聯邦快遞 (FDX) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the FedEx Corporation's third-quarter FY17 earnings conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Mickey Foster, Vice President of Investor Relations, for FedEx Corporation. Please go ahead.

Good afternoon and welcome to FedEx Corporation's third-quarter earnings conference call. The third-quarter earnings release 28 page stat book, and earnings presentation slides are on our website at FedEx.com. This call is being streamed from our website, and the replay and earnings slides will be available for about one year.

(Caller Instructions)

I want 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, such as projections regarding future performance, 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.

Please refer to the Investor Relations portion of our website at FedEx.com, for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.

Joining us on the call today Fred Smith, Chairman; Dave Bronczek, President and Chief Operating Officer; Alan Graf, Executive Vice President and CFO; Chris Richards, Executive Vice President, General Counsel, and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO; Don Colleran, Executive Vice President, Chief Sales Officer, FedEx Corporation; Raj Subramaniam, Executive Vice President, Chief Marketing and Communications Officer, FedEx Corporation; David Cunningham, 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. Welcome to our discussion of results for the third-quarter of FY17. We appreciate the interest of the people on the call.

As our press release notes, we reaffirm our FY17 guidance, $11.85 to $12.35 adjusted EPS, based on our expectation of an excellent fourth quarter, and despite the 30% year-over-year fuel cost increase in the third quarter. Going forward, we will experience less volatility in earnings when fuel prices change rapidly, due to our new weekly, versus monthly, fuel charge adjustment system, that was implemented last month.

Alan will cover this in greater detail. I should note, given the interest in the subject, FedEx Ground segment margin will be 15% plus, in the current quarter, and Alan will also comment further on this.

FedEx delivered an outstanding peak season, with our highest volumes ever, and record service levels. I thank our team members around the world for doing this.

We believe strongly that our strategic investments to expand our global scope and our portfolio of services, will significantly increase long-term profits. During the third quarter, for example, FedEx was pleased to extend our 16 year Express Air transportation relationship with the US Postal Service, and we added to our range of customer solutions with FedEx Fulfillment to benefit small- and medium-sized businesses, and we reached agreement with Walgreens to broaden convenient access to FedEx services. Raj will provide additional context on these.

The integration of TNT Express is proceeding smoothly, and we are targeting operating income improvement at the FedEx Express Group of $1.2 billion to $1.5 billion in FY20 versus FY17. Alan and Dave Bronczek will offer additional information on this.

We reiterate our continued improvement -- continued commitment to grow corporate earnings, margins, cash flows and returns, over the long term. Recently, Fortune magazine recognized FedEx as one of the Best Companies to Work For, and World's Most Admired Companies, a reflection of the commitment by more than 400,000 team members to our Purple Promise, which simply states, I will make every FedEx experience outstanding.

Now, I will turn the call over to Raj.

Thank you, Fred. I'll open with our economic update and outlook, and then discuss our performance and business conditions in each segment, including revenue, volume, and yield, and provide some commentary on broader industry trends and enhancements to the FedEx portfolio.

We see moderate growth in the global economy. We expect US GDP growth of 2.3% in CY 2017, driven by robust consumer spending and stronger business investment. Industrial production growth should rebound to 1.5% this year.

GDP and industrial production are expected to grow by 2.5% and 2.4%, respectively in CY 2018. For the global economy, we forecast growth of 2.6% for CY 2017, and 2.8% for CY 2018.

Now, I'll review revenue volume and yields trends by segment. US Domestic Express Package revenue grew 3% year over year in Q3. Yield per package increased 3%, as a result of increased weight per package, dim devisor change, and improved rate and discount. Yield, excluding fuel surcharge, increased 2%.

FY17 Q3 had one operating day less than Q3 last year, which lowered the revenue growth and year-over-year comparison. Domestic Express Package volume increased by 1% year over year during the quarter.

FedEx International Export Package revenue increased 4% year over year in Q3. FedEx International Priority volume increased 5%, while International Economy volume grew 2%. International Export Package yield increased 1%. Excluding fuel and exchange rate impact, yields increased 2%, primary driven by impact of product and destination mix.

The Ground segment revenue increased 6% year over year, while average daily volume increased 2% year over year. Ground yield per package increased 6%, benefiting from the annual rate increase, and yield improvement in both Ground and SmartPost, and the Ground dim divisor change. As has been mentioned before, FY17 Q3 also had one operating less day then Q3 of last year.

Fuel prices did not have material impact on the yield per package. FedEx Freight segment revenue increased 3% year over year in Q3. Average daily shipments are flat year over year, and this is partially driven by our stronger emphasis on pricing improvement.

Revenue per LTL shipment increased 4%. Excluding the impact of fuel surcharge revenue, the revenue for LTL shipment was up 2%.

The third quarter included most of the 2016 peak holiday season. This year's peak was a record-breaking, both in volume, but most importantly service. We are proud of the more than 400,000 team members around the world, who came together to provide record service levels this past holiday.

With volume that more than doubled our daily average on multiple days, all of our year-round preparation paid off, and our networks performed as designed, to meet the surge in demand. Once again, volume during this season was impacted by the continued growth of e-commerce. The retail and e-tail industry and consumer shopping patters, continue to evolve.

We had record volumes over the peak season, although we had a few large customers who had volumes below their peak forecast. We are already well into our planning for peak 2017 to ensure that we are ready to meet our customers' needs in a profitable manner.

The retail industry is being transformed by e-commerce, and FedEx is at the forefront of innovating and implementing solutions up and down the value chain, that make e-commerce convenient and accessible to consumers around the world. In this context, we made some significant enhancements to the FedEx portfolio during the quarter. Let me highlight a couple of them.

First, we recently announced a long-term alliance agreement with Walgreens, for FedEx Onsite. FedEx Onsite is a nationwide network of alternate delivery locations, which is the direct response to our customers telling us they want access to more choices for package delivery and drop off.

