聯邦快遞 (FDX) 2011 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, Vice President of Investor Relations for FedEx Corporation.

Please go ahead.

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

I would like to remind everyone we are having an investor meeting here in Memphis in less than two weeks, on Tuesday and Wednesday, September 28 and 29.

If you have not registered, please do so right away.

The first-quarter earnings release and 25-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 of 1995.

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.

In our earnings release we include certain non-GAAP financial measures which we may discuss on this call.

Please refer to the release, available on our website, for further discussion of these measures and a reconciliation of them to the most directly comparable GAAP measures.

To the extent we disclose any other non-GAAP financial measures on this call, please refer 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; Chris Richards, Executive Vice President, General Counsel, and Secretary; Mike Glenn, President and CEO of FedEx Services; 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 Bill Logue, 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 question and answers.

Thank you, Mickey.

Good morning and welcome to our conference call to discuss earnings for the first quarter of fiscal year '11.

Improved global economic conditions fuel strong demand for our services, increasing volumes and revenue per package at FedEx Express and FedEx Ground.

We expect a phase of somewhat slower economic growth going forward.

The recovery began a year ago, and we believe slower growth is consistent with historical business cycles.

In any case, the economic environment and growth prospects are much improved from a year ago.

We believe drivers of sustainable growth are in place, such as stronger corporate balance sheets and pent-up demand.

We are confident the economic activities will continue to expand.

FedEx is taking full advantage of the global economic recovery because of the action we have taken to manage our costs, strategically invest in key global growth markets, acquire more efficient aircraft, streamline our networks, and focus on our customers.

We are optimistic about being able to improve our earnings in the years to come and resuming our growth trajectory that was the case prior to the recession.

Of significant importance is that global trade continues to rebound in volume and value.

We are seeing signs of a solid holiday shipping season as many of our customers selling high-tech and high value-added goods trade up for faster premium service to meet their customers' demand.

In August, FedEx Express added a 10th scheduled trans-Pacific flight and earlier this week an 11th flight providing needed capacity between Asia and the United States.

Next month we plan to increase capacity again by adding new 777 freighters to take the place of MD-11 aircraft in the Asian markets.

Synergies within the FedEx Express global network allow us to efficiently increase capacity even beyond the amount of lift we add with new aircraft such as the 777.

These cost-effective synergies include adjusting schedules, adding day turn routes, and using weekend availability to provide lift with the same aircraft, enabling us to handle increasing volume stemming from current strong demand for international shipping.

Load factors in the international airfreight to market continue to be the highest since the year 2000.

The largest economy in the world is the economy of global trade, and the fastest-growing element in global trade is the movement of high-tech and high value-added items on a fast-cycle basis.

Global economic activity continues to expand, led by the industrial sector in countries such as China, India, Mexico, and Brazil.

With key investments in global markets, we see the world economy as a prime source of continued growth.

Domestically, FedEx Ground is gaining volumes and market share while increasing yields.

Customers appreciate its speed and high service levels.

FedEx Ground continues to accelerate its network, providing a clear speed advantage over the competition.

Quite simply, FedEx Ground is faster to more US locations than any other ground carrier.

Just since this last January, FedEx Ground has increased the speed of nearly 3,700 lanes.

Since June 2003, FedEx Ground has accelerated its delivery times by one day or more in about 82,000 lanes.

FedEx Ground now delivers more than half its volume of packages in two business days or less and more than 80% in three days or less.

FedEx Ground service levels are at all-time highs.

Despite significant increases in overall earnings and revenue, our results were affected by losses at FedEx Freight as a result of discounted pricing in contracts signed in fiscal year '10.

Today's announced changes in FedEx Freight, combining its operations into an integrated company with two primary service options along with ongoing yield management initiatives, are expected to substantially improve the profitability of the FedEx Freight segment in fiscal year 2012.

FedEx Freight's unmatched offerings of both priority and economy LTL services within one integrated Company will deliver unique value to customers and make FedEx Freight an even more important element in our unmatched portfolio of solutions.

We will be glad to discuss these changes in more detail during our question-and-answer session and during the analyst meeting that Mickey mentioned.

In closing, I would like to remind you that we plan to increase our earnings per share, improve our margins, improve cash flows, and increase our returns on invested capital in the years ahead.

And we are quite optimistic that we can do so, based on the trends that we are seeing and the actions that we have taken.

Now I would like to turn it over to our Chief Financial Officer, Alan Graf.

Alan?

Thank you, Fred, and good morning, everyone.

By now you know that earlier this morning we released our very strong first-quarter FY '11 results of $1.20 per share, more than double our $0.58 earned last year.

Our results reflect exceptionally strong demand for our services driven by improved global economic conditions.

Revenues increased 18% to $9.5 billion, primarily due to volume increases across all of our transportation segments and solid yield increases at the FedEx Express and FedEx Ground segments.

Operating income and operating margin increased as a result of volume increases, particularly higher-margin IP package and IP freight services.

Increases in the US domestic package yield at FedEx Express and the FedEx Ground segment also contributed to the earnings increase.

Operating expenses include volume-related increases, particularly in salaries and wages, purchased transportation cost, and aircraft maintenance expenses.

The reinstatement of several employee compensation programs and higher pension and medical costs also increased costs for the quarter.

