聯邦快遞 (FDX) 2011 Q3 法說會逐字稿

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

Today's call is being recorded.

At this time I would like to turn the call over to Mr.

Mickey Foster, Vice President of Investor Relations for FedEx Corporation.

Please go ahead, sir.

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

The third-quarter earnings release and our 25-page stat book are on our website at www.fedex.com.

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

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

During our question-and-answer session, callers will be limited to one question and a follow-up so we can accommodate all those who would like to participate.

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

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

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

For additional information on these factors, please refer to our press releases and filings with the SEC.

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 a 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; Mike Glenn, President and CEO of FedEx Services; Rob Carter, Executive Vice President and CIO; 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 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 questions and answers.

Thank you, Mickey, and good morning to everyone on the call.

We appreciate your joining us today to discuss earnings for the third quarter of fiscal year '11 and our outlook.

First I would like to say we at FedEx are very saddened by the loss of lives and the widespread distraction caused by the horrendous earthquake that struck eastern Japan last week, and we extend our deepest sympathy to the people of Japan.

FedEx, including our wonderful team in Japan, is working with our long-standing humanitarian relief organizations -- American Red Cross, Heart to Heart International, Water Missions, and Direct Relief International to transport critical medical and other emergency supplies in support of the recovery efforts.

FedEx quickly resumed service at Tokyo Narita Airport, and we had uninterrupted service at our major operation at Osaka.

In the third fiscal quarter, strong demand for our services drove revenue higher as volumes increased across our businesses.

Yields increased as we continue to focus sharply on managing FedEx for profitable growth.

Particularly impressive was the performance at FedEx Ground, where faster delivery times and other innovative solutions continue to win customers.

We are very pleased with the successful integration of our less-than-truckload businesses and are happy to report we expect FedEx Freight to return to profitability this quarter.

Well done to Bill Logue and the entire team at FedEx Freight for this remarkable accomplishment.

We are very optimistic about future earnings.

The dynamics of global trade appear solid, although the impact of volatile fuel prices and other global events remains uncertain.

Our optimism is based on three factors.

One, our business strategy to profitably grow our international business, improve our yields, manage our cost structure, and make sound investments is working.

Second, global macroeconomic trends are driving growth in markets where we have unique competitive advantages, such as the long nonstop flights being flown by our Boeing 777 freighters.

Three, the FedEx team around the world is delivering on our Purple Promise -- I will make every FedEx experience outstanding.

In that regard we are particularly proud that Fortune Magazine recently rated FedEx among the top 10 most admired companies in the world.

Our businesses are performing strongly in the United States, where industrial production growth is expected to approach nearly 5% in calendar 2011, outpacing GDP and supporting overall transportation volumes.

We plan to take full advantage of continued rapid growth in emerging markets as well, which we serve with the largest, most comprehensive air express/air cargo network in the world.

In the third quarter of FedEx Express began direct, nonstop 777 service, as an example, from Memphis to Seoul, South Korea, increasing capacity and improving transit time.

Expect more enhancements to our international route system in the near future.

FedEx Express completed the acquisition of AFL in India, improving our already strong position in that important market.

This acquisition builds upon an extensive, competitive FedEx network there which includes the most weekly international flights from India of any express service provider; unrivaled connectivity to Asia-Pacific, Europe, and the Americas; and the most customs clearance locations for any carrier.

Coverage in 100% of key import and export markets across India is now in place.

In closing, let me remind you that we are committed to our goals of continuing to increase our revenue, achieving 10-plus-% operating margins, increasing earnings per share, improving cash flows, and increasing returns on invested capital.

Let me turn it over now to Alan Graf, our Chief Financial Officer.

Alan?

Thank you, Fred; and good morning, everyone.

Strong demand for our services continued to drive revenue growth during the third quarter.

Revenue increased 11% to $9.7 billion as yields grew across all our transportation segments and volumes increased in our package businesses.

Our yield improvement program continues to be very effective, as base yields, excluding fuel surcharges, are rising nicely, thanks to the excellent work of our marketing and sales teams as well as the outstanding service we are providing.

Despite this revenue strength, however, our results were significantly impacted by severe winter weather conditions.

Unusually severe winter weather caused widespread disruptions to our networks, which led to lost revenues and drove of higher purchased transportation, salaries, wages, and other operational expenses.

These factors impacted our year-over-year results by an estimated $0.12 per diluted share after considering the effect of variable incentive compensation accruals.

Additionally, higher compensation and benefits, including pension, 401(k), and medical costs, and increased maintenance expense also negatively impacted our third quarter.

Looking now at the segments and starting with Express, Express segment revenues increased 11% in the third quarter primarily due to an increase in IP and US domestic package yields as well as higher IP package and freight volume.

IP package yield increased in the third quarter due to increased package weights, rate increases, and higher fuel surcharges.

Domestic package yields increased due to higher fuel surcharges, rate increases, and increased package weights.

Exports from Asia and Europe drove increases in IP package and freight volume as well.

The overall base yield story is strong.

For IP packages base yields were up 5%, and for domestic US packages they were up 3%.

I should note that IP Freight Ground increased 21% with a total yield increase of 3%.

Express segment operating income and operating margin decreased during the third quarter.

Increased aircraft maintenance costs, the reinstatement of certain employee compensation programs, higher retirement plans and medical expenses, and the negative impact of severe winter weather more than offset the benefit of increased revenues.

Purchased transportation costs increased 32% due to costs associated with the expansion of our freight forwarding business at FedEx Trade Networks as well as IP package and freight volume growth.

Maintenance and repairs expense increased 26% due to an increase in aircraft maintenance expenses as a result of timing of maintenance events and higher utilization of our fleet, driven by the increased volumes.

