FedEx's CEO Discusses Q3 2011 Results - Earnings Call Transcript
FedEx (NYSE:FDX) Q3 2011 Earnings Call March 17, 2011 8:30 AM ET
Executives
Alan Graf - Chief Financial Officer and Executive Vice President
Frederick Smith - Founder, Executive Chairman, Chief Executive Officer and President
David Rebholz - Chief Executive Officer of FedEx Ground Package System Inc and President of FedEx Ground Package System Inc
T. Glenn - Executive Vice President of Market Development & Corporate Communications, Chief Executive Officer of FedEx Services and President of FedEx Services
Mickey Foster - Vice President Investor Relations
David Bronczek - Chief Executive Officer of FedEx Express and President of FedEx Express
Analysts
John Barnes - RBC Capital Markets, LLC
David Ross
William Greene - Morgan Stanley
Jeffrey Kauffman - Sterne Agee & Leach Inc.
Justin Yagerman - Deutsche Bank AG
Ken Hoexter - BofA Merrill Lynch
Garrett Chase - Barclays Capital
Thomas Wadewitz - JP Morgan Chase & Co
Scott Malat - Goldman Sachs Group Inc.
Jon Langenfeld - Robert W. Baird & Co. Incorporated
Christopher Ceraso - Crédit Suisse AG
Kevin Sterling - BB&T Capital Markets
Edward Wolfe - Bear Stearns
Donald Broughton - Avondale Partners, LLC
Jason Seidl - Dahlman Rose & Company, LLC
Nathan Brochmann - William Blair & Company L.L.C.
Paul Kleinschmidt
Matthew Brooklier - Piper Jaffray Companies
Operator
Good day, everyone, and welcome to the FedEx Corporation Third Quarter Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead, sir.
Mickey Foster
Good morning, and welcome to FedEx Corporation's Third Quarter Earnings Conference Call. The third quarter earnings release and our 25-page Stat Book are on our website at fedex.com. This call is being broadcast from our website, and a replay and podcast download 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 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 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.
In our earnings release, we include certain non-GAAP financial measures, which we may discuss on this call. Please refer to the release available on our website for a further discussion of these measures and a reconciliation of them to the most directly comparable GAAP measures. To the extent we disclose any other non-GAAP financial measures on this call, please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of such measures to the 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; Mike Glenn, President and CEO of FedEx Services; Rob Carter, Executive Vice President and CIO; Chris Richards, Executive Vice President and General Counsel and Secretary; 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 questions and answers.
Frederick Smith
Thank you, Mickey, and good morning to everyone on the call. We appreciate your joining us this morning to discuss earnings for the third quarter of fiscal year '11 and our outlook. First, I'd like to say we at FedEx are very saddened by the loss of lives and the widespread destruction caused by the horrendous earthquake that struck eastern Japan last week, and we extend our deepest sympathy to the people of Japan. FedEx, including our wonderful team in Japan, is working with our long-standing humanitarian relief organizations, American Red Cross, Heart to Heart International, Water Missions and Direct Relief International to transport critical medical and other emergency supplies in support of the recovery efforts.
FedEx quickly resumed service at the Tokyo Narita Airport, and we had uninterrupted service at our major operation at Osaka. In the third fiscal quarter, strong demand for our services drove revenue higher, as volumes increased across our businesses. Yields increased as we continue to focus sharply on managing FedEx's more profitable growth. Particularly impressive was the performance at FedEx Ground, where faster delivery times and other innovative solutions continue to win customers. We're very pleased with the successful integration of our less-than-truckload businesses, and are happy to report we expect FedEx Freight to return to profitability this quarter. Well done to Bill Logue and the entire team at FedEx Freight for this remarkable accomplishment.
We're very optimistic about future earnings. The dynamics of global trade appears solid, although the impact of volatile fuel prices and other global events remains uncertain. Our optimism is based on three factors: One, our business strategy to profitably grow our international business, improve our yields, manage our cost structure and make sound investments is working. Second, global macroeconomic trends are driving growth in markets where we have unique, competitive advantages such as the long nonstop flights being flown by our Boeing 777 freighters. And three, the FedEx team around the world is delivering on our Purple Promise: I will make every FedEx experience outstanding. In that regard, we are particularly proud that Fortune Magazine recently rated FedEx among the top 10 most admired companies in the world.
Our businesses are performing strongly in the United States, where industrial production growth is expected to approach nearly 5% in calendar 2011, outpacing GDP and supporting overall transportation volumes. We plan to take full advantage of continued rapid growth in emerging markets as well, which we serve with the largest, most comprehensive air express, air cargo network in the world.
In the third quarter, FedEx Express began direct nonstop 777 service as an example from Memphis to Seoul, South Korea, increasing capacity and improving transit time. Expect more enhancements to our international route system in the near future.
FedEx Express completed the acquisition of AFL in India, improving our already strong position in that important market. This acquisition builds upon an extensive competitive FedEx network there, which includes the most weekly international flights from India of any express service provider, unrivaled connectivity to Asia-Pacific, Europe and the Americas, and the most customs clearance locations for any carrier. Coverage in 100% of key import and export markets across India is now in place.
In closing, let me remind you that we are committed to our goals of continuing to increase our revenue, achieving 10-plus percent operating margins, increasing earnings per share, improving cash flows and increasing returns on invested capital. Let me turn it over now to Alan Graf, our Chief Financial Officer. Alan?
Alan Graf
Thank you, Fred, and good morning, everyone. Strong demand for our services continue to drive revenue growth during the third quarter. Revenue increased 11% to $9.7 billion, as yields grew across all our transportation segments and volumes increased in our package businesses. Our yield improvement program continues to be very effective as base yields, excluding fuel surcharges, are rising nicely thanks to the excellent work of our marketing and sales teams, as well as the outstanding service we are providing.
Despite this revenue strength, however, our results were significantly impacted by severe winter weather conditions. Unusually severe winter weather caused widespread disruptions to our networks, which led to lost revenues and drove higher purchase transportation, salaries, wages and other operational expenses. These factors impacted our year-over-year results by an estimated $0.12 per diluted share after considering the effect of variable incentive compensation accruals. Additionally, higher compensation and benefits, including pension, 401(k) and medical costs and increased maintenance expense also negatively impacted our third quarter.
