Good day, everyone, and welcome to the FedEx Corporation first quarter fiscal year 2014 earnings conference call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Mr. Mickey Foster, vice president of investor relations for FedEx Corporation. Please go ahead, sir.

Good morning, and welcome to FedEx Corporation's first quarter earnings conference call. The first quarter earnings release, and our 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. If you are listening to the call through our live webcast, feel free to submit your questions via e-mail or as a message on stocktwits.com. For e-mail, 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 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. 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, Alan Graf, Mike Glenn, Chris Richards, Rob Carter, Dave Bronczek, Henry Maier, and Bill Logue. And now our chairman, Fred Smith, will share his views on the quarter.

Thank you, Mickey. Good morning everyone, and welcome to our discussion of operating and financial results for the first quarter of fiscal 2014. FedEx had a good quarter, despite higher fuel costs and one fewer operating day. Growth in overall customer demand for our wide range of global transportation solutions drove improved earnings. FedEx Ground reported another outstanding quarter, as average daily volume grew 11%. FedEx Express is skillfully executing its profit improvement plans. As part of this, earlier this month, FedEx Express took delivery of its first new Boeing 767 300 freighter, which uses about 30% less fuel and offers at least a 20% operating cost over the MD-10 it replaces. We’re reaffirming our forecast for full year’s earnings per share growth of 7% to 13% over FY13’s adjusted results. We believe FedEx is well-positioned for continued growth and success as customers around the world realize the full value of our portfolio of solutions. Now I’ll turn the call over to Mike Glenn for his views on the economy, and then to Alan Graf for details on the financial results. Mike?

Thank you, Fred. The FedEx economic forecast calls for continued moderate growth in the global economy. Our U.S. GDP growth forecast is 1.6% for calendar year ’13, which is down 0.4 of a point versus last quarter, and 2.5% for calendar ’14, which represents no change versus the last quarter. For industrial production, we expect growth of 2.4% in calendar ’13, again down 0.4 versus last quarter, and 3.4% in calendar ’14, which is down 0.1 versus last quarter. It’s important to note that historical data revisions account for most of the reduction in the calendar year ‘13 growth rates. Policy risk remains high, but there are signs of improvement in Europe and China. Our global GDP growth forecast is 2% for calendar ’13, down 0.3 versus last quarter, and 2.9% for calendar ’14, down 0.1 versus last quarter. Turning to yield per package, in the domestic express segment, excluding the impact of fuel, year over year package yield increased 2.7%. The increase was primarily driven by rate and discount improvements followed by increased weight per package and product mix. The ground packaging yield increased 2.2%, excluding the impact of fuel. The year over year increase was driven by rate and discount improvements, an increase in extra services charges, and product mix. In the international express segment, export, excluding fuel, International Export Express package yield declined 2.1% year over year due to changes to rate and discount and weight. And finally, in the freight segment, or the LTL segment, excluding the impact of fuel, yield per hundredweight increased 1.1% year over year. The increase was primarily driven by rate and discount changes and shipment class. Now I’ll turn it over to Alan Graf.

