聯邦快遞 (FDX) 2012 Q3 法說會逐字稿

Good day, everyone and welcome to the FedEx Corporation third 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.

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

I am happy to announce that we are holding an investor meeting here in Memphis, so please save Tuesday and Wednesday October 9 and 10, 2012 on your calendar.

We will have more details about the meeting for you in the next few months.

The third quarter earnings release and our statistical 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 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.

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 those 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, or 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; 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.

Now our Chairman, Fred Smith, will share his views on the quarter.

Thank you, Mickey and welcome everyone to the discussion of our strong operating and financial results for the third fiscal quarter of '12.

First and foremost, I would like to thank hundreds of thousands of FedEx team members around the world whose efforts led FedEx to be ranked number six among the World's Most Admired Companies as determined by Fortune magazine and it's research partner, Hay Group.

FedEx has been recognized as among the Most Admired Companies for 12 years and its an extraordinary feat not achieved without each member's commitment to our Purple Promise, our pledge to make every FedEx experience outstanding.

I would like to make a couple of points relative to the competitive landscape in Europe right off the bat.

Over the years, there have been lots of rumors regarding possible acquisition candidates for TNT that have surfaced periodically and we have consistently declined to comment on them.

Our policy in this regard about corporate development activities remains unchanged.

I would like to make a second point and that is that FedEx Express is a profitable multi-billion dollar business in Europe and it is growing strongly.

I am extremely pleased with our operations there and we are very confident in our plans to continue expansion, primarily through organic growth.

We believe these plans will continue to improve our competitiveness in Europe and further contribute to profitable international growth, and Dave Bronczek will have some more comments about that.

I would like to remind you of the new system we put in place.

On the last call we put our earnings release out a half an hour early.

It speaks for itself, so my comments have been shortened because you have had more chance to look at the release.

We will start our comments with Mike Glenn giving you our economic outlook and then he'll turn it over to Alan Graf who will put more color on the numbers.

Thank you, Fred and good morning.

FedEx expects moderate but below trend growth to continue in the US and globally.

We expect calendar year '12 US GDP growth to be 2.1% and industrial production growth to be 3.9%.

Our GDP outlook is slightly below the blue chip consensus of 2.3% noted in the March 10 release.

For calendar year '13, we expect GDP growth at 2.4%, versus the consensus of 2.6%.

We do expect inventory replenishment and business investment to lead growth in the next few months.

And improvement in the job market should support a housing turnaround later this year.

Our calendar year world GDP forecast calls for 2.3% growth.

We are forecasting 1.1% GDP growth in developed countries and 5.2% growth in emerging markets.

This forecast reflects a slight downgrade since our last earnings call, mostly based on the assumption of a mild recession in the euro zone this year.

Stability in the global oil market remains a macro risk factor.

Turning to yields, one of our primary focus areas, the sales, revenue management and marketing teams continue to do an excellent job in this area.

Excluding fuel, domestic express yields increased 6%, rate and discount improvement in product mix were the primary drivers for the increase.

International priority yield, excluding the impact of fuel, increased about 1.5%, driven by base rate and discount changes, as well as product mix.

Ground yields, excluding fuel, increased just under 6%.

Rate and discount improvement and extra service fees, as well as primary product mix changes, were the primary drivers for the increase.

In the LTL sector, our FedEx Freight yields increased 2%.

Again, rate discount and surcharge management were the primary drivers.

Now I would like to turn over to Alan Graf for his comments.

Thank you, Mike and good morning everyone.

Strong earnings growth at Ground and our ongoing yield management programs at all of our transportation segments drove improved results for the third quarter.

Our adjusted earnings per share was $1.55, which excludes a $0.10 per share legal reserve reversal.

Earnings exceeded our guidance of $1.25 to $1.45 this quarter, primarily due to better-than-expected Ground results and a lower-than-expected effective tax rate of 34.1% for Q3, primarily due to a favorable one-time tax audit closure for our fiscal years 2007 through 2009.

Revenues increased 9% to $10.6 billion, from yield increases across all of our transportation segments, as Mike discussed.

Let's look at the segment detail.

At our Ground segment, revenues and operating income increased from increased yields and strong demand for FedEx Home Delivery and FedEx SmartPost services.

