聯邦快遞 (FDX) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the FedEx Corporation second-quarter fiscal-year 2013 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation.

Please go ahead sir.

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

The second-quarter earnings release and our stat book are on our website at FedEx.com.

This call is being broadcast from our website and the replay and podcast 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.

If you are listening to the call through our live webcast, feel free to submit your question via e-mail or as a message on stocktwits.com.

For example, please include your full name and contact information with your question and send it to IR@FedEx.com address.

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

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.

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

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

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

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

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

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

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

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

Thank you Mickey.

Good morning and welcome to our conference call to discuss operating and financial results for the second quarter of fiscal 2013.

We're very pleased with the operating results at FedEx Ground and FedEx Freight, which continued to show improvement.

At FedEx Express, persistent weakness in the global economy and increasing demand for lower-yielding international services limited profits during the quarter.

Superstorm Sandy affected overall earnings as well.

At the October investors and lenders meeting we showed you plans to improve annual profitability by $1.7 billion during the next three years with a significant portion of the benefits achieved by fiscal year 2015.

I'm very confident we're on our way to achieving this ambitious goal.

We're hard at work currently on another record-setting holiday-shipping season driven by the increasing popularity of e-commerce.

On Monday, December 17, team members moved about 19.8 million shipments through our various systems around the world, a daily record.

For the overall holiday we believe volumes in our worldwide networks will increase by more than 13% compared to last year.

I would like to say thank you to all our team members, especially those in the areas affected by Sandy for their hard work and dedication during this peak season.

Before I turn the call over to Mike Glenn for his views on the economy, and Alan Graf for his analysis of the quarter, I would like to do two things.

First I would like to thank Bill Margaritis, our Corporate Vice President of Communications who will be departing FedEx on December 31 after 16 years of service.

Bill, we appreciate everything you've done for us during your time here and look forward to seeing you often in the future.

Second, I would like to congratulate FedEx Express for being recognized by the Great Place to Work Institute as among the world's top ten best multinational workplaces for the second year in a row.

The ranking is the world's largest annual study of workplace excellence and identifies the top 25 best multinationals in terms of workplace culture.

Now let me turn it over to Mike Glenn.

Thank you, Fred.

I'm going to make a few brief comments regarding the economy, then give a summary of our yield results, then finally a couple of comments on peak season.

We continue to see modest growth in the global economy with our forecast for US GDP calling for 1.9% growth in calendar year '13.

For industrial production we expect a growth rate of 2.4% in calendar year '13.

This is slightly lower than our prior forecast, primarily reflecting a lower entry point in FY '13 due to hurricane Sandy.

Our global GDP forecast is 2.5% in calendar year '13.

Finally, I just want to emphasize that the calendar year '13 outlook could swing either direction depending on policy outcomes, especially with the fiscal cliff issues in the US and certainly issues in Europe.

Turning to yield, in the domestic Express sector, excluding the impact of fuel, year-over-year Express yields increased 2.5%, which was primarily driven by pricing and rating and discount improvements.

In the Ground segment, again, excluding the impact of fuel, our yields increased 2.9%.

The year-over-year increase was driven by list and discount improvements followed by an increase in extra services charges.

Excluding fuel, in the international export Express segment, package yields declined 3.8% year over year due to a change in product mix, rate, and discounts, and weight changes as well as the impact of exchange rate.

And finally, excluding the impact of fuel, yield per hundred weight increased 1.9% year over year, which was primarily driven by pricing rate changes.

And as noted in our recently released peak day volume forecast, FedEx expected to handle more than 19 million packages on Monday, December 10.

FedEx not only exceeded our forecast on the 10th but we also handled more than 19 million packages on Monday, November 26, which was Cyber Monday, and Monday, December 17.

The heavy volume was driven primarily by e-commerce sales which consist of lighter weight, lower-yielding residential delivery packages, and our team, both at Express and Ground, worked very closely with our largest e-commerce and multichannel retail customers to deliver outstanding service during this peak season.

With that I will turn it over to Alan.

Thank you, Mike.

And good morning, everyone.

Our second-quarter earnings of $1.39 per share, which includes an $0.11 per share hit from superstorm Sandy reflects the strength of FedEx Ground and SmartPost, continuing improvement at FedEx Freight, and the current trends at FedEx Express.

As we said in October at our investors and lenders meeting, we are committed to delivering improved profitability and shareholder returns, and in addition to a review of the quarter and outlook for the second half of fiscal year '13, I will comment on our progress toward delivering on our profit improvement plans.