FedEx Onsite locations include some Albertsons and Kroger grocery stores, as well as select Office Depot, OfficeMax, and FedEx authorized ship centers. Adding Walgreens will dramatically increase the number of FedEx Onsite locations.

Walgreens is an ideal partner, they are a well-respected brand, with whom we have had a long relationship, and are well known for their convenient locations. We've already started to roll out, and expect nearly 8,000 Walgreens locations with FedEx Onsite, in time for this year's peak season.

Second, we also announced the launch of FedEx Fulfillment in February. This is an e-commerce logistics solution for small- and medium-size businesses. The strength of the FedEx portfolio allowed us to bring to market a fulfillment solution with advanced warehouse management, the latest same-day cut-off times, two day ground shipping throughout the United States, and a seamless return process.

FedEx Fulfillment also improves our accuracy through top-tier warehouse management systems, and experts in fulfillment. We received strong customer interest over the first few weeks since launch, especially with small- and medium-sized customers who are in need of a powerful and attractive alternative to competitive e-tail logistics and fulfillment options.

I'll now turn the call over to Alan Graf.

Thank you, Raj. Well done for your rookie performance. (laughter)

Good afternoon, everyone. I hope your NCAA brackets are holding up better than mine, and all of your favorite college teams are winning.

Looking at FedEx Corporation third-quarter results, the net impact of fuel, one fewer operating day at Express and Ground, and Ground expansion costs, weighed significantly on earnings. A bright spot was yield growth at all of our transportation segments, as we continued to improve our revenue quality and manage yields.

Three things you should know about fuel. First, jet fuel prices increased 30% year over year, for the quarter. Second, year over year, we had a benefit from net fuel in Q3 last year, and a loss from net fuel this year. And, thirdly, last month, as Fred mentioned we began adjusting our fuel surcharge weekly, instead of monthly, for both Express and Ground. This should better match volatility of our fuel expenses to our surcharge. With that change, fuel will not impact our future results as much as it did in the past, but we will not fully lap those year-over-year impacts until February of 2018.

Our effective tax rate of 37.5% for the quarter was 230 basis points higher than last year, and was also a drag. Higher tax rates in FY17 are due to costs incurred in connection with the integration of TNT Express, as well as local-country losses in some entities within TNT, for which no tax benefit was recognized, due to uncertainty for the utilization of these losses.

This impact has been partially offset by the continuing benefit to the tax rate from last year's early adoption of the accounting standards update for share-based payments. During the next three years, however, the benefits of the TNT Express integration, complete modernization, yield management, e-commerce growth, and investments in network capabilities and efficiency will drive significant earnings growth.

For the full year, we are reaffirming our guidance for adjusted earnings of $11.85 to $12.35 per diluted share, assuming moderate economic growth, as Raj discussed. Earnings in Q4 will primarily be driven by growth in volume and yield, at Express and Ground, as well as the inclusion of TNT Express.

As Fred mentioned, we expect Ground segment operating margin to be 15% plus for the quarter. We expect our effective tax rate to fall from Q3 to Q4, and our FY17 effective tax rate should be about 35% prior to year-end mark-to-market accounting.

Our capital spending forecast for FY17 is approximately $300 million lower, at $5.3 billion, due to a reduce for spending forecast at FedEx Ground. For the year, we have made contributions totaling $2 billion to our tax qualified US domestic pension plan, which is $1.5 billion more than what is required, partially funded by the $1.2 billion debt offering we issued in January. We do not expect to make any further contributions to these pension plans during this fiscal year.

We anticipate our US pension plans will make benefit payments aggregating in excess of $1 billion in the fourth quarter, to former employees who elected to receive their benefits early under a voluntary program. This payout will allow us to reduce future liabilities and administrative costs associated with our US pension plans. Our US pension plans continue to have ample funds to meet expected benefit payments.

At Ground, operating income declined 8% year over year, because of higher rent, depreciation, and staffing as a result of network expansion, unfavorable net fuel impact, and one fewer operating day. Ground's FY17 CapEx forecast is reduced from $2 billion to $1.7 billion, much of which is timing the projects that are already underway.

We continue our intense focus on balancing capacity and volume growth with yield management at Ground. These actions affected our Q3 volume results, and are also expected to mute Q4 volume growth. While network expansion dampens Ground's near-term profitability, we believe these investments will enhance long-term earnings, margins, and cash flow.

At Freight, higher salaries, wages, and information technology expenses reduced operating income. As with Ground, we're working toward a better balance of volume, pricing, and capacity. Those efforts along with an expected improvement in the US industrial environment, should lead to better operating results at FedEx Freight in coming quarters.

Express adjusted operating income was significantly impacted year over year by the unfavorable net impact of fuel and one fewer operating day. On a GAAP basis, Express results included $31 million of TNT Express integration expenses for the quarter. Express results benefited from higher yields and volumes, and we continue to manage network capacity to match customer demand, reduce structural costs, modernize our fleet, and increase productivity.

At TNT, revenues were approximately $1.8 billion, with an adjusted operating profit of $40 million. Adjusted operating margin was 2.2%. Adjustments to operating income for Q3, included TNT Express integration and restructuring expenses of $22 million, as well as intangible asset amortization of $16 million.

With respect to the TNT integration, and you will hear more on this shortly from Dave, we continue to have a great degree of confidence in the TNT acquisition, and the value to the enterprise. We have a very long history of success in integrating businesses into FedEx, and TNT is no exception, as the integration is going extremely well.

In the nine months following close, we learned a great deal more about the TNT business. The business we acquired was severely under-invested, particularly in IT and in operations, which is driving additional investments. Furthermore, prior to the acquisition, TNT announced a restructuring program with numerous initiatives to improve the business.

Over the fall, we executed a strategic assessment, through optimized capital and expense across the base FedEx Express and TNT businesses, the TNT restructuring program, and the integration activities. The result is a more streamlined set of projects and initiatives that deliver the greatest benefits. We believe that the combination of the businesses is more than just an integration of the businesses, and we're positioning ourselves to leverage combined businesses in a very powerful way. We see the combination of these two businesses as transformative, and expect significant synergies from the integration.

