very aggressive in restraining our overhead and our SG&A areas across the board.

We are retargeting our priorities, and have focused them more on what we think are the very highest return projects, and frankly setting some aside until we see a better economic environment.

Are there significant cost take-out opportunities that you can really work on in the near term?

And I guess in terms of the China Express rollout, is there some expectation that fourth quarter you lap some of the costs and that begins to help you, or is that a little further out than fourth quarter?

Well, there is some lapping going on in two areas.

One, certainly China.

Secondarily, in our national less than truckload business, which has been weak for several quarters in a row.

So that's definitely happening.

I'll let Dave talk to you about China.

hi this is Dave Bronczek.

Yes.

China domestic is actually doing very well.

Their volumes almost every week set new records for us.

I should point out the international priority product that we have around the world is really the powerful driver of our IP and our IP revenue, not just China domestic at the moment.

Okay.

Thank you for the time.

Thanks, Tom.

And we'll go next to Art Hatfield with Morgan Keegan.

Good morning, gentlemen.

Just one quick question, Alan.

On the Ground, on the driver incentive program, can you help us quantify a little bit more what that cost you in Q2, and how should we think about that impacting the results in Q3 and Q4?

Well, I'm in the going to quantify it specifically, Art, but, of course, it has to do with several areas, notably California, as well as some changes to our incentive plans that are ongoing in the rest of the country.

I'll let Mr.

Rebholz give you a little more color on that.

Yes, Art.

Dave.

We have the bulk of the expenses reflected in our go-forward forecast.

We had a terrific response from the California contractors.

They have transferred into multiwork area and have signed up.

There was a secondary component to incentive that is an incentive to drive more contractors into the multiwork area system, and we're north of three-quarters of those people signed up for the program and, as already stated, the costs are reflective in the go forward numbers.

Just one quick follow-up.

Is there a date where this program ends or where we shouldn't see the kind of near-term costs reflected in earnings?

The variable incentive is an ongoing improvement to the contractor model and that's it.

Okay.

Thank you very much.

And we'll go next to John Barnes with BB&T Capital Markets.

Good morning.

I missed a couple minutes of the beginning of the conference call.

Alan, did you quantify at all the dollar reduction in CapEx that you cited in your press release?

We're targeting now about 3.1 billion, about 11% reduction.

Okay.

And can you elaborate a little bit as to where that money is coming out of?

Well, it's across the board with the exception of what we need to do at Ground in terms of continuing to expand our facilities to handle the unbelievable volume growth that they have.

I should just take this opportunity to let you know that on Monday night, on Monday, Ground had 900,000 more pickups this year than last year, packages, that is.

So when you think about the productivity and the work that has to go into that kind of a surge, which is continuing, we have to build additional facilities and have more people who are providing the service.

Everywhere else, we've reduced pretty much across the board.

We've delayed some vehicles, some information and technology pushed out a couple of aircraft, but are still investing in the areas that we think have the highest ROIC.

Okay.

And does this change the outlook on -- I ask new every quarter, but does this change the outlook on the fleet replacement program?

Does it delay it at all or is that still ongoing?

No, we really very much are excited about the 757s and the 777s, the productivity and the invested capital on those are huge with price of fuel in particular, they're going to exceed anything we've ever done.

And while they're certainly long-term in nature, in terms of their returns, they're really vital for the strategy of this company going forward.

Okay.

Last question.

From a cost standpoint, as you get down into the LTL segment, you've taken a bit of a margin hit.

I think there's been some rebranding of Watkins and some integration and things like that.

Where do you stand and how much of that cost begins to kind of fall off over the next two, three, four quarters?

Don, this is Doug.

We did have, I think it was $3.5 million of rebranding in the quarter.

We have to have it all done by September of next year and we're well on track to do that.

I would point out on the margins, though, that there was a couple of big one-timers in there.

Last year we had insurance proceeds from Hurricane Katrina.

We also had a big gain on the sale of a piece of property in Sacramento.

And you couple that with the fuel surcharge reduction, that's almost 400 basis points of the change year-over-year.

Okay.

Very good.

Thanks for the color.

Nice quarter, guys.

Thanks for your time.

We'll go next to William [Green] with Morgan Stanley.

