聯邦快遞 (FDX) 2010 Q2 法說會逐字稿

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

Today's call is being recorded.

At this time I will turn the call over to your host, Mr.

Mickey Foster.

Please go ahead, sir.

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

I am Mickey Foster, Vice President of Investor Relations.

The earnings release and 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 release 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 the website, 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; Dave Bronczek, President and CEO of FedEx Express; Dave Rebholz, President and CEO of FedEx Ground; and Doug Duncan, 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.

Thank you, Mickey, and welcome to today's conference call to discuss second-quarter earnings and our outlook for the second half of the fiscal year.

Positive momentum in the global economy and continued execution of our business strategy drove volumes higher across all FedEx transportation segments.

Growth was highlighted by increased international shipments.

We are encouraged by this trend.

At FedEx Express, International Priority volume rose 6% in the second quarter due largely to volume growth in Asia and Latin America.

US domestic package volume at FedEx Express increased 4%, and average daily volume also increased at FedEx Ground and FedEx Freight.

We believe these quarterly trends and volume growth indicate global economic conditions are improving.

For more than a year now we have taken decisive actions, during the worst economic downturn in FedEx history, to reduce expenses while still expanding our portfolio of services.

We reorganized our networks and personnel for greater efficiency and productivity.

We pledged FedEx would emerge from this recession as a leaner, stronger Company, and we intend to do so.

With continued improvement in the world economy, we expect stronger demand for our services in the second half of FY '10 and stronger year-over-year comparisons.

For the remainder of FY '10, we will continue to balance cost controls with investment opportunities that serve our long-term interests, such as the more fuel-efficient and productive Boeing 757 and the 777 aircraft joining our fleet.

By the end of FY '10 we will have added a total of 17 757s and four 777s.

We will also invest in services that add value for our customers.

A few weeks ago FedEx ushered in a new era of tracking capability with the announcement of a unique product SenseAware.

Available this spring and designed for the life sciences industry, SenseAware couples a multisensor device and web-based platform for real-time sharing of information on high-value, highly sensitive critical shipments.

We believe the US economy reached a turning point year-over-year during our second fiscal quarter, with the one-year anniversary of the financial collapse.

Several economic indicators related to industrial demand turned positive compared to the same time last year.

Other forward-looking indicators point to near-term improvement.

Manufacturers of capital goods say many of their customers are buying again, as opposed to drawing down inventories, signaling an uptick in capital spending.

We believe the process of inventory clearance has bottomed and subsequent restocking is driving growth.

As we look ahead we see continued opportunities to expand our international business portfolio to take advantage of its potential for high growth and profitability.

For example, FedEx has launched International Direct Distribution, a multimodal shipping option allowing customers to choose among air, surface, and ocean transportation based on their transit time needs and strengthening FedEx as a leading provider of end-to-end supply chain solutions.

FedEx International Direct Distribution enables customers to consolidate multiple packages or freight into one shipment, saving time, money, and streamlining customs clearance before the individual shipments are delivered to their destinations.

FedEx Trade Networks, part of the Express segment, is a growing international ocean and air freight forwarder.

It has opened new offices across Asia, Europe, and Latin America as part of its aggressive expansion plan, bringing to 18 the number of new locations in 2009 to complement its operations in the US and Canada.

In November FedEx Express widened its international portfolio, adding India to the list of countries including China, Canada, the UK, and Mexico where it offers branded domestic service.

FedEx Express enhanced its overnight service between Asia and Europe, introducing next business day service connecting Mainland China, Hong Kong, and Singapore with France and Germany.

In China FedEx Express accelerated inbound international express shipments to Shanghai by six hours.

At this time I would like to thank our 275,000-plus team members around the world for their loyalty and dedicated service in this past year as FedEx weathered the worst economic conditions in its history.

During this holiday season we especially appreciate their commitment to our Purple Promise, which says simply -- I will make every FedEx experience outstanding.

Because of our teams' great work, FedEx handled a record 14.1 million shipments this past Monday, up from 12 million packages on last year's business day.

For all of you who procrastinate, don't forget -- FedEx Express will accept packages up until Wednesday, December 23, for delivery before Christmas.

And if you'd like to bring them, the FedEx office would be happy to pack them as well.

Before turning the call over to Alan, I would like to offer my personal thanks and the thanks of our Board of Directors and other team members to Doug Duncan, founding President and Chief Executive Officer of FedEx Freight.

Doug has been a great partner and is retiring after the first quarter of calendar year 2010.

He will be succeeded by Bill Logue.