Looking at these segments and starting with Express, Express segment revenues increased 11% in the third quarter, primarily due to an increase in IP and U.S. domestic package yields, as well as higher IP package and freight volumes. IP package yield increased in the third quarter due to increased package weights, rate increases and higher fuel surcharges. Domestic package yields increased due to higher fuel surcharges, rate increases and increased package weights. Exports from Asia and Europe drove increases in IP package and freight volume as well.
The overall base yield story is strong. For IP, packages, base yields were up 5% and for domestic U.S. packages, they were up 3%. I should note that IP Freight plans increased 21% with the total yield increase of 3%.
Express segment operating income and operating margin decreased during the third quarter. Increased aircraft maintenance costs, the reinstatement of certain employee compensation programs, higher retirement plans and medical expenses, and the negative impact of severe winter weather more than offset the benefit of increased revenues. Purchase transportation costs increased 32% due to costs associated with the expansion of our Freight Forwarding business at FedEx Trade Networks, as well as IP package and freight volume growth. Maintenance and repairs expense increased 26%, due to an increase in aircraft maintenance expenses as a result of timing of maintenance events and higher utilization of our fleet, driven by the increased volumes.
Fuel costs increased 29% due to increases in the average price per gallon of jet fuel, which was up 19%, and jet fuel consumption increased 10% to 302 million gallons, driven by volume and weight increases.
Turning now to Ground. Ground segment revenues increased 14% to $2.2 billion due to volume and yield growth at both Ground and SmartPost. Ground average daily volume increased 6%, and yield was up 5%. Yields were primarily up due to rate increases, higher residential surcharges and higher fuel surcharges. SmartPost volumes grew 17% as a result of growth in e-commerce business, gains in market share and introduction of new service offerings. Net yields in SmartPost increased 7% due to lower postage costs. Ground segment operating income was outstanding at $325 million, up 26% year-over-year, and operating margin increased to 14.9%, up from last year's 13.5%.
Moving to Freight, segment revenues increased 8% to $1.1 billion, as a result of higher LTL yield, partially offset by lower average daily LTL shipments. Yield increased 11%, while average daily LTL shipments decreased 6% year-over-year, due to our yield management initiatives, as well as severe winter weather. The net operating loss during the third quarter included costs associated with the combination of our freight and national LTL operations and the significant impact from severe winter weather. We incurred costs associated with the combination of $43 million during the third quarter. We expect cash to be received from asset sales to approximate the total cash outlays for the program, including severance and lease terminations.
Taking a look at our outlook. As you can see, we have increased our projected earnings and now looking for a range of $4.83 to $5 for the year. Our earnings growth in the fourth quarter will be dampened by higher anticipated compensation and benefits, including retirement plans and medical costs, and continued higher aircraft maintenance that will be benefited by continued growth in volumes and stronger yields. The forecast assumes the current market outlook for fuel prices with jet fuel prices now in the range of $3.10 and continued moderate growth in the global economy. Earnings could be affected by the impact of the ongoing political turmoil in the Middle East and North Africa on fuel prices and the economy in general. Also the near-term impact of the earthquake and tsunami in Japan on operational costs, shipping patterns and the global economy is uncertain at this point.
Our annual guidance excludes FedEx Freight combination costs in the second quarter legal reserves. We expect that continued improvement in global economic conditions will drive increased demand for our services in the fourth quarter. The combination of our LTL operations at Freight has been successful, and we expect that the integration of these networks will result in a return to profitability for our Freight segment in the fourth quarter. More broadly, we expect continued positive trends to improve revenues and margins in the fourth quarter and in fiscal '12 for FedEx Corporation as a whole. Our free cash flow in FY '11 will be positive, and our balance sheet and pension funded position remains strong. Lastly, we are well into the planning process for FY '12, and we are anticipating substantial margin and earnings improvement at Express and Freight, and continuing strong margins and solid growth at Ground. With that, operator, let's open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Tom Wadewitz from JP Morgan.
Thomas Wadewitz - JP Morgan Chase & Co
Wanted to ask some questions -- ask on the issue of demand in general. We've seen some slowing in the heavyweight airfreight numbers out of Asia. Your IP is still growing nicely, but it is decelerating a bit. How do you see that business looking forward? Are you seeing it slow, or is it just a function of considering tough comps looking forward and the way we model volumes?
David Bronczek
This is Dave Bronczek. No, we see strong demand actually running into Q4 here. We have great momentum all around the world, especially in Europe and Asia, U.S. outbound and U.S. domestic. So the weights are strong. As Alan pointed out, IP alone with 15%. IP, IPFS was up 21%. So I think we're running into Q4 here with great moment.
Alan Graf
Tom, this is Alan. We had, say, back to a year ago when we had an explosion in our IP package and freight, so the comps in the third and fourth quarter are tougher than they've usually been. We may be a little bit lighter at the moment than we thought, but always this time of year, it's very difficult to tell and particularly with the impact of Japan, we'll have to wait and see. But our confidence is still pretty strong about continued growth, and the combination of our yield program and the higher weights is really driving that revenue line.
Frederick Smith
Let me just add one last thing. It's important to note that in all the quarters that FedEx Express has had since we started FedEx Express after the split with FedEx Ground, this was the highest average daily volume quarter that we've ever had across the board, domestic U.S., international, priority international domestic. And in Q3, International Priority across the board was the highest volumes that we've ever had.
Thomas Wadewitz - JP Morgan Chase & Co
Okay. Okay, great. And then a question with respect to pricing, Alan, you commented on base yield in IP, I think up 5% and domestic yields up 3% within Express. What, when you say base yields, does that include weight per piece changes, or is that -- I mean, is it a peer kind of comparable price number, or is there something else? And I guess in terms of outlook on that, do you think base yield or pricing is accelerating further or kind of stable at this level?
