聯邦快遞 (FDX) 2013 Q4 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead.

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

The 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 about one year.

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

During our question-and-answer sessions 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 email or as a message on StockTwits.com.

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

To send a question via StockTwits.com please be sure to include $FDX in the message.

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.

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

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

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

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

Please refer to the release available on our website for a further discussion of these measures and a reconciliation to 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; Henry Maier, 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.

Good morning and welcome to our discussion of operating and financial results for the fourth quarter of fiscal 2013.

As you can see, FedEx made significant progress on several fronts in fiscal 2013.

Our results improved in the fourth quarter with an operating margin of 9.6% and $1.1 billion in operating income on an adjusted basis.

FedEx Ground posted another strong year and e-commerce boosted our volumes.

These positive developments in quarter four, however, did not fully offset sluggish economic growth and customers' preference for international economy services.

However, as noted, we are taking actions to better align our global networks with demand.

We are confident our business strategy is correct and we believe we are positioning FedEx for profitable long-term growth.

Before I turn the call over to Mike Glenn for his thoughts on the economy and Alan Graf for elaboration on financial results, I would like to note that FedEx is revising its practices on earnings guidance beginning this quarter.

We will provide full-year projections with quarterly updates.

We will no longer provide quarterly earnings per share guidance.

For fiscal 2014 the Company projects earnings per share growth of 7% to 13% from fiscal 2013 adjusted results.

There are three primary reasons that we decided to change the format for issuing guidance.

One, volatile short-term shifts in macroeconomic trends and global markets are making quarterly earnings guidance increasingly less precise.

Two, this move will allow us to focus on more productive activities and better manage our business.

And, three, it is consistent with industry peer practices.

Of course, we remain committed to candor, full transparency, and sound corporate governance.

Now, Mike Glenn.

Thank you, Fred.

I am going to provide a brief overview of our economic outlook as well as some commentary on package and freight yields.

We continue to see modest growth in the global economy.

Our US GDP growth forecast is 2% for calendar year 2013 and 2.5% for calendar year 2014.

For industrial production we expect growth of 2.8% in calendar 2013 and 3.5% in calendar 2014.

The outlook remains highly uncertain with the eurozone in recession and policy risk still high.

Our global GDP growth forecast is 2.3% for calendar 2013 and 3% for calendar 2014.

Turning to yields, excluding the impact of fuel, year-over-year Express domestic package yield increased 2.4%.

The increase was primarily driven by rate and discount improvements followed by weight per package.

In the Ground segment, yield per package increased 2.3%, excluding the impact of fuel.

The year-over-year increase was driven by rate and discount improvement and an increase in extra services charges.

Excluding fuel, international export Express package yield decreased 1.7% year-over-year driven by rate, discount, and exchange rate.

And, finally, excluding the impact of fuel, yield per hundredweight in the FedEx Freight segment increased 1.7% year-over-year.

The increase was primarily driven by rate and discount changes followed by weight per shipment.

Now I will turn it over to Alan Graf for a financial commentary.

Thank you, Mike, and good morning, everyone.

In FY 2013 Ground posted another stellar year with industry-leading margins.

Acquisitions in Poland, France, Brazil, and Mexico are on course to enhance profit at Express.

Freight made solid progress following its return to profit last year.

And we signed a new $10.5 billion seven-year contract with the U.S. Postal Service, a testament to the quality of service and the strong relationship we have built over the past decade.

For the fourth quarter, as adjusted diluted earnings per share grew 7% to $2.13, excluding business realignment and charges to retire some aircraft and related engines at Express.

Regarding our aircraft retirements, this Friday at the Memphis airport we will be honoring our last 727 revenue flight.

As Fred mentioned, adjusted operating margin increased to 9.6% for the quarter versus an adjusted 9% last year on 4% higher revenue of $11.4 billion.

Now let's take a look at the segments.

At Express, revenue grew from this year's business acquisitions and from the growth of FedEx Trade Networks in the quarter.

Margins grew year-over-year up 50 basis points to 6.6% excluding charges, due to a net benefit from fuel surcharge timing lag versus the prior year, capacity reductions, and other cost reductions.

Margins grew at Express despite the continued shift toward lower-yielding international services.

At Ground, adjusted operating profit -- adjusted operating margin slightly exceeded last year's spectacular 20% in Q4.

Ground's average daily volume grew 10% for the quarter with growth in both FedEx Home Delivery and business-to-business services.

Average daily volume for SmartPost soared 25%, primarily due to growth in e-commerce.

I should note that Ground has gained revenue share for 54 consecutive quarters.

On the Saturday before Mother's Day, Home Delivery set a new nonpeak record of 1.7 million package deliveries, equivalent to a peak Saturday during the winter holiday season.

