RWB - FDX Analyst Report

FedEx Corporation, headquartered in Memphis, TN, is a $43 billion provider of

global transportation and logistics. Primary offerings in domestic and

international parcel and less-than-truckload.

Retain Outperform rating. F2Q13 results roughly in line with consensus; and

F3Q13/F2013 outlook consistent with expectations. Our F2013 estimates are

unchanged; but raising F2014 estimates and price target on signs of stabilizing AF

volumes. Remain buyers for three reasons: increased clarity to inflection in industry

fundamentals a catalyst for FDX; multi-year EBIT improvement initiative provides

company-specific Express margin catalyst; and valuation disparity to UPS can

narrow this cycle into signs of improving cash flow and capital returns.

■ Solid F2Q13 EPS. EPS of $1.39 (-12% yoy) within guidance of $1.30-1.45 and

our $1.41 consensus-matching estimate. Results include $0.11 negative impact

from superstorm Sandy (reduced shipment volumes, incremental operating

costs).

■ F3Q13 guidance consistent with our expectations; full-year outlook

reaffirmed. F3Q13 EPS guidance of $1.25-1.45 below recent $1.45 consensus

but within our unchanged $1.33 estimate. Full-year F2013 guidance of

$6.20-6.60 reaffirmed ($6.41 consensus).

■ F2Q13 highlights include:

- Express pressured, but AF trends stabilizing... Macroeconomic weakness

and service trade-down by customers remained Express EBIT margin

headwinds (-180 bps yoy). But, November industry airfreight data and +6% yoy

F2Q13 International Express volume growth potentially early signs of stabilizing

AF trends.

- ...and multi-year EBIT improvement initiative on track. Management

remains confident in its $1.7 billion EBIT improvement target by F2016,

outlined in October. FDX expects to incur $550-650 million in pretax voluntary

employee buyout expenses beginning F4Q13; and savings from buyouts

expected to produce net benefit in F2014.

- Ground/Freight results stable. Ground revenue growth solid; but network

expansion costs, fuel surcharge lag and superstorm Sandy impacts pressured

margins (-110 bps yoy). Freight EBIT results solid (margins +250 bps yoy),

benefiting from efficiency initiatives, pricing and tonnage growth despite storm

impacts.

■ F2013 estimates unchanged; raising F2014 estimates and price target.

Raising our F2014 estimates (to $7.77 versus recent $7.82 consensus) given

improving clarity to stabilizing fundamentals. Raising price target to $112 (13.1x

forward EPS, one year out; 5.6x EV/forward EBITDA).

■ We remain buyers of FDX for three reasons: International airfreight

fundamentals appear to be bottoming; inflection creates a potential catalyst for

FDX; multi-year EBIT improvement initiative on track, adding a company-specific

"self-help" catalyst to FDX this cycle; and FDX's valuation disparity (48%

EV/EBITDA discount to UPS versus 10-year 32% average discount) could

narrow into FDX's improved cash flow and capital discipline this cycle.

December 19, 2012 Baird Equity ResearchTransportation/Logistics

FedEx Corporation (FDX)Remain Buyers Into Potential AF Volume Inflection, "Self-Help" Catalysts

Benjamin J. Hartford, CFA

[email protected]

414.765.3752

Kenton Moorhead

[email protected]

414.298.1864

Jack Smith

[email protected]

414.298.5277

[Please refer to Appendix- Important Disclosuresand Analyst Certification]

RAISING PRICE TARGET

1-Year Price Chart

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Stock Data

Rating: Outperform

Suitability: Average Risk

Price Target/Previous: $112/$105

Price (12/19/12): $93.20

Market Cap (mil): $29,377

Shares Out (mil): 315.2

Average Daily Vol (mil): 2.28

Dividend Yield: 0.6%

Estimates

FY May 2013E 2014E 2015E

Q1 1.45 A

Q2 1.39 A

Q3 1.33 E

Q4 2.11 E

Fiscal EPS 6.28 E 7.77 E 9.45 E

Previous (FY) 6.30 E 7.49 E

Fiscal P/E 14.8x 12.0x 9.9x

Calendar EPS 7.18 E 8.70 E

Previous (CY) 6.97 E 8.60 E

Calendar P/E 13.0x 10.7x

Chart/Table Sources: Bloomberg and Baird Data

Details

We remain buyers of FDX at current levels for investors seeking large-cap cyclical exposure. FDX

has modestly underperformed the broader market (S&P 500 Index) by 150 bps year-to-date; however,

the stock has outperformed the market by 390 bps since its early-October investor day. Our positive

outlook on the stock remains unchanged from our opinion following FDX’s October investor day and

we retain our Outperform rating on FDX for the following reasons:

■ International airfreight fundamentals stabilizing; inflection a potential catalyst for FDX.

International Export Express daily volumes were +6% yoy in F2Q13, with International Priority +3%

(from -2% yoy in F1Q13) and International Economy +14%. The ongoing disparity between IP and

IE growth rates highlights continued trade down to lower-yielding services, which has been noted

throughout C2012 by FDX and broader transports exposed to international airfreight. However,

consistent with our recent commentary and channel checks, airfreight out of Asia/Pacific region was

healthy, supported by high-tech product releases during F2Q. FDX also noted volume growth out of

Europe was positive. As Figure 1 highlights below, recent broader industry metrics and FDX results

reflected signs of stabilization in November/F2Q13.

FIGURE 1: FDX IP VOLUMES VS. HONG KONG EXPORTS AND IATA

Source: Company data, HACTL, International Air Transportation Association, Baird estimates

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■ $1.7 billion EBIT improvement initiative on track, adding a “self-help” component to FDX’s

story this cycle. Though international airfreight fundamentals appear to be stabilizing, we note that

no clear sign of a recovery has materialized yet, which leaves us patient on names with broader

international airfreight exposure. However, FDX’s ongoing profit improvement initiatives, largely

targeted in Express and announced in detail at its October 2012 investor day, provide a

company-specific “self-help” catalyst to FDX. As Figure 2 below highlights, FDX’s relative stock

performance historically correlates with its domestic Express network utilization. Though we

acknowledge the secular trade-down pressure from premium-priced Express packages to slower,

lower-yielding Express and Ground modes, we believe the combination of bottoming fundamentals,

FDX’s domestic network transformation and other EBIT improvement initiatives support an

inflection in domestic Express network utilization this cycle, a potential catalyst for the stock.