Fuel costs increased 29% due to increases in the average price per gallon of jet fuel, which was up 19%; and jet fuel consumption increased 10% to 302 million gallons, driven by volume and weight increases.

Turning now to Ground, Ground segment revenues increased 14% to $2.2 billion due to volume and yield growth at both Ground and SmartPost.

Ground average daily volume increased 6% and yield was up 5%.

Yields were primarily up due to rate increases, higher residential surcharges, and higher fuel surcharges.

SmartPost volumes grew 17% as a result of growth in e-commerce business, gains in market share, and introduction of new service offerings.

Net yields at SmartPost increased 7% due to lower postage costs.

Ground segment operating income was outstanding at $325 million, up 26% year-over-year; and operating margin increased to 14.9%, up from last year's 13.5%.

Moving to Freight, segment revenues increased 8% to $1.1 billion as a result of higher LTL yield, partially offset by lower average daily LTL shipments.

Yield increased 11%, while average daily LTL shipments decreased 6% year-over-year due to our yield management initiatives as well as severe winter weather.

The net operating loss during the third quarter included costs associated with the combination of our Freight and national LTL operations and the significant impact from severe winter weather.

We incurred costs associated with the combination of $43 million during the third quarter.

We expect cash to be received from asset sales to approximate the total cash outlays for the program, including severance and lease terminations.

Taking a look at our outlook, as you can see, we have increased our projected earnings and now are looking for a range of $4.83 to $5 for the year.

Our earnings growth in the fourth quarter will be dampened by higher anticipated compensation and benefits, including retirement plans and medical costs, and continued higher aircraft maintenance, but will be benefited by continued growth in volumes and stronger yields.

The forecast assumes the current market outlook for fuel prices, with jet fuel prices now in the range of $3.10, and continued moderate growth in the global economy.

Earnings could be affected by the impact of the ongoing political turmoil in the Middle East and North Africa on fuel prices and the economy in general.

Also the near-term impact of the earthquake and tsunami in Japan on operational costs, shipping patterns, and the global economy is uncertain at this point.

Our annual guidance excludes FedEx Freight combination costs and the second-quarter legal reserve.

We expect that continued improvement in global economic conditions will drive increased demand for our services in the fourth quarter.

The combination of our LTL operations at Freight has been successful, and we expect that the integration of these networks will result in a return to profitability for our Freight segment in the fourth quarter.

More broadly, we expect continued positive trends to improve revenues and margins in the fourth quarter and in fiscal '12 for FedEx Corporation as a whole.

Our free cash flow in FY11 will be positive, and our balance sheet and pension funded position remains strong.

Lastly, we are well into the planning process for FY12, and we are anticipating substantial margin and earnings improvement at Express and Freight and continued strong margins and solid growth at Ground.

With that, operator, let's open it up for questions.

(Operator Instructions) Tom Wadewitz, JPMorgan.

Yes, good morning.

I wanted to ask some questions -- or ask on the issue of demand in general.

We have seen some slowing in the heavyweight airfreight numbers out of Asia.

Your IP is still growing nicely, but it is decelerating a bit.

How do you see that business looking forward?

Are you seeing it slow, or is it just a function of considering tough comps looking forward in the way we model volumes?

Hi, Tom; this is Dave Bronczek.

No, we see strong demand actually running into Q4 here; we have great momentum all around the world, especially in Europe and Asia, US outbound, and US domestic.

So the weights are strong.

As Alan pointed out IP alone was 15%.

IP/IPFS was up 21%.

So I think we are running into Q4 here with great momentum.

Tom, this is Alan.

We had think -- you might think back to a year ago when we had an explosion in our IP package and freight pounds, so the comps in the third and fourth quarter are tougher than they have usually been.

We may be a little bit lighter at the moment than we thought.

But always this time of year it is very difficult to tell, and particularly with the impact of Japan we will have to wait and see.

But our confidence is still pretty strong about continued growth.

And the combination of our yield program and higher weights is really driving that revenue line.

Let me just add one last thing.

It is important to note that in all the quarters that FedEx Express has had since we started FedEx Express, after the split with FedEx Ground, this was the highest average daily volume quarter that we have ever had across the board -- domestic US, International Priority, international domestic.

And in Q3 International Priority across the board was the highest volumes that we have ever had.

Okay, great.

Then a question with respect to pricing.

Alan, you commented on base yields in IP I think up 5% and domestic yields up 3% within Express.

When you say base yield, does that include weight-per-piece changes, or is that --?

I mean is it pure, kind of comparable price number?

Or is there something else?

And I guess in terms of outlook on that, do you think base yield or pricing is accelerating further or stable at this level?

So, anyway, thank you.

Okay, Tom, I will start and then I will turn it over to Mike Glenn.

When I am talking about base yields I am including everything except the fuel surcharge, which is out of our control.

But what we are managing to in terms of rates has been very effective.

We have a lot of momentum there.

Our general rate increase is sticking very nicely, particularly as we look at what we are doing at Freight and the LTL business -- which by the way, having reduced volume is okay; that is by design because we have got to get paid appropriately.

So let me let Mike Glenn follow up.

Good morning, Tom.

Alan is correct.

The sales team is doing a fabulous job in the yield management program, and there are a number of components to that.

One is, as we sign up new business we are signing that business up at higher average yields.

So the pipeline of new business coming in is coming in at higher rates.

Secondarily, we are doing a terrific job at negotiating increases to our agreements as they come due.

We are also doing a great job of clawing back surcharge discounts, all of which have a significant impact on yield.

And our team is doing a great job of selling through the dimensional weight change that we implemented in January.

So the combination of all those activities certainly lead us to believe that we have got continued opportunity moving ahead to see our yields enhance further.

Justin Yagerman, Deutsche Bank.

Hey guys, thanks for taking my call.

