聯邦快遞 (FDX) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the FedEx Corporation fourth-quarter FY14 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 Fourth-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.

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

For e-mail, 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 $FedEx 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 maybe 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 and 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.

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

Good morning, everyone.

This is, of course, the Quarterly Earnings call for FedEx.

But before we get into the business issues, let me note that during the quarter we experienced two unprecedented and inexplicable tragedies.

First, the highway crash in California of the FedEx Freight vehicle and a bus of students, which resulted in the worst accident in our history, with ten fatalities and others injured.

Then a shooting at a FedEx Ground facility in Atlanta by a troubled young man who, before committing suicide, shot six people, with two seriously wounded.

All 300,000 plus of us at FedEx grieve for those who lost their lives and those injured.

And we again extend our deepest sympathies and condolences to their families and friends.

Now to the scheduled business of this call.

As you can see, our numbers are fairly straightforward.

Ground and Freight are performing well.

And Express remains on track to achieve its profit improvement plan, despite the fuel headwinds we've experienced.

This summer, two of our long-serving and finest executives will be retiring in July.

Cathy Ross, the Chief Financial Officer of FedEx Express is leaving after 30 years with FedEx.

Mike Fryt, our Corporate Vice President of Tax, is also retiring after 19 years with the Company.

I would like to thank Cathy and Mike for their service, their many contributions to FedEx.

And all of us wish them nothing but the best in their retirement.

Now let me ask Mike Glenn to give you our economic forecast, and then Alan Graf will comment on our results and the FY15 outlook.

Mike?

Thank you, Fred.

Our US GDP forecast is now 2.2% for calendar 2014 and 3.1% for calendar 2015.

The change to calendar 2014 is entirely due to bad weather and the inventory shift in the first quarter.

Our expectations for economic growth for the remainder of the year have actually improved somewhat.

We expect industrial production growth of 3.6% this year and 3.7% in calendar 2015.

The global economy is recovering from the Q1 setback in the US and slowdown in China and should steadily improve.

We expect global growth of 2.7% in calendar 2014 and 3.1% in calendar 2015.

Now let me make a couple of comments on the Company's yield performance by segment.

Excluding the impact of fuel, year-over-year Express domestic package yield increased 0.9% in the fourth quarter.

The increase was driven by weight and product mix.

The Ground package yield increased 2.9% in the fourth quarter, excluding the impact of fuel.

The year-over-year increase was driven by rate and discount, product mix and extra service fees.

Excluding fuel, international export Express package yield increased 3%, primarily driven by rate and discount improvement, package weight and product mix.

And finally, excluding the impact of fuel, yield per hundredweight declined 0.4% year over year in the fourth quarter.

Rates however improved during the quarter.

Changes in other shipment characteristics, including higher weight per shipment, resulted in the year-over-year decline in yield per hundredweight but contributed to margin improvement.

The higher weight per shipment drove an increase in yield per shipment.

And now I'm going to turn it over to Alan Graf for his comments.

Thank you, Mike.

Good morning, everyone.

We had an outstanding fourth quarter.

Our EPS of $2.46 is an increase of 15% on an adjusted basis, and we achieved a corporate 10% operating margin.

Ground played a prominent role in our success this quarter, with a 19.5% operating margin.

And Freight's income grew an impressive 51% versus last year's adjusted income.

All of our segments increased operating income on an adjusted year-over-year basis, despite one fewer operating day.

Express had a solid quarter.

Express operating income was up 3% versus last year's adjusted income and operating margin improved to 6.8% despite the significant negative net impact of fuel in the quarter.

International Priority volume stabilized after four quarters of decline.

IP box volume grew 2% while lower yielding distribution services volume declined.

International Export yields increased 2%, as improved rates, higher weight per package, and favorable service mix more than offset lower fuel surcharges.

These are clear indications that our yield management efforts are working.

Turning to our Ground segment, Ground achieved a 19.5% operating margin, benefiting from 8% higher average daily volume and increased revenue per package.

SmartPost volumes declined 8% in the quarter.

But volumes increased 15%, excluding the changes in shipping patterns from one large customer.

Overall it yields increased 8% for SmartPost.

FedEx Freight also had an excellent quarter, with operating income increasing $41 million versus last year's adjusted income.

Freights less than truckload average daily shipments grew 12% in Q4, with a 14% increase in demand for priority service.

During FY14, FedEx repurchased 36.8 million shares for approximately $5 billion.

9.9 million of those were acquired in the fourth quarter.

At the end of FY14, we had 287 million shares outstanding.

