FedEx (NYSE: FDX) reported fourth-quarter earnings this week and hosted an investor call. Here's a Foolish digest for current or prospective FedEx investors.

Quick numbers check


Q4 FY 2009

Q4 FY 2010

Earnings Per Share



Net Income

($876 million)

$419 million


$7.85 billion

$9.43 billion

Operating Margin



*Excludes one-time charges.

Sentiment change?


Q4 FY 2009

Q4 FY 2010

Stock Price



CAPS Rating



Data from Motley Fool CAPS. Rating out of a possible five stars.

Besides FedEx investors, who should care about this report?
Shareholders of its biggest competitor, United Parcel Service (NYSE: UPS), which reports earnings next month (July 22).

Further FedEx news and analysis:

What follows is a lightly edited transcript of the conference call.

Mickey Foster, Vice President of Investor Relations, FedEx Corporation
Good morning, and welcome to FedEx Corporation's fourth quarter and year-end earnings conference call. I would like to invite you to our investor meeting here in Memphis. So please save Tuesday and Wednesday, September 28th and 29th, on your calendar. We will have more details about the meeting for you next month.

The fourth-quarter earnings release in the 25-page stat book is on our website at This call is being broadcast from our website, and the replay and podcast download will be available for approximately 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 and a follow-up so we can accommodate all those who would like to participate.

I want to remind all listeners that FedEx Corporation desires to take advantage of the safe harbor provisions of the Private Securities Ligation Reform Act. Certain statements in this conference call may be considered forward-looking statements within the meaning of the Act. Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those express 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 will include certain non-GAAP financial measures, which we may discuss on this call. Please refer to the release available on our website for further discussion of these measures and our reconciliation to them for 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 for reconciliation of such measures for the most directly comparable GAAP measures.

Joining us on the call today are Fred Smith, Chairman, President and CEO; Alan Graf, Executive Vice President and CFO; Chris Richards, Executive Vice President, General Counsel and Secretary; Mike Glenn, President and CEO of FedEx Services; Rob Carter, Executive Vice President, FedEx Information Services and CIO; 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. And now our Chairman, Fred Smith, will share his views on the quarter, followed by Alan Graf. After Alan we will have Q&A.

Fred Smith, Chairman, President and CEO
Thank you, Mickey. Good morning. Welcome, ladies and gentlemen, to our discussion of earnings for the fourth quarter and full year of fiscal year 2010 just ended, and our perspective on fiscal year 11. We finished FY10 with positive momentum following gradual economic improvement during quarter three and a strong fourth quarter. Package volume grew significantly as major global economies began emerging from recession in the second half of fiscal year 10. In addition to being aided by the economic recovery in fiscal year 10, we were able to successfully navigate the economic downturn for several reasons. First, the FedEx team was absolutely committed to coming out of this recession stronger and in a better competitive position. We made calculated decisions during the recession so we could leverage our unique global networks to take advantage of the economic recovery we knew would come. Second, we built and maintained an exceptionally strong balance sheet. And third, we planned and executed a business model that puts variable cost programs, what I refer to as our shock absorbers, in place over many years throughout our network so we can quickly and efficiently flex up or down to match shipping capacity to demand. We implemented in this regard several actions in 2009 to lower our costs, including some salary reductions, suspension of 401(k) company matching contributions, and significant volume related reductions in hours and line haul expenses. We are very pleased that we have been able to begin restoring some of these pay programs and incentives in calendar year 2010.

As we look into fiscal year 11, the year that began on June 1st, we expect stronger demand for our services and continued growth in revenue and earnings as global economic conditions continue to improve. Our chief economist forecasts FY11 GDP growth will be 3.2% compared to less than 1% in FY10. Industrial production, to which our shipment volumes closely correlate, is expected to rise from a negative 3.3% to a positive 5%. We think the restocking process in place will continue in the short term, together with gains in consumption and equipment sales. We believe the improving economy will result in a more stable pricing environment, enhancing our ability to improve yields across all of our transport segments. These yield management initiatives, combined with growth and volume, should improve our margins in FY11. Shipments by air are growing, largely aided by the current inventory cycle as companies find themselves with inventories too lean to meet customer demand using slower modes of transport. International load factors are at their highest levels since 2000. Asian and Latin American volumes have been particularly strong. FedEx Express increased its operating income and operating margin due to volume growth, especially in higher margin FedEx International Priority package and freight services. IP package volume grew 23% in our fiscal year 10 fourth quarter. FedEx Ground grew throughout the recession as domestic customers chose lower price ground transportation and FedEx Ground gained market share. Despite improving economic conditions, the less-than-truckload freight market remains highly price competitive due to continued excess capacity, contributing to an operating loss at FedEx Freight. Having said that, we are confident that Bill Logue and his leadership team are on course to achieve FedEx goals, which are to be the premier LTL service provider, market leader, and the most profitable carrier in the industry. FedEx Freight plays an important role in our unmatched bundle of transportation solutions at customer value.