Revenues increased 14% to $2.5 billion due to yield and volume growth at both Ground and SmartPost.

Ground's operating margins climbed to 18.8% as operating income soared 43% to $465 million, primarily due to 8% growth in revenue per package and 5% growth in volume.

Ground's spectacular results continue to be driven by the unmatched value proposition of our network, as Ground provides faster service for 25% of the lanes served versus our primary competitor.

Turning to Freight, despite a $1 million operating loss, the results from our Freight segment improved significantly due to base yield growth and ongoing improvements in operational efficiencies.

Freight revenues increased 10% to $1.2 billion as a result of higher LTL yield and weight per LTL shipment.

Meanwhile, our average daily LTL shipments increased 2%, reflecting sequential improvement during the quarter, as well as favorable comparisons caused by severe winter weather last year.

While we are pleased with the progress Freight is making, we still have work to do to optimize the network, including improving the mix of traffic and further strengthening yields.

At Express, our operating income of $349 million included the reversal of a legal reserve of $66 million, associated with the ATA Airline's lawsuit that was initially recorded in Q2 of FY '11 as we won the case on appeal.

Also, a significant net benefit from the timing lag that exists between when fuel prices change and when index fuel surcharges automatically adjust, despite our overall higher fuel costs in the quarter.

A mild winter compared to the severe winter last year also helped the quarter.

Revenues increased 8% to $6.5 billion, primarily due to an increase in US domestic and IP package yields, partially offset by decreases of 4% for US domestic package volume and 1% for IP package volume.

We are evaluating actions to adjust our FedEx US domestic network capacity and improve efficiency, and Dave Bronczek will have more to say on that later.

Turning to our outlook, we are expecting earnings per share of $1.75 to $2.00 per diluted share for fourth-quarter and an adjusted $6.35 to $6.60 per diluted share for fiscal 2012.

This guidance excludes the ATA legal reserve reversal and assumes the current market outlook for fuel prices, most notably jet fuel, with moderate growth in the global economy, as Mike described earlier.

We expect strong yields across all of our segments to support corporate-wide revenue and earnings growth in Q4.

Our cash flow from operating activities remains solid and increased by $560 million for the first nine months of FY '12, despite significant higher pension contributions year-to-date of $710 million.

I would like to thank all of our team members for their dedication to Purple Promise and hard work during our peak season.

Now we will open up the call for questions.

(Operator Instructions) Tom Wadewitz, JPMorgan.

Yes, good morning, and congratulations on the good strong quarter.

Wanted to get a sense if you could give us some comments on demand within the businesses.

I know Mike gave us an economic forecast, but if I look at what you reported, I think the domestic express volume is down 4.5%, was a bit weaker than I would have expected given what seems to be modest economic growth.

I wondered if you could comment a bit broadly, looking forward how do you think that trend changes against a moderate economic backdrop?

In terms of Asia outbound, I think the comparisons get easy for you a little later.

Maybe the heavyweight comparisons are easy in, let's say, April.

What is your outlook for Asia outbound as well?

Let me comment on the domestic express part of it, and then I will turn it over to Dave Bronczek to comment on Asia.

In the US domestic express business, traffic in several of the sectors was weaker on a year-over-year basis.

Specifically the tech sector was a bit weaker, primarily driven by lower volume from the major cell phone companies versus last year.

In addition to that, we had some intentional mode shift in that segment to try to get product in the right network to allow us to be more efficient and meet the needs of their customers, while providing a terrific value proposition for them and enhancing the opportunity for us as part of our yield improvement strategy.

That was part of it in the tech sector.

Secondarily, economic conditions in the finance, insurance and real estate segment where we have a heavy presence, we saw traffic down year-over-year there, primarily due to economic activity.

We did see some competitive losses as part of our yield improvement strategy, although they were significantly less than our expectations and what we had planned for.

We were very pleased with our ability to execute our yield improvement strategy within the parameters that we had set for volume impact.

The combination of all those things were the primary drivers.

Again, a consistent theme there is just the economic activity, and a lot of our customers being very conservative in their supply chain.

We have actually been outperforming the marketplace in Asia-Pacific for many quarters now, in general.