Our buyback contributed approximately $0.12 Per diluted share for the quarter and $0.07 per share for the full fiscal year.

Our strong flow of cash from operations enabled us to announce last week that we were boosting our quarterly dividend by $0.05 per share for a total of $0.20 per share, up 33% from our previous dividend.

During the quarter, we announced two pricing changes.

Freight increased its published fuel surcharge indices by 3 percentage points effective June 2.

Ground will apply dimensional weight pricing to all shipments effective in January of 2015.

Currently Ground only applies dim-weight pricing to packages over 3 cubic feet in size.

This change better aligns our pricing with our cost to deliver.

Turning now to the outlook.

Based on the economic outlook that Mike talked about and the momentum we have, we project earnings of $8.50 to $9.00 per diluted share for FY15.

This outlook assumes no net year-over-year fuel impact and includes an approximately $0.45 benefit from the share buyback, which was substantially completed in FY14.

A total of 5.3 million shares remain on our existing share repurchase authorizations as of May 31, and we will complete the share repurchases this year.

We are laser focused on improving operating results of all of our operating segments.

For FY15, we anticipate revenue and earnings growth from ongoing improvements in all of our transportation segments, with moderate global economic growth driving volume and yield increases.

Our overarching goal is to achieve annual double-digit operating margins for the total Company in the near future.

We expect revenues and earnings to increase at Express during FY15, primarily due to improved US domestic and international yields, as we continue to focus on revenue quality and through ongoing execution of our profit improvement programs and great cost management.

We have an Express business plan to exit FY16 with a run rate of $1.6 billion in additional operating profit compared to what we achieved in FY13.

This plan, of course, is dependent on US economic and global trade growth.

It also will be back-end loaded, as our various cost reduction and efficiency programs continue to gain traction.

Ground segment revenues and operating income are expected to grow in FY15, led by volume growth across all our major services due to market share gains.

We also anticipate yield growth in FY15 through yield management programs, including our recently-announced dimensional weight rating changes.

We expect continued revenue and operating income growth at the Freight segment as well in FY15, driven by volume and revenue per share per shipment increases from our differentiated LTL services, as well as continued improvement in network and operational optimization.

The recent increase to our fuel surcharge rates for certain LTL shipments will also benefit yields in FY15.

We believe that our outlook is realistic and achievable, but there are variables that can affect the outcome that are not in our control.

Including, of course, fuel prices, pension return on assets and pension plan discount rates, as well as weather.

Also global trade growth can have an outsized effect on our results.

While global trade growth is improving, it is still below historical norms.

We do expect the pace of trade growth improvement to continue throughout calendar year 2014 and into calendar year 2015.

As Fred mentioned, two of our finance executives are leaving in July.

Cathy Ross will be replaced with Elise Jordan, who will move from her position as Senior VP of strategic Financial Planning and Analysis at Express.

Elise has 31 years of experience at Express.

And although we will miss Cathy, Elise will do a fantastic job for us.

Mike Fryt, our Corporate Vice President of Tax, will be replaced by Bobby Brown, who has 22 years with the Company.

Both Mike and Bobby were in Washington DC last week and will be there this week as well, walking the halls of Congress, discussing the advantages of a lower corporate tax rate.

I would like to thank Cathy and Mike for their exemplary leadership and wish both of them well in their retirement.

A few other factors.

We look at our tax rate for FY15, and we think the effective tax rate will be between 36% and 37%, depending on the amount and source of operating income.

You should note FY14 was 36.3%.

Our US pension plans have substantial funds to meet expected benefit payments and is well-funded.

Because of our strong asset returns, we expect lower retirement plan costs in FY15.

Our CapEx for FY14 came in below our projection, at a total of $3.5 billion, as some projects were deferred into FY15.

CapEx for FY15 is expected to increase to approximately $4.2 billion due to these deferrals, as well as planned aircraft deliveries to support our fleet modernization program, one of the keys to our profit improvement program, and the continued expansion of the Ground network.

We are very focused on achieving double-digit corporate operating margins in the near term and generating healthy cash flows.

Our balance sheet remains strong.

All the initiatives we are working on are designed to ensure the near- and long-term success of FedEx, and include our goal to provide superior returns for our share owners, which we have demonstrated greatly in FY14.

Next we will open the call for questions.

(Operator Instructions)

Ken Hoexter, Bank of America Merrill Lynch.

Great.

Good morning.

Congrats on the double-digit margins in the fourth quarter.

It's been a long time.

So nice to see.

But talking about that pace of gains in looking at your outlook, can you talk about the shifting buckets and how you expect the pace of improvements now that you've got all the employees that you had targeted or had accepted your plan to leave the payrolls?