Frederick Smith
Okay, Tom, I'll start and then I'll turn it over to Mike Glenn. When I'm talking about base yields, I'm including everything except the fuel surcharge, which is out of our control. But what we're managing to in terms of rates has been very effective. We have a lot of momentum there. Our general rate increase is sticking very nicely, particularly as we look at what we're doing at freight in the LTL business, which by the way, having reduced volume is okay. That's by design because we've got to get paid appropriately. So let me let Mike Glenn follow up.
T. Glenn
Alan's correct. The sales team is doing a fabulous job in the yield management program, and there are a number of components to that. One is as we sign up new business, we're signing that business up at higher average yields, so that the pipeline of new business coming in is coming in at higher rates. Secondarily, we're doing a terrific job at negotiating increases to our agreements as they come due. We're also doing a great job of clawing back surcharge discounts, all of which, which had a significant impact on yield. And our team is doing a great job of selling through the dimensional weight change that we implemented in January. So the combination of all those activities certainly lead us to believe that we've got continued opportunity moving ahead to see our yields enhance further.
Operator
Our next question comes from Justin Yagerman from Deutsche Bank.
Justin Yagerman - Deutsche Bank AG
I just wanted to follow up on that question. Obviously some of the yield strategy is playing out seeing it in the numbers. I wanted to get a sense, Mike, maybe you could talk a bit about where you are in terms of getting through your book of business and how many of your customers have you readdressed and how many of those contracts have come up? And how many do we still have to look forward to as we go through the next few quarters?
T. Glenn
Well, I would say we're in the very early stages. We're certainly in the first quarter of the football game here in terms of the yield improvement plan that we're putting in place. Obviously, we have multiyear contracts, and we're not breaking contracts and we're dealing with those as the opportunities present themselves. The biggest impact that we're seeing short term is obviously the new pipeline of business and secondarily, the adjustments that we made in dimensional weight. But our team is doing a great job as contracts come up, getting higher than market rate increases as we negotiate new contracts. So I couldn't be happier with the team in terms of how they're performing, both in terms of base rate increases, changes in surcharges and things of that nature. So we're very early in the game. I would characterize this as a marathon. This is not a one or two quarter exercise. This will be in place for some extended period of time. I'm talking about a multiyear program.
Justin Yagerman - Deutsche Bank AG
Okay, great. That's helpful. And then maybe for Alan, on the cost side, you talked about $0.12 in the quarter from weather, I believe, and you talked a little bit about fuel as well. But the items that haven't really been quantified and keep popping up are compensation and aircraft maintenance and wanted to get a sense, as we look forward for the next few quarters, how we should be thinking of our run rate? I mean, I understand you guys are pretty much through bringing aircraft back from the desert, and obviously, with volume, there's higher maintenance expense and the compensation's going to be a drag for the full calendar year. So maybe if you could give us a sense on what run rate cost drag from compensation would be, and then what kind of a clean run rate aircraft maintenance number or just maintenance number should look like as they move through the year? That would be helpful.
Alan Graf
Okay. Well, first of all as we look into the fourth quarter, we're starting to see a lot of the headwinds lap themselves and abate. So what's left is, obviously, we completed the complete reinstatement of our 401(k) January 1. So that's obviously having an impact here and the rest of fiscal '11 and somewhat into FY '12. Our aircraft maintenance is going to remain high in the fourth quarter, as we look at the timing of the events. So for fiscal '11, it'll be an anomaly of the year in my view. It will start to mitigate in FY '12, which will be a positive and one of the things we're excited about, I cannot tell you today what the market will be like on May 31, when we do our pension calculations, but we certainly are expecting nothing like we saw in the increase in FY '11, so that should be a positive going forward. Our productivity improvement plans are on track. Our G&A cost continued to decline in terms of revenue. So we're excited about that as well. One little math exercise that everybody needs to remember is that at these very high jet fuel prices, that's a margin restrainer because it adds exactly the same amount over time to the revenue line as it does to the expense line. And artificially, is lowering those margins. But the absolute cash flow and EPS won't be impacted by that, just simply the margins will be. So we have a lot of favorable things turning our way. And we're hopeful that the Japan situation will be very short term, and we'll continue with the yield management program until that we're optimistic about the outlook.
Operator
Our next question comes from Garett Chase from Barclays Capital.
Garrett Chase - Barclays Capital
I wondered if you could give a little color on you sustained, if not slightly raised, the fourth quarter outlook, if I'm reading it right. And I'm wondering, and in light of the fact that fuel headwinds have developed I think to a much greater extent than you anticipated when you originally guided to that outcome. I'm wondering if you can give us a little bit of color on what you see that's improving out there that's providing an offset?
Frederick Smith
Well, Gary, if you look at year-over-year, in the third quarter, the net fuel impact is about a wash across FedEx Corporation. We anticipated that it was going to be a positive before the run-up. So we have that working against us in the third quarter. And of course, the fourth quarter, if things stay the way they are, we will not get our full surcharge until May. So right now, we are being penalized by having to run-up in fuel prices and having a trailing six week or so surcharge increase. But what's offsetting that is, as I mentioned before, a lot of these headwinds are starting to fade, we have a lot of momentum. Fourth quarter is always our best earnings quarter of the year, and we're pretty confident about that. With the caveat about fuel going haywire or Japan, which is a very large business for us, deteriorating more than we think it's going to, that's certainly uncertain and we're obviously keeping our eyes on that. Dave can talk a little bit, it would be a good time now I think, Dave, to talk a little bit about what's going on in Japan for us.
David Bronczek
Yes, thank you, Alan. We obviously talked to all of our folks in Japan daily and they're doing a terrific job, and everybody is safe and accounted for, which is the most important thing. We have always maintained our Osaka flights, Narita, we had one day that we had to slow down the inbound flights there because of the backlog for the Northeast there in Sendai area. But we're back in Narita now and Osaka. And everybody's performing very well there obviously it's very difficult situation, so we're watching it closely. But we're up and operating, and we never stopped operating in the South, in the West, and so watching it closely.
Garrett Chase - Barclays Capital
Is Express the place where you think the offset is predominantly? Or is it in Ground or Freight?