Alan, just one quick follow up to the comment about the 900,000 more pickups.

How much growth is that?

Well, it's actually the number of packages.

It's substantially higher than the average growth rate that we've had.

So it was a very big day.

Okay.

And if we look at the U.S.

export business, how much was that up in the quarter?

This is Dave again.

Let me say that for IP revenue this quarter, I wanted to point this out, the highest growth rate we've had in six quarters.

Interestingly enough, Asia Pacific led the strong double-digit growth rates across the world.

U.S.

export was right there with it and Europe, but Latin America and Canada also grew year-over-year.

U.S.

export was up over 10%.

Okay.

And that's faster than you had in the fiscal first quarter?

Yes, that's right.

Okay.

Then just last question.

On the rate increases that you announced for calendar '08 how much should we assume typically can make it into yield after discounting?

Well, a substantial part of it will flow through, although that's difficult to say in this particular economic time with fuel prices being what they are.

I would say fuel prices are the wild card in this particular period, so we'll have to wait and see, but we've always seen a substantial flow-through but, again, I think fuel is the wild card.

Let me just ask, if you look frat the perspective of the last downturn that we had, or slowdown, back at the early part of this decade, how much were you able to capture back then?

Was it sort of 10%, 20% of the increase?

Well, I think it's a difficult comparison, because we didn't have the fuel surcharge index in place at that time, so I don't know that you can crews that as a comparison to go forward.

Okay.

Thanks.

We'll go next to David Ross with Stifel Nicolaus.

Good morning, gentlemen.

Question at FedEx Freight.

The growth in national LTL versus the legacy FedEx freight business, what was the difference in volume growth there?

Well, they both grew sequentially year-over-year from Q1, which is really what we were looking at.

We put these companies together.

We have integrated them now.

Now when you see Q2 you've got good year-over-year comparisons of the entire business segment.

These two companies are actually managed together.

The IT system is the same, the sales force is the same.

They inter change shipments between each other to maintain 100% coverage around the country, so it's really difficult to break that out, and of course now that we've got Q2 and year-over-year comparable we managed the networks together and that's the way we report them.

So I think the 6% decline in shipments is your real year-over-year comparable for the entire network.

Okay.

And the fuel surcharge impact at FedEx Freight, what was, I guess, the net impact on the margin in the quarter?

Well, the fuel surcharge reduction that we took on retail pricing on the surface was about two margin points, but that was part of an overall strategy to make us more competitive with the small and medium-size customer, and after we got the re-engineering done at national and we combined the sales forces, that's just one piece to our strategy of aggressively going after the market and beginning to grow market share again in these two networks.

We'll go next to Jason Seidl with Credit Suisse.

Morning everybody and happy holidays.

First, Fred, congratulations on the Humanitarian award.

That's probably more important than anything we're talking about on this call.

If I can go back to some of the comments on the contractor model at Ground.

Alan, while you're not going to quantify in terms of the impact, can you give us an idea?

Are you going to do what you did in California across other states throughout the course of the year?

Is that how we should look on margin pressure going forward?

This is Chris Richards, and I'm going to try to respond to that.

As we said in our press release we have an increasingly -- increased level of uncertainty in both the regulatory and legal area.

The changes we've made are in response to legal action in California and other aspects of the challenges that we're seeing.

We're going to continue to aggressively work these issues and we're very pleased with the outcome of both of these programs.

We had virtually all of the California contractors accept the incentives, and we've had a tremendous response on the nationwide program.

Okay.

Thank you, Chris.

On the freight side, Doug, did FedEx National lose money again in the quarter or did you guys reach break even?

David, it's impossible to break that out now that would give you anything constructive to use.

These networks are managed together, they interchange shipments, they share the same IT, they share the same sales force.

So we're managing these together now, so that now that we've got the year-over-year comparables in Q2, I think that's the right way to look at for the entire business segment.

I would add that Doug is exactly correct.

Maybe this will help you some, however.

In a very weak less than truckload market, the weakest part of it is the long haul part of it.

We'll go next to Gary Chase with Lehman Brothers.

Good morning, everybody.

Just currency, on the currency side in IP that clearly helps yield.

I'm wondering, should we think of that as a profit contributor or do you have enough non-dollar costs that that kind of washes out in the off profit line?