I just wanted to follow up on that question.

Obviously some of the yield strategy is playing out; we are seeing it in the numbers.

I wanted to get a sense -- Mike, maybe you could talk a bit about where you all are in terms of getting through your book of business.

How many of your customers have you readdressed?

How many of those contracts have come up, and how many do we still have to look forward to as we go through the next few quarters?

Well, I would say we are in the very early phases.

We are certainly in the first quarter of the football game here in terms of the yield improvement plan that we are putting in place.

Obviously we have multiyear contracts.

And we are not breaking contracts, and we are dealing with those as the opportunities present themselves.

The biggest impact that we are seeing short-term is obviously the new pipeline of business and secondarily the adjustments that we made in the dimensional weight.

But our team is doing a great job as contracts come up, getting higher-than-market rate increases as we negotiate new contracts.

So I couldn't be happier with the team in terms of how they are performing both in terms of base rate increases, changes in surcharges, and things of that nature.

So we are very early in the game.

I would characterize this as a marathon.

This is not a one- or two-quarter exercise.

This will be in place for some extended period of time.

I am talking about a multiyear program.

Okay, great.

That's helpful.

Then maybe for Alan, on the cost side you talked about $0.12 in the quarter from weather, I believe.

And you talked a little bit about fuel as well.

But the items that haven't really been quantified and keep popping up are compensation and aircraft maintenance.

Wanted to get a sense as we look forward for the next few quarters how we should be thinking about run rate.

I mean I understand you guys are pretty much through bringing aircraft back from the desert; and obviously with volume there is higher maintenance expense; and the compensation is going to be a drag for the full calendar year.

So maybe if you could give us a sense on what run-rate cost drag from compensation would be, and then what kind of clean run-rate aircraft maintenance number -- or just maintenance number -- should look like as we move through the year, that would be helpful.

Okay.

Well, first of all as we look into the fourth quarter we are starting to see a lot of the headwinds lap themselves and abate.

So what is left is obviously we completed the complete reinstatement of our 401(k) January 1; so that is obviously having an impact here in the rest of fiscal '11 and somewhat into FY12.

Our aircraft maintenance is going to remain high in the fourth quarter as we look at the timing of events.

So for fiscal '11 it will be an anomaly of a year in my view.

It will start to mitigate in FY12, which will be a positive and one of the things that we are excited about.

I cannot tell you today what the market will be like on May 31 when we do our pension calculations, but we certainly are expecting nothing like we saw in the increase in FY11; so that should be a positive going forward.

Our productivity improvement plans are on track.

Our G&A costs continue to decline in terms of revenue, so we are excited about that as well.

One little math exercise that everybody needs to remember is that at these very high jet fuel prices, that is a margin restrainer.

Because it adds exactly the same amount over time to the revenue line as it does to the expense line, and artificially is lowering those margins.

But the absolute cash flow and EPS won't be impacted by that, just simply the margins will be.

So we have a lot of favorable things turning our way.

We are hopeful that the Japan situation will be very short term.

And we will continue with the yield management program, so we are optimistic about the outlook.

Gary Chase, Barclays Capital.

Good morning, everybody.

I wondered if you could give a little color on -- you have sustained if not slightly raised the fourth-quarter outlook, if I am reading it right.

I am wondering -- and in light of the fact that fuel headwinds have developed, I think, to a much greater extent than you anticipated when you originally guided to that outcome, I am wondering if you can give us a little bit of color on what you see that is improving out there that is providing an offset.

Well, Gary, if you look at year-over-year, in the third quarter the net fuel impact is about a wash across FedEx Corporation.

We anticipated that it was going to be a positive before the run-up.

So we had that working against us in the third quarter.

Of course the fourth quarter, if things stay the way they are, we will not get our full surcharge until May.

So right now we are being penalized by having the run-up in fuel prices and having a trailing six-week or so surcharge increase.

But what is offsetting that is, as I mentioned before, a lot of these headwinds are starting to fade; we have a lot of momentum; fourth quarter is always our best earnings quarter of the year.

And we are pretty confident about that.

With the caveat about fuel going haywire or Japan, which is a very large business for us, deteriorating more than we think it is going to.

That is certainly uncertain, and we are obviously keeping our eyes on that.

Dave can talk a little bit about -- it would be a good time now I think, Dave, to talk a little bit about what is going on in Japan for us.

Yes, thank you, Alan.

We have obviously talked to all of our folks in the Japan daily, and they are doing a terrific job.

Everybody is safe and accounted for, which is the most important thing.

We have always maintained our Osaka flights.

Narita, we had one day that we had to slow down the inbound flights there because of the backlogs that were for the northeast there, in Sendai area.

But we are back in Narita now and Osaka, and everybody is performing very well there.

Obviously it is a very difficult situation, so we're watching it closely.

But we are up and operating and we never stopped operating in the south and the west.

So we are watching it closely.

Alan, is Express the place where you think the offset is predominantly?

Or is it in Ground or Freight?

Obviously we are going to improve significantly in Freight.

I mean the combination is behind us, and we will be solidly in the black here in the fourth quarter.

We're looking for very, very good productivity and improvement in FY12.

Ground is just going to continue to keep hitting it out of the park, rocking along at these 15% margins with very nice growth rate, and that will continue.

Express, we just want to forget about the third quarter.

I mean we had everything that could go against Express go against Express in the third quarter.

It is behind us now; and I think the outlook there is very good for significantly improved margins.

Let me just add to Alan's point on Q3 for Express.

We had 27 operating days we had severe service disruption days.

That is one-third of the whole quarter for Express.

Matt Brooklier, Piper Jaffray.

Good morning, guys.

Wanted to focus in on Freight operations.

If I look at the release it would suggest that maybe there was some incremental cost during the quarter outside of the non-continuing that you cited.