As the integration progresses, businesses are combined and countries are fully integrated, discrete financial information about the legacy business will no longer exist on a comparable basis. So, beginning in FY18, we intend to eliminate the TNT segment, and to begin reporting FedEx Express group results in one segment, the FedEx Express segment. Given these plan changes, we will begin describing our target for the TNT integration benefits, along with improvements in the base business, in terms of the FedEx Express group operating income.

We are targeting operating income improvement at the FedEx Express group, of between $1.2 billion and $1.5 billion in FY20, versus our final FY17 adjusted results, assuming moderate economic growth as well as current accounting and tax rules. Based on this target and current tax rules, we expect to lower our pre-mark-to-market effective tax rate to around 33% to 34%, with the completion of the integration.

The pace of the integration activities in FY17, combined with preparations for FY18, is dictating higher levels of dedicated integration personnel, training for our teams, professional fees to support the integration, as well as for investments in IT and operations. As a result, we are increasing this year's forecast for integration- and restructuring-related spending, by $50 million to $300 million, an acceleration previously planned for later in the four-year integration plan.

We expect the aggregate integration expense over the four years to be approximately $800 million. The actual timing and amounts of these integration-related estimates are subject to change, as we implement and adjust our plans.

The integration is complex, and the timing and pace of the integration is subject to change, based on numerous factors and dependencies, however, how we ultimately get to our target will evolve, as market conditions and other factors change. We are highly confident in our target and our goals for the Express group.

And now Dave will give you an update on our progress with the TNT integration.

Okay, and thank you, Alan. Good afternoon to everyone. The TNT acquisition, as I'm sure you know, is the largest in FedEx's history. And we have discussed this with you, previously; this provides extensive benefits to FedEx, including; rapidly accelerating our European and global growth around the world; substantially enhancing our global footprint; and leveraging TNT's lower cost road networks in Europe, Middle East, and Asia, producing improved results for the entire Corporation.

Our global integration teams are working to bring TNT and its 54,000 employees, and their operations across 200 countries, and more than 1 million shipments daily, into the FedEx Express system. The integration of TNT and FedEx is on track, with significant progress thus far in FY17. Our teams around the world are energized, they are focused on delivering the opportunities and the benefits that's provided by this combination.

The integration plan that was developed prior to the close of the deal, has been fully validated, and did not require significant revision, which has given us tremendous momentum as we moved into the execution phase. While we have a multi-year integration ahead of us, my comments will give you some additional context on why we are so confident in the value of this deal, and the status of our progress to date, which has gone extremely well.

On the people side, our leadership team is now all in place. We continue to benefit from the expertise of TNT's personnel. More than 35% of our integration, international officer positions are now held by former TNT executives.

We have an outstanding leadership team in place to drive our integration. And, as Alan and Fred have already talked about, the integration is a key driver to FedEx Express FY20 operating income improvement target, of between $1.2 billion and $1.5 billion.

The benefits of the integration will be driven by four key areas. The first being optimizing pickup and delivery operations. We are implementing new technology, and optimizing the location of all of our facilities and all of our stations, to deliver unmatched service. We will benefit from efficiencies, improve stop density, and the economies of scale that come along with the integration of pickup and delivery operations.

Next we will operate one integrated, global Express network, capitalizing on technology and solutions, to most efficiently route parcels and freight through our integrated hub, line haul, and of course our Intercontinental air network to deliver the absolute best service for our combined customers, while at the same time significantly dropping our costs.

Third, we will improve the efficiency of staff functions, with improved IT solutions, streamlined support functions, and realizing significant sourcing-savings globally. And last, but certainly not least, we will grow revenue by offering a best in class portfolio of services through a single sales team, a single online customer facing tool, and through revenue management activities focused on improving market share, yield, and of course profitability.

As you all know, these are network businesses, and required the combination of our pickup and delivery operations at a local level, our Air and Ground networks, and our extensive operational, sales, and back-office IT systems. Given all of the factors, we continue to expect the full integration to take four years to complete, from the date of the acquisition, which was last May.

Now, on the integration of the two businesses, we generally have concluded at country level, there's different integration models, and we have identified the planning process. Those integration models are what we call direct serve to direct serve. It is FedEx to TNT, or a global service partner at FedEx to a global service partner at TNT, or to one or the other.

Using these models, however, to date, we have successfully integrated 33 countries around the world already. Beyond these 33 countries, other country integrations are underway, including three that we launched during this third-quarter: Spain, Japan, United Arab Emirates.

Our integration in the United States and Canada which started in the first quarter of FY17, will in fact be complete by May 31st. In total, we have approximately 50 countries in process or completed, to this point.

In addition to representing different integration models, the countries completed to date are well-established markets with high value opportunities. And from them we are learning very valuable lessons. While the integration activities are most visible at the country level, the integration is supported by several key back-office initiatives, namely by our IT functions around the world.

One of these, and a foundational element, is the success of the integration of our two Companies, and the ability for us to handle TNT packages inside FedEx, and FedEx packages inside TNT. This cross scan technology we are deploying, will significantly benefit our customers, and of course all of our employees. This first phase of technology was launched February 27th.

Now, as we look to the fourth quarter, in April, we will begin a phase conversion of the intercontinental flights, currently operated by ASL Belgium, to FedEx Express operations. The first phase will convert the TNT transatlantic flight, and over time the wide-body operations between Asia and Europe. These changes bring benefits to approximately 100,000 existing TNT customers for shipping to the United States and Canada, with improved transit times and a broader service coverage.

And beyond the air network changes, country-level integration preparation and executions are in full swing. As we are preparing for our FY18 launch of integrated activities, we are adding 25 more countries.

So, as you can tell, we have a complex and multi-year integration ahead of us, but we are off to a very strong, fast, productive, and extremely important for us, team collaboration going forward.

