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FedEx Corp. (NYSE:FDX)

F3Q2014 Earnings Conference Call

March 18, 2014 08:30 AM ET

Executives

Mickey Foster - VP of IR

Fred Smith – Founder, Chairman, President, and CEO

Mike Glenn - President and CEO, FedEx Services

Alan Graf - EVP and CFO

Dave Bronczek - President and CEO, FedEx Express

Robert Carter - EVP - FedEx Information Services and CIO

Analysts

Rob Saman - Deutsche Bank

Nate Brochmann - William Blair & Company

Ben Hartford - Robert W. Baird

Chris Wetherbee - Citi

Scott Group - Wolfe Research

Ken Hoexter - Bank of America/Merrill Lynch

Kelly Dougherty - Macquarie Capital

Scott Schneeberger - Oppenheimer

Jack Atkins - Stephens Inc.

Tom Wadewitz - JPMorgan

Art Hatfield - Raymond James

Brandon Oglenski - Barclays Capital

Bill Greene - Morgan Stanley

Matt Troy - Susquehanna Financial

Operator

Good day, everyone. Welcome to FedEx Corporation third quarter fiscal year 2014 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead.

Mickey Foster

Good morning, and welcome to FedEx Corporation's third quarter earnings conference call. The third quarter earnings release and our 31-page stat book are on our website at fedex.com. This call is being broadcast from our website, and the replay and podcast will be available for about one year.

Joining us on the call today are members of the media. During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate. You are listening to the call through our live webcast; feel free to submit your questions via e-mail or a message on stocktwits.com. For email, please include your full name and contact information with your question, and send it to ir@fedex.com address. To send a question via stocktwits.com, please be sure to include $FDX in the message. Preference will be given to inquiries of a long-term, strategic nature.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provision of the Private Securities Litigation Reform Act. Certain statements in this conference call may be considered forward-looking statements within the meaning of the Act. Such forward looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from those expressed or implied by such forward looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. To the extent we disclose any non-GAAP financial measures on this call, please refer to the investor relations portion of our website at fedex.com for a reconciliation of such measures to the most directly comparable GAAP measures.

Joining us on the call today are Fred Smith, Chairman; Alan Graf, Executive Vice President and CFO; Mike Glenn, President and CEO of FedEx Services; Chris Richards, Executive Vice President, General Counsel, and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO; Dave Bronczek, President and CEO of FedEx Express; Henry Maier, President and CEO of FedEx Ground; and Bill Logue, President and CEO of FedEx Freight.

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

Fred Smith

Thank you, Mickey. Good morning everyone and welcome to our discussion of results for the third quarter of fiscal 2014. First, I'd like to say that on behalf of more than 300,000 FedEx team members around the world, we are deeply saddened by the disappearance of the Malaysian Airlines flight and extend our deepest concerns to the families and friends of those aboard.

Now as we all know, historically severe winter weather has been a factor in all of our lives these last several months and it has significantly affected our third quarter earnings. In fact, it’s been the toughest winter in which FedEx has ever operated. We’re very proud, however, of the FedEx team for delivering outstanding service despite the hardships posed by a severe weather during December’s peak shipping season when many team members volunteered to work on Christmas Day, and then in January and February when it really got bad. So, let’s hope for spring.

Delivery metrics for this year’s peak shipping season were among our best ever, I might note; thanks to the unique FedEx culture based on our Purple Promise to make every FedEx experience outstanding. The FedEx strategy of maintaining separate Ground and Express network with multiple hubs proved to be especially important during the season and an advantage for our customers during that severe weather and the peak shipping season. On days when the weather was closer to normal seasonal conditions, our volumes were solid and service levels were high.

Despite the near-term impact of weather, the $1.6 billion profit improvement program at FedEx Express remains on track. Our accelerated stock repurchase program initiated in January reflects our confidence in achieving our ambitious financial goal.

A couple of points worth noting, FedEx Express next month is scheduled to formally open its North Asia-Pacific regional hub at Kansai International Airport in Osaka reaffirming our commitment to providing customers with greater access to and from markets in Asia-Pacific, the Americas, and Europe.

Express will be opening a new hub station and call center in Mexico City in the coming week, and recently reached a significant milestone in its European growth initiative which started in October 2011 and now has seen FedEx Express Europe opening its 100th new station in Seville, Southern Spain.

I would like to call your attention to two recent speeches on global trade and transportation that I gave for the Company to both air and ocean transport professionals. These two presentations are posted on the Investor Relations website, and I think they will give you a good view of our view of the overall market.

In closing, I’d like to congratulate the entire FedEx team for making the Fortune’s World's Most Admired Companies list once again. FedEx is ranked number eight overall and number one in the delivery industry.

Now let me turn the call over to Mike Glenn and Alan Graf.

Mike Glenn

Thank you, Fred. I’ll give some brief comments regarding our economic outlook as well as our yield performance during the quarter. We expect economic growth to look better in calendar ’14 than in calendar ’13, though growth remains moderate overall. Our U.S. GDP growth forecast is 2.6% for calendar ’14 and 3% for calendar ’15. For industrial production, we expect growth of 3.4% in calendar ’14 and 3.7% in calendar ’15. On a global front, we expect growth of 2.8% globally in calendar ’14 and 3.1% for calendar ’15.

Turning to yields, in the Express Domestic segment excluding the impact of fuel, year-over-year Express domestic yield per package increased 1.9%. This increase was primarily driven by rate and discount improvement followed by weight per package and service mix.

In the Ground segment, yield per package increased 2.4% excluding the impact of fuel. The year-over-year increase was driven by product mix, rate, and discount improvements and an increase in extra service charges.