December 19, 2012 | FedEx Corporation

2Robert W. Baird & Co.

FIGURE 2: FDX STOCK PERFORMANCE RELATIVE TO S&P 500 VS. CAPACITY UTILIZATION

Source: FactSet, US Bureau of Transportation Statistics

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■ Valuation disparity to UPS can narrow this cycle given FDX’s leverage to a cyclical recovery

and an improved margin/cash flow profile. UPS has consistently generated more stable earnings

results, owing in part to its lower Express revenue exposure; roughly 36% of UPS’ 2012 revenue is

generated from Express services, well below FDX’s 56%. Additionally, UPS has had more capital

discipline, reflected in superior free cash flow generation (UPS’ 6% unlevered 2012 free cash flow

yield vs. FDX’s 3.5%) and capital returns (UPS’ five-year average ROC of 19.1% vs. FDX’s 9.1%).

However, we believe FDX is at or near an inflection point in both operating results and capital

discipline. A primary byproduct of FDX’s EBIT improvement initiatives should be improved cash

flow generation and capital returns over the course of the upcoming cycle. FDX currently trades at a

48% discount to UPS on an EV/LTM EBITDA multiple, a discount greater than its average 32%

discount over the prior 10 years. We believe that not only can FDX’s discount from current levels

revert to its mean, but its multiple discount can narrow this cycle versus its 10-year average into

demonstrated improvement in capital discipline. Figure 3 highlights FDX and UPS' 10-year

EV/EBITDA and FDX's multiple discount to UPS over the past 10 years.



FIGURE 3: FDX AND UPS EV/EBITDA COMPARISON

Source: Factset, Baird estimates

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Read-through to the broader transports. We believe two key themes emerged from FDX’s F2Q13

result and subsequent follow-through in the stock (+0.9% vs. -0.8% S&P 500 Index).

1) Continued evidence of bottoming international airfreight fundamentals should support sentiment for

UPS and international freight forwarders EXPD and UTIW. FDX’s constructive commentary about

recent international airfreight trends, particularly out of Asia, is consistent with recent commentary from

our contacts. November international airfreight trends were generally above seasonal, though we note

that November’s performance comes on the heels of five consecutive months of below-seasonal

airfreight demand. However, stabilizing demand in December and into 1Q13 support the view that

industry fundamentals have bottomed, and growth comparisons ease in C2013. Though we look for

follow-through of stable/improving AF demand trends in December and into 1Q13 before becoming

more constructive on transports with international airfreight exposure, we acknowledge signs of

bottoming are forming.

2) More broadly, 4Q12 reporting can be a potential positive catalyst for transports into low investor

sentiment. We have been highlighting generally low investor sentiment in the group over the past

several months, reflected in valuations near cyclical lows for FDX/UPS and the asset-based truckers,

and two-year stock underperformance in the group into decelerating industry growth trends. As an

example, the Dow Jones Transportation Average has underperformed the broader S&P 500 Index by

9% over the past two years; over the same period, FDX has underperformed by 13%, UPS has

underperformed by 10%, and the asset-based truckload group has underperformed by 28%. However,

FDX’s roughly in-line F2Q13 outlook (into investor expectations for downside) and an in-line

F3Q13/F2013 outlook supported a +0.9% move in FDX (versus -0.8% S&P 500 Index). We believe

similar performances during 4Q12 reporting (in-line quarters and reaffirmed outlooks) can support

upside for broader transports given improving investor sentiment and positioning ahead of a potential

inflection in industry growth trends.



FedEx Corp. (FDX--NYSE)

Quarterly Results and Variance Sheet

Quarterly Results Percent of Revenue

($ in millions) F2Q13 F2Q12 Chg BAIRD Variance F2Q13 F2Q12 BAIRD

Total Revenue 11,107 10,587 5% 10,805 3%

Salaries & Benefits 4,133 3,982 4% 4,137 0% 37.2% 37.6% 38.3%

Purchased Transpo 1,860 1,576 18% 1,668 11% 16.7% 14.9% 15.4%

Rental & Landing Fees 630 623 1% 632 0% 5.7% 5.9% 5.8%

Fuel 1,235 1,200 3% 1,160 6% 11.1% 11.3% 10.7%

Maintenance & Repair 511 511 0% 511 0% 4.6% 4.8% 4.7%

Other 1,428 1,397 2% 1,393 2% 12.9% 13.2% 12.9%

D&A 592 518 14% 577 3% 5.3% 4.9% 5.3%

Operating Expenses 10,389 9,807 6% 10,078 3% 93.5% 92.6% 93.3%

Operating Income 718 780 -8% 727 -1% 6.5% 7.4% 6.7%

Pre-Tax Income 692 777 -11% 708 -2%

Income Tax Rate 36.7% 36.0% 36.9%

Net Income 438 497 -12% 447 -2% 3.9% 4.7% 4.1%

EPS $1.39 $1.57 -12% $1.41 -1%

Consensus $1.41

Diluted Shares 315 316 0% 317 -1%

Segment Results Percent of Revenue

F2Q13 F2Q12 Chg BAIRD Variance F2Q13 F2Q12 BAIRD

FedEx Express 6,858 6,583 4% 6,581 4% 62% 62% 61%

FedEx Ground 2,593 2,339 11% 2,513 3% 23% 22% 23%

FedEx Freight 1,377 1,325 4% 1,397 -1% 12% 13% 13%

FedEx Services 405 427 -5% 404 0% 4% 4% 4%

Total Revenue 11,107 10,587 5% 10,805 3% 100% 100% 100%

FedEx Express 230 342 -33% 244 -6% 3.4% 5.2% 3.7%

FedEx Ground 412 398 4% 427 -4% 15.9% 17.0% 17.0%

FedEx Freight 76 40 90% 55 38% 5.5% 3.0% 3.9%

Operating Income 718 780 -8% 727 -1% 6.5% 7.4% 6.7%

Source: Company reports, Baird estimates

Detailed Review of F2Q Results

EPS of $1.39 (-12% yoy) compares to guidance of $1.30-1.45 and our consensus matching of $1.41.