So, with that I'm going to turn back over to Mickey for opening up for Q&A.

We will take two questions, first from questions that were submitted before, and then we will take two live questions. Fred?

All right Mickey, let's start off with a question about capital. A, will CapEx as a percentage of sales come down by the end of this decade or will it remain elevated beyond 2020? Any specifics would be appreciated. That is from Amit Mehrotra, Deutsche Bank.

And, B, what will be your biggest requirements for capital over the next five years? As a percentage of revenue, do you expect your capital budgets to be less, the same, or more than will be this year? Matthew Troy, Wells Fargo.

Alan will take this.

The biggest requirements for capital over the next five years will remain, the re-fleeting at Express. We have a current pace that we have right now, and you can see in our stat book how the pace continues. I think over time, we will start to see, post-FY18, CapEx as a percentage of revenue will begin to decline.

TNT is not nearly as capital intensive as Express is, although we are investing a lot in integration. And, as you saw in my opening remarks, we have accelerated a lot of these costs into 2017, and we will bring some of 2019 into 2018, because we're being so successful, as Dave so eloquently described. There are a couple of wild cards in what I am saying here.

One is, if we can somehow get approval for 33 foot twins, those have a ridiculously fast payback, and we will begin to re-fleet our line-haul Ground operations as rapidly as we can. Those are not in my projections. And then, secondarily, if there is an expensing of capital, as part of the tax code, we're likely to accelerate our capital spending, as well, because we get significantly improved returns, on essentially the interest-free loan from the government by being able to expense it day one.

The next question from the Internet is, how do drive better forecasting from customers? Can you incentivize them to provide a more accurate forecast, or penalize them for over-promising deliveries? Helane Becker, of Cowen.

Raj?

As I mentioned before, planning's well underway for the peak 2017 to ensure we provide outstanding service for our customers. And we continue to work with our customers year-round to prepare for peak. Now, it's important to remember that it's a relatively small number of customers that drive the bulk of surge in demand at peak. And we work closely with each of them to ensure the highest possible levels of accuracy on their forecast, but do keep in mind, that forecasting e-commerce volumes at peak is an inexact science, at best.

So, all of that being said, we're looking at several pricing options to ensure that we get a reasonable return on investments that we are making.

Okay, now we will take some live questions.

(Operator Instructions)

Allison Landry, Credit Suisse.

Good afternoon. Thanks for taking my question. I just wanted to follow-up on the earlier CapEx question, but sort of honing in on Ground, specifically. It seems fair to say that, with elevated spending at Ground over the last two years, along with the pretty meaningful ramp in CapEx that UPS recently announced, that volume growth has become more expensive.

So, really my question is, are the investments that you are currently making to improve efficiencies in margins, solving today's problems? And then, if we look out another three to five years, assume customer demand will continue to evolve, could you find yourself in a similar situation whereby you need to continue to invest to solve tomorrow's issues? So, really, has e-commerce led to a structural increase in the capital intensity of the Ground business, in your view? Thanks.

Allison, this is Henry Maier. First of all, I think we get an awful lot of flexibility out of these highly-automated projects that we deployed the last couple of years. In fact, today we operate, roughly, 100 fully-automated facilities. That includes hubs. That includes automated satellites.

We have a lot of incremental capacity built into those buildings, just by virtue of the fact that the technology, not only allows us to operate those buildings more per day, we get better productivity out of them. They require about 30% less headcount to operate, and the automation of the operation allows us to flex that capacity across the network, depending upon where the volume shows up. We have invested in capacity today, through our CapEx spend. This can allow us the ability to flex up and down, based on volume for some time.

In terms of just network planning in general, we have a five-year plan. It is a rolling five-year plan, we adjust the number of projects up or down based on trends we see in the business.

I would say that, other than the items that Alan mentioned, probably the biggest thing out of our control right now, with respect to our CapEx spend, is the timing of the projects. We had three major hubs, this year, delayed due to weather. We had a land acquisition that was delayed because we discovered some historic artifacts on it. So, through the due diligence process, we're going to have to comply with the state laws with regard to finding those kind of things.

I think we are in good shape today, and in the future. I don't feel like we are in the catch-up mode we have been in the last couple of years.

And I'm going to throw this back to Alan, he wants to make a comment at the end, too.

Allison, a couple more points. The vast majority of the volume that we carry at FedEx Corporation is business to business, and while e-commerce is the fastest-growing piece, it is the smallest piece. Secondarily, as we discussed many times, and we can discuss ad infinitum, we cannot afford the same capital intensity for peak e-commerce volume, which is why we have been backing away from some customers, and raising our prices significantly. So, that balancing act will continue for us going forward.

Chris Wetherbee, Citi.

Good afternoon, guys. I wanted to follow up on Ground a little bit, and sort of the CapEx relative to capacity utilization. We're trimming $300 million off of this year. I think Alan, it sounded like that was a bit of a pull forward. Are we lowering the Ground spend going forward? I want to get a sense of maybe how your trajectory might look beyond FY17.

And then, just thinking about the fiscal fourth-quarter outlook, your ability to fill up that underutilized capacity that you invested in earlier this year, how that is ramping up through the fourth quarter?

I think you can expect that our CapEx spend will decline over time. The size of the projects that we are bringing on, I think, will position us for the future. In terms of capacity, we generally buy -- we acquire land for what we believe is the end-state for the facility, but we do not build to a future need, which gives us the ability to expand those facilities over time as business conditions warrant.

A great example of that is, next year we have one new hub coming online, which is in Houston. And we have two hub-expansion projects, which are at existing hubs one being in Champaign, Illinois and the other in northern Kentucky. We don't really have -- I don't want to give you the perception here that we have unused capacity. We really don't. Once we get the facility in place, we just engineer the ability to expand it over some number of years, as it reaches full phase in its life. Now we will do two questions here. Fred?

