聯邦快遞 (FDX) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to the FedEx Corporation second-quarter FY16 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 afternoon, and welcome to FedEx Corporation's second-quarter earnings conference call.

The second-quarter earnings release and our 20-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.

We have moved our call to the afternoon to allow more time for us to review our results and answer your strategic questions.

Written questions are welcome via e-mail or social media.

When you send your e-mail, please include your full name and contact information with your question.

Send it to our IR@FedEx.com address.

If you'd like to send a question via social media, go to StockTwits.com and include dollar-sign FedEx -- FDX -- in your message.

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

We'll first take a couple of questions after the remarks from the conference call.

Then we'll answer questions that have been submitted via the Internet.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

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

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

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

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 Mike Ducker, President and CEO of FedEx Freight.

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

Thank you, Mickey.

Good afternoon, and welcome to our discussion of results for the second quarter of FY16.

FedEx Corporation posted solid earnings and a year-over-year EPS improvement of 19%, excluding TNT integration costs and a legal settlement charge for FedEx Ground.

We continue to increase margins, earnings per share, cash flows, and returns on invested capital.

These basic trends should continue well into the future, barring major events or macroeconomic factors.

A record number of holiday shipments, fueled largely by the steady rise of eCommerce, are flowing through the FedEx global networks.

Monday, we picked up over 26 million packages globally.

We greatly appreciate the dedication of more than 340,000 FedEx team members who are delivering the holidays to our customers around the world.

Express service levels, in particular, have been outstanding.

While we have experienced extremely heavy Ground volumes in the Northeast, our team members have risen to the challenge, and the Ground system is running as scheduled.

Adherence to our people, service, profit philosophy and the FedEx strategy of compete collectively, operate independently and manage collaboratively, are keys to our success.

We will exceed the profit improvement program at FedEx Express this fiscal year, and the aircraft fleet modernization program is paying off in a big way.

It's no secret that eCommerce is changing the dynamics of the transportation industry and driving remarkable growth.

We have strategic plans to ensure we will continue to benefit in the years ahead from this growth.

For example, we're integrating Ground and SmartPost facilities and line-haul systems to realize incremental operating expense savings in the future.

Multi-year expansion of automated FedEx Ground facilities will allow continued profitable growth, and provides the most flexible and fastest Ground package system possible.

We're also deploying new technology that will enable us to combine FedEx Ground and FedEx SmartPost packages going to common delivery addresses, which will significantly improve efficiency, productivity and service.

FedEx Freight is focused on improving margin trends in a weak industrial economy through better balance in volume and yield, and higher productivity.

Our recent offer to buy TNT Express, assuming it's approved, will quickly broaden our portfolio of solutions, particularly in Europe.

Customers of both FedEx and TNT will benefit from our unmatched global network.

Despite contraction of US exports due to the high US dollar and low world GDP and trade growth, the overall market for international door-to-door express continues to increase, also driven by eCommerce.

A couple of developments in eCommerce are worth noting.

First, oversized packages are increasing.

And second, a number of eCommerce shippers continue to use extremely cube-inefficient packaging.

Loaded density in over-the-road ground trailers is therefore declining because of these trends.

In this regard, we are extremely disappointed that Congress did not approve the use of twin 33-foot trailers on the nation's highways versus the current 28-foot standard.

33s are already permitted in 18 states, and we have safely driven them almost 1.5 million miles in Florida alone.

Drivers tell us they are more stable than the 28-foot trailers, with similar handling and turning.

Our industry estimates this change would, one, eliminate about 6.6 million trips annually, and thereby improve safety, due to fewer accidents per year.

The 33s would materially reduce congestion.

Third, it would save over 200 million gallons of diesel and reduce carbon emissions by 4.4 billion pounds per year.

With eCommerce exploding and US automobile miles driven reaching a record high this year, 33-foot trailers would be of enormous benefit to our economy, and significantly improve road safety.

We would like to welcome Chris Inglis to the FedEx Corporation Board of Directors.

Chris retired in 2014 as a Deputy Director and Senior Civilian Leader for the National Security Agency.

His cyber security and information technology expertise and significant leadership experience will be very valuable to FedEx.

Regarding the vital issue of cyber security, the pending omnibus bill contains several very positive changes to the law regarding corporations and government agencies, and we sincerely hope it passes.

In conclusion, let me also remind you that this is the earnings call of FedEx Corporation.

We manage our portfolio of services to achieve enterprise results, which does not always translate into each segment's individual earnings and margins.

Now, Mike Glenn and Alan Graf will discuss our economic outlook and further details of second-quarter earnings, after which, as Mickey said, we will take your questions.

Mike?

Thanks, Fred.

I'll open with our economic update and outlook.

And then I'll discuss performance and business conditions in each segment, including revenue volume and yield, and provide some commentary on pricing and broader industry trends that we're experiencing.

But first, I'd like to take this opportunity to acknowledge our team members around the world who are delivering the holidays as we speak.

As Fred noted, we've experienced record-breaking demand during this peak season, largely driven by the rapid growth of eCommerce.

Our busiest days during peak have exceeded our forecast, and more than double our average daily volume.

And it should be noted that our busiest days this year are approximately double what they were just about eight years ago.

Our ability to flex our networks to meet this demand and while delivering service our customers expect, requires many elements.

We continue to invest in new facilities, capacity expansion.

We apply advanced engineering and use state-of-the-art sortation technology.

We innovate the portfolio, and certainly collaborate very closely with our customers.

But more than anything else, our ability to meet this demand comes down to our people, including our drivers, couriers, pilots, package handlers, and all team members that are hard at work around the world right now to deliver the holidays.

Now let me make a few economic comments.

We continue to see moderate growth in the global economy.

Our US GDP growth forecast is 2.4% as we end calendar 2015, which is slightly lower than our September 2.5% growth outlook.

And our forecast for calendar 2016 is 2.6%, which is led by gains in consumer spending in the near term.

We expect industrial production growth of 1.5% in calendar 2015, which is 40 basis points lower than our September outlook.

And we have a forecast for 1.9% next year, which is consistent with our September forecast.

Energy investment, the strong dollar and an inventory correction are restraining growth in the sector.

Our global GDP growth forecast is 2.5% for calendar 2015 and 2.8% for calendar 2016, which represents no change from our prior outlook.

Now I'll review our revenue, volume and yield trends by segment.

In the Express segment, revenue decreased 6%, as lower fuel surcharges and unfavorable currency exchange rates more than offset base yield growth.

US domestic package growth grew by 1%, driven by growth in overnight packages, while US domestic revenue per package or yield decreased 2%, due to lower fuel surcharges.

If you exclude the impact of fuel, year-over-year Express domestic package yields grew by 3%, primarily due to rates and discount, product mix and weight per package.

FedEx International Economy volume grew by 3%, while FedEx International Priority volume declined by 5%.