In the international Export Express segment excluding fuel, yields increased 1.7% primarily due to a change in service mix.

In our FedEx Freight segment, excluding the impact of fuel, yield per hundredweight declined 1.9% year over year. Rate and discount improved during the quarter and weight per shipment increased. Overall, FedEx had a very strong peak season, and I want to thank all of our team members for delivering on The Purple Promise.

And now, I’ll turn it over to Alan Graf.

Alan Graf

Thank you, Mike and good morning everyone. Winter weather often negatively impacts our third quarter results but the impact of multiple severe storms during the third quarter of 2014 was more pronounced than usual, reducing earnings by an estimated $125 million versus last year. Our results for the third quarter also included a negative impact of fuel. These headwinds were partially offset by the benefit across all of our transportation segments of one additional operating day as well as reduced growth in salaries and benefits.

Revenues increased 3% to $11.3 billion, primarily due to higher volumes at Ground and Freight, and as Mike mentioned, yield increases at FedEx Ground.

Express revenues were flat due to the negative impact of lower freight revenue, lower fuel surcharges, and as I mentioned the unusually severe winter weather offset by a stronger base U.S. and international export package business and one additional operating day. The demand shift from our Priority International services to our Economy International services continued to negatively impact our results in the near term.

Express operating income and operating margin increased due to stronger U.S. and international export package business and lower pension expense, partially offset by the lower freight revenues, the estimated $70 million year-over-year negative impact on operating income of winter weather, as well as higher depreciation expense.

In addition, operating income benefited from one additional operating day and the inclusion of costs associated with our business realignment program and the prior year results. Operating income also reflects a negative net impact on fuel.

Turning to our Ground segment, revenues increased 10% to $3 billion due to both volume and yield growth at Ground and volume growth at SmartPost. In addition, revenues were negatively impacted by the severe winter weather and were partially offset by one additional operating day.

Average daily volume at Ground increased 8% while SmartPost volumes grew 2%. Ground segment operating income increased 2% to $477 million driven by the higher volumes and yields. Operating income includes the estimated $40 million year-over-year negative impact of winter weather at Ground. In addition, the increase to operating income was partially offset by higher network expansion cost as we continue to invest heavily in the growing FedEx Ground and FedEx SmartPost businesses as well as the net negative impact of fuel. The Ground segment results also benefited from delayed start of the holiday shipping season in this fiscal year and one additional operating day. The decline in operating margin is primarily attributable to the negative impact of the severe winter weather and the negative net impact of fuel.

At Freight, revenues increased 9% due to growth in average daily less than truckload shipments of 7% as well as weight per LTL shipment. In addition, the quarter was positively impacted by one more operating day partially offset by the negative impact of winter weather. Freight segment operating income and operating margin increased due to the positive impacts, the higher average daily LTL shipments, higher LTL weight per shipments, and greater utilization of rail in the FedEx Freight economy service offerings. Fuel costs increased 3% due to higher average daily LTL shipments. On March 3rd Freight announced it will increase certain U.S. and other shipping rates by an average to 3.9% on March 31.

As we look at our outlook, I should remind everyone that as of February 28, 2014 approximately 75% of the 3,600 employees accepting voluntary buyout, vacated their position. The remaining 25% will depart by May 31, 2014. Our third quarter results included benefits from the voluntary severance program, and additional benefits realized from our voluntary severance program will continue as the fiscal year progresses.

We expect the earnings growth to continue in the fourth quarter driven by ongoing improvements in the results of all of our transportation segments. Our expected results for the fourth quarter will continue to be constrained by the low end of moderate growth in the global economy and continued challenges in demand shift trend from our priority international services to our economy international services at FedEx Express.

We project earnings to be $2.25 to $2.50 per diluted share in the fourth quarter and $6.55 to $6.80 per diluted share for fiscal 2014. We are reducing our full-year earnings per share guidance, largely as a result of the weather impact in Q3 and the beginning of Q4. The outlook also assumes the market outlook for fuel prices and continued moderate economic growth. This outlook reflects share purchases made to date, but does not include any benefit from additional share purchases. We do plan to continue purchasing shares under the program but have no specific timeframe for completion. As of February 28, we have 15.2 million shares remaining under our current.

We continue to execute on the profit improvement programs we announced in October 2012. These activities are focused primarily at Express and Services. The majority of the benefits from our profit improvement programs will not incur until fiscal 2015 and to a greater extent in fiscal 2015. Our ability to achieve the profit improvement target and other benefits from these programs is dependent upon a number of factors including the health of the global economy and future customer demand particularly for our priority services, which has not returned to the growth trends that we assumed in October 2012 when we announced the profit improvement program.

In our economic outlook as Mike discussed, coupled with continued execution of our profit improvement programs in Express and profit growth at Ground and Freight, earnings, returns, and cash flow should all increase over the next several year.

I would like to thank all of our team members for their hard work and dedication during the severe bad weather the past several months. Our service levels were outstanding and they are truly an amazing team.

Now we’ll be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Justin Yagerman, Deutsche Bank.

Rob Saman - Deutsche Bank

Good morning guys, this is Rob Saman on for Justin. I guess, Alan, going back to the profit -- 1.6 profit improvement plan at Express, could you give us a sense what the cost run rate was on that profit improvement at the end of the fiscal third-quarter and how much you’re expecting to see that ramp up in fiscal ‘15 and ’16; if you could talk a little bit about some of the cost tailwinds you’ll get from the opening of the Osaka hub, looking out later this month.