At Freight ongoing profit improvement initiatives enabled us to maintain adjusted margins of 5.8% year-over-year despite 3% fewer shipments.

During the quarter, shipment volume was impacted in part by the transition of Freight to the FedEx enterprise automation platform as some customers encountered difficulties in the process of improving our automation and technology.

As to outlook, based on the economic outlook that Mike talked about and Fred's discussion of the changes to our guidance framework, we project earnings per share growth of 7% to 13% from the FY 2013 adjusted results.

Our outlook depends on our GDP assumptions and a stable pricing environment for fuel since fuel price volatility impacts our fuel surcharge levels and fuel expense as well as demand for our services.

In addition to continued profit improvements in the base businesses at Ground and Freight, our profit improvement programs announced in FY 2013 are targeting annual profitability improvement of $1.6 billion at Express by the end of FY 2016 from the full-year FY 2013 adjusted operating income level.

Collectively, these initiatives are expected to increase margins, improve cash flows, and increase our competitiveness.

However, the amount of benefit ultimately realized will be dependent upon future customer demand, particularly for premium international services.

We expect to begin realizing a portion of the benefits from the profit improvement program gradually in FY 2014.

However, the majority of the benefits, including those from our voluntary buyout program, will not occur until FY 2015 and 2016.

Looking at the Express outlook, revenue and earnings are expected to increase at Express in FY 2014.

Revenue growth is expected as we reap the benefits of our FTN expansion, our international domestic services, and our European organic growth program.

Earnings are expected to benefit from ongoing cost initiatives, capacity reductions, and revenue growth.

As we expect continued pressure on international yields, we are continuing to evaluate further actions within the Express network to better match cost with yield and will eliminate another Asia to US frequency in July.

The USPS agreement is extremely valuable to the Company, but we will see some rate reductions starting in Q2 of FY 2014.

We accelerated the retirement of certain aircraft and related engines due to the planned acquisition of more efficient and reliable new aircraft and projected slower economic growth than previously forecast.

The accelerated aircraft retirements will add $74 million in year-over-year depreciation expense.

The aircraft that were retired at the end of FY 2013 were parked throughout the year and parking them provided a maintenance benefit in FY 2013.

The Ground outlook is good as revenues are expected to continue to grow in FY 2014 led by volume growth across all our major services, due to continued e-commerce growth and market share gains as well as anticipated yield growth from our yield management programs.

As a result of this anticipated volume and yield growth, we expect continued growth in Ground's operating income for FY 2014.

We do expect capital spending at Ground to increase in FY 2014 and for the next several years at a very high ROIC as we expand our capacity to meet growing demand.

At Freight, modest revenue growth is expected for FY 2014 as demand in the LTL market remains weak and we continue to focus on our yield and shipment initiatives and our differentiated LTL services.

Freight operating income and operating margin are expected to increase modestly, driven by increases in yields and shipments as well as the continued improvements in productivity and efficiency across our integrated network, including an increased use of rail for economy shipments.

Overall, we expect earnings growth for Q1 2014 to be solid but challenged as we expect headwinds year-over-year from fuel surcharge timing lag, one less operating day, and continued pressure on international yields and freight volumes.

Also, the benefits of the voluntary buyout program will ramp out throughout the year with the majority of those expense reductions occurring after the first quarter.

Our businesses are cyclical in nature and seasonal fluctuations will affect volumes, revenues, and earnings.

Other factors - we expect our effective tax rate to be between 36.5% and 37% for FY 2014 depending on the amount and source of operating income.

Our US pension plans have ample funds to meet expected benefits.

Retirement plan costs for FY 2014 will decline by nearly $200 million due to strong investment returns on plant assets and a slightly higher discount rate at our May 31 measurement date.

Our FY 2014 capital expenditures are expected to increase to approximately $4 billion due to increase spending on facilities and aircraft.

Approximately half of the 2014 capital expenditures will be designated for growth with the other half dedicated to maintaining our existing operations, most notably continued aircraft fleet modernization at Express.

We will continue to evaluate our investments in critical long-term strategic projects to ensure our capital expenditures generate high returns, and our balance with our outlook for global economic conditions.

Now let's take your questions.

(Operator Instructions) Tom Wadewitz, JPMorgan.

Good morning.

Let's see, I wanted to focus on I guess the restructuring and kind of how you see the pace of that activity playing out.

You indicated you expect, I think, a stronger pace of margin improvement in fiscal 2015 and maybe a build in fiscal 2014.

But are there any numbers that you can give us or kind of a range of numbers in terms of how much actual restructuring cost savings would be in that fiscal 2014?