Our capital expenditures for FY11 are expected to be approximately $3.2 billion with incremental investment in the substantially more fuel-efficient Boeing triple-7 freighters that add unique value for our growing number of international customers and which are helping us win new business for FedEx. The triple-7 is a significant competitive advantage for us, allowing us the latest cutoff times in many Asia Pacific markets for shipments to the United States and Europe. We will continue to balance the need to control spending with the opportunity to make investments with high returns. In this regard, we are confident the investments in the Boeing triple-7s and 757s will improve returns for our share-owners by increasing margins, returns on investment capital, and cash flow. We believe the actions we've taken to reduce costs while investing in areas with the highest returns have allowed FedEx to resume in FY11 the upward trajectory of financial performance that we saw before the recession began.

I'd like to reiterate our long-term goals of increasing our earnings per share by 10 to 15% annually over the long term while growing revenue, achieving 10% plus operating margins, improving cash flows, and increasing the returns on our invested capital. Finally, let me take a moment to recognize Judy Estren and thank her for her 20 plus year service and her many contributions as a FedEx Board Member, including chairing our unique Information Technology Oversight Committee. Judy will be retiring from our Board at the September meeting and will not stand for a reelection at this year's annual meeting. I won't have a chance to say this before we have another conference call, so we would like to thank her for having been a tremendous business partner for FedEx, and we'll miss her expertise and leadership, and we wish her the best in the future. Now let me turn the microphone over to Alan Graf, our CFO.

Alan Graf, CFO
Thank you, Fred, and good morning everyone. This morning we released our strong fourth quarter results of $1.33 per share, more than double our adjusted $0.64 cents earned last year, while revenues in the fourth quarter jumped 20%. Earnings increased as a result of stronger shipment growth in international express and continued growth at FedEx Ground. FedEx International Priority average daily package volume grew 23%, led by exports from Asia. IP average daily volume from Asia grew 41% year over year, and FedEx Ground packages grew 7%. An operating loss at FedEx Freight, the reinstatement of certain employee compensation programs, and higher aircraft maintenance expenses affected fourth quarter results.

Looking first at the express segment, revenue grew 23% to $5.9 billion with an operating margin of 7% in the quarter. Operating profit and margin improvements were driven by volume and revenue growth, particularly in higher margin IP package and freight services, as well as continued strong cost management. IP revenue per package grew 6% due to higher weight per package, which was up 8%, higher fuel surcharges, and a favorable exchange rate impact. IP freight volume increased 68%. Express added a ninth scheduled daily trans-Pacific frequency in April, utilizing the capabilities of Boeing triple-7F aircraft. This additional frequency provides needed capacity from Asia to the U.S., and allows best in market cutoff times. Also in April, a third scheduled daily flight was added from Asia to Europe, providing the first in-market next-day service from Hong Kong to all of Europe. Our international capabilities are simply unmatched.

Looking at the Ground segment, revenues climbed 15% to two billion dollars, while operating income soared 57% to a quarterly record, $319 million dollars. FedEx Ground average daily package volume grew 7%, driven by increases in the business market, as well as FedEx home delivery service. Yield increased 5%, primarily due to higher fuel surcharges, increased extra services fees, and higher average package weight. FedEx Smart Post average daily volume increased 23%, with yields increasing 6%. I might add that our Ground segment exceeded one billion of operating income on an annual basis for the first time in FY10, with an overall operating margin of 13.8%.

Looking at freight, segment results were frankly a bit disappointing. Despite significantly higher revenues, losses continued as a result of lower yields and higher volume related costs. Revenue increased 30% to $1.2 billion versus $900 million last year. LTL volume increased 34% to 91.5 thousand shipments per day from 68.4 thousand last year. Weight per shipment increased 4%, but LTL yield decreased 6%.

Our balance sheet strengthened again as cash flow from operations was positive and debt was reduced $650 million dollars. End of the year our debt total was $1.93 billion, while our cash on hand was greater than that at $1.95 billion.

Turning now to the outlook. Our current outlook is for FY11 Q1 EPS to be in the range of $0.85 to $1.05, and full FY11 EPS to be in a range of $4.40 to $5 per share. In the release we talk about the fact that our outlook assumes stable fuel prices at today's market in the futures outlook and a continued moderate recovery in the global economy. Obviously the volatility and absolute level of fuel price can have a dramatic impact on our results. Our economic forecast for FY11 assumes three-point-two real GDP growth in the U.S., as Fred mentioned, and three-point-one percent for the world as a whole. As I am certain you know, our revenue forecasts start with the economic outlook. And while we have the ability to flex down our cost structure defensive or up offensively, steady moderate growth is a key to hitting these ranges. We are also working very diligently on yield increases across the board, most notably at freight, and Mike Glenn will be discussing that with you in the Q&A session.

We do have some cost headwinds in FY11, the most notable being a fixed pension increase of $260 million over FY10, largely as a result of a one hundred and thirty-one basis decline in our discount rate. Suffice it to say, I doubt any of you on the call had that much of an increase in your first call numbers for FY11. Higher anticipated health care costs will also be a headwind. As we return aircraft from the desert to revenue service, our maintenance costs will increase as well, as they did in Q4 of FY10. We are being very aggressive in our international expansion at Express, significantly increasing our network capabilities with the addition of the triple-7s, and increasing flat hours across the board. Expansion of the air network rang some start-up costs as well, but these investments will significantly improve our earnings in FY11 and beyond. Well, all out, I think we're going to have a very good year in FY11, barring some exogenous variables working very hard against us. Our IP network is unparalleled, and revenues are growing rapidly. Our ground network is the fastest in the business, and we will get freight back on track. With that, operator, we are happy to open it for questions and answers.