Doug has given many years of outstanding service to FedEx; so best wishes to you Doug, and we appreciate everything you have done for us.

Now Alan Graf, our Executive Vice President and Chief Financial Officer, will give you some more color on these remarks.

Thank you, Fred, and good morning, everyone.

In the second quarter we were able to exceed the top end of our guidance range, primarily as a result of stronger than expected International Priority package and freight revenues and better than expected Ground and SmartPost package volumes.

International Priority package volume increased 6% versus last year, led by the Asia and Latin America regions; and International Priority freight pounds increased by 16%.

We were able to move the higher than anticipated volume from Asia by flying extra sections with existing aircraft and incurring only incremental variable operating costs.

Overall, FedEx Corporation revenue decreased 10% as significantly lower fuel surcharges and a very aggressive pricing environment were only partially offset by volume growth and continued strong cost management and productivity gains.

Operating income declined 27% as last year's results significantly benefited from falling fuel prices and the related fuel surcharge timing lag.

Additionally, in the second quarter we have begun to accrue variable compensation for the individual performance portion of our annual incentive compensation plan for nonexempt salaried employees, managers, senior managers, eligible exempt individual contributors, and administrative professionals.

Second-quarter results also highlight the dedication of our team members worldwide and the operating leverage we have built into our global networks by lowering our cost structure while continuing to invest in growth opportunities.

Cost control efforts included fewer flight hours and improved route efficiencies, which led to a 5% reduction in jet fuel consumption despite a 4% increase in Express package volumes.

At FedEx Express, average daily package volume increased 4%, while composite package yield declined 16%, primarily as a result of lower fuel surcharges.

Our weighted average US domestic and outbound fuel surcharge declined to 6% in the second quarter versus 30% last year.

At Express, operating income declined 36%.

At Ground, volume increases and strong productivity drove segment operating income up 12% to $238 million.

Ground volume increased 4%, and FedEx SmartPost volumes increased 63%.

FedEx Ground yields decreased only 2% as improvements in base rates and higher extra services revenue helped mitigate the impact of lower fuel surcharges.

FedEx Freight, although less-than-truckload average daily shipments improved 3% year-over-year, yields declined 12% on lower fuel surcharges and a very competitive pricing environment driven by significant industry overcapacity.

As a result, the FedEx Freight segment incurred an operating loss of $12 million.

Looking ahead, our third-quarter guidance of $0.50 to $0.70 per share versus $0.31 per share last year for the quarter, and $3.45 to $3.75 per share for fiscal 2010, reflect our expectations for stronger year-over-year demand for our services, given easier comparisons, stable fuel prices, the continued benefit of our cost-reduction actions taken during the past year, and a global economy which we believe should continue to modestly improve in our fiscal second half.

We are expecting sequential US GDP growth of 4% in the fourth calendar quarter of 2009; 3.6% in the first calendar quarter of 2010; and 2.7% in the second calendar quarter of 2010.

With global conditions improving, we expect stronger demand for our services in the second half of fiscal 2010; however, we expect a competitive pricing environment will persist.

While we continue to closely manage our cost structure, continued improvement in demand for our services will produce volume-driven increases in operating costs as we adjust capacity to match demand.

Our guidance is tempered by the uncertainty of current demand trends after our peak shipping season; expectations of a continued competitive pricing environment, especially in the LTL market; and the re-establishment of some of our compensation programs -- all of which will somewhat dampen our near-term earnings potential, as our variable incentive compensation programs have a high marginal accrual rate at our current expected profit levels.

Balance sheet side -- our balance sheet and liquidity position remain very strong, even after capital expenditures of $1.5 billion and pension contributions made in the first half of fiscal 2010.

We made contributions of $613 million to our tax-qualified US domestic pension plans during the first half of 2010.

In December we made additional required quarterly contributions of $118 million to our US retirement plans, and expect to contribute another $235 million in fiscal second half, all to keep our pension funds full funded, as compared to some of our competitors.

On the capital expenditure side we still expect to spend approximately $2.6 billion in fiscal 2010 and include spending for aircraft and related equipment at FedEx Express and network expansion at FedEx Ground and SmartPost.

We also continued to invest in productivity-enhancing technologies.

We invested $859 million in aircraft and aircraft-related equipment in the first half of fiscal 2010 and expect to invest an additional $361 million for aircraft for the remainder of 2010 at Express.

Aircraft-related expenditures include the new B-777s, the first of which entered revenue service in the second quarter of 2010, and of course the 757s.

These aircraft-related capital expenditures are necessary to achieve significant long-term operating savings and to support long-term international volume growth.