I have to say that post Chinese new year's, we've actually seen more strengthening out of Asia-Pacific than we had prior to going into Chinese new year.

I should also add that on a sequential quarter-over-quarter basis, and you can look at the numbers from the last several quarters, we have improved from negative 4% in Q1 to negative 3%, to negative 1%, and we are showing some strengthening going into the fourth quarter.

We are actually seeing some mix change, however, as well, very much like the United States from priority to deferred.

Some traffic is actually from consumer electronics moving into our FTN FedEx Trade Networks system that is actually going on the ocean.

I would say there's an overall modest increasing demand for our services in Asia-Pacific right now.

Justin Yagerman, Deutsche Bank.

Could you guys elaborate a little bit on the US domestic capacity, the plans to improve the capacity and network efficiency within the US?

What sort of cost savings should we be thinking about?

Does this impact your capital plan looking forward?

What types of network efficiency improvements do you think you can drive?

Just on the high-level efficiency that we talked about in the press release, and we have been looking at and working on for several months, on a year-over-year basis, through attrition at FedEx Express, we've actually decreased our FTE's by 3,500 FTE's.

We have more attrition that we're looking at right now to consolidate more routes, looking at the line haul efficiencies, so we have more room and we are looking at it based on where our volume is.

We actually had planned a little bit higher volume to be more efficient and more productive and more profitable.

As it applies to the CapEx, as you know, last Fall we announced a transaction with Boeing where we purchased some new 767 airplanes to replace the MD-10s overtime.

The 767 is actually a bit smaller than the MD-10, and it is enormously more efficient, and it has a significant improvement in profit effect on the express network.

At the same time that we did that, we pushed off a number of the long-range intercontinental airplanes based on the lower demand that began to be obvious beginning last Summer.

The capital expenditures being made in Express will do exactly what you're talking about.

It will help improve margins and productivity there.

I would also add that we have been and will continue to be reducing flight hours, just as we always do.

We will take some planes and put them in the desert until economic conditions improve.

We will be looking at that program as well going forward.

Art Hatfield, Morgan Keegan.

To follow-up on some of this talk about the network, the comments about the domestic network, is that purely a cyclical issue or do you see that as being more potentially a secular issue, and that improvements in the efficiency of the ground network and customers relying more on ground as opposed to air express in the US, is driving some of the changes in the network domestically?

I think it's a combination of both.

Clearly we've got some depressed volumes due to economic activity, but I want to highlight something that I've been saying for a long time.

There are three significant fundamental issues that we need to recognize.

One is the globalization of trade, and how customers are refining their supply chain network as opposed to bringing product into bulk, and bulk into the US, and putting it in warehouses and then shipping it out as a domestic transaction.

It is now being shipped from point of manufacture to point of consumption, so that gets counted as an international transaction, which is why you constantly hear us referring to the express network as a global network, and not domestic versus international.

Secondarily, there is clearly some reasonable substitution when it makes sense for customers to use our very efficient and industry-leading ground service.

They are making decisions on how to configure distribution centers to take advantage of that service, so there's clearly some of that.

I referenced that in my earlier comments this morning.

Finally, you have electronic transmission of documents.

Those three fundamentals are also at play here, but I think the underlying issue that we are speaking to this morning is the below-trend growth that I referred to earlier.

Nate Brochmann, William Blair.

I wanted to talk a little bit more on the international freight lane just to explore a little bit more on Tom's previous question, in terms of, obviously there's some big tech product launches coming up currently.

Wondering what the outlook is for that?

And also, we keep talking about the low inventory levels that are out there.

You guys commented a little bit about looking for an uptick there.

Just if you could expand a little bit more on those comments.

First of all, let me say, and I didn't probably stress it enough, we have another network in the international business, it's our FedEx Trade Networks that handles freight forwarding and ocean traffic.

A lot of these big consumer electronic companies that you are referring to are looking through the inventory and the visibility that we provide across the board.

They have been able to pick a network that better services their needs.

And so, even though some of it may not be IP or IPD, international priority distribution, it could go on the ships.

We are still getting that traffic, and we are seeing a pick up in that area.