Thank you, Mike, and good morning everyone. We had a good quarter. Revenues and earnings increased, driven by the solid performances in all of our transportation segments. Operating income grew 7% year over year, primarily from improved profitability at Express, higher volumes and increased yields at Ground, and improved performance at Freight. Our margin improved 30 basis points versus last year to 7.2%, despite significant headwinds from the fuel surcharge timing lag, as well as one fewer operating day. Offsetting those headwinds for the quarter were benefits from lower aircraft maintenance and salaries and wages expense. For Express, quarter one operating income grew 14%, and operating margin improved 50 basis points year over year, despite the significant negative impact of net fuel and one fewer operating day. The improvement was driven by stronger US-based business performance, lower pension expense, and the continued monetization of the company’s aircraft fleet, which helped to drive maintenance costs lower. These were partially offset by higher related depreciation expense. Turning to Ground, operating income grew 5% year over year, despite the negative impact of fuel. Higher network expansion costs were also incurred, as we continue to invest heavily in the growing Ground and Smart Post businesses at very high ROIC. The improvement in Ground was driven by higher volumes, despite one fewer operating day, and higher revenue per package. Freight’s operating income increased slightly, despite one fewer operating day year over year. Higher weight per shipment, LTL yields, and average daily LTL shipments improved income at Freight. Freight continued to optimize the line haul network by increasing utilization of lower-cost rail over the quarter. Now at 17% of total line haul miles. As for the outlook, based on the economic conditions that Mike talked about, we reaffirm our FY14 earnings per share growth of 7% to 13% from the FY13 adjusted results. Our outlook depends on stable fuel prices. Fuel price volatility impacts the timing of our fuel surcharge levels in relation to fuel expense and ultimately demand for our services. As part of our profit improvement program, we are continuing to evaluate further cost reduction actions to continue to improve our results at Express and to ensure that we achieve our $1.6 billion profit improvement goal at Express by the end of FY16. With regard to the voluntary buyout program, as of August 31, approximately 45% of the 3,600 employees that have accepted the voluntary buyout have vacated their positions. The additional 55% will depart throughout the remainder of FY14, with approximately 25% remaining until May 31, 2014. Total SG&A savings from our profit improvement program is expected to be $600 million on an annual basis, by the end of FY16. Now we’ll open up the call for questions.

[Operator instructions] And we will take our first question from Justin Yagerman with Deutsche Bank.

I wanted to ask about the capacity side in the International Express business. Obviously margins are a lot better than expected on the Express side this quarter, and I know that’s due to a lot of what you’ve got going on on the domestic side as well. But wanted to dig in and see how the progress has been going in terms of the third party line haul initiative, and where you guys are at in terms of frequencies on export flights out of Asia.

You’re right, we adjusted for the second quarter in a row now. Last quarter, in April, and this quarter, in July, we reduced some of our global capacity coming out of Asia, which you saw in some of our numbers in terms of fuel usage and fuel in general. That being said, our International Economy volume continues to grow at a rapid rate. It was up 15%. I think it’s been in the teens now for several quarters in a row. So we’re actually putting those packages, and that network, into the right system form now, that is actually benefitting us across the world.

Our next question comes from Dave Ross of Stifel Investments.

It’s actually Bruce Chan on for David Ross. I’m just curious, on the trade network side, we’ve heard from some of the other forwarders out there that trans-Pac volumes have been kind of blah, with soft summer volumes and limited optimism for 2014. I’m wondering if your outlook is the same, or if you’re expecting something a little bit rosier, and if rosier, is that because you’re taking share, whether price related or product offering related?

We’re toggling our traffic back and forth between Express and FTN, so FTN is performing very well. I think the volumes are slightly higher. The yields are a little bit weaker. I think that’s the case across the world, but it’s performing exactly like we had planned it to, so our FTN organization is doing a terrific job, great service, and moving the lower-yielding international economy into their network.

Our next question comes from Benjamin Hartford of Baird.

I guess if we could just tie that all together, could you give us a sense, Dave, maybe where you believe the network is in relation to needing to divert lower yielding freight off of your aircraft into third-party capacity? Do you feel like you’ve gotten out in front of this trade down phenomenon that’s been discussed a lot? Do you still feel like there’s incremental progress to be made in terms of putting the lower yielding packages onto the appropriate modes? Can you provide some perspective there?

, :

We will now take our next question from Christian Wetherbee with Citi.

Good morning, it's [Scott] [ph] in for Chris. My question pertains to Ground margins. I was wondering if you could give us a sense of some of the individual headwinds that you faced during the quarter, the higher network expansion costs, fuel surcharge, and one less operating day, and what those effects were on margins.

Virtually of the year over year change in margin was due to fuel. And as Alan pointed out, operating income was impacted by fuel and one less operating day. Network expansion costs, at this point in time, are really for capacity, and part of our anticipation of peak buildup.