And now we will be happy to answer your questions.

(Operator Instructions) Tom Wadewitz, JPMorgan.

Yes, good morning.

I wanted to ask you a little bit about your guidance.

The volume trend appears very constructive, and it sounds like you are generally expecting that to continue.

It looks like the third quarter is perhaps a little more conservative than the full year.

I am wondering if there are any cost items in the third quarter that are somewhat unusual versus what you would expect looking at the fourth quarter, or versus what you would've had in the second quarter.

Well, a couple of items.

First seasonally the third quarter is always our weakest, particularly post-holidays.

We are having a strong December I will say.

As Fred mentioned, on our largest package day of 14.1 million packages.

But we expect a little bit of a slowdown in the January and February time frame.

Then secondarily as I alluded to, we really didn't have time to add much cost for the anticipated traffic that we saw at Express.

And we want to keep our service levels as high as humanly possible.

And to catch up with that volume and keep service levels high, we are going to have to invest in additional hours.

And also the cycles that we put on those aircraft will have to have some additional maintenance.

So there is a little bit of drag there, as well as we will be continuing to accrue for our annual incentive compensation plans in the second half.

We had no accruals in the first quarter and we had some catch-up accruals in the second quarter.

So other than that I still believe the outlook, as Fred mentioned and I mentioned, for our traffic is very positive; and we should have a lot of momentum going into the fourth quarter and fiscal '11.

Okay.

In terms of the variable compensation, can you give us a sense of the magnitude of what that is in second -- what it was in second quarter and if that is kind of similar, if you look at that across the next two quarters?

Or if it is a lot different, given that you had some -- I think you said some additional true-up in second quarter related maybe to what you didn't accrue in first quarter.

Well, I wouldn't say it is not material to the overall earnings of the Company, but it is a little bit of a drag.

Just as we use it as a shock absorber coming down to help cushion our earnings decline in very tough times, now we are reinvesting back in our folks who worked so hard.

So it will have a dampening effect, but it won't be material.

But it will have a dampening effect.

Okay, thank you.

Ken Hoexter, Merrill Lynch.

Great, good morning.

Normally through this process of the shifting economy it sounds like we are seeing a bit of Express run-up in anticipation of maybe a little bit of a fear of retailers to stock some inventory.

When do you expect part of that migration to move back?

Or are you seeing that migration begin yet to establishing normal inventory levels through the Ground shipments?

Are you seeing that develop yet?

Yes, this is Mike Glenn.

It is very difficult to make that call at this point.

That is why in Alan's earlier remarks he mentioned that it was going to be important for us to see the trends after the holiday season.

We have been pleased with the volume trends as we progressed through the quarter, and leading up to the month of December, which led to our record day of 4.1 million packages but we -- excuse me, 14.1 million packages.

But we certainly want to keep a watch out for the volume trends as we move into January and February before we make that final call.

All right.

Then if I can shift on a follow-up just onto the LTL side, how long do you think it is going to take here to rationalize capacity in the industry?

Just looking at the aggressive pricing that you have got in the market place, just maybe if you can -- if Doug on his way out can just talk a little bit about what plans are for the division, and how long he sees that taking to maybe stabilize a bit.

Thanks.

Ken, we have been trying to predict when the excess capacity will leave for quite some time, and things seem to change daily with press releases by some of our competitors.

But I would say to you that I think capacity is coming out.

We have got a competitor or two that continues to lose business at a 40% clip year-over-year.

That is capacity coming out.

We are very happy with the volume we put in the networks now and now have the scale efficiencies that we need.

I think we now have some opportunities to begin to improve the yield going forward, now that we have got the volume that we need to really operate.

Doug, are you surprised, with the pricing as aggressive as it is, that volumes weren't even better?

Well, you are seeing our volumes, we grew 3% in the quarter.

But every month was better than the previous month.

And our November number of shipments were actually up double-digit percentages year-over-year.

All right.

Thanks for the time.

William Greene, Morgan Stanley.

Yes, good morning.

Fred, I had a question for you on this proposed rule change from the National Mediation Board on union elections under Railway Labor Act.

A couple of the airlines and rails I have spoken to think it is a challenge because you could end up with sort of a minority union.

How do you think about this for FedEx?

How will you adjust if this rule change actually goes through?

I am going to defer that question to our General Counsel, Chris Richards, who is more up to speed on it than I am.

William, this rule change would, as you say, allow for a minority election in the sense that prior to the rule, under the National Mediation Board rules, you would have to get 50%-plus-one of the craft or class to vote for a union before a union would be recognized.