Maybe you could talk a little bit about some unexpected costs at Freight and maybe the magnitude of those costs through the combination.

And then also maybe talk a little bit about weather and how that impacted Freight operations during the quarter.

Hey Matt, this is Bill Logue.

First of all, we are very pleased where we are six weeks into the new corporation here.

First two weeks obviously were dominated by weather.

Again it is why I look at it -- we are really kind of four weeks into the new program and the team has just done an absolutely fabulous job of working our way through learning the new organization and structure, after fighting through the first two weeks with the weather challenge.

So from a cost perspective those first two weeks -- obviously very expensive.

We had to throw a lot of incremental cost at it to work our way out of the situation with the weather.

Bottom line is we are moving along nicely.

Every week we get better and better.

All our efficiencies that we have laid out, our targets, every day, every week improve.

Again we are sitting now four weeks into the post-weather startup, and we feel very confident where we are going in here into Q4.

I will say this Q4, as Alan stated, we expect to be in the black.

But also Q4 will be a very important quarter for us as we continue to adjust and tweak the network to make sure that we are getting ready for a strong FY12.

Okay.

Just a follow-up to that on the volume side.

I understand that you are trying to flush out some lower yielding freight.

But maybe talk about overall service levels during the quarter and through the combination process, and maybe talk a little bit to if there was some share loss.

Yes, let me say this here.

Again, the first two weeks as Express felt we -- actually the quarter had some significant impact from weather obviously.

So when you look at the numbers there is a substantial number in there that's obviously cost, lost revenue, and expenses because of the weather storms.

I think we had five significant events in the quarter.

Obviously the first couple of days of the new structure of the company were pretty dramatic.

But as we go forward here we are confident and comfortable that we have the right strategy.

As far as volume, we worked, hard, obviously Mike's team on the Services front, on the yield initiatives.

If you look at the comparisons, we have -- the comparisons in Q3 are based on a very substantially un-normal third quarter of last year, which was very -- volume was very high.

So again we have worked this past year on the yield initiative and we are seeing very positive results there.

Again, we are confident that the volume that we have in the year-over-year comparisons is driven by the yield initiative predominately, some seasonality obviously, and some weather.

So we feel we are in good shape there and as we go forward.

The customers have responded very well to our new initiative.

As we put it, there is choice out there and they certainly have -- understand the new initiative.

The first two weeks obviously there was -- I think we read there was some confusion out there.

There was -- the sales team, the ops team, and our customer service organization did a fabulous job of touching base with all of our customers that were either in the Priority or the Economy mix, and talked to them, and clarified to make sure they were picking the right service for their business.

So we think we're well past that and now it is full steam ahead into Q4.

Matt, this is Mike.

Let me just say that Bill's team has done an outstanding job of maintaining very high service levels during the transition.

The volume impact during the quarter, as he mentioned, is largely related to weather and then secondarily our yield improvement program.

As you can see by the results we were quite aggressive on the yield improvement activities, and we are extremely pleased with the success that we had.

More importantly, looking forward our pipeline is quite full and customers are responding extremely well to the choice of Priority and Economy options.

That is giving us the flexibility to really pick and choose our spots and, again, command higher rates based upon the value proposition that we are providing.

So we couldn't be happier with where we are at this point.

It really is a great value proposition for our sales team to sell, and we think we are in a great position going forward.

Donald Broughton, Avondale Partners.

Good morning.

Thank you for taking my call.

As it relates to Freight, while we are on the subject, Bill, what if any assumptions are you making on the fate of Yellow?

Are your projections of profitability based upon their demise or simply a status quo for their operations?

Donald, first of all, our projections are based on our business, and the new network, and looking at all of our operating metrics that we have planned, and our volume levels and so forth.

So it is nothing to do with the Yellow or anybody else.

It is our base business.

As far as Yellow, obviously I wouldn't comment on any of our competitors.

Again we worry -- we focus on our business and making sure that we are running the best Freight business for our organization going forward.

Well, then I will speculate.

If something were to happen to them, would you -- given your new redesigned system -- be in a better position to respond than you were before?

Yes, I think obviously our structure the way it is with our two offerings give us a lot of flexibility in either the Priority or the Economy network, depending on a customer's need.

Again that is for any customer that would present our options.

Obviously Mike's team on the sales front plays a very important role for us, making sure the customers get steered to the right network, and then obviously from a pricing perspective making sure that it is going to be profitable business no matter what new business we pick up from any competitor.

Donald, this is Alan.

Let me just add that even though we are selling -- hopefully very soon here -- a number of facilities that we no longer need, we are adding doors in key locations to make this network more flexible for wherever additional volume comes.

We intend to just start back on the growth rate here in the LTL business once we get through this initial period of offering the Priority and Economy services.

Donald, this is Bill again.

I will say, after the first six weeks here -- obviously, first four weeks we learned a lot in the new network.

And we are spending a lot of time making the appropriate adjustments to make sure that we are able to handle today's volume, future volume, and we are making appropriate adjustments to our network to make sure that we are ready.

Obviously, anytime you take on a major restructuring that we did you plan for it.

Then the real skill comes when you adjust to what reality hits when it hits.

Again we are making those adjustments and again we have learned a lot.

We have made great strides short term.

We have great plans for going forward.

So we are well positioned and excited for the Freight future.

Nate Brochmann, William Blair & Company.

Good morning.

Thank you for taking my call.

I wanted to talk a little bit more, Dave, maybe if you could talk about Japan just a little bit more.

I think there is a lot of misperceptions in terms of the size of that business for you as well as the freight that moves in and out of there.

I was just wondering if you could share a few more thoughts on that.

Sure, thanks, Nate.

Obviously Japan being the third-largest economy in the world is big for us and always has been.