Our next question comes from Scott Group with Wolfe Research.

Alan, a question for you on the SG&A. I think you mentioned you’re now expecting $600 million of savings. I just want to make sure I’m understanding it right. Is that comparable with the $500 million you initially laid out at the analyst day over a year ago? And then can you give some color on when we should expect to see that? When I look at labor savings this quarter, and I back out pension, we don’t really see any signs of the headcount reductions, and is that a timing issue or are there any offsets there we should think about?

You asked several questions in there, so let me do my best. First, on the tactical one, we made acquisitions last year that are year over year, and on your last question, that’s what you’re seeing there. Yes, the $600 million is comparable to the $500 million. We are actually well ahead of our cost goals that we outlined 11 months ago, and I feel very comfortable about where we are on the cost side. And we’ll continue to work that hard. Now, having said that, to your strategic question, the world looks a lot different today than it did 11 months ago, when we gave you the very specific five buckets about how we were going to improve at Express. So after you listen to what Mike said about ’13 and ‘14’s economic outlook, I think that we’re going to have a little bit more pressure on our base erosion at Express that we’ve got to, as Dave talked about, match lift to load, if you will. So we’re aggressively doing that. That may mean that we have to get to the 1.6 a little bit differently than what we described to you, and it may mean that we will be more back end loaded towards the second half of ’15 and ’16 as we start really driving the leverage of the things that we’re doing. But we’re committed to the 1.6, and we’ll have that by the end of FY16, and I feel comfortable by saying that in today’s environment.

We will now take our next question from Ken Hoexter with Bank of America.

Following on the international side, I just want to understand, on the trade down effect, are you taking further steps? And to Alan’s point there, are you now looking to get some of those cost savings internationally? I think you talked about originally maybe moving some of these cost programs into the international bucket. And have you started to look at that on the cost side?

I thank you for the question, because again I want to stress that as a strategy from FedEx Corporation, we are embracing International economy. And we like these growth rates. And we believe very strongly that we can make the shift that the customers are making while still growing the premium service of IP. It will just be at a slower growth rate than we had anticipated 11 months ago. But the IE network is coming in place very nicely, and we’re going to continue to work on that and I feel pretty comfortable that we’ll make this strategic change. And I’ll let Dave give you some more detail.

That’s right, Alan. You saw in the numbers our flight hours were down significantly and our fuel usage was down significantly, and that’s on our own backbone network. And as we expand our International Economy traffic into other networks, that’s actually a very positive thing for us on both sides of the financial equation for Express. So we are embracing the economy service. In those traffic cohorts there’s a lot more upside there. We’ve capped it in the past.

We’re going to take our next question from Brandon Oglenski of Barclays.

I guess I want to focus for a third question here on cost. For the first time, we actually saw Express quarterly costs ex-fuel come down, although slightly. Should we expect that to accelerate throughout fiscal ’14 and into ’15? And Alan, are those cost cuts just becoming a little bit more challenging to derive? Is that why you’re saying it might be a little bit more back end loaded to achieve that 75% of $1.6 billion next year?

Again, acquisitions that are now fully in our P&L are kind of masking what we’re doing in terms of bending our costs down. And I think I also mentioned to you about we still have over half the people that are still working here through the first quarter from our voluntary buyout program, which a year from now they’ll all have left and we will be able to see a much bigger number at Express directly and from the chargeback that Express gets from services. So I think that’s the macro answer to your question. Dave has a lot of specific productivity things going on, so I’ll turn it over to him.

We’ve hardened all of our expense programs. They’re all working exactly as we would like them to work. That’s what we told you. In fact, I guess it was the question before, it’s actually all around the world on our expense targets and performance there. So with the exception of acquisitions that have added a layer of expense, and revenue quite frankly, and without the impact of fuel this quarter that was significant for Express, our operating profit improving 14% is right in line with what we’ve planned to achieve and are achieving.

Our next question comes from Thomas Kim with Goldman Sachs.