Under the proposed rule it would just be 50%-plus-one of the actual people who participate in the election.

It is a significant change.

It overturns 70 years of precedent.

But I do want to point out, this is a change to a rule that is very similar to the one that is applicable for elections under the National Labor Relations Act.

So we feel confident that we could deal with the situation in any event.

Okay.

Just as a follow-up for Alan, you mentioned that the volume trends in the November quarter exceeded your expectations.

What are you thinking we can see on International Priority and even Ground for the fiscal third quarter?

Well, I think Ground has been fairly steady, steady as she goes with their growth rates; and I will let Dave Rebholz add some color to that.

On International Priority, they are going to definitely be strong here in the second half, and there is a couple of reasons for that.

One, first of all, the comparisons are fairly easy.

But secondarily, when you have by far the best, most reliable, broadest service, the most awesome sales force who can construct specific service portfolios for our customers, and the reach and the brand that we have, there is no limit to what we are going to do with IP.

William, this is Dave Rebholz.

First of all, you need to understand that we continue to build our volume base off of acquisition of competitive volume.

The reason why I bring that up is because we have spent a lot of time, effort, and energy in improving our value proposition so that we are the best provider of parcel products in the industry.

Our customers are recognizing it.

Additional customers continue to look at us in that regard.

I feel very, very confident that we are going to continue to grow at the pace we have.

The beauty of our organization is that we have a broad portfolio that allows customers to pick and choose the value proposition they would like vis-a-vis the SmartPost offering, and as evidenced by its growth rate.

We are very, very proud of what we have to offer, and we will put ourselves up against anyone -- and quite frankly we will win.

Donald Broughton, Avondale Partners.

Good morning, gentlemen.

Doug, I was hoping you could give us a little bit of insight into the volume trends, national versus regional, on Freight.

Where you are seeing the most ability to grow volume.

Donald, they are both growing.

National had some record days in November that were bigger than they have ever had before.

But regional is growing as well.

So the opportunities are actually broad-based across our two networks.

But obviously regional is bigger than national.

But on a percentage basis, did you see greater volume growth at national on either an absolute or a percentage basis?

It is not material.

Not a material difference?

No, no, they are both growing.

And I think what we have seen is, given the competitive posture in the marketplace, we are still a premium service and premium price carrier.

We have had to accept a little less premium; but when we have done so, our value proposition wins in both networks.

Hey Donald, this is Alan.

I am reading between the lines on your question here about our yields, with obviously national being lower than regional and that mix.

It is really the competitive environment and not the mix that is driving those yields down.

We know we have to work on that, as Doug said.

We have balanced out our networks now.

We feel good about the productivity we are getting in it, and that is a concentration on improving our yield outlook.

Fantastic.

So could you help me then get a little bit -- give us a little bit of a clue, Alan, on how to back out exactly how much of it was fuel and how much of it was unfriendly rate environment?

Well, it was -- those were the two major components of the yield decline, with the pricing environment being a little bit bigger of an impact negatively than the fuel impact.

Donald, I would say you still need to look at it all-out.

Because customers negotiate the total price.

Some customers negotiate tougher on the fuel surcharge; some tougher on the base rate.

So looking at the differences there I don't think are really constructive.

You have to look at it all-up.

That is what the customer looks at, and that is what we manage our business to.

I think we all believe that when the capacity reduction comes -- not if, but when -- the rate environment is going to get a lot better for everyone.

I'll let someone else ask a question.

Thank you.

David Ross, Stifel Nicolaus.

Yes, good morning, everyone.

In the press release you talked about fewer flight hours, making network adjustments, route efficiencies to really help the Express margin.

Could you talk a little bit about the improved volumes?

How much excess capacity is remaining in the network?

And given I guess recent volume trends are you going to think about adding capacity?

Or is there still room to run with your current network the way it has been adjusted?

Thanks David.

This is Dave Bronczek.

Yes, we pulled our flight hours down in the second quarter year-over-year by 6%.

Alan and Fred both talked about the fuel efficiencies obviously we got off of that.

But as the volumes around the world, mainly in Asia and Latin America, started materializing we started flying a lot of extra sections.

And quite frankly we are having a hard time keeping up actually with the roll of containers even at that pace.

One thing I wanted to add that is important I think for you to understand our capacity.

We start in January officially flying our 777s, and then they come -- and then another section goes in, another route structure goes in, in April.

We will have triple 777s flying in and out of Asia starting the third quarter and then in the fourth quarter, with all of that later pickup time and farther reach.

So we are very excited about the opportunity to keep the international revenue growing.

Okay.