Overall revenue grew 5% yoy with Express +4%, Ground +11%, and Freight +4%. EBIT margin

contracted by 90 bps yoy to 6.5% impacted in part by superstorm Sandy related costs and compares

to our 6.7% expectation, with better-than-expected margins in Ground and Freight. Full-year F2013

guidance was reaffirmed at $6.20-6.60, with the new midpoint -3% yoy; compares to recent $1.41

consensus. However, guidance does not include $1.09-1.29 impact from expected pretax costs for

voluntary employee buyouts. F3Q13 guidance of $1.25-1.45 compares to $1.45 consensus; midpoint

-13% yoy.

Express (62% of F12 revenue, 41% of F12 EBIT)

F2Q13 Express revenue was $6.9 billion (+4% yoy) as positive international volume offset lower fuel

surcharges and negative mix. Express EBIT declined 33% yoy to $230 million (from $342 million in

F2Q12) as EBIT margin contracted 180 bps yoy to 3.4%, impacted by mix of lower yielding packages,

net fuel surcharge expense, superstorm Sandy, higher depreciation and pension expense. Demand

shift to lower-yielding international services continued to negatively impact margins as International

Priority volume growth of 3% yoy was outpaced by 14% growth in International Economy volumes.

FDX remains focused on improving margins and ROIC within Express, with continued progress toward

Domestic Express network optimization.

Looking forward, FDX expects a slower growth economic environment to continue. That said, FDX

remains focused on organically growing its footprint abroad supplemented by smaller tuck-in



acquisitions, as evidenced by three acquisitions in 2012 (Opek, TATEX, Rapidao Cometa). FDX’s

long-term strategy remains focused on adding newer, more fuel efficient aircraft. Management remains

focused on progress toward double-digit margins (10%+), with pending network reengineering and a

better macroeconomic environment supportive of this effort.

International Express (20% of revenue)

Total International Express F2Q13 revenue grew 1% yoy on +6% daily volume growth partially offset

by -5% yoy yield (mix, lower fuel surcharge). Notably, daily volume growth was driven by FDX’s lower

yielding International Economy product (+14% yoy) with slower International Priority volumes (+3%

yoy). Against a weaker macroeconomic backdrop, management expects customer trade-down to

lower-yielding deferred international service offerings to persist, which has a negative mix impact on

overall International Express yield and Express segment margins.

FIGURE 4: INTERNATIONAL EXPRESS GROWTH COMPARISON

2006 2007 2008 2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12

Int'l Yield Growth

FDX 5.0% 4.4% 9.4% -14.3% 3.9% 7.3% 8.2% 16.1% 11.1% 10.0% 4.8% 3.0% -3.7% -4.6%

UPS 0.4% 3.9% 3.7% -12.0% 3.2% 1.3% 2.7% 7.0% 0.6% 2.9% -2.2% -3.5% -2.1%

Int'l Volume Growth

FDX 6% 5% 6% -4% 16% 5% 6% -4% -3% 0% -1% -3% 1% 6%

UPS 12% 10% 7% -2% 11% 7% 8% 6% 5% 6% 5% 1% 1%

Total Int'l Revenue Growth

FDX 11% 10% 15% -17% 21% 13% 15% 11% 8% 11% 5% 0% -2% 1%

UPS 12% 14% 11% -13% 15% 10% 11% 14% 5% 10% 3% -3% -2%

* All figures roughly based on calendar year for FDX and exclude international domestic figures

Source: Company reports

Domestic Express (26% of revenue)

Domestic Express F2Q13 revenue declined 1% yoy on a 2% daily volume decline, which was partially

offset by a 1.3% yield improvement (favorable mix, +4.4% ex fuel). Yield improvement remains a tool

for management to manage segment profitability with a willingness to put volume at risk to achieve

greater profitability. Volumes continued to decline across FDX’s three Domestic Express segments

(US Overnight Box, US Overnight Envelope, US Deferred) as customers continue to trade down

service into FDX’s profitable Ground and SmartPost offering. Notably, FDX highlighted that a portion

of US Domestic Express volume decline in F2Q13 was related to comparisons from a specific

customer trading-down from Deferred to FDX’s Ground and SmartPost products in F1Q13.

FIGURE 5: DOMESTIC EXPRESS GROWTH COMPARISON

2006 2007 2008 2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12

Domestic Yield Growth

FDX 5.8% 0.6% 7.9% -17.6% 5.3% 4.7% 9.8% 12.6% 12.1% 10.0% 9.0% 6.1% 2.1% 1.3%

UPS 2.2% -0.2% 3.3% -17.1% 6.4% 6.2% 7.7% 8.0% 2.7% 6.0% -1.3% -2.6% -5.0%

Domestic Volume Growth

FDX -2% -1% -5% 0% 2% 2% -1% -3% -4% -2% -4% -5% -5% -2%

UPS 4% 0% -5% 1% 0% 0% 0% 1% 5% 2% 7% 7% 7%

Total Dom Revenue Growth

FDX 4% 0% 1% -17% 7% 7% 9% 9% 8% 8% 6% 1% -3% -1%

UPS 6% -1% -2% -16% 6% 8% 8% 9% 8% 8% 6% 4% 0%

* All figures roughly based on calendar year for FDX


Ground (22% of revenue, 54% EBIT)

Ground revenue increased 11% yoy to $2.6 billion on +8% volume growth (+11% yoy combined

Ground and Smartpost) and +2.2% yields (+2.5% yoy ex-fuel yield). Combined FDX Ground volume

growth (+11% yoy) continues to outpace the market as FDX leverages network enhancements with

additional benefit from customer trade-down from Express products. Encouragingly, the domestic

ground pricing environment remains solid as competitors focus on improving returns; ex-fuel yield in

Ground remains disciplined. SmartPost revenue grew 19% on 17% volume and 1.7% yoy yield

improvement. SmartPost continues to benefit from secular e-commerce growth.



