聯邦快遞 (FDX) 2012 Q2 法說會逐字稿

Good day everyone and welcome to the FedEx Corporation second quarter fiscal year 2012 earnings conference call.

Today's call is being recorded.

At this time, I would like to 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 second quarter earnings conference call.

The second quarter Earnings Release and our financial and operational statistics book are on our website at FedEx.com.

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

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

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

We are also taking questions through e-mail.

If you would like to submit a written question for the conference call discussion, please e-mail your question along with your full name and contact information to IR@FedEx.com.

Again, IR@FedEx.com.

Preference will be given to inquiries of a long-term strategic nature.

We will also continue to take your questions on the call.

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

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

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

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

To the extent we disclose any non-GAAP financial measures on this call, please refer to the Investor Relations portion of our website at FedEx.com, where 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 Fed Ex services, Chris Richards, Executive Vice President and 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 our Chairman Fred Smith will share his views on the quarter.

Thank you, Mickey and welcome to everyone.

We're going to make a couple of changes to the format today in light of some of the changes we made in getting information out to you.

We moved the press release up 30 minutes, and as Mickey mentioned we're also going to be taking questions on the Internet.

And as a result of those, there's really no need for me to recap the things that are very clearly spelled out in the press release which you had half an hour more to look at.

We're going to ask prior to Alan Graf's usual remarks that will deal with segment information and put some color on the numbers, we're going to have Mike Glenn to talk to you about our economic forecast with a couple of remarks about what we're seeing in the peak season in eCommerce which will set the framework for Alan's comments.

Now, today as you saw in the release, we also announced an agreement to purchase new 767 airplanes from Boeing, so after Alan's remarks I'm going to ask Dave Bronczek to make a couple of comments about that deal which I think will put it in context.

And then following Mike, Alan and Dave, we'll open up the floor to questions including those that we get over the Internet.

Before I turn it over to Mike, let me sincerely thank the FedEx team members around the world, all 300,000 of them, for their continuing efforts, especially during this busy peak season, to deliver our purple promise to millions of customers every day.

Mike?

Thank you, Fred.

On Monday of this week, FedEx handled about 17 million shipments in our global network, almost double our average daily volume to set the latest record for the busiest day in Company history.

As expected the increase was driven by FedEx SmartPost as well as increased volume at FedEx Ground and Home Delivery.

Let me add my thanks to our team members for an outstanding job in handling this traffic on Monday and throughout the rest of the peak season.

ECommerce sales have been growing at mid-teen rates for the past two years and continue to account for a growing share of retail sales.

During the third quarter eCommerce made up 4.6% of total retail sales, which is up 4-point -- from 4.3% in calendar year '10 and less than 1% in the year 2000.

The forecast for the entire holiday season is for 15% year-over-year growth in eCommerce and that compares to 12% growth in 2010.

According to the National Retail Federation, almost 38% of total Thanksgiving weekend spending was done online which is up from 33% last year.

FedEx residential deliveries have benefited from strong eCommerce demand, especially SmartPost and Home Deliveries noted earlier.

However, FedEx continues to manage demand for our services as part of our improvement strategy.

Turning to our economic forecast, we expect overall economic growth to continue at a moderate pace.

Inventory destocking has been a headwind for GDP and shipping demand in recent months.

A combination of record low inventories relative to sales in the distribution sector and continued growth in demand should lead to restocking in the coming months which should benefit our Company.

Consumer confidence remains at very low levels but we have seen improvement recently.

For November, consumer confidence hit the highest level since July, and had its biggest monthly gain since April of 2003.

For calendar year 2012, we expect US GDP to grow 2.2% which is in line with consensus, with industrial production growing 3.9% and consumption growing at 2.2%.

We're forecasting calendar year 2012 world GDP growth at 2.9%, with developed countries growing at 1.8%, while emerging countries are projected to grow at 5.8%.

Our sales revenue management and marketing teams continue to do an outstanding job managing yields for the Company.

During the third quarter, domestic US Express yields, excluding the impact of fuel, increased 6% year-over-year.

The primary driver was an improvement in rate and discount changes followed by product mix changes in weight per package.

International Priority Express yields excluding the impact of fuel unexchanged increased 5% due to improvement in rate and discount changes in weight per package.

Ground yields excluding the impact of fuel increased 6% year-over-year.

Again, the primary driver was improvement in rate and discount changes.

We also saw an improvement in extra services fees and weight per package.

Freight yields excluding the impact of fuel increased 5% year-over-year as a result of rate and discount changes.

Yield management will continue to be a top priority for the Company as we move into the second half of the year and again, I want to thank our sales revenue management and marketing teams for an outstanding job.

Alan?

Thank you, Mike and good morning everyone.