Then can you talk a little bit I guess about the lane balance in the international moves?

(technical difficulty) Asia export traffic went direct into the US.

Is that true?

How much is going from Asia to the US versus Asia receiving freight from the US?

And then there was the Latin American freight going?

Well, the Latin American freight is coming into the United States primarily.

But Asia is actually going into Europe and the United States.

And we actually have had backlogs in Asia, Europe, and Latin America for the last several weeks.

Thank you very much.

Jon Langenfeld, Robert W.

Baird.

Good morning.

Alan, in your prepared remarks you mentioned a couple times pricing and the aggressive pricing environment.

I was hoping you could just focus on the domestic Ground and Express market, and let us know what you are seeing there, and then how you think that pricing environment could or could not change as you look out over the next 12 months.

Jon, thanks.

This is Mike Glenn.

One of the things that is important for us as the economy continues to improve, we believe that we have got a terrific opportunity to review our pricing strategy, to make sure it reflects the value of the services that we provide, with the specific objective being to improve our yields for both our parcel and our freight services.

There are several things that we can do and plan to do to make a positive impact on those yields.

Simply one would be to ensure we get acceptable rate increases as contract renewals roll around.

We have a lot of contract renewals that will be in the hopper here in the months ahead.

Two is we are reviewing our pricing guidelines for new business, given the strength of the volume trends.

And three, we are ensuring and analyzing specific customers to make sure that they are meeting volume commitments to retain their current pricing.

So we have got a lot of opportunity as volumes continue to improve and as the economy strengthens, to really see some yield management on the upside given where we have been in this difficult economy.

Okay, so that sounds good I guess looking forward.

How about what you were currently seeing?

It seems like you continue to express a view that the market is pretty competitive on price in Ground and Express, maybe even more so than what it was over the last six or 12 months.

Well, I would certainly say it is more competitive in the freight LTL arena than it is in the parcel arena.

But again we think there is an opportunity going forward to move that in a positive direction in both of those key markets for us.

Okay.

Thank you.

Justin Yagerman, Deutsche Bank.

Good morning, gentlemen.

I wanted to get a sense on the International Priority.

How much of that would you attribute to just general growth in the freight environment, and then how much would you attribute to market share gains?

I have got to imagine DHL is somewhat impaired coming out of Asia to the US, given their lack of service here.

This is Mike Glenn again.

I think there are three primary issues going on here.

One is clearly some inventory restocking going on, given that inventories have dropped to such a low level.

Two is there has certainly been some increased consumer demand, especially in the electronic products sector, handheld smartphones and things of that nature.

And third is we have been improving our position relative to the competition and taking some market share.

So I think all three of those are factors, given our strong performance.

Got it.

You gave an update last quarter on where you guys were on the Hong Kong to Memphis flights on a daily basis.

Can you give us a sense on how that trended through the quarter and where you are now as we head into January and February?

Well, obviously that is a very powerful lane for us, so much so that our first group of 777s are going to go Hong Kong to Memphis.

So it continues to grow.

It continues to be very strong, not only into the United States but to Europe as well.

Okay.

Last time you said you had gone from seven to eight flights a day.

Have you gone to nine or during the quarter have you pulled back to eight as we have passed the peak?

Any color around that?

Well, we have actually gone to nine and then we have added on top of the nine; we have added all the extra sections.

So we have had dozens of extra sections flown by our terrific flight crew and our ramp folks and so forth.

So it has been a very busy peak for us.

Got it.

And switching geographies I guess a bit you talked in your prepared remarks about increasing freight forwarding capabilities during the quarter.

But I know that European parcel express is obviously a big priority for you guys heading into this part of the -- heading into the economic upturn, hopefully.

What are your thoughts on news out of TNT about potentially activist shareholders?

There has been lots of scuttlebutt in the marketplace, as there always is.

Any thoughts on how you are going to be looking to attack that market on a go-forward basis?

Well, this is Fred Smith.

In regards to TNT and the speculation there, we just don't make any comment about corporate development activities, opportunities, ever.

It is just not in our best interest to do so, and we just won't get involved in that.

Now, having said that, one of the things that I think is a little bit of a myth about FedEx is our European operations are somehow not strong.

They are exceedingly strong.

Europe is extraordinarily profitable for us.

And we have expanded our air express operations in Europe and our intercontinental network to and from Europe, both to Asia and to the United States.

We bought a wonderful company in the United Kingdom.

So we feel that we have got a lot of growth prospects in Europe just from things that we can do organically.

We are very happy with our situation in Europe.

People forget that Europe is a very different situation than in the United States.