Alan Graf

Rob, I'll be happy to start the conversation and then I'll ask Dave to make some comments. I think the – well, I am most pleased about our profit improvement program is our cost management, not just at Express, but really across all of FedEx Corporation. It's been an outstanding job. We’re seeing a lot of traction, I am pretty excited about what we're going to deliver in ‘15 and particularly towards the end of ’15 on our outgoing run rate.

We are in our business planning cycle right now for ’15. So I'll have a lot more to say about that in June when we will tell you about the end of our year, and what we think '15 is going to look like, but that is not only on track, but probably ahead of plan.

As we -- as I alluded to in my opening comments, we are not seeing a strong international trade and global growth right now as we had anticipated back in October of 2012. So, we are going to have to continue to work very hard on rightsizing our network, which Dave is going to talk to you about here next to match our new strategy which is to embrace international economy, and we’re doing a good job there and we're going to really pick up a lot of traction on that in the next 12 to 18 months. So, let me pass it to Dave.

Dave Bronczek

Thanks Alan. Thank you Rob for the question. We are having great success with our fleet modernization. Our Boeing 777’s are flying at well in excess of 99-plus reliability and service performance. Our new 767s are flying even greater than that in the high 99% range. We’re very pleased with that. Obviously the aircraft maintenance fees and so forth are reflected in that because we have brand new engines and new planes, and so we’re very pleased with that. We’re pleased with the voluntary buyout at Express. It’s actually more along the lines of 90% of our people have now accepted the plan, even though corporately it’s at 75%.

And in the United States, if you look at our numbers, there you saw the 1% decline in our salaries and wages and benefits line, that’s in spite of the fact that we had the bad weather and so forth. We’re making tremendous progress there and really across the Board in all of our five pillars for profit improvement, but on the issue of Osaka, that actually affects and improves our profit improvement for international, we’re very excited about that. I'll be there in April to do the ribbon cutting. We have lot of customers that are joining us there that gives us a tremendous amount of flexibility on volume increases or decreases quite frankly. There is a lot of flexibility to move up and down in our change of gauge operations in Asia Pacific coming into the United States.

So we’re very pleased that that is allowing us more flexibility. We’re also taking advantage of the underbelly capacity that’s around the world in moving our deferred traffic in several lanes that are lower cost for us. So, right across the board, we’re executing our plans and we’re very confident.

Operator

Thank you. We’ll take our next question from Nate Brochmann, William Blair & Company.

Nate Brochmann - William Blair & Company

Good morning everyone. Thank you for taking the question. I just wanted to talk a little bit, clearly there is lot of network disruption both on the revenue and the cost side during the quarter. Can you break that down for us a little bit in terms of what was the revenue impact and what rebates you might have had to give back if there was any service disruptions over the holidays versus what’s on the cost side? And as you talk about some of those costs going into the next quarter, where you’re seeing the biggest impact and trying to make adjustments there? Thank you.

Alan Graf

Nate, this is Alan I’ll start and I’ll have the Opco’s CEOs all comment on it. This was really unprecedented winter weather. We had bad winter in fiscal ’11, but we are so much more advanced and so much more productive today than we were back then. To have a $125 million impact to us was really beyond the realm of believable for almost all of us. In Express, we estimate probably lost 40,000 packages a day for the quarter, Ground probably lost 100,000 packages a day for the quarter. Obviously, we had significant amount of over time, de-icing planes in the wrong place. We had a number of service disruptions that we had to declare, but fortunately because of the flexibility of our separate operating company and the number of hubs that we have at Express, we were really able to maintain an unbelievably high service level.

And our customers were very excited about that. We were open on Christmas. Henry will talk to you about how he ran his hubs seven days to week to meet customers’ demand and service levels. And so, even though it was a big impact, we were very pleased with how well we performed and we would have had an unbelievable quarter had it not been for the weather and the fuel headwinds. I’ll let Dave add to that and Henry.

Dave Bronczek

Yes, thanks Alan, that’s right. We showed an improvement of 14% this quarter year-over-year and that of course was -- we should have done much better than that if the $70 million of weather impact wouldn’t have impacted this quarter, but we ended up having the flexibility once again, although it cost us some money to move planes around and move customers’ packages around. When Indianapolis got clobbered with weather and ice and snow, we were able to move it to Memphis and vice versa and New York was the same. So we weren’t paralyzed with one hub that would be shut down over a long period of time. We were able to be more flexible.

Our customers have told us repeatedly how greatly they appreciated the fact that we were able to move their packages around over the holiday peak and through January and February, and quite frankly, it did cost us a little bit more money and more overtime and more deicing and -- but I am very, very proud of our team at Express, they did a tremendous job.

Henry Maier

Hey, Nate, this is Henry Maier. FedEx Ground operates a highly engineered and automated network that enables us to be faster and more reliable than the competition. But significant weather events therefore can disrupt the precision of our network driving increased costs. I think at last tally I think we had 20 significant weather events in the quarter. While safety is always our top priority if line haul loads don’t move due to unsafe conditions or road closures, our hubs get behind causing short times to be extended. This puts the end of the line stations behind requiring them to work more hours to recover. As Alan said, while we plan to work seven days a week at peak in the months of January and February, we had a weekend operation running somewhere every single weekend.

So the impact of weather and fuel on our margin for the quarter was roughly 1.5 points, but thanks to the incredible dedication and professionalism of FedEx Ground people, we were able to provide safe and reliable service despite the worse weather we’ve seen in four years.

Bill Logue

Yes, this is Bill, on the Freight side, again revenue up 9% for the quarter was an excellent quarter for us from that perspective. It probably was impacted on certain days by the weather. I would say the overall impact was large in our operating income although we had a really good quarter, it was held back due to the impact of the weather for sure.