Don't forget, over time, the trend in inventories continues to decline because companies like FedEx are engineering companies operations and supply chains to allow them to do that, and still be able to meet consumer demand.

Donald Broughton, Avondale Partners.

I understand there is a fairly high degree of seasonality to the freight earnings by both fluctuations in volume and weather, but this was a very mild Winter and freight volumes were up.

What else contributed to the swing sequentially from a $40 million earnings last quarter to a $1 million loss in the freight division?

First of all, we are very pleased with our year-over-year improvement of the $66 million increase.

Again, revenue up 10%.

Yield 6% improvement overall, which is a good thing for our business.

Again, volume 2%; we got into a, in December, a volume with the fall off after the holiday season, and then, as Alan said, sequentially we improved through the quarter.

Again, Q3 is always our most challenging quarter, setting us up for a very strong Q4, our strongest quarter.

I will say the sequential improvement continues, which is a good thing for us going forward.

David Ross, Stifel Nicolaus.

To follow-up on Donald's freight question, have you thought about readjusting the fuel surcharge index.

FedEx Freight took their surcharge much lower than the competition a few years ago, but nobody really seemed to follow.

Didn't know if that was hurting you with the rising fuel prices.

Also, didn't know when you were going to end the difference in priority and economy shipments, because for regional LTL freight that really makes no sense, and I think it might be confusing some customers.

You were breaking up on the second part of the question, so I'm not sure I caught that.

That was, just the difference in the priority economy shipments at FedEx Freight.

There really should be no difference in regional.

I didn't know if it made sense to back off of that because for long-haul, certainly it makes sense to have priority economy or you can put some intermodal and it's a cheaper, slower solution, but if it's going from Baltimore to Philadelphia, it needs to be there tomorrow or it is going to be more expensive to haul.

Again, good question, and again, as we built the new design of the network, the priority economy, putting choice in all lengths of haul, which is one of the value-adds of the new proposition.

And interesting enough, the customers are picking choice in all lengths of haul, whether it be short-haul or long-haul, which again, shows the value prop we have out there of allowing the customers to be able to interface with one LTL carrier and have multiple options across all lengths of haul.

We are seeing a nice uptick in the dual users, where we have customers that before were either using FedEx National or FedEx Freight now using both, which again, was one of the objectives behind the new initiative.

We are very pleased with where it's going.

Again, our objective in the future is to continue to work to make sure that we are efficient in every length of haul no matter what the customer chooses, whether it be priority economy, and the choice the customers are coming across with is there.

We are very excited with that.

Let me respond to your question regarding fuel surcharge.

FedEx evaluates our fuel surcharge for all services on an annual basis, and we typically make any adjustments that we deem necessary when we make general rate increase announcements.

That's an ongoing thing for us, not only for freight and LTL, but for all services.

I want to go back and correct, Donald made a statement that was incorrect about Freight's performance last year.

Freight's performance last year was a loss of $110 million, of which $43 million was a one-time.

There was not a profit in Freight a year ago.

I think he was talking about the second fiscal quarter.

As far as the second quarter, that would be our normal seasonality.

Significant improvement is my point.

Let me speak specifically to the question about why we have priority and economy in all length of haul in the newly reengineered Freight network.

The delta in pricing is smaller in the regional area as opposed to the long-haul.

But the reason that we have both priority and economy is that it gives us the ability, if we need to, to roll the economy shipment and operate with higher load factors.

The customer gets a choice.

We can give them absolutely, positively overnight service in the regional markets, or the two-day lanes, or if they are willing to take the chance that it is a shipment that will be delivered a day later, it allows us then to manage load factors.

It's very similar to the way we operate in the express network.

We've been doing it for years.

Nobody has ever done it in the LTL business, and based on the strength of the demand for FedEx Freight at the moment, I think it is very obvious the customers really like having this option.

Kevin Sterling, BB&T Capital Markets.

A lot of talk about the domestic air capacity.

How should we think about your international air fleet?

Do you feel that fleet is right-sized now?

I know you talked about you saw a pick-up post Chinese new year.

We have the flexibility on our international side to add, and we talk about this every quarter.

The extra sections that we talk about to add more or to take them away.