It is a highly fractionated marketplace.

There are many, many competitors in most of the domestic markets.

There are at least a half a dozen pan-European ground parcel networks.

There are four intra-European air express networks.

So it is not the same situation as it is in the United States, and I think sometimes people erroneously conclude that the analogies are greater than they actually are.

Matthew Brooklier, Piper Jaffray.

Hey, thanks.

Good morning.

You guys mentioned in your press release that at Express you had a one-time adjustment to self-insurance.

Can you guys quantify that amount?

About a nickel a share after all things considered.

Okay.

Turning to the LTL division, it sounds like you guys saw nice volume growth there and discussed potentially maybe taking up rates going forward.

At this point in time, do you guys have additional capacity to take more share going forward?

Or are you guys fully utilized?

Matthew, this is Doug.

Obviously we have filled up considerable capacity, and we are operating at scale efficiencies now to really drive the productivity in the network.

But we do have additional capacities.

Of course the months of December, January, and February are seasonally low months for the industry.

So we have the ability to take on more, but it is nice to have the volume in place so that we can begin to look for opportunities to improve the yield.

You can't do that when you don't have the volume (inaudible).

Edward Wolfe, Wolfe Research.

Hey, good morning.

It seems like seemingly you have been able to reduce labor costs more effectively than UPS.

How do you look directionally at the opportunity for market share gains in Ground and Express versus the opportunity to focus a bit more on rates going forward, knowing that you have got that little bit of advantage right now, it feels, relative to your competitor?

This is Mike.

You know market share is an interesting statistic, but it is not what drives FedEx Corporation.

Obviously we are looking to improve the bottom line.

And as I mentioned, as the economy improves we think there is a terrific opportunity to see the pricing environment firm up and improve.

I mentioned the many tactics that we can put in place and are looking at to make sure that happens.

But as Doug mentioned, in the Freight sector, obviously when you have the shipments in your network it is easier to do that.

When you have the solid growth trends we have at Express and Ground you can be more selective, including being more willing to walk away from a piece of business as the economy is improving than you might be in a difficult economy.

So we think it is a terrific opportunity, and obviously there is a lot of leverage for the Corporation.

So it is a high priority for us.

When you look at your full-year guidance you just gave for fiscal '10, what is the expectation in that for pricing for Express, Ground, and Freight relative to pricing that was achieved in the current quarter?

Directionally for each of those, is it similar pricing to where we are at?

Is some of it up, some of it down?

How do you look at that directionally?

Well, obviously we would like to see the pricing environment improve.

We would like to see our yield performance improve.

But some of these tactics that I mentioned, you have to play as they come to you.

In other words, we have to wait for contract renewals to come around.

That is important.

We don't think obviously it would be appropriate to open up a contract in the middle of that contract.

But we have a number of contracts coming up for renewal.

We have a number of new business opportunities.

And obviously revised pricing guidelines and taking a firmer negotiating position when you are negotiating contract renewals will give us opportunity going forward.

But that does take some time to see that change.

Helane Becker, Jessup & Lamont.

Thank you very much, operator.

Hi, everybody.

Alan, can you quantify how much the 401(k) match will add?

Or give us some sense of the number there that we should be thinking about?

And two, I noticed the US-Japan Bilateral Agreement is going to open skies, and that does affect some cargo.

But by virtue of the 1952's, you have unlimited route rights in Asia.

Can you just talk about the effect that agreement would have on you, if any, and the opportunity that exists for you going forward?

Thank you.

Helane, I will take the first one.

I think if you will just track our salaries and benefits you will be able to see the impact of the 401(k).

Again, it was a shock absorber coming down to help protect the shareholders from a cash flow and earnings standpoint.

We need to reinvest back in that program.

We are only putting half of it back up for now, as we wait and see on the strength and continuing strength of the economic improvement.

So again, it will have a dampening effect but it won't be material.

You just have to take all these things together as we continue to manage them.

You know, there is base salaries, there is merit increases, and then there is the compensation associated with the bonus programs and with the 401(k).

They will be increasing our cost of labor; but we believe that we will be able to get that back and more in productivity with our new lower cost structure and redesigned networks.

And I will let Chris answer the Japan question.

Good morning.

The recent Japan-US agreement didn't really provide much upside for us.

But we were in such a good position with our Japan routes and slots that we really weren't looking for a lot of benefit.

Gary Chase, Barclays Capital.

Good morning, everybody.

I wanted to ask a couple of Mike Glenn if I could.

First on SmartPost.

Last quarter you mentioned that you were really working hard to get product into the right channel.

I am just curious how far you are through that process.

