聯邦快遞 (FDX) 2014 Q3 法說會逐字稿

Good day everyone, welcome to FedEx Corporation third-quarter fiscal year 2014 earnings conference call.

Today's call is being recorded.

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

Please go ahead.

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

The third-quarter earnings release and our 31-page 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 session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate.

You are listening to the call through our live webcast.

Feel free to submit your questions via email or a message on StockTwits.com.

For email, please include your full name and contact information with your question and send it to IR at 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 Provision of the Private Securities Litigation Reform Act.

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

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

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

To the extent we disclose any non-GAAP financial measures on 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; 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, everyone.

Welcome to our discussion of results for the third quarter of fiscal 2014.

First, I would like to say that on behalf of more than 300,000 FedEx team members around the world, we are deeply saddened by the disappearance of the Malaysian Airlines flight and extend our deepest concerns to the families and friends of those aboard.

Now as we all know historically severe winter weather has been a factor in all of our lives these last several months and it has significantly affected our third-quarter earnings.

In fact, it has been the toughest winter in which FedEx has ever operated.

We are very proud however of the FedEx team for delivering outstanding service despite the hardships posed by severe weather during December's peak shipping season when many team members volunteered to work on Christmas Day and then in January and February when it really got bad.

Let's hope for spring.

Delivery metrics for this year's peak shipping season were among our best ever I might note thanks to the unique FedEx culture based on our purple promise to make every FedEx experience outstanding.

The FedEx strategy of maintaining separate ground and express networks with multiple hubs proved to be especially important during the season and an advantage for our customers during that severe weather in the peak shipping season.

On days when the weather was closer to normal seasonal conditions, our volumes were solid and service levels were high.

Despite the near-term impact of weather, the $1.6 billion profit improvement program at FedEx Express remains on track.

Our accelerated stock repurchase program initiated in January reflects our confidence in achieving our ambitious financial goal.

A couple of points worth noting.

FedEx Express next month is scheduled to formally open its north Asia-Pacific regional hub at Kansai International Airport in Osaka reaffirming our commitment to providing customers with greater access to and from markets in Asia-Pacific, the Americas and Europe.

Express will be opening a new hub, station and call center in Mexico City in the coming week and recently reached a significant milestone in its European growth initiative which started in October 2011 and now has seen FedEx Express Europe opening its 100th new station in Seville in Southern Spain.

I would like to draw your attention to two recent speeches on global trade and transportation that I gave for the Company to both air and ocean transport professionals.

These two presentations are posted on the investor relations website and I think they will give you a good view of our view of the overall market.

In closing, I would like to congratulate the entire FedEx team for making the Fortune's World's Most Admired Companies list once again.

FedEx is ranked number eight overall and number one in the delivery industry.

Now let me turn the call over to Mike Glenn and Alan Graf.

Thank you, Fred.

I will give some brief comments regarding our economic outlook as well as our yield performance during the quarter.

We expect economic growth to look better in calendar 2014 than in calendar 2013 though growth remains moderate overall.

Our US GDP growth forecasts 2.6% for calendar 2014 and 3% for calendar 2015.

For industrial production, we expect growth of 3.4% in calendar 2014 and 3.7% in calendar 2015.

On a global front, we expect growth of 2.8% globally in calendar 2014 and 3.1% for calendar 2015.

Turning to yields in the Express domestic segment excluding the impact of fuel, year over year Express domestic yield per package increased 1.9%.

This increase was primarily driven by rate and discount improvement followed by weight per package and service mix.

In the ground segment, yield per package increased 2.4% excluding the impact of fuel.

The year-over-year increase was driven by product mix, rate and discount improvements and an increase in extra service charges.

In the International Export Express segment excluding fuel, yields increased 1.7% primarily due to a change in service mix.

In our FedEx Freight segment excluding the impact of fuel, yield per hundredweight declined 1.9% year-over-year.

Rate and discount improved during the quarter and weight per shipment increased.

Overall, FedEx had a very strong peak season and I want to thank all of our team members for delivering on the purple promise.

Now I will turn it over to Alan Graf.

Thank you, Mike, and good morning, everyone.

Winter weather often negatively impacts our third-quarter results but the impact of multiple severe storms during the third quarter of 2014 was more pronounced than usual reducing earnings by an estimated $125 million versus last year.

Our results for the third quarter also include a negative impact of fuel.

These headwinds were partially offset by the benefit across all of our transportation segments of one additional operating day as well as reduced growth in salaries and benefits.

Revenues increased 3% to $11.3 billion primarily due to higher volumes at Ground and Freight and as Mike mentioned, yield increases in FedEx Ground.

Express revenues were flat due to the negative impact of lower freight revenue, lower fuel surcharges and as I mentioned, the unusually severe winter weather offset by a stronger base US and international export package business and one additional operating day.

The demand shift from our Priority International Services to our Economy International Services continued to negatively impact our results in the near term.

Express operating income and operating margin increased due to stronger US and international export package business and lower pension expense partially offset by the lower freight revenue, the estimated $70 million year-over-year negative impact on operating income of winter weather, as well as higher depreciation expense.

In addition, operating income benefited from one additional operating day and the inclusion of costs associated with our business realignment program in the prior-year results.