Is that all now in the run rate number?

Or can we still see some of that accrete into FY15?

Talk about the pace to get to that $8.59 run rate that you're talking about.

I am going to let Dave take the bulk of this answer.

But I just want to start out by saying that honestly the international revenue outlook and global trade outlook today are significantly lower than they were in October of 2012, when we set out the five pillars.

So we've had to significantly revise how we get to the $1.6 billion.

We're still working hard.

We'll still get to, generally, in those categories.

But we have had to adjust our international network to be able to reach those goals.

So we're significantly have less capacity than we did in October of 2012.

I'm going to let Dave talk about what his team is doing to continue us down the road.

Thanks, Allen, and thanks for the question, Ken.

Fred commented on it, and Alan did also.

We are on track and on target to hit our profit improvement by the end of running out of FY16.

But as importantly, we are on track and on target to run out FY15, on track and on target at 75% of all the profits that we actually talked about in 2012.

Alan's right, though.

We actually have a different makeup and a different mix.

We have better cost management.

Partly because of the global shift of business, we had more deferred traffic that entered into our marketplace and into our network, quite frankly, than we did in 2012.

So we've taken down some capacity, realigned our networks.

I wanted to thank all of our Express teams all around the world for actually doing a terrific job of resetting their priorities and realigning our network.

And by the way, in the fourth quarter, Alan mentioned it as well, we had significant fuel headwinds and one less operating day and still beat our operating profit margin and profits year over year.

We have a question off the Internet from William Flynn.

This is a question for Bill.

Moving forward, how will Freight get back to the levels of operating income seen in FY06 and FY07?

Are you more focused on cost and productivity?

Or growth initiatives at this point?

Okay, good question.

Again, first we are very pleased with our quarter.

Again, as we stated back in the 2010, 2011 timeframe, our objective was to get back the Freight double-digit margins.

And we're very pleased with this quarter.

We have a solid business plan for FY15.

And I will just say that from an overall Freight perspective, our focus is on balance.

We're really gone after good balance between yield and volume for the business.

The operating team has done a great job in productivity.

So we'll continue network design, focus on yield and volume growth as we move forward.

And that will continue as we march towards our objective of double-digit margins.

Rob Salmon, Deutsche Bank.

(technical difficulty) -- question.

Mike or Alan, you guys had talked a little bit about the Ground dim-weight changes in your prepared remarks.

Could you discuss a little bit how you see those changes aiding the overall improvement that you're expecting with regard to yields for the segment?

Well, thank you.

The FedEx Ground dim change is an extension of the dimensional weight pricing policy that we've had in place for some time.

Dimensional weight pricing is a common industry practice, as you know, and has been in place for Ground for packages measuring 3 cubic feet or more for several years.

So what we're really doing is bringing consistency to the Ground and Express segment by applying the dimensional weight policy to all packages.

It's important to note that we announced this change several months ahead of when we would typically announce a price change.

And the reason for that is to give us plenty of time to work with customers to refine their packaging specs.

To make sure that the packaging moving through our system and the system of our customers is the most efficient, which will benefit both the customer and FedEx.

We're taking a very collaborative approach working with our customers on this, making sure that they have access to our packaging lab.

We are working with them on a customer-by-customer basis as required to make necessary changes to improve their efficiency.

It will have a positive impact.

Obviously, if we can improve the efficiency of the packaging that creates capacity in the network for us, which is a positive thing.

Nate Brochmann, William Blair and Company.

Yes, good morning.

Thanks for taking the question.

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

It was good to hear the Priority flattening out a little bit.

I was just wondering a couple things.

One, is that maybe because of some growth you're seeing out of those regions?

Or because of market share gains?

Or because we are seeing the bottom of the trade down impact?

And then going forward, regarding your investment in that area, given the sluggish growth rates, what are you guys thinking in terms of general investment?

Thank you.

This is Dave Bronczek.

Let me enter the International Priority question.

First of all, it's important to note that for FedEx Express International Priority in our global network represents 74% of all of our International revenue.

It's always been, and will always be, a prominent dominant role in our network.

To the point that Alan made, our IP box grew 2% this quarter.

And our IP yields grew 2% this quarter.

We did a shift some traffic that was deferred out of our networks that's actually benefited the customer and benefited FedEx.

Just wanted to make sure that the understanding for International Priority is still the vast majority of our revenue in our network.

There is a question from Art Hatfield over the internet.

Can you discuss the long-term trend on CapEx beyond 2015?

