Please standby. Good day, everyone. And welcome to the FedEx Corporation Second Quarter Fiscal Year 2016 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead.

Good afternoon. And welcome to FedEx Corporation's second quarter earnings conference call. The second quarter earnings release and our 26 page stat book are on our website at FedEx.com. This call is being broadcast from our website, and the replay and podcast will be available for about one year. We have moved our call to the afternoon to allow more time for us to review our results and answer your strategic questions. Written questions are welcomed via e-mail or social media. When you send your e-mail, please include your full name and contact information with your question, send it to our ir@fedex.com address. If you would like to send a question via social media go to stocktwits.com and include $FDX in your message. Preference will be given to inquiries of a long-term strategic nature. We’ll first take a couple of questions after the remarks from the conference call then we will answer questions that have been submitted via the internet. 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 maybe considered forward-looking statements within the meaning of the act. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. To the extent we disclose any non-GAAP financial measures on this call, please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of such measures to the most directly comparable GAAP measures. Joining us on the call today are Fred Smith, Chairman; Alan Graf, Executive Vice President and CFO; Mike Glenn, President and CEO of FedEx Services; Chris Richards, Executive Vice President, General Counsel and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO; Dave Bronczek, President and CEO of FedEx Express; Henry Maier, President and CEO of FedEx Ground; and Mike Ducker, President and CEO of FedEx Freight. And now, Fred Smith, will share his views on the quarter.

Thank you, Mickey. Good afternoon. And welcome to our discussion of results for the second quarter of fiscal 2016. FedEx Corporation posted solid earnings and year-over-year EPS improvement of 19%, excluding TNT integration costs and a legal settlement charge for FedEx Ground. We continue to increase margins, earnings per share, cash flows and returns on invested capital. These basic trends should continue well into the future, barring major events or macro-economic factors. A record number of holiday shipments fueled largely by the steady rise of e-commerce are flowing through the FedEx global networks. Monday, we picked up over 26 million packages global. We greatly appreciate the dedication of more than 340,000 FedEx team members who are delivering the holidays to our customers around the world. Express service levels in particular have been outstanding. While we have experienced extremely heavy ground volumes in the Northeast, our team members have risen to the challenge and ground system is running as scheduled. Adherence to our people service profit philosophy and the FedEx strategy of compete collectively, operate independently and managed collaboratively are keys to our success. We will exceed the profit improvement program at FedEx Express this fiscal year and the Aircraft Fleet Modernization program is paying off in a big way. It's no secret that e-commerce is changing the dynamics of the transportation industry and driving remarkable growth. We have strategic plans to ensure we will continue to benefit in the years ahead from this growth. For example, we are integrating Ground and SmartPost facilities, and linehaul systems to realize incremental operating expense savings in the future. Multiyear expansion of automated FedEx Ground facilities will allow continued profitable growth and provides the most flexible and fast as ground package system possible. We are also deploying new technology that will enable us to…

Thanks Fred. I'll open with our economic update and outlook and then I'll discuss performance and business conditions in each segment including revenue volume and yield and provide some commentary on pricing and broader industry trends that we’re experiencing. But first I’d like to take this opportunity to acknowledge our team members around the world who are delivering the holidays as we speak. As Fred noted, we've experienced record-breaking demand during this peak season largely driven by the rapid growth of e-commerce. Our busiest days during peak have exceeded our forecast and more than double our average daily volume and should be noted that our busiest days this year are approximately double what they were just about eight years ago. Our ability to flex our networks to meet this demand and while delivering service our customers expect requires many elements. We continue to invest in new facilities, capacity expansion. We apply advanced engineering and use state-of-the-art rotation technology. We innovate the portfolio and certainly collaborate very closely with our customers. But more than anything else, our ability to meet this demand comes down to our people including our drivers, couriers, pilots, package handlers and all team members that are hard at work around the world right now to deliver the holidays. Now let me make a few economic comments. We continue to see moderate growth in the global economy. Our U.S. GDP growth forecast is 2.4% as we encounter ‘15 which is slightly lower than our September 2.5% growth outlook. And our forecast for calendar ‘16 is 2.6% which is led by gains in consumer spending in the near-term. We expect industrial production growth to 1.5% in calendar ‘15 which is 40 basis points lower than our September outlook. And we have a forecast for 1.9% next year, which is…