Operating income also reflects a negative net impact on fuel.

Turning to our Ground segment, revenues increased 10% to $3 billion due to both volume and yield growth at Ground and volume growth at SmartPost.

In addition, revenues were negatively impacted by the severe winter weather and were partially offset by one additional operating day.

Average daily volume at Ground increased 8% while SmartPost volumes grew 2%.

Ground segment operating income increased 2% to $477 million driven by the higher declines in yield.

Operating income includes the estimated $40 million year-over-year negative impact of winter weather at Ground.

In addition, the increase to operating income was partially offset by higher network expansion costs as we continued to invest heavily in the growing FedEx Ground and FedEx SmartPost businesses as well as the net negative impact of fuel.

The Ground segment results also benefited from delayed start of the holiday shipping season this fiscal year and one additional operating day.

The decline in operating margin is primarily attributable to the negative impact of the severe winter weather and the negative net impact of fuel.

At Freight, revenues increased 9% due to growth in average daily less than truckload shipments of 7% as well as weight per LTL shipment.

In addition, the quarter was positively impacted by one more operating day partially offset by the negative impact of winter weather.

Freight segment operating income and operating margin increased due to the positive impact of the higher average daily LTL shipments, higher LTL weight per shipment, and greater utilization of rail in the FedEx Freight economy service offering.

Fuel costs increased 3% due to higher average daily LTL shipments.

On March 3, Freight announced it will increase certain US and other shipping rates by an average of 3.9% on March 31.

As we look at our outlook, I should remind everyone that as of February 28, 2014, approximately 75% of the 3600 employees accepting voluntary buyouts vacated their positions.

The remaining 25% will depart by May 31, 2014.

Our third-quarter results include a benefit from the voluntary severance program and additional benefits realized from our voluntary severance program will continue as the fiscal year progresses.

We expect earnings growth to continue in the fourth quarter driven by ongoing improvements in the results of all of our transportation segments.

Our expected results for the fourth quarter will continue to be constrained by the low end of moderate growth in the global economy and continued challenges from the demand shift trend from our Priority International Services to our Economy International Services at FedEx Express.

We project earnings to be $2.25 to $2.50 per diluted share in the fourth quarter and $6.55 to $6.80 per diluted share for fiscal 2014.

We are reducing our full-year earnings per share guidance largely as a result of the weather impact in Q3 and the beginning of Q4.

The outlook also assumes the market outlook for fuel prices and continued moderate economic growth.

This outlook reflects share purchases made to date but does not include any benefit from additional share purchases.

We do plan to continue purchasing shares under the program but have no specific timeframe for completion.

As of February 28, we had 15.2 million shares remaining under our current authorization.

We continue to execute on the profit improvement programs we announced in October 2012.

These activities are focused primarily at Express and Services.

The majority of the benefits from our profit improvement programs will not incur until fiscal 2015 and to a greater extent in fiscal 2016.

Our ability to achieve the profit improvement targets and other benefits from these programs is dependent upon a number of factors including the health of the global economy and future customer demand particularly for our Priority Services which has not returned to the growth trends that we assumed in October 2012 when we announced this profit improvement program.

In our economic outlook that Mike discussed coupled with continued execution of our profit improvement programs at Express and profit growth at Ground and Freight, earnings returns and cash flows should all increase over the next several years.

I too would like to thank all of our team members for their hard work and dedication during the severe bad weather these past several months.

Our service levels were outstanding and they are truly an amazing team.

Now we will be happy to answer your questions.

(Operator Instructions).

Justin Yagerman, Deutsche Bank.

Good morning, guys.

It is Rob Salmon on for Justin.

I guess, Alan, going back to the 1.6 profit improvement plan at Express, could you give us a sense what the cost run rate was on that profit improvement at the end of the fiscal third quarter and how much you are expecting to see that ramp up in fiscal 2015 and 2016?

And if you could talk a little bit about some of the cost tailwinds you will get from the opening of the Osaka hub looking out later this month?

Rob, I will be happy to start the conversation and then I will ask Dave to make some comments.

I think what I am most pleased about our profit improvement program is our cost management not just at Express but really across all of FedEx Corporation.

It has been an outstanding job; we are seeing a lot of traction.

I'm pretty excited about what we are going to deliver in 2015 and particularly toward the end of 2015 and our outgoing run rate.

We are in our business planning cycle right now for 2015 so I will have a lot more to say about that in June when we tell you about the end of our year and what we think 2015 is going to look like but that is not only on track but probably ahead of plan.

As I alluded to in my opening comments, we are not seeing as strong of international trade and global growth right now as we had anticipated back in October of 2012 so we are going to have to continue to work very hard on rightsizing our network as Dave is going to talk to you about here next to match our new strategy which is to embrace international economy and we are doing a good job there.

And we're going to really pick up a lot of traction on that in the next 12 to 18 months.

So let me pass it to Dave.

Thanks, Alan.

Thank you, Rob, for the question.

We are having great success with our fleet modernization.

Our Boeing 777s are flying at well in excess of 99 plus reliability and service performance.

Our new 767s are flying even greater than that in the high 99% range.

We are very pleased with that.