So we are watching it closely.

We are keeping all of our resources in play there.

We are providing more when needed.

Quite frankly we are getting a lot of requests, as Alan or Fred mentioned earlier, for people wanting to ship things into Japan now.

Oddly enough that will probably be a benefit for us going into Japan.

So it is an important market, and I think we just have to monitor it and watch it closely.

But right now we feel very good about where we are.

We are still in Narita, Osaka, and we intend to keep providing great service and possibly even more lift into Japan.

Fair enough.

I was just wondering too then, kind of the second part of that is -- obviously with a lot of the noise, I think you guys have addressed it fairly well.

But I think there is a lot more worry now in terms of just the general economic outlook.

But it sounds like your economic outlook going forward hasn't changed at all, and if anything remained obviously very optimistic.

I am just wondering if the last month has changed any of that outlook.

Mike Glenn, do you want to talk about Gene's forecast?

Yes.

We haven't had a material change in the forecast for calendar year '11.

We are still looking at 2.9% GDP growth; industrial production just under 5%, as Fred mentioned; consumer spending again just under 3%.

If you look at our fiscal year '12, as we go into that we are looking at 3.3% GDP growth; industrial production down slightly from this year; and again consumer spending around 3%.

So not a significant change in that.

Ken Hoexter, Bank of America Merrill Lynch.

Good morning.

Just on the Ground side, margins I think posted an all-time high for the quarter, for the third quarter.

Can you talk a bit about the shift going on?

Is there a shift between Ground, SmartPost?

Do you aim to chase some volume here with margins as high as they are?

Can you walk us through that?

Ken, this is Dave Rebholz.

We had a very strong quarter on the volume side.

Very proud of the team and the results we have been able to deliver, especially in light of the unique days -- we had three record Mondays.

We actually beat our record this year.

This year we hit 10.7 million on a Monday, which was 1.5 million packages higher than the previous year.

So there is a lot of incredible focus without significant loss to service, other than some of the service days where whole regions of the country were simply shut down in terms of the highway system.

So putting that aside, SmartPost also had a great year.

On that 10.7 million SmartPost's record day was 4.4 million, which if you go back four years we were doing 350,000, 360,000 packages a day.

It is a humongous recognition by our customers of the value.

And that value is coming through online sales.

It is the dot-com world that is really driving that SmartPost.

So SmartPost had good margins.

We had good margins at Ground.

We always get certain efficiencies in these times.

But we have got our costs very tightly buttoned down.

The incremental costs that we employ or use are all designed to, number one, improve our service -- which we are the fastest in the industry.

Number two, provide additional efficiencies.

And number three, reward our employees and our contractors for the fine service performance that they have been able to do.

So across the board -- and I will add in one less thing.

Yield was strong.

You have heard it repeatedly this morning.

Yield was strong both as a function of weight, our surcharges at home were very strong as we went through the December time frame for the unique services that we provide.

Fuel had a little bit of a drag on us.

We understand that.

Then to what Bill and Dave and Alan have all said, the sales team and the Services organization have been able to take our value proposition and leverage it for incremental increases in our general rate increase.

So I am very optimistic about the future.

Dave, if I can do my follow-up there as well -- and I was amazed how many actually FedEx Ground packages came to my house during the holidays -- SmartPost came (multiple speakers).

Thank you very much.

But the question on that is do you -- I guess if the Post Office starts to shift in their delivery, does that impact the business?

Does fuel running up impact that ability to get the pure rate on the overall?

I guess that is a general yield question.

Well, Ken, the actual postal structure that you have been hearing information about, I think probably the most widely conveyed message was the Saturday operation.

They are really talking about Saturday delivery.

We do not do Saturday delivery with SmartPost.

And their facilities will still be open for acceptance of packages.

When we get in to the peak season, just so you understand, we run three shifts 7 by 24 because that gigantic increase in volume necessitates that you use your capital equipment to the greatest advantage humanly possible.

There isn't any pressure on the Monday through Friday delivery with the Post Office.

I think we are sitting perfectly.

To the extent that they change, we will advise you; but at this point we don't see a risk that we have to be concerned about in the near- or long-term future.

We have a great working relationship both as their largest vendor through FedEx Express, and we are their largest Parcel Select customer.

So we work very closely with them to ensure that we are doing all the right things.

David Ross, Stifel Nicolaus.

Yes, good morning everyone.

With respect to higher fuel prices, there has been a lot of talk, given the FedEx portfolio and how that impacts the customers' shipping options.

Certainly the spike in 2008 caused a lot of trade-down from Express to Next Day, Next Day to Ground, Ground to SmartPost.

A lot of shippers over the last couple years I guess have been optimizing their networks.

Can you comment on where you see further optimization?

How much really is left to do in the trade-down if fuel continues to climb?

Mike Glenn, you want to take that?

Yes.

David, obviously we have seen a lot of that.

We saw a lot of that when the fuel surcharge went well over 20%.

We don't feel we are in that range at this point.

As Alan mentioned our outlook is based upon the fuel prices as we see them today.

Clearly if we were to see a significant spike up, where the fuel surcharge were to increase another 10 points or so it is quite possible you could see some trade-down.

But we are already -- that is part of our sales strategy, to ensure customers' traffic gets in the right network.

So we try to point them in that direction already.

So I don't think you would see as much as occurred in the last go-round.

And keep in mind that we have built the surcharge -- we have taken 2 points every year for the last five or six years and put it into the base rate.

So it certainly minimizes the impact of increasing fuel prices.

So there is certainly a possibility that you could see a slight mix change if fuel prices continue to escalate.

But again, our sales team has done a good job of making sure customer traffic gets in the right network to begin with.

So certainly don't think it would have the same impact that we saw several years ago.

Thanks.

Then just to follow up on the FedEx Freight network, with the newer, leaner infrastructure that you all have plus with, I guess, the greater opportunities -- rail.

What is the network capacity remaining in the new network?

I guess a lot of people think that it is going to be less than the old network; but maybe the way you have adjusted it or your still probably low rail usage might allow for similar capacity.

Yes, capacity obviously is an important part of our business.

We have you been using a lot of rail with our Economy product in the new offering, and that has gone very well.

So we continue to adjust our network.

Obviously we have plenty of capacity.

Again, the key point is where the appropriate customer's need is and where the yield is.

And then we just need internally to adjust our resources now that we have operations on both sides of the business.

So it is all about adjusting capacity as the demand needs.

And our job is obviously to make sure that we align the resources to it.

If we have capacity, we have multiple variable options with our own line haul, with purchased transportation line haul, so we have that flexibility to put the resources where we need to.

As far as facilities from the P&D side of the business, the pickup side of the business, with the reduction in our number of centers we are very confident we have the right pickup and delivery network out there.

Now it is just continuing to adjust with the customers' demands.

Kevin Sterling, BB&T Capital Markets.

Thank you, operator.

Good morning, everyone.

Looking at your Express segment and your positive commentary around that for your outlook, clearly you guys are seeing some strong volumes in Express.

What do you think are the primary drivers?

Is it low inventory-to-sales ratio?

Is it industrial production growth?

Or maybe a combination of both?

This is Fred Smith.

Let me have Dave and then Mike Glenn comment on this.

It is all of the above.

The facts of the matter are the world economy continues to get bigger.

The biggest economy in the world is the economy of world trade; and the fastest-growing part of world trade is the growth among the emerging markets, and the emerging markets to and from the industrialized nations.

I think today, perhaps because of the tremendous news capabilities we have, everybody gets fixated on an event or one thing or another.

And while many of them are terrible and not very pleasant, the facts of the matter are that the momentum of introducing billions of people into the world trading economy is one of the biggest things that has ever happened in the history of the world.

And our Express operation and the entire Express segment sits right in the middle of that.

So that is why we have the confidence.

With the biggest air express-air cargo network -- it is about 60% bigger than the next largest one -- we are getting a lot of advantage from scale.

So that is the macro answer; I will ask Dave and then Mike to comment on more specific issues.

This is Dave Bronczek.

Yes, Fred is right.

Our global powerhouse is going into more parts of the world, deeper into more countries -- India, Mexico, China, the UK, all around the world.

So we are adding to our product portfolio, and customers have a different mix of business now they can give us across the world.

But it is our global footprint that is so powerful.

We are going so deep into these countries now and providing new opportunities, new services.

Then of course our high-tech customers are just shipping -- I'm sure most of you received from FedEx the latest iPads.

And on and on.

But I think it is what Fred said.

It is the global power of our network going deep into many more countries.

The only other comments I would make is, if you look at the GDP forecasts for the emerging economies both in Asia-Pacific and Europe, they are growing much faster than the US, which plays right into the sweet spot for our value proposition.

The launch of the 777 aircraft gives us a significant competitive advantage in key markets, by allowing us to pick up later and open new market opportunities.

Our broadening product portfolio is certainly playing a role in that.

So we have got a terrific value proposition out there that is playing right into the hands of these emerging market economies that are growing at a much faster rate than the US economy.

Okay, great; thank you very much.

That is great color.

As a follow-up, Alan, this question is for you.

You talked about the higher aircraft maintenance expense next quarter.

Is that a function of just pulling more planes out of the desert?

Or is it more of a function that your aircraft have gotten busier?

Yes, the desert is past us.

It is now that our utilizations are up and there are more aircraft.

But it is also some timing anomalies.

So as I said, that will still be fairly high in the fourth quarter; but it will mitigate in FY12.

(Operator Instructions) Jason Seidl, Dahlman Rose.

Good morning, everybody.

A couple quick questions.

One, Bill, on the LTL front.

With the network now as it is, has there been any change in the split between the regional business and some of the longhaul business?

Or is it about the same?

Can you repeat that question again?

Yes, the split between your regional LTL business and your long-haul business now, as the network is redesigned, versus the prior network; has anything changed?

Let me jump in.

This is Mike.

Obviously we have worked a lot with customers to help them understand the new services available for them.

There has been some minimal change in the split of the business, but it is certainly within our projections of what we thought would happen.

I think customers are learning the services, learning the service levels, the transit days.

We will continue to see some modest adjustment going forward in that, but it has not been a significant issue for us and certainly within our expectations.

I will add to Mike's point there.

We also -- the first couple of weeks you saw a lot of customers trying to understand the new offerings.

It certainly has stabilized over the past four weeks, which makes it a lot obviously easier for us to build our plans and so forth.

So we are seeing that stabilization, which addresses that confusion issue I think on the front end as well.

Jeff Kauffman, Sterne Agee.

Thank you very much.

A lot of my questions have been answered but let me ask the following.

We have had tsunamis before.

We had the situation in New Orleans.

We have had kind of global disasters.

Can you talk a little bit about -- with respect to what is going on in Japan and the tsunami?

And David, thank you for the color that you gave.

Which industries, what areas with the brownouts and what is going on in this particular situation, are most at risk over the short term, long term?

You talked about some of the people that are shipping things over.

When there are natural disasters, sometimes there are offsetting benefits in terms of aid volume, in terms of machinery parts, electricity, what have you.

Can you talk a little bit about some of the specific risks and potential benefits that could result from this natural disaster?

Well, this is Fred Smith.

I will ask Dave to comment further.

It is very difficult to ascertain what the effect is going to be.

I don't think in the scheme of things with a company the size of FedEx, at about $10 billion a quarter, that the net effect of Japan is going to be significant.

