FedEx Officers on Ground Legal Challenges - June 20, 2008

FedEx Corporation held its quarterly conference call on June 18.  The full transcript is available at SeekingAlpha.com.

Management painted a bleak picture for the corporation overall.  There were some very tough questions posed by analysts and reporters.

Especially on the Ground segment:

Ed Wolfe - Wolfe Research

Can we talk a little bit about the Ground side? Ground operating income is down 26% and the margin at 750 basis points of year-over-year deterioration seems the worst since you've owned this business year-over-year. The fuel impact is great but should be less at Ground. Can you talk to what's really driving what's been a slow decline at Ground at profitability?

David F.  Rebholz

First of all, let me point out it's not directly related to your comment but I think it's important. I'm extremely proud that FedEx Ground has achieved an all-time record service level both quality and unplanned service in 98.5 and what's important about that is we now deliver more than 56% of our packages in two days or less and 23% of the Ground packages are delivered the next business day. And you're aware of the fact if you follow us closely that part of our investment this past year was to speed up the lanes and recognizing some of the fundamental changes that have already been discussed. So we're very proud of having about a 13% advantage over UPS. Fuel was singularly the largest absolute dollar difference in the quarter and I think it has already been stated by Alan we did have costs related to the contractor initiatives that we've talked about in the past which come in two flavors - the conversion which I'm proud to say we are completed in California and some additional incentives for our multi-work area contractors.  Purchase transportation and other cost lines are really where those numbers reside. The net of it, Ed, is we had a record fourth quarter last year at plus 17% and from a comparable basis along with these investments and one-time costs, I think we have performed extremely well inclusive of our improvement in our service offerings.

Ed Wolfe - Wolfe Research

Dave, can you give more sense in terms of the conversion costs? How much costs are still in front of you? How much of this is ongoing and what percent nationally of the drivers are now single contractors versus multi-route franchisees?

David F.  Rebholz

Well, Ed, first of all the bulk of the costs from this conversion are in our numbers with the exception of the trailing [MWAs] in the fourth quarter so there will be a slight amount moving into the first quarter but the bulk of the numbers are baked into our base right now. We've had a substantial improvement in multi-work area contractors. Today if you look at the multiple work areas, they roughly are about 3,500 of our contractors, 3,600, are in control of about 10,000 of the service areas. Single work areas are about 7,600 for the organization and, of course, they are one-for-one even though they periodically employ their own employees for peak times, etc. We've had a substantial improvement in the MWAs with the last 500 additions all being 100% MWAs and as I mentioned out of the 489 single area work contractors in California, 410 of them have converted to multiple work area performance. So we have the vast majority of our contractors that have converted and our ongoing growth is in the multi-work area. Our long-term goal is to continue to reinforce that part of the model.

William Greene - Morgan Stanley

I think you're talking to the IRS this quarter. I don't know if it was in June or May, but can you give us an update on how those talks have gone?

Christine P.  Richards

We've started those conversations. At this point in time there's a good chance they'll continue on into the first quarter. We're still at the audit level and depending upon the outcome at that level, we will then see how we go forward.