Thank you, Mike. Good afternoon and happy holidays everyone. We had an outstanding quarter and we expect our solid earnings growth to continue in the second half of fiscal ‘16. We reaffirm our adjusted guidance for the year, $10.40 to $10.90 per share. Four highlights stand out to me. First, our adjusted EPS was up 19% for the second quarter. Second, adjusted operating margin for the quarter was 9.6%. Third, our FY16 guidance reflects nearly 20% growth at its midpoint. And fourth, cash flows from operating activities increased $300 million or 14% for the first half of FY16. I'm very proud of the entire FedEx team for its impressive efforts, which are continuing during this record peak season. Quarterly results improved largely due to higher base rates at Express and Ground, continued strong growth of e-commerce and positive impacts from the Profit Improvement Program that we announced in October of 2012 and as probably ahead of schedule at this point. These positive factors were partially offset by lower operating results at FedEx Freight, primarily due to salaries and employee benefits expense, significantly outpacing lower than anticipated volume growth and the modest negative net impact of fuel. There were two expense adjustments this quarter within eliminations, corporate and other expense. First expenses related to the settlement of independent contractor litigation matters of $25 million net of tax or $0.09 per diluted share. Also expenses related to our pending acquisition of TNT Express of $12 million net of tax or $0.04 per diluted share. TNT acquisition will transform FedEx as European offerings and accelerate global growth. We expect the acquisition will be completed in the first half of calendar 2016. Turning now to Express, another stellar quarter, operating margin grew to 9.4%, which is the best margin for Express in nearly nine…

Thank you. [Operator Instructions] And we will first go to Chris Wetherbee from Citi.

Hey. Great. Thanks and good afternoon. I wanted to touch, I guess, on the Express side and how it relates to the guidance. So weaker macro, maintained guidance and you’ve talked about some of the Express Profit Improvement Plan likely exceeding targets? Can you give us some context around that and sort of how you may think about the potential for fiscal ’16 and then maybe beyond?

This is Fred Smith speaking. I'll let Dave talk about it. Express’ margins are going up. They are going to continue to go up, absent macro economic or geopolitical events. As I said in my remarks that the Fleet Modernization Program is making a huge difference, Alan said in his remarks, the productivity because the technology is going up, the system from adjustments that Dave made in his network allow us to put the right traffic in the right network and as I said, Express is in a sweet spot.

Yeah. Thanks for the question and thanks, Fred. We are in a sweet spot and if you remember our Profit Improvement Plan was driven mostly by structural costs initiatives and not as much on the revenue. That being said, the revenue has been better. We've had better yield management. But again we've had a terrific performance in our fleet. The planes are flying at 99 plus reliability and the fuel saving has been great, and of course, the reliability is all around the world. That being said, of course, our productivity and we've right-sized our U.S. operations here throughout the United States. And really on the global basis the traffic that we are moving on the international economy basis, that's growing is very profitable for us now, because we have it in the right network. So, yes, we are very optimistic about our profit improvement going forward. It continues to increase the profits. It doesn't stop. Of course, I saw some of the comments earlier. It just continues to keep growing and increasing. And Fred is right, I mean, we had nine year high of our margins at Express and those will continue to grow as well with our profits.

And we will now go to Tom Wadewitz from UBS.

Yes. Good afternoon. Thanks for the question. If I could -- I don’t know if this is more for Alan or for Dave, but on the Express improvement plan, your -- I guess, it is less clear me, what the kind of metric are versus when you originally introduced the plan, you talked about it, I think, the 1.6 billion? And is that -- and I think that was at the end of fiscal year ‘17 within the base change a little bit related to the pension? So, could you just run through what the right, I think, both absolute amount you're considering to be the plan and then as is year end fiscal ’17 still the right timing on that, recognizing you'll improve on an ongoing basis, you will try to do that? Thank you.

Thanks, Tom. As I -- I think we’ve mentioned this before several times, but it’s important to mention it again. The 75% run out weight rate that we've captured, we captured at the end of last fiscal year. FY16 built on that. All five of the pillars are still the five that are producing the results. Quite frankly they're better in almost every category. You can go back and look at all the notes so you can call IR for the five pillars. But across the Board we are improving each one of the pillars. The one that we counted on the least was the global marketplace revenue and actually we've been better on that. All that being said, that was the one that we were worried about the most. We are doing very well there, because we planned it to be less than all of our cost initiatives. So I would say going forward, obviously, you can see in the numbers, we are having a great year in ’16 and that will continue into’17.

And we will now go to Nate Brochmann from William Blair.

Good evening and thanks for taking my question. Fred you started off like talking about obviously all the changes at e-commerce has brought and how that’s allowed you to redefine your network and serve your customers? As your customer supply change evolved, how have you been able to helped them and get deeper into that relationship and particularly how does GENCO helped with that?

Well, I will ask Mike Glenn to comment on it after I do, but a big part of e-commerce is handling returns. So some years ago as we saw the market evolving, we decided it would be a very, very good thing for us to have a supply chain capability to offer a broader portfolio of value-added services to our e-commerce customers, because this was a huge part of the marketplace. It wasn't just planning on how to get it to the end customer but how to efficiently process the returns and merchandise. So through quite frankly serendipitous chain of events, this great company GENCO, which was coincidentally in Pittsburgh and was by far the leader in this space in our opinion became available and we did a deal with Herb Shear, a gentleman and great management team that he has assembled. And so we think there are enormous energies there. I'll ask Mike and Henry to comment on it but we just couldn't be more pleased with GENCO being part of the FedEx portfolio and think it will enhance our competitive position and problem-solving ability for our e-commerce customers.