Obviously the aircraft maintenance fees and so forth are reflected in that because we have brand-new engines and new planes and so we are very pleased with that.

We are pleased with the voluntary buyout at Express.

It is actually more along the lines of 90% of our people have now accepted the plan even though corporately it is at 75%.

In the United States if you look at our numbers there you saw the 1% decline in our salaries and wages and benefits line.

That is in spite of the fact that we had the bad weather and so forth.

We have been making tremendous progress there and really across the board in all of our five pillars for profit improvement.

But on the issue of Osaka that actually affects and improves our profit improvement for International, we are very excited about that.

I will be there in April to do the ribbon-cutting.

We have a lot of customers that are joining us there.

It gives us a tremendous amount of flexibility on volume increases or decreases quite frankly -- have a lot of flexibility to move up and down in our change of gauge operations in Asia-Pacific coming into the United States.

So we are very pleased that that is allowing us more flexibility.

We are also taking advantage of the underbelly capacity that is around the world and moving our deferred traffic in several lanes that are lower cost for us.

So right across the board, we are executing our plans and we are very confident.

Nate Brochmann, William Blair & Company.

Good morning, everyone.

Thank you for taking the question.

I just want to talk a little bit clearly there is a lot of network disruption both on the revenue and the cost side during the quarter.

Can you break that down for us a little bit in terms of what was the revenue impact and what rebates you might have had to give back if there was any service disruptions over the holidays versus what is on the cost side?

And as you talk about some of those costs going into the next quarter, where you are seeing the biggest impact in trying to make adjustments there?

Thank you.

Nate, this is Alan.

I will start and then I will have the operating company CEOs all comment on it.

This was really unprecedented winter weather.

We had bad winter in fiscal 2011 but we are so much more advanced and so much more productive today than we were back then to have $125 million impact to us was really beyond the realm of believable for almost all.

Express, we estimate probably lost 40,000 packages a day for the quarter.

Ground probably lost 100,000 packages a day for the quarter.

Obviously we had a significant amount of overtime deicing planes in the wrong place.

We had a number of service disruptions that we had to declare.

Fortunately because of the flexibility of our separate operating companies and the number of hubs that we have at Express, we were really able to maintain an unbelievably high service level and our customers were very excited about that.

We were open on Christmas.

Henry will talk to you about how he ran his hubs seven days a week to meet customers' demand and service levels.

And so even though it was a big impact, we were very pleased with how well we performed and we would have had an unbelievable quarter had it not been for the weather and the fuel headwinds.

I will let Dave add to that.

Thanks, Alan.

That is right, we showed an improvement of 14% this quarter year over year and that of course, we should have done much better than that, if the $70 million of weather impact wouldn't have impacted this quarter.

But we ended up having the flexibility once again although it cost us some money to move planes around and move customers' packages around.

When Indianapolis got clobbered with weather and ice and snow, we were able to move it to Memphis and vice versa and Newark was the same.

So we weren't paralyzed with one hub that would be shut down over a long period of time, we were able to be more flexible.

Our customers have told us repeatedly how greatly they appreciated the fact that we were able to move their packages around over the holiday peak and through January and February and quite frankly, it did cost us a little bit more money and more overtime and more deicing but I am very, very proud of our team at Express.

They did a tremendous job.

Nate, this is Henry Maier.

FedEx Ground operates a highly engineered and automated network that enables us to be faster and more reliable than the competition.

Significant weather events therefore can disrupt the precision of our network driving increased costs.

I think at last tally I think we had 20 significant weather events in the quarter.

While safety is always our top priority, if linehaul loads don't move due to unsafe conditions or road closures, our hubs get behind causing sort times to be extended.

This puts the end of the line stations behind requiring them to work more hours to recover.

As Alan said, while we plan to work seven days a week at peak, in the months of January and February, we had a weekend operation running somewhere every single weekend.

So the impact of weather and fuel on our margin for the quarter was roughly 1.5 points but thanks to the incredible dedication and professionalism of FedEx Ground people, we were able to provide safe and reliable service despite the worst weather we have seen in four years.

This is Bill.

On the Freight side again, revenue up 9% for the quarter.

It was an excellent quarter for us in that perspective.

Certainly was impacted on certain days by the weather.

I would say the overall impact was large on our operating income although we had a really good quarter, it was held back due to the impact of the weather for sure.

The linehaul side of it, particularly the rail side, we saw some good utilization of rail to help us work through these winter challenges.

That was a positive and the frontline efficiencies obviously anytime you go through these weather events they really slow you down and can impact you significantly on your cost structure.

I would say from my perspective the big challenge this winter was, it wasn't one big event here, one big event there, it was weekly -- there was always some event every week which is very challenging to run a linehaul network when you have constant events weekly.

Overall, I think the team did a fabulous job of working through the situation.

Ben Hartford, Baird.

Good morning.

Alan, could you provide a little bit of context to the CapEx number falling $200 million.

We've got the flight schedule here, it looks like there is some shifting here in 2014.

Can you talk about the reduction in CapEx, what the source of that reduction here is for the fiscal year?

And then can you provide any context for the next couple of years?

I know it is early, I know you are in your budgeting process but whether the $4 billion CapEx number over the next couple of years is still the right number that we should be thinking about?

