聯邦快遞 (FDX) 2010 Q1 法說會逐字稿

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

Today's call is being recorded.

At this time, I will turn the call over to Mickey Foster.

Please go ahead, sir.

Good morning and welcome to FedEx Corporation's first quarter earnings conference call.

I'm Mickey Foster, Vice President of Investor Relations.

The earnings release and 26 page stat book are on our website at FedEx.com.

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

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

During our 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 in this conference call may be considered forward-looking statements within the meaning of the Act.

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

For additional information on these factors, please refer to our 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 Communication, who is taking the call from Hong Kong.

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.

Now our Chairman, Fred Smith will share his views on the quarter, followed by Alan Graf.

After Alan we will have Q&A.

Thank you, Mickey.

Good morning, ladies and gentlemen.

Thank you for joining today's conference call to discuss FedEx's financial and operating performance during the first quarter of fiscal year '10, and our current outlook.

Our financial performance was stronger than what we expected in June, thanks to a modestly improving global economy, strict cost management, and solid execution of our strategy.

During the first quarter of FY '010, FedEx Ground and FedEx Freight noted positive month-over-month volume trends.

Compared to the fourth quarter of fiscal year 2009, our International Priority volume at FedEx Express showed positive sequential trends.

These are encouraging signs of a more stable economy.

The cornerstone of our success, however, remains our people, who every day are delivering on the Purple Promise, to make every FedEx experience outstanding.

They are the true competitive advantage for FedEx, and for our customers.

One recent example of the Purple Promise in action was FedEx being honored as the Small Parcel Carrier of the Year by Wal-Mart.

Wal-Mart said, "FedEx has set themselves he apart from other carrier partners in the industry by going above and beyond to service our customers, and exceeding our service expectations."

The economy was slightly better during the first quarter of FY '10 and confidence appears to be improving.

The housing sector seems to have bottomed, and auto sales have picked up.

In July, industrial production rose sequentially for the first time after 18 consecutive monthly declines.

At FedEx our balance sheet is strong, service levels are high, and we are taking market share.

Last year in the midst of the worst economic conditions in our Company's history, we undertook a series of actions to protect our Company, preserve jobs, and position us for future growth.

In addition to the outstanding job we've done lowering costs, we've undertaken an enterprise wide realignment to help deliver a simpler, more seamless experience to our customers, boosting service and satisfaction to greater market leading levels.

As the economy slowly picks up pace, we believe these steps will give us a very significant advantage over the competition.

For the remainder of fiscal year '10 we will balance spending with the opportunity to make investments with high long-term returns, such as substantially more fuel efficient Boeing 757 and Boeing 777 freighter aircraft.

In a few days FedEx Express will accept delivery of it's first Boeing 777 freighter.

This aircraft offers greater payload capacity and range than our current international freighters, and uses 18% less fuel.

It is scheduled to go into revenue service in January, flying directly from Asia to our superhub in Memphis, with no need for a fuel stop.

We will broaden our unmatched portfolio of business solutions to provide customers more choices, and wider reach when shipping their packages and freight.

In August, FedEx Express expanded its International Economy service, offering economical alternatives for less urgent shipments, with the same quality and reliability for which FedEx is well-known.

We broadened our global freight forwarding service when FedEx Trade Networks opened seven locations in Asia and Latin America.

These openings are part of the Company's growth plans which include additional facilities and alliances in Asia, Europe, the Middle East, Africa, and Latin America.

As part of this ongoing national expansion plan, FedEx Ground has celebrated the openings of major distribution hubs in the Toledo, Ohio and Chicago, Illinois areas.

FedEx extended its leadership in adopting and advancing, responsible environmental practices.

FedEx Express grew its US hybrid and electric fleet, the largest such delivery fleet in North America, by 50% to 264 vehicles, with an industry first conversion program.

The FedEx hybrid electric fleet has logged more than four million miles of revenue service since being introduced in 2004.

In the United Kingdom, FedEx Express introduced 10 new electric commercial vehicles into its fleet.

FedEx Ground announced plans to install the nation's largest rooftop solar electric system at the FedEx Ground distribution hub in Woodbridge, New Jersey.