If we should expect to see more volume shift from regular Ground or home delivery into SmartPost looking forward, or if you think you are through most of that.

Gary, that is a tactic that is also available to us to improve yields across the parcel product portfolio.

It not only affects SmartPost but would affect Ground and Express as well.

Again as part of our yield improvement plans we want to work with customers to make sure we are providing them the very best value proposition that meets their individual needs.

We will be providing some solutions to them that could affect product mix across our portfolio and could benefit FedEx as well.

So that is an ongoing part of our strategy.

Okay.

So it doesn't sound like there is anything -- doesn't sound like we should expect major change there.

I also was noting that weight per package, that dynamic seems to have changed this quarter.

The year-on-year, while you are still down, not as much as you were in the last few.

Just curious for your color on what might be driving that and if we should expect that to turn for the better looking forward.

I am talking about weight per package in Express.

Yes, weight per package is always an early indication in terms of the economy.

When the economy is turning down you see weight per package decline as customers look to move heavier shipments into slower modes of transportation as a way of managing their transportation budgets.

And as the economy starts to improve you tend to see weight per package firm up.

So we think that is another indicator of the positive trends in the economy.

Chris Ceraso, Credit Suisse.

Thanks, good morning.

What if the expected LTL event doesn't happen?

Do you think there is a chance that maybe some of the price pressure in the market abates because the stronger players pull off the throttle in trying to tip the weaker guy over?

Chris, this is Doug.

As I said I think capacity is coming out of -- excess capacity is coming out of this industry.

Maybe not at the speed we would like to see, but it is coming out.

And we have been able to grow our volumes.

And we really believe there is an opportunity now to begin improving the yields going forward from here.

So it won't be a rapid turnaround, but the opportunities exist for us to do that.

Okay.

Then there was a comment earlier about quantifying the improvement out of Asia.

Some of it is restocking; some of it is demand.

Do you have decent visibility into orders for January and February so you can disaggregate how much of it is restocking and how much of it is real demand?

Is that what is behind some of your caution on the fiscal third quarter?

This is Mike Glenn again.

It is a little early to be making that call.

I think it is important to see some of the trends in January and early February before we will really understand of those three issues how much was inventory restocking versus demand.

We have a pretty good handle on the third issue -- is our relative position compared to the competition.

But how much is inventory restocking versus demand, we need a little more time to get the level of clarity that we would like.

Robin Byde, HSBC.

Hi there, good morning.

Just a question on purchased transportation costs.

These are starting to turn flat year-on-year looking at your numbers.

Can you give us a bit more color on bought-in freight rate trends?

I mean I guess freight rates charged by your suppliers are starting to rise with the improvement in the global economy.

Is that correct?

Well purchased transportation is a complex.

When you talk about FedEx Corporation you need to break it down by opco, where of course Ground is the biggest user of purchased transportation.

Again we have done a great job with productivity.

I am going to let Dave Rebholz talk about that.

Additionally as we take additional volumes at Freight we have to add some purchased transportation until we can our networks back up and take that over.

That is initially a drag on our costs.

We are much more efficient once we take charge of those routes.

But in order to take that (technical difficulty) volume we have to spend more on purchased trans.

But the biggest most important unit is Ground.

I will let Dave address that.

Robin, this is Dave.

Purchased trans is a reasonable balancing act in terms of what we put on, where we put on, and under what economic set of circumstances.

I can tell you that the collective purchasing power of FedEx gives us leverage in the marketplace given our growth rate and the consistency and expectations we have on service and performance from our vendors.

I don't think that we have done anything unreasonable.

I think what we have done is balanced off where the right economics were and have had absolutely no impact to our performance.

Our vendors are terrific, but I don't think there is anything of any kind of significance in the numbers that you should be concerned about.

Okay, thank you.

John Barnes, RBC Capital Markets.

Good morning, guys.

Can you talk a little bit about the delivery schedule for the remaining 757s?

When you anticipate having that done.

You gave the number through the end of the fiscal '10 year.

When do you anticipate getting the rest of the delivery of the 757s?

And then the second part of that would be, do you feel like you have got enough clarification yet on FAA reauthorization and the RLA issue to commit to the next round of the 777s?

This is Dave Bronczek.

I will answer the first and then Chris will answer the second part of your question.

On the 757s we are receiving one 757 a month.

That is the plan that we put in place a year ago, and we are right on track.

We will get our 17th plane at the end of this month; and then we will continue for several years to move the 727s out and the 757s in.

This is Fred Smith.

On the contract on the 777, the way that contract is written is we exercise -- we don't exercise the options.