And as Alan pointed out, we have across-the-board less flying and less fuel usage, partly because of international and partly because of the US.

We have actually been, in this quarter, we pulled those extra sections down, didn't need to fly them.

Going forward right now, we have some backlogs, as Fred just pointed out for Freight, that we are looking at putting some extra sections in and increase the flying.

We have a lot of flexibility to move it up and down depending on how the traffic moves.

There is a little bit of a move to more deferred, like the US and international at the moment, so we're watching it very carefully.

Jason Seidl, Dahlman Rose.

Just want to concentrate a little bit on the margin side, both Express and Ground.

On the ground side, continues to impress.

Just want to feel how much more room you think you have going forward.

And on the Express side, as you continue to right-size the network, particularly here in the US, how far out does that push a goal to get towards 10%?

Let me start off, and pass it off to my colleague and good friend, Dave Rebholz.

On the Express side, we are obviously looking at all of our opportunities that we have in international and the US.

It's not just an international issue.

We have actually, in this quarter, we've had a couple of issues that came up that were different for us.

The acquisitions of India and Mexico hurt us a little bit there.

We've had some depreciation with the 777's, for example.

Some of the volume that we had planned that we didn't that.

All that being said, we are looking at the line haul efficiencies, we have room there on flight hours and fuel usage in our trucking, and so forth.

And on the headcount, we have quite a lot of room, even through an attrition program.

We have a lot of opportunities in both the US and international.

As far as Ground goes, I think I mentioned it once before, but I have a challenge from my boss that I have to get to 20%, God love him.

We are going to meet that goal.

Having said that, there will be a different inflection points where we will assume some additional cost.

Example -- you can't grow at this rate and not upsize your capital.

We've been staying around the $450 million, $460 million range a year.

We have to put in some extra hubs.

We want to be able to handle it with the same level of excellence that allows Mike and his team to be able to sell the product as competitively differentiated from our primary competitor.

Having said that, I think there is plenty of runway, and we are very focused on that.

I'm very encouraged by both our growth, our customers' commentaries to me, and the way we are working with them to help them lower their costs and improve our margins.

And as Mike said earlier, yield is a critical component to our future.

We are going to stay the course, and I think we are going to do better.

Ben Hartford, Robert W.

Baird.

Dave, was wondering if you could give a little more color on the Express margins.

Looking at the MRO line as a percent of revenue, as low as it has been in a decade.

How much of that is a more efficient fleet?

How much of that might be temporary because of favorable Winter weather and whatnot?

Can we talk a little bit about how sustainable MRO expenses are at these levels?

You're right, we did actually improve our margins this quarter over last year's third quarter.

Some of it is the weather, some of it is timing for fuel, some of it is reduction in the attrition, and some of it is the line haul and some of it is the fuel usage.

It's across-the-board.

We are looking at all of those opportunities, both here in the US and international, to make sure our networks are the right size for the amount of volume and yields for the profitability going forward.

Very good question, and we are on top of all of those issues.

I don't want it to be lost on anyone, how good the productivity and cost management of Express has been with volumes down and margins up.

We have a lot of opportunity going forward.

Let me put this in a broader context because I think it's important, given that some of the questions have been answered.

Over the last couple of years, we have consistently said that FedEx believes we can improve margins, improve cash flows, improve returns, and we have done all of that.

We don't look at it quite in the same way that you do on these earnings calls.

We look at it as FedEx Corporation.

When we put our business plan together, and Express puts its plan together, for instance based on the expectations of intercontinental volume, and that volume is a bit weaker than we anticipated, our motivation to pull down capacity is less when we have great performance over at Ground, so we can keep the capacity up and try to take market share.

If that weren't the case, we would probably be managing a little bit differently.

We look at it as a portfolio and not individual silos and individual businesses where we are compelled to try to maximize every quarter.

In the case of Express, there are very long lead-time constraints in Express that require us to manage the capacity on more of a quarterly basis than on a monthly basis.

There are pilot bid lines, there are customer expectations.

At the last earnings call, I talked a bit about some of the structural changes that have gone on in the intercontinental business over the last few years because of the price of fuel, the price of wages in Asia, the problems in Europe and the low growth in the United States.

Things are considerably different now than they were just a couple of years ago.

