聯邦快遞 (FDX) 2012 Q1 法說會逐字稿

Good day, everyone and welcome to the FedEx Corporation first-quarter fiscal year 2012 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.

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

This call is being broadcast from our website and the replay and podcast downloads will be available for approximately 1 year.

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

During our question-and-answer session, callers will be limited to 1 question in order to allow us to accommodate all those who would like to participate.

Next quarter we will enhance our earnings call by taking written questions the morning of the release through our Website in addition to questions on the call.

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

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

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

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

To the extent we disclose any non-GAAP financial measures on the call, please refer to the Investor Relations portion of the website at fedex.com for reconciliation of such measures for the most directly comparable GAAP measures.

Joining us on the call today are Fred Smith, Chairman, President, CEO; Alan Graf, Executive Vice President and CFO; Mike Glenn, President and CEO of FedEx Services; Chris Richards, Executive Vice President, General Counsel and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO; Dave Bronczek, President and CEO of FedEx Express; Dave Rebholz, President and CEO of FedEx Ground and Bill Logue, President and CEO of FedEx Freight.

And now Fred Smith will share his views on the quarter, followed by Alan Graf.

After Alan we will conduct a question-and-answer session.

Thank you, Mickey.

Good morning and welcome to our discussion of operating and financial results for the first quarter of fiscal year 2012.

Revenue and earnings increased significantly in the quarter due to strong FedEx Ground performance, improved FedEx Freight performance and the continued success of the Company's yield management actions.

While there's been considerable speculation that the economy has or will soon enter a recession, this is not our view at present.

We expect sluggish economic growth will continue, largely due to a lack of confidence that US and European policy makers will effectively address current economic challenges.

Slowing global economic growth affected volume and operating performance at FedEx Express in the first quarter.

Accordingly, we've taken actions to manage through a period of lower demand for shipping, particularly in international express.

We have many options that allow us to flex our operations up or down to balance capacity and demand such as reducing the number of airplanes in service and other related activities when demand slows.

While the economic environment is challenging, we remain confident FedEx will improve earnings, improve margins and cash flows this fiscal year.

During this first quarter, a few highlights.

FedEx Express completed its acquisition of MultiPack, a Mexican domestic express package delivery company and launched domestic, next business day service in Colombia's major cities.

FedEx Freight added new markets in Mexico.

FedEx Express enhanced service between Asia and Europe and within the FedEx Express AsiaOne network.

In India, we broadened the reach of FedEx branded domestic services.

In 2 years we've grown domestic express services from 16 origin cities and 58 destination cities to 116 origin cities and 331 destinations.

FedEx Trade Networks, our international ocean and air forwarding company, opened 3 new offices in Munich, Bucharest, Romania and Chengdu in China.

FedEx office enhanced its portfolio of mobile business solutions with a first-to-market feature allowing customers to retrieve files from their Google accounts for convenient printing from wherever their files are stored.

And last month FedEx delivered about 200,000 pounds of high nutrient food in response to the famine in Somalia for UNICEF.

FedEx, in this regard, donated more than 5 million pounds of shipping last year to various causes around the world.

Now let me turn the call to Alan Graf, our Chief Financial Officer for his comments on the quarter.

Alan?

Thank you, Fred, and good morning, everyone.

During the first quarter of fiscal '12, FedEx Corporation earned $1.46 per share, a year-over-year increase of 22%.

The result was within the range we provided in June and was led by our yield improvement program, outstanding performance at Ground and a swing to profit at Freight from last year.

Looking at FedEx Corporation, revenue increased 11% to $10.5 billion, versus $9.5 billion last year.

Operating income increased 17% to $737 million, versus $628 million the previous year, and our operating margin improved to 7%, versus 6.6% the previous year.

Our performance was led by Ground.

Ground continued its outstanding performance for the segment.

For the segment, revenue was up -- was $2.3 billion, up 16% versus last year's first quarter.

Operating profit was $407 million, an increase of 42% and operating margin was 17.9%.