Q-Donald Broughton, Avondale Partners
Good morning, everyone. Congratulations on the solid quarter. There's a big ongoing concern about the European economy and so let's just up-front talk about it. What have you seen in changes in the amount of volume you're seeing coming back and forth across the Atlantic, and for that matter, with your new direct Euro-Asia flight?

A-Dave Bronczek
Thanks, Donald, this is Dave Bronczek. I'll start off. We have seen solid growth in Europe as our numbers would indicate, double-digit growth. We've had several year, in fact you can go back to probably ten years in a row now we've had double-digit growth out of Europe. So between Europe and Asia and Europe and the United States, we continue to see very strong growth in the sector that we participate in. So I understand your question, and I understand that you would be concerned about it, but for FedEx Express, a very solid growth.

Q-Donald Broughton
Do you have a projected date at which you think Freight will get to break-even?

A-Bill Logue
Donald, this is Bill Logue. We are working aggressively toward that plan. We have a solid yield plan. We're doing a great job on the productivity side of the business. But again, our objective is, as I said in the three clear goals, number one is we need to be the most profitable carrier in the business and we're working on that. And again, as FY11 moves on, that is our number one objective.

Q-Helane Becker-Jesup & Lamont
Thank you very much, operator. Hi, everybody. Just a question on the aircraft that are coming out of the desert, Alan. How many are you taking out of service then, and putting back in?

A-Dave Bronczek
This is Dave Bronczek. We've taken six aircraft out of the desert in the fourth quarter and we'll be taking a little bit more than that over the next several quarters in FY11, which is Alan's earlier comment about maintenance.

Q-Helane Becker
Right, right. Gotcha. Thank you very much. That was really my only question.

A-Dave Bronczek
I should add to that. Obviously, the maintenance to go back into service on the engines is some of the numbers that Alan indicated.

Q-Helane Becker
Right. Got it. Thank you.

Q-Tom Wadewitz-JPMorgan
Yes, good morning. I wanted to-I guess I have two questions for you. So one on pricing in domestic express. There tend to be moving parts, and Alan, I think you commented on them briefly. But can you give us a little more granularity on what price would have looked like in your domestic express and how you think that's trending in general?

A-Mike Glenn
Tom, this is Mike Glenn. And we are beginning to see the results of our efforts as we benefited from improvements in base rates and weight per package in our parcel businesses, both Express and Ground, as compared to last quarter and last year. So as I mentioned on the last call, we're being very aggressive in terms of our yield improvement efforts. We're making sure we get acceptable rate increases and taking a much tougher negotiating stance on contract renewals. We've established new pricing guidelines for new business and we're ensuring that customers are meeting their volume commitments in order to retain existing rates. So the results that we're seeing in terms of improvements in base rates and weight per package are a direct result of those efforts, and we remain committed to that path.

Q-Tom Wadewitz
OK. And then the second question, just on maintenance costs. If I look at the fourth quarter, you had I think three hundred and forty-two million in maintenance in Express versus two sixty-one in third, so there was a decent ramp, and that in-I think that's, you know, you had talked about that before. Is fourth quarter a reasonable run rate looking forward, or do you see it ramp further, or how would we think about maintenance in fiscal 11 relative to what the fourth quarter run rate was?

A-Dave Bronczek
Yeah, this is Dave Bronczek again. It's relative to probably the first half of our fiscal year. The fourth quarter would be similar to the first half and then it would gradually decline.

Q-Gary Chase-Barclays Capital
Good morning. I wanted to see if I could get some color from Dave Rebholz on just the Ground margin performance was very solid, and wondered if you could speak to the sustainability of that looking forward, and particular, I noted other expenses looked relatively low. Was there something in there that we should think is not going to carry forward?

A-Dave Rebholz
Gary, Dave. No, the-some of the key advantages we had, obviously, were our volume growth, and it materialized in great productivity. Second thing is, we had a pickup in the growth of our commercial business, which drives productivity, more pieces per stop. We had some improved safety performance that allowed us to reverse or lower some of our accrual, so in the aggregate, we're just performing on all eight cylinders and not missing a beat. So with that in mind, absent any one-time events, my perspective is that we will continue to perform at this level. Remembering fourth quarter is our best question, right. But we're gonna-Alan said 13%. We see no degradation in that margin performance over the year ahead.

Q-Gary Chase
OK, and the lower accruals that you just mentioned, David, that's going to have some ongoing benefit as well, correct?

A-Dave Rebholz
Yeah, absolutely. I mean, they're dialed in now, but we continue with our safety perform-It's really de minimus in the grand scheme of things. Volume is the key driver, and the outliers are, quite frankly, the fuel and any one-time issues that we may run into as an organization. But I mean, I see sustained growth at this level.

Q-Gary Chase
Thank you.

Q-John Barnes-RBC Capital Markets
Hey, in taking a look at the modest sequential improvement in the yields at the freight division, can you talk a little bit about, you know, have you begun to see a reversal in the actual rates there, or is the yield improvement, the sequential yield improvement coming more from a make-shift in just ridding yourself of just maybe some business that, you know, didn't necessarily fit your network?