So let's first review segment results for the quarter and we will start with Ground.

Ground's strong revenue growth from e-commerce and market share gains continues to expand our network and increase our capabilities.

New volume milestones were reached for the second quarter as SmartPost moved over 2 million packages per day and Ground delivered over 4 million packages per day.

On Cyber Monday, November 26, Ground moved 8.7 million packages and SmartPost 6.1 million packages.

Ground's operating income increased 4% to $412 million in the quarter, primarily due to 8% higher volume, together with yield growth, partially offset by network expansion costs.

Operating margin did decrease in the quarter primarily due to lower fuel surcharge revenue and higher purchase transportation costs related to increased fuel expense.

Operating income at Ground was also negatively impacted by Sandy.

At Freight, we are continuing to benefit from the leverage gained by integrating our networks and differentiating our service by offering priority and economy choices for our customers, plus, increasing our use of rail.

Freight's operating income for the quarter improved significantly, up $36 million from a year ago to $76 million as a result of LTL yield growth and increased average daily LTL shipments, along with ongoing improvements and operational efficiencies in our integrated network.

Freight's results were also negatively impacted by Sandy.

Turning to Express, continuing weakness in global markets and customers choosing slower, lower-yielding services are ongoing trends as we continue to adjust our network.

Operating income and operating margin decreased in the quarter due to the demand shift toward lower-yielding international services, a negative impact of year over year net fuel changes, increased depreciation expense, the impact of Sandy, and higher pension costs.

These were partially offset by favorable impact of cost containment actions, which Dave Bronczek will talk to you about in detail.

Operating income and margins were also negatively impacted by ongoing investments in integrating recent acquisitions into the Express network.

Fuel had a negative impact on operating income in Q2 based on a static analysis of the net impact of year-over-year changes in fuel prices compared to year-over-year changes in fuel surcharges.

Fuel costs increased 3% during the quarter through an increase in the average price per gallon of fuel.

Meanwhile the weighted average US fuel surcharge for the quarter decreased 1.7 percentage points versus last year.

In October, we announced programs targeting annual profitability improvement of $1.7 billion during the next three years with a significant portion of the benefits to be achieved by the end of FY '15.

The majority of the profitability improvement will come from initiatives at Express and Services and include cost reductions in selling, general, and administrative functions through headcount reductions, streamlining of processes, and elimination of less essential work.

Also, modernization of our aircraft fleet, transformation of the US domestic operations and international profit improvements in Express, and also improved efficiencies and lower cost of information technology at Services.

Our overall profit improvement plan includes offering voluntary cash buyouts to eligible US-based employees beginning in February of 2013.

Cost of the benefits provided under the voluntary programs will be recognized in the period that eligible employees accept their offers, which will be predominantly in Q4 of this fiscal year.

We expect the pretax cost of the voluntary buyout program to range from $550 million to $650 million, but actual costs will depend on employee acceptance rates.

Eligible employees will vacate positions in three phases to ensure a smooth transition.

Employees in the first phase will vacate their positions on May 31, 2013.

These programs, combined with continued profit improvements in Ground and Freight, are expected to increase margins, improve cash flows, and increase our competitiveness.

The ultimate cost in savings from our profit improvement initiatives will depend upon other things, on a number of employees that participate in the voluntary cash buyout program, and the timing and execution of these programs.

We expect to begin realizing the benefits of these programs in FY '14 and anticipate these savings will be substantially realized by the end of fiscal 2015.

Our capital expenditures for the Corporation are expected to be approximately $3.9 billion in 2013 and include spending for aircraft and related equipment at Express, facility projects at Express and Ground, and vehicle replacement at all our transportation segments.

In December, Express entered into an agreement with Boeing to purchase four incremental 767 freighters to be delivered in 2015.

As part of that agreement, Express is also deferring the delivery of two firm 777 freighter orders for one year from 2015 to 2016.

Turning now to the outlook, and based on the economic outlook for the year as Mike described, we're expecting diluted earnings per share of $1.25 to $1.45 for the third quarter.

We reaffirm our guidance of $6.20 to $6.60 per diluted share for the year, which does not include charges related to our voluntary cash buyout program.

Our outlook also assumes that the US does not go off the fiscal cliff and into a recession.

For the second half of fiscal '13, we are assuming a slightly higher effective tax rate of approximately 37%.