Before I get to my comments I would like to inform everyone that on Tuesday our Corporate Vice President and Treasurer, Burnetta Williams passed away following a battle with cancer.

Burnetta was a very important member of our senior management team who among many other things designed and executed our financing strategy.

She will be greatly missed.

And please join me in a brief moment of silence in her honor.

Thank you.

Looking at our corporate results, our earnings per share for the second quarter were $1.57, up 35% on an adjusted basis.

And revenues climbed 10% to $10.6 billion.

Despite muted economic growth, we increased our operating margin to 7.4%, with continuing strength at FedEx Ground, improved profitability at FedEx Freight and higher yields across all of our transportation segments.

Starting with Ground, the segment continued its excellent performance with increased yields, volumes and operating margin.

Revenue increased 13% to $2.3 billion, driven by market share gains and continued strong growth in FedEx Home Delivery and FedEx SmartPost services, reflecting the growth of eCommerce as Mike mentioned.

Operating income soared 34% to $398 million, resulting in a record second quarter operating margin of 17%.

Average daily volumes increased 4% for FedEx Ground.

And FedEx SmartPost also posted strong growth with daily volumes up 17%, to 1.7 million packages per day.

Our FedEx Freight segment significantly improved with higher yields and ongoing efficiency gains from our integrated LTL network.

FedEx Freight posted operating income of $40 million versus a loss last year.

Revenue grew 9% to $1.3 billion from higher yields and weight per shipment, partially offset by 3% lower daily volumes.

FedEx Express revenues were up 10% to $6.6 billion, primarily due to an increase in package yields.

Operating income increased to $342 million, as a result of the benefit from the timing lag that exists between when fuel prices change and when index fuel surcharges automatically adjust.

As a reminder, prior year results were negatively impacted by a $66 million reserve, associated with a legal matter.

Year-over-year, FedEx Express reduced variable hours associated with volume.

Jet fuel usage was down 3.6% year-over-year, and Express will be parking additional aircraft in the second half of our fiscal year as we continue to align our capacity to demand.

Ongoing weakness in global growth and global inventory destocking reduced our average daily volume for US domestic package by 4%, and IP package by 3%, heavily impacted by weakness in Asia.

However, our combined IP package and freight pounds increased 2%, with 8% higher revenue year-over-year.

Turning to our outlook.

In September we repurchased 2.8 million shares of FedEx stock at an average price of $70.

We currently have 2.9 million shares remaining for repurchase out of the total authorized.

Capital spending for FY '12 remains at $4.2 billion.

With the deferrals of our 777 aircraft deliveries, we expect our FY '13 capital expenditures to moderate to approximately $3.8 billion.

We expect earnings to be in the range of $1.25 to $1.45 per diluted share for the third quarter.

EPS last year for Q3 was $0.73 including an $0.08 per share one-time charge, continuing our improvement.

We reconfirm that FY '12 EPS guidance of $6.25 to $6.75.

This guidance assumes the current market outlook for fuel prices, normal winter weather, and moderate growth in the global economy as Mike Glenn described to you earlier.

Now I'm going to turn it over to Dave Bronczek who will discuss our new agreement with Boeing.

Thank you Alan.

Good morning to everyone.

As you know, one of the most important investments for the future is the modernization of our aircraft fleet.

As you are aware, FedEx Express has been aggressive in its fleet modernization efforts beginning with the replacement of our aging 727 fleet with 757s and continuing with the acquisitions of 777s, to support our international growth.

Now, in conjunction with the Earnings Release today, we announced our plan to continue these modernization efforts as we entered into an agreement with Boeing to purchase 27 new 767-300F aircraft over the remainder of the decade.

With three arriving in FY 2014 and six per year in fiscal 2015 through fiscal 2018.

The 767s were selected as the best choice to begin replacing our older MD-10 aircraft.

Some of which, believe it or not, are older than 40 years old.

With aircraft of similar capacity and without the relatively high fuel and maintenance costs.

By purchasing more modern, more reliable and much more fuel efficient aircraft, we will reduce the structural costs of our operations into the future, while maintaining our great service reliability that our customers have come to expect.

The 767 provides lower operating cost of over 23% per trip and over 20% per pound of payload, compared to our MD-10 fleet.

With the approximate 30% fuel efficiency advantage of the 767 being the key driver of these benefits.

In addition, we'll receive near term benefits associated with avoided maintenance on our MD-10 fleet and lower upfront cost of maintenance the 767s provide during the initial period of operation.

We will also benefit from the operational compatibilities this new aircraft type will share of course with our 757 and our 777 fleet.

Also, being announced today, is our agreement with Boeing to delay the delivery of 11 777 aircraft.

two aircraft will be deferred from fiscal 2013, five from fiscal 2014, and one per year in fiscal 2015 through 2018.