A-Mike Glenn
John, this is Mike Glenn again. And we are starting to see the results of our LTL yield improvement efforts. However, during the quarter, the most challenging issue that we faced was a higher than expected growth rate from our more heavily discounted customers, which hurt our progress on the yield improvement during the quarter. We are executing many of the same tactics in the freight sector that we are in the LTL sector. Having said that, we are being even more aggressive by reviewing accounts with less than acceptable margins or that are driving a disproportionate share of expense and making rate adjustments as required. In some cases, this is going to require us to put traffic at risk, which we are prepared to do to meet our goals.

Q-John Barnes
OK, and then secondly, I was at an event recently where the majority of participants kind of agreed that FAA reauthorization is probably going to happen sometime soon. It sounds like, you know, without the FedEx provision in it. From your perspective, do you have any update on the timeline of that and what you expect?

A-Chris Richards
Hello, John, this is Chris Richards. I'll tell you what we expect right now, and it might change in the next twenty-four hours. But at the current time, it looks like a fair amount of progress has been made on the resolution and reconciliation of some of the issues not related to the RLA and the Bill. We presently expect the Senate Leadership to move forward and see if there is a way to get a FAA Bill that does not include the RLA change in it, and quite frankly, we could see some efforts in this area as soon as next week.

Q-Justin Yagerman-Deutsche Bank
Hey, good morning. I don't envy you guys having to project what the economy is going to do a year out, and I guess I just wanted to get a sense for how confident you guys are in the full year guidance you put out and what kind of visibility you feel like you have to the current environment, given all the cross-currents that are out there in the macro right now.

A-Alan Graf
Well, it's the first time we've given annual guidance in a while, Justin. And so we are a little bit more confident. I think I caveated it quite a bit about totally depending on a moderate economic growth on a global basis and fairly stable and not-and feel prices at the level that they're at, which are two, obviously, things that are out of our control. But our IP growth is continuing exceedingly strong here in June, and it looks like it's going to continue that way for the foreseeable future. Ground traffic is very positive. We'll get Freight back on track. And if you're looking a little bit further down the road than a year, some of those cross headwinds I was talking about in FY11 don't repeat in FY12. I can't imagine that interest rates are going to do anything but go up from this point, which has a big impact on our expense, and we could actually see a lower pension expense in 12 than 11, rather than the giant increase. So we have a lot of confidence but feel a lot better about our business. But you're absolutely right, there are so many things going on that, you know, I could have a different tune in September. But as where we are today, that's our current look.

Q-Justin Yagerman
OK, I appreciate that. And I guess as a follow-up, you guys, you know, have talked about the three billion in costs that you've taken out over the last couple years and the one and a half that's permanent. How much of that other one and a half do you guys feel has come back at this point and, you know, where are you in seeing those costs, you know, begin to come back?

You know, that three billion and a one and a half was obviously a non-GAAP analytic snapshot at the time. And then after that we go on and we manage our business. So obviously, a lot of those cost savings fell to the bottom line. We absolutely crushed our business plan last year and funded a significant amount of annual incentive compensation that we didn't think we were going to fund. We're also being very aggressive in international now, so we're spending some of that permanent savings in a different bucket. So the savings are still there, we're just reinvesting it very heavily. Obviously the earnings are better than they otherwise would have been so, you know, I'm very comfortable that we've significantly reduced our cost structure by the amount that we said, but we're adding in other areas as we're growing and becoming more aggressive. You know, I think the range that we've given you is pretty thrilling. From an EPS growth rate, I don't any other companies out there saying that they're going to be able to do that, so I think that's been one of the keys. The other key will be our yield management as we go through FY11.

Q-Matthew Brooklier-Piper Jaffray
Hey, good morning, guys. Just wanted to look at kind of the sequential trends from an even perspective within the Freight division. Can you talk about what the OP loss look like in March, April and May, and were you guys operating a loss in May, or was there a profitability at Freight?

Hey, Matthew. Q3 to Q4 obviously saw some good sequential improvements. The yield front, as Mike talked about, as the quarter went on we saw good improvement. The productivity improvement was outstanding within the organization. So we're seeing some good mixes there. I won't quote profitability by month, but we saw good sequential improvement over Q4 over Q3, and if you look at Q4 year over year (inaudible) pretty closely over last year. So I think it was a good performance, positioning ourselves well for where we're going down the road.

Q-Matthew Brooklier
OK, and how are things feeling thus far for Freight in June?

I would say overall starting out in June, I think, again, we look at it from the quarter perspective. We can-our objective is to continue sequential improvement through the quarter and have a Q1 stronger than Q4 overall.

A-Alan Graf
Matthew, this is Alan. Let me just add that you saw the growth numbers and you heard me talk about the increase in shipment count. And, you know, unlike the package business where you're everywhere every day, the Freight business is much more unique in its pickup and delivery capabilities. And so we outgrew out capabilities and we had to incur a significant-and still are incurring a significant amount of purchase transportation. That will take us some time to work down. Once we get it back into our networks then our productivity will start to significantly reduce those costs at the same time as we're improving yield. So I can't give you the exact timing, but we've got the formula.

Q-David Ross-Stifel Nicolaus
Yes, good morning everyone. If you could talk a little bit about the Express margins and, you know, why they're not the same as they were, I guess, from FY05 to FY08. You talked about international load factors being at ten year highs and the volumes aren't too much different. Is it mainly a yield issue, or is there something else there that does not enable you to get that Express margin back up to where you want it sooner?