We are hopeful and confident as we move ahead.

Forward-looking indicators such as new manufacturing orders, and the Conference Board's US leading economic index increased four consecutive months through July.

In August, US factories saw their output rise for the first time since January 2008.

At FedEx, we expect calendar third quarter GDP to grow about 3%, followed by roughly 4.9% growth in quarter four of calendar 2009.

For calendar 2010, we believe US GDP will grow 2.9%.

More importantly, industrial production, a significant driver of FedEx's business, should improve more than 4% in 2010, a strong contrast to its 10% decline in 2009.

And now, I will turn the mic over to Alan Graf, our CFO.

Thank you, Fred, and good morning, everyone.

As we reported last week, first quarter EPS was better than we had initially expected at $0.58 per share versus our guidance of $0.30 to $0.45 per share, resulting from better than expected International Priority volume, and decisive management cost actions.

However, EPS versus last year's first quarter declined significantly, as last year's earnings benefited from rapidly declining fuel prices, and the timing lag that exists between when fuel prices change, and when indexed fuel charges adjust.

Most of this year-over-year decline in EPS is a result of that fuel head wind.

At Express, International Priority volumes improved sequentially for the second consecutive quarter, led by the Asia Pacific and Latin America regions.

While yields declined 20%, or $12.94 per package, most of that decline, $11.15, resulted from declining fuel surcharges and unfavorable exchange rates.

US domestic volume grew slightly, benefiting from market share gains from DHL.

Domestic yields declined 23%, with fuel surcharge declines accounting for approximately 80% of that decrease.

Weight and rate per pound also both declined in a very competitive pricing environment.

At Ground, although revenue decreased slightly, operating margin improved to 12.1%, or a 100 basis point improvement above last year.

Purchased transportation decreased to 40.1% of revenue, versus 43.8% last year as we continue to see productivity gains in our field operations.

SmartPost continues it's meteoric volume growth, up 73% on a year-over-year basis.

At Freight, results declined as shipments, yields, and weights all were lower, reflecting the weak economy and excess LTL capacity.

Shipments were down 14%, and yields were down 13%.

Looking ahead, our guidance remains at $0.65 to $0.95 per share, assuming stable fuel prices, which means barrel prices of about $70 per barrel, and a continued modest recovery in the global economy.

Fred gave you those numbers, 3% growth in US real GDP on a quarter over quarter basis in the third calendar quarter, and 4.9% in the fourth.

As was the case in the first quarter, fuel head winds versus last year will have a significant negative impact on the second quarter.

We do expect International Priority volumes to improve sequentially again in the second quarter, with a possibility of year-over-year growth.

We also expect US domestic and ground average daily package volume to increase on a year-over-year basis in our second quarter.

As to annual cash flows, we are still expecting to spend about $2.6 billion on capital, $1.2 billion of which is aircraft related.

In September, we made US qualified pension plan contributions totaling $613 million, and plan another $235 million for the remainder of fiscal year '10.

We expect to be cash flow positive for the year, excluding debt repayments of $653 million, which we have funded with available cash.

One final point regarding our long-term versus permanent -- long-term permanent versus temporary cost reductions.

During fiscal years '09 and '10, we will have reduced our cost structure by approximately $3 billion.

All of that would be permanent if there were to be no recovery in the economy, and our volumes would remain flat, and our profitability to remain low.

However, as we expect volume to increase, and profitability to improve over time, probably 50% of that will come back in terms of volume-related expenses, and rebuilding of our merit programs and our 401(k) match.

The other 50%, will be permanent reductions from our cost structure going forward.

And that completes my remarks, and we'd like to open it for Q and A.

Thank you.

(Operator Instructions)

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

Please go ahead, sir.

Great.

Good morning.

Alan, can you talk a little about, you've seen the domestic side come up with a rebound on the boxes, you talked a bit about from DHL.

Can you talk about what you're seeing from DHL and as you begin to lap that over the next few months, what kind of growth -- core underlying growth you're seeing, if you were to exclude those volumes?

Well, Ken, again, with this very volatile and uncertain misty crystal ball that I have, about the only comment I can give you, is that we do expect year-over-year growth in the US domestic package business.