Thanks.

Largely timing and also we continue to scrub and purchase better and push things out.

Again, we are at the low end of the moderate economy growth.

Frankly as the CFO, I would say it is slow.

In my opinion, it has been the weakest recovery from any recession ever for a lot of reasons and so that has enabled us to delay some things.

Having said that, we still are committed to our refleeting at Express and our expansion at Ground and I think if you take note of our great improvement that we are having at Freight, we are very pleased with where that is and are expecting great things from them over the next couple of years.

So we will probably stay in the pretty high range of the $4 billion or so and a lot of that will be determined by timing, whether a plane is delivered in May or June obviously can impact that.

But we don't have anything other than some pushing back and timing issues right now and we are still committed to that.

We need those 767s.

Every time we get a 767 and it replaces an MD10, it is a $10 million annual positive impact to the P&L despite the higher depreciation so we are going to continue that.

Chris Wetherbee, Citi.

Thanks, good morning.

When you think about the total value of the profit improvement plan relative to some of the progress you have made so far which sounds like it is working in the right direction and doing well relative to expectations and then comparing that to the economic backdrop which is maybe a little disappointing relative to what you initially thought, does that change your thoughts on your ability to get that full $1.6 billion?

I guess I'm just kind of -- understand the puts both the short-term and longer-term as you think about that total number.

I will start and then I will pass it over to Dave.

We still are committed to having a $1.6 billion profit improvement as we exit fiscal 2016 going into 2017.

We can still see it very clearly but it is not the same way we constructed it back in October of 2012, no question about it.

Fuel prices have been working against us.

They could end up being a benefit over the next couple of years in terms of that timing.

We have had some benefit from pension, we will see where long-term interest rates go.

But basically as I said earlier, our cost programs are working exactly as designed if not better.

Our productivity improvements are very good although they were totally masked by the bad weather in Q3, you will see them in Q4.

I think the range I gave you for Q4 is pretty heroic for us and that will give you an idea of how we will be exiting FY14.

Dave?

Alan is right about all of the expense initiatives, they are all performing exceptionally well.

We didn't put in if you recall in our $1.6 billion profit improvement very much incremental revenue, it was mostly expense.

The challenge for us is the base revenue of course so if the base revenue deteriorates we will have to find more opportunities on expense and that is a balancing act that Alan has mentioned several times and that we are reviewing all the time.

So yes, we are performing well in all of the areas of our expenses, global economy isn't what we thought it would be and so we are looking at other opportunities on expenses.

Now that being said, if the global economy gets a little bit better, it is all good news.

Scott Group, Wolfe Research.

Thanks.

Good morning, guys.

Wanted to ask about the Ground segment and first, on the volume side so last quarter there was the issue of cyber week getting pushed into this quarter and we didn't see that show up in better volumes this quarter and I know there is some weather here.

But how do you think or how should we think about Ground volumes going forward?

Can we get back to a double-digit volume growth rate or is that unreasonable here?

Then just along the same lines just on the Ground side, when do you think it is reasonable to think Ground margins turn positive year-over-year again?

Scott, this is Henry Maier.

Let me talk for a minute about peaks.

The Ground segment experienced a record peak in terms of revenue, volumes and service and despite certain challenges including the compressed calendar and weather, our on-time service for the month of December exceeded 99% so we feel really good about that.

A lot of -- some of the volume decline in the quarter was driven by the fact that customers worked shorter days or were closed.

We saw more customer closures in the quarter than we have in memory.

I mean certainly in my 30-some-year career in this business, I have never seen the number of major cities in the Midwest and East entirely shut down for a day due to weather and unfortunately we don't see that volume come back when things recover.

I think also Fred said in his release that on days where we had good weather, our volume performed exactly the way we expected it to.

When we didn't have good weather, we were off considerably from what we expected it to be.

So I think a lot of what you are seeing in the quarter is driven by this very severe weather situation we have had in the last quarter.

And I will tell you that nobody more than the Ground team and the rest of the Express team are looking forward to spring coming.

With respect to our margins, I can tell you that we expect margins in the midteens.

As I have said before on this call, there isn't anybody on the Ground team that would be satisfied with anything less.

Ken Hoexter, Bank of America.

Great.

Good morning.

I just want to follow-up on the cost side.

I guess if you look at your profit improvement plan and if you add the 1 point of impact to Express, you would have done a 3% margin ex the weather.

That is up about 70 basis points.

In the first quarter, you had a 50 basis point year-over-year, second quarter is a little murky given Hurricane Sandy a year ago.

So it doesn't seem like the benefits are accelerating to a very large extent in terms of hanging in that 50 basis point, 70 basis point improvement year-over-year.

In order to try to get to your double-digit margin target, I guess how much more of the profit improvement plan do you still have to execute on and can you still meet that kind of 75% done by the end of next fiscal year target?

Ken, I will just tell you that -- not trying to time it anymore because of the changes that we have seen and of course of our strategic change.

I feel very good about how we will be exiting FY15 although we are not done with our business plan.

And if we look at where we are going to go, this is going to continue to build.

As we said, we still have not exited all of the people that we were and Dave takes a very big burden in the services expenses.

