FedEx Corp FDX
Q3 2013 Earnings Call Transcript
Transcript Call Date 03/20/2013

Operator: Good day everyone, and welcome to the FedEx Corporation Third Quarter Fiscal Year 2013 Earnings Conference Call. Today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead, sir.

Mickey Foster - VP, IR: Good morning, and welcome to FedEx Corporation's third quarter earnings conference call. I'd like to start by saying that we're planning an investors and lenders meeting this fall in New York City. So, please save the afternoon of Monday, October 28 for this event. We will have more details in the next few months.

The third quarter earnings release and our statistical book are on our website at FedEx.com. This call is being broadcast from our website and the replay and podcast will be available for about one year.

Joining us on the call today are members of the media. During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate. If you're listening to the call through our live webcast, feel free to submit your question via email or a message on StockTwits.com.

For email please include your full name and contact information with your question and send it to our IR@FedEx.com address. To send a question via StockTwits.com please be sure to include the $FDX in the message. Preference will be given to enquiries of a long-term strategic nature.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call maybe considered forward-looking statements within the meaning of the Act. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC.

In our earnings release, we include certain non-GAAP financial measures, which we may discuss on this call. Please refer to the release available on our website for a further discussion of these measures and a reconciliation of them to the most directly comparable GAAP measures.

To the extent we disclose any other non-GAAP financial measures on this call, please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of such measures to the directly comparable GAAP measures.

Joining us on the call today are Fred Smith, Chairman, President and CEO; Alan Graf, Executive Vice President and CFO; Mike Glenn, President and CEO of FedEx Services; Chris Richards, Executive Vice President, General Counsel and Secretary; and Rob Carter is on vacation this week with his family, so we have David Zanca, Senior Vice President of IT here to answer your IT questions; Dave Bronczek, President and CEO of FedEx Express; Dave Rebholz, President and CEO of FedEx Ground; and Bill Logue, President and CEO of FedEx Freight.

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

Frederick W. Smith - Chairman, President and CEO: Thank you, Mickey. Good morning and welcome to our discussion of operating and financial results for the third quarter of fiscal 2013. Our FedEx Ground and FedEx Freight posted solid financial results. The third quarter was very challenging for FedEx Express due to continued weakness in international air freight markets, pressure on yields due to industry overcapacity, and customers selecting less expensive and slower transient international services.

In response, as Dave Bronczek will tell you after Alan Graf's remarks beginning April the 1st, FedEx Express will decrease capacity to and from Asia and will aggressively manage traffic flows to place lower-yielding traffic in lower-cost networks.

We are assessing how these actions may allow FedEx Express to accelerate the retirement of more of its older, less efficient aircraft as part of our fleet modernization program done several years ago. We remain focused on our strategic cost reduction programs, which are ramping up and on target.

FedEx has a long successful history of flexing our networks to meet market conditions and I'm confident the strategic profit improvement program we are implementing as well as additional actions we're taking at FedEx Express will increase margins, improve cash flows, and strengthen our competitiveness over time.

I'd like to congratulate FedEx team members around the globe for once again making FedEx one of the 10 most admired companies in the world according to a survey last month by Fortune Magazine. This honor and others our team has received reflect the outstanding reputation they've earned to their commitment to our Purple Promise, which says simply, 'I will make every FedEx experience outstanding'.

Before I turn the microphone over to Mike Glenn for his comments on the economy and then Alan Graf for financial perspective, and as I mentioned, Dave Bronczek on the Express issues, I'd like to recognize and thank Dave Rebholz who is participating in his final earnings call as President and CEO of FedEx Ground.

Dave is retiring on May 31st after 37 years of service to FedEx. He spent more than 30 years with FedEx Express and during the last seven years has been largely responsible for the incredible success and growth of FedEx Ground. Dave, on behalf of the entire FedEx team, thank you for your leadership, your friendship, and your wise counsel as a member of our strategic management committee during these many years and best wishes for your well-deserved retirement.

Now, Mike Glenn.

T. Michael Glenn - EVP, Market Development and Corporate Communications: Thank you, Fred. On the economic front our forecast calls for modest growth in the global economy. Historic revisions and incoming data since our last earnings call led us to adjust our GDP in industrial production numbers. Our U.S. GDP growth forecast is 2% in calendar '13 and 2.5% in calendar '14.

For industrial production we expect growth of 3% in calendar '13 and 3.5% in calendar '14. Housing and auto markets have shown improvement, e-commerce experienced mid-teen growth rates and we've seen some inventory restocking taking place in the near-term. Our global GDP forecast calls for 2.3% growth in calendar '13 and 3% in calendar '14. The calendar '13 outlook certainly remains uncertain due mainly to policy issues in the U.S., Europe and China.