Thanks, David. I'm glad you asked that question. And you're right, eighteen months ago we were right at 9.2% margins closing in on ten and maybe we can stop talking about it because we'd be double digits then and move on, but then the recession of course took place and then by that eighteen months in terms of rebuilding our revenue, taking our costs down, and resetting our baseline going forward to get to our 7% in the fourth quarter, obviously we're very happy with that. But there's no question in any of our minds the goal is double digit margins as fast as we can get there. And obviously at the rate that International is growing, we have a very good prospect for double digit margins in the very near future.

Q-David Ross
OK, and then, I guess, could you also talk about, you know, customer supply change shifts, if you've seen anyone going back from ocean to air recently and maybe that's one of the reasons for the strong air volumes is the oceanliners have been slow steaming, and then expectations you have I guess for the fall shipping season, maybe a little bit better air, you know, than last year for that reason?

A-Dave Bronczek
This is Dave again, and for Express, I can tell you that there is a strong demand for FedEx Express air freight. You saw it in our numbers. Alan talked about 68% in growth. That's international priority freight. So I think you're right. I think that there is a lot more traffic shifting to air than we saw last year in the air freight in IP. And then the rest of it moves on the ocean. Of course we have FedEx trade networks that helps move that as well, so we're actually benefiting from more ocean traffic and more air freight traffic in our sector. So from a freight perspective that you referenced, we are doing very well in both sectors.

A-Mike Glenn
This is Mike Glenn. I want to make two points here. One, as Fred mentioned, we're clearly benefiting from inventory restocking. Many of the customers that we're talking to are, quite frankly, behind the power curve in terms of meeting demands that they have, and we're benefiting from that inventory restocking and expect that to continue at least in the near term. Secondarily, it's important to understand that we are taking market share. We have a value proposition, especially as we deploy these triple-7 aircrafts. That is really resonating with our customers and it's allowing us to enjoy growth rates as a result of the value that we're providing in the international network. So those two factors are important to consider.

A-Fred Smith
This is Fred Smith. Let me give you one fact here that will put what Mike and Dave said into perspective. When the volcano erupted in Iceland and shut the European air space down, we continued to get traffic, which we had to move by road and accumulate and move to areas where we could uplift it. But even with those efforts, we still developed a significant backlog because so many airports were shut down. In the week following the opening of European air space, we flew seventy some odd incremental wide body flights and cleared every bit of that backlog. There's not another organization in the world that could have done that. So the scale of our international network related to the demand to move goods by air has reached a very important point. And the second thing I would say, which I think sometimes gets missed in these quarter to quarter calls, the largest economy in the world is the economy of global trade. And the fastest growing part of that economy is the movement of high tech and high value added items. And those things are increasingly moving by door-to-door Express that is required by this fast cycle world we live in where everybody can go on the Internet and sell and source any product to any other person on the planet that also has an Internet connection. And we sit right in the middle of that. So if you look at these numbers that Dave Bronczek was talking about, I mean, that's very encouraging. And in my mind, that very large trend of the emergence of these middle classes in India and China and Brazil that are now integrated into this trading nation of global trade is something that's pretty profound. And people have an undue sense of pessimism relative to what's actually happening out there, in my opinion.

Q-Jon Lagenfeld-Robert W. Baird
Good morning. Can you talk a little bit about on the Ground side as you think out over the next couple of years, how you think about the growth in that business? I think as we go back to the last cycle you talked about sustained double digit volume growth there. How does that change with it being a bigger product, and also more importantly, with it being a better pricing environment domestically? How do you balance that?

A-Dave Rebholz
This is Dave Rebholz, John. We're very optimistic. Right now we're sitting at what, twenty-three, twenty-five percent, twenty-two percent market share. The market opportunity out there is great. In fact, an economic turn-around from our base would-it would absolutely accelerate our growth rate in a dramatic way. In other words, existing customers that have also seen downturns in their sales. When you couple that with the fact that we've got unique products at home with unique feature sets, and that we have Smart Post as an alternative, going back to Alan's comment about how dramatically they grew, and the way we're changing our feature set such that we are giving access to all products, especially Smart Post to smaller customers, we see all sorts of offsets to the economic circumstances, to the pricing environment, and getting the right customer in the right network and growing our business dramatically over the next several years. We are very bullish on our outlook, and that is the reason why we continue to invest four, five hundred million dollars a year in our capacity. And I might want to add to that, that one of the things that I've repeatedly said here is that we continue to improve the value of the product itself. Alan made mention of it. We improved seven thousand lanes last years. We've got north of a twenty percent competitive advantage on speed to destination, and we're very proud of that. Those are investments that are paying off as customers realize both the quality and the timeliness of our service. And a very competitive pricing position has great value. So we're happy as all get out right now.

A-Mike Glenn
This is Mike Glenn. I just want to add a comment that I think is important for you to understand. One of the key advantages that we have in our ability to not only delivery solid growth rates but yield improvement at the same time is the ability to balance our Ground and home services with Smart Post. Customers that are benefiting from e-commerce and e-tailing in general tend to be growing at higher rates. At the same time, many of those companies produce packages that result in lower yields for us. While we're prepared to handle that traffic, we're going to shift that traffic where appropriate into the Smart Post network and allow us to balance our growth in the respective networks and ensure that we get an appropriate yield per package for each one of those transactions. So we really have a good portfolio of services that is ideal to take advantage of the market trends and the growth out there, yet at the same time delivery yield improvement. So we feel very good about it, as Dave said.