Is that $200 million or $300 million?

And what you think that number might build to in terms of the restructuring-driven operating income improvement in fiscal 2015?

Thank you.

Tom, this is Alan.

Thanks for the question.

I think I will answer two of the three parts, if that is okay.

As we noted, we only had about 40% of the people leave on May 31 as we determined how many folks we needed to keep for a longer period of time to continue our high service levels for both internal and external customers.

So I don't know what everybody has in their models that is in First Call, but I suspect that there were people who were expecting to see a higher FY 2014 benefit than what I am currently looking at, which is the right thing for the Company to do.

I will tell you this that we expect the ongoing savings when we -- on an outgoing rate in FY 2016 to be well in excess of $600 million.

The cash charges or the business realignment charges from an accounting standpoint, as we said, were $560 million in 2013.

The cash outflows actually are spread out as people leave.

We expect about a 21 month payback on this program.

So we are thrilled with where we are and think we have got it right in the sweet spot.

But less benefit in 2014 and much greater into 2015 and 2016.

Tom, this is Dave Bronczek.

I will add to what Alan said.

We talked about it at the analyst meeting the FY 2016 target of our $1.6 billion profit improvement is still on target; 75% of that accrues by FY 2015.

And we are right on track to hit those goals.

Justin Yagerman, Deutsche Bank.

This is [Taylor Molnar] on for Justin this morning.

I'm hoping to get your thoughts on trans-Pacific Express capacity in the trade down going forward.

It's looking like Express continues to be impacted by both demand headwinds and the trade down to the lower yielding services.

So can you talk a little bit more about your cost-cutting efforts for the line haul network and your shift toward using more third-party resources?

This is Dave Bronczek again.

We announced last quarter that we were reducing some of our network capacity and we announced it again today for July.

You saw in our numbers for the last several quarters International Economy has been growing at double-digit rates, 11% and 12%.

International Priority has been slightly behind growth plans that we had put forward.

So we have moved some of the traffic that is more lower-yielding economy into our FTN network, pulling down our network capacity, pulling down flight hours, pulling down some fuel and overall balancing our network.

And we will continue to do that going forward.

Nate Brochmann, William Blair and Company.

Good morning.

Thanks for taking the question.

Just to follow up on that, Dave, talking about the FedEx Trade Networks; as you continue to build that how is your pricing negotiations going with the other third-party vendors in terms of whether we can see some more yield improvement there as we gain a little bit more scale through that?

Just if you could touch on that a little bit.

Well, the capacity buildout is going extremely well.

We are in 140 locations now in 27 countries.

We continue to have great progress and great results there.

We are bundling with our customers, of course, the right products and the right network so we are actually more internally focused with our customers in how we price the products going forward.

So we are actually in very good shape there.

David Ross, Stifel Nicolaus.

Good morning, everyone.

This may be a question for Chris.

The new legislation passed in New Jersey that says truck drivers must be employees.

Does the multi-work area contractor model or the ISP model you switched to become impacted if that is signed into law?

And are there other states that are doing anything similar or threatening to the Ground model right now?

This is Chris Richards.

The bill as it was passed by the legislature unfairly targets independent contractors in the transportation industry who have chosen to operate through their own small businesses.

As you know, we have only incorporated independent contractors and they all have their own employees.

This law will discourage small businesses and hamper the state's ability to maintain employment in a time when the economy is challenging employment.

So we are confident that the administration in New Jersey is not going to be interested and will not want to enact a law that harms small businesses at this juncture.

And we are working in that direction.

Now, we fully expect that there may be some other folks who might want to follow in proposing legislation in other states.

But I want to make it very clear, we are absolutely confident that these kinds of laws interfere with interstate commerce and we will aggressively challenge any situation where such a law is enacted.

Benjamin Hartford, Robert W Baird.

Good morning.

Dave, I was wondering if you could provide any context or perspective to underlying airfreight trends.

We know the divergence between IE and IP trends, but underlying airfreight trends generally in your outlook for the second half of the year.

It sounds as though tech-related customers are slightly more confident as it relates to the back half of the year and as it relates to Asian outbound airfreight.

So wondering if you have any perspective as it relates to that?

This is Mike Glenn; let me make a couple of comments.

World air cargo traffic has shown consistent growth historically, but we have certainly seen a slowing of that in the last five years.

In fact, we have seen a decline in four of the last five years in overall traffic levels in the air cargo segment and there are really four issues that are driving that.

One is global GDP has been growing at a slower pace.

Global trade drives air cargo and has traditionally grown faster than global GDP, but that has not been the case recently.

As I mentioned, we have seen a decline in global air cargo markets four out of the last five years and certainly higher energy prices are having an impact on that.