And as I said earlier, we also have a possibility that we can grow IP, on a year-over-year basis.

Those aren't going to be spectacular growth numbers, but they're going to feel good if they're not in red and brackets.

And then if I could just do a follow-up on the Ground side.

A nice margin on that.

I just wanted to see, as some of these court cases move to the sidelines, is there an ongoing kind of -- or decreased legal costs, or any other benefits that we could see continue to improve those margins?

Or how do you continue to see -- or where do you see those margins pan out other time, at what level would you see them level off?

Ken, we're really -- this is Dave Rebholz, we're very confident about the cost management that we have had under way.

We are balancing ourselves very appropriately.

The legal costs themselves over time, the assumption would be clearly, that those costs are going to come down.

At the present time, it continues to be a moving target.

I would venture to say that we'll be closer to a better understanding in the next fiscal year as to what they settle out to be, but right now we're very confident in managing those costs very effectively.

And our next question comes from John Barnes with RBC Capital Markets.

Please go ahead.

Thanks, guys.

Alan, could you talk a little bit about just the thought process, when you're adding something like the Asian flight that you mentioned in your pre-announcement, adding a flight like that back?

What are you seeing versus just being able to handle whatever the volumes were with the existing infrastructure in place?

Or in the balance of maybe having to sacrifice a little service in order to maximize asset utilization?

Just trying to understand when you make a decision like that on adding something as costly as adding a flight back.

Could you just elaborate a little bit?

Sure, John.

First of all, I just want to be really clear here.

All of our service indicators are continuing to improve off very high levels already.

And we absolutely are not making any decisions to sacrifice service for cost reductions during this period.

We think that will make us much stronger as we come out the other side.

We're very excited about our International franchise.

And very excited about the outlook for International Priority, both in the second quarter and beyond.

So it is appropriate for us to get ahead of that curve, and get that service in place, so as those volumes build, we're prepared to handle them.

And I should also add, as Fred said, when the 777's come in, we're going to be able to offer service that no one else can offer with much later pickup times, as those planes do not have to stop as they come back across the Pacific and the Atlantic.

And I'll let Dave talk about that

Yes, hi.

This is Dave Bronczek.

Alan is right.

We are going to -- replacing the MD-11 on some of those routes, with the much more efficient 777s.

We won't be making fuel stops.

We will have later departures, later pickups.

Our customers in the Asia Pacific are very excited about that.

As Fred mentioned, we start in January.

We'll be out in Seattle next week to welcome our new 777's into our fleet.

I think it's been mentioned that Asia Pacific had a good quarter.

Sequentially, every international region around the world improved.

That's very important for us.

So Alan is right, we're very excited about our International opportunities and going forward.

All right.

Getting to the specific question, however, basically Dave is adding capacity, when he's confident, he's got the traffic to justify the capacity.

I mean, we're not putting capacity out there on a wing and a prayer, so to speak.

It's basically presold before the flight is put in place.

Okay.

Yes, Okay, thank you, I appreciate that color.

And then, could you just talk a little bit about the core pricing environment, and what has gotten -- what has changed there that kind of led to you go ahead and announce I guess, the rate increase that came out with your announcement today?

And do you think in this environment where you've got maybe a little less visibility into the strength of volumes, how much of that do you think stakes early versus, is that 5.9 something you aspire to, but it is going to take a couple quarters to get to?

I'm going to ask Mike Glenn to answer this question, as Mickey mentioned he's in Hong Kong.

But one of the things we've done for the last few years, and which is also part of this rate increase, is there's a reset of the fuel barrel price in the rate increase.

So it's reported as a 5.9% rate increase.

In actual fact, it's a 3.9% rate increase, because we reduced the 2%, and the fuel surcharge to get a more realistic barrel price of fuel.

So with that having been said, Mike, can you address the question more fully?

Sure, Fred.

John, the timing of the announcement is consistent with the timing of our rate increase announcement last year.

We typically release our Express rate increase in the fall, so the timing is unchanged.

We certainly anticipate that as the economy improves, the pricing environment is going to strengthen.

And that will help us obviously hold on to more of the rate increase, as we move throughout this economic recovery.