Ground package volume was up 5% and yields were up 9%, 6% from base yield improvement and 3% from higher fuel surcharges.

SmartPost average daily volume increased 29% to 1.4 million packages and yield was up 5%, all of which is attributed to higher fuel surcharges.

The incredible industry-leading speed and reliability of the Ground network continues to win customers and deliver outstanding financial results.

Looking at Freight, revenue was $1.33 billion, up 6% year-over-year.

Operating income was $42 million, versus a loss of $16 million a year ago, resulting from increased LTL yield and efficiencies coming from January's combination of FedEx Freight and FedEx National operations.

LTL yield increased 11%, 6% from base yield improvement and 5% from higher fuel surcharges.

LTL volume did decline 7%.

Turning now to Express, revenue for the quarter was $6.6 billion, up 12% from the prior year, but operating income fell 19% to $288 million.

US domestic package yields increased 13%, including 7% of base improvement and 6% due to higher fuel surcharges.

IP package yields increased 16%.

Fuel surcharge accounted for 6% and base and exchange rates provided 10% of the year-over-year improvements.

However, slower global economic growth, particularly from Asia, resulted in a shift to our lower yielding services and reduced demand in general for our IP package and US domestic services.

US domestic volume declined 3%, IP volume declined 4% and total International Priority weight was up 2%.

I should note that last year inventory restocking was occurring and the comparisons were going to be tough without the economic shortfall.

The declining economic conditions versus what we expected for the first quarter outpaced reductions in variable operating costs, such as flight hours and FTEs.

Simply stated, we put capacity out anticipating traffic that did not materialize.

We have subsequently adjusted our networks to match current demand.

Turning to our outlook, as we said in the release, we're projecting earnings to be $1.40 to $1.60 per diluted share in the second quarter and $6.25 to $6.75 per diluted share for fiscal 2012, compared to the Company's previous full year forecast of $6.35 to $6.85 per share.

This guidance assumes the current market outlook for fuel prices and moderate low growth in the global economy.

Even though the economy for the rest of the fiscal year will be weaker than we thought when we provided annual guidance in June, the range was only lowered $0.10 per share as we expect further yield improvements across our portfolio, continued strong Ground and improved Freight performance, and we have positioned our Express network for lower volumes.

I should note that our Express network is now properly aligned to current volume levels, and we have additional action plans and trigger points identified to quickly further reduce frequencies and expenses if the economic conditions deteriorate from here.

We are not relying on significant Express volume growth to drive operating margin improvement in quarters 2 through 4 at Express, which we know will come.

Strong Ground financial performance will continue, as well as ongoing profitability at Freight.

Additionally, we have built-in shock absorbers to use as needed, such as reduction in variable compensation accruals.

And with that, now we're ready to take questions.

Thank you.

(Operator Instructions) And we'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll take our first question from Donald Broughton from Avondale Partners.

Good morning gentlemen and ladies.

Good quarter.

The question I'm sure is on everyone's mind, talk to us about current Asian, Hong Kong volumes.

I know we're very early in the quarter, but what have you seen already just in the first couple of weeks of that volume as it's developing?

Hi, Donald, this is Dave Bronczek, thanks for the question.

Alan said it right.

We've readjusted our line haul anticipating moderate growth over in Asia.

Of course, when you saw the quarter last quarter, we were at 6% growth in IP in Q4 to negative 4, so we're actually very comfortable with the performance that we're expecting in Q2 relative to our new network performance that we put in place, and I think you'll see improved profits and margins for Express coming out of Q2.

And the question specifically on Hong Kong, we're actually going to see a pickup in our traffic relative to last year's Q2.

We have more high-tech customers that shipped last year in Q1 that are going to be shipping in Q2.

Thank you.

We'll take our next question from Tom Wadewitz with JPMorgan.

Good morning.

I wanted to ask you a bit about the cost side.

Alan, you gave us some comments that you've reset the network in terms of some of the cost items.