We’ve noticed that the cash flows continue to build up nicely, and you’re now looking at about $5 billion in the quarter. Can you give us a little bit of guidance as to how we should be thinking about capital allocation with regard to, perhaps, your longer term plan for capex? And as we think about modeling, do we want to think about modeling capex as some sort of ratio as a percentage of fixed assets, or revenue? And then within that component, what percent do you think is more for replacement as opposed to the growth side of the capex?

Our capex strategy has changed over time, as we are now focused on replacement and modernization of the aircraft fleet at Express, which is driving, and you’re already seeing it. Notice the last two fiscal years, in the fourth quarter, we’ve significantly reduced, and we’ve retired a number of planes, we’ve shortened the depreciable lives, which of course is a headwind for Dave’s segment. But it’s for replacement capital, which is much more efficient, and with fuel prices where they are - you know, jet’s at $3 - it’s absolutely mandatory that we continue to do that if we’re going to hit our $1.6 billion goal. We want to put as much money as we possibly can into Ground, because it’s going to continue to grow. It’s very high ROIC. Ground’s margins are going to stay in the 17% to 19% range, and we’re going to continue to take market share. Freight, they’ve done a great job of continuing to tweak their operating model a lot more on rail. We expect freight to grow, and so we’ll invest there as well. As to capital allocation, we continue to talk about that as the strategic level all the time, and we don’t have anything to say about capital allocation today, and we’ll keep you posted.

We’re going to take our next question from Kelly Dougherty of Macquarie.

Alan, maybe if you could give us some more color on the different buckets outside of the SG&A, how you get to that $1.6 billion number. I know things have changed around a little bit, but could you give us any more sense on what the size of the other buckets look like?

Well, we’re only one quarter into a 12-quarter program. I was just trying to point out that we have to manage the business as well, and things change, and we’re doing that. So whereas we were looking at a different revenue outlook for International Express 11 months ago, components have changed. There will be much more IE in the future than we had anticipated, and probably less IP, although it will continue to grow. So we have to change our cost structure more than we thought. So you might see a little bit more on the cost side of the equation, and a little bit less on the revenue benefit side of the equation.

And these are the buckets that we’ve gone over before, but just so you can put them down, domestic transformation, or domestic cost network, if you will; international profit improvement across the world; fleet modernization; efficiency of staff functions and the process therein - of course, targeting profitable yields and revenue growth.

We’ll take our next question from Scott Schneeberger with Oppenheimer.

In Ground, you’ve spoken about building out capacity and spending a bit more on capex this year. Can you give us a progress report, an update, on what’s going on there? You mentioned some buildout for the holidays. Also, is there any work there to strategically capitalize on etailer strategies, expanding distribution networks?

There were a lot of questions there, so I hope I get them all. First of all, 90% of the capital expense is to expand our capacity for growth. And the large elements of these expenditures are new hubs, building expansions and relocations, material handling, and rolling stock. So we are very disciplined, as I’ve said in the past, about adding capital. We try to handle peaks in volume with operating expense instead of capital, and we generally put together a five to seven year plan based on our forecast as to how we intend to expand the network. Now, clearly our volume is being driven by ecommerce. I think Mike has said in the past it’s growing 5-6 times the rate of brick and mortar. I would tell you that we believe that we are uniquely positioned to compete in this space. We have FedEx Home Delivery for customers that desire high-touch, high value transportation services for their residential deliveries. FedEx Home Delivery offers extra services, including day-definite service, appointment service, and evening delivery, in addition to signature options. And then we have FedEx Smart Post, which is uniquely positioned to offer a low-cost option for customers who would like to offer free shipping to their customers. And we do this with final mile delivery by the USPS. So we think that we’re uniquely positioned in the marketplace to capture our fair share of ecommerce.

We’re going to take our next question from Jack Atkins with Stephens.

Just had a quick question on the tech product launches that are planned here in the second half of 2013. Can you just give us some color on what you think that will do to overall industry capacity, and maybe what’s baked into your guidance from a volume and rate perspective?