Now turning to yield commentary; excluding the impact of fuel, year-over-year Express domestic package yields increased 2.1%. The increase was primarily driven by rate and discount improvements followed by increased weight per package. The FedEx Ground yield increased 1.9%, excluding the impact of fuel with the year-over-year increase, driven by rate and discount improvements and an increase in extra service charges. Excluding the impact of fuel International Express package yield declined 3% year-over-year due to changes in product mix, which were referenced earlier, rate and discount and weight changes.

Finally excluding the impact of fuel, FedEx freight yield per hundredweight increased 1.7% year-over-year with the increase primarily driven by rate and discount changes.

Now, I'll turn it over to Alan Graf.

Alan B. Graf, Jr. - EVP and CFO: Thank you, Mike and good morning, everyone. Our third quarter adjusted earnings per share of a $1.23 excludes $46 million in cost for business realignment activities, primarily from the voluntary buyout program that we outlined in our profit improvement plan.

As Fred noted, Ground and Freight continued to post steady results. However, our lower than expected results for the quarter and reduced full year earnings outlook were driven by third quarter international revenues at Express, declined approximately $100 million versus our prior forecast, primarily due to accelerating customer preference for lower-yielding international services, lower rate per pound and weight per shipment. Profitability was also impacted this year by one fewer operating day at Express and Ground and two fewer days at Freight.

Now, let's take a look at the segment results for the quarter. Starting with Ground, Ground continued its solid performance for the 17% operating margin. Average daily volume at Ground increased 10% from growth in our home delivery service and increases in our commercial business. Meanwhile, SmartPost volumes grew 26% through growth in e-commerce.

Operating income increased slightly, while operating margin was lower as the benefit of higher volume and revenue per package was mostly offset by higher purchase transportation, a favorable self-insurance adjustment in the prior year, higher network expansion costs, one fewer operating day as I mentioned earlier. Intercompany charges of $9 million associated with the business realignment program. One-time items such as insurance benefit and the realignment costs drove the majority of the difference in margin year-over-year.

Freight continues to leverage the benefits of an integrated network. Freight's operating results improved with LTL yield growth and increased average daily LTL shipments, along with ongoing improvements in operational efficiencies. This is the first positive profit in the third quarter for Freight since 2008. Freight's profitability for the quarter improved despite 17% higher depreciation and amortization expense, from continued investment in transportation equipment and technology. As a result of our higher utilization of rail and other fuel efficiency improvements, Freight’s fuel costs were 5% lower year-over-year.

Turning to Express, our results for Express reflect a significant decline in profitability due to the ongoing shifts in demand to lower yielding international services, a trend that has continued to accelerate this year versus our previous expectations. Results were also impacted by lower international yields, as lower rate per pound, lower weight per shipment, and lower fuel surcharges have all impacted yields for international. Given the persistence of this trend, additional cost-cutting actions are underway for the line haul network, which represents a significant part of our cost to provide our international services. We are reducing our Trans-Pacific capacity on April 1; flight hour reductions will lead to savings in fuel, crew and maintenance costs.

We will align our global networks to better match yields with the appropriate cost to serve network, taking advantage of the increased capabilities at FedEx Trade Networks. Some of the actions we are evaluating may involve temporarily or permanently grounding older, less efficient aircraft, which could result in asset impairment or other charges in future periods, and Dave Bronczek will have more to say about this when I conclude my remarks.

I'd like to now look at our profitability improvement programs and our outlook. In addition to taking actions to reduce our network costs at Express due to the recent trends, we are also continuing to implement our profit improvement plan for the Corporation, as discussed at our October Investors and Lenders meeting. As part of our plan, in Q3, we began implementing our voluntary buyout for eligible U.S.-based employees. Certain officers and managing directors accepted the voluntary buyout as we adjust our leadership team to our new organizational structure.

In mid-February, eligible U.S. employees were offered voluntary buyouts with a deadline of April 1st to accept. Employees that accept the buyout will be scheduled to vacate their positions in phases to ensure a smooth transition and maintain service levels to our customers. Employees in the first phase will leave on May 31st and we expect all employees who accept the buyout to vacate their positions by the end of FY '14.

The pre-tax cost of the voluntary buyout program will be approximately $450 million to $550 million in FY '13. Actual costs will depend on employee acceptance rates. Costs for the voluntary program will be recognized when eligible employees accept their offers, predominantly in Q4 of FY '13. Additional costs will be incurred beyond FY '13, primarily related to facility optimization and professional fees associated with our ongoing IT transformation projects.

While the estimated range for the FY '13 costs of the voluntary buyout program is approximately $100 million lower than our previous forecast, we still expect the same savings from our business realignment activities. The estimated range is lower due to facility closures that we originally expected in late FY '13, which will now occur in FY '14. Also, significantly deferred hiring of open positions reduced our need to offer voluntary buyouts in some cases.

Other ongoing profit improvement initiatives for Express include aircraft modernization, pickup and delivery productivity, aircraft maintenance processes, fuel consumption best practices and further facilities rationalization. In addition to continued profit improvements in the base businesses at Ground and Freight, our profit improvement programs are targeting annual profitability improvement at FedEx Express of $1.6 billion by the end of FY '16 from the full year FY '13 results.