So the global air cargo market has been under pressure for four out of the last five years.

Obviously, we are taking actions to manage our way through that which Dave has pointed out.

Bill Greene, Morgan Stanley.

Good morning.

Thanks for taking the question.

Alan, can I ask you to comment a little bit further on some of the CapEx plans?

You talked about some of the growth in Ground; of course, we have got some good ROICs there.

But I was a little surprised to see it up almost 18% relative to the last fiscal year.

Can you talk a little bit about the ability to move that around over the course of the year?

Is this a hard and fast number, or maybe some insights as to kind of why it went up so much?

Well, the largest increase is going to be at Ground.

We have to take the next -- start building for the future.

We are going to develop new properties and facilities, and I will let Henry add some color to this, that we have got to start investing in now so that we can be ready for what traffics we are expecting in FY 2016.

And I think it is a good thing.

These are high ROIC investments and we are happy to put it in.

There is a slight increase at Express, but again that is part of our fleet modernization and those got, particularly the 757s and 767s, have good, good ROICs.

So let me turn it over to Henry on the Ground aspect because he is the biggest increase.

Thanks for the question.

Majority of our capital is for capacity growth to support our growth or for revenue equipment replacement.

You know we are very disciplined about any decision we make about capital and we're going to be very disciplined going forward.

Chris Wetherbee, Citi.

Good morning.

Maybe a question just about the pace of kind of underlying business trends within Express.

You guys have announced I guess now two trans-Pacific frequency cuts which will at least have partial benefit in fiscal 2014.

And you probably I think you said you get some benefit of the employee separation in the second half of the year.

I guess I'm just want to make sure I understand what the pace of maybe core profitability growth or deterioration in the Express business in fiscal 2014 or as how you guys see it in fiscal 2014.

Just given the guidance and some of the cost issues that you have mentioned, it feels like it is a little bit on the conservative side; just curious your thoughts there.

Well, Alan said it -- this is Dave Bronczek.

Alan mentioned it before; our operating profits and margins are up in FY 2014, in part to all of the issues you mentioned.

And then all of the other things we are working on in our five-point profit plan -- our US domestic reshaping, the international profitability, our harvesting the international acquisitions we have made, and so forth.

So in Alan's guidance is an improvement at Express in both profits and margins.

I think as far as trends go we are not any better than anybody else at predicting the volatility of fuel and it can have a major swing in an individual year at Express.

So we are expecting that to be a headwind for Express in FY 2014.

If it goes the other way then it is conservative, but it could also be a bigger headwind than what we have in our plan.

So that is really the one uncontrollable factor that we are facing, but reduced capacity will obviously lower our exposure to that some.

This is Fred Smith.

Let me make a comment here to try to put some of this in perspective.

Seven or eight years ago the FedEx Express segment was competing in a marketplace that today is worth about $40 billion.

Just the Express segment, the very high priority, door-to-door sector.

Because of the buildout of FedEx Trade Networks that Dave Bronczek mentioned to you, we are now competing in an air cargo market in its entirety that is somewhere around $98 billion.

So I think there is this implicit belief in the questioning that the growth of the economy sector for FedEx is a bad thing.

In actual fact, as you saw in the numbers, the Economy traffic grew 11% in the quarter; the Priority traffic grew 2%.

So our issue was simply that we had too much of the Priority capacity up and we needed to be more aggressive in the Economy sector, and that is what Dave has done.

So I think at the end of the day that these trends are not necessarily a bad thing.

We just have to make sure, as Dave mentioned, that we have got the right traffic in the right network.

It is very similar to the Ground and Express situation.

If the item can go in the Ground system the customer is probably going to choose that.

It's very high ROIC, very high margin situation and we think over time the same will be true in the Express segment.

And I think it is important that you look at it as a segment and not just the Express business, which is the majority of the Express segment, but the broader base business is increasing at a rapid rate.

Again, as Dave mentioned to you.

Scott Group, Wolfe Research.

Morning, guys.

So I hear that you are affirming the $1.6 billion profit improvement target, but also hearing that maybe some of the trade down issues are continuing or worse than you thought.

So I am wondering if there is anything within that $1.6 billion that is doing better than you thought to offset the trade down.

And then just directionally, do you have views on when this trade down issue is going to stop or any signs of it getting better or worse?

This is Fred Smith again.

I obviously didn't make my point there.

The Economy business is up 11%; the Priority business is down, Mike Glenn mentioned to me 1%.

That is not necessarily a bad thing and it doesn't necessarily mean that Express can't make more money on the Economy business.

And implicit in your question was that assumption.

I think if you go down that road you are making an erroneous assumption.

So it is very important that you recognize that.