Obviously we’ll see some tech launches this week. There have been changes in the way that tech products are moved into the marketplace. A lot more staging of inventory going on the international front as opposed to using expedited from door to door. So we have seen some changes in that regard in terms of how product is moved to the U.S. and put into inventory. We will certainly benefit from that, with these launches. Probably a greater benefit in the domestic system, although it is a short burst. So even though it’s a lot of traffic in a very short period of time, you don’t see the long tail of that that potentially you’ve seen in the past, although certainly we’ll benefit from accessories and other things that come on the back end of these tech launches.

We’re going to take our next question from Jeff Kauffman with Buckingham Research.

You did take down modestly your U.S. and global forecast. I know you mentioned, Fred, that it was related to some changes in the makeups of these growth objectives. But in terms of your own outlook, you spent a little less capex than we were looking for. What are your thoughts on your capital budget for this year, and what is changing in your own forecast where you’re maintaining your forward guidance in the face of lower global growth?

Let me clarify. On the current year ’13 economic outlook I mentioned that it’s historical data revisions that are really driving the bulk of the reduction in our calendar year ’13 growth rates. Obviously as GDP numbers are updated, which takes some time, we build that back into the historical trend, and that affects the forecast going forward. So really not as much material change in the fundamentals of the business, as opposed to just historical data revisions on the economic forecast. And I’ll let Alan handle the second part.

We’re not changing our capital spending plans for this year. As I said, we want to continue to invest heavily in Ground, and we want to continue to do the fleet replacement at Express. As we look at ’15 and ’16, as part of the profit improvement program and other things, there may be a possibility that we will slide some of that further out depending on how the economy goes. And we’ll just have to see. We have some flexibility to do that, but I think $4 billion is the right number for us this year. If we can sort of hold that level for a while, as revenues grow, then we’ll get a better capex to revenue ratio. I’m not making any ’15 commitments yet, because we’re going to have to wait and see what the outlook looks like, but I can tell you the 767s, the first 25 of them, are just beautiful from a return and operating profit improvement standpoint.

Our next question comes from William Greene with Morgan Stanley.

Mike, can you remind us, on the GRI in Express, how much of the business does that cover? And also, does it include dim weight pricing changes? Because it seems like that’s been quite effective for pricing in the past.

Well, that’s been one of our key strategies, to substantially increase the amount of parcel traffic that is covered by the GRI. And we’ve done a terrific job over the last three to four years. That’s been a key component of our revenue management program. So well over half the traffic is now impacted. We certainly have contracts that still are in place today that are locked into a GRI, and it’s based upon the contract term and not the annual GRI. But our sales team and our pricing science team have done a phenomenal job of working with customers to get them on an annual rate increase. So we’re very pleased with that. We did not make any changes to the dimensional weight that we put in place several years ago. That’s the last time we made the change. But that clearly has benefited the company, that strategic change we made several years ago.

Our next question comes from Allison Landry with Credit Suisse.

I was wondering if you could quantify what the overall fuel lag headwind was during the quarter, and if we should be expecting a similar impact in Q2.

While we don’t give specific numbers, I can tell you it was significant. If you just think about how the fuel prices ran up towards the end of the quarter, and our fuel surcharge lags by six weeks, it’s pretty evident that we were paying a lot higher for jet fuel and not able to pass along the surcharge. As to Q2 and the rest of the year, I wish I could tell you. It’s one of the things that’s a big wildcard on a quarter to quarter basis, is what happens with, particularly, jet fuel prices, but also with diesel and vehicle fuel. But particularly jet fuel prices. If the global political environment calms down a little bit, and the price of crude declines and jet fuel follows it, then that would be beneficial to us in the second quarter, but I can’t predict it. So we just have the six-week lag, and we just have to deal with it. Over time it evens out, but it sure does cause volatility.

Our next question comes from Tom Wadewitz with JPMorgan.