Looking ahead based on the economic outlook that Mike discussed, we project diluted earnings per share of $1.90 to $2.10 for the fourth quarter and $6 to $6.20 for FY '13. Both of these ranges do not include charges related to the Company's business realignment. All the profit improvement initiatives discussed are expected to increase margins, improve cash flows, and increase our competitiveness.

But now I'd like to turn the call over to Dave Bronczek, who will discuss Express in more detail.

David J. Bronczek - President and CEO, FedEx Express: Thank you, Alan and Fred and Mike. I'm going to talk about something they all talked about and basically to start off with I wanted to say at Express, the $1.6 billion that we gave you at the Investors and Lenders Meeting in October is well on track. We told you that 75% of that benefit would accrue in FY '15. That's still the case and in fact in some categories we're exceeding even those estimates.

I also wanted to stop and say that in our domestic business, we're performing actually very well. Our average daily volume this quarter was up 1%, domestic yields that Mike Glenn pointed out was up 2.1%, domestic U.S. freight was up 3%, and domestic U.S. yields in freight was up 3%. So our business in the United States domestic Express is performing very well. The international business and the international trends is what I'm going to talk about for the remaining of my time; and those trends have shifted, the marketplace has shifted this quarter. And to show you how much it shifted, the revenue this quarter in IP, International Priority, was down 4%.

The revenue was down in International Priority Freight by 13%. Yields for international exports were down 3%, and overall IP Freight yields were down 1%. So we have a yield issue that exaggerated itself this quarter over last quarter.

The other issue that we're dealing with is actually something you would think was a good problem for us to have. Total international export volume was up 4%. That however was driven by a 12% growth in deferred international export traffic, mainly led out of Asia and Europe. So we had a lot of freight, a lot of freight on our planes. Our high load factors, quite frankly, were driven by the deferred traffic. So we had lower yields, we had more traffic, higher pounds, all in deferred traffic.

So, what Fred and Alan have said, is we started in November actually to start moving our linehaul network down and tweaking some of our network around the world. We're big enough to move our network around – and I'm going to talk about that in a minute here, was actually up without affecting service to our customers.

So, in November we began the process. April 1, we're moving our trans-Pacific linehaul capacity down because we have markets that have multiple aircraft in them. We're going to be forcing a higher yielding revenue component into our planes, while we're reducing our costs, moving some of that lower yielding deferred international economy freight into lower-cost networks, primarily our FedEx Trade Networks network and our own deferred network. By doing so will actually improve the overall yields into our network that is actually going to be reducing its costs, and that's the beginning of our outlook for our international line haul. That starts April 1st.

Beyond that, we are looking at the rest of our global line haul that also has multiple airplanes in multiple markets that we can actually force the revenue yield and quality of the revenue into our existing network while reducing our costs. So as Alan and Fred both pointed out, we are going to take this opportunity off of the third quarter market shift to look at our fleet and if in fact if we have some of our airplane that are inefficient for fuel and maintenance and determine throughout the quarter if we have some airplanes that we can retire.

Going back to the issue at hand, Q3's performance on international revenue driven by yields was the issue. We actually had more volume. So we are resetting the Express capacity. We are resetting the revenue of forecasting. Going forward we are actually going to take a very hard look at all of our expenses at international but the main expense for international is our global line haul. Q3 to Q4, Q4 in significantly improved over Q3. So in Alan's guidance and his outlook you'll have an Express Q4 performance that's significantly better than Q3.

Mickey Foster - VP, IR: We are ready for questions.

Transcript Call Date 03/20/2013

Operator: Tom Wadewitz, JPMorgan.

Thomas Wadewitz - JPMorgan: I think I had probably said this before the congratulations to Dave Rebholz, wish you well in retirement. So, a lot of things going on in international, I wondered, if you could give a sense of why – what you think is happening in the market? Whether this is a shipper driven effect in terms of the trade down and some of the weakness and if you see that continuing and becoming more of an issue? Is it somewhat of a competitive issue where I think UPS had announced that they are doing – starting to offer I guess an IP freight type of a product where I don't think they've had that specific product in the past and I think DHL has been aggressive? But how do you think about what's really driving the issues in the international and how they might play out going forward if they get any better or if it's just a challenge that persists?