We have also agreed to exercise two additional 777 options, however.

The decision to defer these aircraft will extend the time our MD-11s are operating on international routes, and not move back to our US domestic routes as we had originally planned to replace the older MD-10 fleets.

These deferrals will allow us to balance our overall international capacity to expected demand.

However, it will not impact our ability to meet projected international growth requirements as we are still adding an additional 16 777 aircraft through fiscal 2018.

In addition, we have access two additional 777 options and can leverage our existing MD-11 fleet to provide tremendous flexibility should the needs arise.

This decision will also allow us to defer a portion of our near term projected capital spending to accommodate the 767 purchases within our previous estimates.

The combined 767 and 777 actions announced today will contribute to the overall Express profitability.

In summary, this is an excellent decision for FedEx in meeting our future operational requirements at lower costs and overall lower investments.

With that I'll turn it back over to Mickey.

Thank you.

Now we'll open it up for questions.

Thank you.

(Operator Instructions) We ask that you limit yourself to one question to allow others the opportunity to pose their question.

You may also submit your questions via email to IR@FedEx.com.

(Operator Instructions) We'll pause for just a moment.

Tom Wadewitz, JPMorgan.

I wanted to ask you a question about volume growth expectations in International and also how that relates to your new fleet plan.

So if you could offer some comments about how you think International volumes may grow in let's say calendar '12, what your outlook would be, and how you think the fleet will -- what you would essentially be planning for in your baseline fleet capacity expansion in the International network the next several years, given the changes in your 777 order and the new 767s.

Yes, thanks for the question.

This is Dave Bronczek.

We have -- as I mentioned we have an additional 16 777s still coming and still moving into our network in all the appropriate parts of the world so we're very comfortable with that.

This change allowed us to put in the 767 aircraft to much improve our profitability primarily in the United States system and at the same time reduce our overall capital cost.

So we're very confident that we can match our international capacity needs.

If we need to, we can exercise options and we have the ability to leave our MD-11s out in the international market longer than we had anticipated.

So net-net it's a win-win-win for us.

We have a couple of Internet questions so I'll ask Alan Graf to address the first one here.

First one says Express had EBIT margins north of 8.5% on $22 billion in revenue in 2007.

Today with revenues at $26 billion rate, margins are 5%.

Are prior margins achievable at some point and what revenue levels is required to see that level of profitability.

Absolutely prior margins are achievable.

Obviously right now with our IP being weaker than we expected, we're adjusting our network to match that capacity and in fact my guidance for the rest of the fiscal year assumes essentially no growth year-over-year in our IP volumes.

And with the advent of the -- that we told you today about the 767, we should see significantly enhanced performance in terms of AOD cost, lower fuel burn unit performance along with a lot of other productivity things that we're working on.

So we're going to work really hard on things we can control which is the cost and productivity side of the house.

And if we get the economy that Mike Glenn talked about, we should be back on our way towards improving these margins.

Okay.

So we'll continue now with questions on the call.

Justin Yagerman, Deutsche Bank.

Hey, good morning, guys.

Wanted to ask you a question on Ground.

Now we've seen back to back pretty stellar margins here in this division.

You guys continue to improve.

I've got to imagine some of that is the continued percentage of SmartPost that's coming into the business.

One, wanted to ask what you guys are viewing run rate margins to look like in Ground, given that we've seen this kind of improvement on a quarterly basis now.

And two, what kind of impact if any could USPS changes have on SmartPost and could there be an impact to the margin improvement that we've seen?

Justin, Dave Rebholz.

Let me take your latter first because there seems to be a lot of inquiry about the post office.

First of all, we've got a great working relationship and the right economic model that allows us to adjust.

I don't see any risk in the short term whatsoever.

I would love to be able to determine what the post office does or says or implements.

Frankly, we don't have that answer but what we do have is a working model that will continue to produce the kinds of dividends that we're looking for vis-a-vis our model.

In terms of our overall impact, my boss, Mr.

Smith, suggests that I should be at 20%, but I think in the reality where we are right now is a sweet spot.

We continue with our variable model to produce the kind of dividends that both reward our small business independent contractors, as well as FedEx.

As it lies out right now including the current economic conditions, I think that we're in a very good spot and any economic upside will only benefit us and that's the reality of where we sit today.

David Ross, Stifel Nicolaus.

Yes, good morning, everyone.

If you could just comment on the International Express volumes by region, how much was Asia down versus Europe versus US?

And how much capacity exactly did you take out in the quarter specifically in the Trans-Pacific market.

This is Dave Bronczek again.

Generally speaking, Asia Pacific had the lion's share of the impact to our International volumes.

Around the rest of the world they held up pretty nicely, quite frankly.