There are a couple of additional ones on Ground. I think I'm going to segue right into that, since they follow on what Henry has been talking about. And then there's one on Freight.

This is a question about what percentage of SmartPost volumes can be redirected into Ground by end of 2018. Any targets you can share in terms of potential margin impact this could have would be appreciated. Amit Mehrotra, of Deutsche Bank.

And then a related question from David Ross of Stifel, is -- are you have any problems getting contractors, Henry?

Okay, on first question, I think we have to keep in mind here, that the mission is improving delivery density and revenue per stop. And, we are getting some software delivered the summer. We call it Terminator, internally. It is part of a delivery optimization project that allows us to virtually divert packages in the network from SmartPost to Ground that have the same address, on the same day.

You have got to keep in mind, here, that there is also an opportunity with adjacent deliveries and the ability to build density through the expansion of our retail Onsite network, which is the Walgreens deal that we did a couple of months ago, that Raj refer to. So, there is a number of moving parts here, that get us to where we believe we need to be. We do have an internal number, but we have decided that we're going to keep it internal for this time.

In terms of Ground businesses, and the trouble in finding contractors, you might be surprised to know that the actual number of businesses under contract has declined over time, and that has been the result of two things. One, the size of these businesses is getting larger. And two, our transition to a single, independent service provider contract nationwide.

Currently, we contract with roughly 6,000 small businesses, that collectively employ over 60,000 employees. And, we have seen no indication that these businesses are having any trouble attracting drivers, either on the line-haul side, or on the pickup and delivery side. And we just came through a record peak season, and they performed admirably in terms of being able to get the necessary resources to handle the volume.

So, we have a question or two on Freight. You mentioned on the last call the investments being made at FedEx Freight. Is that why the margin is compressed a bit? Can you talk about the investments being made and how they should set FedEx apart from the competition? That is from David Ross, of Stifel.

And, what investment is the firm, meaning Freight, making in natural gas tractors? And do you think over the next few years, that these alternative sources will reduce fuel expenses at FedEx Freight? That's from Keith Schoonmaker, of Morningstar. Mike Ducker?

Thank you, David. Yes, somewhat. That is a partial reason for the margin compression.

There a number of different areas we're investing in. Number one, safety systems. 80% of our fleet today has the most recent safety features available on the fleet. We will be 100% complete by the end of 2018.

We're investing in customer automation systems, line-haul optimization systems, and replacing some legacy systems, as well as new dimensioning technology. All of those investments are really aimed at our goal of double-digit margin, and improving the customer experience. I hope that answers your question.

Secondly, Keith, we have the signature facility in Oklahoma City, with 100 CNG trucks operating today. We opened that facility in October. So, it is somewhat dependent on the difference in CNG pricing and diesel pricing. So it is really too early to tell the long-term impacts of that. But, we are monitoring that closely, and looking at investing in these newer kinds of technology, and really the whole Corporation -- FedEx Freight Corporation is embracing the new technologies available to us.

Let me make an editorial comment based on what Mike said about our reaching 80% of our FedEx Freight having these new modern technologies in the tractors. Similarly, Ground has been providing incentives, and soon all of our independent service providers will be required to have these same types of technologies. And quite frankly, the Department of Transportation and the Congress should mandate these technologies.

It is simply unacceptable to have vehicles on the road that do not have these modern technologies that can prevent so many accidents that take place, historically, because of the inability to stop in time, or to change lanes precipitously, and so forth. So, every truckload carrier in the United States, every LTL carrier, ground, parcel, it should all be mandated, and we're trying as hard as we can to push this technology into every vehicle we have, as fast as we possibly can do it.

Let's take a couple of live questions.

Tom Wadewitz, UBS.

Yes. Good afternoon. I wanted to -- I appreciate new information and the update on TNT. There's a lot of good information to work with. And, it is great to hear about the strong progress there. I was wondering if you could help us understand, maybe, the new framework of the $1.2 billion to $1.5 billion, versus the prior framework of $750 million. How much of an increase is there versus the prior $750 million? Obviously, it is a different categorization. It sounds like it is a expansion on the $750 million, that you think there's more there at TNT standalone. But I do not know if you can parse that out on a comparable basis, and give us a sense of that. Thank you.

This is David Bronczek, and then I will turn it over to David Cunningham. Let me start off by saying what Alan said earlier. We decided, and it is in the best interest of our Company, to just look at it holistically, starting June 1st, so we will not break out TNT and FedEx Express into the future. And, the combination of TNT and FedEx Express, the synergies of it all are what we have actually presented to you now.

So, looking at our business, and our business model, and our strategic outlook, combined with TNT, and what we see and what we have seen before, and putting it all together, these are the numbers that we have now come up with. And so, because of all of the hard work, and because of all of the teams that have been working on this, for almost a year now, we are confident to give you these new numbers. David?

Just a couple of quick questions and thanks. We got a lot of moving parts in this equation. You've got two base businesses. You've got integration. You've got fleet changes. And, so what we try to do is give you the ability, and us the ability, to measure our progress in very clear terms, between now and then. So that is what this target is, and it incorporates the synergies that we identified earlier.

Tom, it's Alan. So, everything else we're doing in Express. There are unbelievable things going on at domestic Express, things that have nothing to do with TNT, in terms of productivity. We continue to deploy automation and IT solutions everywhere, that are increasing our cost performance. And so, I cannot see the $750 million anymore, is really the issue. I might've been able to see it a little bit longer, but we have done such a good job with speeding up the integration, that became very clear. So rather than wait until June, we just thought we would deliver this news now, and so you will know what to expect.

Brandon Oglenski, Barclays.

Hey. Good afternoon, everyone. And thanks for taking my question. Alan or Fred, I guess as I look at the outlook here, if margins are improving at Ground from where we are today, and you get the Express improvement as you have laid out. And we appreciate that guidance as well. It sounds like you are going to have more free cash flow, although, I'm not sure we heard a commitment that CapEx will stay flat from here.