Alan Graf
Well, obviously, we're going to improve significantly in Freight. I mean, the combination is behind us, and we'll be solidly in the black here in the fourth quarter and looking for very, very good productivity and improvement in FY '12. Ground is just going to continue to keep hitting it out of the park, rocking along with these 15% margins were very nice growth rate, and that will continue. And Express, we just want to forget about the third quarter. I mean, we had everything that could go against Express go against Express in the third quarter. It's behind us now. And I think the outlook there is very good for significantly improved margins.
Frederick Smith
Let me just add to Alan's point on Q3 for Express. We had 27 operating days. We had severe service disruption days. That's 1/3 of the whole quarter for Express.
Operator
Our next question comes from Matt Brooklier from Piper Jaffray.
Matthew Brooklier - Piper Jaffray Companies
Wanted to focus in on Freight operations. If I look at the release, it would suggest that maybe there were some incremental costs during the quarter outside of the non-continuing that you cited that maybe you could talk a little bit about some unexpected cost at Freight and maybe the magnitude of those costs through the combination? And then also maybe talk a little bit about weather and how that impacted Freight operations during the quarter?
William Logue
This is Bill Logue. Well, first of all, we're very pleased where we are six weeks in the new corporation here. First two weeks, obviously, were dominated by weather. And again, so I look at it, we're really kind of four weeks into the new program and the team is just on an absolute fabulous job of working our way through learning a new organization and structure after fighting through the first few weeks with the weather challenge. So from a cost perspective, those first two weeks, obviously, very expensive. We're headed for a lot of incremental cost, we have to work our way out of the situation with the weather. Bottom line is we are moving along nicely. Every week, we get better and better. All our efficiencies that we've laid out, our targets, every day, every week improve. And again, we're sitting now four weeks into the post weather start up, and we feel very confident where we are going in here into Q4. I will say this, Q4, as Alan stated is expected to be in the black. But also, Q4 will be a very important quarter for us, as we continue to adjust and tweak the network to make sure that we're getting ready for a strong FY '12.
Matthew Brooklier - Piper Jaffray Companies
Okay. And just I'll follow up to that on the volume side, understand that you're trying to flush out some lower yielding freight, but maybe talk about overall service levels during the quarter and through the combination process and maybe talk a little bit to if there were some share loss?
William Logue
Yes. Let me say this here. Again, the first two weeks as Express felt, we had -- actually the quarter had some significant impact from weather, obviously. So if you look at the numbers, there's a substantial number in it. It obviously cost or lost revenue in expenses because the weather storm, I think we had five significant events in the quarter. Obviously, the first couple of days of the new structure of the company were pretty dramatic. But as we go forward here, we're confident and comfortable that we have the right strategy. As far as volume is, we worked hard obviously, Mike's team on the services front, on the yield initiatives. And if you look at the comparisons, the comparisons in Q3 are based on a vary substantially kind of unnormal third quarter of last year, which very -- the volume was very high. So again, we've worked this past year on the yield initiative, and we're seeing very positive results there. And again, we're confident that the volume that we have in the year-over-year comparisons is driven by the yield initiatives primarily, some seasonality, obviously, and some weather. So we feel we're in good shape there. And as we go forward, the customers have responded very well to our new initiative. As we put it, there's choice out there, and they certainly have understand the new initiative. The first two weeks, obviously, there was, I think we read there was some confusion out there. There was -- with the sales team, the ops team and our customer service organization did a fabulous job of touching base with all our customers that were either in the priority or the economy mix and talked to them and clarified to make sure they were picking the right services for their business. And so we think we're well past that, and now it's full steam ahead into Q4.
T. Glenn
This is Mike. Let me just say that Bill's team has done an outstanding job of maintaining very high service levels during the transition. The volume impact during the quarter, as he mentioned, is largely related to weather, and then secondarily, our yield improvement program. As you can see by the results, we were quite aggressive on the yield improvement activities, and we're extremely pleased with the success that we had. More importantly, looking forward, our pipeline is quite full, and customers are responding extremely well to the choice of priority and economy options, and that's giving us the flexibility to really pick and choose our spots, and again, command higher rates based upon the value proposition that we're providing. So we couldn't be happier with where we are at this point. And it really is a great value proposition for our sales team to sell, and we think we're in a great position going forward.
Operator
Our next question comes from Donald Broughton from Avondale Partners.
Donald Broughton - Avondale Partners, LLC
As it relates to freight, while we're on the subject, Bill, what, if any assumptions, are you making on the fate of Yellow? Are your projections of profitability based upon their demise, or simply a status quo for their operations?
Frederick Smith
First of all, our projections are based on our business and the new network and looking at all of our operating metrics that we have planned and our volume levels and so forth. So it's nothing to do with the Yellow or anybody else. It's our base business. And as far as Yellow, obviously, I wouldn't comment on any of our competitors. And again, we focus on our business in making sure that we're running the best freight business for our organization going forward.
Donald Broughton - Avondale Partners, LLC
Well, then I'll speculate. If something were to happen to them, would you, given your new redesigned system, be in a better position to respond than you were before?
Frederick Smith
Yes. I think, obviously, our structure, the way it is, is about the two offerings, gives us a lot of flexibility in either the priority or the economy network depending on the customer's need. Again, that's for any customer that would present our options. Obviously, Mike's team and the sales front, plays a very important role for us, making sure the customers get steered to the right network. And then obviously, from a pricing perspective, making sure that it's going to be a profitable business no matter what new business we pick up from any competitor.
Alan Graf
And, Donald, this is Alan. Let me just add that even though we are selling, hopefully very soon here, a number of the facilities that we no longer need, we are adding doors in key locations to make this network more flexible for whatever additional volume comes. We intend to start back on the growth rate here in the LTL business once we get through this initial period of offering the priority and the economy services.
William Logue
And, Donald, this is Bill again. I will say after the first six weeks here, obviously, the first four weeks, we learned a lot in the new network and we are spending a lot of time making the appropriate adjustments to make sure that we're able to handle today's volumes, future volume, and we're making appropriate adjustments to our network to make sure that we're ready. Obviously, any time you take on a major restructuring that we did, you plan for it. And then the real skill comes when you adjust to what reality hits, when it hits. And again, we're making those adjustments. And again, we've learned a lot and we've made great strides short term. We have great plans for going forward. So we're well positioned and excited for the freight future.