Q-Jon Lagenfeld
Alan, a follow-up question on the free cash flow side. You guys are obviously going through a nice investment phase here that's going to set up the company well over the longer term. But can you talk to us a little bit about when you'd expect free cash flow to rebound closer to net income, you know, when the current investment phase can be overcome by the business and, you know, the infrastructure that's in place?

A-Alan Graf
Well, hopefully not for a while. I think we've got a lot of runway ahead of us so to speak in International Priority and Ground. And so we're going to continue to be very aggressive with our investments in that regard. And as we improve the margins at Express, which we will, and we're on a good upward slope to continue to do that, and if you just take a look at the range I gave you, you've got to know we have to improve Express's margins in FY11 to hit those kind of numbers. That will also generate a significant amount of cash flow as well. So I think we'd rather right now continue to reinvest in the business because we think the opportunities are so positive for the foreseeable future and increase the dividend to something other than a nominal dividend we have or do a stock buy-back, and that's where we are right now.

Q-Kevin Sterling-BB&T Capital Markets
Good morning, and thanks for your time. You were talking about the growth in air and it looks like it's going to continue for the foreseeable future, particularly on the major trade lanes, Asia to US, Asia to Europe. Where are other opportunities to take advantage of your scale, is it places like inter-China?

A-Dave Bronczek
This is Dave Bronczek. Yes, it's inter-China, it's Mexico, it's Latin America, it's Canada, the NAFTA lanes, really all around the world we're seeing, obviously fueled by Asia's economic power. But all around the world we have a lot of upside, a lot of opportunity. Trucking across the borders. Brazil, as Fred mentioned before. Mexico. Intra-Asia and China. So obviously we're very optimistic about our network opportunity to produce a lot of volume and a lot of growth.

A-Mike Glenn
This is Mike Glenn. And in addition to what Dave said, we have broadened our portfolio of international services to include deferred services, both in the parcel and the freight side, which has actually expanded the market where we're now competing. And that's not including the expansions we made at FedEx trade network. So we're competing in a broader market today than we were just a few years ago, and that provides the growth opportunities for us.

Q-Kevin Sterling
OK, Dave and Mike, thank you for that color. And one follow up question, and this may be more for Alan. Talking about the higher aircraft maintenance expense. It seems a lot of these expenses are one time in nature, bringing your planes out of the desert. Is it reasonable to assume that aircraft maintenance expense will decline in fiscal year 12?

A-Dave Bronczek
This is Dave again. I had referenced that earlier in this call. We brought six aircraft out of the desert this quarter and more in the first and second quarter of this year. And then of course we added more capacity. So I would expect it to be, you know, probably incrementally a little bit more in FY11 than FY10.

Q-Bill Greene-Morgan Stanley
Yeah, just a quick question here on network strategy, maybe for Fred, I guess. If we look at your US strategy, you started there with air, added Ground years later, and it seems like you've got a similar strategy outside the US. So I'm curious how important you think it is to have a ground capability maybe in some of the larger markets overseas?

A-Fred Smith
Well, we have, for instance, as Dave mentioned, in China a very fast growing intra-China business which is both air and ground. We have the same thing in Canada. We have a lot of demand from our customers around the world to broaden the product line. And so I think you will see us looking at that. Having said that, the growth in our IP and international economy services that Mike Glenn just mentioned are so strong that we don't have to do anything in the near or intermediate terms. So we will look at it on an opportunistic and a market by market basis. But there certainly are opportunities out there, and there certainly are customers that would like to see us do that.

Q-Bill Greene
OK, thanks. Just one quick follow-up. What was the -- Was there any impact from currency in the fiscal fourth quarter as it related to your US export business? Did you see the currency fluctuations cause that to change significantly?

A-Fred Smith
No. In the fourth quarter, we had a little bit of benefit overall, but it was de minimus.

Q-Chris Ceraso-Credit Suisse
There were a number of different references to expenses that are going out, pension, health care, aircraft maintenance, et cetera. Are there other actions that you're taking on the cost side, outside of the various things you did in fiscal 10 to help offset some of those cost increases?

Well, I'm lobbying to get smoothing back on pension accounting, for one. You know, obviously there are some things that are under our control and things that we can't control, and the market-to-market on pension for a company like FedEx which has thirteen, thirteen and a half billion dollars of assets and a call for only three hundred million dollars a year, penalizes us more than it does for people who have more current retirees than they do active. It's just the way it is, the way the discount rates work without long tail of liabilities. So that, one, we're subject to market, but more important, we're subject to our bottom line on our discount rate, which I think we'll-this is the lowest rate I think we'll ever see. And again, that was a big factor in why our range may be a little bit lower for FY11 than where first call is because we had a much bigger pension hit than I think most people were anticipating. As far as everything else, I think we've proven that we can manage defensively and offensively very well. I mean, we had a great FY10, all things considered. We have reinstated certain employee benefit programs, and we are having merits. We have brought back half the 401K match. You heard about the pension expense. Health care, I think everybody's got the same problem with health care. We're just going to have to see where that goes. And we're going to continue to manage that aggressively but fairly, getting the right balance. So a lot of productivity things under way and every operating company will continue to hammer away at our cost structure in that regard. But we aren't going to sacrifice our service. In fact, we're investing in service. Dave's speeding up -- Rebholz -- a lot of lanes this month by a day. Our international reach is expanding, and we will get Freight back on track.