As Fred mentioned, an operating loss at the FedEx Freight segment was driven by discounted pricing and higher purchased transportation.

Cash flow from operations was a very strong $796 million in the first quarter as we continue to manage expenses closely.

I should note that last year's first-quarter cash flow included net tax refunds of over $200 million due to bonus depreciation and large pension contributions which are, of course, tax-deductible.

Turning to the individual segments, FedEx Express segment results surged with volume growth and the net benefit of higher fuel surcharges.

Segment revenues increased 20% in the first quarter due to a 19% increase in IP package volume led by Asia, higher US domestic package yields primarily driven by an increase in the fuel surcharge, and a 41% increase in IP freight volumes.

Growth in IP freight volume was driven by exports from Latin America, Asia, and the US.

Composite package and freight yields increased primarily due to higher fuel surcharges and weights.

In addition, US domestic package yields rose due to a higher rate per pound as our yield improvement program is being well executed by our terrific sales team.

Purchased transportation costs increased 45% due to costs associated with the expansion of our freight forwarding business at FedEx Trade Networks and IP package and freight volume growth.

Maintenance and repairs expense increased 35% primarily for aircraft maintenance timing, as we pull airplanes out of the desert to meet the high demand and higher utilization of our fleet.

The fuel costs increased 32% due to increases in the average price per gallon of fuel and volume driven consumption.

Based on a static analysis of the net impact of year-over-year changes in fuel prices, compared to year-over-year changes in fuel surcharges, fuel had a positive impact to operating income in the quarter.

FedEx Ground segment revenues increased 13% to $2 billion during the first quarter due to yield and volume growth at both FedEx Ground and FedEx SmartPost, generating an operating margin of 14.6%, an outstanding performance by the Ground team.

FedEx Ground average daily volume increased 7% to 3.5 million due to market share gains.

Yield improvement of 5% at FedEx Ground was a primarily due to higher fuel surcharge as well as increased package weight.

FedEx SmartPost average daily volumes grew 9% to $1.1 million as a result of gains in market share and the introduction of new service offerings.

Yields at FedEx SmartPost increased 19% primarily due to lower postage costs as a result of increased deliveries to US Postal Service final destination facilities and higher fuel surcharges.

FedEx Freight segment revenues increased 28% during the first quarter as a result of higher average daily LTL shipments partially offset by lower LTL yields.

The LTL freight market remains highly competitive due to excess capacity.

Discounted pricing drove an increase in average daily shipments of 29% but also resulted in yield declines of 3%.

However, yields increased 4% from the fourth quarter of FY '10 as a result of our recent yield management initiatives, which include more disciplined contract pricing and reviews of lower performing accounts for rate adjustments.

Discounted pricing and the higher volume-related costs resulted in a loss of $16 million for Freight in the first quarter.

FedEx will combine its FedEx Freight and FedEx National LTL operations effective January 30, 2011.

This action will increase efficiencies and significantly reduce operational costs.

Additionally, we will provide customers a choice of priority or economy less-than-truckload freight services across all lengths of haul from one integrated company.

This change, along with the Company's ongoing yield management initiatives, is expected to substantially improve the profitability of the FedEx Freight segment in fiscal 2012.

The estimated cost of this program is $150 million to $200 million, primarily related to one-time charges that will be recorded most likely in the second and third quarters of fiscal 2011.

These charges will include severance costs associated with personnel reductions, lease terminations, and certain non-cash charges.

The actual costs will be dependent on the number and timing of employee departures and lease terminations.

The net cash effect from the one-time cost of these actions is expected to be immaterial over time due to anticipated proceeds from asset sales.

Turning to guidance, we expect continued growth in revenue and earnings in the second-quarter of 2011 as the global economy continues to grow and yields improve due to our yield management initiatives.

FedEx projects earnings to be $1.15 to $1.35 per diluted share in the second quarter, and $4.80 to $5.25 per diluted share for all of fiscal '11, an increase over our previous estimate.

This guidance excludes any FedEx Freight combination costs.

In addition, our earnings expectations are based on a continued recovery in global economic conditions, slower but sustained economic growth in the US, and fuel prices remaining at current forecasted levels.

Our anticipated earnings growth in the remainder of FY '11 will be dampened by costs associated with the reinstatement of employee compensation and benefit programs, such as 401(k) matching contributions, increased pension and medical expenses, and higher aircraft maintenance and purchased transportation expenses.

Our capital expenditure forecast has been increased to $3.5 billion in FY '11 and includes spending for aircraft and related equipment at FedEx Express, network expansion at FedEx Ground, and revenue equipment at the FedEx Freight segment.

We invested $747 million in aircraft and aircraft-related equipment in the first quarter and expect to invest an additional $1.2 billion for aircraft and aircraft-related equipment during the remainder of FY '11.

Aircraft-related capital outlays include the new B-777Fs and the B-757s, which are substantially more fuel-efficient per unit than the aircraft type they are replacing.

These aircraft-related capital expenditures are necessary to achieve significant long-term operating savings and to support projected long-term volume growth that will drive higher earnings, margins, and returns.

As Mickey mentioned, we are planning our investor and lenders meeting here in Memphis on September 28 and 29.

At that meeting, Fred Smith will talk about how the global economy, the global recovery is being led by manufacturing and by emerging markets such as China, India, and Brazil.