This is Alan.

Let me just add that our Europe IP actually grew year-over-year.

Art Hatfield, Morgan Keegan.

Good morning everyone.

Just a real quick question.

With changes in the fleet plans with taking some aircraft down and the new Boeing 767 order and obviously the delay in the 777, how can we think about maintenance going forward?

One of the benefits of those coming on and some of the things you're doing would be that we'd see kind of muted growth in that.

Should we expect to see that pick up with the fleet staying the way it is for now?

Art, great question.

Obviously, maintenance is a significant issue at FedEx Express.

This will improve it.

Fuel efficiency is also significant at Express.

This improves it.

And let me just add one other thing to the last question.

Our two-year rate of international growth is -- in Asia is up 10%.

So when you add the last two years together, just wanted to make sure that people knew, we were still growing in Asia.

Nate Brochmann, William Blair & Company.

Hi, good morning everyone.

Wanted to talk a little bit about with the eCommerce growth, whether that's a shift maybe from other modes that might have taken place in the past or whether that's true market share gains.

And then also whether you're seeing any real change in your customer supply chains because of that and how you're shifting your network to take advantage of those changes.

This is Mike Glenn and as I mentioned earlier, we have seen an increase in eCommerce sales as a percentage of total retail sales.

In the third quarter, eCommerce sales were 4.6% of total retail sales which was up from 4.3% last year and 1% in 2000.

So there's certainly an increasing trend for more online sales, although still as a percentage of total retail sales it's relatively small, even though it's growing at about 15%.

Certainly as eCommerce is becoming more popular, promotional tactics like free shipping are a key part of that.

Our SmartPost service plays right into the hands of that and allows us to compete very effectively in the eCommerce area with SmartPost and our FedEx Home Delivery also performs extremely well with optional services such as appointment delivery day, definite delivery and time delivery.

So we're well positioned to take advantage of this increasing trend of eCommerce sales and have certainly benefited during the peak.

Let me just, if I could, just take one minute to correct something I said earlier.

I mentioned that FedEx Freight yields increased 5% absent fuel.

That number is actually 4%.

I picked up the International Priority number when I was speaking there.

FedEx Freight yields absent fuel increased 4% not 5%.

Thank you.

Kevin Sterling, BB&T Capital Markets.

Thank you.

Good morning and please accept my condolences regarding the passing of your Treasurer.

As I look at your average pounds per package in Express, we saw it increase this quarter and looks like to one of the highest levels in recent years.

How should we think about average pounds per package in Express going forward?

Is this higher average the new normal or was there something going on this quarter?

We had more heavier deferred traffic, heavier box deferred traffic into our mix and of course IP and IPFS, IPFS has higher weight and helps our overall revenue so quite frankly, I think a lot of focus is on IP, IPFS combined so I think we're on that track going forward.

Robert Pickels, Manning and Napier.

Good morning.

Thanks for taking my call.

My questions are mostly on the new aircraft order.

For what it's worth, we applaud the decision that you guys have made.

Just wanted to get a few details on it.

You mentioned you've deferred the 777s.

Is that sort of indefinitely deferred or is there -- maybe you could just help me understand what the total 777 aircraft order is and the time line of that.

And then in the past you've said the 777 is the best return on capital opportunity that you have.

I'm just wondering -- I'm guessing that's still the case.

I'm just wondering what's changed that math.

Is it the 767 can -- has entered as a more viable option or is it that the slower demand in Asia or maybe you can just talk about that a little bit.

Thank you.

That's a great question.

The 767 is a terrific plane for us to replace our very aging MD-10 aircraft.

We looked at multiple ways to do it, quite frankly, we were going to leave our MD-11s out in International longer now.

It's a better operating profit return for us now.

We just moved back the 777s.

We're still keeping the orders, obviously.

To open up room to put this very efficient, very productive, very profitable airplane into our fleet at a time that we thought it was the best opportunity to do so.

So I think on all fronts, we're going to keep the 777s.

Obviously we just pushed them back.

We opened up a window for CapEx to put the 767 airplane in.

We have 16 777s still coming as scheduled and then the other ones will come in behind them.

So we just opened up a window here to replace a very old, very inefficient, expensive airplane with a terrific airplane for exactly the role that it will serve.

Donald Broughton, Avondale Partners.

Good morning, gentlemen.

A strategic question.

As you add these 777s and the 767s in your International Priority Express business, would you rather see just extraordinary growth in one lane that added to say your dominance in the Trans-Pacific line or would you rather see a more even growth in all of your lanes over the next five, 10 years?

Well, we would rather see an overall even distribution around the world and of course as Asia keeps emerging, the traffic flows continue to expand to Latin America, to Europe, to the Middle East, obviously, North America.