So we're very confident in our an ability to manage through this rate increase.

And again, the timing is consistent with last year.

Our next question is from Gary Chase with Barclays Capital.

Please go ahead, sir.

Good morning, everybody.

I don't know if this question is for Dave, or maybe Mike.

Wondered if you could add a little color.

I know you quantified a little bit of how much was rate, or, excuse me, fuel surcharge and FX rates and so on, and IP.

And you talked a little bit about the surcharge impact on yields domestically.

Curious if you can give us a little color on business mix.

I mean, when we see there's a portion of the yield erosion not explained by some of those factors, is that the need to be more aggressive on pricing?

Or is it just a different business mix, and when do you think those kinds of things can turn around?

Let me comment briefly.

I want to remind everyone that when we added a significant amount of traffic from DHL, that traffic came to us at lighter average weights than we would typically see in our Express business.

And secondarily, we had had to be a bit more aggressive on price to be able to attract that traffic.

So you have a little bit of a hangover, if you will, as a result to the significant traffic that we added, as a result of DHL's departure from the market.

Secondarily, there is a negative impact due to the average weight per transaction, which is typical to what would you see during a slowing economic environment.

So those two issues, those two in combination with the declining fuel surcharge, were the major drivers.

It sounds like there's not some major change in business mix that's driving it, right?

Well, it certainly has an impact, but it's not significant relative to the other two issues.

Okay.

Can you just give us a sense of where you are in September?

You talked about the possibility of IP volumes up, and domestic up.

Is that where we're starting September?

Well, we did see improvement in volume trends as we moved through the quarter, so we were quite pleased with that, and encouraged by the trends that we've seen, and expect those to continue as was already mentioned, as we move into the next quarter.

Okay, thanks very much.

We'll go next to Tom Wadewitz with JPMorgan.

Please go ahead, sir.

Yes, good morning.

So when we look at the yield effects as you were talking about Mike, I guess weight per piece has a big impact as well as just base rate, can you tell us what the change in rate per piece was in terms of domestic Express for the quarter?

And would you expect, as your comments on industrial economy improving, do you think it's possible that that weight per piece really improves significantly if you look out a couple of quarters?

Well, it's hard to say, because I think one of the things that we've seen is a downgrade in traffic to slower modes of transportation.

We've seen a change in product mix, which has resulted in -- it's hit the weight per piece issue as well.

How quickly that responds is difficult to predict, but it will certainly be tied to the economy, and its improvement.

So as the economy improves, we would anticipate that the average weight per transaction improves.

Okay.

And then as a follow-up here on the Express margin, was -- is still running at a pretty low level here, and obviously you've done a lot with costs.

What do you think is necessary looking out few quarters, to really see the Express margin show material year-over-year improvement?

Is that really about pricing and weight per piece?

Is that about just the volume numbers improving a lot?

What do you think we should look for to see that Express margin show some material improvement?

This is Alan.

The biggest piece is fuel price stability, particularly on a year-over-year basis.

We are just being hammered here in the first half because of what we enjoyed last year with that very rapid decline.

If we could get a little stability in fuel price and the continued modest economic improvements, you will just see by definition that Express margins improve.

And once we get IP back to a year-over-year growth rate, that will also have a very positive impact on it as well.

So I think on the cost side, we're very comfortable with where we are.

I mean, there are more levers we could pull if things went back downhill, but we're not expecting that.

So what we need is stable fuel price, a modestly improving economy, and thats -- those are the two factors.

Our next question is from Helane Becker with Jesup & Lamont.

Please go ahead.

Thank you very much, operator.

Hi, gentlemen, thank you for take my question.

So -- so I'm just trying to get a sense, in terms of IP, is there -- can you just talk to how much in International is within Asia, or Asia to the Indian subcontinent, or South America?

And how much of International doesn't really come into the US and the trends you're seeing in those markets?

This is Dave Bronczek.

Hi, Helana.

We -- probably at least 50% of our International business transits in or out of the United States, so it's a very important International point for us around the world.

Asia Pacific is growing the fastest.

It's the largest right now.

So as that continues to grow, it's actually fueling the rest of the world International volumes, in and out of the United States and Asia.