Frederick W. Smith - Chairman, President and CEO: Well, this is Fred Smith speaking and let me make a comment or two and then Dave put some color on it. I'd like to refer you back to a speech I gave in May, I mentioned this in the last quarterly call I believe. It's on our investor website and while I was the spokesman of this speech, obviously it reflects FedEx's belief about the trends in international trade and international transportation. I would urge you if you're interested in this matter in depth to read that presentation because it lays out what has gone on in the international trading arena. The reality is that the American consumer drove international trade for a long period of time and brought Europe back after World War II and helped bring China into the current fantastic economic powerhouse it is, but policy decisions and the cost of fuel have radically changed the international trading situation. So last year you had a reduction of international airfreight in its broadest sense. Again I'd refer you to the Wings Club speech of about 1.9% in terms of revenue freight kilometers as is measured and you had about 1.9% increase in seafreight measured TEUs for twenty-foot equivalent units. So trade has contracted relative to where it was before 2008 and the cost of fuel is such along with the increasing cost in China that these markets have been constrained. At the same time you have a lot of capacity that's come into the market. Driving the bottom line is we got a little bit ahead of our skis and we had more capacity out there into the heavier, more cost sensitive airfreight market and that's what Dave is doing is adjusting our capacity back. So it's really focused more on the international priority where our network is quite unique and has a competitive advantage. Dave?

David J. Bronczek - President and CEO, FedEx Express: That's exactly right Fred. I think if you look at the market you can see that it's overcapacity and because of that overcapacity people are looking for a market shift in their pricing and the issue for us isn't that we don't have enough volume. We have too much volume in the wrong product in the wrong network. As I mentioned before, our overall growth in deferred was 12% and quite frankly, that's only because we had to cap it because our planes coming out of Asia were full, full of the wrong type of products. So, we are moving the traffic into a lower cost network. We're opening our express traders for truly IP, international priority, traffic and we're bringing down our costs of the capacity. So, when you look at the marketplace, it shifted. Right now until the marketplace corrects itself on the overcapacity, we're taking the lead for our business.

Operator: Justin Yagerman, Deutsche Bank.

Justin Yagerman - Deutsche Bank: Wanted to dig just a little bit more on this international side and try to figure out what's changing on the margin here. I mean, it makes a lot of sense to move to third party line haul in some of this business because of the margin differential. Is it the weakness because of overcapacity more in the air cargo market versus the parcel market that's actually taking place with all the wide body deliveries that have happened and that are scheduled to happen and then when you take a look at your fleet, should we expect – when you balance out deliveries and retirements on a go-forward basis that we'll see a net decrease in FedEx's fleet capacity? And I guess the third part of that is, what does that imply for CapEx on a go-forward basis? And a whole lot of pieces there, but trying to figure out if its air cargo versus parcel, what the net impact is to FedEx's fleet and then how does that impact your capital plans on a go-forward basis?

Frederick W. Smith - Chairman, President and CEO: This is Fred Smith speaking. I'm going to turn it over to Dave about the fleet and then he and Alan can talk about the go forward CapEx. It is the air cargo market, and the air cargo market is as I just mentioned a moment ago has been adversely affected by lower economic growth around the world, caused by the policy choices that are now reflected in the European situation, relatively low growth in the United States and China situation. So, the international Express business is still growing, the door-to-door part of the business and these aren't new things. They just perhaps have accelerated a little bit because of this over capacity situation. Over the last couple of years, Dave Bronczek has done a great job of readjusting our deliveries of capacity pushing off 777s and bringing in the 767s which have an immediate accretive effect in the domestic system. So they are so much more fuel efficient than the airplanes they are replacing. So I'll let him talk about that and Alan on CapEx.

David J. Bronczek - President and CEO, FedEx Express: Thanks, Fred. That's right, its air freight market. Our IP parcel it actually grew 2% which is a good thing. The issue is we've got this big lane imbalance between Asia and United States and it keeps driving itself farther and farther, where it would actually help to put on more planes coming back from the United States back to Asia. So our goal is to take advantage of our network, per se global network, where we have multiple airplanes in some markets, move them out, force the traffic that's truly IP into our planes, move into a lower cost network, some of these lower yielding packages, more lane balance the network around the world and we have a lot of opportunities beyond just Asia to the United States. We're looking at Asia to Europe and back and so forth. So, when you look at the marketplace, we have a lot of growth in it. It shifted to deferred because you have overcapacity in the air freight market. In terms of airplanes, yes, we're looking at ways to – because of the pull-down in the international market there, looking at ways to replace or retire, I should say, older, more inefficient, fuel inefficient maintenance planes sooner.

Alan B. Graf, Jr. - EVP and CFO: Justin, this is Alan. Two points; one, we're already seeing the benefit of flying fewer pounds at higher yields in the fourth quarter guidance that I gave you that are continuing to '14. So, as Dave said, Express' performance in Q4 year-over-year will be a whole lot better than it was in Q3 and there's been a lot of cost cuts that are already been done ahead of schedule. Secondarily, from a CapEx standpoint, recall that Express' aircraft capital expenditures over the next two or three years are largely replacement, and if anything, we're going to accelerate that, because we will be – if we decide to make some elections to retire airplanes, they will be the older airplanes that have significantly higher fuel burn, more maintenance, et cetera. So those capital investments we still want to make because they still have a high ROIC. We're not taken by a couple of 777s over the next several years; most of those have been shut way back. So, whatever we come up with there will be the size of the fleet we're going to fly internationally for at least two or three years.