Operator
Our next question comes from Nate Brochmann from William Blair & Company.
Nathan Brochmann - William Blair & Company L.L.C.
I wanted to talk a little bit more, Dave, maybe if you could talk about Japan just a little bit more. I think there's a lot of misperceptions in terms of the size of that business for you, as well as kind of the freight that moves in and out of there. And I was just wondering if you could share a few more thoughts on that.
Frederick Smith
Sure. Obviously, Japan, being the third largest economy in the world, is big for us, and it always has been. So we're watching it closely. We're keeping all of our resources in play there. We're providing more when needed. Quite frankly, we're getting a lot of requests, as Alan or Fred mentioned earlier, for people wanting to ship things into Japan now. And oddly enough, that will probably be a benefit for us going into Japan. So it's an important market. And I think we just have to monitor it and watch it closely. But right now, we feel very good about where we are. We're still in Narita, Osaka, and we intend to keep providing great service and possibly even more lift into Japan.
Nathan Brochmann - William Blair & Company L.L.C.
Fair enough. And I was just wondering to then, the kind of second part of that is, obviously, with a lot of the noise, I think you guys have addressed it fairly well. But I think there's a lot more worry now in terms of just the general economic outlook, but it sounds like your economic outlook kind of going forward hasn't changed at all, and if anything, remained obviously very optimistic. I'm just wondering if the last month has changed any of that outlook.
Frederick Smith
Mike, Glenn, you want to talk about Gene's [ph] forecast?
T. Glenn
Yes. We haven't had a material change in the forecast for calendar year '11. We're still looking at 2.9% GDP growth. Industry production is just under 5%, as Fred mentioned. Consumer spending, again, just under 3%. If you look at our fiscal year '12, as we go into that, we're looking at 3.3% GDP growth, industrial production down slightly from this year. And again, consumer spending around 3%. So not a significant change in that.
Operator
Our next question comes from Ken Hoexter from Bank of America Merrill Lynch.
Ken Hoexter - BofA Merrill Lynch
Just on the Ground side, margins, I think posted an all-time high for the third quarter. Can you talk a bit about kind of the shift going on? Is there a shift between Ground, SmartPost? Do you aim to kind of chase some volume here with margins as high as they are? Can you kind of walk us through that?
David Rebholz
Yes. Ken, this is Dave Rebholz. We had a very strong quarter on the volume side. Very proud of the team and the results we've been able to deliver, especially in light of the unique days. We had three record Mondays. And we actually beat our record this year. This year, we hit $10.7 million on a Monday, which was 1.5 million packages higher than previous year. So there's a lot of incredible focus without significant loss to service other than some of the service days where whole regions were -- regions of the country were simply shut down in terms of the highway system. So putting that aside, SmartPost also had a great year on that $10.7 million, SmartPost record day was $4.4 million, which if you go back four years, we were doing 350,000, 360,000 packages a day. It is a humongous recognition by our customers of the value. And that value is coming through online sales. It's the .com world that is really driving SmartPost. SmartPost had good margins. We had good margins at Ground. We always get certain efficiencies in these times. But we've got our costs very tightly buttoned down and the incremental costs that we employ or use are all designed to number one, improve our service, which we are the fastest in the industry; number two, provide additional efficiencies; and number three, reward our employees and our contractors with the fine service performance that they've been able to do. So across the board, and I'll add in one last thing, yield was strong. You've heard it repeatedly this morning. Yield was strong, both as a function of weight. Our surcharges at home were very strong, as we went through the December timeframe for the unique services that we provide. Fuel, it had a little bit of a drag on us. We understand that. And then to what Bill and Dave and Alan have all said, the sales team and services organization have been able to take our value proposition and leverage it for incremental increases in our general rate increase. So I'm very optimistic about the future.
Ken Hoexter - BofA Merrill Lynch
Dave, if I can do my follow-up there as well and I was amazed how many actually FedEx Ground packages came to my house during the holiday -- SmartPost came. But the question on that is do you -- I guess if the post office starts to shift in their kind of delivery, does that impact the business? Does fuel running up impact that ability to get the pure rate on the overall? I guess that's a general yield question.
Alan Graf
Yes. Well, Ken, the actual postal structure that you've been hearing information about, I think probably the mostly widely conveyed message was the Saturday operation. They're really talking about Saturday delivery. We do not do Saturday delivery with SmartPost. And their facilities will still be open for acceptance of packages. When we get into the peak season, just so you understand, we run three ships 7x24 because that's gigantic increase in volume necessitates if you use your capital equipment to the greatest advantage as humanly possible. There isn't any pressure on the Monday through Friday delivery with the post office. I think we're sitting perfectly to the extent that the change will be -- we will advise you, but at this point, we don't see a risk that we have to be concerned about in the near or long-term future. And we have a great working relationship, both as their largest vendor through FedEx Express, and we're their largest parcel select customer. So we work very closely with them to ensure that we're doing all the right things.
Operator
Our next question comes from David Ross from Stifel, Nicolaus.
David Ross
With respect to higher fuel prices, there's been a lot of talk, given the FedEx portfolio and how that impacts the customer shipping options. Certainly, the spike in 2008 caused a lot of trade downs from Express, the Next Day, Next Day to Ground, Ground to SmartPost. A lot of shippers over the last couple of years, I guess, have been optimizing their networks. Could you comment on where you see kind further optimization? How much really is left to do in the trade down if fuel continues to climb?
Frederick Smith
Mike Glenn, you want to take that?
T. Glenn
Yes. David, obviously, we've seen a lot of that. We saw a lot of that when the fuel surcharge went well over 20%. We don't feel we're in that range at this point. As Alan mentioned, our outlook's based upon the fuel prices as we see them today. Clearly, if we were to see a significant spike up where the fuel surcharge were to increase another 10 points or so, it's quite possible you can see some trade down. But we're all ready -- that's the part of our sales strategy to ensure that customers traffic gets in the right network. And so we try to point in that direction already. So I don't think you would see as much has occurred in the last go-round. And keep in mind that we built the surcharge, we've taken two points every year for the last five or six years and put it into the base rates. So it certainly minimizes the impact of increasing fuel prices. So there's certainly a possibility that you could see a slight mix change if the fuel prices continue to escalate. But again, our sales team has done a good job of making sure customer traffic gets in the right network to begin with. So certainly don't think it would have the same impact that we saw several years ago.