International export revenue per package decreased 9%, as lower fuel surcharges and unfavorable currency exchange rates more than offset higher base rates.

If you exclude fuel, international export Express package yield decreased 3%, primarily driven by the negative impact of exchange rates, which outweighed the positive impact of weight, rate and discount changes.

Excluding fuel and exchange rate impact, yields actually increased 1%.

In the Ground segment, revenue increased 32% in the quarter, due to the inclusion of GENCO results, higher Ground volume and base rates, and the recording of SmartPost revenues on a gross basis versus the previous net treatment.

FedEx Ground average daily volume grew 9% in the quarter, primarily driven by the growth in demand for residential deliveries related to eCommerce.

FedEx Ground revenue per package increased 10%, due to the recording of FedEx SmartPost revenues on a gross basis, and higher base rates, which include additional dimensional weight charges, partially offset by lower fuel surcharges.

Excluding the impact of fuel, Ground yield per package, including SmartPost, increased 13% year over year, primarily driven by changes in dimensional weight rating, extra services and SmartPost customer mix.

Normalizing for the change in treatment of SmartPost revenue on a gross basis, Ground yields, excluding the impact of fuel, increased 3.9%.

FedEx Freight revenue declined 2% and shipments increased 1%, which is directly related to the lower levels of industrial production.

We've also seen some heavier-weight shipments move back to truckload as capacity has eased.

LTL revenue per shipment declined 3% due to lower fuel surcharges, partially offset by higher base rates.

Excluding the impact of fuel, yield per shipment increased 2% year over year at FedEx Freight, which was primarily driven by shipment class, rate and discount.

As we announced in September, we will be raising rates at FedEx Express Ground and Freight by an average of 4.9% on January 4, 2016.

In addition to the rate changes, FedEx also recently increased surcharges for unauthorized packages in the FedEx Ground network.

We've seen significant shifts in demand across our portfolio, including higher demand for residential deliveries due to eCommerce growth.

We've rapidly responded to these shifts both through increased investments in capacity, expansion of our portfolio, and pricing decisions across the portfolio.

The rise in residential deliveries brings with it operational considerations, including the number of increased stops, a higher use of fuel as a result of the increased stops, and evolving package and weight dimensions.

For example, packages classified as oversized account for almost 10% of Ground home delivery packages during peak season.

This is a primary reason why we increased the surcharge on unauthorized packages in November and will be increasing the surcharge on oversized packages in January.

As we conduct our post-peak season analysis, we'll factor all these considerations into future pricing decisions.

As I mentioned earlier, we are experiencing a record breaking peak season, with strong demand across the portfolio, especially for residential deliveries within the Ground network.

Strong customer collaboration is absolutely critical in preparing for peak, as it enables us to anticipate surges in volume, and position resources appropriately to meet the customers' needs.

We've experienced heavy demand for FedEx Ground, particularly in the Northeast, as Fred noted, but our dedicated team members are working hard to deliver the holidays.

Demand in our industry is rapidly evolving, and we have continued to make changes to our service portfolio and adjusted our pricing strategies to meet customer needs and generate profitable growth around the world.

And now I'll turn it over to Alan Graf.

Thank you, Mike.

Good afternoon, and happy holidays, everyone.

We had an outstanding quarter, and we expect our solid earnings growth to continue in the second half of FY16.

We reaffirm our adjusted guidance for the year of $10.40 to $10.90 per share.

Four highlights stand out to me.

First, our adjusted EPS was up 19% for the second quarter.

Second, adjusted operating margin for the quarter was 9.6%.

Third, our FY16 guidance reflects nearly 20% growth at its midpoint.

And fourth, cash flows from operating activities increased $300 million or 14% for the first half of FY16.

I'm very proud of the entire FedEx team for its impressive efforts, which are continuing during this record peak season.

Quarterly results improved largely due to higher base rates at Express and Ground, continued strong growth of eCommerce, and positive impacts from the profit improvement program that we announced in October of 2012 -- and it's probably ahead of schedule at this point.

These positive factors were partially offset by lower operating results at FedEx Freight, primarily due to salaries and employee benefits expense significantly outpacing lower-than-anticipated volume growth, and the modest negative net impact of fuel.

There were two expense adjustments this quarter within eliminations, corporate and other expense.

First, expenses related to the settlement of independent contractor litigation matters of $25 million net of tax, or $0.09 per diluted share.

Also, expenses related to our pending acquisition of TNT Express of $12 million net of tax, or $0.04 per diluted share.

TNT acquisition will transform FedEx's European offerings and accelerate global growth.

We expect the acquisition will be completed in the first half of calendar 2016.

Turning now to Express, another stellar quarter.

Operating margin grew to 9.4%, which is the best margin for Express in nearly nine years.

Operating income increased 26%, despite a revenue decline of 6%.

While Express fuel expense decreased 43% in the quarter due to lower fuel prices, fuel had a slight negative net impact to earnings versus last year.

The negative net impact of fuel was a result of lower fuel surcharge revenue year over year, primarily and partially offset by lower fuel prices during the quarter.

Currency fluctuations have little net impact on our P&L at Express, but can drive significant changes to revenue and expense.

In addition, impacts to our P&L are more influenced by some currencies than others.

Recent strength in the US dollar against certain currencies has caused lower revenue expenses for FedEx Express, as well as a shift in trade patterns, as US imports have increased and exports have declined.

A portion of our non-US originating revenue, particularly from large multi-national customers, is paid in US dollars, and therefore for is not subject to currency fluctuations.

This helps our international revenue and expense denominated in foreign currencies to be more balanced, causing little net impact on our P&L from currency fluctuations.

That will change once we acquire TNT, and we will update you on what the impact is at that point.

In spite of weakening trends in global trade, Express is realizing benefits from its profit improvement plan, as I mentioned before.

This includes strong productivity gains, a right-sized workforce, efficient and reliable assets due to the fleet modernization program, and improved base yields.

These structural improvements allow us to take advantage of the growing eCommerce market and to succeed under current global economic conditions.

Express remains focused on ensuring the right products are in the right network, and is looking for more opportunities to improve profit by using purchased transportation on a lane-by-lane basis, where it meets our service level requirements and adds shareholder value.

The significant network improvements we are making enable us to profitably handle growth around the globe and quickly address any lane imbalances due to shifting trade patterns.

Looking at Ground, FedEx Ground posted healthy results as a result of eCommerce growth, pricing actions and growth in market share.

Operating income was up 13%, due to higher base rates and volume.

This is the financial metric that we are most focused on at Ground.

As we expected, operating margin was affected by the recording of FedEx SmartPost revenues on a gross basis and the inclusion of GENCO results.

Together, those items reduced the operating margin year over year by 2.1 percentage points for the quarter.

GENCO business itself is very good.

By definition, however, it will impact Ground's margins because of Ground's much higher overall margins.

This is no surprise to us.