Emerging-market GDP as a percent of world GDP increased from 36% in 1980 to 46% today.

Mike Glenn will speak about how an improvement of 100 basis points in Express yield equates to $170 million of incremental annual profit.

Rob Carter will cover our complete electronic trade document solution and our latest advances in hub automation technologies.

Dave Bronczek and his team will discuss our roadmap for achieving double-digit margins in the not-too-distant future.

Dave Rebholz will talk about our major advantage -- speed.

And Chris Richards will speak about the August 2010 MDL decision regarding Kansas, where the Court granted FedEx Ground's motion for summary judgment, holding the plaintiffs were independent contractors as a matter of law.

Bill Logue will discuss more details about the combination of FedEx Freight and FedEx National LTL into one integrated company with a choice of priority and economy LTL services for our customers, and how our highly advanced internal operations technology makes this possible.

What I say will remain a secret until September 29.

I look forward to seeing everyone.

In closing, I want to thank all the team members around the world for their outstanding performance and dedication.

I am optimistic about where we are headed in terms of a continued improved profitability, particularly as I think about the rest of FY '11 as well as my expectations for FY '12, when many of the headwinds from FY '11 will be gone.

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

(Operator Instructions) Tom Wadewitz, JPMorgan.

Yes, good morning.

Let's see.

Wanted to ask you a question on the LTL restructuring and how you would think about the magnitude of costs that you are taking out.

You gave us the specifics with 100 terminals and 1,700 headcount.

What is the magnitude of cost that that equates to?

And then, is there any kind of ballpark of -- you take out that much capacity, how much freight would you expect to push out of the system related to that?

Is it 5% or is it 10%, or just some kind of ballparkish numbers for the LTL restructuring?

Hey, Tom.

It's Bill Logue.

Again, Alan mentioned the cost estimates for the integration of the networks is $150 million to $200 million.

As far as the volume perspective, we believe this is an absolute positive for our customers, offering priority and economy choice now in the LTL space.

So we believe -- and we will work closely with our sales force and our customers over the next three months here to really show the value of what we are doing here.

It's a significant change in the LTL space that we are very excited about.

Market research has supported this initiative and we believe that, absolutely, we expect share of wallet improvement versus volume moving out.

I think we will see some volume changes as we continue our yield improvement initiative, looking at customers that we believe that the value in our network from either us or them does not match up.

We will continue to work on the issues.

But the overall -- putting the networks together, we believe this is a positive for the customers and believe it will be a plus on the volume side.

Tom, Alan.

I am not going to give you a specific number on expense reductions, but I will tell you that the word substantial that we used in the press release is real.

It's a big number and we are very excited about it for next year.

Gary Chase, Barclays Capital.

Good morning, everyone.

I wondered if I could just follow up with that and just ask Bill if the -- for a little bit of color on the recent trends in the Freight segment and whether or not the restructuring in any way reflects a view that the longer term opportunity for this segment is somehow different.

Thanks, Gary.

Actually, we have looked at in the past nine months this whole LTL position, both the industry and FedEx Freight and our two operating companies.

We believe that this is, as I said earlier, it's a positive movement.

We think is a absolute plus.

We are very positive on the LTL space for the business.

I have said since the last nine months that our objective is to get Freight back to profitability, get back to double-digit margins; and we believe we have this formula here to do that.

Recent trends?

Obviously, yield coming up is a very good thing for our business.

We saw quarter over quarter -- we saw volume a little bit flat, and that was somewhat intentional as we moved some of our volume out, as we improved our yield.

So we think we are well positioned.

I have read a lot of the analysts' write-ups, and you'll see it is a combination of short haul, long haul coming together.

Reality is, this is really kind of changing our business model and offering choice to every length of haul.

Having a priority and economy choice, which the customers are asking for, and moving our business forward by giving them choice, reliability.

And that is something that I think is very important and needs to be understood by everyone, that this is a significant difference in how we are going to market.

Every length of haul we will have two options and two choices, separated by probably an average of about a day transit.

We're excited about it.

And what is really promising is the market research felt that it was a very positive move and at the same time that FedEx was probably only one of the companies that could pull this off.

So we are excited about it.

And the tone of business hasn't changed?

The tone of business, I think it's again the yield side of the business a lot in the industry.

Obviously everyone is trying to get work to get the yields up.

We see that, which is a good thing.

And again, volume for us remains strong.

Okay, thank you.

Rob Pickels, Manning & Napier.

Good morning.

I have two bigger picture questions.

The first question is on your capital plan.

I guess I am wondering how you evaluate the trade-off between adding new flights and adding capacity and increasing your CapEx and the impact that has on your volumes.

Versus, as one of the largest players, if you chose not to add that capacity, presumably the market would be even tighter and you would benefit on the yield side.

So I am curious how you go through evaluating that trade-off and making the decision to add the capacity.

Rob, this is Alan.

It's pretty easy.

Our incremental margins on IP are 40%.

That market is growing rapidly, and we are taking share, and our anticipation is that will continue.

So we are sourcing aircraft for that international expansion to handle that volume.

That is a very easy decision to make right now, and it's going to drive us over the next several years as we continue to grow that and continue to improve Dave's margins.

I will let Dave add to it, but that is the resource allocation decision.

No, that's exactly right, Alan.

Our growth engine, of course, is international, and we are having a hard time keeping up with the demand.