I am thinking more strategically at the Board level, Fred, is there any impetus or change in strategy that says we need to start compensating people on the long-term plans, not just on EPS growth, but also look at free cash conversion or return on invested capital?

You know, it is funny you should ask that. I just requested, several months ago, another look at whether we should put an ROIC component into our LTI, which Judy Edge, who heads up our Corporate HR, and Strategic Finance headed up by Bob Henning just did a crackerjack report. And we will show this to our Board of Directors, either at the next meeting or the June meeting, I cannot remember which.

Bottom line is, our current correlation between EPS and shareholder return is so close, it is approaching 95%. And the dangers of perverse incentives of putting things like that on automatic pilot, are so great that we don't think that it makes sense. Now, having said that, for those of you who had been here or listened to what we have said over the last year and a half, let me say it again. I don't think that FedEx Corporation CapEx, in absolute dollars, is going to vary too much, for the foreseeable future. We want to put these new modern airplanes in. We see an opportunity to continue to grow our Ground business, the Freight 20/20 initiatives, that Mike said, but with the numbers that we gave you today, it just reinforces what we have been saying that margins, cash flows, and returns are going to increase over the next several years.

So there should be an increase in free cash flow, unless we do some other Corporate development activity, or as Alan mentioned to you, there is expensing in a new tax bill, or we got 33 foot trailers, which is a huge improvement in national productivity and safety as we've been arguing over and over again. That might change it a little bit, but I do not think you are going to see the CapEx materially change in the next few years.

It is just too lucrative to us, and our position does nothing but strengthen competitively by continuing to do this. But, we will be throwing off more free cash flow in the years to come as a result of these projections, or outlooks, that Alan gave to you, particularly based on these TNT synergies.

Scott Schneeberger, Oppenheimer.

Thanks. Good afternoon. Could you delve in a little bit to B to C, versus B to B growth in Ground, in the quarter. Just if you could give us a feel of how each of those performed versus past peak. And then a little commentary on what you would think for Ground volume going forward. Thanks, very much.

Let me kick it off, and then I will turn it over to Henry. This is Raj. We do not break out our Commercial and Residential volume growth numbers. Although, what I can still tell you is that we did see higher growth rates in our Residential delivery volume, driven by e-commerce.

Yes. I would say, without breaking out our Commercial and Residential volumes, our Commercial volume has been very strong, and have been for the last three quarters, or so. I think I'm pretty bullish on where we are from here, but you need to understand that we are going to continue to balance yield and volume going forward, as Alan and others have said, here. Other than that, I think you can continue to see us make good progress in this area.

Okay, I think will do a couple more questions, Fred?

Okay. On the United States Postal Service, what would be the implications for FedEx and the industry if the USPS reform actually passes into law? As written it seems to broadly support the USPS financially, which could lead to greater competition, but also higher capacity for SmartPost, and other products. That is from Brian Ossenbeck, of JP Morgan.

And, what are the implications for the extended FedEx and USPS day-sort contract with Express? Also, from Brian. So, let me break this into two parts. First, let me ask Christine Richards to comment on the legislation that is being considered by the Congress, and then I will get her to revert it back to me, and either Dave Bronczek or I, or one of us, will comment about the other two aspects of this question.

Hello, the implications of this legislation passing would be positive, and we strongly support the Postal Reform Bill that passed out of the House Oversight Committee, last week. As you may know, there were unique pre-funding requirements imposed on the Postal Service, with respect to the cost of their retiree health, requires them to pre-fund those obligations, and they have failed to make the payments for several years now. It is time for legislation to address this situation, and provide stability to one of our largest customers, and also, a very important vendor for us.

Let me just talk about, in the broadest terms here, obviously our daytime system is a great asset of FedEx. It is terrific for the Postal Service. It provides a wonderful service for their Priority Mail. It allows us to transport on the same airplane, our 2Day Express, and our IE traffic, to and from international points, as required. I think you will continue to see us put a lot of emphasis in these areas.

In the case of SmartPost, overall, I think it is important that people that follow this industry, to again recognize that there is no entity that has the delivery density of the United States Postal Service. Henry knows these numbers better than I, but it is something like 155 million deliveries they make every day. I think it is 120 million residential. 125 million out of the 155 million, are residential deliveries. They have mostly these small vehicles delivering mail, which pays for these routes.

The Postal Service's overall revenues are three-quarters mail, one-quarter package. And, the packages co-mingled with the mail, has proven to be a very great thing for the e-commerce industry, and for the Postal Service.

The real question is, what happens over time, as mail is diverted to digital transmission, as opposed to physical delivery, which lowers the revenue per stop, and what implications that has on the package business. There's this constant refrain about the Postal Service as quote, a competitor, as in this question.

The biggest part of the Postal Service's package delivery business, is Parcel Select. That is where you have upstream providers pick up, transport, and insert into the Postal Service, packages for last-mile delivery by the Postal Service. That is our SmartPost.

FedEx Ground, every day, or every operating day, injects into approximately 22,000 postal DDUs as they call them, direct delivery units, for last-mile delivery. It's a wonderful agreement. We do all of the upstream, these enormous hubs, and operate these twin trailers, which again, would be much better if they were 33 versus 28. And our SmartPost, UPS's version of this, UPS's SurePost, and Amazon's direct injection into the Postal Service, is the vast majority of the Postal Service's Parcel Select business.

The next biggest cohort is Postal pick up, transport, and delivery of Priority Mail, most of which is transported by air by FedEx Express. Then there are some other segments there, First-Class Mail Package, or whatever it is, that is sub-one pound, it is like the samplers you get, and this, that, and the other. That is the Postal Package business. There are some other ones, but there is this constant refrain of, well, the Postal Service is a competitor.

The Postal Service is our good partner in most cases. There is some overlap there, but if you don't define the market, clearly you don't understand what these logistic systems are, and what they are not. And, that is what has led to a lot of this mythology out there, that people that only see the delivery end of it, and not everything that is upstream.