The line haul side of it, particularly the rail side, we saw some good utilization of rail that helped us work through these winter challenges, that was a positive. And these front line efficiencies obviously, anytime you go through these weather events, it will slow you down and make you -- impact you significant on your cost structure. I would say from my perspective, the big challenge this winter was, it wasn’t one big event here, one big event there, it was weekly. There was always some event every week which is very challenging to run a line haul network when you have constant events week-to-week. Overall, I think the team did a fabulous job of working through the situation.

Operator

Thank you. We will take our next question from Ben Hartford of Baird.

Ben Hartford - Robert W. Baird

Hey good morning. Alan, could you provide a little bit of context to the CapEx number following $200 million. We got the flight schedule here. It looks like there is some shifting here in 2014. Can you talk about the reduction in CapEx? What the source of that reduction here is for the fiscal year?

And then can you provide any context for the next couple of years? I know it’s early. I know you are in your budgeting process, but whether the $4 billion CapEx number over the next couple of years is still the right number that we should be thinking about. Thanks.

Alan Graf

Largely timing and also we continue to scrub and purchase better and push things out. Again, we're at the low end of the moderate economy growth frankly as [I'll say] (ph) slow in my opinion and the weakest recovery from any recession even. There are a lot of reasons and so that’s enabled us to do licensing. Having said that, we still are committed to our re-fleeting at Express and our expansion at Ground and I think if you take note of our great improvement that we're having at Freight, we're very pleased for what that is and are expecting great things from them over the next couple of years. So, we'll probably stay in the pretty high range of the $4 billion or so and a lot of that will be determined by timing, whether our plan is delivered in May or June, obviously can impact that. But we don’t have anything other than from pushing back and timing issues right now and we're still committed for that. We need those 767s, I mean every time we get a 767 and replace it with MD-10, it's a $10 million annual positive impact to the P&L despite the higher depreciation. So, we're going to continue that.

Operator

Thank you. Our next question comes from Chris Wetherbee, Citi.

Chris Wetherbee - Citi

Hey thanks. Good morning. When you think about the total value of the profit improvement plan relative to some of the progress you've made so far which sounds like it’s kind of working in the right direction and doing well relative to expectations and then comparing that to sort of the economic backdrop which is maybe a little disappointing relative to what you initially thought. Does that change your thoughts and your ability to get that for '16? I guess I am just kind of understand sort of the puts and takes both for short-term and longer term as you think about that sort of total number.

Alan Graf

I will start and then I will pass it over to Dave. I mean we still are committed to having a 1.6 billion profit improvement as we exit fiscal ‘16 going into ‘17. We can still see it very clearly but it’s not the same way we constructed it back in October of 2012, no question about it. Fuel prices have been working against this, and they could have been a benefit over the next couple of years in terms of that timing. We've had some benefits from pension and we'll see where long-term interest rates go, but basically as I said earlier, our cost programs working exactly as designed if not better. Our productivity improvements are very good although there were totally masked, had bad weather in Q3, you will see in Q4. I think the range I gave you for Q4 is pretty heroic for us and that will give you an idea of how will we executing FY14. Dave?

Dave Bronczek

Alan is right about all the expense initiatives. They are all performing exceptionally well. We didn’t put in, if you will recall, in our 1.6 billion profit improvement, very much incremental revenues. It was mostly expense. The challenge for us is the base revenue of course, so if the base revenue deteriorates, we'll have to find more opportunities on expense and that’s the balancing act that Alan has mentioned several times and that we're reviewing all the time. So, yes, we are performing well in all the areas of our expenses. Global economy isn’t what we thought it would be and so we're looking at other opportunities on expenses. Now that being said, the global economy gets a little bit better, it’s all good news.

Operator

Thank you. Our next question comes from Scott Group of Wolfe Research.

Scott Group - Wolfe Research

Hey thanks, morning guys. Wanted to ask about the Ground segment and first on the volume side, so last quarter there was the issue of Cyber weekend pushed into this quarter and we didn’t see that shop and better volume this quarter, I know there’s some weather here. But how do you think or how should we think about Ground volumes going forward? Can we get back to a double-digit volume growth rate or is that unreasonable here?

And then just along the same lines, just on the Ground side, when do you think it’s reasonable to think Ground margins turn positive year-over-year again?

Henry Maier

This is Henry Maier. Let me talk for a minute about peak. The Ground segment experienced record peak in terms of revenue, volume and service. And despite certain challenges including the compressed calendar and weather, our on-time service for the month of December exceeded 99%. So we feel really good about that, I mean a lot of -- some of the volume decline in the quarter was driven by the fact that customers work shorter days or work low, we saw more customer closures in the quarter than we have in memory. I mean certainly in my 30 some year career in this business, I have never seen the number of major cities in the mid-west and east entirely shut down for a day due to weather and unfortunately we don’t see that volume come back when things recover.

So I think also Fred said in his release that on days where we had good weather, our volume performed exactly the way we expected it to, when we didn’t have good weather, we were off considerably from what we expected it to be. So I think a lot of what you’re seeing in the quarter is driven by this very severe weather situation we’ve had in last quarter. And I’ll tell you that nobody more than the Ground team and the rest of the Express team are looking forward to spring coming. With respect to our margins, I can tell you that we expect margins in the mid-teens. As I have said before on this call, there isn’t anybody on the Ground team that would be satisfied with anything less.

Operator

Thank you. Our next question comes from Ken Hoexter of Bank of America.