So I think the global market is the global market and it will just keep expanding around the world that way.

So I think we're in great shape, well positioned to have the best airplane for exactly the needs that we need for our customers in the 777.

Donald, this is Alan.

I'm sure as you know, a balanced network is a much more profitable network whether you're flying airplanes or switching telephone calls.

And we work on that every day.

We do with pricing, we do it with picking the customers that we need and knowing exactly where we have capacity that we need to fill and so that is a key point in moving Express' margins up over time, is to continue that balancing of that global network.

Just one other thing, and it shouldn't go unsaid.

I mentioned it in my comments but the commonality of the 757 and the 767 and the efficiencies with our crew force and so forth is another very big advantage besides the fuel and besides the maintenance.

It's a terrific airplane for our operating margins going forward.

Peter Nesvold, Jeffries.

Good morning.

So you brought down the US GDP forecast by about 30 basis -- about 30 basis points or so but you maintained the earnings outlook for the year.

So I'm curious, is it that you're still just inside that range, just maybe a little bit lower on the earnings front?

Or has something more Company-specific occurred whether it's yield improvement or cost cutting, et cetera, that's allowed you to hold the EPS outlook despite the lower GDP backdrop?

Are you sneakily asking me to give you a pinpoint EPS number here.

Absolutely not.

Just directional.

We're managing this Company and even though we see a little bit slower GDP domestically, we still see growth.

We still see world growth as Mike mentioned and we still feel very comfortable with the range that we have out there.

Thank you.

This is Fred Smith speaking.

I want to make sure that there's a clear understanding of what Dave said here about these planes.

The original plan was to bring in 777s and push the MD-11s in the domestic fleet and retire the MD-10s and that had a very good return.

When the 767 was selected for the US tanker mission and Boeing decided to keep the airplane in production, we looked at that and bringing it in to the middle and replacing the MD-10s was a higher return than the 777s and it pushed the MD-11s if you will back into the International system.

So our International capacity hasn't changed at all and we have International capacity to grow but we'll simply operate the MD-11s in the International system a bit longer and the 777s and the MD-11s are not that much difference in capacity.

The big difference is in efficiency and range in the 777.

So it's important that you understand that dynamic.

Not much has changed other than the fact we're bringing in a higher return asset in the middle and utilizing the MD-11s in the International and the somewhat smaller 767 relative to the MD-11 is a better fit for the domestic system which is why it has the higher returns.

So I was a little bit afraid people were getting -- going down the wrong rabbit hole here even though Dave I think said it pretty clearly.

I just wanted to re-emphasize that.

Bill Greene, Morgan Stanley.

Hey, good morning.

Alan, you had a really interesting chart at the Investor Day that showed sort of the earnings trends for FedEx from the last cycle.

You said listen, it's not a forecast, but there is a suggestion here that we're seeing sort of similar trends.

Now we've had a lot of changes at the macro level.

So can you update us on your thoughts about kind of pushing that out or forward because of cost efforts, or where we are on that trend line.

Well, I think as we just pointed out to you, even though we don't have the robust economic environment that we would love to have, we still increased our EPS 35%.

So had we had a robust economy, like we did back in 2007, hard to say but it would have been significantly higher than that.

So we have to manage to what the economy around the world is doing and so we're going to do that.

And this has slowed us a bit in terms of Express because of the size of the network which we are, as I've said, re-sizing right now.

But if you take a look at Ground and Freight's performance, we're managing right through it.

So I'm still very confident.

That's why we reconfirmed the range and we hope to continue that in fiscal '13.

Gary Chase, Barclays Capital.

Good morning, everybody.

I wondered if you could elaborate a little bit on some of the capacity adjustments you were referring to in the prepared remarks within the Express network.

Should we be thinking that that is more structural change and adaptation to what you were just describing, Alan or is it more of a view that just temporarily these adjustments make sense from a capacity perspective?

I'll let Alan chime in here but this is Dave to start off.

We have fluctuations in our volumes and of course we match the lift to the load and we do it every day and every week.

So when we have surges in capacity from big shippers around the world we'll add the capacity or take it back.

And quite frankly, we have a lot of flexibility in our fleet as Fred mentioned with our MD-11s to go up and over the top of the normal peaking days.

So we have what we call extra sections, we can flex them up or down.

I would say that as we talk about here every day.

Bouncing the network is a key driver in Express' profitability and the volatility of trade flows is as high as it's ever been.

And I think it's going to be -- we think it's going to be the new normal.

So we're going to have to be much more adept at matching our capacity quicker.

I think we're doing that.

I think having the 767s is going to help quite a bit in that regard.

And that's how we're going to do this going forward.

I think we will be very efficient at it.

Keith Schoonmaker, Morningstar.