Well, we do have a lot of offshore expense these days associated with pickup and delivery, of course, but our fuel, pilot pay and depreciation aircraft are dollar denominated, so it was a help for profit, no question about it.

There some percentage that we can use as a benchmark?

I guess we can go back and look at what those are.

Well, in our case it's not substantial like it would be for other companies, particularly manufacturing companies.

But it was -- it did have a little bit of a boost for us this quarter.

We'll go next to Edward Wolfe with Bear Stearns.

Thanks.

Good morning, guys.

Two questions, just following up on the Ground side and then on guidance, if we could.

The language in your release is pretty strong for the first time, talking about -- it's reasonably possible that cost increases could be material going forward for the change in relationships with your contractors.

Should we view this as legal ease or should we view this as risk of changes that might alter the margin potential at Ground?

How do we think about that and what are you referring to?

Ed, it's Chris.

We're well committed to providing the most transparent disclosure that we can in both our releases and our SEC filings.

This is the best summary that we can provide of a situation that we're dealing with right now.

It's very straightforward.

We anticipate changes and we understand that it's reasonably possible that these cost increases could be material.

Why now, though?

You haven't put in this in before now.

What's changed in the timing of this?

We felt at this point in time it was best to go ahead and talk about this in this context.

Okay.

Changing gears just follow up on the guidance.

Alan, you talked about the fuel impact would reverse itself in two quarters.

If fuel stays flat and it peaked a couple weeks back why shouldn't that reverse itself in two months in the current quarter?

Why should it wait four months to reverse itself?

What am I missing?

You're not missing a thing, Ed.

You're correct.

It will be a benefit but the year-over-year impact won't be nearly as big as it will be in the fourth.

Okay.

You made one other comment about the volumes that would pick up in the fourth quarter.

I didn't quite understand.

Something about Express and Ground volumes as good in third quarter as fourth quarter.

I didn't quite get that.

Well what we're saying is those are going to remain the two strongest parts of our business.

Again, with the caveat that we're not expecting a recession, we are expecting continued growth, although it would be low, and particularly global growth, and our IP and Ground volumes are going to be significant profit contributors in the fourth quarter.

We'll go next to Scott Flower with Banc of America Securities.

Good morning, all.

Just wondered if I could get a little color on, again, however you want to describe it, as we look through the quarter between the different units of Freight and Ground and Express, how did volume growth progress?

Was it even?

Did it vary?

Did it get better?

Did it get worse?

Just trying to get some gauge as we look through the fiscal second quarter.

How did volume growth progress?

Volume growth did not materially increase in the quarter until we got into this last week.

We've seen a strong surge in volume in this last week.

Obviously a lot of people are delaying purchases and making those via the Internet because they can now, but having said that, the quarter, relatively speaking, did not see tin creases that you would expect to see as you approach peak season and approach the Christmas holiday period.

But did the rate of change slow or increase, or was it about the same throughout the different months, understanding there's normal seasonality?

Well, it was relatively flat compared to previous years, moving up towards the final week or so of the holiday period.

Okay.

Then just the other quick question I had is I'm just wondering, because one of the things we look at maybe it's because of the mix effect with some of the acquisitions you've made, obviously weight of package may matter, obviously in the quarter weight of package was up 8% or so, and I am just wondering is that a function of some of the international acquisitions?

Is that a domestic number?

Is that telling us anything that the weight of package is improving, or is that a mix effect from acquisitions or just in general?

I'm sorry --

The average weight of express package I think was up about 8% in the quarter.

I'm just trying to get a dense, was that driven by mix effect due to acquisitions, or is that actually telling us the economy -- maybe the debt to the economy is maybe overstated and sort of all the doom and gloom that's prevalent not in this call but just generically in the market?

Primarily related to IP packages, although there was some mix issue on the domestic side related to softer volumes in the financial markets.

We go next to John Langenfield of Baird.

Good morning.

Can you reflect on the pricing environment today?

I guess domestic express pricing environment today versus maybe the 2000, 2001 calendar period.

You're taxing my memory here by asking me to go all the way back to 2000 and 2001.

The best way that I can answer that question is to say that we've seen no material change in the recent quarters.

But it seems like there was more pressure on the yield side back then when the economy slowed than what we're seeing here today.