There is a tremendous amount of capacity in the international marketplace in these long-range twin engine airplanes, particularly the 777.

And if you are watching the Paris Air Show there is going to be a lot more of them with the A350 and the 777-8 and 777-9.

So our FTN capabilities allow us to participate now in both of those sectors -- the priority sectors where we can have a competitive advantage with our own equipment and the broader economy sector.

So I had to jump in here because it seemed to me like I didn't get my point across in my comments before.

This is Dave again.

Let me add to what Fred said.

On the cost side, we are actually doing very well.

We actually are exceeding some of our own projections on the cost side.

To Fred's point, on the International Economy the goal for us and the issue for us is to make that economy product grow more and make more money on it in the right network.

And that is absolutely what we are doing.

This is Alan.

From a strategic standpoint you have to remember, where we built the international aviation network expecting significantly higher growth in IP and, as we have mentioned to you several times now, that has slowed.

We still have an awful lot of IP and an awful lot of opportunity to continue to grow IP, but IE is going to grow faster for the foreseeable future and that is what we are talking about.

As we adjust these networks it is not a switch.

These are complicated changes.

It sounds easy to take down one flight.

It is not.

There are all kinds of changes that go through the entire network when you do that, as well it takes FTN a while to build up its capacity to do that.

So we are doing that during 2014 and expect to really start seeing those benefits post-2014.

Ken Hoexter, Merrill Lynch.

Great, good morning.

When you think about the guidance, Alan, are these -- the mix of cost cutting, the 3,600 employees, was that larger than you expected to offset some of the trade downs in other areas?

Are the buckets the same?

Maybe can you kind of delve into how you are viewing the cost-cutting program so far?

Okay, Ken.

Well, the voluntary buyout was one piece and we had told you in October that we thought we would get $500 million.

We are well over $600 million.

We saw significantly higher tenured people take the package, which is fine, but that also means we are going to get a lot higher returns on that.

The cost trimming is beyond just that, however.

There is significant going on in the Express and I'm going to turn it over to Dave to let him tell you what he has been doing there in terms of hours and station management, etc.

So I feel very comfortable about the cost piece of what we laid out for you in October and I'm very confident we are going to beat it.

The issue that we have had since October is the one we have been talking about, is less than expected IP growth.

And we have got to adjust for that and we will.

Just on a very high level, we are in good shape on US productivity.

The hours are coming down.

We are consolidating facilities; the flight hours, the fuel burn, the network capacity.

So across the board it actually all adds up to improving our cost structure going forward.

Brandon Oglenski, Barclays.

Good morning and thanks for taking my question.

So I guess I want to follow up on maybe some of the confusion with the trade down and even get back to Bill Greene's question on CapEx.

Alan, you talk about high hurdle rates on your capital projects, but I guess with where you see the market going it sounds like an asset-light model is the better way to serve that International Economy product.

So I think part of the disconnect here might be that we continue to put, or it looks like we are continuing to put a lot of CapEx into the Express segment.

So how do we balance what your target ROIC rate might be for the Express segment versus putting more assets into it relative to an asset-light model going forward that is needed for that economy package?

This is Fred Smith.

Let me say one thing before Alan makes his comment.

We are not buying any airplane capacity for growth.

The airplanes that we are buying are for replacement.

We are replacing the 727s, and as Alan mentioned the last one flies Friday; the 757s, ditto the A310s.

767s start coming in in September.

And those are very high ROIC activities with the existing volumes.

They are not -- it is not growth at all.

The 777s are replacing the MD11s over the next 10 years and I think we have got 18 more of them on order over the 10 years.

So there is no capital in airplanes.

We are not putting capital in the business for growth.

We are simply replacing the assets that we have.

I certainly understand the concern, but we have a long-term objective as to retire all of our tri-motors.

As Fred said, we found that twins are much more efficient and reliable and the numbers are very strong there.

But when you are calculating ROIC it certainly increases the denominator.

When you add a brand-new airplane you take out a fully depreciated one.

We understand that, so it is not a short-term ROIC decision.

It is a longer-term ROIC decision.

I would also add that just please remember that we not only retired a bunch of airplanes at the end of last year and at the end of this year, we have also accelerated retirements of a bunch of other ones that we have.

So our capacity isn't going up any and, in fact, it may come down.

Yes, that is right.

This is Dave again.

And in that $1.6 billion number that you all saw in October one of the five points in the five-point profit improvement of course is the fleet modernization.

It is worth hundreds of millions of dollars to the bottom line for profits.

And to Alan's last point, the 76 planes that we have accelerated the depreciation and the 287 engines and so forth it is a continuing push to modernize our fleet to become more profitable.