Fuel has worked against us again this year and it is a fairly significant number on an annual basis and we are hopeful that that will turn because it should average out in the long run and that should also be a benefit in the next couple of years, we will have to see.

But as I said and as Fred said, we are still on track.

We will be on pace by a year from now to be pretty close to that number on an exit basis, not an average for the year but on an exit basis.

Dave?

That is right.

The end of FY15 and through FY16 -- by the end of FY16 is what we have always targeted.

Of course, profit improvement includes the voluntary buyout and the fleet monetization and all those things start building on each other and they accumulate.

The one thing that has been a major drag for us this year has been fuel, the net fuel and they always reverse but this year has been an incredibly difficult year for us on net fuel.

And so when you look at our expenses, it is masked in a big way I mean we talked about weather this year in the third-quarter, well fuel dwarfs that for the FY14.

Also one last thing, Ken.

We are learning and doing a very good job of handling this very strong growth in international economy.

We are getting our cost structure right there.

That is going to take a little bit longer than I might have anticipated in October of 2012 but frankly we didn't see how much the ship was going to be.

IP is still growing but at a low rate and the international economy is growing very strong and so as that continues to grow and we continue to manage that cost structure, that will also accelerate our profit improvement [program].

Kelly Dougherty, Macquarie.

Thanks for taking the question.

I just wanted throw out the bigger picture question to you, kind of the changing landscape of e-commerce.

I am sure you have heard about the suggestion that FedEx and UPS can't be fast enough or nimble enough to meet the needs of some of these guys and they are more relying on regional delivery companies.

I just wanted to get your thoughts on that suggestion and then maybe what you may be doing to adapt to some of the changes that e-commerce is obviously bringing -- a spike to your peaks, things like that?

Let me say a couple of things on a broad scale and then I'm going to ask Mike Glenn if he will comment about e-commerce overall.

A couple of things that you've got to remember about e-commerce, in certain ways it is back to the future.

There was a very large business of catalog shopping a long time before there was e-commerce.

It was just the order entry system was a piece of paper or a telephone versus a mobile iPhone or a wonderful app or excellent software by an e-commerce provider.

And the primary delivery mechanism for e-commerce for catalog delivery was in the past and it will remain for the foreseeable future the Postal Services around the world because you are moving mostly lightweight items into residences and the challenges of moving lightweight items into residences are very formidable in terms of the cost structure.

So our operations in the residential sector we very carefully manage and I think one of the reasons we had a great peak season is because Mike's Sales & Solutions Group run by Don Colleran, do a very good job of contracting with our customers so that we don't overpromise or say we can do things that we end up not being able to do.

When we launched FedEx Home Delivery, Henry was very involved in that and you will recall as well it was important that we had traffic demographics of a certain weight per package and certain revenues that made it profitable from the get-go.

So the real challenge about the e-commerce world is delivering those lightweight items to residences and Amazon talks about this constantly, the Postal Service is getting a lot of business from various sources because of e-commerce and probably the biggest challenge is the fact that so much of the business comes in such a short period of time.

And obviously it is not possible to make these enormous capital investments for two or three weeks out of the year.

So I suspect that what you will see on a go-forward basis is a bit of realism on the part of consumers and providers as to what the infrastructures can provide, even the Postal Service because remember the Postal Service is not geared up to operate for just those two or three weeks either.

So there will be lots of innovative solutions in this regard.

One thing is very clear and that is the information systems that the consumer-driven mobile society have today are very, very important.

You can't just drop a package for an e-commerce shipper into an anonymous hole and they are going to be satisfied with it coming out some time in an indefinite delivery window.

They actively want to be a part of that process, they want to know when it shipped, they want to be able to redirect it to a location.

This is an incredible capability that we have and UPS also has and it is going to become a bigger and bigger feature.

So it is hard to see the landscape as this thing rolls out but we will take a very disciplined approach in our presence in that business because you can clearly go broke trying to deliver noncompensatory packages into people's homes.

Mike?

Thank you, Fred.

Let me just say e-commerce has a long runway growth opportunity for FedEx both domestically and internationally and we are poised and well positioned to benefit from that.

The range of services that we have running from same-day delivery in select markets to home delivery and SmartPost align perfectly with the needs of e-commerce customers.

And I can tell you based upon our discussions with small and large e-commerce customers, there is certainly a need for the service and they appreciate the portfolio that we offer.

Regarding regional carriers, they have long played a role in this market segment and will continue to do so.

Having said that, they do not offer the same features of service that FedEx offers and certainly the same level of reliability that FedEx offers.

And regarding speed, let me just make the point that nobody operates faster networks than FedEx.

So we are very comfortable with our ability to provide the flexibility that we need to meet the needs of e-commerce customers.

I think the point that Fred made that is critical for us though is to be selective.

You can go after a lot of e-commerce volume and be pretty pleased with your year-over-year growth rates but that doesn't necessarily mean it is going to fall to the bottom line.

So we have taken a very disciplined approach and one of the things that we have to take into consideration is the peaking fact.

You can't as Fred said, invest significant capital to operate three to four weeks out of the year so when we are pursuing growth opportunities in e-commerce, we make sure that we have a proper balance between growth the 11 months of the year versus the growth in peak.