I wanted to follow up on one of the topics, Dave Bronczek, that you talked about a little bit earlier on the shift into IE traffic, and I guess how that relates to trade down. So your comments were pretty optimistic, that you’re making good progress. And I just wanted to get a sense is that something that you’re optimistic because you’re going to see this change, but you’re early in the change in terms of shifting that traffic? Or have you just executed this maybe quicker than we would have anticipated, and you’d say, hey, 50% of our IE traffic is already in commercial lift, and that trade down headwind that we’ve been concerned about really wasn’t that big of an issue in the quarter. So I guess some further perspective on the trade down and shift of IE traffic would be great.

Great question. We’ve actually been looking at this issue, planning for it. As you know, we’ve talked about it for several quarters. Our team has executed this flawlessly. It’s been terrific for our customers and for our network, of course. I think you’re going to see, going forward, that we think we have more opportunity in the International Economy side. We used to capital that International Economy traffic in our existing line haul network. And going forward, there’s an opportunity to grow that and grow it successfully. So I think the answer to your question, we’ve planned it now for several quarters. We’ve executed it flawlessly, and we’re very excited about where we are. Mike?

I just would add one point. I think one of the keys to success that we’ve had is the terrific collaboration between our sales team and the Express operating unit, in terms of getting customers into the right network. And we’re early in that process, but I’m extremely happy with the results in terms of how we’ve been able to collaborate here to get to the right solution for our customers.

Our next question comes from Keith Schoonmaker with Morningstar.

I noticed a pretty strong 16% growth in international domestic volume. Is this organic, or mostly from folding in acquisitions? And I guess related, could you comment on international regions where you’ve seen particular strength?

Yes, that’s a good question. It’s from both, actually, acquisitions and our organic European plan. The organic plan has performed outstandingly well. I’d like to thank and congratulate our team over there. We’ve opened 87 stations in the last 18 months, and the service has been terrific. So with the incremental acquisitions we’ve added, that’s where you’ve seen the domestic international volume up 16%.

Our next question comes from Kevin Sterling with BB&T Capital Markets. Kevin Sterling - BB&T Capital Markets : You talk are looking at international economy, and Alan, I think you talked about maybe a little more base erosion in Express. So how would you characterize where we stand today with the customer trade down? Is it the same as it was a year ago? Has it accelerated? And maybe it sounds like you guys are embracing it more. So maybe if you could compare where we are today to where we were a year ago.

I think the bigger issue is we’re dealing with a new normal. We’ve seen a lot of the trade down already from customers that have made the change to deferred services. I think we’re now talking about more of a growth story going forward in terms of the mix of growth than we are the trade down story. So this is a terrific opportunity for us, and we plan to take advantage of that opportunity with our networks.

If you think about the aviation and fuel and energy intensity of an international movement, and the time differential between priority and economy, given how high fuel prices are, you can understand why customers are trading down, because they get significantly better price, and they give up a couple of days. That’s much more difficult to manage in the short term than what we’ve been managing in the U.S. between Express, Express Deferred, and Ground, which we now have right about in the right place. As you notice, U.S. domestic did fine in the quarter on its revenue growth. So I’ve got to say, hats off to the sales and marketing team for grappling with this and handling this and how swift these changes occurred. And our pricing, I think, is right. It’s just going to take us a little bit longer than we’d hoped to get this perfectly balanced. And Dave can give you some tactical information.

Again, Mike mentioned it before. For example, on the high tech [unintelligible], these big releases, in the past I would have had to have added extra sections of flying. Now we’ve moved it into our FTN network, and it’s very consistent, it’s very reliable, and we move it into our networks in the United States in freight and ground. It’s a perfect portfolio play for us now, and the cost and profit implications are much greater. So I think yes, we’ve embraced it, and I think it’s a big opportunity going forward.

Our next question comes from David Vernon with Bernstein.

Just a couple followups on the International Economy thing. First, Dave, did you just say that the International Economy product was coming into the ground or freight networks, as opposed to the express networks? Just as a clarification on the last comment? I just wasn’t sure I heard that correctly.