The high-value, high-tech sector of the business around the world is really doing very well.

We are adding flights to keep up with the demand.

Also, these 777s going to market, that actually helps us extend value to our customers by adding more pickup time and arriving into markets earlier in the morning.

So it is a double win here.

Okay, thank you.

The second question real quickly is on China.

We know that the Chinese government is trying to build out more of a domestic consumer economy there.

One of your competitors recently put out a press release about investments in a road network in China.

So I am wondering, what are FedEx's plans as it relates to the Chinese domestic market?

Not the international import/export market, but building out a domestic airfreight network or building out a ground network?

Well, this is David Bronczek again.

As you probably know, or maybe you don't know, we have been in China for many, many years, over a couple of decades.

Our international business there is booming.

But a year ago or so, we added a domestic Chinese business that is doing exceptionally well, bundling the two together I guess it is 18 months or two years ago now.

But the point is that the customers in China are thrilled with the value that we have added into the domestic market as well as the bundle to international.

So the Chinese market for FedEx Express is very strong and getting stronger every month.

Okay, thank you.

Tom Wadewitz, JPMorgan.

Yes, thanks for giving me a chance for the second question in there.

Your guidance is a bit -- I don't know, it could be viewed as conservative; it could be viewed as indicating that there is some slowing potentially in demand trends.

You did refer to the economy slowing a little bit.

If you look at a normal historical pattern it seems like you get -- so I looked at fiscal '04 through fiscal '07, your November quarter is up about 21% versus the August quarter.

The midpoint of your guidance implies about 3% earnings growth, $1.25 versus $1.21.

So from that frame it seems pretty conservative.

But it could also be that you expect slowing in volume.

So I was just wondering if you could give us a sense of -- what is it that maybe makes that guidance number look lower versus the historical pattern for second quarter?

We have been debating that ourselves.

But actually it's a pretty simple answer.

The first quarter sequentially had a very big benefit from fuel and the second quarter will not.

That is one of the major drivers.

Then there are some additional cost adjustments and things, a number of them.

Maintenance and repairs, for example, will be higher in the second quarter than the first quarter at Express again, as we try to work down this huge backlog of traffic we have all around the world and we continue to add planes.

There is some additional AIC because we now have raised the rest of the year.

The way we book our AIC, that is an increase.

We also have a few other expense categories that we are going to invest in and I will be ready -- I will be willing to talk about those after we do it, rather than giving anything away competitively at this point.

But having said that, I would not focus on the second quarter.

I would focus on the range for the year and the momentum we will have going into FY '12 when we won't have any of these things recurring, and we will have rebuilt our variable compensation base, so that won't be an impact either.

So that is why my comments about FY '12 were what they were.

Okay, great.

Thank you very much.

Ken Hoexter, Bank of America Merrill Lynch.

Great, good morning.

Just want to follow up on the LTL side for a moment.

You talk about the improvement.

What is the improvement that you get by combining them?

And then I guess, when you look at them, the market has always kept the local and long-haul separate for service issues and ability to use the cross docs properly.

What does this hurt, then, by combining it?

If we haven't seen it done before, what service levels do you use?

Because you said a customer can now call up and get anything.

I presume they could have called you up before and gotten the same thing just from your two separate companies.

So what does it hurt by doing this in terms of service capabilities?

Well, I will take the expense side.

As we said earlier we are not going to exactly identify that for you, but it is very substantial.

And it is going to return Freight to profitability in and of its own right before you even talk about yield improvements.

I will let Bill talk about the technology and operational capability we have to be able to do this.

Yes, as we have looked at the -- again, over the last nine months did the analysis, we have determined that, you're right, today a customer could call in and pick a long-haul, short-haul, a premium or a deferred type offering with different companies.

In our case, Regional and National.

We have looked at it in detail.

With our technology enhancements on our internal operating unit systems we are now able to offer again the choice between two levels of service in every bit of length of haul.

And we're actually seeing the market kind of shift that way.

You notice a lot of the carriers are trying to -- long-hauls are trying to penetrate the short-haul; short-haul are trying to penetrate the long-haul to try to find additional revenue in certain spaces.

But at the same time the customers are looking for that choice going now towards more transit choice as well as not only strictly long- or short-haul.

They are looking for choice within the network.

Also, we are going to be looking at -- and again, we have designed a network that on our economy offering will also capitalize on some intermodal opportunities that will help us on the cost side of it.

So there are some interesting developments there which we will go into at the analyst call as well.

This is Fred Smith speaking.

Let me make a couple of comments about Freight, because it is obvious there is a great deal of interest about it.

I don't know of a single project that we have ever done inside FedEx where we have had more extensive operational research modeling and customer focus group research than we have on this project.

We are very, very confident in our ability to execute it, and it will be a real paradigm change in the LTL market.

Quite frankly, I don't think this would have been possible a few years ago absent the IT capabilities that are now available on a real-time basis, which allow you to utilize the terminals much more efficiently than was historically possible.

That's why regional and national networks were separate; it's because the ability to cross-utilize the facilities was next to impossible.

But we know how to do that now, and are very confident that the Freight segment will be highly differentiated and will achieve double-digit margins in the foreseeable future.

So we are very excited about this.

And this isn't something that we are doing with a wish and a prayer.

It is one of the most detailed business plans we have ever put together.