We will take some more live questions.

Ken Hoexter, Merrill Lynch.

Great. Good afternoon. So, I just want to confirm on your 4Q targets, you reiterated your full-year target. The way I look at that, it is $379 million to $429 million to make your range. You noted a 15% Ground margin. Can you put some other parameters on there? It seemed like Ground volume slowed, down to just over 2%. Can you talk about -- are you still pushing away volumes there? Can you talk about your outlook, and what is in that fourth-quarter number? Thanks.

I probably shouldn't have given you the dang bonus about Ground's fourth-quarter margins. (laughter) That will be the last time I do that. I think the point was, is that we didn't have the financial quarter in Q3 that we had expected but we had a lot of reasons why that won't repeat. Notably, some of our largest customers at Ground did not it their forecast, yet we provided capacity for that, that went unused.

We had one less operating day, I don't know what you have in your model for that. Fuel, as I described, was a big change that will probably reverse itself in Q4, and then the tax rate. It is more steady as she goes, and if I were you guys, I would forget Q3. Look at everything else we said.

More importantly, what you need to do is look at what Alan told you last June. What was the range you gave last June, Alan?

It was same range except it was 10% lower on the bottom.

Well, that says everything you need to know.

Jack Atkins, Stephens.

Hey. Good evening, guys. Thanks for the time. So, just a quick question here, kind of referencing back to UPS's analyst day, and their decision to initiate Saturday ground operations in the US, this year on a rolling basis. What sort of impact do you think that could have on your own Ground business? And would there be any need to make some changes to your own operating days during the week in response? Thank you.

Well, Jack, thanks for the question. You should know that we have been operating on Saturdays at FedEx Ground, for going on 17 or 18 years, now, and operating six days a week is absolutely nothing new to us. In fact, every year at peak, at least for the past 10 years or so, we have operated six days a week, sometimes seven, every day from cyber Monday through Christmas Eve.

And, our highly automated facilities give us the capability to do this. Now, given the growth of e-commerce, we thought some time ago, that if retail customers could ship six days a week in December, they might like to do that 12 months out of the year. So, a couple of years ago we actually put together a concept where we begin offering six day delivery in select markets.

Now, in addition to the obvious customer benefits to this, you should know that there are some pretty significant operational benefits to operating six days a week year-round, as well. What we have learned from all of this, and what we continue to learn through these pilots, is, in order to get the full benefit of the six-day operation, e-commerce companies must fulfill and release volume over the weekend, in time for sortation and delivery on a Monday.

If they are able to do that, then you can hit a home run, because you significantly advance volume in the network that would have been due for Tuesday. As customers adjust their operations to fulfill and ship on weekends, and do it year-round, I can assure you we are ready to take their business. Fred?

We have another question off the Internet. This is about Amazon.

Amazon's interest in delivery has evolved rapidly from -- this is a quote, not for me: from cute photo ops of drones to now registering as an ocean and air forwarder, to most recently announcing plans for a $1.5 billion air hub, not far from your largest competitors. As Amazons posturing has become more aggressive and larger in scale, have your thoughts changed on their potential impact on the industry and how you interact with them as a customer/competitor? Matthew Troy, Wells Fargo.

Raj?

Thank you, Matthew. Let me just say that Amazon is a long-standing customer of ours, and while Amazon does deliver a portion of their packages, they still rely heavily on USPS, UPS, and FedEx for delivery. It is definitely worth mentioning, that no single customer represents more than 3% of our total revenue. And Amazon is far from being our largest customer.

I think there is one more point to make here, and that was, Alan's comment a few minutes ago. The vast majority of FedEx business, is business to business. 85% plus of our business, has nothing to do with e-commerce. So, Amazon is a wonderful company, and they certainly have revolutionized the e-commerce world, and we are not sure what Amazon is going to do one way or another. But, the FedEx system that consists of thousands of facilities, and the ability to pick up, transport, and deliver it, in one to two business days, between any two addresses in the United States, has been decades in the making.

And, we think that we have a, not great risk, of being disrupted to use the term, and we obviously, as Raj, and David Bronczek, and others, are putting a lot of effort into making sure that there is no opportunity for somebody to disrupt us on a substantial scale. I think again, people focus on the e-commerce, because everybody looks at this from their mobile phone forward. Where the real story is, everything behind the mobile phone, and that is what FedEx has in enormous quantities. Airplanes, trucks, facility, team members, so hopefully that answers your question.

Now we will take live questions.

Scott Group, Wolfe Research.

Hey, thanks. Afternoon. So, Alan, just wanted to ask you, just going back to the full-year guidance, that you are keeping the range. Does that suggest to you think the midpoint is possible? Or would you think we should be better off at the lower end of the range?

And then separately, do you have a thought on Ground margins for next year? Do think we will see year-over-year margin improvement at Ground in FY18?

I'm sorry we didn't understand that question. (laughter) Come on, goodness gracious. We have answered this question about as clearly as we can.

We are not going to give you any more specificity on the range. If we wanted to do that we would have been specific in the target. I think we have answered the question on Ground. Were very confident in Grounds earnings here. Alan?

I do not know where to begin. The range is the range because we have a lot of moving parts and this is a big complicated Company. And, what we do is very hard to do, I might add. I am so proud of our team that does this every day.

That goes back to the question that Fred just answered before. This is very hard to do and it is very capital intensive. There are so many things that go on around the world. I quit giving quarterly ranges, because I could never hit them. I think we will just let it stand for where we are, and we will talk about Ground's margins in FY18 in June.

Scott, let me give you one example here of just what we are talking about. I happened to be in New York last Monday, giving a talk for Fortune magazine. A snowstorm hit, which I unfortunately, was out in. I do not know what the snowstorm cost FedEx, with the size and scope of our operations, but it certainly cost us a significant amount of money at Ground, Freight, and Express. So, whatever it is, that is why we have range, because stuff happens.