The international freight that I’m talking about, coming out of Asia and around the world, is just moving in a different network, in our FTN network. We move it around the world, instead of our FedEx purple tails. When traffic gets into the United States, we look at the service requirements the customers want, and if we can, we move it into ground, we move it into freight, we move it at express.

Let me try to say a couple of things here to clarify some of the things that we’ve been commenting on. In the main, express traffic, whether it’s package or light freight, is smaller and lighter than the type of traffic that’s handled in the FTN network. So these big bulk shipments coincident with product releases by the high tech folks are very difficult to handle, because they’re lumpy and they have expectations of very low yields. So that’s the type of movement that Dave is talking about FTN moving and then putting into the ground and freight movement. The day to day express movement, whether it’s priority or economy, is picked up and transported by the Express unit, and it’s moved in the right network. And as Dave said, on the line haul side, depending on what the customer wants, it’s toggled between express and FTN, depending on the nature of the traffic. You certainly cannot fly an owned airplane at today’s yields in the general commodity freight network. Now, you can say I’m making money in my underbellies, if you’re a combination carrier, but at today’s yields, it’s almost too costly to cover the direct operating expenses, much less the capital expenses for some of these operations. So the market has changed, and as Dave and Mike have said, and I said at the last conference call, it’s important that you recognize that the International Economy Express is a growth sector. Dave said it’s growing 15%. So we’ve embraced that, and the strategy we put in place over the last year and which our people have executed is terrific, and it’s a perfect complement to this heavier traffic that FTN carries, an awful lot of which goes on the ocean. And that is inserted into the ground and freight networks when we get into the United States. So I think there’s a little bit of misunderstanding about the demographics of the traffic, as well as the nomenclature of the traffic.

Our next question comes from Brian Jacoby with Goldman Sachs.

Regarding future aircraft purchases, can you maybe tell us a little bit more about where you guys stand with respect to leasing versus purchasing the aircraft? I know you said a few years back that you were probably leaning more towards putting those aircraft on balance sheet, now that you guys are pretty well positioned in the investment grade world.

Pretty shortly, everything’s going on balance sheet, whether it’s leased or not, so that’s not why we leased airplanes in the past. We’re going to own airplanes going forward, because we are a full effective tax payer, and we can use those benefits. And one of the reasons we accelerated our capital the last couple of years was in fact to take advantage of the 100% and 50% bonus depreciation.

We haven’t leased an airplane in years, 2000, Mickey just informed me.

Our next question comes from Jay [unintelligible] with [unintelligible]. Jay [unintelligible] with [unintelligible]: Looking at your International Express regional market position, you have an outstanding position in the Americas and Asia, but a weaker position in Europe. Does that lack of balance hurt margins, and how could you strengthen your presence in Europe?

The comment I made earlier, and I think I talked about it before, our organic European expansion is adding a very nice layer of growth and cost improvement in Europe and traffic coming in from around the world into Europe. So we are working hard to be more balanced - I think that’s your point - but we’ve seen tremendous results in our plans. We’ve had it now in place for 18 months, and we plan to expand that going forward into the next fiscal year.

Just to remind you, in the last 12 months, we’ve bought companies in Poland, France, and South Africa.

And a couple of years ago, we made a great acquisition in the United Kingdom, and FedEx U.K. is a terrific operation now.

Our next question comes from David Campbell with Thompson Davis & Company. David Campbell - Thompson Davis & Company : The forecasts for fiscal ’14 are partially based on so-called stable fuel prices. Does that mean stable relative to the prices in August? Stable to what?

It means that there’s no volatility in them from where we are, because of the lag time between the surcharge and the cost of the fuel, which I think I talked about earlier.

We’ll take our next question from Justin Yagerman with Deutsche Bank.