Finally, for those of you who haven't finished your holiday shopping, there are a few days left to ship your presents in time for Christmas, and our 300,000 teammates around the world are ready and anxious to deliver reliable service for you just in time for Christmas.

And with that, we will now open the floor for questions.

(Operator Instructions)

Tom Wadewitz, JPMorgan.

I wanted to ask a bit, Alan about the, you had quite a bit of helpful commentary following up in the October meeting, kind of reviewing some of the drivers on the broader improvement program.

If you are taking this charge in fourth quarter, it would imply that you have significant run of the headcount that would be out in fiscal '14.

Is that primarily related to the SG&A cost savings, the I think $500 million total that you had identified, and how would we think about that?

Is it reasonable to think that you could realize a fair bit of that cost savings given the timing of your buyout program?

Tom, thanks for the question.

At the investors and lenders meeting, we had thought that the buyout would be as people departed.

We have since done a lot of further accounting research and have determined that we will take the charges upon the signing of the execution of the voluntary buyouts, no matter when people depart.

So that's why we will expect most of the charges to occur in 2013.

We are working very hard on our reorganization plans.

We think we know within a pretty good tolerance range of how many people are going to accept it and where they will be, and how we will address that, but until we actually get through February, it is going to be very difficult for me to quantify how much in fiscal '14 that we will be able to put to the bottom line as we determine how long we will have to retain people to ensure the smooth transition.

It will be significant, but I would look for most of the benefits from the voluntary buyout to be realized in fiscal '15, and I will say the same thing for the profit improvement program at Express.

We've already started it there.

Dave will talk about it.

In fact, I will just turn it over to him and let him talk about it as part of this.

We've already started that.

We've saved a lot of money already.

We're well on our road.

I would just say to sum up, we are very confident about reaching the $1.7 billion profit improvement program by fiscal '16, and I think as the deeper we get into this, the more confident that we are.

Let me have Dave talk a little bit about profit improvement.

Thanks, Alan.

That's correct.

We're very optimistic that the five-point plan that we presented is going exceptionally well.

SG&A as Alan pointed out, a big part of it is at Express.

This quarter I should go back to, and I will talk about expenses in a minute here, significantly was affected this quarter, our profits and our margins by Superstorm Sandy was a big part of the $0.11 was at Express.

Another big part of it significantly was at fuel that Alan pointed out, although it seemed like it would be a positive, it was a negative significantly.

Pension.

Then the fourth point that you may not pick up is in our purchase transportation is our new acquisitions sits in that purchase transportation number.

It's a big negative number.

That's the short term obviously until we get these new acquisitions rolling.

So you have those significant head winds in our profits and our margins this quarter.

Going forward we're very optimistic that those margins and profits improve.

But on the expense side, even in this quarter, our FTEs were down 1,736, over 2%.

Our fuel usage was down thanks to our great programs we've put into air operations, aircraft maintenance was down, even though our pounds were up.

So our pounds were up across the world.

A lot of them being international economy, which I will talk about a little bit later, because it's a new network design we're putting in for that lower-yielding international traffic to be in a much more cost effective network going forward.

That's part of our five-point plan.

So we're feeling very good about our five-point plan.

We actually had a quarter that would have significantly looked better had those four initiatives not hit all at one time.

So going forward we're very optimistic.

Justin Yeagerman, Deutsche Bank.

Rob on for Justin.

I guess Dave as a follow-up to your comments related to the various cost initiatives at Express, you guys had called out I think roughly $350 million at the investor day which you weren't including in that $1.7 billion of cost initiatives that you were targeting for fiscal '13.

Can you give us a sense how much of that actually showed up in the earnings this quarter, just given the head winds from Sandy?

Earnings were a bit better, so I'm just trying to get a sense of how much of those cost initiatives are now showing up in the bottom line.

That's a good question because if it wasn't for Sandy a lot more would have shown up.

We actually did reduce our FTEs in our US transformation number that you are talking about, the $250 million, would have been significantly better.

You would have seen at lot more dramatic.

But it's in our US domestic transformation program that you are talking about.

We're going after those costs in a lot of different areas.

Attrition, of course, redesigning the network, and even with Sandy, we still had pretty good improvement on our FTEs.

Alan?

Rob, let me just add to that that we're building momentum, and while I know that a lot of people don't like my outlook for the third quarter, we did keep the year the same because we expect the momentum to build through Q3, and we will really start to see the impact of this at Express in the Q4 results for Express and for the Corporation, then on into fiscal '14.