It's important to understand that we are very convinced that in all of our three major transport reportable segments, that we can achieve double-digit margins, and that as a Corporation, we can continue to improve earnings, improve margins, improve cash flows, and improve returns.

But we may not do it the way some of the folks on this call would like to do, where we can say -- well, we're going to have just a great quarter in every segment because we are managing it as a portfolio.

Bill Greene, Morgan Stanley.

Alan, I am hoping to get a little more color from you on the guidance.

If we look at the fourth quarter guidance seasonally, so you look sequentially versus the third quarter, it looks a little bit light than what you might think versus the normal sequential change.

I am sure some of that is weather, but you've also had in some of your commentary here that you are seeing below-trend growth.

Can you break out a little bit about how much of weather versus how much of below-trend growth drives the guidance in fourth quarter?

I think the fourth quarter is still very good.

What we are seeing at the moment, as Mike Glenn started off the call with, is that we just don't have a strong as an economy as we had hoped it would be a year ago.

I was hoping that we would have record earnings this year.

While that still would be at the very high end of that range, or a little bit stretch above it, frankly, the economic environment and the elasticity that we are seeing on our premium services from the high fuel costs are dampening the fourth quarter a bit.

It is still going to be a very good quarter, and I think we will go into the next fiscal year with a lot of momentum.

That is really the answer.

Brandon Oglenski, Barclays Capital.

Following off of that answer, Alan, when we think about higher fuel prices, and maybe that is impacting Express a bit more into the fourth quarter, how are you going to offset that in the Ground segment?

It looks like you are getting very good results in the higher fuel environment in that segment.

Well, again, as I mentioned, Ground is such an unbelievably great value proposition versus the competitive offering.

There's a lot of managed trade down, if you will, from the Express network to the Ground network where we can reduce the CapEx over time at Express, and increase it over time at Ground, which has a higher ROIC, which is the objective that Fred outlined for you.

I think we will continue to do that.

Obviously, on a lower base and diesel fuel, the impact of the fuel surcharge is significantly less at Ground than it is at Express.

Keith Schoonmaker, MorningStar.

This is a related question.

I appreciate Mr.

Smith's comments on viewing the results of the consolidated FedEx Corporation.

Wanted to ask about the effect of mix.

The margin in Ground is impressive, to state the obvious, and with Ground lanes so fast now, the lower price per package, can you please comment on the net effects of customers switching modes?

Greater parcel density benefits either operation, and it is tempting to think of putting volume in the higher margin operation would be accretive, but if FedEx has relatively higher fixed costs as we think of the full suite, can you explain how we view shifts from Express to Ground?

Our sales team works with customers on a regular basis to ensure that we put the very best value proposition in front of them that takes advantage of the broad range of services that we have.

I wouldn't get too fixated on mode shift as an issue here.

It certainly has an impact.

We work with customers, specifically as it relates to mode shift, when it's to mutually beneficial outcome, and that is key in terms of how we approach it.

Obviously, it doesn't make a lot of sense for us to shift volume out of Express into Ground when it doesn't benefit the customer and it doesn't benefit FedEx Corporation, as Fred noted earlier.

Alan used the word, managed, and I think that is the key word in this discussion is managing mode optimization, if you will, to increase the value for the customer and, frankly, FedEx Corporation.

That's how we approach that.

We view that, when it's done correctly, and our sales team does a great job of that as a benefit for FedEx Corporation.

Christian Wetherbee, Citi.

I was wondering if you could give us an update on how things were trending in IP quarter-to-date, and could we see that ultimately turn positive if things go as expected for the rest of the quarter economically?

I apologize, I must have covered that too quickly because I covered that early in my comments.

Let me give it to you again.

Sequentially from Q1, and you can look back at our statistics, we were negative 4% on IP, which includes IP, IPD, IE, IEF.

Q2 was negative 3%; Q3 is negative 1%.

We are seeing strengthening going into Q4.

I should add that we are picking up traffic into another mode of transportation that we have is also FTN.

Some of the IPD in the past would move to that, and go on the ocean.

Across the board, we would have sequentially improving IP trends.

Jeff Kauffman, Sterne Agee.