Yes, thanks.

I noticed International domestic grew revenue an impressive nearly 50% year-over-year but average yield declined somewhat.

Can you please comment on growth rate excluding acquisitions in India and Mexico and perhaps give some direction on profitability of this portion of the business?

Well, a lot of it was acquisitions, quite frankly, and the International growth rates, though, are very strong as I mentioned.

If you look at a two-year cycle of our International growth, it's strong all around the world and even this past quarter, absent Asia, we had very good balanced International loads and International revenue.

So I think a big part of the yields that you're looking at, even though Mike mentioned the International yields are up 5%, is some of the noise of acquisitions.

Chris Weatherby, Citi.

Great.

Thanks.

A quick follow-up on the capacity discussion that you just had.

When you think about parking some additional aircraft or matching it, can you give a little sense of geographically where you're thinking?

I mean, is it really still all the Asia to US lanes or does this maybe need to be adjusted here in the US?

It could be anywhere in the world, quite frankly, would be mostly the Asia capacity as the volumes spike and peak at this time of the year, coming off of that.

Would be primarily in the Asia market.

Jeff Kaufman, Sterne Agee.

Thank you very much.

Guys, congratulations, just really solid numbers in a tough environment.

Alan, I may be reaching out a little far but I think my bigger questions have been answered.

Pension expense.

Is this more of a fiscal '13 issue and can you -- some other companies are starting to talk about it.

Can you give us any guidance on what you're thinking about pension costs when we revise the assumptions there?

Well, my favorite subject, if you've got three hours we can talk about it.

Obviously, on May 31, end of our fiscal year, we'll take a look at how our assets have performed and what our discount rate is and we'll deal with it when we deal with it.

I should say, I think that versus many companies that I look at in the universe of all companies, we've done an excellent job with our liability-driven investment strategy, our portfolio is actually up since June 1, so on the asset side at the moment we're feeling pretty comfortable.

It will all be decided by the discount rate and we'll know that when we get there.

But I'm not expecting to have the shock and awe that some of these other companies are going to have, particularly those who had September 30 year-end fiscal dates.

Ken Hoexter, Bank of America-Merrill Lynch.

Good morning.

Just want to bring it back to Ground.

I guess, Dave, if you look at the growth in the Ground network you're up to almost 4 million packages per day on the pure Ground side, on the SmartPost up almost another 2 million.

Is there kind of sizable investments you need to start making as SmartPost is maintaining this pace?

I just want to understand your investment and your scalability to keep pace with the growth you're seeing and keeping margins at those levels.

Ken, this is Dave.

It's a great question.

We ponder this monthly.

We have plenty of capacity to grow.

We try to size our network around peak.

Unfortunately, with the large retail base, we have peaking factors that are greater than other op-cos at FedEx.

Knowing that we implement strategies and investments that size it accordingly.

I don't think we have any risk and I do not think we have any additional expense that we have to play or pay for.

The SmartPost model is different than the Ground model and the home model, but in reality, I think we're sized perfectly for where we need to go over the next two or three years.

Chris Ceraso, Credit Suisse.

Thank you.

Good morning.

I know you spent a fair amount of time on the airplane and the strategy but just one follow-up question here on the 777s.

Is there anything implicit in this decision to defer some of the airplanes, a comment on the actual returns that you're seeing?

In other words, is it proving to be worth it for you to buy these 777s in order to offer the later drop-off time for your customers?

Are they paying up for this service?

The answer is absolutely yes.

We love the 777s.

We'll love them into the future.

We just had, as Fred pointed out and I mentioned in my comments, an opportunity in the short term here for the US network to put the 767 in to better improve our profitability, primarily here in the United States by replacing the MD-10s with a better opportunity.

I should add that because we're so big and a global, powerful network, that we have the ability to flex around the world so when I talk about replacing capacity or adjusting for capacity, we have a lot of frequencies into most markets around the world.

So when we adjust our capacity, we're never eliminating or distracting from our service to our customers.

Never.

It's just the amount of frequency we put into those markets.

So the 777s, they're fantastic.

Customers love them.

We have later departures, earlier arrivals all around the world and that will be the backbone of our system going forward.

Scott Group, Wolfe Trahan.

Thanks.

Good morning, guys.

So Alan, I think I heard you mention that you're expecting International Priority volumes to be flattish in the second half of fiscal '12.

I was wondering if you can talk about some of your other volume assumptions for Domestic Express and Ground and LTL if you can give some color there.

And then also is there any benefit in fiscal '12 from lower maintenance or with the planes or does that happen starting in fiscal '13?

I think it's nothing dramatically departing from what we've been seeing in terms of the segment growth rates.

We expect Ground will continue to grow.

As I said, I think IP will be around flat year-over-year, within a range.