Well, I think there are a number of factors that are different today.

Obviously, FedEx has a very broad portfolio of services that allows us to custom our solutions to meet the individual needs of any of our major customers and as a result of that, they have the flexibility to move volume between networks to meet their needs at any given time during a business cycle, so we have seen some movement of volumes between the Express and Ground networks, between our priority and deferred services, and that does certainly pact the pricing environment in a significant way.

So you have to look at it relative to the portfolio that we offer today versus what was available really in 2001, it's significantly different.

Got it.

A follow-up.

Doug, your business is probably closest to the day to day economy.

As you think about how your trends progress during the quarter, can you give us some color?

Was it consistent?

Did it deteriorate throughout the quarter?

How would you look at that on a volume basis?

Well, clearly our strongest month was November.

So it built during the quarter.

But I think you have to go back and understand that we came out of the surges we got the FedEx national company, all the re-engineering and network changes done.

We completed the consolidation of our sales force so that we had a sales force out there with a strong message.

We introduced the service level and the long haul business that is head and shoulders above everything else that's out there, so I think the track we've seen since summer, the growth track we've seen has been far more about market share growth than it has been about the economic growth.

The truck indexes that I see have been continuing to decline and flat, and we have bucked that trend, but I think that's a FedEx phenomenon and not necessarily a market phenomenon.

We'll go next to Ken Hoexter with Merrill Lynch.

Great.

Good morning.

Can we just talk -- I want to review what you said about the peak season.

Were you saying through December you're seeing higher volumes than a year ago?

Is that because you were saying the record days had been stronger?

I just want to kind of understand, or were you just referring specifically just to the peak day?

Well, in Alan's opening remarks, he was referring specifically to the peak day.

Having said that, where we did see a record volume.

Having said that, if you look at the month as a whole, really kind of trailing what you've seen with retail sales, the start of the month was a little bit less than we anticipated, but we have seen some strengthening here as we get closer to Christmas.

This week, for example, has been particularly strong, but I would call it more of a balloon effect, and it's really had I think the higher fuel prices that we're seeing, which I think fuel, petroleum is now representing about 7% of GDP which is significantly up, is having a material impact on spending in the holiday season, and we're seeing the effect of that.

Again, having set that this week has been strong.

Strong.

Obviously it always build to this week.

Strong on a year-over-year basis or just stronger than prior weeks?

Stronger than prior weeks.

Okay.

If we can kind of revisit what you were talking about Ground.

There was, I guess, a string of losses obviously following California.

I saw something happened in Massachusetts last night.

I thought everything was kind of aggravated into -- I thought it -- was it Indiana or Illinois where you had aggregated 30 some-odd cases?

That offer that you made in California, it sounded like there was an incentive program nationwide.

Is that -- are you offering kind of the same bullet kind of deadline for everybody to go to multi routes or is that something that's kind of an offer but not mandated?

Well, there are several things going on, and I can certainly understand how this can be confusing.

First of all, the California incentives were offered in part because we had litigation that was separate litigation, the Estrada case in California.

Those California incentives, as you correctly note, were to convert single-route contractors into multi-route contractor operations, and that's been very well received.

At the same time that we did that, we provided incentives to our contractors on a nationwide basis to enhance their multi route operations, especially for those who want to grow their business.

That is not particularly tied to any specific litigation or challenge.

It was thought to be a good business move and consistent with our needs as a growing business.

The multi district litigation in Indiana is the consolidation of what are now 40 separate cases, and with the exception of just one or two trailing cases, those matters have now all been briefed and are awaiting decision and class certification except for the Kansas case where a decision was entered during this quarter.

We have appealed that decision on class certification to the 7th Circuit Court of Appeals, but those matters continue to proceed.

Separate from that litigation, however, we continue to have periodic challenges or allegations, like the ones made yesterday in Massachusetts.

The Massachusetts AG yesterday issued citations, which are a type of civil allegation alleging certain violations in Massachusetts with respect to 13 single-route contractors.

This is the beginning of a civil process where we will contest those allegations and we face these challenges periodically throughout the U.S.

We'll go next to Rob (inaudible).

Good morning.