We are basically spending capital on two major initiatives.

The first is the growth in our Ground network, as we continue to exploit the great improvements that the Ground team had put in place over the last decade.

And second, to modernize our aircraft fleet.

We are not adding capacity but every time we bring on one of these new fuel-efficient airplanes and replace the legacy capacity, we get immediate hit to the profitability of the Company and build a much stronger long-term future.

I think we believe capital's going to stay in the same general area that you've seen it.

But as Alan mentioned in his remarks, we are very focused on improving our margins and improving our cash flow and EBITDA.

So while the CapEx will remain high in absolute terms, we believe as a percentage of revenues, they should drift down.

But the primary expenditure are on those two programs that I just mentioned.

Chris Wetherbee, Citi.

Thanks, good morning.

Following up on that point, as you see the margin expansion roll forward, how should we think about cash allocation from a shareholder return standpoint?

Obviously a nice dividend increase that was announced a week ago.

You're almost done with the buybacks.

Should we expect more on that side?

Is that going to be more a regular part of the cash allocation strategy as we move into fiscal 2015 and beyond?

Hi, Chris, it's Alan.

Let me just say that echoing what Fred said, we have plenty of room for investment in fleet modernization Express and Ground, as well as to continue to provide return to our shareholders.

As I said, we are going to finish the buyback, the remaining authorization of 5.3 million shares, if not by the end of the quarter, certainly by the end of the calendar year.

So we are continuing that.

We had great discussions with our Board about this subject.

It's an item of focus for us.

Not going to commit to anything at this point, but we have it right in front of us as one of the objectives to continue to do, along with getting the double-digit corporate margins.

Kelly Dougherty, Macquarie Capital.

Hi, thanks for taking the question.

Can you provide a little bit more color on what happened in the SmartPost during the quarter?

I think you mentioned it was attributed to a particular customer.

A little detail on that.

Then how you think about the direction with SmartPost going forward.

As B to C density improves, is there a desire to reduce your reliance on SmartPost at all, especially as postal rates increase?

How you think about that.

Yes, hi, Kelly.

This is Henry Maier.

Year over year volume comps for SmartPost were really impacted by one customer, who changed their distribution model earlier in the year.

If you exclude that one customer, SmartPost grew roughly 14.5% over the year.

That's still a pretty good business.

We are uniquely positioned to ride this wave that e-commerce is generating.

I've talked about this before here.

It's a portfolio play with SmartPost for largely customers who want to offer free shipping.

And then FedEx home delivery for high-touch, high-visibility customers who choose that type of service for their product.

I don't think that those can be disconnected.

Our customers increasingly are telling us that they want the option for both services in the portfolio.

That's the way we think about this.

Scott Schneeberger, Oppenheimer.

Thanks, good morning.

Just curious, within Ground, what type of margins directionally are you expecting going forward?

With the initiative that you have there in CapEx and OpEx to grow it out.

Just curious on the sense for that.

Thanks.

Hey, Scott, this is Henry Maier.

Well, first of all let me reiterate that the Ground team, and that includes me, would not be satisfied with anything less than margins in the high teens.

We are laser focused on reducing our costs through state-of-the-art technology and disciplined expense control.

We are focused on sound capacity investments, improving our yields, and producing industry-leading margins.

Thanks.

Jack Atkins, Stephens

Great, thanks guys.

Good morning.

Shifting over to the FedEx Freight segment for a moment.

Could you maybe talk about what drove the strength in your LTL daily shipments in the quarter?

Especially on the Priority side.

Secondly, we've been hearing some rumblings about the potential for a second GRI at LTL world this year.

Given that you guys are the market leader, is there any color you could add around that?

Do you think the market's strong enough to support a second GRI this year?

Thank you.

Thank you, Jack.

First of all let me say that we don't comment on the competitive pricing strategy at all.

I couldn't speculate regarding what others might do regarding GRIs.

We've announced our GRI, and we announced the change to the fuel surcharge as Alan mentioned.

So I can't speculate on what others might do.

The growth that we are seeing at FedEx Freight is driven by several things.

One is a very positive customer response to the value proposition that we have, which allows a selection between priority and economy services.

Two, is the outstanding service that we are delivering at FedEx Freight.

The third point, which is significant, is that we've seen an increase in demand from small and mid-sized customers.

That, in large part, is due to the great collaboration we have between the operating units all the way down to the ramp level and our sales team.

They are executing to perfection in terms of the strategy that we have laid out.

As Bill said, it is allowing us to be very efficient in terms of growing our business with the proper balance between shipment growth and yield improvement to maximize margins.