A lot of my questions have been answered, so question for Mike and Dave.

In terms of your changed economic outlook, could you break that down a little bit in terms of what the change was in your European outlook versus your Asian outlook versus your domestic US outlook?

Let me take a look here and just get the numbers in front of me for a second, Jeff.

The forecast for Europe, EMEA specifically, for calendar year '12 was 0.7% GDP growth.

For euro land, it is a negative 0.4%.

For calendar '13, it is 0.9% for euro land, and 2% for EMEA.

The only additional color that I will give you for EMEA, and I know we don't break this out, is that as Fred pointed out, it is a growing and profitable region of the world for us, and it continues to be so.

Scott Group, Wolfe Trahan.

Wanted to just ask another one on some of the assumptions for 4Q.

What is the fuel lag that you are expecting in the coming quarter versus what you saw in the third quarter?

Then with that on the IP side, normally when we think about IP volumes inflecting positive, we think about a lot of operating leverage.

Does that story change a little bit at all now that there is some mix changes away from priority to more of a deferred product?

Versus last year, I think in the fourth quarter we will have a benefit from the fuel lag versus the cost of the fuel versus the surcharge.

But with the high fuel prices that are existing, it's going to have a dampening impact on our premium services revenues.

That will probably offset, in terms of the results, and that's why I have the range that I have.

Yes, and on IP, I mentioned it a couple times, but our FedEx Trade Networks group that is very efficient, clearance and brokerage and ocean shipping, some of that deferred traffic that would have in the past flown on our super express freighters is because of the customers demand moving to that.

So, we are still picking up traffic.

And probably over time become more profitable with it.

Ken Hoexter, Merrill Lynch.

Fred, I know you mentioned at the beginning of the call you don't want to speculate or comment on speculation for TNT, but let's look at what's been announced, and can you give your thoughts on when you heard about the announcement of UPS TNT coming to the agreement, and what you think that does for growth in Europe and how you view the market now?

Do you want to increase your presence on a domestic basis there?

Do you feel pressure from customers to have that greater product offering than you do?

Give us some thoughts on that.

For Dave, can you throw in thoughts on your peer pricing was up 6%, you mentioned at Express and Ground.

Can you talk about the trends there?

Do you think that continues to gain some steam in face of fuel prices?

Europe is a big part of the FedEx network, as I said in the opening remarks.

We have a multi-billion-dollar business there.

It's profitable and it's growing.

We are expanding the business.

Having said that, there are two things that you have to remember about Europe.

The first is, as Mike Glenn just mentioned to you, the growth rates in Europe are extremely low, and my personal belief is they are going to continue to be low as long as the policies being pursued in Europe are the same as the policies that have been pursued over the last 20, 25 years.

I think the same thing is true in the United States.

I am not trying to be political in any statement, we simply don't have policies in place in the US and Europe that are stimulative of GDP growth beyond relatively low levels.

That is one point.

The second point that you have to realize about Europe is that, unlike the United States, it is a much more fractionated market.

There are domestic markets which are historical there that have a number of competitors.

There is the Pan European surface market.

There is the Pan European or intra-European air express business, and then there is the intercontinental business.

We are very strong in the intercontinental business.

We have an excellent intra-European air express network, and we have selectively participated in the domestic marketplace.

We have an organic expansion planned inside Europe, and I would like for Dave to comment on that.

This goes back, for several years now we have actually been working on more intercontinental flights from Asia to Europe.

We have had flights from the US to Dubai and to the Middle East.

On the Intercontinental side, we have added a lot of connectivity and excellent service, world-class service for our intercontinental business.

On the more recent activities, to Fred's point, just in the last five months since October, we have opened over 23 stations in Germany, France, Spain, Italy, the Netherlands, Sweden, across the board, we have added more jet city points to the network inside Europe.

We've added 757s in Europe, we are growing, we are profitable, we are adding to the later pick-up times that customers really want to connect to the European market and to the global market, and much earlier deliveries.

We have a really good story, we have a great management team in Europe, and we are very optimistic about the forward-looking future.

We will talk a lot more about this for those of you who can come to the October 9 and 10 thing.