Operator: Nate Brochmann, William Blair.

Nate Brochmann - William Blair: Wanted to talk a little bit, kind of shifting gears a little bit just away from the Asia, U.S. kind of lane, but over in Europe obviously with the big merger that kind of fell through with some of your competitors, how are you thinking about your opportunities there? I mean what are some of the current trends and what are your, kind of investment outlooks there to kind of take advantage of that growing region?

David J. Bronczek - President and CEO, FedEx Express: Our European organic strategy we put in place about 18 months ago has been performing exceptionally well. We've opened 70 stations in Europe. By the end of this fiscal year it will be 87 and that's over a two-year period time. The service is great. The volumes are growing. As I mentioned before, Asia and Europe actually led the way for international export but also in Europe. So actually very – we are very comfortable with our position in Europe right now. The markets are tough but we are in a very good position there. Obviously we don't talk about acquisition opportunities now and we for a lot of good reasons that Fred always talks about. So I just wanted to point out, our European team's doing a great job, very happy with their results.

Operator: David Ross, Stifel Nicolaus.

David Ross - Stifel, Nicolaus: (I was going to) talk about Express, I want to shift over to FedEx Freight for a bit. It was barely profitable in the quarter, so I was wondering, does price need to go up there, or is density still weak and more terminals need to be closed? Because the gap is not being closed with the competition, and the competition is all operating a lot better than FedEx Freight, still a mile away from its former industry leading operating ratio.

William J. Logue - President and CEO, FedEx Freight: Again, as Alan said, our quarter three was our strongest quarter three in five years. So we are probably most profitable in the quarter. The challenging issues that we have in this quarter, obviously, is December, January, February, and we have seen a significant impact from two less operating days this year. That had a big impact on our numbers. So, again, our overall Q3 from our perspective – again, we saw volume up, we saw yield up and we saw weight up. So, from that perspective, it was a good quarter. We took on some charges from the buyouts, as Alan mentioned, increased depreciation. So I think from that perspective, our business had a healthy Q3, and if you look forward, we saw productivity in the quarter being very strong as well. So again, our shipments productivity were up 2%. So from our perspective, we had a good quarter, as we move now into Q4. So, Q3 best in five years for us, so that was a good progress.

Operator: Ben Hartford, Baird.

Benjamin Hartford - Robert W. Baird & Co.: Could you provide some perspective – obviously, you are taking airfreight capacity out of the Asian market both inbound and outbound, but trends I guess in the March and the pace of factory activity coming back up online following lunar New Year, I've been hearing some mixed data points as it pertains to that and the trajectory of March airfreight out of Asia at the moment. Could you provide some perspective on that front?

T. Michael Glenn - EVP, Market Development and Corporate Communications: This is Mike Glenn. We don't provide monthly forecasts and projections regarding the business, but I would say that the trends have been stable. We expect those to continue in terms of the shift in the mix of the business. So, we don't anticipate any significant changes in the mix of traffic going forward. I think the key for us, as Dave has mentioned several times, is the adjustments we are making to the network that allows us to leverage the global network that we have to improve the profitability in our international segment.

Operator: Bill Greene, Morgan Stanley.

Bill Greene - Morgan Stanley: Dave, before we have you head on off for your retirement, I was wondering if I could ask, could you just comment a little bit on your thoughts about growth in volumes? Alan read sort of a number of items that affected the margins this quarter, but it is the second quarter we've seen incremental volume growth with margins that didn't go up. So I realize that maybe if we adjust for these things, margins might have been flattish. But I think it's safe to assume that at these kind of margin levels, it's tough to see the margins go up materially from here. So, do you think the time has come to slow the volume growth a bit and focus a bit more on yields to get the profit growth instead of just growing the share? How do you think about balancing those two?

David J. Bronczek - President and CEO, FedEx Express: So you understand that the predominant factor was the year-over-year issue of the favorable self-insurance. That is just simply a fact. We continue to grow not only in the second and third quarter; we've picked up growth in the fourth quarter. we're very confident and happy about that. I think fundamentally that, while margins are unpredictable relative to weather and different issues that affect us, the timing of issues, the fact of the matter is that we have a better mousetrap. Our service is absolutely supreme. Customers are coming and talking to us. I think if you talk to my compadre Mike Glenn, and the person who is going to replace me, who I have incredibly great faith in, Henry Maier, who I hired in the first year that I went up to Ground for the purpose of replacing me and building the organization and changing it, I don't see any end in sight. Now, having said that, all of these issues come down to the fact that we have invested a lot of money; we've done it efficiently and effectively to make sure that our service proposition is greater than the competition. To put that another way, when there are too many people that want to get in the door, you've got to raise your yields. Having said that, we will look at every customer on an individual basis and determine the value proposition that we each share, and essentially improve our margins. Putting that aside, I see no risk in the Ground proposition value today. I think we are on the right track. We're moving in the right direction. So, I would ask Mike to comment on the yield. But as a matter of fact, I think we're in a very good sweet spot.