So momentum is there.

It does take awhile to get everything, once we've made the plans executed, you've got, for example, bid packs with the pilots.

You've got attrition that you have to let happen.

We've got to continue to go through the reorganization for the G&A that we're doing.

But strong momentum building, and you'll see it in Q4.

One last thing on the four 767s.

Obviously it's accretive to our operating profits and margins.

It's a positive MIRR as well.

All part of one of those five pillars that I pointed out in our fleet modernization as well.

Nate Brochmann, William Blair & Company.

I wanted to talk a little bit on the international side.

Obviously there continues to be some trade-down there but yet kind of saw some up tick in volumes.

I was wondering how much of that might be market share gains from your competitors' disruption over there maybe with their big deal, just separating that as well as with just improved activity over there.

This is Mike Glenn.

Market share data trails, so it would be premature to make definitive statements regarding market share gains at this time, although we have seen strong performance, stronger performance out of the Asia Pacific region, and certainly strong performance out of Europe.

I would also add that our European organic expansion plan is right on target.

Our strategic business case there looks very good despite the weak economy over there, they're executing on it very well.

As you know we've made important acquisitions in Poland and France, and we will continue to roll that out.

We're very pleased with the progress.

Just one last point.

You've seen our numbers.

International Priority, which is also International Priority distribution, where a lot of our high-tech customers use that product, grew at 3%.

International economy grew at 14%.

So going forward, there's a big opportunity for us there to put those packages in the right network for improving our profits.

David Ross, Stifel Nicolaus.

Could you talk a little bit about the Company's exposure to the US housing market?

The housing market seems to have bottomed and has gotten better this year.

Is there assumed more upside surprise in 2013, can you talk about how each of the different segments might benefit from that?

Yes, I think from -- David, this is Bill Logue.

On the Freight side of the business, as the housing recovery comes around obviously that's a big role in the Freight side of the business.

Whether we, in the quarter we saw some good volume movement through November, October, November, pretty healthy for us.

So again, helped our results.

Again, as we see continued improvement going forward, then there's significant upside for us on the Freight side.

Now, as we go into our Q3 side of the business, obviously we have two less operating days in this quarter, and our third quarter, which is December, January, February, is the most challenging quarter because it's in the LTL space.

It's three challenging months.

That plus two less days.

As we work through Q3 our objective is to stay focused on continuing to build on our base business, continue our efficiencies, and very focused on our contract renewals, which we are in a very heavy part of our season right now and prepare to us run efficient through Q3 as best we can with the challenges of the volume during this period and get us ready for Q4.

So again if housing continues, we will see the benefit of that.

Helane Becker, Dahlman Rose.

Just on some press reports a couple of weeks ago on this recent lawsuit over charges, in your network can you just address that or how we should think about that?

Thank you.

Hi, Helen.

It's Chris Richards.

This case was filed in February 2011 and received some recent media attention.

We deny the allegations in this complaint.

It had to do with an assertion that we weren't properly paying -- we were improperly charging for residential surcharges which, of course, we have a very subtle process where customers if they have this concern can note from their invoice that they have it, and we'll address those issues.

I have to tell you, it's not uncommon for plaintiffs' counsel where they have a situation where a case may be disposed of on preliminary motions for them to go to the media and attempt to bring forward negative facts in the media.

And we're not going to try this case in the media.

So just want to bring it to the attention of all of our customers that we note on our invoices when residential surcharge has been applied.

We take seriously and address any concern that's raised about those charges.

We have a good process in place to make sure we are doing this correctly.

But, on the other hand, this isn't a perfect science, and if you drive around your town you will probably find some places where houses that used to be filled with families are now the locations for beauty salons and Mexican restaurants and other kinds of things, and so it's a changing situation that we address through our various data sources.

So that's where we are.

It's very preliminary stage, and we can't be accountable for plaintiffs' lawyers' actions.

Ben Hartford, Robert W Baird.

I'm wondering if you can provide some context on the air Freight dynamics without giving specific numbers in the quarter, can you talk directionally about how trends trended?

It sounds as though November in Freight was healthy after being weak for the five months prior.

And can you talk a little bit about trade lanes in terms of that dynamic, and maybe what you're seeing from a near term perspective, whether you do have the sense that air Freight fundamentals globally have started to bottom or if there's still too much uncertainty to make any sort of claims, any sort of color on that would be helpful.

Thanks.

I'll start.

This is Dave Bronczek.