Now, if volumes are a bit stronger than we think in the fourth quarter, it won't make any difference, we will be at the top end of the range. If volumes aren't quite a strong, then that snowstorm may push us within the range to some other place.

It is very difficult for us to be any more specific, and I think, as I mentioned a moment ago, for a Company of this size, $60 billion, for the CFO a year ago June, to tell you that we were going to have a range, and we now reconfirm 10 months later, even I am in awe of that. I think it is just remarkable that our financial planning folks, and the great systems that Alan and Bob Henning, and the operating companies to put it together. This is really something to watch, that we are able to tell you with the degree of specificity that we do tell you.

Basten Majors, Susquehanna Financial.

I know the Fulfillment business is pretty new here. But, I was hoping you could just take a step back, and maybe give us the pitch that you use when you go in and try to convince a customer to use your Fulfillment service over something like Amazon's. And, early on, what do you think is resonating there?

This is Henry Maier. I'm sorry did not get your name.

It's Basten Majors, with Susquehanna.

Let me give you a couple of updates, here. First of all, the company that was formally known as GENCO was rebranded to FedEx SupplyChain in the quarter, and we launched FedEx Fulfillment, which, I think you need to look at as an all-in-one logistics solution for e-commerce companies, but primarily targeted at small- and medium-sized e-commerce companies, some of which are startups.

Let me just put a little bit of color around this. You really need to have somewhere between 50 and 2,000 shipments a day to fit into this. And, the reason why that range is necessary, is, because in order for this to work, you've got to have the ability to keep your inventory in at least one, but potentially two of these warehouses that are run by FedEx SupplyChain. The reason why that is important is, is that we have cited those fulfillment centers in such a way as we can reach 94% of the population out of two of them, in two days or less. I will let you -- I mean, it should be obvious to you why that is a big deal.

The pitch is simply this. FedEx Fulfillment is a one-stop shop for warehousing, fulfillment, order management, inventory and transportation management, and reverse logistics, which allows the small- to medium-sized customers to really focus on their business, which is selling things online. It is not a marketplace.

However, since these folks may be selling on their own website, it gives them the ability for them to have visibility to their inventory, as they could potentially sell across some of the 90 or so marketplaces that exist out there. It's highly customizable in the sense that you can -- we will actually ship your product, in your own branded carton. Which is really important, because there are now companies that do not allow you to sell or I'm sorry to fulfill for certain fulfillment operations, if it is going to show up in that company's branded box.

They also do gift wrapping as part of this. So, something that is really important for some of the smaller facilities. It is also integrated with FedEx Cross Border, which gives them the ability to sell internationally, which is a big deal for these small customers. Because generally the first thing they find out is, is once they get online and get their product on one of these marketplaces, orders come in from parts of the world they did not expect.

I will tell you that we are really grateful for the customer interest we have had in this today, because it has far surpassed any of our expectations. I hope that answers your question.

Again, let me stress what Henry just said here, to make sure the point is there. This lets the merchant sell on any marketplace. So if they want to sell on Amazon that is great. If they want to sell on Walmart, as very aggressive trying to attract marketplace customers. If they want to sell on eBay, if they want to sell on Alibaba, JD.com.

There are, as Henry said, there are 90 of these marketplaces. Now, obviously, Amazon in this country is the biggest. So, that is the advantage, that they get all of these centralized support that Henry gave to you, but they can sell in any or all of the channels that they find most useful for their product and merchandise.

David Vernon, Bernstein.

Good afternoon, and thanks for taking the question. Maybe Dave, a question for you on the integration plan with the TNT Liege hub. Are you guys planning on keeping that as part of the network? And as you guys work to integrate that, can you talk a little bit about how your international capacity, your transatlantic, transpacific capacity is going to be growing over the next couple of years?

Thanks for the question. Yes, Liege, Belgium. I was just there two months ago with my colleague Rob Carter, and I have to tell you, they've done a great job there. We're putting a new technology into the automation into the hub there. We are starting -- you probably saw the press release already come out. We have a 777 that starts in April, that comes out of Liege, comes to Memphis, goes to Seattle, goes to Asia.

It is going to be fantastic in every way. We actually improve our service and our cutoffs in deliveries.

So, the answer to your question, specifically, is yes. I am proud of the management team in Liege. They have done a great job of transitioning from an old facility to a new one. It is critical to our success there. And it goes alongside our Cologne hub, and our CDG hub, so we'll operate all three hubs there. It is very effective for us to have all three hub operations in Europe.

Amit Mehrotra, Deutsche Bank.

Hi. Thanks so much for taking my question. The question is, on the operating income target at Express, I'm just wondering if you can provide any cadence of that improvement over the next three years? And some color on what, if any, revenue synergies are included in that number?

It just seems like there is an enormous opportunity to increase penetration with European multinational corporations, given the enhanced presence in Europe. So, if you could talk about that, or talk to that, and what is assumed, related to that in the new Express profit plan. Thank you.

Well, we agree there is a lot of opportunity, and we're not going to give you the cadence of it at this point in time. Because that would be in tantamount to giving you our forecast, which Alan does in June. David Bronczek?

Yes. Let me add to what Fred said. I can tell you that, you are right, and I said it in my comments. The sales organization in Europe is highly motivated. They are extremely excited to be part of the FedEx global sales organization, and the marketing team.

So, I think that you are going to see us become a little bit more aggressive, as I mentioned before, in filling up our 777s coming out of Liege, and the operations in Europe. I think there's going to be more synergies between the volumes, between TNT of the past and FedEx in Europe, including, helping our yield, including helping our profitability, but also fundamentally growing our volume and growing our revenue. No question about it.

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you for your participation in the FedEx Corporation third-quarter earnings release conference call. Feel free to call anyone on the investor relations team if you have any additional questions about FedEx. Thank you very much. Goodbye.

And, once again, that does conclude today's presentation. We thank you all for your participation, and you may now disconnect.