T. Michael Glenn - EVP, Market Development and Corporate Communications: Bill, I appreciate your comment, but I do want to remind you that Ground had 10% growth in the quarter, and our yields excluding the impact of fuel grew almost 2%. So, I think that's very consistent with our strategy to work with our operating companies to find the right balance between volume growth and yield improvement to maximize the profitability. I would encourage you to look at the long-term trends that we've been able to produce here, and we're very confident in our ability to position the outstanding value proposition we have in the marketplace and our sales team is doing a great job at that.

Alan B. Graf, Jr. - EVP and CFO: So, Bill, this is Alan. Just to answer your question, this Company is about driving cash flows, and we are perfectly happy with continuing to grow the top line while we maintain 17% or 18% margins at Ground and have a 27.5% after-tax ROIC.

Operator: Chris Wetherbee, Citi.

Alex Hahn - Citi: This is (Alex Hahn) in for Chris. I just had a question about incremental capacity and investment in Ground. Where do you think that's going and do you think the network now is in a position to leverage future volume growth?

Frederick W. Smith - Chairman, President and CEO: Well, Alex, the good news about our problem is we constantly have to balance this; the growth and the demand at the right price point, we will invest whatever is appropriate to take on new business. However, we are well suited moving forward.

Operator: Jeff Kauffman, Sterne Agee.

Jeff Kauffman - Sterne Agee: I have one question for Dave and one question for Bill. On the international side, it sounds to me like what you're saying is the issue isn't growth; the issue is the wrong assets in the wrong place for the type of business you're seeing. Is that the way to think about it? That's really the whole point of this realignment?

David J. Bronczek - President and CEO, FedEx Express: Yes, we have the wrong – we had high growth in deferred, which is good. As long as we put it in the right network, that makes us more money, and we open up our network that actually is there for the higher-yielding packages and right now it's being overrun almost by the deferred traffic. So, we're moving that traffic off of our Express freighters on to a more – lower cost network, our FTN network, and some of our own deferred flights, and opening up the Orange network, our priority network at Express for the higher-yielding traffic. So, when we do that, we actually force the capacity to go down and force the revenue quality to go up.

Operator: Scott Group, Wolfe Trahan.

Scott Group - Wolfe Trahan: So, a question on the Express side. So, the mix shift seem worse than you were thinking, and you're trying to offset that with more capacity reductions than, I guess, you were initially thinking. Net-net, how should that impact the $1.6 billion of profit improvement over the next few years, and is there a point where if the mix shift continues to accelerate more than you thought where it’s just impossible to offset with capacity? And then maybe just separately on the domestic side, first quarter the volume growth in domestic Express in a couple of years, do you think something is changing there and that's sustainable, or just kind of just a one-off quarter on easy comps?

David J. Bronczek - President and CEO, FedEx Express: Well, I'll answer both questions. On the $1.6 billion that I gave you in October, off of our FY '13 base, that's all still in place. On the international side, I think I gave you $350 million, and that $1.6 billion was on the international piece, that's still in place. We have probably more opportunity to try and beat that, quite frankly, with the way we're looking at our network going forward. In the United States, we're performing very well; the volumes, the yields, working with Mike Glenn and his sales team. There's also a component in that $1.6 billion in our U.S. transformation, and that's on plan, and quite frankly, our team is doing a great job there. So, we just are adjusting our network right now and we are big enough to do that and become more profitable there.

Frederick W. Smith - Chairman, President and CEO: This is Fred Smith speaking. We've made this point a couple of times on these calls and at the Investor Day back in October. The Express market is going to be around forever. I mean, the growth in Ground is outstanding and it's a much bigger market in terms of units, but the types of things that go into the Express network, things that require time certain long-distance delivery are going to continue to be a requirement for shippers. It's just the ratio of the Express shipments to the Ground shipments. I think what you saw in this quarter was sort of a stabilization of the Express/Ground ratio. There is certainly e-commerce driving a lot of traffic for Ground and some proportion of the e-commerce requires Express delivery. So that's really what you're seeing.

Operator: Ken Hoexter, Bank of America Merrill Lynch.

Ken Hoexter - Bank of America Merrill Lynch: Just a follow-up on that, Bill. If you look at the profit improvement plan and you're already talking about cutting more aircraft, a quarter after a multi-year kind of program was set. Does that mean when you look back you didn’t go far enough in terms of adjusting the network? I just want to understand how you think about how you need to reshape that domestic network as you're just about to enter the real part of the SG&A savings and network realignment?

William J. Logue - President and CEO, FedEx Freight: Well let me be clear, it's really the global network that we are talking about here. We have an opportunity and I have challenged my team to – we have some older planes, 727s and some tri-motors that if we could require them earlier after what I told you before, would be better. But it's really across the world and it's on a global basis.