So that's really what you're seeing.

We are very pleased with that, and we plan to continue that strategy.

Allison Landry, Credit Suisse.

Good morning.

Thanks for taking my question.

Part of the guidance for 2015 was that fuel would be flat year over year.

I was wondering if you could give us any sensitivities around how changes in fuel might impact 2015 earnings.

For example, fuel prices are 5% higher or 5% lower.

What would be the risk or benefit to profits?

Allison, this is a very volatile part of our business on the short-term look of the P&L.

It really depends on the timing of what happens with fuel price and our surcharges, versus what happened last year with the timing of prices and surcharges.

So it's not just simply fuel price.

It's the relationship of fuel price to when we can catch up with the surcharge and how fast that is compared to what happened in the previous year.

We have had some years where we've had some thrilling impacts to the P&L, both good and bad.

What we're saying in our guidance is that right now we are not expecting for the Corporation to have that happen this year.

But of course, with things that are going on in the Middle East, it's a big wild card.

We wanted to make sure that we called that out as a risk.

It's also a possible opportunity.

But if fuel prices continue to go up, there's also the elasticity impact of the size of the fuel surcharge to how our customers react to that in terms of the selection of the service that we are providing.

Keith Schoonmaker, Morningstar.

Yes, thanks.

I'd like to as about an aspect of the growth strategy.

Would you please explain the importance of your recent investments in the national hub in Mexico?

And comment on key growth drivers you find attractive in this market, please?

Yes, this is Dave.

That was part of the multi-pack acquisition we made down there.

Terrific domestic company that went along with our business we have already had in Mexico.

We see a lot of trade back and forth from Mexico to the United States.

It's increasing.

A lot has shifted out of Asia, quite frankly, into Mexico.

So the acquisition we made several years ago now is a very valuable for our going-forward profitability.

It's also part of the whole network down in Latin America, as Mexico plays such a key role in that part of the world.

It's a good call-out.

I appreciate that.

The hub is up and running 65,000 handling packages a day and it can go up from there.

So we're doing very well down there, and Juan Santo and his team are to be commended for that.

William Greene, Morgan Stanley.

Hi, good morning.

Mike, I was hoping to ask you a little bit more on the dim-weight.

I think in the past you had talked about dim-weight adding $100 million or so to the revenue line.

Is this change bigger than that?

Along those lines, dim-weight is not something you address in your annual price increases.

Should that change?

Or is this something you put in place, let it go for a few years, and it won't really affect pricing beyond this year?

Thank you.

Well, first of all, it would be difficult for me to speculate on the impact of the Ground dimensional weight price change, because as I mentioned, one of the things that we are working on right now is helping our customers utilize more efficient packaging.

I don't think I have to tell you, if you received any kind of packages at your home, whether they're cookies from Grandma or an e-commerce package, they're not always packed efficiently.

There's sufficient opportunity out there for us to work with customers to make better packaging decisions, which would obviously significantly impact the extent to which the dim-weight change is actually applied in terms of billing.

I certainly can't speculate, would not speculate, on the bottom-line impact of dimensional weight change, but we are constantly evaluating all of our pricing policies.

As you recall, several years ago we made a change to the dim-weight divisor for both Express and Ground.

That has served FedEx well.

We followed that up with this change and we'll continue to evaluate those.

But we look at dimensional weight pricing changes, GRIs and other surcharge and extra service charge fees as part of an entire pricing strategy and yield management strategy.

This is Alan.

I want to add to that a little bit.

It's actually more beneficial from a return on invested capital standpoint, to have our customers adjust their packaging than for us to collect a dim surcharge.

That's because we basically get free space with no capital investment.

So it's equal driver, if not more important, for that to occur.

This is Fred Smith here.

Let me make a comment on this in the context of a broader issue.

That is the initiative on behalf of the entire LTL and ground parcel industry to have the federal standards for the twin trailers, which are the standard in these sectors, increase from 28 feet to 33 feet.

A lot of times the general news media talks about quote, the trucking industry.

And of course, it's divided into two parts: the truckload sector, which uses 53 foot trailers.

Oftentimes those trailers are used to pull very heavy loads, which make it controversial in terms of road repair and so forth.

And the ground parcel business and the LTL business, in both cases, you cube out long before you weight out.

So if the federal standard were increased, there would be millions and millions of fewer miles driven per day.

It's about an 18% increase in cube, massive amounts of fuel saved and CO2 emissions avoided.

You would actuarially eliminate over 400 accidents per year, just by reducing the number of vehicles on the road.