I don’t know if I missed it or not, but I didn’t hear the change in frequencies out of Asian when I’d asked that with Dave earlier. And then I wanted to ask about the GRI, following up on Bill Greene’s question. The other thing that we didn’t see this year is a change in the fuel surcharge alongside a GRI with Express, so I was kind of curious if you guys feel like that may not be needed anymore, or if that’s something that you just decided not to do this year, if that wasn’t something that you disclosed in the release.

On your first point, it was my first comments that I made. We actually adjusted our global network coming out of Asia this quarter, similarly to what we did last quarter. So yes, you’re right, we adjusted Asia down.

We began in 2005 to institute higher base rate increases while reducing the fuel surcharge, as you noted. The strategy there was to help ensure that the fuel surcharge index was properly aligned to fuel prices, and it also gave customers more predictability, because if the base rates have been adjusted to account for some of the fuel surcharge, obviously it doesn’t have the volatility that it would have if it were sitting in the fuel surcharge. We believe that the index as it sits today, and has been in place since last January, is appropriate for the current environment, although obviously we’ll reevaluate that each year as part of the GRI and will determine next year as to whether we need to go back to the prior practice or continue with what we did this year.

Our next question comes from Scott Group with Wolfe Research.

I wanted to ask one on ground. How much of the margin pressure at ground is fuel and how much is kind of the capex rollout? And as we think about that capex spend, is this kind of one year that sets you up for four or five years of growth? Or are we at the point where you’re going to have big capex increases in ground every year for a while?

As I said before, virtually all of the margin impact in the first quarter year over year is due to unfavorable fuel. Concerning capex, we’ve put together five, six year forecasts on our capital needs based on our growth and where we see we’re going to be constrained in the network. I’ll say again that we are very disciplined about where we add capital. We try to avoid adding capital for peaks in business as best we can. We tend to handle those with operating cost. And I think that’s probably the answer to your question.

Our next question comes from Derek [Rabee] with Raymond James. Derek [Rabee] - Raymond James: I wanted to look at the freight division if I could, and maybe some commentary there on how demand trended throughout the quarter, and then how it’s shaping up so far in September.

Again, we’re pleased with our momentum as we had good balance between yield, weight per shipment, and volume. A few network adjustments during the quarter, and again there will be one less business day. So we were pleased with our progress in the quarter, and again, the operations team is doing a really nice job on the efficiencies to balance off that one less day. But good balance overall, and a focus on good balance yield.

We’ll take our next question from Dave Ross with Stifel Investments.

I just wanted to switch gears a little bit to talk about Smart Post. Underlying postal rates there went up a little bit, and foreseeably are going to continue to do so. At what point do you guys plan on shifting some of that volume onto maybe your own fleet? Or are you going to continue to pass rates through and keep things as they are?

We have the ability through our contracts to pass through postal increases. We are always impacted, though, by the timing and customer mix in terms of how quickly we can realize that. And decisions to switch between networks are largely customer decisions. We don’t drive that.

I’ve got a question here that came in on the internet from William Flynn. “What are the opportunities for increasing leverage gains in freight? It seems as if you’re taking advantage of investments in equipment in the form of lower maintenance cost, but these are being offset by increased PT cost, purchase transportation costs. So how should we think about the dynamics in freight going forward?” Good question. Again, we’ve made some good investments in our fleets over the last three years. Purchase transportation right now, rates are up, moving, as we move more to the rail. So a combination of moving to the rail, price increases in the purchase transportation, but again seeing the offsetting benefit in our line haul. So again, we will keep investing in our fleet, obviously making sure we have appropriate equipment running at good efficiencies. But again, purchase transportation will always be a supplement to our line haul. And again, our objective there is a combination, because rail comes in the purchase transportation bucket. So again, line haul, as we all know, is a key objective to improve that for the organization, and again, a rate benefit for leverage going forward for our business.

And that does conclude today’s question and answer session. Mr. Foster, at this time, I would like to turn the conference back over to you for additional or closing remarks, sir.

Thank you for your participation in FedEx Corporation’s first quarter earnings release conference call. Feel free to call anyone on the investor relations team if you have additional questions about FedEx. Thanks again.