Maybe if you could give a little more detail behind that in terms of how -- what Express head count might look like year over year with the reset network and what you think Express margin might look like year over year given that you do have some volume pressures, but you've done some work on the cost side and obviously pricing should provide some support.

Well, I'll start and then I'll turn it over to Dave to get more specific.

We were on track for growth in June when we gave you our first quarter and annual earnings guidance, and then in July we saw sudden deceleration that continued all the way through August, again, versus tough comps, particularly I'm talking about International priority.

And, that's continuing right now, but we have done a substantial amount of network reduction, which does take us anywhere from 1 month to 6 weeks to change our flight schedules and change the amount of hours that we have in the field.

And so we believe now that we've caught up with that and I'm going to let Dave give you some more details because his team has done a great job.

Thanks, Alan.

That's right.

We actually have, in going back to that earlier question from Donald, our comps in Q2 will be much easier for us to hit, quite frankly, on the revenue side and our expenses are better because we've actually gone back and adjusted the line haul, the frequencies, the head count and some of the traffic that we're anticipating coming from some high-tech customers in Q2.

So, we're positioned quite well for Q2.

I want to go back, also, and talk about Ground and Freight where we're seeing great productivity.

17.9% margins at Ground in the first quarter are phenomenal and Freight, it's second consecutive quarter of profitability.

We're starting to see a lot of productivity improvements with more to come from the combination of those networks.

So, on the cost side there, we're in terrific shape.

Thank you.

We'll take our next question from Justin Yagerman with Deutsche Bank.

Hi, guys.

So, if I'm hearing you right, it sounds like the Express issue was more of a timing issue than it is actual economic weakness?

It sounds like last -- in Q1, difficult comps because your customers last year were bringing a lot of goods in and restocking and this quarter should be easier because now we're going to see an easier year over year comp, but you also called out weakness in Asia and we heard that from your main competitor last week at their investor day.

So, I guess what I'm just trying to figure out is how much the environment has actually stepped down versus how much of this is actually a timing issue in terms of when your customers are shipping goods?

And then I guess on top of that, if I could, just how you have such confidence in the visibility into that high-tech chain.

Well, thanks for the question.

It's actually a combination of everything you just said.

It is a slowing down in Asia, obviously.

When you look at our Q4 IP performance of plus 4 on the volume and up on the yields, and then negative 4 in Q1, so it swung pretty dramatically.

So, it's partly that.

It's partly that last year in Q1, if you go back, actually, our 2 year running rate for Q1 to Q1 is actually up 14%.

That just goes to show you how strong last year's Q1 was for IP and driven, obviously, by Asia and specifically China.

So, you have a very high Q1 last year and to compare it to Q1 this year was tougher.

We had a lot of traffic in the high-tech sector in Q1 last year.

That's actually shifted to Q2 this year.

So, Q2's comps, you can understand, are more -- they're relatively easier to hit and the expenses are better because we went back and readjusted the line haul so that it actually gives us the confidence into Q2.

Thank you.

We'll take our next question from Matthew Brooklier with Piper Jaffray.

Thanks, good morning.

Just wondering if you could provide some commentary in terms of your macro assumptions baked into your current annual guidance?

I think previously you had commented on in June with the guide specific GDP and IP numbers.

Just wondering if you could talk a little bit about that?

Thanks.

Matthew, let me review our current GDP assumptions.

For calendar year FY -- excuse me, calendar year '11, our current GDP forecast is 1.8%, for calendar year '12 our GDP forecast is 2.5%.

The industrial production forecast for calendar year '11 is 4.1% and the industrial production forecast for calendar year '12 is 3.9%.

I think it's important to note the forecast has come down for just a couple of reasons.

One, as you know, the bureau of economic analysis revised down the historical GDP growth rates and that impacted about 2/3 of our forecast.

The other third of the forecast is really impacted by the issues that we're dealing with the US debt crisis, treasury down grades and the EU debt crisis.