The air Freight out of Asia Pacific is doing quite well.

A lot of it is our high-tech customers.

Obviously this time of the year, there is a shift.

However, we think in the overall market that has more Express on the high end, and more Freight IE type of traffic on the low end, so it's actually going to play into our network very well.

So our volumes were up out of Asia Pacific.

They're also up out of Europe.

So we're actually seeing some positive trends from our key customers in our market segment.

Mike?

Yes, I was just going to highlight, as Dave mentioned, as most people know during the quarter there were several high-tech product releases that certainly benefited the market overall and FedEx, and those don't happen every quarter, but certainly we benefited from that during the quarter.

This is Fred Smith speaking.

On our Investor Relations website, you can read a speech which I gave in May at the Wings Club that gives a comprehensive look of our views about the international cargo business from the Express sector through the commodity air Freight, or traditional air Freight business, down to ocean Freight.

And you will see that over the last several years, particularly since the great recession, there have been major systemic changes, and I would commend that work to you because it gives a more comprehensive answer to the question you just asked.

Bill Greene, Morgan Stanley.

Yes, Fred, maybe I can ask you just to follow up a little bit on that.

We hear a lot about near sourcing of manufacturing back to North America.

Obviously FedEx serves all those places but we also hear that International Priority Freight is some of the best Freight on the network.

So maybe what are the puts and takes there?

So is it a good thing if we get near sourcing back here for FedEx or is that more of a challenge as a secular shift?

We're in all these sectors.

It's just really an issue of managing the capacity and putting the right traffic in the right network, and I think over the last couple of years as Dave mentioned, customers have opted to trade a bit of speed for a lower price, but that's fine.

We just to have make sure that the economy traffic is moved in the appropriate network.

And we're moving in on the Ground more as opposed to flying it as much.

So it's more drive, fly, drive, rather than and then fly, fly.

So that takes some time.

One of the things that we're most excited about in the last couple of years, and perhaps Dave can talk a bit more about this, we bought a terrific company in Mexico, which will be a major beneficiary of near sourcing trends.

We got a great team down there, and it's going very well.

So we're prepared on either side for continued growth across the Pacific, and I think the sector that we pioneered, the door-to-door Express, will be the growth area, and we're also well situated for near sourcing, Dave?

That's exactly right, Fred.

We have a great company in Mexico.

We come across the border now in trucks when it gets near sourced, and that's a great question.

Or it's Indonesia, or it's in China, or it's in Austin, Texas.

Those customers are telling us in advance where they're moving to, and we align our network to that.

In some cases, it's actually better for us financially when they near-source it.

So we have a good line of sight on where these customers are, and we have great businesses and great business models all around the world to handle it.

Christian Weatherby, Citi.

I was maybe wondering we could touch a little bit on the fuel surcharge and the purchase transportation and maybe the Sandy allocation within Express.

Just trying to get a better sense of maybe what the underlying earnings power of the segment is right now and how you think about that, ex some of those items.

Just a little bit more color there would be very helpful.

Well, as we grow FedEx Trade Networks, our purchase transportation costs are going to increase because that's all purchase transportation.

FedEx Trade Networks is a very important part of our strategy.

It goes back to the last couple of questions where we're getting bigger in ocean, and we are also getting bigger in forwarded air traffic on a small basis now, but hope to be larger as we go, where we can't justify flying an entire aircraft.

That's an important part of our strategy.

Also with acquisitions, there's a lot of purchase transportation acquisitions.

And acquisitions, when you first make them, you have two costs that you have to deal with, particularly in the first year.

One is you can't capitalize the cost of the acquisitions any more.

Those are expensed immediately.

And secondarily, you have integration costs as we hook those acquisitions into our international network.

We know that going up-front.

We have a strategic business case on all of these that understand that.

But as we get them tucked in and up and running and FedEx branded, 18 months down the road, they start to pay off.

So those are the answers there.

As to the fuel, you have to remember about the fuel surcharge.

You have to remember what happened a year ago in terms of those lags between the surcharge and the price and what happened this year.

So a lot of people thought we would have a tailwind.

We actually had a headwind as our fuel price variance was significantly higher than the year over year, and our surcharge revenue was basically flat across the enterprise.

Jeff Kauffman, Sterne Agee.

Sal Vitale on for Jeff Kauffman.

Looking at some of the trends in the Express business, volume-wise was there anything in terms of easier comps this quarter?

If I look at the trend over the last few quarters you had the May quarter was down about 3% year over year.