Hi Nate. This is Mike. I think it’s important to note that that our sales team has a solutions organization that works hand in glove with our large e-commerce customers to help optimize their supply chains and that includes everything from types of information management solutions to location of distribution facilities, selection services, all designed to drive value for those companies. And sometimes those solutions are good for FedEx in the short term, sometimes they are not so good for FedEx in short-term but they're always good for us in the long-term because we’re working with customers to drive solutions that are going to benefit the relationship between FedEx and the customer over the long haul. So we're well ingrained in and embedded into our largest customers and work with them hand in glove throughout the year to prepare for peak season and operations 12 months out of the year. GENCO was a significant addition to our portfolio. We recognized we had an opportunity to enhance the portfolio. As Fred noted, they have world class solutions in the return segment. Returns is a particularly big part of any e-commerce value proposition because they tend to be double digits whereas the traditional brick-and-mortar retailer is in the mid-to-lower digit return rate. So GENCO has been a tremendous addition to the portfolio. We’re well down the track on integration and we see a lot of benefit going forward.

I should note that GENCO does many things other than returns. And within their capabilities, they’re just outstanding in the market leader in the returns. Henry, you want to add anything?

No. The only thing I would add is their product footprint on the board, logistic side as well. So customers that want, for instance, fulfillment, GENCO could do. I think it’s important for the folks on the call to understand there are a lot of transportation segments between all of these nodes on the supply chain. And this gives us an opportunity to participate in that transportation whereas before we probably didn't get a chance.

And I’ll now turn the conference over to our speakers for any questions that may have come over the email.

Okay. We’ve got some questions over the internet. Ken Hoexter of Bank of America Merrill Lynch. Thoughts on Amazon creating its own network. Mike Glenn, you want to comment?

Yeah. Thanks Fred. I'm not quite sure how you're defining network but let me say that virtually every major retailer in the United States today has a dedicated linehaul operation to move inventory between distribution centers and stores and Amazon certainly no different in that regard. Amazon is a very large FedEx customer and we work closely with them as I just noted to optimize delivery needs and of course, work with them very closely to create new solutions to support the future growth. I do think it’s important to point out however that FedEx is a highly integrated global transportation network. In fact, one of only two operating at a significant scale in the United States today and only one of three major delivery networks in the U.S., the other two being UPS, the United States Postal Service. That’s not likely to change in the foreseeable future as these networks are very capital intensive and information intensive. And I think family, I think it’s important to note that our network is a lynchpin in the e-commerce market and our customers rely on us to sport their growth. So we feel quite comfortable where we’re situated -- comfortable where we situated today.

Okay. There are a couple of questions here from several Internet questionnaires about the update on TNT. I think we answered that in Alan's comments. We’re hopeful we’ll close by the first half of next year. I'll ask Chris Richards to put any color on that she wants. There is another regulatory question from Helane Becker about is there a concern, the fine levied by the French will be copied by other countries and are you considering an appeal, Chris?

Thank you, Fred. I’ll start with the update on the regulatory approvals of the TNT acquisition. As we indicated in our joint press release with TNT on October 20th, we have been informed by the European commission that no statement of objections will be issued to the review of our transaction. We are anticipating that we will receive final unconditional approval from the EU in the first two weeks of January. In addition, we have completed the process and received clearance in 10 other countries including the U.S., Australia, Chile, Colombia, Japan, New Zealand, Russia, Taiwan, Turkey and Ukraine. At this time, we are aggressively pursuing clearance in the remaining seven countries, Brazil, China, Argentina, Israel, Korea, Namibia and South Africa. And we are very confident that we will achieve the clearances that are necessary to close this transaction in the first half of calendar ‘16. Moving on to the question about the French proceeding. No there is not any concern of the fine levied by the French will be copied by other countries because this proceeding involved TATEX, a French company that we acquired in 2012 and the events that are the subject of this proceeding occurred in 2010, long before we acquired the business. The events were limited to France but despite that situation we are considering an appeal of this decision and will give you an update on it next quarter.

Jack Atkins of Stephens wants to know what the margin goals for the Ground segment are? He asked a couple of other questions here. But I think they were basically answered because they concern TNT and he’s interested to know Henry about the cost savings to be realized from the integration of SmartPost into FedEx brand?

The other significant savings when we can marry two packages together, the residential delivery because the vast majority of the cost in any of these networks is really around stopping the truck in front of an address. So when you can pull a package out of SmartPost, for instance, marry it up in single network with a FedEx home delivery package, the savings are quite a bit -- quite a bit that costs are quite a bit less than paying the postage on that package throughout the U.S. Postal Service delivery. There are a number of other advantages as well. One is, is that we can maximize the capacity between Ground and SmartPost from time to time and at times even geographically throughout the year we see volume spikes. This gives us the ability to move front since the SmartPost package into ground hubs, Throughout the year we see volume spikes, this gives us the ability to move upfront some of the SmartPost package into a Ground hubs, small store operation and process of their as opposed to centrally just bringing in more people at SmartPost to handle the added volume. There are number of other issues and just in the sense that we can share people now. We have effectively dissolved the corporate structures, so all of SmartPost people are either being deployed in their current jobs and the former SmartPost or within FedEx Ground.