Operator: Brandon Oglenski, Barclays Capital.

Brandon Oglenski - Barclays Capital: I was wondering, can we talk a little bit about your international domestic operations as well? It looks like obviously, you've had a lot of acquisitions there and the comps are impacted by those, but when I look at your purchase transportation at the Express. I mean it looks to be growing in line or maybe even a little bit above the revenue growth in international domestic. Is there correlation there and can you talk to the opportunities in those new networks and where the profit targets might be in the future?

Alan B. Graf, Jr. - EVP and CFO: Yes. On that purchase transportation line, it looks like, it's growing 30%. It's actually in the base growing 2%, only 2%, its acquisitions and FTN, which is a good thing. Our domestic acquisitions are perfect for our Company and we will start harvesting the returns and the profit opportunities in the very near future going forward, but on the purchase transportation, that 30% growth is in the base only 2%.

Operator: Thomas Kim, Goldman Sachs.

Thomas Kim - Goldman Sachs: There has obviously been a lot of focus on Asia and Europe and I was wondering, if you could just take some time to elaborate or remind us about the FedEx opportunities particularly with LatAm given the tremendous air freight growth we continue to see out of those markets and then perhaps to some extent Middle East?

Frederick W. Smith - Chairman, President and CEO: Well, Dave can talk about this more in greater detail, but Latin American market is in fact growing. We have a great position there, great management team. We made an acquisition in Mexico. We made an acquisition in Brazil. So, we're very optimistic about the prospects for Latin America and we have a good position there. A lot of the air freight market, the traditional air freight market in Latin America, are perishables, and we have a position in that market to some degree, but as the acquisitions become integrated and turn from an expense to a positive, as Dave told you we are very optimistic about our Latin American results. Dave has got a better focus, perhaps on the Middle East and he can give you some comments on that.

David J. Bronczek - President and CEO, FedEx Express: I will Fred, thank you. I will talk about Latin America for a minute though. One sense those are ahead of Latin America, fantastic executive. We acquired two terrific companies one in Mexico, one in Brazil, same cultural fit, same great service, same great market presence, same great customer base, and we're going to see terrific returns when we harvest the profitability that we had to go through the obvious branding, the IT integration, but we're well on our way there. So, you're going to see more very good performance out of Latin America. In the Middle East, of course in the Middle East they are performing well. We have another acquisition in India that we lump into our Middle East region, it's actually improving. Some of the linehaul adjustments across the world actually affect the India and the Middle East in a positive way.

Operator: Kelly Dougherty, Macquarie Research.

Kelly Dougherty - Macquarie Research: You mentioned being more return on invested capital focus background, but does that mean then that the 17% to 18% margin level is where things stay as the mix of B to C increases or are there some other levers that you can pull to move those margins higher and Ground. Maybe where do you think they go from here?

Frederick W. Smith - Chairman, President and CEO: There are plenty of levers. I think the capital investment is in exactly the right spot. If you look at our past, it has been consistent and we've been able to provide a good return as evidenced by our ROIC as Alan said earlier. There is nothing that is at risk. We are very judicious and on how and where we spend money and we are very judicious about, as I said earlier, the right return from customers that come in the door. So, we will spend money when we can make money. End of story.

Operator: Scott Schneeberger, Oppenheimer.

Scott Schneeberger - Oppenheimer: A three-part question in Ground. Part number one, could you just recap and assess the holiday season now that we're all the way through and just the positives and negatives that you saw there in the Ground category? Number two, the yield was a little bit lower than anticipated throughout Ground and just how impactful were higher postal rates in SmartPost, just how should we think about that going forward? It's kind of addressed earlier, but if you can touch on that? Then lastly, weather impact in the quarter in Ground?

David J. Bronczek - President and CEO, FedEx Express: This is Dave. Let's take the weather last. Every year has its own experiences with weather and clearly this past year there were some unique circumstances, but frankly we were able to perform effectively and as evidenced by our contractor model, our contractors rose to the occasion. So, from a service standpoint, it was great. From a cost standpoint, in any kind of weather situation no matter what organization you're talking about in transportation, you have lagging effect. So, you might get hit for a week of bad weather; you get some recovery as people rebound. So put that aside. That is just simply a nominal issue. In terms of – so you had a three-part question. I want to make sure I answer them correctly. So go back to your first question, because I want to make sure I have it right.

Frederick W. Smith - Chairman, President and CEO: Holiday season.