So the entire industry is behind this and we are very hopeful it will pass in Congress soon.

Because again, it's safer, it's more efficient and it's less fuel.

It's in exactly the same vein as this dimensional weight increase.

At the end of the day, with fuel prices where they are today, this industry must do everything it can to more efficiently utilize the cubic space.

Because we do not come up against weight limits, only against cube limits.

Thomas Kim, Goldman Sachs.

Hi, thanks very much.

I have a question for Henry on the Ground side.

We've seen margins expand at the fastest sequential rate we've seen in years, but rates are still slightly below last year's level.

I'm just trying to understand a couple things.

One, can you help us understand what drove the magnitude of growth sequentially?

Obviously there's some seasonality in there, but it has been a noticeable pickup and acceleration.

Can we assume that this momentum continues, so we can see margins in Ground rival the FY12 levels again?

Thanks.

Thanks, Tom.

The short answer is, is that the reason why we had the margin improvement over the third quarter, is we stopped plowing snow.

That's the simple answer.

Once the weather went back to being something close to normal and we removed a lot of those expenses, everything normalized pretty quickly, both on the operation side of the house for us and what we see with respect to customer shipping patterns.

In regard to your question about fourth-quarter margins versus last year, the biggest reason for the difference is simply higher network expansion cost year over year.

We've talked about our increased CapEx for capacity expansion.

You can't grow 10% a year the way we've been growing the last couple of years without adding more capacity to the network, and we've had to do that.

We do that from a very disciplined standpoint with very high ROIC hurdles before we approve a project.

So I don't know what more I could say about that.

I hope that answers your question.

I said at the outset here, that we are just simply not satisfied with anything other than margins in the high teens at FedEx Ground.

Our operations team works very hard to control expenses.

When we design these facilities, particularly the new ones, they include the state of the art materially handling equipment to reduce our costs over the long term.

Thanks.

We have a question over the Internet from Ben Hartford at Baird.

It basically is about acquisitions and would our strategy change as our capacity to support both increased returns to shareholders and larger scale acquisitions.

Let me take the front part of this and then asked Alan if he wants to comment on it.

Our policy towards acquisitions is not going to change.

Basically we look at a lot of things, but there are three factors that govern whether we have any interest in an acquisition, whether it's a large entity or a small tuck-in entity.

Number one, that there's got to be a strategic rationale for making the acquisition.

Second, that the technology, particularly the IT part, and the corporate culture fit.

And third, that we don't overpay, because there's no reason to overpay for something and thereby decrease margins or your earnings.

Alan, you want to comment further on that?

We like acquisitions.

We are always looking, with Fred's three criteria, I think, guiding us.

I think we've made some great acquisitions over the years.

Flying Tiger, Caliber, which was RPS, which is now Ground, which will probably have more EBITDA this year than we paid for it.

We have also not made some acquisitions that have been great.

We didn't have a culture fit or it was going to be too expensive, and as we look back on it, we are thankful for some of the moves we haven't made.

So it's a two-way street.

Our eyes are always open and we'll continue to look, but that's the way we've always been.

David Ross, Stifel Nicolaus.

Yes, good morning, everyone.

Back to the pricing side of things, the dim pricing at FedEx Freight.

We haven't seen density-based pricing in LTL for a while, but there's been a lot of chatter about getting rid of the old classification system and moving to more of a dimensional pricing there.

How do you see the pricing direction at FedEx Freight?

Can you move to dimensional soon?

What would be the impediments to doing so?

This is Mike.

Clearly there are multiple considerations when making these pricing decisions.

We operate in a very fragmented LTL space, and certainly aware of some of the optional density-based pricing that is being offered in the segment to some customers.

As the leader in the LTL industry in terms of revenue and volume, certainly we have a clear view of the market conditions and will consider any opportunities to more efficiently price the LTL service.

I think it is important to note that the class system that is used today is overly complicated.

Now having said that, that doesn't mean that change occurs quickly.

This is a pricing system that has been in place for decades and will take time to modify.

Many customers like it and they don't want to get rid of it, and some customers are more open to different pricing strategies.

So we'll continue to evaluate the opportunities and work with customers.

But I think it would serve the industry well over the long haul if the LTL pricing environment was simplified.

David, let me add a couple of comments.

In this fiscal year we'll be rolling out some of the dim capture machines out there to really go out there and capture dims on our current business.

Two-fold, number one, it helps us with our classification and current pricing for existing business.

But also more importantly, it builds up our costing files so we can really see as we go forward with our renegotiations on contractors and so forth, get a better look at the actual costing.