David Ross
Excellent. Just a follow-up on the FedEx Freight Network with the newer, leaner infrastructure that you all have, plus with, I guess, the greater opportunities in rail, what is the network capacity remaining in the new network? I mean, I guess a lot of people think that it's going to be less than the old network, but maybe the way you adjusted it or you're still probably low rail usage might allow for similar capacity.
Frederick Smith
Yes, capacity, obviously, is an important part our business. We've been using a lot of rail with our economy in the offering and that's gone very well. So we continue to adjust on that work. Obviously, we have plenty of capacity. Again, the key point is where the appropriate customer is needed and where the yield is. And we just needed internally to adjust our resources now that we have operations kind of on both sides of the business. So it's all about adjusting capacity as the demand needs and our job is obviously to make sure that we align the resources to it. If we have capacity, we have multiple variable options with our own linehaul, with the purchase transportation linehaul. So we have that flexibility to put the resources where we need to.
Frederick Smith
And as far as facilities from the PU&D side of the business, pick up side of the business, with the reduction in our number of centers, we're very confident that we have the right pick up and delivery network out there. Now it's just kind of continuing to adjust with the customers' demands.
Operator
Our next question comes from Kevin Sterling from BB&T Capital Markets.
Kevin Sterling - BB&T Capital Markets
Looking at your Express segment and your positive commentary around that as for your outlook, clearly, you guys are seeing some strong volumes in Express. What do you think are the primary drivers? Is it low inventory sales ratio? is it industrial production growth? Or maybe a combination of both?
Frederick Smith
Well, this is Fred Smith. Let me have Dave and then Mike Glenn comment on this. It's all of the above. The facts of the matter are, the world economy continues to get bigger, the biggest economy in the world is the economy of world trade and the fastest growing part of world trade is the growth among the emerging markets and the emerging markets to and from the industrialized nations. And I think today, perhaps because of the tremendous news capabilities we have, everybody gets fixated on an event or one thing or another, and while many of them are terrible and not very pleasant, the facts of the matter are that the momentum of introducing billions of people into the world trading economy is one of the biggest things that's ever happened in the history of the world. And our Express operation and the entire Express segment sits right in the middle that. So that's why we have the confidence. And with the biggest air express air cargo network, it's about 60% bigger than the next largest one, we're getting a lot of advantage from scale. So that's the macro answer. I'll ask Dave and then Mike to comment on more specific issues.
David Bronczek
Yes, this is Dave Bronczek. Yes, Fred's right. Our global powerhouse is going into more parts of the world, deeper into more countries, India, Mexico, China, the U.K., all around the world. So we're adding to our products and portfolio and customers have a different mix of business now they can give us across the world. But it's our global footprint that's so powerful, and we're going so deep into these countries now and providing new opportunities, new services. And then of course, our high-tech customers are just shipping, I'm sure most of you received from FedEx the latest iPad and on and on. But I think it's what Fred said. It's the global power of our network going deep into many more countries.
Frederick Smith
The only other comment I would make is if you look at the GDP forecast for the emerging economies, both in Asia-Pacific and Europe, they're growing much faster than U.S., which plays right into the sweet spot for our value proposition. The launch of the 777 aircraft gives us a significant competitive advantage in key markets, allowing us to pick up later and open new market opportunities. Our broadening product portfolio is certainly playing a role in that. So we've got a terrific value proposition out there that's playing right into the hands of these emerging market economies that are growing at a much faster rate than the U.S. economy.
Kevin Sterling - BB&T Capital Markets
Okay, great. Thank you very much, that's great color. And as a follow-up, Alan, this question is for you. You talked about the higher aircraft maintenance expense next quarter. Is that a function of just pulling more planes out of the desert? Or is it more a function that your aircraft have gotten busier?
Alan Graf
Yes, the desert is fastest. It's now that where our utilization's are up and there are more aircraft, but it's also some timing anomalies. So as I've said, that will still be fairly high in the fourth quarter, but it will mitigate in FY '12.
Operator
[Operator Instructions] Our next question comes from Jason Seidl from Dahlman Rose.
Jason Seidl - Dahlman Rose & Company, LLC
A couple of quick questions. One, Bill, on the LTL front. With the network now as it is, has there been any change in the split between the regional business and some of the Long Haul business, or is it about the same?
Alan Graf
Can you repeat that question again?
Jason Seidl - Dahlman Rose & Company, LLC
Yes, the split between sort of your Regional Business and your Long Haul business now as the network is redesigned versus the prior network? Has anything changed?
T. Glenn
Kevin, let me jump in. This is Mike. Obviously, we've worked a lot with customers to help them understand the new services available for them. There's been some minimal change in the split of the business, but it's certainly within our projections of what we thought would happen. I think customers are learning the services, learning the service level, the transit days, and we'll continue to see some modest adjustment going forward in that. But it has not been a significant issue for us and certainly within our expectations.
Frederick Smith
Yes, I'll add to Mike's point there. We also, the first couple weeks, we saw a lot of customers trying to understand the new offerings and it certainly has stabilized over the past four weeks, so which makes it obviously, easier for us to build our plan and so forth so we're seeing that stabilization, which kind of addresses that confusion issue I think on the front end as well.
Operator
Our next question comes from Jeff Kauffman from Sterne Agee.
Jeffrey Kauffman - Sterne Agee & Leach Inc.
A lot of my questions have been answered, but let me ask the following: We've had tsunamis before. We had the situation in New Orleans. We've had kind of global disasters. Can you talk a little bit about in with respect to what's going on in Japan and the tsunami, and David, thank you for the color that you gave, which industries, what areas with the brownouts and what's going on in this particular situation are most at risk over the short term, long term? And you talked about some of the people that are shipping things over. When there are natural disasters, sometimes there are offsetting benefits in terms of A, volume in terms of machinery parts, electricity, what have you. Can you talk a little bit about some of the specific risks and potential benefits that could result from this natural disaster?