I think Domestic Express will be flat to maybe down a bit just as it has been.

And we've been working very hard on our yields at Freight.

We're now about ready to lap some comparisons and we expect to see Freight get back on a growth plan as well.

That's all l in the range that I've given you.

And as far as maintenance, yes, we're working very hard on maintenance.

When you park airplanes, you're able to defer maintenance for some period of time and we're very careful about which airplanes we park and for how long we park them.

We keep them on the op spec.

We can pull them out in a hurry.

Just as we've done in the past.

Just adding one more thing to what Fred said, we are really trying to allocate our capital as best we can to drive ROIC.

And the 777 and -- 777s in International are terrific.

All we're changing right now is we're leaving MD-11s Internationally and replacing these maintenance and fuel hog MD-10s in our domestic business.

That is a much higher return than using MD-11s to replace MD-10s in the domestic business and add additional 777s, particularly in the economic environment that we are in.

So we are driving our returns by making this decision and lowering our CapEx in fiscal '13.

Ben Hartford, Robert W.

Baird.

Good morning.

This is for Bill Logue.

I was hoping we could dive a little bit deeper on the LTL side.

Alan addressed the volume expectations to some extent but with 4% growth on the industrial production side next year, as the baseline, how confident are you that we can sustain this kind of 4% plus type ex-fuel yield growth that you've experienced this quarter into calendar 2012?

Yes, great question.

The sales team has done a great job for us on a yield front and worked our yield initiative very well.

We continue to focus heavily on that, and as Alan mentioned, we're starting to lap ourselves in the volume on a year-over-year comparison so we believe that as we move forward we still have great opportunities.

Where we're focusing heavily on the small, medium customer which is a very big segment for us from both a margin, profitability perspective and from a market share opportunity.

It's a big one.

And also, as we go forward, we'll continue -- again, right now we're hitting the third quarter which for us is December, January, February.

From an LTL perspective is obviously our challenging quarter and we're managing through that, getting ready to position ourselves strongly for Q4 as we move on.

So we're very happy with where we are from a year-over-year perspective.

This is Mike Glenn.

On the yield front the sales team has done a terrific job.

And I want to point out that going forward, we will be -- certainly be focused on yield improvement in the Express business.

But I think a big driver there will be the changing customer mix as we bring on more and more small customers and that will be equally important as just normal rate increases that we get on a contractual basis.

David Vernon, Bernstein.

About the competitive dynamic in terms of market share stability on the Asia to Europe versus the Asia to US lane, are you seeing in this weak growth environment any sort of change in behavior by some of the competitors on the long haul IP package?

No, not in the main.

On certain lanes, they try to match our -- the opportunities that we provided our customers but in the main, we have our business lined up for our customers and the lanes into Asia and the lanes into the United States, so if any of our competitors were trying to match that, they would have a hard time matching our later departures and earlier arrivals.

Peter Jacobs, Jacobs Broel Asset Management.

Good morning, Fred.

Good morning, Dave.

Hey, I wanted to turn back to the 767, 777 capital spending plans.

I'm going to guess that a part of the decision to go with the 767s is that Boeing likely offered you a great deal on those as they try to bridge the gap to the building of the tanker for the US Air Force.

And so is it fair to say that this kind of dropped in your lap and that spurred you to make this decision where otherwise you probably would not have, in that the pricing was probably pretty good?

I'm not sure to the extent you can confirm this but I guess a nod or a wink would help us maybe better understand this opportunity that was presented to you.

Well, we've looked at the opportunity to improve our efficiencies in our fleet for many years now and quite frankly, our opportunities were to leave the MD-11s as Alan and Fred correctly pointed out with our 777s versus moving the MD-11s back.

And this opportunity came along and it was a good you opportunity for us and good for Boeing to replace a very old, very inefficient MD-11 -- or MD-10 that we had looked at replacing for many years now.

I think I would just leave it at that.

We have a great opportunity to improve our operating profitability, our efficiency, fuel efficiency, that we have been studying for a long time now into our fleet and we're very comfortable with the role that that 767 plays with our 757, and with the 777.

One of the things that -- for those of you that are interested in the airplane transaction might focus on is the fact that there are two certified conversion programs for the 767, and the 767s have stayed in service a lot longer than many people thought they would because of the delays in the 787.

And there's a good possibility that in a couple years, as the 787 comes out and the 767s are released around the world, we might have made the same decision using used 767s.

Or for that matter, A-330 200s, had they offered a conversion program.

So the new opportunity was a very good transaction for both us, I think, and Boeing and it provides us with the opportunity to buy all new 767s or a mix of new and used.

So you have to put this transaction in that context, the broader industry issues.

David Campbell, Thompson Davis and Company.

Good morning.