[Operator Instructions] We’ll go to Allison Landry from Credit Suisse.

Thanks. So Fred, you mentioned early in your remarks that e-commerce customers continue to use an efficient packaging. And you’re continuing to see growth in oversized packages. So given that customer behavior is not changing, how do you plan to mitigate this going forward? And do you intend to lean more enterprising?

Well, the answer to that question is yes on the pricing and of course, we’ve already done some of that and we’ve announced more. That's really where dimensional pricing came from. I mean, we were getting lots of packages that were one or two cubic feet and inside was a six ounce stuff toy and that comes from the way e-commerce is processed there. These large fulfillment centers or perhaps not so large. But they're using a lot of effort, particularly during the holidays to speed up, order fulfillment and they put things in boxes and is quite different than say Procter & Gamble packaging toothpaste in the most efficient and most dense way to minimize transportation costs. So the reason is it continues quite frankly with more effort not put into it on the part of the e-tailers is the Postal Service doesn't have dimensional price. And I have to tell you, I feel for a lot of our postal folks out there. They operate their parcel delivery system with 200,000 jeeps, which were basically designed for mail delivery and watching them it looks like a submarine. These people are -- they got at least, packages on the left-hand side of the truck, they have to stop, they have to pull them out, resequence them before delivery and at my house, I can promise you we’re getting a lot of very lightweight cube items coming from retailers through SmartPost or directly from an e-tailer. So over time, all markets are rational and it does not make a lot of sense for the e-tailer or the transportation company or the delivery company in the case of the postal service to pay money to deliver air. So I think pricing will rationalize it. As I said in my remarks, it's just…

And our next question comes from Tom Kim from Goldman Sachs.

Hi. Good evening and thanks for your time. I wanted to follow-up on the Ground margin question. I’ve question I guess around the integration of SmartPost and GENCO. In the prepared remarks, you’d mentioned that operating margins had been impacted by about 1.2% or more. Is that including anyone off integration costs?

Well, this is Fred Smith speaking. Alan mentioned that of the Ground margin delta 2.1% out of I think 2.2% was having to report because of the integration of Ground and SmartPost, the revenues at the gross level versus the net level. Prior to our doing that, we simply took the net cost of the postal deliveries and excuse me, the delta between the postal delivery cost and in our revenues, as a single network the accounting rules are such we had to take it on a gross basis. So there's no diminution whatsoever in earnings, cash flows, the performance of ground, it’s just an accounting situation. The second is the fact that we put GENCO into the Ground segment and Henry is in charge of this because it is so closely aligned with the Ground parcel SmartPost presence in the e-commerce market. Now again, as Henry said, GENCO does many, many other things for Express and freight and so forth. But we're very confident in our Ground margins and Henry want to add to this and say it one more time what our goals are here.

Yeah. We strive for mid-teens margins at FedEx Ground. There is no discernible integration costs in there at all. I mean this is roughly 10 basis points frankly falls into all other. There was no single large item. You got to keep in mind with the company of this size and the fact that we recognize revenue on delivery not on pickup, having a couple thousand packages move in or out over quarter and have a huge bearing on operating profit.

Our next question comes from Scott Schneeberger from Oppenheimer.

Thanks very much. Good afternoon. I was curious, could you address the Transpacific and perhaps Transatlantic, trade lanes. How they progressed through the quarter? What you’re seeing into the coming quarter and also with consideration for capacity? Thank you.

Yeah. This is Dave Bronczek. I think I heard your question Transpacific, Transatlantic. It’s generally the same economic environment that Mike talked about at beginning around the world. It's growing but it’s more modest. So I wouldn't say -- I think it is actually growing more out of Europe because of the currency exchange, a little bit less out of Asia but around the world we’ve balanced our network. So for us in Mike's comments, we’ve took that into consideration as to where we put our packages and how we flow our network.

Our next question comes from Rob Salmon from Deutsche Bank.

Hey, thanks and good evening. I guess, continuing on the Ground line of questions? Can you give us a sense of what drove the acceleration in the average daily package volume growth? Was this -- was a lot of -- as a result of the GENCO acquisition, we are starting to sees some of those revenue synergies showing up? How much of an impact was the calendar and if there were any shifts coming out of Express’ U.S. deferred volumes which declined for the first time in a few years? It would be helpful to kind of understand the different puts and takes there?

The volumes at Ground are growing because we are taking market share and because e-commerce, the delivery of individual packages to businesses and retailers is growing. And on the -- what was the Express deferred, do you want to comment on that Mike?

Yeah. I wouldn't read too much in the Express deferred traffic levels on a trend basis. Again, is similar to what Henry noted, specific pricing decisions on a customer by customer basis can impact volumes in any quarter. And so I wouldn't read too much into that. I mean, we are pretty pleased with where we sit from an Express volume standpoint, being up overall with the growth coming in overnight that that's a positive thing for us.

And I will now turn the conference over to our speakers for more e-mail questions.