Ken Hoexter - Bank of America/Merrill Lynch

Great, good morning. I just want to follow up on the cost side. I guess if you look at your profit improvement plan and if you add the one point of impact to Express, you would have done a 3% margin ex the weather, that’s up about 70 basis points, in the first quarter you had 50 basis point year-over-year, second quarter is a little murky given Hurricane Sandy a year ago. So it doesn’t seem like the benefits are accelerating to a very large extent in terms of hanging in that 50, 70 basis point improvement year-over-year. In order to try to get to your double-digit margin target, I guess how much more of the profit improvement plan do you still have to execute on and can you still meet that kind of 75% done by the end of next fiscal year target?

Alan Graf

Ken I will just tell you that I am not trying to time it anymore because of the changes that we've seen in the course of our strategic change. I feel very good about how we’ll be exiting FY15, although we’re not done with our business plan. And as you look at -- if we look at where we’re going to go, this is going to continue to fill. As we said, we still have not exited all the people that we were and Dave takes a very big burden in the services expenses. Fuel has worked against this again this year and it's a fairly significant number on an annual basis and we’re hopeful that that will turn because it should average out in the long run and that should be also a benefit in the next couple of years, we’ll have to see. But as I said and as Fred said, we are still on track, we will be on pace by a year from now to be pretty close to that number on an exit basis. Not an average for the year but on an exit basis. Dave.

Dave Bronczek

That’s right, the end of the FY15 and through FY16 it's by the end of FY16 is what we’ve always targeted. Of course the profit improvement includes the voluntary buyout and the fleet monetization and all those things start building on each other and they accumulate. So, one thing that has been a major drag for us this year has been fuel, the net fuel and they always reverse but this year has been an incredibly difficult year for us on net fuel. And so when you look at our expenses, if not in a big way, I mean we talked about whether this year, in the third quarter fuel dwarfs that for the FY14.

Alan Graf

Also one last thing Ken, we are learning and doing very good job of handling this very strong growth in an international economy, bringing our cost structure right there, that’s going to take a little bit longer than I might have anticipated in October 2012. But frankly we didn’t see how much the ship was going to be. IP is still growing but at low rates, international economy is growing very strong and so that continues to grow and we continue to manage that cost structure that will also accelerate our profit improvement.

Operator

Thank you. Our next question comes from Kelly Dougherty of Macquarie.

Kelly Dougherty - Macquarie Capital

Hi thanks for taking my question. Fred, I just wanted to have the bigger picture questions to you kind of the changing landscape with e-commerce, sure you have heard about suggestion that FedEx and UPS can’t be fast enough or nimble enough to meet the needs of some of these guys and they are more relying on regional delivery companies. I just want to get your thoughts on that suggestion. And then maybe what you may be doing to adapt to some of the changes that e-commerce is obviously bringing despite your peaks, things like that.

Fred Smith

Well, let me say a couple of things on a broad scale and then I’m going to ask Mike Glenn if he will comment about e-commerce overall. Couples of things that you got to remember about e-commerce, in certain ways its back to the future. There was a very large business of catalogue, shopping a long time before there was e-commerce, it’s just the order entry system was a piece of paper or telephone versus a mobile iPhone or a wonderful app or excellent software by an e-commerce provider and the primary delivery mechanism for e-commerce for catalogue delivery was in the past and it will remain for the foreseeable future, the postal services around the world because you are moving mostly lightweight items in the residences and the challenges of moving lightweight items in the residences are very formidable in terms of the cost structure.

So, our operations in the residential sector we very carefully manage and I think one of the reasons we had a great deep season is because Mike’s sales and solutions group run by Don Colleran do a very good job of contracting with our customers so that we don’t over promise or say we can do things that end up not being able to do. And when we launched FedEx Home Delivery, Henry was very involved in that and we recall as well it was important that we had traffic demographics of a certain weight per package and certain revenues that made it profitable from the get go.

So, the real challenge about the e-commerce role is delivering those lightweight items to residences and Amazon talks about this constantly, the postal services getting a lot of business from various sources because of e-commerce and probably the biggest challenge is the fact that so much of the business comes in such a short period of time. And obviously it is not possible to make these enormous capital investments for two or three weeks out of the year. So, I suspect that what you will see on a go forward basis is a bit of realism on the part of consumers and providers as to what the infrastructures can provide even the postal service, because remember, the postal service is not geared up to operate for just those two or three weeks either.

So, there will be lots of innovative solutions in this regard. One thing is very clear and that is the information systems that the consumer driven mobile society have today are very, very important. You can’t just drop a package for an e-commerce shipper into an anonymous hole and they’re going to be satisfied where they are coming out sometime on an indefinite delivery window. They actively want to be a part of that process, they want to know when it shipped, they want to be able to redirect it to a location. This is an incredible capability that we have and UPS also have and it’s going to become a bigger and bigger feature. So, it’s hard to see the landscape as this thing rolls out but we’ll take a very disciplined approach in our presence in that business, because you can clearly go broke trying to delivery non-compensatory packages in to people’s homes. Mike?

Mike Glenn

Thank you, Fred. Let me just say e-commerce has a long runway of growth opportunity for FedEx both domestically and internationally and we’re poised and well positioned to benefit from that, the range of services that we have running from same day delivery in select markets to home delivery in smart approach aligned perfectly with the needs of e-commerce customers and I can tell you based upon our discussions with small and large e-commerce customers, there is certainly a need for the service and they appreciate the portfolio that we offer.

Regarding regional carriers, they have long play to role in this market segment and will continue to do so. Having said that, they do not offer the same feature to service that FedEx offers and certainly the same level of reliability that FedEx offers. And regarding speed, let me just make the point that nobody operates faster networks than FedEx.