August was up about 1.5%, then you had up 6% in the November quarter.

Is there anything there we should be looking at?

I don't think there is anything in -- beneficial in that regard.

I think to the contrary we're still lapping the one customer, one large customer, the cell phone industry that I mentioned last quarter, which moved the traffic out of the Express network into the home and SmartPost, Ground and SmartPost network.

So that is still a headwind for us in the Express sector so what we've seen is stronger numbers.

Obviously we've been benefiting from e-commerce to some degree, and specific opportunities with other customers.

But it's more -- I would say it's more of a headwind than a tailwind that we're dealing with.

Scott Group, Wolfe Trahan.

What I understand on the Ground side, we saw nice acceleration in the volume growth and wondering what's driving that.

Are you hearing from customers?

Do you think you're taking maybe a little bit of share or accelerated share ahead of UPS's Teamster contract next year?

Then on the expense side of Ground that you talked about expansion costs and higher contractor cost, maybe give a little color there, and should we think about those as ongoing in the next few quarters?

Okay, Scott this is Dave Rebholz.

There is no question that with our value proposition and the quality of the service that we are performing that we are taking some level of share.

It would absolutely be ridiculous to not think that we're not doing that.

All up, our customers are pointing out to us what is valuable, what's important.

We have picked up a number of significant customers that have obviously stated concerns over the UPS situation, but I don't think that's the primary driver in this.

Otherwise, I think we would see a heck of a lot more volume coming on board in the short term.

So I think we're absolutely winning the game over the long run.

In terms of the cost structure, it's just basic fundamentals here.

Alan already mentioned the net fuel position that we were in.

We are all in the position of the legging factor which will benefit us going forward.

We put on a significant and -- you follow us very closely -- we put on a significant amount of expansion that comes on in this particular quarter in anticipation of the peak volumes that we have to handle, which Mike already told you were record-level days.

My peers laugh at me when I say it's kind of like the fishes and loaves because the days are unique, dramatic, and we're handling it at incredible levels of performance.

So I'm very, very pleased with our team.

I would like to good on the record for staying the level of dedication and commitment not only from our own employees but from our contractors is second to none.

So all up, those are really the two big issues in this quarter.

Fuel and expansion.

We anticipated it.

And we're looking forward for the years to come, and in particular the second half, because I think we've got head way to play this thing out.

I have no idea what the situation is with UPS and their contract.

All I know is, we've got customers that are coming on for the long term.

Ken Hoexter, Merrill Lynch.

Dave, could I just follow up on the Ground side there, it seemed like yields also seemed to take a deceleration, not a decline but maybe slowing over what we've seen the last few quarters.

Is it getting more competitive in terms of getting in that business, or is I guess maybe e-commerce having a greater impact?

I know you just highlighted expansion and fuel but is the rapid growth of e-commerce impacting your margin capabilities as a growth of SmartPost or anything else going on within the network that we should think about?

Thanks.

Ken, the issue here is that as we have moved into this peak season, the acceleration of e-commerce is very real.

You don't have to look at FedEx to understand what's going on out there in the marketplace with our largest retail customers and their customers.

It appears that there's been a lot of pent up demand from us, we as consumers, and so ordering on-line is the most convenient way to do business.

So I don't think that trend is going to change.

The economics on yield, we were over yield as was already articulated by Alan in our press release.

That's not to say that the larger the customers, and as the mix changes, that we could not envision some sort of yield risk as a function of customer mix.

Not as a function of rate.

Okay?

So I think we're in a very healthy position, and all I can tell you is, is that the growth and the demand is very strong, and yes, it is true, and I will let Mike comment on it, our largest customers are seeing record years.

Ken, I just want to highlight a couple of points.

I certainly agree with what Dave is saying, but I want you to focus on the fact that FedEx has been leading the industry in terms of overall yield improvement and our yield management, and our sales team, along with our revenue management team has done an outstanding job of managing our yields in the various quarters over the last couple of years.

Our objective, as I stated at investors and lenders meeting, is to balance our yield improvement along with volume growth to maximize profitability for each operating company, and we have worked very closely with the operating companies to make sure that we accomplish that.

Certainly during quarters leading up to -- or the quarter leading up to the peak season we do see a change in customer mix, as Dave noted, which does put some pressure on the yield.

But our long-term objective is to balance yield improvements and volume growth to maximize our profits, and that's what we're focused on.