So we don't split out exactly the percentages of the growth, but you can imagine that China would be growing very fast for us, and it is, and it's driving Asia.

So the International network being so global and so big, for all of it to be growing together is very positive for us.

Okay.

That was my only question.

Thank you.

Our next question comes from Donald Broughton with Avondale Partners.

Please go ahead.

Good morning, gentlemen.

You made quite a change in your aircraft fleet.

I'm seeing -- what you've -- versus the end of fiscal '08, we've seen a reduction of 19 planes -- net added -- though four just in the last three months, and a big change in the complexion -- 727s -- you can't get rid of them fast enough.

DC10s, even the Airbus A310s.

Can you help us quantify the kind of fuel savings you are going to be generating as you are going to bring in more of these, even before the 777s, the fuel savings has to be pretty significant for the MD-10s, MD-11s that you're bringing into the fleet.

Well, that is a great question.

Obviously we're very pleased with our 757s.

We are flying 13 of them now.

We get one a month, and we can't get them fast enough, and we can't replace the 727s fast enough.

And of course, the 777s are coming in right behind them.

So you are exactly right.

So far in the quarter we just reported, our fuel consumption is down 11%.

That's a huge number for us.

And as these planes keep coming in, the 757s have more capacity, less fuel burn, better for the economy, the environment.

You're right, we're heading in that direction, and the faster we can get there, the better.

And you took the number of flights you had -- I know in the Asian -- the US to Asia flights from -- if my notes are right here, from 11 down to 7 at the trough.

How many have you increased that to?

I'm not sure what the reference you have there is.

We haven't reduced the flights.

In fact, we've added some sections back over the last several weeks and months.

We now fly nine trans-Pacific flights in and out of Asia.

We have a trans-Pacific eight at the moment, but the reference you made to pulling the flights down in Asia, we're going to be at eight, and we'll be at nine in October.

But from the peak -- you had pulled down, and you now have added back, I guess two flights, it sounds like.

We have very good customer demand, as Fred mentioned at that time very beginning, so we did pull back some sections.

We have trans-Pacific, eight flights now, and we'll be putting a ninth one back in October.

Fantastic.

Thank you, gentlemen.

We'll go next to Edward Wolfe with Wolfe Research.

Please go ahead.

Hey, thanks.

Good morning.

It looks like maintenance and repair, the expense line item has been around $260 million the past couple quarters, which is down quite a bit from the peak of over $400 million.

Can you talk a little bit to that?

How long is that sustainable, and where is that headed as we go out?

Well, as you know, Ed, we parked some planes, and retired some planes, and obviously that had a very positive impact on our maintenance this quarter.

A lot of it is is sequential.

I mean a lot of it is timing.

But you're right, the quarterly number on maintenance is very significant, and we're going to be watching that very closely.

But a lot of that is the planes that we've parked, and the planes that we've retired.

So is that a fair range to think about it going forward for awhile, if volumes don't explode?

It's a fair range for the time being, yes.

Okay.

Second question, the decision that just came out from the IRS, can you talk a little bit about bit why there was an adverse ruling, but only at Home Delivery, and not on all the Ground?

What was the IRS's rationale for that?

Ed, this is Chris Richards.

And with respect to the Ground contractors, the IRS audit team asserted, the so-called 530 Safe Harbor applies, and no assessment should be made.

That 530 protection stems largely from the Ground organization consistently treating these workers as independent contractors.

And from the IRS's prior ruling and agreement, that the workers qualified as independent contractors under their common law test.

With respect to the HD contractors, the audit team reached other conclusions, which we strongly believe are erroneous.

And quite frankly, the logic escapes us because the contractor arrangements are substantially identical.

The US District Court -- US Court of Appeals for the DC circuit recently ruled in a case that involved two Home Delivery contractor terminals in Boston, that those contractors are independent contractors under a test that's substantially similar to the IRS test.

So we believe that we will continue to point out to the agency, their weaknesses in their argument and their position.

We will ultimately succeed in a zero assessment on both the Home Delivery and the Ground contractors.

Does the Safe Harbor apply to the Home Delivery?

Yes, it does.

But the IRS has asserted that it doesn't.