And let me put a point on the debt ceiling debate and its impact on consumer sentiment.

There was a university -- excuse me, a Michigan consumer sentiment index study that was done during the time of the debt ceiling debate and over that 2-month period, consumer sentiment dropped almost 16 points and it was directly related to the lack of confidence in the country's ability to deal with that issue.

So, make no mistake about it, a lot of what we're dealing with today is sentiment based.

There is some sound underlying economic issues, such as the auto sector, which we talked about earlier, but we've got to turn around this sentiment in order to see some growth beyond what we're expecting right now.

Thank you.

We'll take our next question from Art Hatfield with Morgan Keegan.

Good morning.

Just a quick two-part question.

First, Alan, I thought I heard you say that the volume declines in Asia are continuing.

Can you just characterize that further?

And then secondly, can you talk a little bit about -- you mentioned what list prices are going to do at the beginning of 2012.

Can you talk a little bit about what's going on with contract pricing right now?

We're only supposed to let you have one question, Art, but you snuck it in, so I'm just saying that the trends that we saw in the first quarter are continuing and the easier comps in the second quarter are out of Asia.

There's no real pickup at this point.

I think we had an earlier question about how do we have such good visibility?

Well, it's because we're talking to our customers every day, they're telling us exactly when and what they're going to ship.

So, I have a lot of confidence about what our Asia traffic is going to look like in the second quarter and all the way through the holiday season.

Art, this is Mike.

The list price increase that we announced for Express and US export is consistent with what we've done the last 2 years.

During this period of time, I'm also very proud of the sales team and the revenue management team for the job that they've done in working with our customers to renegotiate new contract rates.

We have been exceeding our expectations in that regard and are quite pleased with that performance, and expect that to continue at least through this contract cycle.

Thank you.

We'll take our next question from Nate Brochmann with William Blair & Company.

Yes, I wanted to talk a little bit about -- to take a line with those questions, what you're hearing from your customers on their inventory levels and whether there's any true optimism that we could see some emergency shipping heading into the late holiday peak season?

Retailers have certainly responded to the weaker sentiment by managing inventory levels very conservatively.

As a matter of fact, the value of inventory levels relative to sales is near historic lows and we believe that any increase in consumer sentiment and consumer spending could certainly benefit us by more expedited transportation based upon these lean inventories.

As we see new product introductions in the tech sector, particularly in the mobile device sector, that could certainly benefit us.

Thank you.

We'll take our next question from David Ross with Stifel Nicolaus.

Yes, good morning, all.

Question on the FedEx Freight segment, improving margins there and better pricing.

Are the volumes where you want them to be and when do you expect to see year over year volume growth in the network?

David, this is Bill.

Yes, we're pleased with the current volume levels and obviously with the current economic soft patch.

We are about 1 more quarter before we'll start to see year over year growth.

So again, the negative 7 on the volume, obviously, is a result of our yield strategy and we -- 1 more quarter to go and we should be lapping ourselves and heading into annual year over year growth.

Thank you.

Our next question comes from Kevin Sterling with BB&T Capital Markets.

Thank you.

Good morning, gentlemen.

Going back to Express, how much of an impact was Japan on your Express volumes?

And then, also, are you seeing any strength in other regions, maybe South America?

Yes.

Japan, obviously, like most of Asia Pacific, kind of fell into the same soft patch that Billy was talking about, but mostly it was China.

So, I would say that Japan and most of Asia Pacific was softer.

In terms of Latin America, yes, that's actually been strengthening.

So, we're seeing some additional volume from Brazil and Mexico and Latin America in general.

But the question on Japan, kind of fell under the same category, but it was the lesser impact.

Thank you.

Our next question comes from Jason Seidl with Dahlman Rose.

Good morning, gentlemen.

Quick question, there has been a lot of talk about the post office and the post office pulling back.

You are the largest contractor, but clearly if they eliminated Saturday deliveries, that would be on the positive side.