The GENCO acquisition complements and differentiates the FedEx value proposition, and is central to our eCommerce strategy.

Opportunities from GENCO will help grow our core transportation business, especially reverse logistics, and leverage existing customer relationships to open doors for both Companies.

Ground's long-term strategy is focused on sustainable revenue, earnings and cash flow growth.

In addition to GENCO, here are five ways Ground prepares for the long game.

First is automation.

We are making significant investments to add additional automated hub capacity and ensure many new stations are also fully automated, providing significant operational flexibility and capacity, particularly during sustained high volume, and keeping FedEx ahead of the competition.

Second is SmartPost integration.

As one network, Ground is able to maximize the use of facilities and line-haul assets to save operating expense.

And moving SmartPost packages on to a home delivery truck that is already going to a residence is significantly less costly than paying postage for the USPS to deliver the package.

Over the next several years, as we combine packages that are destined to the same delivery address, we will further increase our efficiency and profitability.

Third is Monday residential service.

Online shopping is a 24/7 experience, so we began a pilot test in which we make weekend pick-ups at retail locations for Monday residential deliveries in a defined area.

We may consider additional markets, depending on the results of the test.

Fourth is technology enhancements.

This is a cornerstone of how we operate inside the FedEx portfolio.

We continue to identify tests and implement new technology for our operations beyond automated sortation.

Scanners, package photo-imaging and GPS are a few examples.

And fifth is pricing.

As Mike discussed, adjustments to our dimension-based and oversized pricing help offset the increasing packing sizes that reduce our cube efficiency and increase our line-haul costs.

The surcharges that went into effect last month apply to packages that exceed the length or weight limitations with the FedEx Ground network and are handled at our option.

These proactive steps help ensure that oversized packages accepted in our network are properly priced for the space they use.

We expect Ground capital expense for FY17 to remain at its FY16 level of about $1.6 billion.

90% of that will be targeted for growth, largely because of rising costs of land and equipment necessary for Ground expansion and further automation.

This is a change from my Ground capital comments on the previous earnings call.

At FedEx Freight, we are adjusting to challenging less-than-truckload market conditions.

Manufacturing, especially in oil exploration and production, has been weakening for most of the year.

The latest rating for November showed the Purchasing Managers' Index, an indicator of the economic health of the manufacturing sector, down more than 15% year over year.

Slower manufacturing and a weaker economy and mode shift have been significant headwinds to Freight's performance.

Freight's segment operating income and operating margin decreased, due to salaries and employee benefits expense significantly outpacing lower-than-anticipated volume growth.

We are adjusting staffing levels and other items to offset the impact of the current weak industrial environment.

Looking ahead, we expect our solid earnings growth to continue in the second half.

And it's significant that we are reiterating our adjusted FY16 earnings guidance.

This equates to an adjusted EPS growth year over year of 16% to 22%, despite the weaker-than-anticipated industrial production and global trade.

Earnings growth for the second half of 2016 will be driven by volume and base-yield growth at Express and Ground, and continued benefits from our profit improvement program initiatives.

Year-over-year adjusted earnings growth is expected to be stronger in Q4 versus Q3, due to the significant net benefit from fuel in Q3 of last year, and the growing benefits from our profit improvement initiatives.

Remember, this guidance doesn't include any impact from TNT and mark-to-market pension adjustments.

We will provide updated information at a later date.

We still expect to close in the first half of calendar year 2016, and are waiting on regulatory approvals.

Our tax rate is lower this quarter because we were able to resolve a state tax matter in our favor.

The full-year rate is expected to be about 36%, excluding any impact from TNT and mark-to-market pension adjustments.

Our capital spending forecast for the fiscal year remains at $4.6 billion, primarily for fuel-efficient new aircraft and to support eCommerce growth at Ground.

We will continue to invest in our people.

Team members' pay increased in October, their healthcare premium held steady in calendar 2016, and our pension fund is strong, with an accounting funded level of approximately 87%.

On November 13, we replaced our revolver and letter of credit facilities with a new five-year $1.75 billion revolving credit facility that expires in November 2020.

The facility, which includes a $500 million letter-of-credit sub-limit and multi-currency capability, is available to finance our operations and other cash flow needs.

Also during the quarter, we issued $1.25 billion of 30-year notes at 4.75% coupon.

The rating agencies affirmed our current ratings for this transaction.

Interest will be $36 million for FY16 from this transaction, and $60 million on an annual basis going forward.

We used the proceeds for some of our share repurchases, as well as other corporate purposes.

Since FY14, we have returned over $7 billion to shareholders through repurchasing over 53 million shares at an average price of about $139, including over 8 million shares we have repurchased in FY16 to date.

4 million shares remain under our existing share repurchase authorization, and we plan to repurchase all the remaining authorized shares by the end of the fiscal year.

In closing, let me remind you that despite the economic headwinds, the FedEx Corporation balance sheet is strong, our cash flow is improving and we expect strong EPS growth.

Thanks very much for your attention, and now we'll open the call up for your questions.

Thank you.

(Operator Instructions)

We will first go to Chris Wetherbee from Citi.

Great, thanks, and good afternoon.

Wanted to touch on the Express side and how it relates to the guidance.

So weaker macro maintained guidance, and you've talked about the Express profit improvement plan likely exceeding targets.

Can you give us some context around that, and how you may think about the potential for FY16, and then maybe beyond?

This is Fred Smith speaking.

I'll let Dave talk about it.

Express's margins are going up.

They will continue to go up, absent macroeconomic or geopolitical events.

As I said in my remarks, the fleet modernization program is making a huge difference.

Alan said in his remarks, the productivity, because of technology, is going up.

The system form adjustments that Dave made in his network allow us to put the right traffic in the right network.

And as I said, Express is in a sweet spot.

Thanks for the question, and thanks, Fred.

We are in a sweet spot.

And if you remember, our profit improvement plan was driven mostly by structural cost initiatives, and not as much on the revenue.

That being said, the revenue has been better.

We've had better yield management.

But again, we have had terrific performance in our fleet.

The planes are flying at 99-plus reliability, and the fuel savings has been great, and of course, the reliability is all around the world.

That being said, of course, our productivity -- and we've right-sized our US operations here throughout the United States.

And really, on the global basis, the traffic that we're moving on the international economy basis, that's growing is very profitable for us now, because we have it in the right network.

So yes, we're very optimistic about our profit improvement going forward.

It continues to increase the profits.

It doesn't stop -- of course, I saw some of the comments earlier.

It just continues to keep growing and increasing.

And Fred is right.

We hit a nine year-high of our margins at Express, and those will continue to grow, as will our profits.

And we'll now go to Tom Wadewitz from UBS.

Yes, good afternoon.

Thanks for the question.

If I could get -- I don't know if this is more for Alan or for Dave.

But on the Express improvement plan, I guess it's less clear to me what the metrics are, versus when you originally introduced the plan.