Given some of the cost pressures that might be developing in the Ground business, can you talk about how you think you might try to recover some of those cost pressures or improve the margins if will you?

Is it passing some of the costs along to customers?

Is it reaching for more volume?

Are there cost cutting opportunities that you can use to offset some of these?

Well, this is Dave Rebholz.

There is no question that productivity and growth go hand in hand to offset cost pressures.

We have consistently done on a year-over-year basis a terrific job of dropping productivity to the bottom line, both to offset our capital investments, and other costs that may arise.

If you look at the core quarter, the performance -- the core business was simply fantastic.

I was very proud of our team.

We did have some one-time costs that we recognized that were related to legal, but those are one-time costs.

We expect that the continued productivity and technology investments that we have been making consistently over our 20 years will continue to reap benefits in anticipation of our earnings goals that we've set for ourselves.

Okay.

Thank you.

And we'll go next to David Campbell with Thompson Davis & Company.

Hi, good morning.

There's quite a bit of debate going on about the domestic downturn in industrial activity and consumer spending here, spreading eventually to reduction in international business activity and growth rates of -- tonnage growth rates and so forth.

Do you have any opinion on that?

David, Fred Smith.

How are you doing?

Thanks.

I'm doing fine, Fred.

And you?

Fine.

Let me try to give you a couple of larger themes here about what's going on.

I think sometimes in these conference calls we get focused on a number here or a number there.

The global trading system for the movement of goods like we carry is extremely strong, and it is being driven by substantial macro economic trends.

The most important of that is you now have, in the form of the Internet, a very low cost standardized visual medium where people can sell and source goods without regard to time or place.

At the same time, you have networks like the one pioneered by FedEx and, remember, we are the leader by a long shot in moving goods by air around the world, 60% bigger than the next largest entity out there.

And because of the great information systems we've put together and FedEx trade tools and so forth, you're making it easy to move small lots of just-in-time type shipments, and that is what is driving the growth in our IP business overall, and I suspect even with low economic growth that that is going to continue for sometime in the future.

That's a very positive story for our company.

In particular, there are two subsets to that in our outlook.

One is the dollar exchange rate is driving a substantial growth in international exports.

There, too, we have a commanding market share lead.

So we are benefiting and Dave Bronczek and his team are adding capacity.

I mentioned the Manchester express freighter that we put in place.

And the second theme is this outstanding domestic China network that we put in place.

And obviously it's a drag on earnings at the moment, but it is -- it's incredible what's going on in China, and we have a great service over there.

I think both of these things in that very big macro economic trend is going to continue for some period of time.

The second major issue is on the Ground side, we are growing at a very rapid rate.

We are growing at a very rapid rate because Dave Rebholz and his team have vastly improved the Ground network over the last few years and it is a heck of a value proposition.

And so those two themes are going forward.

Now, on the economy as a whole, as I think Alan mentioned a moment ago you've had, since 2002, petroleum go from 3.1% of GDP to about 7% of GDP.

You've lost 4% of the GDP of the United States, which is mostly shipped offshore because 60% of our petroleum is now import.

That's a huge offset to the growth in U.S.

export of goods and services.

And, of course, all of you are familiar with the meltdown in the financial mark and what that has to do with housing.

So, with fuel prices up, and the housing meltdown, you see a very tepid growth rate in the U.S.

economy, as Alan mentioned to you.

And in the housing and the automotive sectors, where we see that the most is on the freight side, which are tied into those areas.

But we have outstanding growth opportunities in the international marketplace, and on the Ground side of the house, and I believe that this re-engineering that Doug did in his freight network which, as he mentioned, is providing a level of service never seen in that industry before.

I think I'm correct, Doug that you're providing in excess of 98% of on-time deliveries in the national system as well as the regional system.

That is correct.

So those are the bigger themes here, and we don't think that the United States is going to see an economic meltdown, but we don't think there is going to be strong growth in the U.S.

economy, and that's what our forecast is built around.

So we have a lot of confidence in these numbers that we're putting out there provided you don't see fuel run-up and, bear in mind, last March's conference call, I said repeatedly that fuel is the wild card.

And fuel, I think, at that time was about $60 a barrel.

It went to 90 something.

So as long as you don't have huge crisis of confidence, I personally think that the Congress and the administration ought to put some stimulative things out there.