So some quarters you are going to see yields a little higher, some quarters you're going to see yields a little lower, but the key is improving our profits.

Brandon Oglenski, Barclays.

This question might kind of be a follow-up for you, Mike, or maybe Dave Bronczek.

When we look at yields in Express as well, is that being challenged any way domestically by what your peer is doing with these new saver products that they've introduced over the last few quarters?

And with the declining volume environment what are some things that you are doing to try to push better price outcomes looking forward?

Our yield strategy I can tell you is independent of what our primary competitor is doing.

As I said before our objective here is to balance our yield improvement along with volume growth to maximize our profitability.

We've worked very closely with our Express company to identify opportunities, whether they be on a lane segment basis or out of a particular market or region to grow our services.

We've had a lot of new contract negotiations that have come up in the quarter and we work, again, very closely to make sure that we're getting the level of contribution that we need to get.

What's really driving a lot of the yield issues in the market in general in Express is the growth in e-commerce.

And again, as I stated at the investor and lenders meeting, our SmartPost and home delivery services are ideal for growth in SmartPost, and at the same time we are being more selective in the Express segment when pursuing e-commerce opportunities.

Certainly Express benefited during the quarter from strong e-commerce results but we are more selective in that regard and perhaps more selective than our primary competitor.

Art Hatfield, Raymond James.

Quick question going back to the profit improvement initiatives and the cost saves that will come.

Alan, in your comments, you talked about some of the savings in next fiscal year.

Most of the benefits being in place by the end of fiscal '15.

Is the right way for us to think about it -- I know you can't pinpoint all this at this point in time; as this occurs will it be something that will come in a stair step function, or it will accrue smoothly over the quarters as you start to see those benefits kick in?

I think it will be a combination.

There will be small stair steps but it will mostly be momentum that will drive this.

Again, we are talking about thousands of people here.

So as we reorganize around that, with a very limited backfill behind that, we have to space these folks out.

So there will be May, then there will be some August, then there will probably be some November, then there will be some the next May.

And I don't have clear visibility of that, except I know where we will be in fiscal '15 with pretty good certainty.

So we'll have a lot more to say about this over the next couple of calls, Art, because I will have a lot better knowledge after we actually go through the process.

We've told our employees what the voluntary buyout is.

We want them to think about over the holidays and talk with their families.

We want to do this the right way.

And I'm confident that we'll get where we need to be.

Peter Nesvold, Jefferies and Company.

It's Elliot Waller on for Peter.

Congratulations on a good quarter.

Just continuing on the cost savings, just questions for you.

How many people approximately were offered the buyout?

And your charges that you spoke of in the next quarter, how many people does that assume, ballpark estimate, in terms of accept those buyouts, and then should we expect charges going forward into fiscal '14?

Thank you.

Most of the voluntary buyouts offered are at FedEx Express and FedEx Services.

There will be a significantly large population but I'm not going to get into details of numbers.

As I said, we expect it to be in the thousands of those who will take the voluntary buyout.

I've given a number between $550 million and $650 million.

We will book the majority of that in the fourth quarter as contracts are signed as opposed to spreading that out.

So we will have most of the voluntary buyout will be in fiscal '13.

There will be some continuing costs associated with the program that will go into fiscal '14 but they will not be material compared to the savings that we'll see in '14.

So we will have a plus in fiscal '14.

I just can't tell you how big it is today, but I will certainly give you some indication at our next call, then we'll have a great definitive answer for you when we report our year-end earnings.

We have a question from Andrew Meister.

Are you actually trying to affect turning Freight from one network to another for the long-term benefit of both FDX and your customers, and how do you affect such changes if so?

The reality is we don't affect those changes.

The customers affect the changes, and it depends on a number of factors.

But again, referencing the Wings Club speech, what you will see is one of the most important elements in the transportation market over the last decade is the increased price of fuel, from 2001 to 2011 the price of diesel and jet fuel went up about 4.5 times.

So that by itself drives people to make price/service trade-offs, and obviously the more expensive Express transportation, the more energy intensive, because it's built around aviation, and it drives people to make decisions.

Second, is the relationship of value per pound of the product that's being shipped.

Mike mentioned a cell phone provider, I think it was a communications company, and they moved from Express to SmartPost.

Well, what happened there is, cell phones went from being exotic, expensive devices, to much lower cost commodities, and so the need to move them with the same speed requirement declined.

So that's happened to a lot of the electronics trade across the Pacific.