So we have a disciplined process but I can tell you that nobody operates faster networks than we do, nobody has the breadth of services that we do to serve e-commerce.

And we are pleased with our position and as I said, there is a long runway of growth opportunity for FedEx here.

I might just ask Rob Carter to comment on the incredible demands that consumers are placing on carriers in the e-commerce sector.

Well, not just consumers but the entire information ecosystem is so explosively growing around this, as our volumes peak in our network for information systems peak at an even greater rate so you can see when you watch this technology, you can see the consumer interacting with the shipments at a far greater percentage than they ever did in the past.

They carry it with them in their pockets and on their tablets.

So the shopping phenomenon is certainly a big part of it but also the tracking and accountability of that delivery is a big deal in today's consumer world and with the technology that they are equipped with.

I will just make one final comment and then hopefully we have answered the e-commerce landscape question.

One of the things that happened during the peak season this last time is there was a disconnect between when the merchants in some cases were shipping the items they in essence showed that they had been shipped when they actually had not been tendered to the carriers.

And of course if you don't have a possession scan or know that you have it, that creates a lot of pressure and extra work on the part of our customer service folks, TechConnect, in our particular case.

I think you will see that very much change this go-round, and that will eliminate a lot of the -- I think the angst that a lot of people had when they place an order, they think it is underway, it actually hasn't been tendered to a carrier; that gap is going to be closed.

And people will have a much better visibility of what is actually going on.

Scott Schneeberger, Oppenheimer.

Thanks.

Good morning.

Shifting to FedEx and international, the 8% volume growth obviously very strong.

We have seen it above double digits recently.

Just curious, is that something that you see returning to higher growth rate?

Was there something regional moving around there?

And then as a follow-up, could you just address the capacity issues at Trans-Pacific; any update there?

Thank you.

Yes, that is correct.

We have been running double digits and, of course, it was 8% international economy, and we feel strongly that will continue to grow.

Don't forget in the international export and economies, the US international is part of that international number.

And we did get some weather impact into our volumes even in US international outbound, and to a certain degree from Asia back into the US because of the plants being shut down, because of the weather back here in the US.

We have a tremendous market share, as you know.

So we are very bullish on international economy.

We have repositioned our network so we can move our more lighter weight deferred traffic into the bellies of some of our partners now.

And leaving our very valuable, very fast, very reliable purple tail fleet available for that higher yielding package.

This is Fred Smith.

Let me make a comment here, because I suggested that you read the speech as we put up on our IR network.

It is important to focus on the details of what we say in those speeches and not just the top line.

The reality is the express market continues to grow.

The global express market continues to grow and we continue to take market share within the global express market.

The sea container business continues to grow.

What has changed is the commodity airfreight, the big consolidation is going generally airport to airport and that cohort is being squeezed from both the door-to-door express which if it is very urgent and time critical moves on our Priority network and the opening of the new Osaka hub will be terrific in that regard of giving us these unprecedented transit times.

And if customers are willing to take another couple of days in transit, same pickup and delivery, same IP interface, customs clearance and so forth, but that can be moved in these prolific underbelly.

And electronics are a -- and technology products are a very big part of the total air cargo market in its broadest sense but many of those products are much lighter weight today.

They are not being -- the new products are not being introduced so the type of door-to-door small shipments, light freight and packages, is continuing to grow because the Internet in this perfect shopping universe of everybody being connected to everybody else is creating this force field.

That is why Mike Glenn said that international e-commerce has a long runway.

So it is important that you separate these market segments to be able to correctly analyze the market places that we are working in.

We are also in that sea freight and commodity airfreight business with FedEx Freight Networks.

We can handle that too but the growth area is basically the door-to- door express segment.

Jack Adkins, Stephens.

I guess the focus of my question, I'm curious if you could maybe comment on what sort of abnormal weather impact if any that you are assuming for the fourth quarter guidance and could you maybe quantify the negative impact from fuel to consolidated operating income relative to your expectations in the third quarter?

Thank you.

We didn't give any guidance on the third quarter so I will just say that our guidance for the year is always anticipated that we would have some negative impact in fuel year over year and that is about as far as we are going to go on quantifying that.

So it is not a GAAP number.

I will just remind you that there is a lag time between when we buy fuel and when we can surcharge fuel and that means that there is an anomaly between and a disconnect between year-over-year this year, year-over-year last year.

In the long run, it should even out and of course that ignores the elasticity of the fuel surcharge itself but from a pure cost standpoint, it should average out.

So we weren't surprised by that but we thought it was important to remind everybody that it did have a year-over-year impact.

Tom Wadewitz, JPMorgan.

Good morning.

Alan, I know this is a quarter early really to talk about fiscal 2015.

You have already mentioned you haven't done the full planning.

But I was wondering if perhaps you could provide a broad comment.

If I look at your guidance for fourth quarter, I believe the (inaudible) is an adjusted number.

It is something like 12% earnings growth year-over-year.

If I look at the Street consensus for next year, it implies, fiscal 2015 implies something like 28% growth.

So clearly the Street is expecting some big acceleration and I would think primarily in the cost initiatives maybe there is a little implicit improvement in the economy.