Ground EBIT improved 4% yoy as margins (-190 bps yoy to 15.9%) were pressured by network

expansion costs, superstorm Sandy impacts and fuel surcharge lag. Longer term, management

remains focused on achieving 20% Ground margins. Operating income is expected to improve in

F2013, aided by volume and yield growth as well as productivity enhancements. Enhancements

include automated planning/execution on preload and pickup/delivery processes and GPS tracking of

trailers and dollies to improve fleet management.

FIGURE 6: DOMESTIC GROUND GROWTH COMPARISON

2006 2007 2008 2009 2010 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q12 4Q12

Domestic Yield Growth

FDX -2.8% 2.6% 4.1% -1.4% 4.5% 5.3% 7.5% 9.3% 8.1% 7.5% 7.7% 4.5% 2.4% 2.2%

UPS 2.6% 2.9% 3.9% -3.0% 3.2% 4.3% 5.8% 5.7% 3.4% 4.7% 2.2% 1.3% 0.2%

Domestic Volume Growth

FDX 9% 26% 8% 1% 6% 6% 6% 5% 4% 5% 5% 3% 5% 8%

**FDX 5% 11% 10% 9% 11% 11% 7% 9% 7% 7% 8% 11%

UPS 4% 1% -1% -5% 2% -1% 0% 0% 4% 1% 4% 3% 3%

Total Dom Revenue Growth

FDX 15% 23% 12% 1% 13% 14% 15% 16% 13% 14% 14% 9% 8% 11%

UPS 7% 3% 2% -7% 5% 5% 6% 6% 7% 6% 6% 4% 2%

* All figures roughly based on calendar year for FDX

** Includes combined FedEx Ground and SmartPost growth; emergence of UPS' SurePost in UPS Ground

makes SmartPost inclusion in FedEx's Ground more appropriate


Freight (12% of revenue, 5% EBIT)

Revenue grew 4% yoy in F2Q13 on 2% daily tonnage growth and 2.5% yield improvement (+1.9% yoy

ex-fuel). EBIT of $76 million improved 90% yoy, as EBIT margin improved 250 bps yoy to 5.5%

despite cost impacts from Superstorm Sandy. Daily tonnage growth of 2% yoy was a factor of 9% yoy

growth in FDX’s Economy offering and -1% yoy Priority volumes. Yield improvement was largely a

factor of 10.7% yoy improvement in FDX’s Economy yield benefiting from mix (lower shipment weight)

while Priority yield contracted 1.3% yoy. Investments are focused on network and equipment planning

as well as increased customer automation aimed at enhanced customer service. Going forward, FDX

remains focused on eventually generating double-digit margins, which we recognize will require

continued focus on yield improvement and efficiency gains. That said, a maturing cycle and a

slower-growth economy could temper FDX’s ability to achieve double-digit margins this cycle.

Balance Sheet and Cash Flow

FDX ended F2Q13 with $2.5 billion in cash and $2.2 billion in debt. Debt/total capitalization is roughly

13% (43% including operating leases). In F2Q13, working capital fluctuations resulted in cash

consumption of $101 million on $815 million in cash from operations and $916 in net capital

expenditures. For F2013, we expect $323 million in free cash flow on $4.5 billion in cash flow from

operations and $3.9 billion in net capital expenditures. FDX also announced deferral of two 777F

aircraft from F2015 to F2016 in order to better match capacity timing to global demand. Longer term,

FDX would expect capex in the range of 6-8% of revenue.

Investment Thesis

Current thoughts. F2Q13 results were roughly in line with consensus; and were above expectations

normalizing for negative impact from superstorm Sandy. Encouragingly, F3Q13/F2013 outlooks were

consistent with expectations; and solid F2Q13 results and a stable outlook supported FDX's stock

strength into low investor sentiment. We remain buyers for three reasons: we view increased clarity to

a potential inflection in industry fundamentals as a catalyst for FDX; FDX's multi-year EBIT

improvement initiatives provide a company-specific "self-help" catalyst; and we believe FDX's

valuation disparity to UPS can narrow this cycle into signs of improving cash flow and capital returns.

Our upwardly revised price target of $112 reflects 13.1x forward earnings, one year out.

Diverse suite of leading transportation services. Recognized as the leader in global express



delivery, FedEx reaches over 90% of the world's GDP in 48 hours. After largely completing a

worldwide express network in 1997, FedEx successfully diversified its service offerings. FedEx now

operates the second-largest domestic ground package delivery network, is the largest regional

less-than-truckload provider, and is a leading document services company. This portfolio should

enable FDX to deepen existing client relationships, expand its client base, and achieve market-leading

growth rates.

Express trends critical to capital returns. Long term, we expect express global package volume

growth to exceed GDP growth as the parcel market becomes a greater share of transportation

spending in Asia, Europe, and the US. Growth of the Express business is a critical component to

sustain FDX's recent success improving margins and capital returns. FDX must continue to work

Express margins higher through growth and productivity improvements. Every 100 bps of Express

margin equates to just over $0.50 in EPS. While the slow economic environment will limit margin

expansion, over time we expect the Express margin to improve 50-100 bps annually in a healthy

economy. Express performance is essential to improving FDX's modest returns on capital (average

10% ROC).