Monetary policy and the fed can't do it all.

Even Larry Summers who, yesterday, who is a traditionally a democratic -- has a democratic point of view, is calling for tax cuts.

The U.S.

tax rates on -- corporate tax rates are simply noncompetitive.

We're the highest of all industrialized countries except one.

So a reduction in corporate tax rates or a new investment tax credit or something along those lines may be necessary to get it back into a growth rate, particularly when you've got to absorb new plant and equipment that is more efficient in terms of energy use, because you cannot have an economy that goes from 3% of GDP spent on petroleum, to 7% in a five-year period without having it have a big effect.

Thank you.

And for my follow-up, if the dollar were to not continue to be weak and say were to rally somewhat, would that have a negative effect on our export growth?

Another way of saying it, in other words, how much of the strength in exports is due to the dollar and how much is due to just overseas economic growth?

Well, my guess is the much bigger factor in this is that huge macro economic scenario that I gave you.

I think that has been under -- or to quote my friend, the president, mis underestimated for a long time.

So you've got to remember, David, our planes go both ways.

So we're happy to take stuff from China, from the United States, and exchange rates are clearly an exogenous factor as are petroleum prices.

But I think the general growth story, because of those big factors I mentioned to you in the international trading area in the sweet spot where we stand, is going to continue for some period of time.

We may be wrong, but it's been going on for a long time now, and I don't think it's going to change much despite growth rates.

I mean, exchange rates.

We'll go next to Peter Jacobs with Ragen MacKenzie.

Good morning, gentlemen.

First, for Fred, there was a commentary in the November 16 announcement that when you revised guidance downward basically saying that you are seeing some economic signs that the decline in industrial production has hit bottom.

Could you talk about that a little bit?

And then I have a follow-up question to kind of get a better sense of the business and the percentage of business now that's being done basically from consumers ordering packages on the Internet or gifts on the Internet and sending those off.

Well, in regard to the first question there, I think in terms of year-over-year industrial production, in the first quarter of the -- is that calendar?

Okay.

In calendar '07, we were looking at industrial production about 2.5% year-over-year growth.

Second quarter, 1.8%.

Third quarter, 1.8% and the fourth quarter we're estimating at about 2.1%.

So that will give you some indication.

It's sort of -- it didn't decline there.

It went down to the trough and is sort of knocking along there at about 1.8 to 2% or something, along those lines.

And the second part of the question was what?

I'm just curious about the growth that you've seen from customers using your services from ordering goods off of the Internet.

And if you could help quantify that a little bit so we get a sense of the growth there and also what kind of percentage of the overall business that comprises now.

Well, let me mention -- let me let Mike Glenn comment about the specifics, and then I'd like Rob Carter to comment about what's going on in terms of integrating of information systems in with these E-tailers.

There again is a very big macro economic story that's sort of missed in the quarter to quarter numbers.

Mike.

We won't have the final numbers until after the holiday season, but I think it's fair to say that we've seen an increase in the percentage of packages that originate through the Internet.

I think that's also evidenced by what we've seen in the month of December as customers, quite frankly, begin to procrastinate more which is a benefit to us, although does it put more pressure on peak week, and I'll let Rob talk about the more general issues.

Yes, Peter, we have amazing growth in the Internet channels, no question about that, but one of the most strikely parts is the part of the Internet that we call kind of the gateway, those E-tailers that integrate directly with our shipping and rating and tracking services into their E-tail site.

We've seen phenomenal growth that in segment of Internet connectivity.

So the Internet is transitioning from about dragging everybody to www.fedex.com to today a more connected world of people that tap into those services from an E-tailing standpoint, utilize our shipping capabilities directly in their systems, their customer and fulfillment systems.

So some really fast and exciting growth there, but overall those online channels continue to grow far more robustly than the brick and mortar holiday peak experience has grown at a much slower rate than the E-tailing experience this year, even based on very large numbers.

This concludes the question-and-answer session today.

Mickey foster, I'd like to turn the conference back over to you for additional or closing remarks.

Thank you very much for participating on the second quarter conference call, and please feel free to call anyone on the IR team if you have any additional questions.

Thank you very much.

Once again, this concludes today's conference.

We do appreciate your participation.

You may now disconnect.