Net-net, what would you be looking at in terms of an impact for that reaction from the post office?

Jason, it's Chris Richards.

As everyone knows, the business fundamentals of the post office have changed and they need action by Congress to address some of the issues.

There have been a number of different proposals offered in legislation and we're monitoring that situation closely.

As you know, FedEx Ground is a large customer of the postal service with our SmartPost service, and FedEx Express is a key provider to the postal service because we provide the transportation service that has improved the reliability of postal service's priority mail service from less than 70% to more than 95%.

We look forward to continuing both of those relationships.

We'll be monitoring the situation and feel confident with our relationship with them.

Thank you.

Our next question comes from Jeff Kauffman with Sterne, Agee.

Thank you very much.

I just wanted to ask the below the line question, big change in other net.

Could you give us a little bit of insight on that?

Well, big change, but really not too material.

I talk about tax rate and interest, we've got a lot of cash, we're capitalizing a lot of interest expense on the triple 7 deliveries.

Our tax rate's are a little bit lower because we are permanently investing offshore a lot of earnings that we actually do intend to reinvest offshore.

So, all of those things, Jeff, are helping us below the line, but the real story will be how well the economy grows going forward and that will be the bigger difference as we look at quarters 2 through 4.

Thank you.

Our next question comes from Bill Greene with Morgan Stanley.

Good morning.

Alan, Fred mentioned in his comments that he doesn't see, at this point, a double dip.

When we think back to '08, what was sort of the canary in the coal mine?

What are the things you would be watching for to say, yes, our business turning south at a broad portfolio level?

As we think about each segment, what are the things we need to watch?

I think Mike hit it.

It's consumer sentiment this time.

We have an environment of significantly lower interest rates than we had in 2008, we have a really -- look at Ground's performance and we still have an economy that is growing and moving things and, so at this point there hasn't been this, well, we're just going to shut down everything kind of mentality that we went through the last time, I think.

The Company is much more flexible in its cost structure than it was back in 2008, we're able to react much more rapidly, much more variable costed than we were.

So, all of those things, I think, protect us on the down side.

In my range, we have -- because we're forecasting substantial improvement year over year, we have our annual incentive compensation is being fully funded and it wasn't back in that time frame.

We can also start to reduce that and will if we start seeing a deterioration.

So, just a completely different situation.

Our customers' hair is not on fire, they're just saying, we're going to be steady as she goes.

So, it just feels completely different than it did back in '08.

Thank you.

Our next question comes from Peter Nesvold with Jefferies & Company.

Good morning.

Thanks for taking the call.

If I can dig just a little bit into the guidance, it directionally feels a little back ended and the reason I say that is when I look at -- if I strip out the mid-point of fiscal second quarter mid-point of the year, if I did the math right, it seems like you're assuming high single digit earnings growth in the back half above past peak earnings.

And then to put that into contrast, from fiscal 1Q to fiscal 2Q, it's almost flat sequentially, whereas historically you might have seen a $0.10 bump on the low end, $0.20 on the high end.

It feels like expectations are kind of set low for the current quarter, but that in the back half of the year, your fiscal year, it seems that things are anticipated to get directionally better.

Is there anything beyond the GDP forecast that you had cited that would suggest that or am I interpreting the information wrong?

A couple of things.

First, we're not expecting the peak we had last year, but even with that, we're going to have a substantial earnings improvement in the second quarter, even when you count the charges that we had in last year's second quarter.

So, sequentially from the first quarter, the Company worked really hard in the first quarter to lower its costs to achieve that number, and so if we were going to have our normal really high peak, you would probably see a lot bigger differential sequentially Q2 over Q1.

As we get to the second half, again, Express -- we expect Ground and Freight to continue their performance and Express, we think the volume situation will be a little better than it was in the first quarter with a little growth, but we don't need a whole lot to hit those numbers.

So, that's why I still have a pretty wide range for the year, it depends on where the economy falls out.

Right now we're feeling, like we told you, fairly confident that it's going to be steady as she goes and no double dip.