It's a great story, and we've got a terrific management team in Europe, and as Dave mentioned, we have been expanding it at flank speed over the recent past, and are going to continue for the foreseeable future to broaden the portfolio that we offer in Europe.

As I mentioned, it's a highly fractionated market in Europe.

I will comment on the yield question that you had.

As I stated earlier, I'm extremely proud of the sales revenue management marketing team for their focus on this.

We clearly had solid yield performance during the quarter.

This is part of a managed program that we have that entails both the change that we made in the dimensional weight surcharge, which went into place over a year ago, which we have now lapped.

How we manage contract increases and things of that nature.

I will say that we are starting to cycle through the contract increases now as part of that.

We were seeking and have been successful in getting above-trend annual rate increases on those contracts in year one.

We would expect to see lower rate increases in years two and three.

That will have some impact on that.

We have lapped the dimensional weight surcharge.

Let me state again, this will be a major focus item for us.

It will be at the top of our priority list, and as I said earlier, we have been prepared to put some volume at risk in order to achieve our rate increases and our yield improvements.

We did see some impact during the quarter, specifically at Express, but as I said earlier, it was well within the parameters that we had set in order to achieve the yield improvements that we were targeting.

I continue to be very pleased with our performance in this regard.

We work very closely with the operating companies to make sure that we are making decisions that not only benefit improving yields, but that benefit the operating company performance.

And that will be our modus operandi going forward.

David Vernon, Bernstein.

Could you talk a little bit more on timing on the domestic Express network adjustments, and how that might impact service and flow through to momentum on pricing?

We actually look at our network all the time -- every week, every month.

We have been doing this for years and years, and we have a great portfolio, as Mike Glenn and Fred have talked about, and Alan.

Where the customers pick the services that they need, and so we work with the customer with our teammates.

As I mentioned, year-over-year, for example, through attrition, we're down 3,500 FTE's.

Depending on the volume outlooks and the customer demand and how the economy is, we have opportunity to flex up or flex down, and right now we're looking at it, and we've been looking at this for years.

We are not going to reduce our service levels.

We are going to increase our service levels, and we will continue to do that.

The trick here is to continue to lower expense, improve productivity while we expand our service capabilities, which are extremely high already.

There will be nothing but service improvements.

The changes that you're looking at are incremental as opposed to a network redesign in some fashion?

I think we are too early in the stages here to comment any further than we have on that.

Chris Ceraso, Credit Suisse.

Did you see in the third quarter a notable shift in B to C, and did that weigh on your margins in Express?

Also on the tax rate, could you comment if it's going to be lower again in Q4 like it was in Q3?

The third quarter was a settlement of the IRS of our fiscal 2007 and 2009.

The fourth-quarter tax rate will be 36% to 37% depending on where our earnings are earned in the quarter.

We did see, and always see a substantial increase in B to C transactions during the quarter because of the peak season and the significant growth of e-commerce shipping.

I should point out as part of that, we did pass on some growth opportunities, particularly at Express because we didn't feel the yields were compensatory and consistent with our long-term objectives.

We always see an increase in B to C shipping during that quarter because of the holiday season and the increase in B to C.

John Barnes, RBC Capital Markets.

On the Express side, can you talk about the further headcount reduction?

You stated that you had seen attrition, lower FTE's by 3,500.

How much more can that number decline?

Secondly, on the Ground side, given the volume growth there, and you've obviously fielded a lot of questions about right-sizing the domestic Express network.

Is there any need to right-size the Ground network, namely, do you need further investment there to continue to handle this growth?

We look at our headcount as we always have for years and years, on an attrition basis, and based on the volume and the demand, and we will continue to do that.

Peter Nesvold, Jefferies & Company.

On fuel, if I can ask that one briefly, if fuel prices were up year-over-year, and we exited the quarter at higher fuel prices than we entered the quarter, it is not clear to me how it such a big tailwind.

Was there some kind of improved productivity because of the warm Winter, or did you pre-buy fuel, or how else did that be such a tailwind?

It was a tailwind versus last year.

It was a restrainer in terms of what it did to the demand for our premium services.

That concludes our question-and-answer session.

I will turn the call back over to Mickey Foster for any additional or closing remarks.

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

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

Thank you very much.

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

You may now disconnect.