Okay. We have some other internet questions here. Kelly Dougherty, Macquarie. How does a greater unpredictability of online sales challenge impact your year-out-year planning projections? Well, let me make a couple of comments here and then ask Mike to jump in or Alan. As we mentioned earlier, we have this enormous sales group, which I've unabashedly think is the best in the Industrial Services sector and as an integral part of that we have this wonderful solutions group. So our good customers that work with us in a partnership basis we can do an excellent job of anticipating what their needs are and provide the equipment in the right place and the sortation equipment. The people that have the real problem in the e-commerce business by and large are those that view the transportation companies as some sort of utility or a vendor and they make some really, really bad decisions. I mean, they are -- we’ve just watched an amazement several of them just really dig themselves into a whole. But our good customers, we work very closely with them. Now despite all of the best efforts, despite that, sometimes they grow faster and sometimes they grow in different places because of their customers, I mentioned in the Northeast, the demand was just extraordinary. However, FedEx Ground is very unique in this regard. Our hubs and those you have been in them you'll know this, they're essentially completely automated. So what that means is that if we're over volume in our New Jersey hub, we can divert that traffic to Hagerstown, Maryland or into Pennsylvania and sorted in a different timeframe, but we are not reliant on the manning inside the hub, because really the only labor that's at the location are the people that offload the trucks and the people that reload the trucks. And we've been talking about this over and over over the years and I don't think that a lot of people understand the profundity of that automation and that flexibility we have. It’s a big competitive advantage. It allows us to use bigger problems with more direct routings, which is a big part of our 27% day faster situation. So that's how we do it as we try to work with our customers and I have to tell you there are a lot of our midsize customers that it is very clear that they are figuring out this e-commerce, what they are doing some very, very smart things and creative things. And I think, in part that's why the market is growing as much as it is. Mike, you and Henry want to amplify that.

Well, I just want to add that, I think, it's important to note that peak season is a very highly planned period of time. I mean we literally will start working with customers in late January, preparing for next peak season. The second point is we’re not going to over commit to traffic levels that we can't handle in our network. In other words, we understand what the capacity is on a given day and our operating companies do a tremendous job flexing up capacity. But as we've noted many times on this call, we have to cap certain customers to make sure that that we're providing the service that meets the customer expectations. In addition to that, we have a team that essentially is conducting an orchestra for about one month out of the year and they have essentially a control tower that has minute by minute discussions with the operating companies, which are making changes to inputs that we received from our customers, which allowing -- allow us to deploy our resources and adjust the changes in demand both up and down. So as we say in the South this is not our first rodeo and we've been doing this for awhile and I think we have got a pretty good business model here and we've demonstrated that works well in terms of meeting customer expectations.

Yeah. This is Henry Maier. I'd just like to add to this question a couple things. First of all, Fred mentioned the 33 fully automated hubs we have. The second thing I would add is that we currently operates 49 fully automated satellites as well, which gave us -- which give us enormous flexibility in being able offload volume from hubs to these automated satellites and vice versa. They also provide a bit of a relief if you will for diverting volume away from hubs and being able to sort it and move it direct. The biggest reason why we are successful as we are and at peak, and we see the surges in volume is simply FedEx people. We have the greatest group of people of any company I believe in the world. We add in the yeoman effort of our contracted service providers and the dedication and professionalism, the commitment to quality and just playing innovation to being able to adapt on-the-fly. I can tell you it, for somebody who sits in my chair it's nothing short of an inspirational. And I think that's the secret sauce here which allows us to be able to handle the unpredictability of online sales.

David Ross asked will the price of oil if it's lower for longer help or hurt Express? You know on the margin, the elasticity will certainly create more Express demand and on the margin it might be a bit more priority versus economy. But the markets for Express and increasingly the door-to-door International Express are built on customer needs and purchases. So if you need a defibrillator for an operation tomorrow at the Cleveland Hospital, you do not want that defibrillator stuck and a package be a truck with a bunch of toys and that is why our Express network is focused on these high-value added type of products and high-value added products are sold around the world in global markets. And finally, what’s really exciting is increasingly they're being sold door-to-door on an e-commerce basis. One customer that has the entire wares of the world for a business or a consumer, and that is going to be a very big market and it's where the Express Intercontinental Network is focused. So on the margin, yes it will have some effect, but not as much. I think as the fact that people use Express and Global Express when they have an urgent need to move something in one to two business days door to door. David Vernon of Bernstein asked, has FedEx detail the cost-benefit opportunities and costs associated with the TNT acquisition? And does the company intend to provide guidance on these items at any point prior to their incorporation and the results what we learn as we go as we have GENCO. I’ll answer the first and ask Alan to comment on the guidance issue. The answer to the first part of the question is of course we have detailed plan. We did an in-depth strategic business case as we do for any potential acquisition, which was studied in great detail. We have a very, very good integration process that’s run through a formal process headed up by Alan and Bob Henning on the financial side and Dave Bronczek and David Cunningham and David Banks, our President of Europe, on their side. And this is a process -- a template that we use on all our acquisitions. The acquisition, of course, was presented to the FedEx Board of Directors and it is in great detail. Now obviously, based on imperfect knowledge and changing economic circumstances as you get in deeper and you understand things, things will change but we’re already far enough into it. Although we are still not able to completely get into details because we don’t have approvals to know that this is going to be just a terrific fit. And we love the team members over there. And I think they love being part of FedEx prospectively. So Alan on the guidance, you want to comment?