So, we are very comfortable with our ability to provide the flexibility that we need to meet the needs of e-commerce customers. I think, the point that Fred made that its critical for us though is to be selective, you can go after a lot of e-commerce volume and be pretty pleased with your year-over-year growth rates but that doesn’t necessarily mean it’s going to fall out of the bottom line. So, we have taken a very disciplined approach and one of the things that we have to take into consideration is the big impact. You can’t, as Fred said invest significant capital to operate three to four weeks out of the year. So, when we are pursuing growth opportunities in e-commerce, we make sure that we have a proper balance between growth, the 11th month of the year versus the growth in P. So, we have a disciplined process, but I can tell you that nobody operates faster networks than we do, nobody has the breadth of services that we do to serve e-commerce. And we're pleased with our position and as I said, there is a long runway of growth opportunity for FedEx here.

Alan Graf

I might just ask Rob Carter to comment on the incredible demands that consumers are placing on carriers in the e-commerce sector?

Robert Carter

Well, not just consumers, but the entire information ecosystem is so explosively growing around this. As our volumes peak in our network, our information systems peak at an even greater rate, so you can see when you watch this technology, you can see the consumer interacting with the shipments that are far greater percentage than they have even been in the past. They carry it with them in their pockets and on their tablets, so the shopping phenomenon is certainly a big part of it but also the tracking and accountability of that delivery is a big deal in today's consumer world and with the technology that they are equipped with.

Alan Graf

I will just make one final comment and then hopefully we've answered the e-commerce landscape question. One of the things that happened during the peak season this last time is there was a disconnect between when the merchants in some cases were shipping the items, they in essence showed that they have been shipped when they actually have not been tendered to the carriers. And of course, if you don’t have a possession scan or know that creates a lot of pressure and extra work on part of the our customer service folks [that connect] (ph) in our particular case. I think you will see that very much change this go around and that will eliminate a lot of the -- I think the angst that a lot of people had when they placed an order, they think it’s underway. It actually hasn’t been tendered through a carrier, that gap is going to be closed and people will have a much better visibility of what’s actually going on.

Operator

Thank you. Our next question comes from Scott Schneeberger of Oppenheimer.

Scott Schneeberger - Oppenheimer

Thanks. Good morning. Shifting to FedEx and international, the 8% volume growth obviously very strong, we've seen it above double-digits recently. Just curious, is that something that you see returning to higher growth rate? Was there something regional moving around there? And then as a follow-up, could you just address the capacity issue brand specific any update there? Thank you.

Alan Graf

Yes, that’s correct. We have been running double-digit and of course it was 8% international economy and we feel strongly that, that will continue to grow. Don’t forget in the international export and economy, its U.S. International is part of that international number and we did get some weather impact into our volumes even in U.S. International OPA. And from to a certain degree from Asia back into the U.S. because the plant being shut down, because of the weather back here in U.S., we have a tremendous market share, as you know. So, we're very bullish on international economy. We've repositioned our network so we can move our more lighter weight deferred traffic into the belly of some of our partners now and leaving our very valuable, very fast, very reliable PurpleTail fleet available for that higher yield and package.

Fred Smith

This is Fred Smith. let me make a comment here because I suggest that you read the speeches we put up on our IR network. It’s important to focus on the details of what we say in those speeches and not just the top line. The reality is the Express market continues to grow. The global Express market continues to grow and we continue to take market share within the global Express market.

The sea container business continues to grow. What’s changed is the commodity air freight, the big consolidations going generally airport to airport and that cohort is being squeezed from both the door-to-door Express which, if it’s very urgent and time critical, moves on our priority network and the opening of the new Osaka hub will be terrific in that regard of giving us these unprecedented transit time. And if customers are willing to take another couple of days in transit, same pick up in delivery, same IP interface, customs clearance and so forth but that can we loop in these prolific underbelly.

And electronics are a technology product, are a very big part of the total air cargo market in its broadest sense, but many of those products are much lighter weight today. They are not being -- the new products are not being introduced, so the type of door-to-door small shipments light freight and packages is continuing to grow because the internet in this perfect shopping universe are there by being connected to everybody else is creating this force field, that’s why Mike Glenn said that international e-commerce has a long runway. So it’s important that you separate these market segments to be able to correctly analyse the marketplaces that we’re working at, and we’re also in that sea freight and commodity air freight business with FedEx trade networks, we can handle that too. But the growth area is basically the door-to-door Express segment.

Operator

Thank you. And we’ll take our next question from Jack Atkins of Stephens.

Jack Atkins - Stephens Inc.

Good morning guys, thanks for the time. I guess to focus my question on, I am curious if you could maybe comment on what sort of abnormal weather impact if any, that you’re assuming for the fourth quarter guidance. And could you maybe quantify the negative impact from fuels, the consolidated operating income relative to your expectations in the third quarter. Thank you.

Alan Graf

Well we didn’t give any guidance on the third quarter, so I’ll just say that our guidance for the year is always anticipated that we would have some negative impact in fuel year-over-year and that’s about as far as we’re going to go on quantifying that. So, we don’t -- it’s not a GAAP number, I’ll just remind you that there is a lag time between when we buy fuel and when we can surcharge fuel. And that means that there is anomaly between and a disconnect between year-over-year this year and year-over-year last year.

In the long run it should even out and that of course ignores the elasticity of the fuel surcharge itself but from your cost standpoint it should average out. So we weren’t surprised by that, but we thought it was important to remind everybody that it did have a year-over-year impact.

Operator

Thank you. And we’ll take our next question from Tom Wadewitz, JPMorgan.