I am very excited about it.

This is Mike Glenn.

I just want to add that there is a significant change to the value proposition in terms of ease of access, ease of use, and choice for the customer.

That is a significant difference from what anyone else has to offer in the marketplace.

Once we have an opportunity to lay this out at our upcoming meeting I think this will become very clear as to why the value proposition resonated so strongly with customers in our qualitative and quantitative research in preparing for this change.

Great.

Thanks for that insight.

On the international side, you are adding the 11th flight.

Can you talk a bit about your outlook for international?

Obviously you continue to see this trend on this accelerating growth.

I guess maybe a little bit of your thoughts as you move into the thick of the peak shipping season.

Yes, this is Dave again.

You're right, the volumes are continuing as strong as they were in the first quarter.

We are very pleased with that.

I should point out that we say we are officially adding a flight or two.

The truth of the matter is we have been flying extra sections now for many, many months.

This gives us a more reliable, scheduled, better cost-efficiency way of handling this traffic -- in Asia specifically, but really all around the world.

So yes, we have added some flights.

We are adding a fight to Shanghai, one to Hong Kong.

Those markets continue to perform exceptionally well.

But again, we have added these flights in connection with extra sections that we have been flying now for many months.

This is Fred Smith.

Let me point out that there are a lot of similarities in what David Bronczek is doing in his international network and what we just announced in the FedEx Freight network.

In Asia, with the 777 airplanes that Dave is putting into service, we're able to offer these nonstop flights and give these major market longer cutoff times with the flights departing at the end of the business day, allowing the maximum time to process shipments.

We're also able to add extra sections that come off of the Asian markets in the morning, where items have been assembled from a very large catchment area.

This is why over the last few years we have stressed to you the introduction of our international economy, international economy freight, international economy distribution.

Those flights come up over our Anchorage hub and then down into the United States into one of our hubs here, where they are then delivered via the ground.

So we basically are making our assets sweat a bit more with a broadened product line and more options for our customers.

So in both Express and Freight, this concept is pretty powerful, based on our research and our experience.

Justin Yagerman, Deutsche Bank.

Good morning.

Wanted to get a sense where you guys are right now, going back to the Freight side of the business and opening up contracts, talking to customers and going through your book of business to re-price some of the yield.

You made some progress sequentially from the fourth quarter.

But wanted to get a sense where you are.

And then also maybe, any implications on the yield side that fall out of this restructuring, either positive, negative or what have you?

This is Mike Glenn.

I am extremely pleased and would say that our sales team has executed almost flawlessly here over the last several months in executing our yield improvement strategy, as evidenced by the 4% quarter-over-quarter change.

Obviously, we have worked very hard to identify opportunities where the margin was not at acceptable levels and have addressed those.

We see that effort continuing in the future.

We have also had a lot of success executing a similar plan on the parcels side, as evidenced by the strong yield improvements we have seen at both Express and Ground.

I want to reiterate again that the value proposition we are able to deliver through this restructuring at Freight strongly resonates with customers in terms of their desire for choice and ease of access.

So I see that as being a benefit for us going forward.

Customers always like choice.

And with the industry-leading service levels that we have, we are going to be able to deliver a great value proposition.

I again would reinforce -- once you see that laid out in a couple of weeks, I think you will understand why we are so excited about that.

Okay, thanks.

Wanted to get a sense -- a question was asked earlier about capacity in Asia.

Maybe if you guys could give a little bit more granularity on what the situation is in terms of airlift capacity out of Asia.

Calendar fourth quarter of last year we saw obviously a very tight situation in the last holiday season.

As you look out over the next two months is that your expectation?

Then if you could go into a little bit of detail on where you guys have implemented the 777s on those longer haul lanes and how those are changing the way that you are doing your business internationally, that would be helpful.

Thanks.

This is Fred Smith.

I would like to make a broader comment and then ask Dave to speak more specifically about what he is seeing out there.

One of the points that we have made consistently over the last few years, and I would like to make it again today.

When you talk about the air cargo market, there are really two segments to it.

There is the door-to-door express segment, which today is roughly 11%, 12% of the tonnage moved in the air cargo market; but it's about 30% of the revenue.

The increase in the air express segment over the last 20 years by weight has probably been 5X; and in terms of the revenues it's probably been 10X.

So that trend is going to continue, we believe, as more high-tech technology and high value-added products are moved, particularly between points in the developing world.

In that regard, the developing world now ships about 50% or exports about 50% of its export shipments to other developing countries.

That is more than double just a few years ago.

So these trade patterns are very different than the conventional wisdom.

And we believe with our network, which is the largest in the world by a substantial margin in terms of tonnage and revenue -- about 60% in terms of revenue ton miles based on the IATA data from last year.

The reason we are adding capacity and making those capital expenditures is not just because of the overall air cargo market; it is because of the growth within that express sector, which to some degree we created and continue to stimulate demand with these types of super express freighter services that Dave told you about.

So be careful about just using the broad industry numbers.

Because the lower value-added items and the traditional airport-to-airport air cargo business is a bit different than the door-to-door express business.

Now, I will ask Dave to talk specifically about global industry capacity and our capacity.

Let me just say one final thing here, which puts a final punctuation point on some of Alan's remark.

We believe that we are going through a period of time here where we have had and will for the next year or two a unique opportunity to grow our international franchise.