We have a very detailed integration planning going underway right now that I'm very excited about. First of all, they're executing on our outlook strategy. We agree with that. We've been supportive of that. And they have been successful in that regard. Secondarily the integration teams have great details to the extent we’re permitted to talk about, that is on what’s going to happen on day one, what’s going to happen on next 100 days, in year one, two et cetera. I can tell you that the people that we’re working with are terrific. There are many, many opportunities that are equal to or greater than I thought when we build the strategic business case. Having said that, I would also tell you that the integration is going to take some time and is not easy to do. There are tax structural and accounting issues to deal with. There are IT issues, there’s rationalizing the lanes, all the things you can think of. We've got every one of those being worked on. We can't talk to their customers. They can’t talk to ours. We can talk about pricing and of course that’s where some of the big numbers are. But what I'm seeing so far is I’m very pleased with it. As I said day one, we are not going to see big synergies financially until fiscal ‘18. Fiscal ‘17 is going to be a year of getting our hands around some of these very tough issues and making sure that we don't do any harm. The business continuity is there that the customers are taking care of and that we don't miss a beat from service level. So it's not easy but I think the reward is going to be fabulous.

So let me combine two questions here into one answer because I think this is an important issue. First part of it comes from Allison Landry at Credit Suisse. Have you seen any shift changes in the marketplace with respect to UPS’ acquisition of Coyote in terms of handling the peak season? And on the same line of thinking, David Vernon, as does the transition to the ISP model at ground increase the risk of these larger contracting entities are harder to handle or deal with in essence? Well, a couple of things here. First of all, we already have a truck brokerage, and transportation management unit inside FedEx and have had for quite some sometime. But much more importantly, I think it's a misunderstanding of the FedEx Ground business model because the very reason we have these small businesses providing our highway and pickup and delivery capabilities is that they are very, very close to the market, very close to the to the customers, very close to the understanding of the roads and geographic areas that they serve. So by design, we want small business people who have those characteristics and are very, very entrepreneurial and we do not have many contract service providers that have over 7 to 10 trucks. I mean that would be a very big one. And if you start going beyond that, you lose that tactile entrepreneurial feel. And the thing I love about it and I'm most proud about the ground thing is these are entrepreneurs and they do very well if they're good business people and it's just really fun to watch them. I hated that when we bought RPS, the single route contractor, you watch these young folks and minorities and everything start off and get an area and build themselves a wonderful life. And then because of all of this litigation and the plaintiffs’ attorneys and the state tax people and all that, we've had to move to the point where you have to have a minimal level vehicles and be incorporated. To be that as it may, we still retain the best of both worlds. And in fact, it's probably much more productive based on our experience to have the somewhat larger unit. So for all intention purposes, I will stay with this business model and that's not going to change. So we don't need the same number of purchased transportation tractors and trailers that UPS does. And so I think it was probably smart for them to get Coyote. I'm not sure that it would be smart for FedEx. And Henry wants to jump in here.

Well, I think it’s -- I would echo everything Fred said. I think it’s important for the folks on the phone to understand that we provide some peak incentives so that both our PND contractors and over-the-road contractors bring on the necessary resources within their business to handle our projected peak volumes. That just gives us unbelievable flexibility particularly when business spikes et cetera. I would add that the way you need to think about them as they are coin-operated. They are entrepreneurs. They respond very well to the opportunity to earn more revenue for their businesses and they step up every single year.

So in essence, we have a huge truck brokerage capability through our highway contract service providers. They get tractors and are able to put this power on much better in the geographic area than a centralized brokerage system for us. However, again we have a wonderful truck brokerage and transportation management capability for our supply chain customers and to help with purchased transportation where we get it. Let me take one more from the Internet and then we’ll take a few from the telephone. Again this is Allison Landry of Credit Suisse. Have you seen a contraction in domestic B2B? The answer to the question is no.

And thank you for those email questions. We’ll now take a few questions over the phone line. And we will go to Scott Group from Wolfe Research.

Hey. Thanks. Afternoon guys. So just wanted to follow up on the question earlier about Ground volume growth and maybe little bit about seasonality. So nice acceleration and volume growth to 9% in the second quarter. Is this continuing in the third quarter? I’m just wondering if there's any impact of Cyber Monday which was in 2Q this year and I think in third quarter last year. So, Alan, how does that impact the seasonality of earnings? And I know you made some comments about third quarter, fourth quarter, can you just clarify what your point was there?

Well, this is Mike Glenn. And let me say, just reiterate the remarks we made earlier. I mean we’re off to a strong start in our peak season. As Fred said, we picked up over 26 million packages on Monday. We've exceeded our forecast for our peak days in the month of December and what January, February holds, we'll just have to wait and see. We don't forecast volumes for upcoming quarters. But we're very happy with where we are based on the start to peak season.