Q-Chris Ceraso
So no big reductions to headcount or changes to the network? You did some of that stuff in 2010. It sounds like you have to just absorb some of these increases this tier.

You know, again, you take a snapshot on June 15th and where we are today. I don't see anything-I don't see anything big. But, you know, I'm never going to say never, particularly as we see what faces us going forward.

Q-Scott Malat-Goldman Sachs
Thanks. The US domestic price (inaudible) I know people ask that. That's obviously the point here, and that's the key positive. But are we seeing some of the effects on volumes, so for both Express and Ground, are you maybe walking away from some business, and that's what we're seeing in the numbers?

I think we've got a pretty strong balance performance here. We've got industry leading growth rates on the Ground side. We're very pleased with our performance on the Express side. But having said that, as I mentioned on our last earnings call, that if we had to walk away from some traffic to accomplish our yield improvement goals that we were prepared to do that. Now I can't tell you how proud I am of our sales team in terms of how they're executing this strategy. They understand the importance of it. They're working very hard to deliver upon our goals, and they're doing a fabulous job. So I think we've got it right about in the center of the fairway right now and we're going to continue to execute accordingly.

Q-Scott Malat
Thanks. Just on China, we have heard some reporting of worsening in the business climate, maybe the change (inaudible) terrorist, maybe some protectionism, over the last few months. Can you talk about any of the changes in your ability to do business in China? Are you seeing anything similar to that, both from and import-export perspective, and then just more importantly, doing business in domestic China? Thanks.

A-Dave Bronczek
Well, this is Dave Bronczek again. Our business in domestic China, obviously, is in our numbers and doing very well. Our intra-Asia, because of China, obviously, is doing well, and our growth rates out of China that Alan referenced from Asia, is the highest we've seen in years. So, I mean, it's always, you know, it's not the United States. With that being said, we've been in China for over twenty years, and we have a great leader over there, Eddie Chan's our president in China. So no, I think for FedEx Express we're well positioned in China, have been doing business there for a couple of decades now, so the opportunities and the upside for us is very strong.

Our IP revenue out of China increased sequentially every quarter during fiscal 10.

Q-Edward Wolfe-Wolfe Trehan
Thanks. One thing I'm trying to get a handle on is if GDP is give-or-take 3% and IP 5% going forward and maybe even a little stronger than that now, how come domestic Express continues to be growing less than 1%? What is it you're seeing? You know, is there cyclical and secular headwinds here? And what's in your guidance for volume growth for the US Express volume?

I'll start and then I'll let Mike go. And that 1% or 2% volume growth is 10% revenue growth because our yield management program is doing so well. That coupled with bundling Ground and Express is right about where we want to be. If we can have 10% revenue growth quarter after quarter out of domestic Express, we're very pleased with that. But Mike...

A-Mike Glenn
Ed, I remember making this presentation probably about seven or eight years ago when I stood in front of the-our annual analysts meeting and told everyone that the domestic Express market in a vacuum was a maturing market. And that's the three primary reasons. One is electronic transmission of documents. Two is the substantial improvements in the Ground services which have been led by FedEx. And three is the globalization of the economy. And I think it's important to look at our Express network going forward as a global network. Things that were produced many years ago and moved into the US in bulk, then put into a warehouse and then picked, packed and shipped using our domestic system are now manufactured outside the US and moved directly to the point of consumption through our international network. And that's being driven, to a large extent, by technological improvements and new technology products such as the iPhone 4 launch which we'll be participating in going forward. So I think it's important to understand those three primary factors which we've been talking about for years. So this is not a surprise to us. This is one of the reasons why we're so focused on our yield improvement strategy, and at the same time, we're so critically focused on expansions in our global network, because it is a global network and that's the way you need to look at it.

Q-Edward Wolfe
Thank you. I have a follow-up question. Can you talk a little bit about an update on the Ground contractors and the MDL after the recent summary judgment for the Plaintiffs against you guys on that Illinois case. As I understand it, it's the same Judge as the MDL Judge. Can we get an update on where we are and what the next actions we might hear on that case are on the Ground contractors side? Thank you.

A-Chris Richards
Ed, this is Chris Richards. Judge Miller entered a number of rulings during this quarter. He denied Plaintiff's request to have reconsideration of the denial of class certification and those cases where class certification had been denied in an earlier ruling. And as you know, in Illinois, in the Illinois case at the end of May, he granted summary judgment in this case, which is-pertains to three named Plaintiffs on employment classification for purposes of their claim for improper wage deductions under the Illinois Wage Payment and Collection Act. The Court ruled only on employment classifications, not liability under the Act, and reserved ruling on the five other asserted claims. The Illinois Wage Payment Act has an ABC test for determining employment classifications, and the Judge ruled only on the B prong, which is the test as to whether the work is performed either outside the employer's usual course of business or outside the employer's places of business. This ruling pertains only to this one state statute in this one state, and this is not a case that class had been certified, so it is brought on behalf of the three named Plaintiffs. What I expect to see over the next few months is a series of rulings by Judge Miller on the pending motions in these various MDL cases. The current motions all pertain to the classification issue. That round of motions will be followed by the other dispositive motions in a variety of other kinds of defenses that we'll also have to follow on. We are very confident in our position in these cases. We expect to move forward with our model and our defense of these actions. I am pleased that within a week of Judge Miller's decision in Illinois we were able to move forward with an agreement in a unemployment tax and workmen's comp audit in Tennessee, where the State of Tennessee acknowledged that, for purposes of the ABC test in Tennessee, the ISP model as we were able to present it will meet the requirements of the test in that state. So I think what you're going to see going forward is a series of rulings. They will require some explanation, which we'll be happy to provide, and we'll just be going forward with this process over the next year.