So we are putting capital into that business.

But in the out-years, we very much believe that the returns on that capital will be quite substantial and the capital to revenue or expense ratio will go down.

If we didn't believe that, obviously we wouldn't be making these investments.

It's important that our shareowners understand why we have done that is to exploit this growing opportunity in this growth of the door-to-door express market, particularly between these developing markets.

Dave?

Okay, thanks, Fred.

Alan mentioned it earlier; just to reiterate it, our incremental margin for international packages is 40%.

That is one statistic.

Just a few more statistics so you can wrap your minds around just FedEx for a moment here.

Our international weight for the quarter went up 29%.

That is significantly higher than IATA reported around the world for the rest of the industry.

Our international revenue per package revenue was up 24%, and the international freight was up 41%.

You can see that the demand is there; it's continuing there; it's strong returns there.

And quite frankly, our customers are so pleased with our service and the offerings now to a add more time to their distribution networks and into our network, to get early deliveries and late pickups, that we are putting all hands on deck to keep up with the demand.

Matt Brooklier, Piper Jaffray.

With respect to aircraft being brought out of the desert and back into service and the related maintenance costs, wondering if you could walk us through how many aircraft were taken out of the desert during fiscal 1Q; your expectations for taking more aircraft out of the desert in fiscal 2Q; and potentially beyond that.

I guess that depends on demand.

And maybe provide some color on the incremental maintenance costs and your expectations for maintenance cost as we move throughout fiscal 2011.

Well, rather than focusing on the number of planes let me just tell you that in the maintenance costs category that you are looking at, we ran around $91 million.

That is a combination of things.

It is bringing planes out of the desert, plus the increase of utilization and demand.

That is a significant point that I wanted to make.

I would tell you that probably for the next several quarters it will be around the same aircraft maintenance cost of higher utilization and demand and a few more planes coming out of the desert.

But that being said, it's right now more along the lines of utilization and demand than it is planes coming out of the desert.

Okay, so it sounds like that incremental maintenance is more stress on planes due to incremental volume versus the maintenance costs of bringing aircraft out of the desert.

My second question.

domestic Express volumes actually picked up nicely in the quarter.

We know that international has been strong and should continue, albeit the actual growth rates on the international side likely moderate.

But it looked to me like the domestic side of the business, US packages grew nicely, picked up from a growth rate perspective versus last quarter.

Maybe give us some color on what is driving that increased growth within US packages and your expectations for the US Express market this year.

This is Mike Glenn.

We were pleased with the domestic Express volume performance.

It is also being driven by the high-tech, high value-added sector.

But the particular point I want to make here is about the strong yield management activities that are in place and we will continue going forward.

That is our primary objective.

While we want to continue to grow volume and expect that we will do that, our primary focus is on improving yields at the domestic Express business as well as in Ground and certainly LTL.

So our primary focus is not on market share so much as opposed to continuing to improve yields.

This is Dave.

Just to add to what Mike said -- and I have mentioned this a couple of times before and will talk about it in a couple of weeks here.

Yes, the volumes is up 3%.

And yes, my yields are up 7%, for an overall revenue increase of 10%.

But again the global network that FedEx Express is, the more international packages that end up in the United States in the inbound or outbound part of my cycle, drives more and more profits automatically.

So the more international packages that end up in my US domestic trucks, coupled with the yield improvement program that Mike just talked about, is a significant profit driver for FedEx Express.

Art Hatfield, Morgan Keegan.

Morning.

Just one big-picture question.

Can you address how or what you are hearing from your customers with regards to inventory levels and how you think that may play out or impact volumes in the next couple quarters?

Well, Art, as Fred mentioned in his opening remarks, we expect a very solid peak season.

It always gets a little cloudy after that, with a key focal point being Chinese New Year.

So we are optimistic about going into the holiday period and think we will have strong performance both in our US networks and international networks through the peak season.

But it always gets a little cloudy after that with the important period being around Chinese New Year.

We do expect a solid industrial production numbers for the calendar year 2010 and going into [2011] level in the 4% to 5% range.

And we expect a little bit of consumer spending pickup; our numbers are around 1.5 in calendar year '10 and about 2.6 in calendar year '11.

So, those are numbers that we're very comfortable with in terms of supporting our business levels.

Obviously, we will need to wait a little while after peak season to see what the remainder of the year looks like.

Art, this is Alan.

Let me just add, particularly in the high-tech sector, our customers don't have any inventory.

What's happening, the market is coming to us as there is a disintermediation of intermediate distribution.

Items are going directly from where they are manufactured to point of consumption, which is called International Priority Express.

And that is what so exciting about the next few years around here, is that is going to continue.

With the reliability that we put up, there is no need to have an intermediate warehouse and there is no need to have a backlog of things that could go obsolete on the shelves.

And that is part of the excitement that we see around here.

Great.

Thank you for your time.

David Ross, Stifel Nicolaus.

Yes, good morning everyone.

Can you talk a little bit about the strength in overnight box particularly versus envelope and the deferred US Express segment?

Is that just due to an increase in manufacturing more so than retail or other industries?

Or is there something else going on there?

Well, I mentioned the industrial production numbers which have improved substantially versus where we were this time a year ago.

So that is certainly one of the factors that we are seeing.

Again, strong performance in the high-tech, high value-added sector which is really driving the business that we are seeing here in the US and, for that matter, abroad.