And they may be moved in air transportation for a product release, but over time, as the value per pound of the product goes down, they might move to ocean transport.

So it's a dynamic process, and we're not doing this.

It's a function of what the customers want, and we then have to be prepared as we are to efficiently handle it, and that's what the FedEx portfolio does.

We can handle near sourcing or transPacific.

We can handle the most economical shipment in our Ground and SmartPost network or the defibrillator for the surgery tomorrow for first overnight delivery.

Now, I do think that the rapidity with some of these changes over the last few years has been something that we've had to deal with.

And that's what we talked about in the investors and lenders meeting.

And the reality is that things didn't come back the same way after the big recession as everybody thought they would.

And so clearly the voluntary buyout and the new networks that Dave Bronczek are putting in place are reflecting what customers want.

So that's the answer to how traffic churns in the network.

It's not us.

It's the customers and the macroeconomic environment and the input costs, particularly the price of fuel.

Chris Ceraso, Credit Suisse.

This is actually Patrick Geekie on for Chris.

We haven't talked too much about Freight thus far in the call so I want to see if you could elaborate on the current competitive environment, and in particular pricing that you're seeing right now in the market.

Thank you.

Patrick, this is Bill Logue.

I would say from a competitive perspective obviously the market is a very competitive market.

There is a -- on the pricing side, again pricing remains rational.

Obviously the contract renewals and pricing is -- gets a little more challenging as you go through this time of year with the volume levels where they are, so again we're seeing some of that in the market space.

But overall, we're happy with where we're positioned in the market space.

Customers are responding.

As you saw, volume growth continues on both volume and yield growth, so we're getting net yield improvements, and we're getting volume, and the customers are using both services, which is again, the value that we put out with our new design model.

So from that perspective I think we're in good shape.

And I said earlier we're going through our Q3 is a challenging quarter.

So again I want to make sure that that's something that we're very focused on, and building through Q3 to get us ready, into our strongest quarter which is Q4.

So from the market's perspective, challenging as we go into this time of year, but I think I'll let Mike comment on some of the yield initiatives.

Well, as Bill indicated, when you are dealing with softness in the economy, and you have the number of competitors that we are facing in the LTL industry, there's certainly opportunity to see more aggressive pricing, but I would reiterate what Bill said.

I would consider the market rational.

I think our team has done an outstanding job again working with the Freight operating company selectively being aggressive where appropriate, and at the same time being focused on improving our yields.

And as I stated before, without the impact of fuel, our yields went up 1.9% during the quarter which I would characterize as very solid performance.

Anthony Gallo, Wells Fargo.

Just a couple of questions tied to the headcount reduction.

So it's $550 million to $600 million in charges, that equates to about a $300 million run rate benefit that begins in May of '13.

Did I get those numbers and timing correct?

Well, I didn't comment on the run rate in '14, and I'm not going to, but you got the fourth quarter charges correct.

David Vernon, Bernstein.

Just a quick question.

Looks like we're getting very good volume growth in the Ground segment, 8%, and 17% in SmartPost.

Perhaps maybe not as much operating leverage as you would expect in the business with that kind of volume.

There were some comments about network expansion costs and Hurricane Sandy and stuff like that, could you help us understand what level of nonrecurring costs might be in that Ground result for the quarter?

I'm not going to comment specifically on the specific numbers, but what we were trying to point out to you is every year we have expansion costs in this quarter because we time when we're bringing on capacity in anticipation of peak.

In terms of the fuel, that's relatively public information that's -- you've got to be looking at what those fuel trends are.

All up, I didn't think that our return on that growth rate was a bad number.

So I'm not sure what else I can add to that, but I would ask Alan if he wanted to comment on it beyond that.

I think Dave told you earlier about our biggest customers who are having seasons that are higher than they even forecasted.

And so that means that we had to add late additional capacity in November and in December to be able to handle the volume surges that we had not planned or forecasted and still make the service commitments that we made.

So that's probably a little bit of nonrecurring, because we've really had an unbelievable peak so far as we have given you the numbers.

But having said that, knock on wood, the weather has been pretty good, and I think we'll have a great service week this week, and expect that we will continue our expansion at Ground and we'll have to have some of the things that we're dealing with next year.

So there's a little bit of that in there.

But generally speaking, the margins in Ground are solid.

They're going to stay solid and their growth is going to continue.

And at this time I would like to turn the conference over to our speakers for any additional or closing remarks.

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

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

Thank you very much.

That does conclude today's conference.

Thank you for your participation.