Sustainable leadership position in attractive markets. Express global package trends should

continue to outpace broader air cargo volume growth over the long term. Industry leaders are

benefiting from a number of powerful trends including globalization, supply chain complexity, and

demand for integrated logistics offerings accompanied by robust technology solutions. In our view, few

can match FedEx's scale and infrastructure, positioning the company to enjoy long-term leadership in

global transportation and logistics.

Share gains in Ground; opportunity in Freight. FedEx is taking market share in the domestic

ground package markets with FedEx Ground, and we expect Ground to continue to deliver

above-market growth rates as the company further leverages its domestic and global capabilities.

Additionally, FedEx Freight competes in the more attractive regional LTL market. Freight profitability

continues to benefit from C2011 restructuring efforts and ongoing efficiency initiatives remain a focus

going forward. We believe FDX is positioned to further leverage its service-sensitive, low-cost Freight

model. This success should further diversify FDX's business and improve overall company capital

returns.

Valuation compelling ahead of emerging catalysts. Our $112 price target reflects roughly 13x our

forward EPS estimate, one year out, below its average multiple of 14.5x over the past five years given

muted near-term Express volume expectations balanced against a healthier domestic pricing

environment and expected cost reductions from Express network reengineering. In a better economy,

we recognize the potential for FDX to achieve sustained multiple expansion with an improving cyclical

margin story, rising estimates and better capital returns. We believe a below-average multiple is

appropriate given the continued weakness to the macroeconomic environment, particularly within its

Express segment; but improved asset utilization given stable-to-improving volumes and network

capacity reductions could support upside to both EPS expectations and its valuation multiple.

Risks & Caveats

Economic sensitivity. Impediments to economic growth or trade will negatively affect growth and

profitability. As an asset-intensive business, small changes in revenue can create significant changes

in operating profit.

Domestic express market. Growth potential is constrained in FDX's largest segment Domestic

Express due to the increasing reliability of time-definite Ground alternatives. Further, rising fuel

surcharges make the Domestic Express offering less price competitive.

Acquisition integration risk. In recent years, FDX has made multiple smaller scale tuck-in

acquisitions and integration remains a potential operational and cost risk.



Ground independent contractor model being contested by the IRS and through driver lawsuits.

Unsuccessfully defending this model could negatively impact Ground profitability.

Competes in highly competitive markets. Global transportation and logistics is highly competitive

and may be subject to price competition and deteriorating profitability.

Capital returns need to improve. FedEx's return on capital has historically been below its cost of

capital. Recent success has resulted in double-digit ROC, but there are not guarantees these levels

are sustainable.

Company Description

FedEx Corporation is a $43 billion leading provider of global transportation and logistics services.

Founded as a domestic air express company, management expanded geographic and service

coverage over the past two decades through organic and acquisition growth. Operates through four

primary operating companies.

■ FedEx Express - Largest express carrier and largest cargo airline in world; offers variety of

time-definite express services within one to three days and serving markets that comprise more

than 90% of the world's GDP; segment includes Trade Networks, a customs broker, freight

forwarder division, and Supply Chain Systems, a logistics service.

■ FedEx Ground - North America's second-largest small-package delivery provider; Home Delivery

targets business-to-consumer transactions; nationwide coverage; also includes SmartPost.

■ FedEx Freight - Largest regional less-than-truckload (LTL); entered national LTL market through

Watkins Motor Lines acquisition (subsequently re-branded FedEx National LTL); partnerships in

Europe, Canada, Central and South America to provide international door-to-door coverage;

includes Custom Critical.

■ FedEx Services - Responsible for sales, marketing and customer-facing information technology.

Segment includes FedEx Office (formerly Kinko's), the world's largest provider of document

solutions and business services with nearly 2,000 locations worldwide providing copying, printing,

remote access solutions, and outsourced document management services.



Income Statement ($millions) Robert W. Baird & Co., Inc.

2005 2006 2007 2008 2009 2010 2011 Q1 Q2 Q3 Q4 2012 Q1 Q2 Q3E Q4E 2013E 2014E 2015E

Revenue

Express 19,485 21,446 22,681 24,421 22,364 21,555 24,581 6,592 6,583 6,543 6,797 26,515 6,632 6,858 6,554 6,915 26,959 28,264 29,875

Growth (%) 11% 10% 6% 8% -8% -4% 14% 12% 10% 8% 3% 8% 1% 4% 0% 2% 2% 5% 6%

Ground 4,680 5,306 6,043 6,751 7,047 7,439 8,485 2,278 2,339 2,480 2,476 9,573 2,462 2,593 2,702 2,737 10,495 11,443 12,580

Growth (%) 20% 13% 14% 12% 4% 6% 14% 16% 13% 14% 9% 13% 8% 11% 9% 11% 10% 9% 10%

Freight 3,217 3,645 4,586 4,934 4,415 4,321 4,911 1,328 1,325 1,234 1,395 5,282 1,399 1,377 1,260 1,456 5,492 5,867 6,364

Growth (%) 20% 13% 26% 8% -11% -2% 14% 6% 9% 10% 7% 8% 5% 4% 2% 4% 4% 7% 8%

Services 2,066 2,088 2,136 2,138 1,977 1,770 1,684 411 427 401 432 1,671 389 405 380 410 1,584 1,584 1,584

Gross Revenue 29,363 32,294 35,214 37,953 35,497 34,734 39,304 10,521 10,587 10,564 11,008 42,680 10,792 11,107 10,771 11,392 44,062 46,654 49,899

Growth (%) 19% 10% 9% 8% -6% -2% 13% 11% 10% 9% 4% 9% 3% 5% 2% 3% 3% 6% 7%

Total SG&A Expense 25,382 27,651 30,101 33,050 31,571 30,760 34,772 9,275 9,289 9,251 9,475 37,290 9,477 9,797 9,488 9,719 38,481 40,209 42,508

EBITDA 3,981 4,643 5,113 4,912 3,926 3,974 4,532 1,246 1,298 1,313 1,533 5,390 1,315 1,310 1,283 1,673 5,581 6,444 7,391

EBIT

Express 1,463 1,842 2,086 1,901 1,077 1,127 1,294 288 342 306 415 1,351 207 230 181 433 1,052 1,455 1,908