So I would say those are the two key factors that you are seeing bare.

Then if you could just give a quick update on the FAA reauthorization bill and where you see that in Washington right now.

This is Chris Richards.

As you know, Congress has a number of things that they are looking at in a very short time period, as they want to go on recess at the beginning of October.

The FAA reauthorization bill extension expires September 30, and I would expect at this point in time that there will simply be another extension, probably towards the end of the calendar year.

Thank you.

Jon Langenfeld, Robert W.

Baird.

Good morning.

On the Ground side, can you talk a little bit about the volume growth there relative to the yields?

In a healthy market, do you see this returning to a double-digit volume grower?

Well, we certainly have -- this is Dave Rebholz.

Obviously, with our competitive advantage, we are gaining share.

This is not some dramatic turnaround in our core business, which is more economically based.

So we are picking up share.

We have a competitive advantage.

We still have a lot of runway in terms of where the opportunity of the market lies vis-a-vis UPS and USPS.

So, I am very confident that we are going to continue to just grow and grow.

This is Mike Glenn.

I want to comment on one thing and caution you about looking at the Ground numbers in a vacuum.

One of the strategic advantages that we have is SmartPost.

SmartPost allows us to attack the residential lightweight business in a very efficient and profitable way.

So rather than trying to steer that traffic into the Ground network and the home network in particular, we steer that traffic into the SmartPost network.

So by definition some of the growth potential that might otherwise go to Ground is growing to SmartPost, and I think you can see the very strong performance we have there.

So you have to look at our Ground strategy as an overall residential strategy including SmartPost.

And we are very pleased with our ability to continue to have industry-leading growth rates and very strong yield improvement efforts at Ground.

I think that is based upon the combination of a great sales team that is armed with a tremendous value proposition; and that is a formula for success.

Okay, great.

Thanks for the color.

Then on the international side, when you pre-announced in July positively, you talked about in excess of 20% volume growth there.

Can you talk about how that trend then played out through the quarter?

Obviously it came out a little bit less than that.

So just want to understand the trend line there.

Well, when I said 20% that was a -- 20%'s sort of a round number, so 19% versus 20% is -- I'll take it.

Then like I mentioned before, our international weight grew 29% and overall revenue 24%.

But I think one of the things that we're really pleased about is our international Freight grew 41%.

So we have a great story and a lot of product offerings for our customers out there.

Bill Greene, Morgan Stanley.

Yes, hey, good morning.

I just had a couple of questions.

The first is on -- if you look at your Ground margins, I think this may in fact be the highest margin that you have ever posted in the first quarter.

Not 100% sure on that, but I think it is among the highest, for sure.

You mentioned Express International also doing very well on margin.

So I am wondering if maybe it makes sense, since international is where the big margins come from Express and Ground is doing so well, shouldn't Ground take over more of the domestic network for you perhaps?

Wouldn't that be optimal from that perspective?

Even if Express delivered and have Ground do final mile, how do you think about maybe that sort of optimization?

This is Fred Smith speaking.

This has been an issue on the mind of several analysts for many, many years.

I don't want to spend a lot of time on it because we have talked about it before.

But our belief is that the advantages of focus and segmentation trump the advantages of scale.

Our Express network is built around our aviation network; it is an integrated air-ground system.

So the key switching points, if you will, are necessarily on airports.

To move Ground parcels of lower value-added products for the retail industry and so forth through these enormously expensive locations would not be cost effective.

Secondarily, once you start combining time-definite Express packages with day-definite Ground packages -- which can be delivered in accordance with the optimum efficiency of the operator -- you have to make compromises.

So a good example of that is what Mike Glenn just talking about.

If you really want to talk about the most cost-sensitive segment of the market, it is lightweight, low value-added retail items going to the home.

There is no one that has the density that can compete with United States Postal Service.

That is why several years ago we came up with the strategy of developing a SmartPost service and why it is growing at huge rates.

So we firmly believe that our strategy, which has allowed us to pick up in the commercial ground sector -- what about, 12 market share points, Dave?

Mike?

And we continue to grow market share in the international business, and we believe all three of our major segments can operate at double digit margins as we go forward into the future.

We clearly have had to reset some things.

We went through the biggest slowdown since the Great Depression as everyone knows.

So that is why we do it and do it our way.

The advantage of focus in Express, Freight, and Ground trump any advantages of trying to put those operations together.

Edward Wolfe, Wolfe Research.

Hey, good morning.

Another question on LTL restructuring.

Can you hear me?

Just based on the numbers you released, it looks like about 5% of the headcount and 20% of the terminals are closing.

Just a couple questions.

Is some of this going to be national and some of this regional in terms of people and headcount, or is it mostly coming from one place or the other?

And what do you expect you to do in terms of taking capacity out of the network?

When you think about we have X amount of excess capacity now, how that might look afterwards.

Okay, Ed, yes, let me just clarify.

We are combining to one company, FedEx Freight.

We will take -- again closing 100 facilities.

We will consolidate the workforces from all the units together into one company.

So that is a -- we are taking two really good companies, putting them together.

Our employees will come together to offer, again, that one service -- one company, two service offerings.

One pickup, one delivery.

Dual networks for line-haul and hub processing.

So we're excited about that.