Art Hatfield, Raymond James.

Morning, everyone.

Sorry to go back to the trade down issue, but as you look at that and as you manage through that can you talk a little bit about if there are any costs and what the dollar benefits are as you take down one aircraft in service as you talk about in July?

Additionally, as you go forward is this kind of -- whether or not this accelerates or whatnot, if you continue to see this trend developing is there something that you could or would do from a more meaningful, say, restructuring standpoint similar to what you announced last fall and do something like that in the international business?

This is Fred Smith speaking.

You know, I think the problem we have is trying to answer questions like you just asked us.

We have given you the basic overall trends.

The international air cargo business is not going to go away.

It is a $98 billion business.

We have given you a forecast of 7% to 13% of EPS guidance and you will just have to trust us to know how to manage the business.

It is getting down into that level of detail is just something we are not prepared to do.

I would add from a strategic standpoint the trade down is more forward-looking.

We had flat IP growth year-over-year.

The growth was all in IE and, frankly, since October that surprised us a bit.

And so we have to adjust for that.

But we still have a strong IP business, but the future growth, at least for the next couple of years, is going to be much higher in IE than it is going to be in IP.

So that is sort of the trade down.

It is not that we are losing IP packages.

Finally, Art, I would -- this is Mike Glenn.

I would just that I think it is important to separate how we manage our network and the concept of growth.

FedEx continues to pursue a growth strategy, although coming from different segments of the market.

So how we elect to move that in our network, obviously we are going to look for the most efficient way to do that.

But I think it is important not to confuse the two.

How we manage the network and our efforts to grow the business are separate issues.

Thomas Kim, Goldman Sachs.

Thanks.

If I could just switch gears and talk about Ground where you're just doing a tremendous job gaining share.

My first question is related to the sustainability of this trend and I am wondering how far can you push the envelope before you see a more significant competitive response?

I guess more specifically I am wondering about the pricing risk.

Then, kind of related to the pricing side, with shippers increasingly focused on continuing their own costs I am wondering to what extent are you seeing some resistance in rates.

Thank you.

Tom, thanks for the question.

Our strong result is a reflection of the structure and culture of our operations, speed and reliability of our service, and our yield management discipline.

We have a salesforce out there that does a terrific job getting every package in the right network and our customers are increasingly voting with their dollars.

Kelly Dougherty, Macquarie.

Thanks for taking the question.

Sorry to go back to the guidance, but just wanted to get a sense in terms of conservatism.

Obviously, fiscal 2013 was tougher than expected, so how much of this guidance is you guys setting the bar to a very achievable level and then kind of potentially seeing upside?

Or how much really is due to what you are not quite sure about on the fuel side of things?

Is there anything that you could do to maybe more quickly get to the higher end of the guidance?

I promise you we don't play games like that.

This is our best 50/50 shot.

I will tell you that no CFO worth his or her salt will give you the entire bell curve of potential outcomes, but this is our best shot at what we see today based on all the factors that we have talked about.

And we are certainly not trying to play any games here.

This is Mike Glenn.

Let me go back to the question regarding Ground opportunities.

As Henry pointed out, we have a very unique value proposition that is delivering industry-leading service levels and our sales team is doing a phenomenal job of positioning that in the context of the broader portfolio of services that we offer.

I do think it is important to point out that we still have plenty of runway for growth in an overall market where we only have, including SmartPost, about 30% market share.

So there is plenty of runway there.

On top of that we do not have our fair share in the smaller customer segment in the Ground market, so there is plenty of opportunity there to grow the business at higher than average yields.

So we are excited about the opportunities.

We have a phenomenal service that Ground has provided our sales and marketing team to sell, and we think there are plenty of opportunity going forward.

Scott Schneeberger, Oppenheimer.

Thanks, good morning.

Staying on Ground, could you elaborate a little bit or compare and contrast B2C margins and B2B margins?

Then a very impressive margin in the quarter.

Any consideration for how high that can go?

And then sneaking one more in, an update on Delivery Manager please?

Thank you.

Well, I would say that we have a revenue management committee.

We look at every account that sales presents to us in terms of how it fits in our network and what it means to the business.

So we have a very disciplined approach to determining an acquisition strategy in the marketplace.

We, at Ground, are exceedingly disciplined around yield management.

It is just part of our culture, and I would say that we are extremely confident we can continue this going forward.

I think it is important when you talk about margins to understand the portfolio that we offer in the Ground network.

We have a commercial portfolio, we have a home delivery portfolio, and we have SmartPost.

So SmartPost plays a very important role in dealing with those lighter weight residential delivery packages.

That is a key element of our value proposition that allows us to ensure that we are delivering the right returns in the Ground segment.