EBIT Margin 7.5% 8.6% 9.2% 7.8% 4.8% 5.2% 5.3% 4.4% 5.2% 4.7% 6.1% 5.1% 3.1% 3.4% 2.8% 6.3% 3.9% 5.1% 6.4%

Growth (%) 38% 26% 13% -9% -43% 5% 15% -19% 4% 72% -3% 4% -28% -33% -41% 4% -22% 38% 31%

Ground 604 705 822 736 815 1,024 1,325 407 398 465 494 1,764 445 412 493 543 1,894 2,132 2,386

EBIT Margin 12.9% 13.3% 13.6% 10.9% 11.6% 13.8% 15.6% 17.9% 17.0% 18.8% 20.0% 18.4% 18.1% 15.9% 18.3% 19.9% 18.0% 18.6% 19.0%

Growth (%) 15% 17% 17% -10% 11% 26% 29% 42% 34% 43% 18% 33% 9% 4% 6% 10% 7% 13% 12%

Freight 354 485 463 329 59 (135) (46) 42 40 (1) 81 162 90 76 11 95 272 363 476

EBIT Margin 11.0% 13.3% 10.1% 6.7% 1.3% -3.1% -0.9% 3.2% 3.0% -0.1% 5.8% 3.1% 6.4% 5.5% 0.9% 6.5% 5.0% 6.2% 7.5%

EBIT Total 2,519 3,093 3,371 2,966 1,951 2,016 2,573 737 780 770 990 3,277 742 718 686 1,071 3,217 3,950 4,770

EBIT Margin 8.6% 9.6% 9.6% 7.8% 5.5% 5.8% 6.5% 7.0% 7.4% 7.3% 9.0% 7.7% 6.9% 6.5% 6.4% 9.4% 7.3% 8.5% 9.6%

Growth (%) 34% 23% 9% -12% -34% 3% 28% 17% 26% 77% 11% 27% 1% -8% -11% 8% -2% 23% 21%

Interest Expense (158) (115) (61) (59) (70) (104) (113) (13) (3) (21) (8) (45) (15) (26) (25) (27) (94) (90) (74)

Pretax Income 2,361 2,978 3,310 2,907 1,881 1,912 2,460 724 777 749 982 3,232 727 692 661 1,044 3,124 3,860 4,695

Tax Rate (%) 37.9% 37.8% 37.3% 37.3% 37.6% 37.5% 36.4% 35.9% 36.0% 34.0% 35.4% 35.4% 36.9% 36.7% 36.7% 36.7% 36.7% 37.0% 37.0%

Net Income 1,466 1,852 2,075 1,822 1,173 1,195 1,565 464 497 494 634 2,089 459 438 418 661 1,976 2,432 2,958

Diluted Shares Outstanding 307 310 311 312 312 314 317 318 316 316 317 317 316 315 314 313 315 313 313

Continuing Ops EPS $4.78 $5.97 $6.67 $5.84 $3.76 $3.81 $4.94 $1.46 $1.57 $1.56 $1.99 $6.59 $1.45 $1.39 $1.33 $2.11 $6.28 $7.77 $9.45

Growth (%) 35% 25% 12% -13% -36% 1% 30% 21% 35% 92% 13% 33% -1% -12% -15% 6% -5% 24% 22%

GAAP EPS $4.72 $5.82 $6.48 $3.34 -$0.35 $3.77 $4.58 $1.46 $1.57 $1.65 $1.73 $6.41 $1.45 $1.39 $1.33 $1.50 $5.68 $7.16 $9.45

Dividend $0.29 $0.32 $0.36 $0.39 $0.44 $0.44 $0.48 $0.13 $0.13 $0.13 $0.13 $0.52 $0.13 $0.13 $0.13 $0.13 $0.52 $0.80 $1.00

Expense Ratios

Salaries & Benefits 40.7% 38.9% 38.7% 37.4% 38.8% 40.4% 38.9% 38.1% 37.6% 38.1% 37.2% 37.7% 38.0% 37.2% 38.5% 37.3% 37.8% 36.4% 36.0%

Purchased Transportation 10.0% 10.1% 11.0% 11.7% 12.6% 13.6% 14.4% 14.4% 14.9% 15.3% 14.7% 14.8% 15.6% 16.7% 16.1% 15.4% 15.9% 16.3% 16.7%

Rental & Landing Fees 7.9% 7.4% 6.7% 6.4% 6.8% 6.8% 6.3% 5.9% 5.9% 5.9% 5.6% 5.8% 5.7% 5.7% 6.0% 5.6% 5.8% 5.7% 5.7%

Fuel 7.8% 10.1% 10.0% 12.1% 10.9% 8.9% 10.6% 11.8% 11.3% 11.7% 11.6% 11.6% 10.5% 11.1% 10.5% 10.5% 10.7% 10.6% 10.3%

Maintenance & Repair 5.7% 5.5% 5.5% 5.4% 5.3% 4.9% 5.0% 5.2% 4.8% 4.3% 4.2% 4.6% 5.0% 4.6% 4.6% 4.1% 4.6% 4.5% 4.2%

Other 14.3% 13.6% 13.6% 14.0% 14.5% 13.9% 13.4% 12.7% 13.2% 12.2% 12.8% 12.7% 12.9% 12.9% 12.5% 12.3% 12.6% 12.6% 12.4%

D&A 5.0% 4.8% 4.9% 5.1% 5.6% 5.6% 5.0% 4.8% 4.9% 5.1% 4.9% 5.0% 5.3% 5.3% 5.5% 5.3% 5.4% 5.3% 5.3%

Key Op Stats (yoy change)

Express

Volume 1.8% -0.2% -1.4% -1.9% -4.4% 1.3% 1.7% -3.0% -3.7% -4.5% -4.9% -4.0% -5.1% -2.1% -4.5% -3.7% -3.9% 0.2% 0.4%