You talked about, I think, the $1.6 billion.

And is that -- and I think that was the end of FY17, but then the base changed a little bit related to the pension.

So could you just run through what the right, I think, both absolute amount you're considering to be the plan?

And then is year-end FY17 still the right timing on that?

Recognizing you'll improve on an ongoing basis, or you'll try to do that.

Thank you.

Thanks, Tom.

I think we've mentioned this before several times, but it's important to mention it again.

The 75% run-out rate that we've captured, we captured it at the end of last fiscal year.

FY16 built on that.

All five of the pillars are still the five that are producing the results.

Quite frankly, they are better in almost every category.

You can go back and look at all the notes or you call IR for the five pillars, but across the board, we're improving each one of the pillars.

The one that we counted on the least was the global marketplace revenue, and actually we've been better on that.

All that being said, that was the one that we were worried about the most.

We're doing very well there, because we planned it to be less than all of our cost initiatives.

So I would say going forward, obviously you can see in the numbers, we're having a great year in 2016, and that will continue into 2017.

We'll now go to Nate Brochmann from William Blair.

Good evening, and thanks for taking my question.

Fred, you started off talking about all the changes that e-commerce has brought, and how that's allowed you to redefine your network and serve your customers.

As your customer supply chains evolve, how have you been able to help them and get deeper into that relationship?

And particularly, how does GENCO help with that?

Well, I'll ask Mike Glenn to comment on it after I do.

But a big part of e-commerce is handling returns.

So some years ago, as we saw the market evolving, we decided it would be a very good thing for us to have a supply chain capability, to offer a broader portfolio of value-added services to our e-commerce customers, because this was a huge part of the marketplace.

It wasn't just planning on how to get it to the end-customer, but how to efficiently process the returns and the merchandise.

So through, quite frankly, a serendipitous chain of events, this great Company, GENCO -- which was, coincidentally in Pittsburgh and was by far the leader in this space, in our opinion -- became available.

And we did a deal with Herb Shear, a fine gentleman, and great management team that he had assembled.

And so we think there are enormous synergies there.

I'll ask Mike and Henry to comment on it.

But we just couldn't be any more pleased with GENCO being part of the FedEx portfolio, and think it will enhance our competitive position and problem-solving ability for our e-commerce customers.

Hey, Nate, this is Mike.

I think it's important to note that our sales team has a solutions organization that works hand in glove with our large e-commerce customers to help optimize their supply chains.

And that includes everything from types of information management solutions to location of distribution facilities, selection of services -- all designed to drive value for those companies.

And sometimes those solutions are good for FedEx in the short term, sometimes they're not so good for FedEx in the short term.

But they are always good for us in the long term, because we're working with customers to drive solutions that are going to benefit the relationship between FedEx and the customer over the long haul.

So we're well-ingrained and embedded into our largest customers, and work with them hand in glove throughout the year to prepare for peak season and operations 12 months out of the year.

GENCO was a significant addition to our portfolio.

We recognized we had an opportunity to enhance the portfolio, as Fred noted.

They have world-class solutions in the return segment.

Returns is a particularly big part of any e-commerce value proposition, because they tend to be double digits, whereas a traditional brick and mortar retailer is in the mid- to lower-digit return rate.

So GENCO has been a tremendous addition to the portfolio.

We are well-down the track on integration, and we see a lot of benefit going forward.

I should note, GENCO does many things other than returns.

And within their capabilities, they are outstanding, and the market leader in the return space.

Henry, do you want to add anything?

The only thing I would add is, is that they have quite a footprint on the forward logistics side as well.

So customers that want, for instance, fulfillment, GENCO could do.

I think it's important for the folks on the call to understand, there are a lot of transportation segments between all of these nodes on supply chain.

And this gives us an opportunity to participate in the transportation, whereas before, we probably didn't get a chance.

I'll now turn the conference over to our speakers for any questions that may have come over the e-mail.

Okay, we've got some questions over the Internet.

Ken Hoexter of Bank of America Merrill Lynch: thoughts on Amazon creating its own network.

Mike Glenn, do you want to comment?

Yes, thanks, Fred.

I'm not quite sure how you're defining network, but let me say that virtually every major retailer in the United States today has a dedicated line-haul operation to move inventory between distribution centers and stores, and Amazon is certainly no different in that regard.

Amazon is a very large FedEx customer, and we work closely with them, as I just noted, to optimize delivery needs.

And of course, work with them very closely to create new solutions to support their future growth.

And I do think it's important to point out, however, that FedEx is a highly integrated global transportation network, in fact, one of only two operating at a significant scale in the United States today, and only one of three major delivery networks in the US -- the other two being UPS and the United States Postal Service.

That's not likely to change in the foreseeable future, as these networks are very capital-intensive and information-intensive.

And finally, I think it's important to note that our network is a linchpin in the e-commerce market, and our customers rely on us to support their growth.

So we feel quite comfortable where we are situated today.

Okay.

There are a couple of questions here from several Internet questioners about the update on TNT.

I think we answered that in Alan's comments.

We're hopeful we will close by the first half of next year.

I'll ask Chris Richards to put any color on that she wants.

There's another regulatory question from Helane Becker about -- is there a concern the fine levied by the French will be copied by other countries?

And are you considering an appeal?

Chris?

Thank you, Fred.

I'll start with the update on the regulatory approvals of the TNT acquisition.

As we indicated in our joint press release with TNT on October 20, we have been informed by the European Commission that no statement of objections will be issued to the review of our transaction.

We are anticipating that we will receive final unconditional approval from the EU in the first two weeks of January.

In addition, we have completed the process and received clearance in ten other countries, including the US, Australia, Chile, Colombia, Japan, New Zealand, Russia, Taiwan, Turkey and Ukraine.

At this time, we are aggressively pursuing clearance in the remaining seven countries -- Brazil, China, Argentina, Israel, Korea, Namibia and South Africa.

And we are very confident that we will achieve the clearances that are necessary to close this transaction in the first half of calendar 2016.

Moving on to the question about the French proceeding -- no, there is not any concern that the fine levied by the French will be copied by other countries.

Because this preceding involved TATEX, a French company that we acquired in 2012, and the events that are the subject of this proceeding occurred in 2010, long before we acquired the business.

The events were limited to France.

But despite that situation, we are considering an appeal of this decision, and we will give you an update on it next quarter.

Jack Atkins of Stephens wants to know what the margin goals for the Ground segment are.

He asked a couple of other questions here, but I think they were basically answered, because they concerned TNT.

And he's interested to know, Henry, about the cost savings to be realized from the integration of SmartPost into FedEx Ground.

Yes, there's significant savings when we can marry two packages together to residential delivery.

Because the vast majority of cost in any of these networks is really around stopping the truck and throwing them an address.

So when you can pull a package out of SmartPost, for instance, marry it up in a single network with a FedEx home delivery package, the savings are quite a bit, the costs are quite a bit less than paying the postage on that package to have the US Postal Service deliver it.