Once we build that database, it's going to help us have the ability long-term to go out there and move towards that.

As Mike said, the dimensional-based pricing solutions which will come over a period of time.

Scott Group, Wolfe Research.

Hey, good morning.

This is Andrew Gordon on for Scott Group.

Henry, I just wanted to piggy-back off of Kelly's earlier question on SmartPost, if you don't mind.

Sorry if I'm asking you to repeat yourself, but can you clarify what you meant by that one large customer's change in shipping patterns, as you called it?

I'm wondering if they shifted volumes to the regular Ground business?

Or if it's possible that they're deferring some volumes?

Or do you expect that this was just a complete exit of their business?

And then lastly, was the strong yield growth in SmartPost, would you say it was exclusively due to this customer's actions?

Or largely impacted by it?

Thanks.

Yes, I think the short answer is, is that the distribution change was made to go directly to the Postal Service as opposed to using SmartPost to get their packages into the USPS.

Regarding yields, we've been focused on yields at SmartPost for some time.

We are confident we'll replace this customer's volume with volume that is not only higher-yielding, but has that are margins than the business that left.

I can also tell you, and I can't tell you to what extent, but we believe that some of that volume also ended up in other FedEx networks.

The other thing I would say is, is that I don't believe all of it will leave.

I hope that answers your question.

Brandon Oglenski, Barclays.

Yes, good morning everyone.

I want -- kind of a two-part question but both related.

I wanted to follow-up from Dave's earlier comments that it looks like you guys are well on track to achieve the 75% of the $1.6 billion in the run rate by the end of FY15.

Dave, does that mean that Express EBIT could actually be north of $2 billion for FY16?

And then secondly, Alan, I also wanted to follow-up on your conversation around reaching the full $1.6 billion.

You did say that you're looking for better domestic and international trade growth.

Can you perhaps expand upon that?

What type of growth levels are you looking for to achieve those numbers?

This is Dave.

I'll go first.

I'm just going to comment that what we talked about in 2012 was our profit improvement plan.

I just wanted to say again we are on target.

We got there a little bit differently.

So I'm not sure how Alan all adds it up at the end of the day.

But for us, what was important for us is we ended up coming up with the plan that we are now executing for the end of FY15 to be on target in the end of FY16 to be on target.

Alan?

It used to be that international trade was a multiple of global GDP.

Those days have passed.

However we are, as Mike told you, looking for improvement in the global GDP through calendar 2014, and certainly into 2015.

With that, we do expect global trade will pick up.

I don't think it'll be a multiple of GDP, but we do expect it to pick up.

And when it does, we have the best, fastest, most global network out there, and we should benefit from it.

In that regard, we got a question over the internet from Michael Mathay, AllianceBernstein.

I'll take part of this and then asked Dave to put some color on it.

Can you provide an update on the Osaka hub and long-term impact for the Express business?

Our strategy in the Express business, to reiterate, is to operate an unduplicated backbone priority network that allows people to move door-to-door Express shipments of parcels and light freight between almost any two points on the planet within one to two business days.

And not dissimilar to Freight and Ground, we also offer an economy service, which in the main is moved on other people's networks.

Because we have an extra day or so to process it, and customers make the choice between priority and economy.

Same pick-up and delivery operation, same information technology, same scanning and so forth.

We think that that is a very winning strategy.

The Osaka hub was an extraordinarily important piece to this puzzle.

I'm going to ask Dave to comment on it, because he was out there for the opening.

But with our 777 airplanes we can come off of the Osaka hub and go straight in to our major hubs in the United States, which we do everyday, and back to our hubs in Europe.

It's the fastest possible service with the latest possible pick-up and the ability to add any point on the network without having to have a transpacific frequency.

So this has been an integral part of our long-term strategy and plan.

I'll ask Dave to comment on it because, again, he was out there just recently.

Thanks, Fred.

That's exactly right, and it's nothing short of a spectacular.

I was there in April for the ribbon-cutting.

The employees there are fantastic.

The customers all showed up in big numbers.

They're supporting our network out there and they told us that they would and they have.

Fred's right.

You can come off of Osaka and go all the way to Europe into our Charles de Gaulle hub.

You can go to the United States.

The fastest, latest pick-up times.

You can come off of there with deferred traffic, which we also have.

You load up all of our containers in all of those flights and so they're all full.

It's been one of our better strategic initiatives that we put in place in many many years.

All I can tell you is that it's very efficient, very successful.

You can flex up off of that hub as trade goes up and you can flex down, if it were to go down.

So it's actually perfect.