So as Henry mentioned, we are very disciplined in terms of how we approach a customer and the value proposition that we have with that in mind.

Turning to Delivery Manager, it is a major new offering for FedEx and it has the potential to change the expectations that recipients have in the parcel delivery segment and is in the sweet spot of e-commerce.

Since it was launched a few weeks ago, using Delivery Manager over 0.25 million packages were delivered involving the input from the recipient, helping them get their package in their hands when they want it, where they want it.

Our large e-commerce shippers are responding very favorably to the convenience, the visibility, the flexibility, and the options that we offer through Delivery Manager.

And it is allowing us to provide an improved customer experience while certainly having a benefit on our cost structure as well.

So we are very excited about the rollout of Delivery Manager.

Jack Atkins, Stephens.

This is actually [Connor Gustavo] on for Jack today.

We have seen a few announcements recently regarding growth in your distribution business.

Can you maybe give us a sense for the scope of your current contract logistics and distribution product offering and maybe where you think you would like to see that go in the future?

Thanks.

Thanks, this is Dave again.

FTN is, I think, the group that you are referring to and SupplyChain, two of our components inside of FedEx Express.

Both units are growing and both are profitable, and they are a nice bundle to the business.

We can go to bigger accounts, which we have been saying all along this morning, and move the traffic into the right networks then, depending on whether it is in the ocean with FTN, in the supply chain in any region of the world, quite frankly, that we have SupplyChain set up.

So we have seen growth and we have seen it profitably for us in both of those segments.

And we think that continues going forward.

Just for those of you who are not aware of it, I mentioned this earlier, the FedEx SupplyChain and the FedEx Trade Networks operating companies are part of the Express segment as it is reported.

But they are individual companies with their own CEOs that report back into Dave.

The reason we are organized that way is because we have one worldwide global management team and it coordinates our customer activities much better than if we had them in a different segment.

So sometimes that is lost and that was one of the points I was making a little bit earlier.

When you talk about Express you have got to look at the Express segment because it has the very large Express business, but it also has reported in that segment is FedEx Trade Networks and FedEx SupplyChain.

And FedEx SupplyChain has some very terrific services that we rolled out in the last couple of years and it is really getting up a head of steam.

We are very excited about it.

Going back to the point I made, they toggle back and forth and they contribute back and forth between Express and SupplyChain and FTN.

So really that is the point I'm trying to make is they bundle it all together for the betterment of the Company, so that is where we are going forward.

Keith Schoonmaker, Morningstar.

Thanks, good morning.

Are there aspects of the new USPS airlift award other than rates that differ from the prior agreement?

For example, with the slight increase to the full share does this new arrangement drive even greater utilization?

Yes, I will comment on that.

We are very pleased with our long-term relationship with the USPS; obviously the service and the value we provided to them.

We are the sole awardee to their entire air transport business and we are very pleased about that.

Obviously, there is more business that they had in play than just what we had to begin with.

So going forward I think we have an opportunity to build on that relationship and build on the business that we have with them.

As Alan pointed out, it is a seven-year agreement now going forward.

Chris Ceraso, Credit Suisse.

Thanks.

So, Alan, I'm hoping you can just help us bridge the fiscal 2013 to fiscal 2014.

You have mentioned some of the big pieces.

You have got $200 million of help from pension and, pick a number, maybe it is a couple hundred million, help from the headcount reductions.

You have got $70 million negative from accelerated depreciation.

It sounds like fuel is a negative.

I'm interested to know how much you are allowing from a profit standpoint for the ongoing shift to lower-yielding packages and if there is any other big pieces that I am missing on the walk from 2013 to 2014.

Appreciate the question.

Earnings guidance is 7% to 13% of EPS off FY 2013 adjusted and that is all we are going to talk about.

Donald Broughton, Avondale Partners.

Good morning, everyone.

Since everyone wants to beat the trade down question to death, let's look at this from a different angle.

I am noticing something very interesting.

Normally when you see trade down you see people take higher weight packages out of the system first because those are more expensive.

You guys obviously charge per pound for Express.

Yet we have seen something very interesting happening; the weight per package has been going up.

We are running at, what, 10.4 for the quarter?

That is 18% higher than last year.

If there is so much trade down, why are people increasing the size, the weight of their packages?

What is happening there?

We have a lot of business that is in our numbers, Donald, in our acquisitions, so there is more weight per package in a lot of our acquisitions around the world.

And that may be part of what you are seeing.

David Vernon, Bernstein.

Thanks for taking the question.

Maybe if you could just talk a little bit about the balance of B2B versus B2C growth in both the domestic Express segment and the Ground, excluding SmartPost part of the business.