Yield 5.3% 6.7% 2.4% 4.0% -2.8% -9.9% 6.7% 12.6% 12.1% 9.0% 6.1% 9.8% 2.1% 1.3% 0.4% 0.1% 1.0% 2.0% 2.0%

Ground

Volume 14.2% 7.9% 11.0% 7.6% 1.2% 3.5% 6.3% 5.3% 3.5% 4.9% 3.5% 4.3% 4.7% 7.6% 7.6% 7.6% 6.9% 6.1% 5.9%

Yield 3.1% 5.1% 2.7% 3.7% 2.9% 0.4% 5.7% 9.3% 8.1% 7.7% 4.5% 7.4% 2.4% 2.2% 2.2% 2.2% 2.3% 3.0% 3.0%

Freight

Volume 9.8% 5.3% 17.2% 1.9% -6.7% 10.6% 4.5% -7.4% -2.9% 1.9% 4.2% -1.3% 3.6% 1.8% 1.8% 2.0% 2.4% 3.5% 4.0%

Yield 8.8% 8.8% 10.7% 5.3% -2.9% -10.4% 6.8% 11.4% 8.3% 5.6% 3.6% 7.3% 2.2% 2.5% 2.5% 2.5% 2.4% 3.0% 3.0%

Dollars in $millions

Source: Company reports and Robert W. Baird & Co. estimates.

Please refer to Appendix - Important Disclosures and Analyst Certification.

Benjamin J. Hartford, CFA (414) 765-3752

Kenton Moorhead (414) 298-1864

Jack Smith (414) 298-5277

(FDX - NYSE)FedEx Corporation


FedEx Corporation(FDX - NYSE)

Balance Sheet ($mln)

F2007 F2008 F2009 F2010 F2011 F2012 F2Q13 Cash Flow Statement F2007 F2008 F2009 F2010 F2011 F2012 F2013E F2014E F2015E

ASSETS Net Income $2,016 $1,125 $98 $1,184 $1,452 $2,032 $1,976 $2,432 $2,958

Cash and cash equivalents $1,569 $1,539 $2,292 $1,952 $2,328 $2,843 $2,517 Depreciation and Amortization 1,742 1,946 1,975 1,958 1,973 2,113 2,364 2,494 2,621

Net Receivables 3,942 4,359 3,391 4,163 4,581 4,704 5,202 Other 246 1,241 1,682 574 948 1,525 132 140 140

Other Current 1,118 1,346 1,433 1,169 1,376 1,509 1,440 NWC Changes (441) (828) (1,002) (578) (332) (835) (100) (543) (558)

Total Current 6,629 7,244 7,116 7,284 8,285 9,056 9,159 Cash Flow from Ops (CFO) 3,563 3,484 2,753 3,138 4,041 4,835 4,372 4,523 5,161

Net Property & Equipment 12,636 13,478 13,417 14,385 15,543 17,248 18,349 Capital Expenditures (2,882) (2,947) (2,459) (2,816) (3,434) (4,007) (3,900) (4,200) (4,100)

Goodwill 3,497 3,165 2,229 2,200 2,326 2,387 2,757 Free Cash Flow (FCF) 681 537 294 322 607 828 472 323 1,061

Prepaid Pension and Other 1,238 1,746 1,482 1,033 1,231 1,212 1,047 Acquisitions (1,310) (4) 0 0 (96) (116) 0 0 0

Total Assets 24,000 25,633 24,244 24,902 27,385 29,903 31,312 Dividends (110) (124) (137) (138) (151) (164) (170) (250) (250)

Net Cash Flow (NCF) (739) 409 157 184 360 548 302 73 811

LIABILITIES & EQUITIES FCF/Share 2.19 1.72 0.94 1.03 1.92 2.61 1.50 1.03 3.39

Current Debt 639 502 653 262 18 417 1 NCF/Share (2.38) 1.31 0.50 0.59 1.14 1.73 0.96 0.23 2.59

Accrued salaries and benefits 1,354 1,118 861 1,146 1,268 1,635 1,297

Accounts payable 2,016 2,195 1,372 1,522 1,702 1,613 1,730 Du Pont Formula F2007 F2008 F2009 F2010 F2011 F2012 LTM

Accrued expenses 1,419 1,553 1,638 1,715 1,894 1,709 1,800 Net Margins (NI/S) 5.9% 4.8% 3.3% 3.4% 4.0% 4.9% 4.7%

Total Current 5,428 5,368 4,524 4,645 4,882 5,374 4,828 Assets Turnover (S/A) 1.51 1.53 1.42 1.41 1.50 1.49 1.45

Long-Term Debt 2,007 1,506 1,930 1,668 1,667 1,250 2,241 Leverage (A/E) 1.93 1.83 1.77 1.79 1.80 1.91 1.90

Deferred Income Taxes 897 1,264 1,071 891 1,336 836 973 Return on Equity 17.2% 13.4% 8.3% 8.7% 10.8% 14.0% 12.9%

Other Liabilities 3,012 2,969 3,093 3,887 4,280 7,716 7,727 Return on Assets 8.9% 7.3% 4.7% 4.9% 6.0% 7.3% 6.8%

Common Equity 12,656 14,526 13,626 13,811 15,220 14,727 15,543 ROC (after-tax) 12.0% 9.9% 6.8% 7.6% 9.5% 11.5% 10.5%

Total Liabilities and Equities 24,000 25,633 24,244 24,902 27,385 29,903 31,312

Valuation Measures F2007 F2008 F2009 F2010 F2011 F2012 LTM

Balance Sheet Analysis F2007 F2008 F2009 F2010 F2011 F2012 F2Q13 Historical P/E High 15 20 25 31 20 15 15

Current Ratio 1.2 1.3 1.6 1.6 1.7 1.7 1.9 Historical P/E Low 8 14 9 16 14 10 10

Days Sales Outstanding (DSO) 39 40 40 40 41 40 42 Historical P/FCF High - current yr 45 69 99 95 51 38 65