Let me just add that one of the objectives that we've been after, aside from the fact of improving our operating margins, is to do what Dave just said, is to provide more much more flexibility in this network.

So that we can move much quicker than we've been able to do in the past, which should prevent us from having big down cycles as we react to this big huge fixed-cost network.

We are getting more and more nimble and we're going to continue to improve that over the next 24 months.

Kevin Sterling, BB&T Capital Markets.

Thank you and good morning, gentlemen.

What's your outlook as it relates to FedEx trade network's growth of FY15?

I'm curious how should we think about both the air and ocean side as it relates to FedEx trade networks?

Thank you.

This is Dave again, and then Fred wanted to comment as well.

But let me just say that it's been a very big part of our whole portfolio.

It's been very significant.

When we talk to very big customers or small, but in the main very big, they're looking for fast overnight.

We've got that with our 777s.

And when they want deferred, we now have that in a big way with our ocean forwarding business in FedEx trade networks.

But more importantly, we now can go to a customer and bundle the whole portfolio in a way that we couldn't do in the past.

So it's been very successful.

I just wanted to make a comment about the international transportation segment.

I gave three speeches over the winter which are published on the FedEx IR website.

I think one of the problems I see and sometimes with people commenting on international trade in the air cargo business specifically, is you don't break it into the granular sectors that we see on a day-to-day basis.

You really have to understand it in terms of the door-to-door express segment, the general air cargo segment, and the ocean freight segment.

What customers are increasingly doing is moving to a more just-in-time door-to-door regime for the things that are important.

In that segment is both priority and economy, because you are talking about the difference between one to two days and two to four days, still massively faster than sea freight.

But as the cost of fuel continues to go up, people are doing all kinds of things, including relocating things to Mexico, which is why we several years ago bought a wonderful company in Mexico.

We're now uniquely positioned for the cross-border NAFTA trade there.

Then the commodity Freight is toggling between the express segment and the sea freight segment.

That's where people get a little bit off base, is they tend to look at the market as much more holistic than it actually is.

David Vernon, Bernstein.

Hey, thanks for taking my question.

Dave, maybe you could comment a little bit on productivity and capacity utilization levels you are seeing in the express network today?

And how much better you think those levels could get over the course of the next two years in the restructuring program?

Yes, thanks for the question.

I meant to comment on this earlier.

We talk about international all the time, but our US domestic express team is doing a fantastic job.

They've had attrition and they haven't back-filled people in the past.

Going forward that will continue to be the case.

They've consolidated facilities.

We've consolidated routes.

Productivity is going up.

Efficiency's going up.

The restructuring transformation in the United States is very significant in our plans going forward.

So the United States team that's listening to this call, I wanted to thank them and congratulate them as well.

We talk about international a lot, but as importantly, the United States express team.

David, this is Alan.

I just wanted to add that our use of technology here is unbelievable.

The productivity that we're driving, the efficiencies that we are driving to the great technology that we have and that we're developing, is making a big impact on these productivity issues.

We couldn't do it without it, frankly.

There's more to come here.

We're getting traction every day.

I'd like to turn it over to my partner, Rob Carter, to talk about that.

One of the key elements to the profit improvement program was technology.

Whether it was taking down the cost of technology and deploying more efficient and modern technology across the board, or helping our operating friends operate their businesses more effectively with great technology.

So we're proud to be a part of these improvements and there is more to come, like Alan said.

We are making significant investments in modernizing and simplifying our technology, as well as improving speed to market.

Jeff Kaufman, Buckingham Research.

Thank you very much.

A lot of my questions have been hit.

Alan, real quick, you mentioned the pension expense being reconfigured for next year.

The markets are up quite a bit over the past year.

Could you quantify how much lower you believe your pension expense could be in 2015 versus 2014, in terms of how you think about that forward guidance?

Well, it'll definitely be a significantly lower number in 2015 than 2014, as was 2014 versus 2013, Jeff.

It was on the back of very strong return on assets.

We actually had another discount rate decrease at our measurement date, which was May 31, which was a little surprising.

But offsetting that are -- we have merit increases.

We have healthcare increases.

Hopefully as the Company does better, we're going to rebuild our annual incentive pools to higher levels.

We are going to use some of that pension good news to put it into additional programs for our employees.

And that's all in the guidance.

Thank you.

It appears there are no further questions at this time.

Mr. Mickey Foster, I would like to turn the conference back to you for any additional or closing remarks.

Thank you very much for your participation in FedEx Corporation fourth-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.

And that does conclude today's conference.

Ladies and gentlemen, we would like to thank you for your participation.

You may now disconnect.