But I was just wondering if given what you broadly see if you think that that is just an unrealistic ramp up in terms of what you would see coming in on the cost side or if you could offer any kind of broader comment of expectations versus what you might see for fiscal 2015?

Thank you.

Tom, you are exactly right.

It is too early to talk about FY15.

I really don't know what you and others have in your 2015 number.

I am assuming that a lot of that EPS is from our accelerated share repurchase program which will have a very big positive impact to EPS next year as we will be largely done by the end of this fiscal year with maybe some to go in the first quarter of next to have a big impact.

I think our run rate in terms of our cost reduction programs which you can see in Q4 will only improve from that.

And I guess I will just have to fill in the blanks in June because we have got a lot of planning going on right here, got a lot of initiatives underway.

We have some things that we want to do that probably won't pay off in FY15 but will towards the end of 2016 and beyond that we are debating.

So a lot of work to go and I look forward to having that conversation in June.

Art Hatfield, Raymond James.

I was going to ask about 2015 too but I won't even try.

Alan, if you could, I am assuming your fourth-quarter guidance assumes the ice storm you had in Memphis the first week of March.

Is there any way at this point in time you can quantify what kind of impact that has on fourth quarter?

Finally, can you tell us what the diluted share count was at the end of Q3?

Yes, I am sorry I didn't answer that question earlier.

It is just at the very beginning of March, we just had another one and so we are not used to that in the fourth quarter.

That is probably not going to be significant but it is going to have some impact and we are trying to assess that right now looking at the same methodology that we used in Q3.

It is okay to ask about 2015.

I think that is what everybody is wanting and like I said, we should have a good show for you in June, Art.

That is about the best that I can say at this point.

On the share count, yes, the share count for the three months ended in the quarter average diluted shares was 307 million versus 317 million a year ago so obviously what is happening in that share count is that not only are we buying shares back but the increase in the stock price has brought back into the calculation previously anti-dilutive options.

There were 8 million of them a year ago, there were just a few of them this year so that is why there is only a few cent impact in the quarter of our share buyback for Q3.

Brandon Oglenski, Barclays.

Good morning, everyone.

I won't be the third in a row to ask about fiscal 2015 but maybe the longer-term question for Fred or Mike.

We obviously see that you guys delivered some pretty good service results here for customers in the quarter even with all of the challenges in this big peak.

But what is the ability long-term to drive better price outcomes because obviously even adjusted at 3% Express margins, best return, I think if you look at your cost improvement plan obviously the targets are much higher from here.

Is there anything structural that can be done in the finish (inaudible) to extract a little bit more price for that service that you are going to offer?

This is Mike.

We make pricing decisions regarding the economic conditions, the market conditions and the value of the service that we provide and obviously that is a critical component of our yield management activities that we do on a weekend and week out basis.

The main issue is to make sure that it is not a list rate issue.

The main issue is that as we work with customers to make sure that we get an appropriate price for the value of service that we provide.

A lot of factors go into that.

Obviously the productivity of certain lanes and head haul versus backhaul in the freight business and how we utilize and configure networks and international so it is not a one-size-fits-all by any stretch of the imagination, it is an operating company by operating company, service by service plan that we work very closely with the operating companies.

Having said that, I think our yield performance given the situation that we have been in and the weak economy has been quite solid and it will be a continued focus area for us.

Yield improvement is an important part of our profit improvement plans and one that we focus on on a regular basis and I am confident in our ability to execute that.

Our sales team does an outstanding job negotiating with our customers and making sure we get an appropriate yield for the service that we provide and they will continue to stay focused on that.

But we have a very disciplined process around that where we work with the operating companies week in and week out to manage our yields but it is not a one-size-fits-all and it will continue to be a focus area for us.

Bill Greene, Morgan Stanley.

Mike, I am curious if you could elaborate on something that Fred said earlier about e-commerce and being careful about growing some of the high-cost residential deliveries too quickly.

Does the UPS experience in December create an opportunity or is it more of kind of a lesson learned about what can happen when you do grow that business too fast or don't have the proper controls in place to measure it into a network?

We have enough to worry about at FedEx as opposed to commenting on issues that UPS may have.

But I can tell you that we take a very disciplined approach working with our customers and it has already started for next peak to make sure that we have a balance between the volume that we carry during non-peak versus the volume that we carry in peak.

One of the biggest challenges that you can have is overcommitting your resources during peak season because that is a recipe for service failure.

I think one of the strategic advantages that we have is to do separate networks, Express versus Ground and the hub configuration that we have allows us to have more flexibility and manage our networks independently so we can make commitments at Express or make commitments at Ground that don't necessarily impact the other operating companies.

So we work very closely with our customers, we make firm commitments about the traffic that we are going to carry for them during peak and then obviously it is a daily dialogue with these customers during peak season if we happen to have excess capacity on the next two or three days, we will work with customers and say we can take a little more volume or we're going to have to stay at the level that we pre-negotiated.

So it's an art, it is not a science, there is a lot of science built into it but when you actually get into the battle, it becomes an art and the flexibility in our networks and the outstanding job that our solutions team does in pre-planning peak is a strategic advantage for us combined with the different operating networks.

So I think we've got a pretty good track record of performing during peak season and delivering outstanding service for our customers and I think if you were to talk to our customers and based upon our performance during peak and our ability to meet the commitments that we made to them, they would give us a very high score for this past peak season.