There are a number of other advantages as well.

One is, is that we can maximize the capacity between Ground and SmartPost.

From time to time -- and at times, even geographically throughout the year -- we see volume spikes.

This gives us the ability to move, for instance, a SmartPost package into a Ground hub small-sort operation and process it there, as opposed to essentially just bringing in more people at SmartPost to handle the added volume.

There are a number of other issues, and just in the sense that we can share people now, we have effectively dissolved the corporate structure.

So all of SmartPost's people are either being deployed in their current jobs in the former SmartPost, or within FedEx Ground.

We'll now take a few questions over the phone lines.

We'll go to Allison Landry from Credit Suisse.

Thanks.

So Fred, you mentioned early in your remarks that e-commerce customers continue to use inefficient packaging, and you're continuing to see growth in oversized packages.

So given that customer behavior is not changing, how do you plan to mitigate this going forward?

And do you intend to lean more into pricing?

Well, the answer to that question is, yes, on the pricing.

And of course, we have already done some of that, and we have announced more.

That's really where dimensional pricing came from.

I mean, we were getting lots of packages that were one or two cubic feet, and inside was a six-ounce stuffed toy.

And that comes from the way e-commerce is processed.

These large fulfillment centers -- or perhaps not so large -- but they are using a lot of effort, particularly during the holidays, to speed up order fulfillment.

And they put things in boxes, and it's quite different than, say, Proctor and Gamble packaging toothpaste in the most efficient and most dense way to minimize transportation cost.

So the reason this continues, quite frankly, with more effort not put into it on the part of the e-tailers, is, the Postal Service doesn't have dimensional pricing.

And I have to tell you, I feel for a lot of our postal folks out there.

They operate their parcel delivery system with 200,000 jeeps which were basically designed for mail delivery.

And watching them, it looks like a submarine.

These people are -- they got all these packages on the left-hand side of the truck.

They have to stop, they have to pull them out, re-sequence them for delivery.

And at my house, I can promise you, we're getting a lot of very lightweight cube items coming from retailers through SmartPost, or directly from an e-tailer.

So over time, all markets are rational, and it does not make a lot of sense for the e-tailer or the transportation company -- or the delivery company, in the case of the Postal Service -- to pay money to deliver air.

So I think pricing will rationalize it.

As I said in my remarks, it's just a terrible shame that 33-footers were not approved.

That gives about 18% more cube, very little increase in weight.

And as I mentioned, from an environmental and safety standpoint, it was just a complete lay-up.

And the forces that opposed it, quite frankly, were not well-informed on the issue.

And hopefully the Department of Transportation will move smartly to correct this.

Because, as I said, these are already used in 18 states, and they are more stable, because they put slightly more weight on the axle of the twin trailers.

Passing a 33-foot set of doubles versus 28-foot doubles at 60 miles an hour is basically inconsequential.

It's about a tenth of a second difference.

So it was a great opportunity to have a win-win-win solution in terms of national productivity for e-commerce, reduction in fuel and environmental emissions, and then would reduce over, I think it was a thousand accidents estimated with the Ground parcel and LTL industry per year.

But it is what it is, and obviously, we will have to operate the 28-footers.

But that would have mitigated a lot of these inefficient cube developments we've been talking about.

Our next question comes from Tom Kim from Goldman Sachs.

Hi, good evening, and thanks for your time.

I wanted to follow up on the Ground margin question.

I have a question around the integration of SmartPost and GENCO.

In the prepared remarks, you had mentioned that operating margins had been impacted by about 1.2% or more.

Is that including any one-off integration costs?

Well, this is Fred Smith speaking.

Alan mentioned that of the Ground margin delta -- 2.1% out of, I think, 2.2% -- was having to report because of the integration of Ground and SmartPost, the revenues at the gross level versus the net level.

Prior to our doing that, we simply took the net cost of the postal deliveries.

And -- excuse me, the delta between the postal delivery cost and our revenues.

As a single network, the accounting rules are such, we had to take it on a gross basis.

So there's no diminution whatsoever in earnings, cash flows, the performance of Ground.

It's just an accounting situation.

The second is the fact that we put GENCO into the Ground segment, and Henry is in charge of this, because it is so closely aligned with the Ground parcel SmartPost presence in the e-commerce market.

Now again, as Henry said, GENCO does many other things for Express and Freight and so forth.

But we're very confident in our Ground margins.

And Henry why don't you add to this, and say it one more time what our goals are here?

We strive for mid-teens margins at FedEx Ground.

There is no discernible integration costs in there at all.

I mean, this was roughly 10 basis points.

It frankly falls into all other.

There was no single large item.

And you've got to keep in mind, with a Company of this size, and the fact we recognize revenue on delivery, not on pick-up, having a couple thousand packages move in or out of a quarter can have a huge bearing on operating profit.

Our next question comes from Scott Schneeberger from Oppenheimer.

Thanks very much.

Good afternoon.

I was curious, could you address, please, the trans-Pacific and trans-Atlantic trade lanes?

How did they progress through the quarter, what you're seeing into the coming quarter, and also, with consideration for capacity?

Thank you.

Yes, this is Dave Bronczek.

I think I heard your question.

Trans-Pacific, trans-Atlantic -- it's generally the same economic environment that Mike talked about at the beginning, around the world.

It's growing, but it's more modest.

So I wouldn't say -- I think it is actually growing more out of Europe because of the currency exchange.

A little bit less out of Asia.

But around the world, we've balanced our network.

So for us -- in Mike's comments, we took that into consideration, as to where we put our packages and how we flow our network.

Our next question comes from Rob Salmon from Deutsche Bank.

Hey, thanks, and good evening.

Continuing on the Ground line of questions, can you give us a sense of what drove the acceleration into average daily package volume growth?

Was a lot of this as a result of the GENCO acquisition -- you're starting to see some of those revenue synergies showing up?

How much of an impact was the calendar?

And if there were any shifts coming out of Express's US deferred volumes, which declined for the first time in a few years?

It would be helpful to understand the different puts and takes there.

The volumes at Ground are growing because we're taking market share and because e-commerce -- the delivery of individual packages to businesses and retail -- is growing.

And on the -- what was the Express deferred?

Do you want to comment on that, Mike?

Yes, I wouldn't read too much into the Express deferred traffic levels, on a trend basis.

Again, as similar to what Henry noted, specific pricing decisions on a customer-by-customer basis can impact volumes in any quarter.

And so I wouldn't read too much into that.

We're pretty pleased with where we sit, from an Express volume standpoint, being up overall, with the growth coming in overnight.

That's a positive thing for us.

I'll now turn the conference over to our speakers for more e-mail questions.

Okay, we have some other Internet questions here.

Kelly Dougherty, Macquarie: how does the greater unpredictability of online sales challenge impact your out-year planning projections?