Clearly e-commerce is a major driver of the parcel segment in the US, although I would say that our growth that we have seen in the Express segment has been fairly well-balanced and is a result of a very targeted program where our sales and marketing team have worked very closely with the Express team to ensure that we are getting the right kind of growth in the networks.

And we are very pleased with that.

But there is no question that e-commerce is continuing to be a larger and larger driver with e-commerce sales now representing a little over 10% of total retail sales.

On top of that retail e-commerce sales have a slightly higher returns rate, which also impacts the business.

So there is no question that e-commerce is a driver.

But having said that we have seen strong growth in all of our sectors in the Ground business and Home Delivery and we are quite pleased with that.

Peter Nesvold, Jefferies.

I think this was asked earlier, but I don't think it was answered.

You have made it very clear that you are more or less agnostic to IP versus IE so long as the freight matches the network.

But when you look at that mix shift towards IE for the next several years, do you see that as something that is sort of semi-permanent?

Is this similar to what happened 10 years ago with domestic air Express going to domestic Ground parcel?

Thank you.

This is Dave Bronczek.

Let me answer that question.

I think that we do see that trend continuing, very much like the United States.

The great news there is that as that IE continues to grow and we unleash more capacity that makes us money on those products, like FTN, we actually can uncap what we have been capping because it has been sitting in our planes kind of cap before.

So that trend of increasing International Economy can continue, and I think Mike Glenn mentioned it before, as a growth opportunity for us that actually makes more money for us.

This is Fred Smith speaking.

I have mentioned this on the call before, but a year ago May, in May of 2012, I gave a speech at the Wings Club, which is an annual talk.

It is then published in a little booklet and it is on our investor website.

And I would urge you, if you are interested in this, to go read that speech because it represents our view about the international cargo business.

The reality is that the last several years have seen a sea change in international trade and in international transportation.

It has been caused by, number one, the increased price of fuel.

I mean we are sitting around with low growth economies and the price of Brent is still north of $100 a barrel.

People forget that 10, 11 years ago it was a $0.60, $0.70 per gallon versus $3-and-some-odd-cents per gallon now.

That has had enormous effects on people's thoughts about transportation alternatives.

It does make people willing to trade off rate for speed.

Secondly, you have policy choices that have been made in China, in the United States, and in Europe that have had big effects on the growth in world trade.

As Mike Glenn mentioned, for the first time really in modern history you have seen in the last couple of years worldwide GDP grow faster than worldwide trade.

A few years ago worldwide trade was growing 2, 2.5 times the growth of world GDP.

Now there are still huge markets.

As I mentioned, the world cargo, air cargo market is a $98 billion market.

The sea freight market is north, well north of $100 billion, so these are very large markets.

They are not going to go away, but these policy choices and fuel have had very big effects on these markets.

So our job as managers is to change our systems to meet those and that is what we have been trying to describe to you we have done.

I would say the one thing that we are a bit disappointed on, we probably should have moved a bit faster on some of our capacity because we thought that the mix would be a little bit different than it ended up.

But it's like Ground and Express; we are happy to get either one.

We just have to manage properly within those segment demands from the customers.

By the way, I got a question on the Internet.

Do you think that traditional aircraft product cycles are getting shorter?

It seems that the high cost of fuel is shortening useful age of a new aircraft from 30 years to around 20 years.

I think that the answer to that question is yes.

You are seeing that with the turnover of these narrowbodies into the new generation Airbus A320 Neo's and the 737 MAX.

And you are seeing Boeing coming out with a 777-8 and 777-9 at a period which is much shorter against the 777-300ER than would have been the case in the past.

And it is driven, just as you surmised, by the cost of fuel.

Now what it means for us is obviously we are re-fleeting, as Alan mentioned, with these more efficient twin jets.

Because of the utilization that we have, I don't think that the twin jets that we are talking about will be obsoleted by technology in any of the foreseeable future.

And the 767, 757 are terrific for us.

The good news is also part of the question is, yes, indeed we can use 767s in addition to the new ones because they are essentially the same.

A lot of 767s are going to be coming out of the fleets as the 787s and A350s come into place.

We do anticipate that we will use -- acquire some used airplanes, which will help the capital returns in the Express business.

Thank you.

That does conclude our question-and-answer session for today.

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

Before closing I would like to mention we are changing the date of our next investors and lenders meeting to late September or early October 2014 here in Memphis.

Our last two meetings were two years apart in 2010 and 2012 and this timing will allow us to continue on that schedule.

We will update you on our progress through other communications, including these quarterly conference calls and other investor meetings.

Thank you for your participation in FedEx Corporation's fourth-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.

Thank you.

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

You may now disconnect.