EBIT/ Interest Expense 55.3 50.3 27.9 19.4 22.8 72.8 46.0 Historical P/FCF Low - current yr 25 46 36 49 36 25 43

Fixed Coverage Ratio 4.4 3.1 1.6 2.9 3.1 4.3 Recent Price: $93.71

Debt / Total Cap 17% 12% 16% 12% 10% 10% 13% Enterprise Value (EV) 28,522 28,430 17,239 26,383 29,778 28,334 29,645

Debt / Total Cap (incl Op Leases) 47% 46% 47% 45% 41% 43% 43% ST+LT Debt 2,646 2,008 2,583 1,930 1,685 1,667 2,242

Book Value/Share $40.69 $46.86 $43.81 $43.71 $47.86 $46.47 $49.13 Cash & Equivalents 1,569 1,539 2,292 1,952 2,328 2,843 2,517

Tangible Book Value/Share $29.45 $36.65 $36.65 $36.74 $40.55 $38.93 $40.42 Total EV 29,599 28,899 17,530 26,361 29,135 27,158 29,370

EBITDA 5,113 4,912 3,926 3,974 4,532 5,390 5,471

Source: Company reports and Robert W. Baird & Co. estimates. EV / EBITDA 5.8 5.9 4.5 6.6 6.4 5.0 5.4

Please refer to Appendix - Important Disclosures and Analyst Certification. EV / EBITDA with Op Leases 6.5 6.9 5.7 7.4 7.1 5.9 6.1


Appendix - Important Disclosures and Analyst Certification

Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q350

60

70

80

90

100

2010 2011 2012 2013

03/08/10N:$97

03/18/10N:$100

06/16/10N:$98

07/26/10N:$100

12/16/10N:$109

02/03/11O:$117

09/16/11O:$96

09/22/11O:$82

12/15/11O:$95

03/23/12O:$110

06/19/12O:$112

09/05/12O:$102

10/12/12O:$105

Rating and Price Target History for: FedEx Corporation (FDX) as of 12-18-2012

Created by BlueMatrix

1 Robert W. Baird & Co. Incorporated makes a market in the securities of FDX.

Robert W. Baird & Co. Incorporated and/or its affiliates expect to receive or intend to seek investment banking related compensationfrom the company or companies mentioned in this report within the next three months.Robert W. Baird & Co. Incorporated may not be licensed to execute transactions in all foreign listed securities directly. Transactions inforeign listed securities may be prohibited for residents of the United States. Please contact a Baird representative for more information.Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity marketover the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months.Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12months.Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis onsafety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue andearnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Companycharacteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H -Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Companycharacteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and pricevolatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk.Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changingmarket dynamics, high leverage, extreme price volatility and unknown competitive challenges.Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by asubjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may beused to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons,and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific informationregarding the price target and recommendation is provided in the text of our most recent research report.Distribution of Investment Ratings. As of November 30, 2012, Baird U.S. Equity Research covered 687 companies, with 51% ratedOutperform/Buy, 48% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 15% of Outperform/Buy-ratedand 8% of Neutral/Hold-rated companies have compensated Baird for investment banking services in the past 12 months and/or Bairdmanaged or co-managed a public offering of securities for these companies in the past 12 months.Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst's recommendations and stock priceperformance; 2) Ratings and direct feedback from our investing clients, our institutional and retail sales force (as applicable) and fromindependent rating services; 3) The analyst's productivity, including the quality of the analyst's research and the analyst's contribution tothe growth and development of our overall research effort and 4) Compliance with all of Robert W. Baird’s internal policies andprocedures. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's ResearchOversight Committee.Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does notcompensate research analysts based on specific investment banking transactions.A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed athttp://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx .



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You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee,WI 53202.Analyst Certification. The senior research analyst(s) certifies that the views expressed in this research report and/or financial modelaccurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensationwas, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.DisclaimersBaird prohibits analysts from owning stock in companies they cover.This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflectour judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but wecannot guarantee the accuracy.ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUESTThe Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure andreport performance of various sectors of the stock market; direct investment in indices is not available.Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securitiesand Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ fromAustralian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers andnot Australian laws.Copyright 2012 Robert W. Baird & Co. IncorporatedOther DisclosuresThe information and rating included in this report represent the Analyst’s long-term (12 month) view as described above. The researchanalyst(s) named in this report may at times, discuss, at the request of our clients, including Robert W. Baird & Co. salespersons andtraders, or may have discussed in this report, certain trading strategies based on catalysts or events that may have a near-term impacton the market price of the equity securities discussed in this report. These trading strategies may differ from the analysts’ published pricetarget or rating for such securities. Any such trading strategies are distinct from and do not affect the analysts’ fundamental long-term (12month) rating for such securities, as described above. In addition, Robert W. Baird & Co. Incorporated and/or its affiliates (Baird) mayprovide to certain clients additional or research supplemental products or services, such as outlooks, commentaries and other detailedanalyses, which focus on covered stocks, companies, industries or sectors. Not all clients who receive our standard company-specificresearch reports are eligible to receive these additional or supplemental products or services. Baird determines in its sole discretion theclients who will receive additional or supplemental products or services, in light of various factors including the size and scope of theclient relationships. These additional or supplemental products or services may feature different analytical or research techniques andinformation than are contained in Baird’s standard research reports. Any ratings and recommendations contained in such additional orresearch supplemental products are consistent with the Analyst’s long-term ratings and recommendations contained in more broadlydisseminated standard research reports.UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W.Baird Limited holds an ISD passport.This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Servicesand Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed toprivate clients. Issued in the United Kingdom by Robert W. Baird Limited, which has offices at Mint House 77 Mansell Street, London, E18AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial ServicesAuthority requirements, this investment research report is classified as objective.Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated bythe Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has beenprepared in accordance with FSA requirements and not Australian laws.

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