There's a lot of talk as you know about recessions in Europe, how the situation there will get worse regarding the industrial production, consumer spending.

I haven't seen it in the seasonal air freight data and you talked about your IP growth holding up in Europe.

I wondered if you had any visibility as to business activity there in the next six months to one year?

Well, I'll start off and then Alan can -- from our perspective, from FedEx Express in Europe as Alan pointed out we actually are growing.

We're doing quite well.

We're expanding.

We're doing a lot of things to improve service, pickups and later departures and the customers are responding with obviously more traffic for us.

So the next six months from FedEx Express' perspective we see pretty much business as usual for us.

David, we have an organic growth program under way inside of Europe which is helping us tremendously.

I think we've opened a number of new stations, made better connections, improving our reliability and we're going to continue to do that.

So our crystal ball is like everybody else's.

Frankly, who knows what's going to happen over there.

But so far, we've seen strength and we think we're going to see growth from Europe, the rest of the fiscal year.

Justin Yagerman, Deutsche Bank.

Hey, guys, thanks for taking a follow-up.

Just curious on the market share side, you made a quick comment that IP volumes were actually up in Europe and it would seem to me that looking at the competitive landscape, your European competitors feel impaired for a variety of different reasons.

When you guys are going into multinational customers, is there worry over doing business with these European companies right now?

Are you winning business based on their inability to service regions that you guys are now going to?

Justin, this is Mike.

We're winning business based upon the global value proposition that we offer.

Multinational companies are obviously doing business by definition in a number of different parts of the world.

Our ability to connect those locations with the largest, the fastest, the best service levels is really what's winning the day.

We don't sense any issue regarding reluctance to deal with one competitor versus another over economic conditions in Europe.

It's the value proposition that's winning the day.

Tom Wadewitz, JPMorgan.

Yes, thanks also for allowing me a follow-up question.

Fred, I wanted to ask you what you think of the current cycle.

We're seeing this trend where heavyweight air freight out of Asia has been weak for quite a while.

Your Asia outbound IP volumes have shown some weakness since July, August.

Obviously not as much as the heavyweight.

And then the GDP that you're looking at seems to be still modest growth.

So do you think this is kind of a normal response from air freight at this point later in the economic cycle?

And how do you think that relationship between air freight and IP versus GDP would play out, looking a bit forward?

Well, this is a big question that's being debated by a lot of people in the industry.

For many, many years the growth in air freight, meaning the aggregate marketplace, whether it's the smallest individual package or a big consignment of heavy skids has grown at about twice the rate of GDP and that connection over the last couple or three years seems to have been broken to some degree.

It's a bit hard to say exactly because you had the tremendous meltdown in '08 and '09.

But I think our overall belief is, and this plays to the strength that Dave Bronczek has been talking about today, the movement of goods by air internationally is changing in the following ways.

Number one, the marketplace has devolved so there's a lot more small shipments going door-to-door and that's why the long range capabilities of the 777s and these super express freighters as we call them are very important, because it gives you more time to service of those small and medium customers in the origin markets and we'll continue to do that.

As the 777s come in we'll put in longer range routes, a few per year.

Some of the other routes you don't have to have that range capability, MD-11s stopping in Anchorage or going across the Atlantic is fine and it's roughly the same capacity.

The second thing that's marked by the air freight business today versus where it used to be is it seems to be much more episodeal.

We think that's because such a high percentage of the business is composed of electronics, what is it, Mike, about 25?

About 25% of the entire air freight market in its broadest sense are composed of electronics and they're now built around product launches, new devices, and so forth.

And that's why having this big fleet and the ability to flex up and down is very helpful because Dave can put on 50 additional flights per month if he needs.

Our fleet is so big, between 777s and MD-11s.

And so that seems to be a factor that's marking it.

So you've got more door-to-door small shipments, more episodeal or cyclicality.

And then I think the third thing is the information systems in logistics chains have gotten lots better and so people are using more ocean with better visibility for the commodity type move.

And it's just really a trade-off between carrying cost and obsolescence and I might say that's why several years ago we put such an effort into building our FedEx trade networks out.

So we now have that broad product line from ocean freight, commodity air freight, economy package, economy international freight, international priority packaging and international priority freight.

So that's all I can tell you.

But it's not clear whether the relationship that's been through the last 25 or 30 years of roughly two times GDP will stay, but for our purposes we think we can take market share within that overall air freight market.

This will conclude the question-and-answer session.

At this time, I'd like to turn the call back over to Mr.

Mickey Foster for any closing remarks.

Thank you very much for your participation on the FedEx Corporation second quarter earnings release conference call.

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

Happy holidays.

Ladies and gentlemen, this does conclude the call today.

We appreciate your participation.

You may now disconnect.