Okay, thank you very much.

I appreciate the time.

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

Please go ahead.

Yes, good morning, everyone.

Just talk a little bit first about SmartPost, the yield decreased there.

Is that just due to the added density you have, getting more DDU penetration, or is there something else going on there?

Well, there's two issues.

One issue has to deal with the current customers we have.

It's a great bundle product for our sales team to use.

And some of these customers have been working with us to offset some of the other postal rates that they've had had to deal with, vis-a-vis bound printed matter and other product, Standard A.

We're working with the Post Office to find ways to do rate sharing and cost sharing with them on that.

We have worked with these large customers to help them bundle.

And quite frankly, as a result, we've been able to secure significant amounts of business.

So it's two product lines that are a de minimus amount out of the total SmartPost volume that we get daily.

Or let's say on a Monday where we get two-plus million packages every single Monday.

So we're growing, but we're trading off that yield with some mix changes.

And then you've got to remember that this is not a one-for-one, because as we go into the DDUs, we get cost benefits, that the yields don't reflect, but the profit margin does.

Yes.

Understand.

And then on the freight side, can you just get a little color about the national LTL volume versus the traditional FedEx rate volume?

This is Doug, David.

We're growing volumes in both networks sequentially.

August was the biggest growth of the quarter, where it jumped up significantly, and that seems to carry into September as well.

So we're seeing some real good up tick in both of those networks as we speak.

Thank you.

We'll go next to William Greene with Morgan Stanley.

Please go ahead.

Yes, hi.

Just two quick questions for Mike.

First on the 2008 rate list increase how much of that did you keep?

And secondly, SmartPost, it's a great product, but what you also saw historically is that you guys dramatically improved your service offering in Ground.

There was some downward move, I would think, from the air network into the ground network.

How do you guard against keeping your premium ground stuff from migrating into lower rated SmartPost, given that that's a product that the market seems to really like?

Well, let me take the second one first, and I'll come back to the rate issue.

We actually work with customers to make sure that we get the right product into the right marketplace.

And the target for SmartPost is lightweight packages destined to residences.

So we actually encourage customers to move traffic out of our Home Delivery network into the SmartPost network, where it meets their service requirements.

So that is something we proactively work with customers to do.

So -- now, when the average weight per transaction going to a residence starts getting above seven pounds or so, it really doesn't make economic sense to move that into the SmartPost network.

And as a result of that, there's a pretty clear delineation there.

But it ultimately gets down to, does SmartPost meet the service requirement, and if, so we certainly encourage our customers to take advantage of the great service that SmartPost provides.

On the rate increase, it's very difficult to point to a specific percentage of rate increase retained, because there are a number of ongoing factors that cloud the issue.

One is the change in average weight per transaction that affects yield.

Two, is the product mix that issue we talked about.

And three, there's ongoing discounting as a result of how we interact with our customers, that have nothing to do with rate renegotiations, or simply as a result of closing new business.

If you control all those issues, we actually retain a significant amount of the annual rate increase.

But allowing those issues to be included in the calculation, obviously it significantly lowers the amount of the rate increase that's retained.

So we try to control for those, to make sure that we feel comfortable that we retain a reasonable amount of the rate increase, and we feel we've done that.

But the picture is pretty cloudy when you look at the weight change, the product mix change, and then ongoing discounting.

Alright.

Thanks for the help.

We'll go next to Jon Langenfeld with Robert W.

Baird.

Please go ahead, sir.

Good morning.

Nice job on the cost side.

Curious on that.

How much of the actual costs were run rated in the quarter?

I mean you've taken out about $2 billion of costs over the last year or so.

Are you basically at the run rate where you're recognizing most of the benefits there?

Well, actually, we're going to take additional costs out in FY '10.

We have more worldwide network optimization to do, which we're excited about.

We think we can continue to get some on SG&A side, and revenue supplies and various and sundry areas, and those are going to continue to be reduced as we go through FY '10.

On the flip side of that, we're hoping to improve our profitability.

As I mentioned earlier, start to reinstate some of our -- I'm sorry -- to make up for the lost time of our 401(k) match and our merits, and start to reinstate those programs that we halted last year.