Thank you.

Our next question comes from Gary Chase with Barclays Capital.

Good morning, everybody.

Last quarter, one of the things that you guys spoke about was some degree of investment in Express, that the other segments were performing so well that you decided to accelerate some of the investment there.

Wondered if you could just elaborate a bit on where those investments were being made, if they continued in the fiscal first quarter and whether or not some of the cost reduction will come from sort of a wind down of that investment activity?

Yes, this is Dave Bronczek.

That's correct.

We've added some more investments in Europe, Asia, Latin America and they're all geared to improve our profits and our margins.

They're all organic in nature, they're all station operation sales, marketing and so forth.

So, it is the same, as we said in Q4 of last year.

We decided to keep that -- those programs in place because they were going to improve our profits and our margins, and they're all organic inside FedEx Express, in Europe, Asia and Latin America.

Thank you.

We'll take our next question from Robert Pickels with Manning and Napier.

Thanks for taking the question.

Just -- you may have touched on it a little bit already, but what would cause you to adjust your capital spending forecast?

You've been spending a lot and I think the economy is slowing and what would -- what would cause you to adjust that in the rest of the year or going forward?

I think you've got to take a look at the performance of the Company in general.

We are earning a 25% ROIC at Ground, I'm going to put as much money in ground as they can possibly stand and continue to grow and take market share with those margins and returns.

We're not backing off any, we may even be accelerating there.

In terms of Freight, we're going to make sure we have the most modern equipment and the highest service levels to help them get back to double digit margins.

So, we're going to continue to invest there.

In terms of Express, we're not going to back off of our triple 7 orders whatsoever.

We may delay some station expansions and some hub improvements and some things like that depending, but it will just be on the margin.

Remember, we're still enjoying the accelerated depreciation from a tax standpoint, so we still want to be taking advantage of that.

We'd be looking more at FY '13 and beyond for us to be talking about any significant reduction in CapEx.

Thank you.

Our next question comes from Keith Schoonmaker with Morningstar.

Thanks.

You highlighted some expansion of OD points in India.

I was hoping you could elaborate a bit on this market, particularly in regards to dealing with low price per parcel.

What portion of this business is triggered by company assets, materiality, that market in the IP portfolio?

Yes, we -- as you know, we acquired a company in India for exactly that purpose, to bundle and leverage the domestic market in India and our international business in and out of India and, of course, that market is so important to us strategically going forward, connecting India to Asia and India to Europe and the United States.

So, we've made a lot of improvements there, bought a very nice company there and we're integrating it to bundle our customers to give them better value.

Thank you.

We'll take our next question from Chris Ceraso with Credit Suisse.

Thanks.

Good morning.

Can you talk a little bit more about Asia, maybe give us some color on where you saw the slow down sequentially, what industries or which customers and which destinations, is it US, is it Europe?

I'll start and I'll kick it over to Mike Glenn, but obviously last year in the first quarter we had a booming quarter in Asia and we had a lot of high-tech traffic coming through multiple big customers of ours and that -- that shipping pattern is shifting into the second quarter of this year.

So, we had high growth rates.

Obviously, when you look at our 2-year average of 14% volume growth and what I just said our IP was negative 4% this year, you can see that last year's Q1 was booming in international.

So, it's obviously mostly China, mostly the high-tech customers for Express.

Mike, do you want to add to that?

Well, I agree with what Dave said and again, I'd like to reinforce the consumer sentiment issue that we're dealing with right now.

There's just an overall lack of confidence and I think that's impacting, certainly, exports out of Asia and China in general.

We were impacted most by the tech sector, though.

Thank you.

We'll take our next question from Ben Hartford with Baird.

Thanks, good morning.

To follow up on that, Dave, I'm wondering if you can provide what the IP volume growth number was for the month of August just to get a sense for the pace of change through the quarter and what we have experienced from an IP volume growth or contraction number here in the first 3 weeks of September?