Well, let me make a couple of comments here, and then ask Mike to jump in, or Alan.

As we mentioned earlier, we have this enormous sales group, which I unabashedly think is the best in the industrial services sector.

And as an integral part of that, we have this wonderful solutions group.

So our good customers that work with us on a partnership basis, we can do an excellent job of anticipating what their needs are and provide the equipment in the right place, and the sortation equipment.

The people that have the real problem in the e-commerce business, by and large, are those that view the transportation companies as some sort of utility, or a vendor.

And they make some really bad decisions.

We've just watched in amazement several of them just really dig themselves into a hole.

But our good customers, we work very closely with them.

Now despite all of the best efforts -- despite that -- sometimes they grow faster, and sometimes they grow in different places because of their customers.

I mentioned in the Northeast, the demand was just extraordinary.

However, FedEx Ground is very unique in this regard.

Our hubs -- and those of you who have been in them, you'll know this -- they are essentially completely automated.

So what that means is that if we're over-volume in our New Jersey hub, we can divert that traffic to Hagerstown, Maryland, or into Pennsylvania, and sort it in a different timeframe.

But we aren't reliant on the manning inside the hub, because really, the only labor that's at the location are the people that offload the trucks and the people that reload the trucks.

And we've been talking about this over and over, over the years, and I don't think that a lot of people understand the profundity of that automation and that flexibility we have.

It's a big competitive advantage.

It allows us to use bigger hubs with more direct routings, which is a big part of our 27% day-faster situation.

So that's how we do it is, we try to work with our customers.

And I'll have to tell you, there are a lot of our mid-size customers that, it's very clear that they are figuring out this e-commerce world.

They are doing some very smart things and creative things.

And I think, in part, that's why the market is growing as much as it is.

Mike, do you and Henry want to amplify that?

Well, I just want to add that I think it's important to note that peak season is a very highly planned period of time.

We literally will start working with customers in late January preparing for next peak season.

The second point is, we're not going to over-commit to traffic levels we can't handle in our network.

In other words, we understand what the capacity is on a given day, and our operating companies do a tremendous job flexing up capacity.

But as we've noted many times on this call, we have to cap certain customers to make sure that we're providing the service that meets the customer expectations.

In addition to that, we have a team that essentially is conducting an orchestra for about one month out of the year, and they have essentially a control tower that has minute-by-minute discussions with the operating Company which are making changes to inputs that we receive from our customers.

Which allow us to deploy our resources and adjust to changes in demand, both up and down.

So as we say in the South, this is not our first rodeo.

And we've been doing this for awhile, and I think we've got a pretty good business model here, and we've demonstrated that it works well in terms of meeting customer expectations.

This is Henry Maier.

I'd just like to add to this question, a couple things.

First of all, Fred mentioned the 33 fully automated hubs we have.

The second thing I would add is that we currently operate 49 fully automated satellites as well, which give us enormous flexibility in being able to offload volume from hubs to these automated satellites, and vice versa.

They also provide a bit of a relief valve, if you will, for diverting volume away from hubs, and being able to sort it and move it direct.

The biggest reason why we are successful is, we are at peak, and when we see these surges in volume, it's simply FedEx people.

We have the greatest group of people of any Company, I believe, in the world.

You add in the yeoman effort of our contracted service providers, and the dedication and professionalism, the commitment to quality, and just plain innovation to being able to adapt on the fly.

I can tell you, for somebody who sits in my chair, it's nothing short of inspirational.

And I think that's the secret sauce here which allows us to be able to handle the unpredictability of online sales.

David Ross asks: will the price of oil, if it's lower for longer, help or hurt Express?

You know, on the margin, the elasticity will certainly create more Express demand.

And on the margin, it might be a bit more priority versus economy.

But the markets for Express, and increasingly the door-to-door international Express, are built on customer needs and purchases.

So if you need a defibrillator for an operation tomorrow at a Cleveland hospital, you do not want that defibrillator stuck in a package in a truck with a bunch of toys.

And that is why our Express network is focused on these high-value-added type of products.

And high-value-added products are sold around the world in global markets.

And finally, what's really exciting is, increasingly they are being sold door to door on an e-commerce basis -- one customer that has the entire wares of the world for a business or a consumer.

And that is going to be a very big market, and it's where the Express intercontinental network is focused.

So on the margin, yes, it will have some effect.

But not as much, I think, as the fact that people use Express and global Express when they have an urgent need to move something, in one to two business days, door to door.

David Vernon of Bernstein asked: has FedEx detailed the cost benefit opportunities and costs associated with the TNT acquisition?

And does the Company intend to provide guidance on these items at any point prior to their incorporation into results, or will we learn as we go, as we have with GENCO?

I'll answer the first, and ask Alan to comment on the guidance issue.

The answer to the first part of the question is, of course we have a detailed plan.

We did an in-depth strategic business case, as we do for any potential acquisition, which was studied in great detail.

We have a very good integration process that's run through a formal process, headed up by Alan and Bob Henning on the financial side, and Dave Bronczek and David Cunningham and David Binks, our President of Europe, on their side.

And this is a process -- a template that we use on all our acquisitions.

The acquisition, of course, was presented to the FedEx Board of Directors, and it is in great detail.

Now obviously, based on imperfect knowledge and changing economic circumstances as you get in deeper and you understand things, things will change.

But we're already far enough into it -- although we are still not able to completely get into the details because we don't have approvals -- to know that this is going to be just a terrific fit.

And we love the team members over there, and I think they love being part of FedEx, prospectively.

So Alan, on the guidance, do you want to comment?

We have a very detailed integration planning going underway right now that I'm very excited about.

First of all, they are executing on our outlook strategy.

We agree with that, we've been supportive of that, and they are being successful in that regard.

Secondarily, the integration teams have great details to the extent we're permitted to talk about areas, on what's going to happen on day one, what's going to happen in the next hundred days, in year one, two, et cetera.

I can tell you that the people that we're working with are terrific, that there are many opportunities that are equal to or greater than I thought when we built the strategic business case.

Having said that, I will also tell you that the integration is going to take some time and is not easy to do.

There are tax, structural and accounting issues to deal with.

There are IT issues.

There's rationalizing the lanes -- all of the things you can think of.

And we've got every one of those being worked on.

We can't talk to their customers, they can't talk to ours.

We can't talk about pricing, and of course, that's where some of the big numbers are.

But what I'm seeing so far is -- I'm very pleased with it.

As I said day one, we're not going to see big synergies financially until FY18.

FY17 is going to be a year of getting our hands around some of these very tough issues, and making sure that we don't do any harm, that business continuity is there, that customers are taken care of, and that we don't miss a beat from service levels.

So it's not easy, but I think the reward is going to be fabulous.

So let me combine two questions here into one answer, because I think this is an important issue.