And that will just depend on how well we do here through the quarter, and going into early calendar '10, on how we manage that.

But we have more work to do on the cost side, and we're getting more out every day.

Okay, good.

Then lastly, on the Express side, if I just look it at your volume trend, and just trying to work around the fuel piece here, if I look at your volume trends for the domestic business and International Priority business, they're about 5% lower in the first quarter than where they were in the first quarter of '07.

I guess that would be fiscal '08.

So two years ago.

And yet the profitability is down 80% from where it was in the first fiscal quarter of '08.

What's the primary difference on that basis?

I mean are we talking more weight per shipment?

Or other mix issues that we can't necessarily see when we're looking at just the volume numbers?

Yes, this is Dave Bronczek again.

As Alan pointed out, the fuel hit has been enormous for us this year versus last year and two years ago.

And certainly because of the recession, the weight would be off as well.

But it's mainly the fuel and the fuel surcharge.

Because I think the fuel last -- or the first quarter of fiscal '08 was kind of in the $2.20, $2.30 range.

You were in the $1.90 to $2.00 range.

It wasn't a dramatic difference between those two periods, I don't think.

Jon, it's the year-over-year comparison that you are missing.

You have to go back and look at '08 versus '07.

This is now -- we're looking at '10 versus '9.

It's not a snapshot.

It is a continuing, rolling comparison.

So that's really the major impact there.

And again, while the -- Dave mentioned the recessionary impact certainly has an impact on those weights.

And then, there's a significant amount of exchange noise in here, that we try to manage by balancing our known foreign currency revenues, and try to match those as well as we can with our offshore expenses that are denominated in foreign currency, but all of our aviation is in dollars.

Got it, thank you.

The other obvious thing, you were commenting on the cost per gallon, and the fuel surcharge is even a bigger variable in there, and a bigger negative.

It was 33% last year, for example, the fuel surcharge, and it's 3% this year.

And our next question comes from John Mims with BB&T Capital Markets.

Please go ahead.

Good morning.

What sort of volume uptick would we need to see before we start to see headcount numbers come back up?

Well, obviously there are costs associated with the increased volume, but for awhile, we need to rebuild ours.

For our flight crews, and for our hourly employees all around the world, and so we'll be doing doing that first, before we talk about headcount.

And again, it will just depend on the timing, and how well we can continue with our productivity programs.

But I don't see much FTE increase in the foreseeable future.

Okay, thank you for that.

And looking at the LTL space, if there is a major event in the near future, where does pricing go and how fast?

And where are you from a capacity standpoint with that -- would that have any impact on your CapEx budget?

I think we've managed our way through this downturn quite different until some of our competitors, and I think in a much smarter way.

We have certainly resisted the hourly wage cuts that most of our competitors have taken, so our driver force, our workforce is intact.

Our culture is as strong as ever.

We've protected our drivers.

Rather than lay off drivers, we put drivers on the dock doing dock work.

So we've got CDL qualified employees ready to go back to driving, which is a long pole in the tent if you will, in creating capacity.

We've continued to complete strategic real estate projects that were choke points for us, in volume going forward.

And the value proposition that we win on is service.

And we haven't backed off of that one iota, either.

In the month of August, we reduced service standards on 6,000 lanes in our LTL space.

And our two biggest growing products is the 10:30 am delivery we launched earlier this year, and our Direct Next Day to Canada.

So we're very prepared, from a competition standpoint -- from a consolidation standpoint, which we believe will occur at some point.

So I think we've managed our business very well.

(inaudible)

I'm sorry, I said increased the service standards.

We lowered the service standards on six -- number of days -- lowered.

Improved.

Improved the service standards, sorry.

(Operator Instructions)

We'll go next to Justin Yagerman with Deutsche Bank.

Please go ahead.

Hey, good morning.

Wanted to get a sense with the growth that you guys show on SmartPost, if there's any way to break it down, between what you're seeing from DHL freight that was out there in the marketplace, what part of that is actual shifting, as you guys discussed, from Ground business to SmartPost business?

And then what kind of percentage of that would represent new market share that you're gaining out there, outside of the?

Yes.