Frederick Smith
Well, this is Fred Smith. I'll ask Dave to comment further. It's very difficult to ascertain what the effect is going to be. I don't think in the scheme of things, with a company the size of FedEx, at about $10 billion a quarter, that the net effect of Japan is going to be significant. Now that doesn't mean that there couldn't be a lot of money in human terms, but in relative terms to FedEx's operation. And secondarily, while this thing has been horrific and one of the worst things we've seen in a long, long time, the reality is it's fairly localized. And assuming that there's no great effect from the nuclear power plant issues, the Japanese are very resourceful people and we're carrying a lot of traffic out of Japan as we speak. And the trade balance from Japan and to Japan was always much more export oriented there. So there will be more traffic going into Japan from reconstruction purposes than would otherwise have been the case. And of course, there will also be humanitarian relief, and as I mentioned in my remarks, we try to stand up and help people do that because we have a unique capability to do it, and other people in the industry also do that. So I don't think that Japan will be significant overall. There may be some pinch points in various supply chains and have some effect on automotive or high-tech production. But the Japanese are very able folks, and I think the way 'they've handle this thing is also very admirable. I might add, and on our board, we have Doctor Shirley Jackson, and Doctor Jackson's the head of the Rensselaer Polytech. And she was also the head of the nuclear regulatory commission, and we coincidently had our quarterly board meeting on Monday. So one of the most interesting things we've had in a long time was to listen to her educate us with about the situation in Japan. And I think the likelihood is that the effects of the nuclear situation there are more probably less rather than more, unless there's some drastic, unfortunate convergence of events takes place.
Alan Graf
Yes, Fred's exactly right. I mean, we have a lot of requests right now from the American Red Cross, Heart to Heart and many, many others. Of course FedEx is famous for providing that level of support anywhere around the world, whether it was the China earthquake a year ago, 18 months ago and so forth. But on top of all that, we are getting a lot of requests right now, and we're looking at positioning it to ship materials, heavy materials into Japan to support the reconstruction efforts over there. So you would expect that because we are so big and so global and we have the resources, so we're queuing that up now.
Operator
Our next question comes from John Barnes from RBC Capital Markets.
John Barnes - RBC Capital Markets, LLC
In terms of LTL, going back to that for just a second. If I take a look at what you did on a revenue per hundred weight basis in the quarter versus where you're revenue per hundred weight peaked I think back in like the first fiscal quarter of '09, it's still down like 9% or 10% from the prior peak. And my question is, one, how long will it take you to kind of get back to those peak levels of revenue per hundred weight? And two, do you have to in order to get back to the prior level of profitability at freight, or has this restructuring kind of lowered that bar a little bit?
T. Glenn
John, this is Mike. You're correct that we're not at our peak yields, although we've had significant year-over-year and quarter-over-quarter improvements in yield, and I certainly expect that to continue. And I also expect us to exceed those peak yields. Although certainly, we don't make forecast on timing of such activities, but we're going to stay committed to the yield improvement programs, and we think we've got a value proposition now that will allow us to do that, and I'll let Bill comment on the network and the ports of yield in that.
William Logue
Obviously, we've been -- restructuring our network is key, but internally, we focused on the network is one half, to continue yield initiative is the other half. So the answer to your question directly, yes, we need a network positive gains. We're getting that plus continued yield improvement to get where we need to be to get our -- to achieve our double-digit margin goal. And Mike's team is doing a great job continuing focus on it and the ops team has done a great job aligning our metrics for our network side and then the continued great performance by Mike's team negotiated in the yield side of the business is really a key factor as well for our long term success.
Alan Graf
This is Alan. Let me just give it to you direct. No, we don't have to get back to those old yields to get very, very nice double-digit margins to freight because we have taken out a tremendous amount of cost duplication and G&A overhead.
Operator
Our next question comes from Chris Ceraso from Credit Suisse.
Christopher Ceraso - Crédit Suisse AG
Alan, you walked through some of the things that change from '11 to '12, but it sounds like in many cases, it's just you're not going to see another big increase from '11 to '12. Are there costs, whether it's maintenance or compensation or pension, I know it's hard to gauge, but are some costs actually going to decline outright from '11 to '12? Or is it just you get better leverage because the revenues keep going up and the cost don't go up again?
Alan Graf
Well, it I think that the productivity that we have, momentum that we have in all of our operating companies is tremendous right now, so we're going to continue to get continued productivity gains. I mean, if you look at Ground, for example, and how they're driving increased margins, it's because every time they add another 100,000 pieces, whether it's in SmartPost or commercial or home delivery, they're getting additional economies of scale and productivity. Our technology improvements that we're adding everywhere is providing us additional productivity. Our G&A headcount is essentially frozen. So it's everywhere inside the company. It's being engineered with cost management and service improvements in mind, and we're very focused on quality and so it's pervasive. As far as some big giant cost reduction, no, I don't think so, although eventually, we will see lower pension costs as interest rates rise.
Operator
Our next question comes from Peter Kleinschmidt from Jefferies.
Paul Kleinschmidt
Just a really quick housekeeping question. It looked like the tax rate was a little light in fiscal third quarter. I'm just curious, what discounted into the fourth quarter guidance?
Frederick Smith
I love that, a little bit light. We like it lower, okay? So that's where light is good. We are seeing improvements to our lowering of our effective tax rate as a result of our international profitability and our permanent reinvestment programs, and then we have around the world. We would love to see a corporate tax rate reduction. We love to see territoriality and all those to help us even more, but working with what we can, that's a major driving factor. And of course, our cash tax rate is going to be very low as we take advantage of 100% expensing this year, this calendar year and 50% next calendar year.
Paul Kleinschmidt
Okay. So the book rate historically, was tracking around 37%, it sounds like maybe 34%. As you went back down is the direction we're going?
Frederick Smith
Well I'd say for this year, just depending on how things work out and with the Japan situation, 36% to 37%, but yes, we intend to drive it down over time. On a static basis as we continue to improve our international profitability where our earnings are taxed at a lower rate.
Operator
Our next question comes from Jon Langenfeld from Baird.