We obviously don't give us regions and IP volumes and so forth, but I'll just add to what Alan said before on a comp basis year over year, we're very pleased with how the performance is going to do in Q2 for IP.

Going into the comp comparison year over year for volume it will improve and the yields are still strong and our expenses are improving.

So, really that's the story for us for international into Q2.

Thank you.

We'll take our next question from Scott Group with Wolfe Trahan.

Thanks, good morning, guys.

So, I hear that you feel you've adjusted the network for slower volumes, but can you give some color on what kind of volume growth you're actually expecting?

It certainly sounds like you're expecting a lot better than minus 3 in the US and minus 4 IP.

Is it fair that you've assumed growth closer to 3%, 3.5% between your GDP and IP assumptions?

And just with that, how much of the buy back is assumed in your guidance now?

I would just say that we're not expecting a big difference from what we experienced in the first quarter, particularly in the second quarter.

We do expect it to slowly improve on the comps year over year, but we don't -- again, as I've said in my opening remarks, we don't need, at Express, much growth at all to hit the range that I've given you because we have done such a good job of matching the size of our network accordingly.

And, don't forget about our yield improvement program, which is delivering unbelievable results, as I mentioned to you, on the base improvements and that is going to continue.

Regarding the buy back, it's not a material impact in the range.

Thank you.

We'll take our next question from Christian Wetherbee with Citi.

This is Seth Lowry in for Chris.

I was just wondering if you could give us a sense if you were to sort of average out fourth quarter and first quarter IP volume trends and let's say that 2Q plays out as expected, what sort of the trailing couple quarter's run rate on IP that you've seen and if you could just give us a sense of -- on that?

Yes, I think the best way to deal with the IP issue is to state that we have seen a modest improvement in trends going forward relative to our expectations, but as Alan said, we don't anticipate a significant peak this year, so that's important to keep in perspective.

We do anticipate some product launches in the tech sector, based upon feedback from our customers, which will certainly benefit us, and we've got better comps.

But, again, I would just summarize by saying that we have seen some improvement relative to what we have been seeing in the quarter, but we don't expect strong volume growth in that sector, as Alan mentioned earlier.

This is Fred Smith speaking.

One of the things that you have to focus on in the international air cargo and the international express market is the fact that a very large percentage of the goods that are moved by air today are technology and electronic products.

And we know from talking to our customers, the retailers, the manufacturers and so forth, the primary driver of the reduced demand is the lower sales of electronic product and in the second quarter, there will be some new product launches, but there hasn't been a collapse in demand on electronic products, it's just that the consumer is -- with the sentiment that Mike mentioned, just doesn't have an appetite for considerably more purchases.

That's really the swing issue in the express marketplace and the international side of the house.

Yes.

Let me just add to what Fred said because that's right.

If you look at our numbers closely there, our IP, IPFS weight, the pounds actually went up 2% year over year in Q2.

So, they shifted some of the premium products into more deferred as well.

Thank you.

Our next question comes from Ken Hoexter with Banc of America Merrill Lynch.

Great, good morning.

If I could just switch over to Ground for a second, your margins were up 350 basis points year over year, I think the highest level I've seen since you created FedEx Ground.

Can you talk about what drove that?

Was that just volumes pouring onto the network or is there anything one time in nature in that number?

It's, obviously, a very strong number.

Ken, this is Dave Rebholz.

There's good volume.

We got the benefit of yield from fuel as the head line said that we released.

We got the benefit from pricing actions.

We have a few key accounts that are blowing and going and we're pleased to service them.

I think the more important point is that the customers are recognizing the very positive differential in our service offering.

There was a time where people questioned why weren't we like Express.

Well, now our service performance is like Express.

All up, I think customers really like what we have to offer.

We're at the right price point, we're getting a premium because of our significant -- relatively speaking 24% speed advantage on overnight lanes and as we've talked before, we have a huge advantage in the aggregate marketplace with all the changes we've made.