Now that doesn't mean that it couldn't be a lot of money in human terms, but in relative terms to FedEx's operation.

And secondarily, while this thing has been horrific and one of the worst things we have seen in a long, long time, the reality is it is fairly localized.

And assuming that there is no great effect from the nuclear power plant issues, the Japanese are very resourceful people.

We are carrying a lot of traffic out of Japan as we speak, and the trade balance from Japan and to Japan was always much more export-oriented there.

So there will be more traffic going into Japan for reconstruction purposes than would otherwise have been the case.

Of course there will also be humanitarian relief.

And as I mentioned in our remarks we try to stand up and help people do that because we have a unique capability to do it, and other people in the industry also do that.

So I don't think that Japan will be significant overall.

There may be some pinch points in various supply chains and have some effect on automotive or high-tech production.

But the Japanese are very able folks, and I think the way they have handled this thing is also very admirable.

I might add that on our Board we have Dr.

Shirley Jackson, and Dr.

Jackson is the head of the Rensselaer Polytech; and she was also the head of the Nuclear Regulatory Commission.

We coincidentally had our quarterly Board meeting on Monday.

So one of the most interesting things we have had in a long time was to listen to her educate us about the situation in Japan.

I think the likelihood is that the effects of the nuclear situation there are more probably less rather than more, unless just some drastic unfortunate convergence of events takes place.

Dave?

Yes, Fred is exactly right.

I mean, we have a lot of requests right now from the American Red Cross, [Heart to Heart], and many, many others of course; and FedEx is famous for providing that level of support anywhere around the world, whether it was the China earthquake a year ago, 18 months ago, and so forth.

But on top of all that, we are getting a lot of requests right now; and we are looking at positioning it to ship materials, heavy materials into Japan to support the reconstruction efforts over there.

So you would expect that because we are so big and so global and we have the resources.

So we are queuing that up now.

John Barnes, RBC Capital Markets.

Good morning, guys.

In terms of LTL, going back to that for just a second, if I take a look at what you did on a revenue-per-hundredweight basis in the quarter versus where your revenue-hundredweight peaked, I think, back in like the first fiscal quarter of '09, it is still down like 9% or 10% from the prior peak.

My question is, one, how long will it take you to get back to those peak levels of revenue-per-hundredweight?

And two, do you really have to in order to get back to the prior level of profitability at Freight, or has this restructuring lowered that bar a little bit?

John, this is Mike.

You are correct that we are not at our peak yields, although we have had significant year-over-year and quarter-over-quarter improvements in yield and I certainly expect that to continue.

I also expect us to exceed those peak yields, although certainly we don't make forecast on timing of such activities.

But we are going to stay committed to the yield improvement programs, and we think we have got a value proposition now that will allow us to do that.

I will let Bill comment on the network and the importance of yield in that.

Okay, thanks, Mike.

Yes, John, obviously we have been restructuring-our network is a key, but internally we focused on the network as one half; the continued yield initiative is the other half.

So to answer your question directly -- yes, we need the network, positive gains we get from that, plus continued yield improvement to get where we need to be to achieve our double-digit margin goal.

And Mike's team is doing a great job continuing to focus on it.

And the ops team has done a great job on aligning our metrics for our network side; and then the continued great performance by Mike's team negotiating the yield side of the business is really a key factor as well for our long-term success.

This is Alan.

Let me just give it to you direct.

No, we don't have to get back to those old yields to get very, very nice double-digit margins at Freight.

Because we have taken out a tremendous amount of cost duplication and G&A overhead.

Chris Ceraso, Credit Suisse.

Thanks, good morning.

Alan, you walked through some of the things that changed from '11 to '12.

But it sounds like in many cases it is just you are not going to see another big increase from '11 to '12.

Are there costs, whether it is maintenance or compensation or -- pension I know it is hard to gauge.

But are some costs actually going to decline outright from '11 to '12?

Or is it just you get better leverage because the revenues keep going up and the costs don't go up again?

Well, I think that the productivity that we have, momentum that we have in all of our operating companies is tremendous right now.

So we are going to continue to get continued productivity gains.

If you look at Ground for example and how they are driving increased margins, it is because every time they add another 100,000 pieces -- whether it is in SmartPost or commercial or home delivery -- they are getting additional economies of scale and productivity.

Our technology improvements that we are adding everywhere is providing us additional productivity.

Our G&A headcount is essentially frozen.

So it is everywhere inside the Company.

It is being engineered with cost management and service improvements in mind.

We are very focused on quality, and so it is pervasive.

As far as some big, giant cost reduction -- no, I don't think so; although eventually we will see lower pension costs as interest rates rise.

Peter Nesvold, Jefferies.

Good morning, thanks for take in the call.

Just a really quick housekeeping question.

It looked like the tax rate was a little light in fiscal third quarter.

I am just curious; what discounted into the fourth-quarter guidance?

I love that.

A little bit light?

We like it lower.

I understand.

Okay?

So that is where light is good.

We are seeing improvements to -- lowering of our effective tax rate as a result of our international profitability and our permanent reinvestment programs that we have around the world.

We would love to see a corporate tax rate reduction.

We would love to see territoriality and all those to help us even more.

But working with what we can, that is the major driving factor.

Of course our cash tax rate is going to be very low as we take advantage of 100% expensing this calendar year and 50% next calendar year.

Okay, so the book rate historically was tracking around 37%.

It sounds like maybe 34%, edging back down, is the direction we are going.

Well, I would say for this year, just depending on how things work out and with the Japan situation, 36% to 37%.

But yes, we intend to drive it down over time on a static basis as we continue to improve our international profitability where our earnings are taxed at a lower rate.

Great.

Thank you.

Jon Langenfeld, Baird.

Good morning.