The first part of it comes from Allison Landry of Credit Suisse: have you seen any shift changes in the marketplace with respect to UPS's acquisition of Coyote, in terms of handling the peak season?

And on the same line of thinking, David Vernon asked: does the transition to the ISP model at Ground increase the risk that these larger-contracting entities are harder to handle or deal with, in essence?

Well, a couple of things here.

First of all, we already have a truck brokerage and transportation management unit inside FedEx, and have had for quite some time.

But much more importantly, I think it's a misunderstanding of the FedEx Ground business model.

Because the very reason we have these small businesses providing our highway and pick-up and delivery capabilities is that they are very close to the market, very close to the customers, very close to the understanding of the roads and the geographic areas that they serve.

So by design, we want small-business people who have those characteristics and are very entrepreneurial.

And we do not have many contract service providers that have over seven to 10 trucks.

That would be a very big one.

And if you start going beyond that, you lose that tactile entrepreneurial feel.

And the thing I love about it and I'm most proud about it in the Ground thing is -- these are entrepreneurs, and they do very well if they are good business people.

And it's just really fun to watch them.

I hate it that when we bought RPS, that the single-route contractor -- you watch these young folks and minorities and everything start off and get an area, and build themselves a wonderful life.

And then because of all of this litigation and the plaintiff's attorneys and the state tax people and all we've had to move, to the point where you have to have a minimum level of vehicles and be incorporated.

But be that as it may, we still retain the best of both worlds.

And in fact, it's probably much more productive, based on our experience, to have the somewhat larger unit.

So for all intents and purposes, we'll stay with this business model, and that's not going to change.

So we don't need the same number of purchase transportation tractors and trailers that UPS does, and so I think it was probably smart for them to get Coyote.

I'm not sure that it would be smart for FedEx.

And Henry, why don't you jump in here?

Well, I think that it's -- I would echo everything Fred said.

I think it's important for the folks on the phone to understand that we provide some peak incentives so that both our P&D contractors and over-the-road contractors bring on the necessary resources within their business to handle our projected peak volumes.

That just gives us unbelievable flexibility, particularly when business spikes, et cetera.

I would add that the way you need to think about them is, they're coin-operated.

They are entrepreneurs.

They respond very well to the opportunity to earn more revenue for their businesses, and they step up every single year.

So in essence, we have a huge truck brokerage capability through our highway contract service providers.

They get tractors and are able to put this power on much better in the geographic area than a centralized brokerage system for us.

However, again, we have a wonderful truck brokerage and transportation management capability for our supply chain customers, and to help with purchase transportation where we get it.

Let me take one more from the Internet, and then we'll take a few from the telephone.

Again, this is Allison Landry of Credit Suisse: have you seen a contraction in domestic B2B?

The answer to the question is, no.

Thank you for those e-mail questions.

We'll now take a few questions over the phone line, and will go to Scott Group from Wolfe Research.

Hey, thanks.

Afternoon, guys.

Just want to follow up on the question earlier about Ground volume growth, and maybe a little bit about seasonality.

So nice acceleration in volume growth to 9% in the second quarter.

Is this continuing in the third quarter?

I'm just wondering if there's any impact of cyber Monday, which was in 2Q this year, and I think in third quarter last year?

So Alan, how does that impact the seasonality of earnings?

And I know you made some comments about third quarter, fourth quarter.

Can you just clarify what your point was there?

This is Mike Glenn.

Let me say -- just reiterate the remarks we made earlier.

We're off to a strong start in our peak season.

As Fred said, we picked up over 26 million packages on Monday.

We've exceeded our forecast for our peak days in the month of December.

And what January and February holds, we'll just have to wait and see.

We don't forecast volumes for upcoming quarters.

But we're very happy with where we are, based upon the start to peak season.

We don't forecast them for you, we forecast them internally.

(laughter) So Henry and Alan want to weigh in on this.

Scott, this is Alan.

One of the reasons that I've taken up my guidance for you on Ground CapEx is not just by the way of fairly stellar increases in land acquisitions and material handling costs -- and that's all got to do with e-commerce.

It's also because Ground is going to continue to grow.

What we can't do -- and I'm a good Missouri Lutheran, so I can say this -- we can't build the church for Easter.

So part of what we're doing about yield management and everything else is, we've got to get these packages a little bit smaller, or we've got to get paid for the space they are using.

But we can't have a lot of excess capacity laying around the other 11 months of the year, and we are not going to do that.

Henry is working his people every day of the week.

We're open 24/7 for this entire peak season.

The competition is not doing that.

And it's made a big difference for us.

This is Henry Maier.

I'll be a little bit more to the point.

I've been around here for a lot of peaks -- this is without a doubt, the busiest one I've ever seen.

And it has been consistent every single day since November 30, and there's no sign it's going to let up.

So that's where we are.

Our people are stepping up to the task.

Our network is doing -- is performing exactly the way it's designed.

If we didn't have these automated hubs and automated satellites and the great people, I think we would be in much different shape than we are today.

You know, let me just state again what I said in my opening remarks here.

We think we have very good strategic plans and an in-depth knowledge of this market better, or at least as good, as any entity on the planet.

And we have very creative concepts to make our assets sweat more, or be able to process more packages in all of our networks.

And that's why we were so forthright in saying that we expect this to continue, absent macroeconomic or geopolitical events.

And let me say it again.

We continue to increase margins, earnings per share, cash flows and returns on invested capital.

And we are confident these basic trends should continue well into the future, barring major events or macroeconomic factors.

Now having said that -- I know that it's very important for all of you folks on the call -- sometimes we're off 1% or 2% in a quarter.

This is a big enterprise.

We can pick up, transport and deliver to virtually any address in one to two business days to 90%-some odd of the global population.

That takes incredible networks.

Henry Maier's network at Ground has 550 facilities.

David Bronczek has 600 FedEx Express stations, which are very different in the way they are designed -- that's just in the US.

They are very different in the way they are designed, because they are designed to interface with airplanes, not with 28-, or hopefully someday, 33-foot [pup].

Mike Ducker's FedEx Freight is very different.

And as I told you, these automated hubs that Henry is operating are some of the most incredible facilities ever put on the planet.

So this is a very big, complex business, with an enormous amount of value-add.

And so we can't get it within 1% or 2% sometimes.

But directionally, we're very confident that we will continue to achieve those things that I just said -- increasing margins, earnings and cash flow, and ROIC.

Thank you.

We'll now go to Alex Vecchio from Morgan Stanley.

Good evening, thanks for taking the question.

This might be best suited for Chris.

Can you just provide a little bit more color and background on the independent contractor litigation costs at Ground in the quarter?

The extent to which we might see litigation expenses going forward related to any lawsuits outstanding?

And maybe the overall defensibility of the independent contractor model that you employ?

I realize that you guys have made some changes there with respect to requesting that the contractors incorporate.

But maybe we can just get a recap of the model and the litigation expenses this quarter?

Thank you.