Jon Langenfeld - Robert W. Baird & Co. Incorporated
I have two questions. One on the CapEx side and the pension side, relative to your calls on capital, what should we think about that in the next couple of years? And then the second question was just weight per shipment, you highlighted it on the international side and Express, but can you also talk about weight per shipment in the Ground business?
Frederick Smith
I'll handle the first part and then I'll turn it over to Mike and Dave Rebholz for the second. As we stated many times, we are being very aggressive right now. We have a substantial amount of cash on the balance sheet. As I've said, we're going to be very nicely cash flow positive this year. That's after we paid for our CapEx, after we pay for our acquisitions and after we fund our pension fund and after we've paid off some of the debt. I mean, we have a zero net debt position if you take our cash and offset with the debt that we have on the balance sheet, in fact, it's positive. And we intend to make sure that happens in FY '12. Having said that, because we're getting expensing at a 100% and 50%, we think now's the time to, with markets that we see, to accelerate that a little bit. So we're going to be aggressive, and we'll probably take our CapEx up in FY '12 as a result and accelerate some things forward because we're getting the essentially, tax-free, interest-free loan from the government from the expensing. So that's our plan but we'll still be cash flow positive and we'll still drive improved earning and we will be carrying our company for the long run.
T. Glenn
John, this is Mike. If you look at weight and its impact on yield during the third quarter for ground, the primary driver there was rate and discount changes. Once you exclude fuel, weight had a very minor effect on yields in the quarter. And if you look at it at a quarter-over-quarter basis, weight actually had a very slight negative impact on the yields, which is always the case in the quarter with peak season because you tend to have a little bit lighter weight per transaction there. So all up, a slight positive on a year-over-year basis and a quarter-over-quarter basis, a slight negative.
David Rebholz
Let me just add, this is Dave Rebholz. We did have a nice pick up in our general rate increase, and we had a nice pick up in surcharges, both dimensionalization and other unique surcharges associated with the growth in home delivery networks. And Mike's already answered the weight situation.
Operator
Our next question comes from Scott Malat from Goldman Sachs.
Scott Malat - Goldman Sachs Group Inc.
I just wanted to follow-up just on Express yields. On the -- can you help us with the outlook here? Obviously, it tends to move with industrial production, but when you're close to eight pounds per package, how do we think about it at these high levels? What's left of the opportunity here?
Frederick Smith
Express yields, we certainly believe we've got plenty of opportunity going forward. We have a multiphase strategy here. I've talked about some of that already. Obviously, we have a number of contracts that will come up for a renewal. In the next six months, we expect to get above-market rate increases as we renew those contracts. Our sales team is doing a fabulous job negotiating with our customers in that regard. We're doing a great job of managing surcharges as part of that. The annual rate increase, we're holding on to a higher percentage of that. The change in dimensional weight pricing has provided a benefit greater than our expectation and we continue to manage that. So we have a lot of things going in our favor. And again, I have to say again, our sales team is doing a fabulous job of taking the yield management challenge and executing accordingly.
Operator
Our next question comes from Ed Wolfe from Wolfe John.
Edward Wolfe - Bear Stearns
Just a follow-up on what Mike has said now a couple of times about these multiyear contracts that I think you said earlier. You don't intend to try to break early and so there's obviously a potential pricing opportunity in the future. Can you discuss the percent of these multiyear contracts? How many are kind of directionally one year above that? How much of your business is spot across the Express and Ground networks?
Frederick Smith
Well, Ed, the majority of our contracts are multiyear contracts, some are two some are three. It's rare that we go above three years unless the customer just insists on a longer-term contract. Obviously, we have the ability to make adjustments to those contracts with appropriate notice, but we don't think that's the right action to take there. And I'll be honest, I don't have the percentage off the top of my head on the amount of the business under contract, but it's -- I would say, it's a little over half.
Edward Wolfe - Bear Stearns
A little half what? I'm not sure what that half represents.
Frederick Smith
A little over half would be under -- I mean, just to be clear, all of our discounted businesses is on a pricing agreement. So that would be, for all intents and purposes, a contract. The difference is for our larger customers, you tend to have multiyear contracts, with the smaller customers, you have Evergreen contracts. In other words, they just continue on with annual rate increases built in until one party or the other terminates the agreement. So all of our discount businesses is under some form of agreement, but the larger customers clearly have -- tend to have the multiyear agreements.
Operator
Our next question comes from Bill Greene from Morgan Stanley.
William Greene - Morgan Stanley
Alan, just two quick data questions for you. The first is, can you just maybe size Japan revenue for us on that $10 billion quarterly number? And secondly, if we think about the investment, if you will, the restructuring investment you're making in freight, what's a reasonable return to think about on that investment? 15%, does that sound like a fair threshold?
Alan Graf
Well, as you know, we don't break out regional revenues, and I don't think it's as good a time to start, but as Dave said, it is the third largest economy the world. Go back all the way to the late '80s when we bought Flying Tiger where Japan was a majority of those revenues at those days and we've grown it since then. So it's a substantial part of our business. And I do have in the range that we've given you, a lower profitability than I would have had for Japan before the tsunami. But where it's actually is going to fall out in the short run, I really can't answer. But we'll manage around it. I mean, the good thing is, in offshore locations, most of our assets are human. And as Dave said, they were all safe and rolling stock for aircraft with wings, so we can fly out of there. So our property losses were very, very de minimis over there. And what was your second question?
William Greene - Morgan Stanley
It was just on freight. What you think about the restructuring investment you're making, what's a reasonable return for that?
Alan Graf
Well, on a cash basis, it's unlimited because we actually don't have any net cash outflow to do the restructuring. So the write-offs were book entries only. And as we've said many, many times, the productivity alone, not to mention the service improvements that we're getting from the priority, the economy thing are very substantial. So I wish I had 10 more projects just like it, quite frankly.
Operator
And this is all the time we have for questions. At this time, I would like to turn the call back over to Mr. Foster for any additional or closing comments.
Mickey Foster
Thank you very much for participating on the conference call today. Please feel free to call anyone on the Investor Relations team if you have any additional questions. Thank you very much.
Operator
That does conclude today's conference. We do thank you for your participation.
- Read more current FDX analysis and news
- View all earnings call transcripts