This is Fred Smith speaking here.

I would make this comment.

During the peak season, there was a lot of press reports about the issue of e-commerce and so forth and many times you would see the FedEx name up on the caller of the TV or the story.

The reality is by historical standards, we had a terrific peak and the Express Company just did a fantastic job measured relative to years past.

And I think the reason for that was the very disciplined approach we take that Mike just talked to you about, the network design that we have and we just have this incredible commitment to the purple promise like our volunteers out there on Christmas cleaning up anything that was held up in the network because of weather and so forth.

I think the change this year is we live in a world where twitter and social media make anecdotes much bigger than perhaps they are and this whole phenomenon of e-commerce as people get better and better mobile devices, as Rob was talking about, where you can shop and monitor things coming in, that was the big difference from our standpoint.

From an operational standpoint at Christmas time, we had a very, very good peak relative to years past.

So we just plan to continue on doing that and planning very carefully to makes sure that we don't disappoint people and that we provide that high level of service because at the end of the day, that is the business, that is the franchise.

I just could not be more proud of our folks and we were disappointed that we kept getting pinged with the big problem in e-commerce.

I would tie off by saying one other thing for those of you who are interested in the e-commerce world.

The e-commerce world has grown very fast and there are a lot of people trying to gear up and meet this demand and quite frankly a lot of the processes that a lot of the e-commerce folks have used have many quality issues with them.

There are packages that are fore-ordained to be damaged because they are not packed well; there are labels that are not affixed to the packages very well.

As I mentioned earlier, there are e-commerce shipment advices when the shipment actually hasn't been tendered to the carrier.

I can promise you that the customers are not going to tolerate those types of things over the long haul.

So the e-commerce shippers that succeed long-term are going to be the ones that work with us and other folks to try to improve those processes and the quality of their service because no one wants to order something over the Internet, get it three days before Christmas and it is smashed or the label comes off of it and the package goes into the ether.

So we are working very carefully with our customers on these aspects as well but it is a big part of the e-commerce business that really didn't get enough publicity last year because they were an integral part of the problem even more than the weather and the carrier performance.

Matt Troy, Susquehanna Financial.

Thank you.

Fred, in your comments on March 11, you made some pretty detailed remarks and chose to isolate protectionalism as something that had been hampering world trade.

I'm just wondering when you look at that dashboard, what are the one or two key items you see coming down the pike that may -- depending on how they break either be favorable or unfavorable for FedEx specifically?

And just more broadly long-term, how do you engage to help [clear] some of these issues in a more pro-business way whether it is engaging on the political front or reallocating capital?

I just want to get a sense of your dialogue and how you guys approach being part of more business oriented solutions?

Thanks.

First, let me just give the highest accolade to Ambassador [Michael Froman] and the US PR team for the effort that they have underway on multiple fronts.

The WTO Agreement on Trade Facilitation was a great accomplishment.

That was the first agreement WTO in its long existence has ever concluded.

So it was long in nature in other words many of the trade improvements that were agreed upon by the signatories take forever to put in place but at least there was an agreement.

They have the transpacific partnership, they have a transatlantic initiative underway and the trade in services initiative.

So the most important thing that we do are as we were trying to do in those speeches is to point out to folks the great benefits of world trade and expanding it.

Because at the end of the day, increased prosperity comes from innovation, investment and increased scale for your market.

Even a market as big as NAFTA is tiny in comparison to the world population.

So you have seen over the last few years partially because a lack of determined American political leadership because it was this country that really pushed this thing from the beginning of World War II on, and so we are stuck.

The Congress of the United States today is not willing as was famously noted in the press by the Senate Majority Leader to even consummate taking up trade promotion authority.

There is no way to consummate any of these trade agreements without PPA because our negotiating partners simply will not seriously engage if they think Congress is going to renegotiate the agreement after the US Trade Rep has concluded his work.

So we just tried every possible venue to push these things forward and the purpose of those two speeches in the main was to talk to those two audiences about getting involved with it.

Growth is low, trade has gone from 2.5X world GDP growth to roughly into parity.

There has been no endeavor in human history that has lifted so many people out of poverty than the opening up of world markets particularly the United States leadership in opening up ours, often permitting other countries to trade with us on a mercantilistic basis.

So hopefully after the midterm election, the Administration will turn to on this, the Congress will see the light.

I think it is particularly important to try to respond to the very strong position taken by the Prime Minister of Canada and the President of Mexico that we need to negotiate NAFTA 2.0.; that has been a fantastic success.

We have seen trade between the NAFTA countries go from $200 billion and some-odd to over $1 trillion in the last 20 years.

That is a lot of jobs, no question there have been local pain here, there and the other place but overall the opening up of these markets has been very strong.

That is the concern I expressed in the speech on behalf of the Company.

That is our prescription for doing it and I appreciate you giving me a chance to make these remarks to a sophisticated group like this because it is a big issue.

Thank you.

This concludes today's question-and-answer session.

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

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

Feel free to call anyone on the investor relations team if you have any additional questions about FedEx.

Thank you very much.

Goodbye.

This concludes today's presentation.

Thank you all for your participation.