We don't forecast them for you. We forecast them internally. Henry and Alan want to way in on this.

Scott, this is Alan. One of the reasons that I’ve taken up my guidance for you on Ground CapEx is not just the -- by the way, fairly stellar increases in land acquisitions and material handling costs and that's all got to do with e-commerce. That’s also because Grounds going to continue to grow. What we can do and I’m a good Missouri Lutheran, so I can say this, we can’t build the Church for Easter. So part of what we’re doing about yield management and everything else is we've got to get these packages little bit smaller or we’ve got to get paid for the space they’re using. We can’t have a lot of excess capacity lying around the other 11 months of the year and we’re not going to do that. Henry is working his people everyday of the week, we’re open 24x7 for this entire peak season, competitions not doing that and that’s made a big difference for us.

Scott, this is Henry Maier. I’ll be a little bit more to the point. I’ve been around here for a lot of peaks. This is without a doubt the busiest one I’ve ever seen. And it is been consistent every single day since 11.30 and there's no sign it’s going to led up. So that’s where we are. Our people are stepping up to the task. Our network is doing -- is performing exactly the way it’s designed. If we didn’t have these automated hubs and automated satellites and the great people, I think we’d be much different shape than we are today.

Let me just state again what I said in my opening remarks here. We think we have very, very good strategic plans and an in-depth knowledge of this market better or at least as good as any entity on the planet. And we have very, very creative concepts to make our assets sweat more and be able to process more packages in all of our networks. And that's why we were so forthright in saying that we expect this to continue absent macro-economic or geopolitical events. And let me say it again, we continue to increase margins, earnings per share, cash flows and returns on invested capital, and we are confident these basic trend should continue well into the future, barring major events or macro-economic factors. Now having said that, I know it's very important for all you folks on the call, sometimes we are off 1% or 2% in the quarter. This is a big, big enterprise. We can pick up, transport and deliver to virtually any address in one to two business days to 90 some odd percent of the global population. That takes incredible networks. Henry Maier's network at Ground has 550 facilities. David Bronczek has 600 FedEx Express stations, which are very different in the way they're designed that just in the U.S. They're very different in the way they’re designed because they're designed to interface with airplanes, not with 28 or hopefully someday 33-foot hub. Mike Ducker’s FedEx Freight is very different and as I told you, these automated hubs that Henry is operating are some of the most incredible facilities ever put on the planet. So this is a very big complex business with an enormous amount of value add. And so we can’t get it within 1% or 2% sometimes, but directionally, we’re very confident that we will continue to achieve those things that I just said, increasing margins, earnings and cash flow and ROIC.

Thank you. We’ll now go to Alex Vecchio from Morgan Stanley.

Good evening and thanks for taking the question. This might be best suited for Chris. Can you just provide just a little bit more color and background on the independent contractor litigation cost at Ground in the quarter, the extent to which we might see litigation expenses going forward related to any lawsuit outstanding. And maybe the overall defense ability of the independent contractor model that you employ. I realize you guys have made some changes there with respect to requesting that the contractors incorporate. But maybe we can just get a recap of the model and the litigation expenses this quarter? Thank you.

Yes. Alex, I'll try to give you some insight on this. First of all, all of the litigation involved the Ground contractor model that was being operated in the early 2000. And we have made significant changes as you know, both requiring incorporation but also requiring that every contractor treat all of their folks as employees and they provide a complete compliant program including workers compensation, unemployment compensation and all the other matters that are required by the various states to ensure that the folks are comfortable. But these are in fact, independent businesses running under their own direction and guidance. We have had some litigation that has not been as positive for us, particularly out in the Ninth Circuit. For those of you, who are familiar with the Ninth Circuit, it is a very tough Circuit for business operation. They tend to be very difficult in their analysis of what constitutes an employee. And so we have had some settlements from cases where we had adverse decisions in the Ninth Circuit. That being said, we have had positive decisions in the First Circuit and in some other Circuits and we still have the bulk of the cases being held at the Seventh Circuit where we are awaiting a briefing and hearing schedule. We do opportunistically settled these lawsuits if we get in a situation where we can do that to resolve the issues and move things forward. You need to keep in mind that in most of these instances, the bulk of the people who are involved in this litigation have moved on and are not contractors any more. So this is really in our rearview mirror and while it's my job to make sure we get through it on a satisfactory basis, we are extremely confident in our independent service provider model and are all incorporated model that we are operating today.

Thank you. Our next question will come from Brandon Oglenski from Barclays.

Yeah. Good afternoon, everyone. Thanks for taking my question and congrats on good results in a very difficult economy. So Fred or Mike, I think for an analyst, it’s been covered in for a long time. If we knew where ISM is going to be, an IP be negative, we would have thought a lot of earnings contraction here for the company because you just historically had a lot of exposure to the industrial economy. So what do you think has decoupled here that’s allowing you actually to get close to 20% growth if you hit the guidance this year? And what otherwise is a very slow growth or even contracting industrial macro backdrop?