Excuse me; there is a time period in front of each airplane, so I will let Christine give you some details about that.

The delivery date is preceded by a decision date; and we make an indication to Boeing at the time of that decision date whether we will take that particular aircraft.

So the RLA status has to be something we are comfortable with in each of those decision dates before we will take each particular airplane.

Okay.

Then Fred, just your opinion on how the FAA reauthorization is proceeding.

Do you have any more color as to timing and just the status of the two, the Senate and House versions?

And how -- are they in renegotiation yet?

Or any color on that?

This is Chris again.

As you know, the FAA reauthorization passed the House with the RLA amendment in that bill.

On the Senate side it has moved out of committee, but nothing is moving much up on the Senate side right now except healthcare.

And I am not in a position any better than you are as to guess when that might move forward.

I can say this.

Both the House and the Senate have passed an extension of FAA funding through March 31, 2010.

So we anticipate that this issue will continue to be something that we will be monitoring and working on very hard during the spring and summer of 2010.

Keith Schoonmaker, Morningstar.

Good morning.

I recognize trade networks are still ramping up, but hope to hear a little bit more about this development.

With the announced 18 new offices, does this bring the total to about 30?

And are clients here primarily Express clients who want bundled services, or some other particular market?

That's right.

It's 18 this year and it will be over 30 by the end of the fiscal year.

And yes, it is primarily Express customers around the world that will end up moving traffic into our sister companies here in the United States.

But it is a nice bundle for us around the world.

I guess continuing on that bundled idea, are you seeing a lot of customers switching from competitors maybe who value FedEx's more comprehensive ability to serve US domestic as well as international shipments?

There is no question about that.

Obviously with DHL out of North America primarily, and the structure and the strength we have in Asia-Pacific and around the world, Europe and the Middle East, customers are finding our bundle very attractive.

David Campbell, Thompson, Davis & Co.

Thanks.

I heard a lot of talk and been reading about your increasing interest in forwarding and Federal -- where the trade networks business and carrying freight.

But then I see in the Federal Express numbers that your air freight was down 25% in pounds in this last quarter; International Priority was only up 6%; International Priority pounds were up 16% but on balance there wasn't any growth in the pounds and there was only 6% growth in packages.

Is this a capacity problem?

Or is it you just haven't gotten going on the forwarding/poundage business?

This is Dave Bronczek again.

Obviously that is what we want.

We want the higher IP/IPFS pounds to displace the ATA low-yielding traffic.

In fact ATA is having a hard time getting on our planes now for several weeks; and going forward it looks like it is having a hard time.

So we are actually very pleased with how we are moving the ITFS, the IP, and our deferred international product as well.

So we have a good mix.

Obviously the deferred traffic can flow on our planes on an off-cycle.

So David, it is exactly the program we have in place for that.

So we really won't see any change in the near term in those trends?

Probably not.

We will continue to see more IPFS than IP pounds.

[Scott Flower], Macquarie Securities.

Good morning.

A couple of questions.

One was on the LTL business.

I wanted to see if Dave could give us some sense of -- have the trends continued into December?

And just broadly, have a lot of the share gains come from national oriented accounts or customers?

This is Doug, Scott.

The growth has come from a broad base of customers.

We are getting increased business from small customers, what we call field accounts, as well as corporate accounts.

So I would say the growth is very broad.

I forget the other part of your question.

Have the trends on shipments continued into December?

You said there was -- through the quarter trends were improving on shipments.

Has that continued into December?

December volumes still remain very strong.

It is normally a time where we begin to see volumes tail off seasonally in the Freight business; but that hasn't happened to this point.

Then just one last question, perhaps for Alan.

I know it has been broached, but I just didn't know whether I could get some gauging; and obviously it is in your guidance.

But between the salary increase on merit and the 401(k) match and the incentive comp being brought back in, is there any sense you could give us just on a yearly basis what that totals to?

Obviously again it is in your guidance.

Well, it is.

And I am not going to say any more specific than I have, other than to assure you that we have worked very hard on our productivity and our overall cost structure, which has significantly been lowered.

As we bring additional traffic back, it is time to repair and improve our compensation programs and reward that productivity that we are getting.

So on a net-net basis it will not restrain our growth because we expect to see additional volume and productivity that will offset those costs.

Thank you.

That will conclude today's question-and-answer session.

I would like to turn the conference back over to Mr.

Foster for any additional or closing remarks.

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

Please feel free to call anyone in the investor relations team if you have any additional questions.

Thank you.

Thank you for your participation.

This does conclude today's conference call.