David J. Bronczek - President and CEO, FedEx Express: All right, the holidays. All right. So, what happen in the holiday? The holiday was a great season for us. All of our large customers had exceptional demand. There was clearly demand from the online world that probably had not been experienced historically. That was good for them and that was good for us. We recovered; we handled the business; we handled that with a high level of service. Understand that when demands are high, we're going to spend some extra money to make sure that the customers who do business with us all year long are satisfied with our performance during the two weeks. So, I think that the retail sector is very healthy. There are some changing dimensions. We are prepared to handle it with our three bottom line product portfolios; Ground to commercial, Ground to home and our SmartPost product portfolio. In terms of SmartPost, the only thing that we were surprised by was the relative rate increase from the postal service. We are well-positioned to handle those rate increases and our customers value the product portfolio and we are very well-positioned to handle additional growth in that network and I think our partnership as their largest customer puts us in a position to continue to grow.

Alan B. Graf, Jr. - EVP and CFO: Scott, this is Alan. Let me just clarify one thing you said that the Ground yields were less than anticipated. That's your words. They came in almost exactly where we thought they would be. And a little bit of the margin issue year-over-year that we had a higher peaking factor in Ground this year. And that's what Dave was referring to, that the higher the peaking factor, the more temporaries and the less productivity that you get when you get to those higher peaking factors. So, some of that extra peaking traffic did not carry the same margins in this year's peak as in last year's peak.

David J. Bronczek - President and CEO, FedEx Express: Scott, let me sneak one comment about – as part of our revenue management process, when we bring on a large customer, especially in the e-commerce segment, we do a lot of work with the operating company to look at not only the impact of the volume and yield and non-peak season, but how the traffic peaks during peaking season and how it's going to affect the overall profitability of the opportunity. So, we do a lot of extensive work to work closely with Ground to make sure that we have a clear understanding of the impact of e-commerce and peaking as it relates to our margin. So, a lot of effort there, and I think the Ground company did a phenomenal job in providing outstanding service during peak season.

Operator: (Derek Rabe, Raymond James).

Derek Rabe - Raymond James: This is (Derek Rabe) on for Art Hatfield. You were granted licenses to operate the domestic Express network in eight cities in China back in September. Can you just talk about customer response to the shift so far and any growth opportunities or speed bumps you have encountered or see going forward? And then also, are there any progress updates toward countrywide access there?

Frederick W. Smith - Chairman, President and CEO: This is Fred Smith speaking. I'm going to have Dave talking about it in greater detail. We have a very large domestic business in China. I don't know how this kind of has been obscured over the years. We actually serve 400 cities in China and we got that domestic network by acquiring our joint venture partner some years ago. Then the Chinese government passed a different law that requires you to be relicensed under a different part of the China government. So they issued these licenses and they've assured us that our domestic operation over time will be relicensed if you will, but in the interim that domestic business continues to operate and grow and we are very excited about it. Because of its unique capabilities and it's one of those areas that could be lumped into the category that Dave was talking about that will start producing profits in the years to come after having built its network. Dave you want to add anything on that?

David J. Bronczek - President and CEO, FedEx Express: Well Fred, you said it exactly right and we have worked with the Chinese government. It's business as usual for us. We do serve 400 cities there in China. We are making great strides there and we've been in China for a lot of years. So our international business is very big there. Our domestic business is growing there and we think that in the very near future, this will be very accretive for us that domestic business in China.

Operator: Kevin Sterling, BB&T Capital Markets.

Kevin Sterling - BB&T Capital Markets: I know we talked a lot about Express and you talked about managing the traffic flows to place low yielding traffic in low cost networks. As I think about the growth in your FedEx Trade Networks, does this mean we could see an even greater focus on the ocean and would you be looking maybe to drop some of that lower yielding traffic maybe to water?

Frederick W. Smith - Chairman, President and CEO: Yes. We've had terrific growth in our FedEx Trade Networks organization and they've done a fabulous job over the last three years, almost tripling or quadrupling their growth that will continue. The customers have a great – that they can track and trace the same. They can use the same sales organization. So the opportunities for us to grow our FTN, our Trade Networks organization continues to be very big because we started off in a modest organization a couple of years ago and I think that this opportunity now that presents itself will allow customers see how good our service opportunities are on trade networks.

David J. Bronczek - President and CEO, FedEx Express: Yeah. Let me just add that I want to make sure we're clear here. The changes that we're talking about in our network are not designed to take traffic out of our airplanes and put it on the ocean, the market will drive the trends in terms of the mix between air freight and ocean traffic. We are looking to make sure that we have the right product in the right network to maximize profitability. But as Fred noted earlier, we do see growth in the overall market in the ocean side and some pressure on the air side, but that's a different issue than what we're talking about here in terms of rightsizing the network.

Operator: Thank you. This does conclude today's question-and-answer session. I would like to turn the call back over to Mickey Foster for closing remarks.

Mickey Foster - VP, IR: Thank you for your participation in the FedEx Corporation third quarter earnings release conference call. Please remember to save Monday afternoon October 28 for our Investors and Lenders Meeting in New York City. Feel free to call anyone on the Investor Relations team if you have any additional questions about FedEx. Thank you very much.

Operator: That does conclude today's conference. Thank you for your participation.