So from a capacity perspective we believe we are going to engineer this network -- again a positive there; we also have a very strong book of business from the national side coming over.

So we have the economy network and volume already with us.

So we are going to engineer this out where we have the appropriate capacity for our volume, and we build the infrastructure facility-wise where we know exactly what our planned growth is over the coming years.

We have the appropriate capacity both the equipment and facilities to be able to expand and react to volume growth as we move forward here.

Ed, this is Alan.

If you think about E2 and priority overnight and the domestic express business and the utilization of hubs, we are going to significantly improve the hub utilization that we have in the Freight network.

So that they will be -- those assets, as Fred said, will be sweating a lot more too.

So we're not taking that much capacity out, although it sounds like it with 100 facilities.

That is the great thing about what we have been able to engineer here.

Yes, Ed, we have a couple of economy hubs and obviously that will be going to a significant amount of dual hubs, which gives us the utilization of that asset both night and day, which allows us to flow the two products through the network.

This is Fred Smith speaking.

I want to stress one other point here.

I mentioned a few minutes ago the analogy in the international express business with our IP and IE product line; and now in the Freight we have our priority and economy lines.

In essence, we have the same thing in the Ground business, too, with the Ground business of SmartPost.

We utilize the same pickup units in the main, except for the very large customers.

We then separate the products at point of origin, and the SmartPost goes to one network, generally a day later, and then is inserted very deep into the postal network.

And we have Ground.

So that is what we are doing in the Freight business.

Our ability to handle traffic is not going to be diminished at all; if anything it will actually be increased.

But the utilization of the assets will increase.

The pickup and delivery efficiencies will increase.

And then the terminals and hubs and the line haul will be structured to accommodate a priority and an economy service level.

So it is something we are very comfortable with.

I don't think Bill answered the specific question that Ed Wolfe had about the personnel low.

I believe that the personnel are not necessarily from freight or national.

It is locational and seniority-based, with the exception of the Lakeland operation.

Correct, Fred.

We are taking -- as we close the facilities, obviously we are moving that volume work to another facility.

So we will consolidate the workforces, again based on seniority, and we will work through it.

We have an excellent enhanced severance package for anyone that is -- will look for an opportunity.

So we believe that we will have a really strong united workforce going forward -- again, based in protecting this Company's seniority.

And I might mention that one of the reasons that we selected the date for the combination of FedEx Freight and FedEx regional was to make sure our customers had the confidence that peak season would not be interrupted.

It was done with very much a people orientation of taking care of our folks, so that we'd give them plenty of time to know what was coming down.

We would have a chance to communicate with them.

It has been very carefully planned.

There's a lot of relocation packages being offered here.

So we hope that the headcount reduction will be basically those people who need to leave or want to leave.

It's a very well put together plan that is very consistent with our People, Service, Profit philosophy.

Scott Malat, Goldman Sachs.

Good morning.

Thanks.

Most of my questions have been answered.

The question I had was on employee count.

It was up a little more than I would have thought, up 3% in the quarter.

Just take us through the areas that was in and thinking about the productivity you have gotten in the quarter.

Thanks.

I am not sure why you think that is an issue given how much the volume went up.

I thought it was a pretty good trade-off and shows that we are really working hard on productivity.

Chris Ceraso, Credit Suisse.

Thanks.

Just a quick question on the yields.

As I look at the different businesses from the fourth quarter to the first quarter it looks like yield slipped a little bit.

Is that seasonal?

Is it fuel?

If not, is there some evidence that maybe some of the end markets or some of the capacity is softening a bit?

Well, the issue that you are referring to is primarily driven by mix.

We had the influx of some lighter weight traffic especially into the Express network.

But if you look at the yields on a year-over-year basis there was very strong performance.

If you exclude fuel from the equation, that was drive predominantly by rate.

In other words, base rate improvement with some benefit from weight on the Express side.

On the Ground side, again if you look at it on a year-over-year basis there was solid improvement in rate, which reflects discounting practices with some benefit on the weight, again excluding fuel.

So I think the big issue that you're referring to is a mix issue on the domestic Express side as a result of some traffic that we got -- and some seasonality -- but some traffic we got in the banking sector.

Secondarily, in the high-tech sector, there has been obviously strong demand for cell phones and things of that nature which tend to be lighter weight, lower yield.

So it's a combination of those issues, some mix issues and a little seasonality.

But strong performance on a year-over-year basis.

Scott Flower, Macquarie Securities.

Good morning, all.

Alan, you mentioned this and I just wonder if you would give us some rough ballpark about the net fuel impact.

I know it is a static analysis and you've got lots of moving parts and pieces.

But just so we could frame it.

Well, it's really a non-GAAP number.

It's analytic.

It's static.

It is all those kinds of things that we study and make a lot of assumptions on, including elasticity and everything else, so I would just tell you that sequentially the first quarter benefited more from the fuel than will the second quarter, which was my answer to the question about why the second quarter didn't look as strong compared to the first quarter as historically it has.

So, about all I can give you on that, Scott.

And that does conclude the question-and-answer portion of the presentation.

At this time I will turn the call back to Mickey Foster for closing comments.

Thank you for your participation in our first-quarter earnings release conference call.

We look forward to seeing you at our investor day here in Memphis on September 28 and 29.

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

Thank you very much.

That does conclude today's conference.

Thank you for your participation.