Tom Wadewitz - JPMorgan

Good morning, Alan I know this is a quarter early really to talk about fiscal ‘15 you’ve already mentioned you haven’t done the full planning. But I was wondering perhaps you could provide a broad comment. If I look at your guidance for fourth quarter, I believe the adjusted number is something like 12% earnings growth year-over-year. If I look at the street consensus for next year, it implies -- fiscal ‘15 implies something like 28% growth. So clearly the street is expecting some big acceleration in, I would think primarily in the cost initiatives maybe there is a little implicit improvement in the economy.

But I was just wondering if given what you kind of broadly see, if you think that that’s just an unrealistic ramp up in terms of what you would see coming in on the cost side or if you could offer any kind of broader comment of expectations versus what you might see for fiscal ‘15? Thank you.

Alan Graf

Well Tom you’re exactly right, it is too early to talk about FY15. And I really don’t know what you and others have in your FY15 number, I am assuming that a lot of that EPS is from our accelerated share repurchase program, which will have a very big positive impact to EPS next year as we will be largely done by the end of this fiscal year with maybe some to go in the first quarter of next to have a big impact. I think run rate in terms of our cost reduction programs, which you can see in Q4 will only improve from that and I guess I’ll just have to fill in the blanks in June. Because we’ve got a lot of planning going on right here, a lot of initiatives underway, we get some things that we want to do that probably won’t pay off in FY15, but will in towards the end of ‘16 and beyond that we’re debating. So, lot of work to go and I look forward to having that conversation in June.

Operator

Thank you. Our next question comes from Art Hatfield, Raymond James.

Art Hatfield - Raymond James

Well I was going to ask about ‘15 too but I won’t even try. Alan if you could, I am assuming your fourth quarter guidance assumes the ice storm you had in the first week of March. Is there any way at this point in time you can quantify what kind of impact that has on fourth quarter? And finally can you tell us what the diluted share count was at the end of Q3?

Alan Graf

Yes, I'm sorry I didn’t answer that question earlier. It’s just that the very beginning of March we just had another one and so we’re not used to that in the fourth quarter. It's probably not going to be significant but it’s going to have some impact and we’re trying to assess that right now, looking at the same methodology that we used in Q3. [Indiscernible] asked about ‘15, I think that’s what everybody is wanting and like I said, we should have a good show for you in June Art, and that’s the best that I can say at this point.

On the share count, yes, the share count for the three months ended in the quarter, well average diluted shares with 307 million versus 317 million a year ago. So obviously what’s happening in that share count is that not only are we buying shares back, but the increase in the stock price has brought back into the calculation previously anti-dilutive option, there were 8 million of them a year ago, there was just a few of them this year. So, that’s why it was only a few cents impact to the quarter of our share buyback in Q3.

Operator

Thank you. Our next question comes from Brandon Oglenski of Barclays.

Brandon Oglenski - Barclays Capital

Yes, good morning everyone. I won’t be the third in row to ask about fiscal ’15, but to maybe the longer term question for Fred or Mike, we obviously feel you guys delivered some pretty good service results here for customers in quarter even with all the challenges in the peak, but what’s the ability long term to drive better price outcomes, because obliviously even adjusted at 3% express margin looking for best return, I think if your look at your profit improvement plan obviously the targets are much higher if compared. Is there anything structural that can be done in this industry to extract a little bit more price for that service that you’re going to offer.

Mike Glenn

This is Mike. We make pricing decisions regarding the economic conditions to market conditions and the value of the service that we provide and obviously that critical component of our yield management activity that we do on week-in and week-out basis. The main issue is to make sure that it’s not a list rate issue, the main issue is as we work with customers to make sure that we get an appropriate price for the values and service that we provide, a lot of factors go into that. Obviously the productivity of certain lanes and head haul versus backhaul in the freight business and how we utilize and configure network in internationals. So, it’s not a one size fits all by any stretch of the imagination, it’s been up OPCO-by-OPCO service-by-service plan that we work very closely with the OPCOs.

Having said that I think our yield performance given the situation that we’ve been in and the weak economy, has been quite solid and it will be a continued focus area for us, yield improvement is an important part of our profit improvement plans and one that we focus on a regular basis and I’m confident and our ability to execute that. our sales team does an outstanding job negotiating with our customers and making sure we get an appropriate yield for the future service that we provide and they’ll continue to stay focused on that but we have a very disciplined process around that where we work with the OPCOs week-in and week-out to manage our yields. But it’s not a one size fits all and that will continue to be a focus area for us.

Operator

Thank you. Our next question comes from Bill Greene of Morgan Stanley.

Bill Greene - Morgan Stanley

Hi there, good morning. Mike I’m curious if you could elaborate on something that Fred said earlier about e-commerce and being careful about growing some of the high cost residential deliveries too quickly. Does the UPS experience in December create an opportunity or is it more of kind of a lesson learned about what can happen when you do grow that business too fast or don’t have sort of the proper controls in place to measure it into a network.

Mike Glenn

Well, we have enough to worry about at FedEx as opposed to commenting on issues that UPS might have. But I can tell you that we take a very disciplined approach working with our customers and its already started for next peak to make sure that we have a balance between the volume that we carry during non-peak versus the volume that we carry in peak, one the biggest challenges that you can have is over committing your resources during peak season because that’s the recipe for service failure. I think one of the strategic advantages that we have is to do separate network of Express versus Ground and the hub configuration that we have allows us to have more flexibility and manage our network independently. So we can make commitments to the express or make commitments to Ground that don’t necessarily impact the other operating company.

So, we work very closely with our customers, we make firm commitments about the traffic that we’re going to carry for them during peak and then obviously it’s a daily dialogue with these customers during peak season, if we happen to have excess capacity on the next two or three days, we will work with customers and say we can take a little more volume or we’re going to have to stay at their level that we pre-negotiated. So, it’s an art, it’s not a science, there is a lot of science built into it but when you actually get into the battle, it becomes an art and the flexibility in our networks and the outstanding job that our solutions team does in preplanning peak is the strategic advantage for us combined with the different operating networks.