I have two questions.

One on the CapEx side and the pension side, relative to your calls on capital, what should we think about that over the next couple years?

Then the second question was just weight per shipment.

You highlighted it on the international side and Express; but can you also talk about weight per shipment in the Ground business?

Thank you.

I will handle the first part and then I will turn it over to Mike and Dave Rebholz for the second.

As we have stated many times, we are being very aggressive right now.

We have a substantial amount of cash on the balance sheet.

As I said we are going to be very nicely cash flow positive this year.

That is after we pay for our CapEx, after we pay for our acquisitions, and after we fund our pension fund, and after we paid off some of the debt.

I mean, we have a zero net debt position if you take our cash and offset with the debt that we have on the balance sheet.

In fact, it is positive.

And we intend to make sure that happens in FY12.

Having said that, because we are getting expensing at 100% and 50%, we think now is the time, with the markets that we see, to accelerate that a little bit.

So we are going to be aggressive.

We will probably take our CapEx up in FY12 as a result and accelerate some things forward, because we are getting the essentially tax-free interest-free loan from the government from the expensing.

So that is our plan.

But we will still be cash flow positive and we will still drive improved earnings, and we will be preparing our Company for the long run.

John, this is Mike.

If you look at weight and its impact on yield during the third quarter for Ground, the primary driver there was rate and discount changes, once you exclude fuel.

Weight had a very minor effect on yields in the quarter.

If you look at it on quarter-over-quarter basis, weight actually had a very slight negative impact on yields, which is always the case in the quarter with peak season, because you tend to have a little bit lighter weight per transaction there.

So all up, a slight positive on a year-over-year basis; and a quarter-over-quarter basis is slight negative.

Let me just add; this is Dave Rebholz.

We did have a nice pickup in our general rate increase and we had a nice pickup in surcharges, both dimensionalization and other unique surcharges associated with the growth in the home delivery network.

And Mike has already answered the weight situation.

Scott Malat, Goldman Sachs.

Hey, thanks.

I just wanted to follow up just on Express yields.

Can you help us understand about the outlook here?

Obviously it tends to move with industrial production.

But when you are close to 8 pounds per package, how do we think about it at these high levels?

What is left of the opportunity here?

Thanks.

Express yields?

We certainly believe we have got plenty of opportunity going forward.

We have a multi-phase strategy here.

I have talked about some of that already.

Obviously we have a number of contracts that will come up for renewal in the next six months.

We expect to get above-market rate increases as we renew those contracts.

Our sales team is doing a fabulous job negotiating with our customers in that regard.

We are doing a great job of managing surcharges as part of that.

The annual rate increase, we are holding on to a higher percentage of that.

The change in dimensional weight pricing has provided a benefit greater than our expectation, and we continue to manage that.

So we have a lot of things going in our favor.

Again I have to say again our sales team is doing a fabulous job of taking the yield management challenge and executing accordingly.

Ed Wolfe, Wolfe Trahan.

Thanks, just to follow up on what Mike has said now a couple times about some of these multiyear contracts that I think you said earlier you don't intend to try to break early.

So there is obviously a potential pricing opportunity in the future.

Can you discuss the percent of these multiyear contracts?

How many are directionally one-year, above that?

How much of your business is spot across the Express and Ground networks?

Well, Ed, the majority of our contracts are multiyear contracts; some are two some are three.

It is rare that we go above three years unless the customer just insists on a longer-term contract.

Obviously we have the ability to make adjustments to those contracts with appropriate notice.

But we don't think that is the right action to take there.

And I will be honest; I don't have the percentage off the top of my head on the amount of the business under contract.

But I would say it is a little over half.

A little -- half is what?

I'm not sure what that half referred to.

A little over half would be under -- I main, just to be clear, all of our discounted business is on a pricing agreement; so that would be for all intents and purposes a contract.

The difference is for our larger customers you tend to have multiyear contracts; with the smaller customers you have evergreen contracts.

In other words they just continue on with annual rate increases built in until one party or the other terminates the agreement.

So all of our discount business is under some form of agreement.

But the larger customers clearly tend to have the multiyear agreements.

Bill Greene, Morgan Stanley.

Good morning.

Alan, just two quick data questions for you.

The first is, can you just maybe size Japan revenue for us on that $10 billion quarterly number?

Secondly, if we think about the investment if you will, the restructuring investment you are making in Freight, what is a reasonable return to think about on that investment?

15%, does that sound like a fair threshold?

Thanks.

Well, as you know we don't break out regional revenues, and I don't think this is a good time to start.

But as Dave said it is the third-largest economy in the world.

Go back all the way to the late '80s when we bought Flying Tiger, where Japan was a majority of those revenues at those days, and we have grown it since then.

So it is a substantial part of our business.

I do have in the range that we have given you a lower profitability than I would have had for Japan before the tsunami.

But where it actually is going to fall out in the short run, I really can't answer.

But we will manage around it.

I mean the good thing is in offshore locations, most of our assets are human -- and as Dave said they are all safe -- and rolling stock or aircraft with wings that we can fly out of there.

So our property losses were very de minimis over there.

And what was your second question?

Sorry, it was just on Freight.

When you think about the restructuring investment you are making, what is a reasonable return for that?

On a cash basis it is unlimited because we actually don't have any net cash outflow to do the restructuring.

So the write-offs were book entries only.

As we have said many, many times, productivity alone -- not to mention the service improvements that we are getting from the Priority and Economy thing -- are very substantial.

So I wish I had 10 more projects just like it, quite frankly.

This is all the time we have for questions.

At this time I would like to turn the call back over to Mr.

Foster for any additional or closing comments.

Thank you very much for participating on the conference call today.

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

Thank you very much.

That does conclude today's conference.

We do thank you for your participation.