Hey, Brandon. This is Alan. We’ve been working for a very long period of time with profit improvement program and all the things that are involved in that are preparing for the very situation that we’re in. We have significantly reduced our capacity but it's significantly more fuel and maintenance pilot efficient and more reliable and we have a network that’s running pretty tight. Having said that, we’ve got a lot of growth for IP to continue to grow and move lower yielding products off that backbone network that we flying internationally. Productivity that we’re seeing in the field with our technology and automation improvements at Express are yielding tremendous thing. I mean, its essentially we’re doing exactly what we told you we were going to do in October 2012 and we’re learning as we go. And we’ve got a lot more room to do that. I’m going to pass it over to Dave Bronczek.

Yeah. This is Dave. Alan’s right. I mean and if you remember what I said at the beginning, we structured our network to flex up and to flex down. And we would win on either side of that equation. And quite frankly, we’re not flexing down much anymore because the economy is pretty robust for us. International economy is growing and IP is still 72% or more of my all up revenue for international. So it's significant, its high yield. So when we actually can flex up or down when we win, we're in a really good spot, so that’s international network, couple that with the U.S. network and the Asia to the U.S. and U.S. back that's why you're seeing such high margins and profits from Express.

Bear in mind also we have a huge outbound market share and Express for the United States. So the dollar exchange ratio means that our outbound is affected much more than our inbound. And I think Dave mentioned earlier our European to the U.S. traffic is substantially up and our Asia to the U.S. traffic is it's short of flattish but it's not declining. And the real pony in here again is e-commerce and you're starting to see these patterns where people are shipping individual items door-to-door because they can now with the software that we're putting out there and others, they can see what the landed cost is and what the duties and taxes are. So it’s a sea change. It’s the same thing that's driving e-commerce in United States but is more industrial because their business products in domain and to some degree individual consumer B2C as well. There is international question about FedEx Trade Networks. It's an integral part of the Express segment. The quest is to comment on them. Only forwarding industry, I don't think it's appropriate for us to do that but it’s an integral part of the value proposition that Dave offers and the Express system is essentially focused on door-to-door express. There are some freight that moves through that network. We’re capable of flying extra sections of customers needed, particularly at peak and then FTN handles the cargo, the freight and heavy consolidation. So our FTN network which we built from scratch is a perfect complement for our customers to our Express network.

And we’ll now go to Kevin Sterling from BB&T Capital Markets.

Thank you. Good evening. Alan, in your prepared remarks, you briefly mentioned a Monday residential trial run. You are trying in certain cities. Could you expand on that a little bit? What exactly you guys are doing there, kind of, some of the successes you’re having and I’d imagine, it’s trying to increase stop density if you will. So maybe you can expand on that trial run little bit with Monday residential deliveries?

Yeah. This is Smith here. Let me turn it over to Henry because he can give you some detail and Alan wanted Henry to answer this. But our home delivery network was set up to deliver Tuesday through Saturday and remembers a few minutes ago, about we have lots of concepts based on the growth of e-commerce, how to make our assets sweat more, how do we move more traffic, deliver more traffic with the same assets. So Henry has begun to deliver six days a week, not just five days a week. Now B2B has always been different than the B2C. So why don’t you give some color around that, Henry?

Yeah. Since its inception, FedEx home delivery delivered Tuesday through Saturday, which means we've essentially deliver Monday’s volume the previous Saturday. And with the advent of e-commerce, I mean, it’s a 24x7 market, you can buy things online from your phone anytime at the day or night. The way we are able to flex up our capacity at peak every year as we essentially operate a Monday through Saturday network and we run hubs on Sundays so that we can advance -- we can pick up volume into the network, so that we can smooth the huge peaks and valleys during peak throughout the six days of the week. It's occurred to us some number of years ago that why don't we just operate that way year round. With e-commerce, Monday is tends to be fairly heavy pickup days anyhow. Why not begin working that volume on the weekend rather than on Monday. Deliver the volume on Monday and then operate the network six days a week year round. The benefits of that are obvious. The first is, is that on residential service side, we essentially advanced roughly 20% of the volume in the network by whole day, so the customer gets to the day sooner than they would have been. The other thing is it gives us the ability to smooth the volume, which means that we can operate our fixed network more efficiently throughout the week and by smoothen the capacity we frankly don't need as much of it as we had in years past. And we’ve tried we -- as Fred and Alan mentioned here, we've had a pilot running since roughly May of this year. I would say it’s a success. We are currently studying where we roll it out next.

Our next question comes from Ken Hoexter from Merrill Lynch.

Hey. Good evening. Just a quickly on the other operating loss, it increased $212 million? Can you kind of delve into what scale that up?

Well, it had a pension credit unit from mark-to-market accounting really in our K and if you want lot more detail, we will be happy to take that offline.

Okay. That’s the end of the call. Thank you for participating in FedEx Corporation second quarter earnings release conference call. Feel free to call anyone on the Investor Relations team if you have any additional questions about FedEx. Thank you very much.

This concludes today’s presentation. Thank you for your participation.