So, I think we’ve got a pretty good track record of performing during peak season and delivering outstanding service for our customers and I think you go to talk to our customers and based upon our performance during peak and our ability to meet the commitments that we made to them, they would give us a very high score for this past six weeks.

Fred Smith

It's Fred Smith speaking here, I would make this comment that during the peak season there was a lot of press reports about the issue of e-commerce and so forth and many times you would see that the FedEx name up on the collar of the TV or store, the reality is by historical standards, we had a terrific team and the Express company has done a fantastic job measured relative to years past and I think the reason for that was the very disciplined approach we take that Mike just talked to you about. The network design that we have and we just have this incredible commitment to the Purple Promise like our volunteers out there on Christmas cleaning up anything that was held up in the network because of weather and so forth.

I think the change this year is we live in a world where Twitter and social media make anecdotes much bigger than perhaps they are and this whole phenomenon of e-commerce as people get better and better mobile devices as Rob was talking about where you can shop and monitor things coming in, that was the big difference from our standpoint.

From the operational standpoint, at Christmas time we had a very, very good peak relative to few years past. So, we just plan to continue on doing that and planning very carefully to make sure that we don’t disappoint people and that we provide that high level of service because at the end of the day, that’s the business, that’s the franchise. So, I just could not be more proud of our folks and we were disappointed that we kept getting pinged with the big problem in e-commerce and I tell by saying one other thing for those of you who are interested in the c-commerce world, the e-commerce world has grown very fast and there are a lot of people trying to gear up and meet this demand and quite frankly a lot of the processes that a lot of the e-commerce folks use, have many quality issues with.

There are packages that are [forward named] (ph) to be damaged because they are not packed well. There are labels that are not affixed to the packages very well. As I mentioned earlier, there are e-commerce shipment advises when the shipment actually hasn’t been tendered to the carrier. I can promise you that the customers are not going to tolerate those types of things over the long haul. So, the e-commerce shippers that succeed long-term are going to be the one that work with us and other folks to try to improve those processes and quality of their service because nobody wants to order something over the internet, get it three days before Christmas and it’s smashed or the label comes off of it and the package into the ether.

So, we're working very carefully with our customers on these aspects as well but it’s a big part of the e-commerce business that really didn’t get enough publicity last year because they were an integral part of the problem even more than the weather and the carrier performance.

Operator

Thank you. Our next question comes from Matt Troy of Susquehanna Financial.

Matt Troy - Susquehanna Financial

Thank you. Fred in your comments on March 11th, you made some pretty detailed remarks and shows to isolate protectionalism, it’s something that have been hampering world trade. I was just wondering when you look at that dashboard, what are the one or two key items you see coming down of pipe that may, it depending on how they break either to be favourable or unfavourable for FedEx specifically. And just more broadly long-term how do you engage to help gear some of these issues in more pro-business way whether it’s engaging on a critical front or reallocating capital, I just want to get a sense of your dialogue and how you guys approach being part of more business oriented solutions? Thanks.

Alan Graf

Well, first let me just give the highest accolade to Ambassador Michael Froman and the USPR team for the effort that they have underway on multiple front. The WTO agreement on trade facilitation was a great accomplishment that was the first agreement WTO in its long existence as ever concluded. So, it was long in nature, in other words many of the trade improvements that were agreed upon by the signatories take forever to put in place but at least there was an agreement. They have the Trans-Pacific partnership. They have the Trans-Atlantic initiative underway in the trade and services initiatives.

So, the most important thing that we do are as we were trying to do in those speeches is to point out to folks, of the great benefits of world trade and expanding it because at the end of the day, increased prosperity comes from innovation, investment and increased scale, bigger market and even a market as big as NAFTA is tiny in comparison to the world population. So, you have seen over the last few years partially because a lack of determined American political leadership as it was this country that really pushed this thing from the beginning of the World War 2 on, and so we’re stuck.

The Congress of the United States today is not willing as was famously noted in the press by the Senate majority leader to even [indiscernible] taking up trade promotion authority. There is no way to consummate any of these trade agreements without PPA, because our negotiating partner simply will not seriously engage if they think the Congress is willing to renegotiating the agreement after the U.S. trade as concluded his work.

So we just tried every possible venue to push these things forward and the purpose in those two speeches in the main was to talk to those few audiences about getting involved with it. Growth is low, trade is gone from 2.5 ex-world GDP growth to roughly into parity. There has been no endeavour in human history that has lifted so many people out of poverty than the opening up of world market particularly the United States leadership and opening up ours, often permitting other countries to trade with us on a merchant realistic basis. So hopefully after the mid-term elections, the administration will earn to own this, the Congress will see the light, I think it’s particularly important to try to respond to the very strong position taken by the Prime Minster of Canada and the President of Mexico that we need to negotiate NAFTA 2.0 that has been a fantastic success.

We’ve seen trade between the NAFTA countries go from 200 and some odd billion dollars to over $1 trillion in the last 20 years, that’s a lot of jobs, no question there have been, local pain here there in the other place but overall the opening up of these markets have been very strong. So that’s the concern I expressed in the speech on behalf of the Company. That’s our prescription for doing it and I appreciate you giving me a chance to make these remarks to a sophisticated group like this, because it’s a big issue.

Operator

Thank you. This concludes today’s question-and-session. At this time I would like to turn the conference back over to Mickey Foster for additional or closing remarks.

Mickey Foster

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

Operator

And this concludes today’s presentation. Thank you all for your participation.

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