Yes, Alex, I'll try to give you some insight on this.

First of all, all of the litigation involves the Ground contractor model that was being operated in the early 2000s.

And we have made significant changes, as you note, both requiring incorporation, but also requiring that every contractor treat all of their folks as employees, and they provide a complete compliant program.

Including workers compensation, unemployment compensation, and all the other matters that are required by the various states, to insure that folks are comfortable, that these are in fact independent businesses running under their own direction and guidance.

We have had some litigation that has not been as positive for us, particularly out in the Ninth Circuit.

For those of you who are familiar with the Ninth Circuit, it is a very tough circuit for business operation.

They tend to be very difficult in their analysis of what constitutes an employee.

And so we have had some settlements from cases where we had adverse decisions in the Ninth Circuit.

That being said, we have had positive decisions in the First Circuit and in some other circuits.

And we still have the bulk of the cases being held at the Seventh Circuit, where we are waiting a briefing and a hearing schedule.

We do opportunistically settle these lawsuits, if we get in a situation where we can do that to resolve the issues and move things forward.

You need to keep in mind that in most of these instances, the bulk of the people who are involved in this litigation have moved on and are not contractors any more.

So this is really in our rearview mirror.

And while it's my job to make sure we get through it on a satisfactory basis, we are extremely confident in our independent service provider model and our all-incorporated model that we are operating today.

Thank you.

Our next question will come from Brandon Oglenski from Barclays.

Yes, good afternoon, everyone.

Thanks for taking my question, and congrats on good results in a very difficult economy.

So Fred or Mike, I think for an analyst that's been covering you for a long time, if we knew where ISM was going to be, and IP being negative, we would have thought a lot of earnings contraction for the Company, because you just historically had a lot of exposure to the industrial economy.

So what do you think has decoupled here that's allowing you actually to get close to 20% growth -- if you can hit the guidance this year -- in what otherwise is a very slow growth or even contracting industrial macro backdrop?

Brandon, this is Alan.

We've been working for a very long period of time with the profit improvement program and all of the things that are involved in that, of preparing for the very situation that we're in.

We have significantly reduced our capacity, made it significantly more fuel- and maintenance pilot-efficient, and more reliable, and we have a network that's running pretty tight.

Having said that, we've got a lot of growth for IP to continue to grow and move lower yielding products off that backbone network that we fly internationally.

Productivities that we're seeing in the field with our technology and automation improvements at Express are yielding tremendously.

I mean, it's essentially --we're doing exactly what we told you we were going to do in October 2012.

And we're learning as we go, and we've got a lot more room to do that.

I'm going to pass it over to Dave.

This is Dave.

Alan is right.

And if you remember what I said at the beginning, we structured our network to flex up and to flex down, and we would win on either side of that equation.

And quite frankly, we're not flexing down much anymore, because the economy is pretty robust for us.

International economy is growing and IP is still 72% or more of my all-up revenue for international.

So it's significant, it's high yields.

So when we actually can flex up or down, when we win, we're in a really good spot.

So that's the international network.

Couple that with the US network and the Asia to the US and US back -- that's why you're seeing such high margins and profits from Express.

Bear in mind also, we have a huge outbound market share in Express from the United States.

So the dollar exchange ratio means that our outbound is effected much more than our inbound.

And I think Dave mentioned earlier, our European-to-the US traffic is substantially up, and Asia-to-the-US traffic is flattish, but it's not declining.

And the real pony in here, again, is e-commerce.

And you're starting to see these patterns where people are shipping individual items door to door, because they can now, with the software that we're putting out there and others, they can see what the landing cost is and what the duties and taxes are.

So it's a sea change.

It's the same thing that's driving e-commerce in the United States, but more industrial, because there are business products in the main, and to some degree, individual to consumer B2C as well.

There's an international question about FedEx trade networks.

It's an integral part of the Express segment.

There were questions to comment on the forwarding industry.

I don't think it's appropriate for us to do that.

But it's an integral part of the value proposition that Dave offers.

The Express system is essentially focused on door-to-door Express.

There is some freight that moves through that network.

We're capable of flying extra sections if customers need it, particularly at peak.

And then FTN handles the cargo -- the freight and the heavy consolidation.

So our FTN network, which we built from scratch, is a perfect compliment for our customers to our Express network.

We'll now go to Kevin Sterling from BB&T Capital Markets.

Thank you, good evening.

Alan, in your prepared remarks, you briefly mentioned a Monday residential trial run you're trying in certain cities.

Could you expand on that a little bit, what exactly you guys are doing there, some of the successes you're having, and I'd imagine just trying to increase stop density, if you will?

So maybe you could expand on that trial run a little bit with Monday residential deliveries?

This is Smith here.

Let me turn it over to Henry, because he can give you some detail, and Alan wanted Henry to answer this.

But our home delivery network was set up to deliver Tuesday through Saturday.

And remember our remarks a few minutes ago about, we have lots of concepts, based on the growth of e-commerce, how to make our assets sweat more, how to move more traffic, deliver more traffic with the same assets.

So Henry has begun to deliver six days a week, not just five days a week.

Now B2B has always been different than the B2C.

So why don't you give some color around that, Henry?

Since its inception, FedEx home delivery has delivered Tuesday through Saturday, which means we essentially deliver Monday's volume the previous Saturday.

With the advent of e-commerce, I mean, it's a 24-by-7 market.

You can buy things online from your phone any time of the day or night.

The way we are able to flex up our capacity at peak every year is, we essentially operate a Monday-through-Saturday network.

And we run hubs on Sunday so that we can advance weekend pick-up volume into the network, so that we can smooth the huge peaks and valleys during peak, throughout the six days of the week.

It occurred to us some number of years ago that, why don't we just operate that way year-round?

With e-commerce, Mondays tend to be fairly heavy pick-up days anyhow.

Why not begin working that volume on the weekend rather than on Monday, deliver the volume on Monday, and then operate the network six days a week year-round?

The benefits of that are obvious.

The first is, is that on the residential service side, we essentially advance roughly 20% of the volume in the network by a whole day.

So the customer gets it a day sooner than they would have been.

The other thing is, it gives us the ability to smooth the volume, which means that we can operate our fixed network more efficiently throughout the week.

And by smoothing the capacity, we frankly don't need as much of it as we had in years past.

And we've tried to -- as Fred or Alan mentioned here, we've had a pilot running since roughly May of this year.

I would say it's a success.

We're currently studying where we roll it out next.

Our next question comes from Ken Hoexter from Merrill Lynch.

Hey, good evening.

Just quickly on the other operating loss, it increased to $112 million.

Can you delve into what scaled that up?

It had pension credit in it from mark-to-market accounting.

Really arcane.

If you want more detail, we're happy to take that offline.

Okay, that's the end of the call.

Thank you for participating in FedEx Corporation's second-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.

This concludes today's presentation.

Thank you for your participation.