This is Dave Rebholz Prior to the DHL demise in the US, we picked up a substantial portion of the baseline accounts that are creating this growth rate.

Our largest account, Amazon, came from using Postal Service rate -- Postal Services Direct, that did not come from DHL.

And it's a substantial portion.

But we were also the benefactor -- probably 20%, 25% of the growth that we have today is coming from DHL conversions.

But we continue to get net new business, and net new applications from non-existing customers.

And as Mike already pointed out, from existing customers, who are finding new utilization of our services.

So a lot of it incremental, but DHL is not the driving factor.

Got it.

Thanks for that color.

And then, you guys mentioned in your prepared remarks, the freight forwarding capabilities that you guys are building out.

Maybe you guys could talk a little bit about, as you are looking at the landscape over next couple years, and where you see growth and how you want to align your freight forwarding network with that.

Where are the areas that we should expect to see you start to get more aggressive?

Well, this is Fred Smith, then I'll ask Dave Bronczek to speak more fully on it.

Our customers have been very clear with us over the last several years, that they would like for FedEx to offer a broader product line, with the same type of reliability and information excellence and commitment to our Purple Promise in those broader product lines.

So that's a common theme you've heard over many quarters now, the expansion of the SmartPost product line that Dave Rebholz just mentioned.

I would point out we're very excited about our new FedEx SmartPost return service which is now rolling out.

That's good example of it.

I mentioned in my prepared remarks, the substantial expansion at FedEx Express in August of our International Economy, International Economy Freight, and International Economy Distribution.

And I think Dave you've got that now to over 80%, 90 countries, 80% of the world's GDP.

So that broadened our product line in our door-to-door Express network for the slightly less urgent shipments.

And in the same vein, as Dave will tell you here in more detail, our customers want us to have door-to-door sea freight offering, and commodity air freight for the less urgent items.

And having that broader product line with an expanded FTN Network will allow us to get more market share in the Express segment.

Dave can tell you what we've done under Mike Ducker and Fred Schardt's leadership.

And I would like to commend Ed Clark, who is our retiring CEO of FedEx Trade Networks, who has done a great job and is retiring on October 1st, and is handing over the reins of FTN to Fred Schardt, who is driving this expansion.

Dave?

Thanks, Fred.

My congratulations to Ed Clark.

He's a long term, excellent FedExer, for sure, wish him well.

We are rolling out around the world, we started in Asia, specifically in China.

We're ahead of plan.

We're going to have the same kind of openings.

You'll see that every quarter now, for several years.

We'll roll through Latin America region and into Europe, and Middle East as well.

And as we started off talking about early on, it's driven by our customers, and the customer relationships we have around the world.

And this is exactly the space that they have wanted us to move into and expand into.

And I can tell you, it's going exceptionally well.

Thanks a lot, guys, appreciate the color.

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

Please go ahead.

Yes, good morning.

I wanted to ask Alan about the -- your citing the recovery and expenses as you build volume growth.

And did we see some of that in the first quarter with your salaries and related costs up about $100 million from the fourth quarter?

Is that the beginning of that?

No, and I don't think you've got your numbers right.

I suggest maybe we get you with you Mickey and we can give you a little deeper explanation on that, Dave.

Okay, that's great.

What is the plan for 777 freighter deliveries in the rest of fiscal 2010?

We get our first plane this month.

We'll put it in active service in January.

We start rolling out three to four 777s every year, 2011, 2012, 2013.

We've already assigned to all those planes to their routes in priority order.

We have an excellent plan.

And we're very excited about the plane.

So there's just one in fiscal 2010?

No, we parallel them.

We have four actually that will be in 2010.

So we'll have two of them will start in January.

Two in January.

Yes, and four for 2010, three more in 2011, four in 2012.

We can give you the specifics, when you talk to Mickey about the other question.

Okay.

Thank you very much.

Actually, Dave, that schedule is in the 10-Q and --

And also it's in the stat book.

Yes, I realize that.

I just wanted to make sure I had the numbers right.

Okay, well, thank you very much for participating on the call here.

And please feel free to call anyone in the Investor Relations team if you have any additional questions.

Thanks.

That does conclude today's conference call.

Thank you for your participation.