Q-Jeff Kauffman-Sterne Agee
Thank you very much. Congratulations for your solid quarter. If I-just one clarification, and then a question on trucking. If I look at the total corporate DNA, it was down about eight million, but Express DNA was up about nineteen million, which means it was twenty-seven million lower DNA in the other divisions. I know Freight was down ten million, Ground down eight, and then this nine million of other I can't seem to figure out. Why on higher volumes is depreciation expense down so much on Ground units?

Well, remember, we took a lot of assets out of service? And so that stopped the depreciation on them and we wrote them off in last year's fourth quarter. And we haven't been as capital intensive as we had been in the past over the last couple of years, and that slowed it down, too. But, you know, at the end of the day, I don't really look at that number very much, Jeff, because I don't think really as a driver. What I'm trying to look at is what kind of returns we're going to get on these triple-7s in the long-run and let the depreciation, you know, be what it is and make sure we got the proper cash flows to cover it.

Q-Jeff Kauffman
Thank you. The Freight division, I guess my question from ten thousand feet is at what point did you look at it and say maybe we went a little too far on the volume side and now we got to change things? Kind of, what has led to the different thinking on the trucking side?

A-Mike Glenn
Yeah, this is Mike Glenn. We took a hard look at the situation pre-peak, and in hindsight it would have been more prudent to pull the throttle back a bit at that time. To be honest, we did not have the clear visibility in the pipeline that we do on the parcel side of the business in the Freight sector. And we allowed the sales effort to continue through peak season and then, quite frankly, we were hit with extremely high volume growth rates which we did not anticipate post-peak season. So, you know, obviously, being an armchair quarterback, we would have pulled the throttle back a bit pre-peak. We did not do that, and as a result we have higher traffic levels in our network. Now having said that, when executing the yield improvement program, I'd much rather have the traffic levels in our network which provides more flexibility to be more aggressive on rates than if you were dealing in the reverse situation where we were looking for traffic growth while trying to execute the yield improvement program. So, you know, it's easy to be an armchair quarterback. I think what we've learned is that we've got to do a better job in terms of having visibility into the pipeline, and we are addressing that and working very hard on that, working very closely from a sales perspective with our operating team and team members that pray. And I'm confident we're going to execute and deliver upon these yield improvement plans.

I think it also shows the value of the bundle, and the customer, what they view Freight offering in the marketplace, you know, I think, it's going to come on because of the expectations of what we can deliver for them. And again, the sales force has done a great job from a bundle perspective, and between the Express, the Ground, and the Freight. So it really positioned us well for the future, as Mike said, as we work our yield strategy.

Q-David Campbell-Thomsson, Davis & Co.
Good morning. I hear a lot of optimism about the Express unit and profitability going forward, but I don't see it in the four to five dollar estimates for the fiscal 2011 year. And I understand there are cost headwinds in maintenance and pension expense, but it doesn't look like you're going to get any (inaudible) growth and margins based on your estimate for the fiscal 11 year; is that correct?

A-Dave Bronczek
This is Dave Bronczek. Yes, we actually are going to see improvements in our margins in FY11. Obviously, if we didn't have some of those headwinds they'd be very significant. I think Alan correctly pointed out that FY12, once we get past the view of these headwinds, will be very impressive. Dave, what's wrong with a twenty to thirty-five percent improvement in EPS year over year?

Q-David Campbell
Nothing. I'm just saying I don't see it in the Express margins. I mean, you know, that's all. I'm just-I'm just looking at the numbers, and it doesn't look like it's going to be an Express margin. But that's fine. I just want to-I just want to understand the situation.

[inaudible] you're looking at obviously the numbers different than we are. I don't know how you get those kinds of forecasts and improvements in EPS without improved margins in Express. So with all due respect, we don't agree with what you just said.

Q-David Campbell
Well, that's fine. Thanks. I just see Express profits going up, I don't see the margins going up.

And the margins will improve as well.

Q-David Campbell
Thank you. And the second question relates to purchase transportation costs. That is-assume (inaudible) any cost, in fact, there from the volcano, having to purchase transportation to move freight around, or is that just the reflect of the-reflection of the excellent growth in the-in your Freight forwarding business?

Yes, it's the latter. It's the-the purchase transportation has gone up with the tremendous amount of volume improvement in international Freight and IP.

Mickey Foster
Thank you for your participation in the FedEx Corporation's fourth quarter earnings release conference call, and please feel free to call anyone on the investor relations team if you have additional questions. Thank you very much.

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