They've been an investment, but the investment is paying off.

So, we're very pleased and customers like what we have to offer and then last, but not least, our broad portfolio of commercial, home, which has its unique attributes, and SmartPost are really providing the opportunity to grow for customers who are looking for the right channel.

And we can trade off channels for price and that really works.

Thank you.

Our next question comes from [Jim Cordor with SMPIQ].

Good morning, gentlemen.

Most of my questions have been answered, but I wanted to know, Fred spoke about leverage you could pull in terms of reducing frequencies and reducing volumes.

Have you taken any planes out of service or actually reduced frequencies out of Asia to combat the slowness?

The answer is yes.

We adjusted the line haul, didn't effect the service at all, but we did because of the lower volumes, we were able to take some of the frequencies out and move them into the United States and when we need to, we can look at adjusting it further.

Thank you.

(Operator Instructions) Our next question comes from Justin Yagerman with Deutsche Bank.

I was wondering if you guys can give a little clarification on the cost reductions that took place in the quarter.

If you look at, Alan, how much annualized cost came out of Express, can you give us a sense and maybe if we can get a sense of how many planes have been taken out, whether they're permanently retired or planes that would come back into service at some point or another?

I guess just trying to get a feel for how big of a cost reduction took place and if things took another step change down, if you'd have to take out more planes or if that's kind of -- if you think the network is right sized for even another step down.

I think it's important to point out that we're such a big, powerful network that we have a lot of flexibility and the utilization of our planes is really the key.

When there's a swing up in demand, we add extra sections and extra frequencies.

When it swings down, we pull them down.

And so we pull down our flight hours and all the associated costs that go along with that, it's a big swing.

Now, what Alan said to start with is June actually was starting off pretty strong and right when we got into July, we saw the changes start to take place.

So, to pull the network back takes a little bit of time.

The good news is we've done that now.

If it continues to strengthen and we have the flexibility to add the frequencies back in.

Thank you.

Our next question comes from Urs Dur with Lazard.

Good morning, guys, thank you for the time.

Most everything has really been asked multiple times.

I like the fact that you're not saying it's a double dip recession.

I tend to agree.

Can you just give us more of a macro view on sluggish growth in the West and better growth in the East?

What are your GDP outlooks for the major regions, including South America?

Do you have those and willing to share them?

Well, I've given you the calendar year numbers.

I think we'll stay at that level.

I think when you start dissecting the economy down to regional levels within the US, that's probably putting a finer point than need be for this call, but, again, we expect modest growth to continue.

The biggest drag on economic improvement at this time is sentiment and the country, as well as FedEx, needs a change in that in order to benefit from further economic growth.

Thank you.

We'll take a follow-up question from Tom Wadewitz with JPMorgan.

Great, thanks for the chance on the follow-up.

Chris had commented -- Chris Richards had commented a little bit on the postal service and it sounds like maybe you don't want to go into a lot of detail, but I was wondering if at a high level you could give us a sense of the strength of your contract and whether, as the postal service works hard to cut costs, there is some degree of risk that the terms in that contract could change, or if you think that, that's set up in a way that would be pretty difficult for them to change the terms.

I'm referring to priority mail specifically.

Tom, it's Chris.

Our contract is well established.

It has flexibility built into it.

So, while there's fundamental threshold commitments by the postal service as far as volumes and weight go, it's able to move up and down depending upon what their need is as they go through the year.

It is not set as a single level the way you might think about a traditional contract and that's 1 reason why it's been so successful, because we've been able to flex our system and support up and down to meet their needs.

We're very comfortable with where we are on the agreement.

We've got enough flexibility and we stay in constant conversation with them to make sure that we understand where their volumes are and how their system and needs are changing.

Thank you.

Ladies and gentlemen, this does conclude our question-and-answer session.

At this time I would like to turn the conference back over to Mickey Foster for any additional or closing remarks.

Thank you very much for your participation on our earnings release conference call.

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

Thank you very much.

Thank you.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect.