FedEx Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
December 15, 2021

There are 15 speakers on the call.

Operator

Good day, everyone, and welcome to the FedEx Corporation's 2nd Quarter Fiscal Year 2022 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx. Please go ahead.

Speaker 1

Good afternoon, and welcome to FedEx Corporation's 2nd quarter earnings conference call. The 2nd quarter earnings release, Form 10Q and stat book are on our website at fedex.com. This call is being streamed from our website where the replay will be available for about 1 year. Joining us on the call today are members of the media. During our question and answer session, Callers will be limited to one question in order to allow us to accommodate all those who would like to participate.

Speaker 1

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, such as projections regarding future performance, may be considered forward looking statements within the meaning of the 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. Please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of the non GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us on the call today are Raj Subhoomanian, President and COO Mike Lens, Executive Vice President and CFO and Brie Carreri, Executive VP, Chief Marketing and Communications Officer.

Speaker 1

And now Raj will share his views on the quarter.

Speaker 2

Thank you, Mickey, and good afternoon, everyone. Let me begin by extending a heartfelt thank you to our more than 600,000 dedicated team members, As expected, we are seeing strong levels of volume in our network given unprecedented levels of shopping and shipping this holiday season. FedEx Ground had an outstanding cyber week with 100,000,000 packages picked up during the 1st official week of peak. Our ability to handle this influx of packages has been years in the making as we've taken deliberate steps to enhance our unparalleled network to support customers large and small. This includes strategically adding more capacity across our network to support our growing customer base.

Speaker 2

For example, at FedEx Ground, this means adding 14,400,000 square feet to our network, the equivalent of 300 football fields since June of this year. In Q2 alone, we brought online 24 major expansion projects, with 9 of them starting operations in November, just weeks before peak. While it was important that these facilities were up and running to add to our capacity in time for peak, Experience tells us that they will operate with increasing efficiency in the weeks and months ahead. As we shared on the Q1 call, Overcoming staffing and retention challenges due to the constrained labor market has been a key focus. We continued to take bold actions in Q2 to hire and invest In our frontline team members and thus increased network efficiency.

Speaker 2

These actions including pay premiums, Increased paid time off and tuition reimbursement. I'm pleased to share that we have made considerable traction in recruiting frontline positions. Last week, we exceeded 111,000 applications, the highest level in FedEx History. To put this in perspective, we had 52,000 applications the week of May 8. This has led to appropriate staffing levels of peak, including hiring more than 60,000 frontline team members since we last spoke in September.

Speaker 2

We delivered strong results For the quarter with an 11% increase in adjusted operating income, which exceeded our initial expectations shared during the Q1 call. 2nd quarter results include outstanding performance by our team at FedEx Express, where operating income on an Ass adjusted basis exceeded $1,000,000,000 for the quarter. The ability we have at Express to flex our cost structure and network in response to changing market conditions positions us for long term sustained profitability. FedEx Freight also Delivered a strong quarter with an operating margin of 14.7 percent. I'm proud of the team as they continue to focus on revenue quality and profitable growth.

Speaker 2

We estimate the effect of labor shortages on our Q2 results was approximately $470,000,000 in line with our original expectations. And consistent with the Q1, Ground once again bore the majority of these costs to the tune of $285,000,000 While Ground's results were negatively affected by labor challenges in the first half of the year, We are encouraged by hiring momentum as we look to the second half and are focused on retaining recently hired team members after the peak season concludes. Our swap shifts with a colleague all from the convenience of an app on their phone or computer. All of this to say, We anticipate cost pressures from constrained labor markets to partially subside in the second half of the fiscal year. Now it's a good time to focus on what is ahead for FedEx.

Speaker 2

The FedEx business has been built Over nearly 5 decades and during that time, we have built networks and capabilities that are differentiated from our competitors and nearly impossible Our customers and their customers value these networks and capabilities as we enable global supply chains to stay connected. This has never been illustrated more clearly than during the last 2 years of the global COVID pandemic. Our industry has proven to be absolutely critical in delivering during this pandemic whether it is business to business or e commerce. And within this industry, our strategy is unique. Our future growth and profitability will be driven by Our strategy and we will drive total shareholder value over the immediate mid and long term.

Speaker 2

There is solid momentum in our base business as we continue to lean into the dynamic growth of e commerce amid a robust pricing environment. In addition, we have other levers for profitable growth, including: number 1, increasing collaboration and efficiency to optimize our networks and Number 2, driving improved results in Europe and International and number 3, Unlocking value by digital innovation. Our expanded collaboration across operating companies will drive cost benefits, lower delivery and line haul costs And better utilization of existing assets. Said differently, we'll utilize our air and ground networks in a smarter, more calculated manner. FedEx Freight trucks have traveled 4,000,000 miles while operating on behalf of FedEx Ground this year.

Speaker 2

FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched nearly 50,000 times. We will look continue to look comprehensively And all assets in our network, including stations, hubs and equipment to put the right package in the light network of the best service for our customers. As I highlighted earlier, the focus on collaboration also extends to our customers as we work to make their supply chains smarter. This includes providing integration and common data platform opportunities and planning the best way to leverage our network flexibility for their volume needs. The second lever is continuing to improve our international profitability.

Speaker 2

Our international business, particularly Europe, Remains one of our biggest opportunities. I was in Europe in October. I was happy to note the excellent progress there As we build upon the success of station integration, which is completed in May 2021, we remain on track for the completion of our Air network integration in April 2022, which will complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks. After April 2022, Paris's Charles De Gaulle Airport will serve as the main hub for all European and intercontinental flights. Liege We'll connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth.

Speaker 2

Brie will share more on what this enhanced value proposition means for our customers. Finally, we are unlocking value through digital innovation and our accelerated integration of data driven technologies and enhanced digital capabilities Ranging from increased network efficiency to customer experience improvements. For example, early package visibility visibility of 3rd party trailers that's improving customer collaboration, information sharing and package prioritization. Model driven estimated delivery date uses machine learning to provide a more accurate estimated delivery data pack delivery day of packages to customers and recipients. And trailer load scan automation eliminates the need for a manual scan and enabling faster and more efficient loading while Significantly reducing package touches.

Speaker 2

These ongoing investments in network capacity, automation and technology have helped FedEx build the most In closing, the successful execution of our strategies continues to drive high demand for our differentiated services. We remain confident in these strategies for the various reasons outlined. Our unparalleled portfolio of services powered by the strength and reach of our global network, positions FedEx to deliver superior, sustainable financial returns and drive shareholder value for years to come. With that, let me turn this floor over to Brie.

Speaker 3

Thank you, Raj. Good afternoon, everyone. Q2 delivered our 2nd consecutive quarter of 14% revenue growth, demonstrating the strong demand for our differentiated portfolio and our ability to drive revenue quality as a result. Constrained capacity has continued to support a favorable pricing environment. We are maintaining a brisk pace for repricing contracts, ensuring a high surcharge capture and yield improvements.

Speaker 3

We are working with large customers to identify to move their volume from our national network to our regional and local networks, freeing up additional capacity for small business customers. Small businesses rely on our market leading transit times and our 7 day a week network to compete. They cannot afford to deploy for or they cannot For deploy inventory at the 6.1% with fuel in Q2. Our general rate increase will take place in January And we expect a strong capture rate. In January, the ground economy peak surcharge will be replaced by the new ground economy delivery surcharge at $1 And positions us well for continued profitable growth.

Speaker 3

We are forecasting that the U. S. Domestic parcel market will reach 134,000,000 pieces a day by calendar year 2026, a remarkable 70% growth from 2020. E commerce is expected to drive 90% of the parcel market growth. We have developed a tremendous And we are very confident that our competitive value proposition Will enable us to continue to take share smartly in the addressable e commerce market.

Speaker 3

As you all know, we have a diversified customer base globally as well as here in the United States and as such large and disruptive customer negotiation. The U. S. Domestic B2B market is Turning now to international. Our successful commercial and operational International export composite yield grew to almost $54 per package, While average daily volume was more than 1,100,000.

Speaker 3

I am very proud of the international revenue quality results, especially given that we also had double digit e commerce growth internationally, which of course puts downward pressure on our package yields. International Priority Freight had a very strong quarter with 34% year over year revenue growth year to date. With new variants of COVID causing uncertainty in the global recovery, we believe that air cargo capacity will remain constrained through calendar year 2022. And a full recovery is not anticipated until at least 2024. Export demand in Europe and APAC fully recovered to pre pandemic levels and capacity on international lanes remains scarce.

Speaker 3

We anticipate a continued favorable Pricing environment and an embargo on our deferred services out of Asia Pacific for the foreseeable future. We are targeting both B2B and cross border e commerce market share internationally. We have identified As Raj alluded to, with the launch of our integrated air network in April, we will dramatically enhance our capabilities within and into Europe, creating benefits for customers with our intra European shipments through our expanded portfolio of services. We will be able to offer customers an option of midday or end of day service in Mountain to Europe, giving These enhancements along with our intra Europe road services and industry leading Europe to U. S.

Speaker 3

Service position us with a very competitive portfolio. As we approach the final stages of physical integration present on the road in Europe by approximately 30%, including the rebranding of vehicles and facilities. Additionally, intercontinental e commerce will contribute approximately half of the growth in the parcel market over the next decade. FedEx International Connect platform for the quarter, which enables us to compete more effectively in this growing e commerce market. In addition to the improvements in our transportation portfolio, we are very focused on our digital solutions across the customer We have launched our new account opening application in 8 countries with very great results.

Speaker 3

We are seeing double digit improvement in We have also launched our new FedEx Ship Manager application in more than 100 countries, primary tool for our small business segment to ship with FedEx. With the modern easy to use interface, a small business can now create a label and get the package out We will launch this new FedEx Ship Manager in the United States in 2022. In summary, we are very confident in our commercial strategies for revenue growth and yield improvement. And with that, I'll turn it over to Mike for his remarks.

Speaker 4

Thank you, Brian. The continued staffing challenges felt by numerous companies around the world, We're quite pleased with our 2nd quarter consolidated financial results with adjusted Operating income up 11% year over year. While adjusted earnings per share was unchanged year over year, This year's effective tax rate was significantly higher and rated most of the headwinds we experienced in the Q1 persisted through the Q2, which dampened our Q2 profitability by an excellent quarter. To further unpack our 2nd quarter results, I will highlight several key drivers. The labor market once again had the largest effect on our bottom line, representing Estimated $470,000,000 in additional year over year costs.

Speaker 4

As I did last quarter, I'll separate the effect of and network inefficiencies resulting from labor shortages. Of the $470,000,000 we estimate $230,000,000 was incurred in We estimate network inefficiencies resulting from labor shortages increased costs by approximately 240,000,000 Higher usage of 3rd party trade positions assets in the network over time and recruiting incentives, All to address staffing shortages. Beyond the labor effects, our results headwinds, dollars 90,000,000 related to investments in the ground network, as Raj outlined earlier, that are critical to improving service and adding capacity

Speaker 5

We expect to be able to get a better result of the

Speaker 4

impact year over year from higher federal excise With that overview, highlights for the segments. Ground reported $8,300,000,000 in revenue, a 13% increase year over year with operating margin at 5.8%. The results at Ground in the 2nd quarter with operating income and margin down are not where we would like them to be and our teams remain very focused on improving performance. Ground operating income was down approximately $70,000,000 and in addition to the $90,000,000 I mentioned earlier, results were significantly affected by higher wage and purchase transportation rates and network inefficiencies amidst the constrained labor market. Express Freight had another outstanding quarter with an operating margin of 14.7% as revenue for Q2 increased 17% year over year and operating income increased 33% year over year.

Speaker 4

Net pretax noncash, $60,000,000 related to the termination of the TNT Express Netherlands pension plan and a curtailment charge related to the U. S. FedEx Freight Pension Plan. I'll point you to our Year to date, we spent $3,100,000,000 in capital as we continue to invest in our strategies for profitable growth, service excellence and modernizing our digital platforms. Our capital forecast for fiscal 2022 remains at $7,200,000,000 and less than 8% of anticipated revenue.

Speaker 4

We ended our quarter with $6,800,000,000 in cash and are targeting approximately $3,000,000,000 in free cash flow for FY 2022, which puts us on pace to deliver over 7,500,000,000 in adjusted free cash flow for FY 21 and 22 combined, far exceeding our historical levels. These cash flows have provided extensive flexibility as we can continue to focus on balanced As part of this program, we expect to enter into a $1,500,000,000 share of the fiscal year, which is on top of the $750,000,000 of repurchases in the first We have in our business and underscores our commitment to driving value. During Q2, we also made a $250,000,000 voluntary contribution to our pension plan, which mitigates PBGC fees and further strengthens the funded status of our plan for our employees, dollars 250,000,000 contribution in February. As for our FY 'twenty two guidance, adjusted EPS range to 20 Standing financial year with a year over year increase in adjusted EPS by 18% following our While the Q2 exceeded our expectations, uncertainty We are closely monitoring developments related to the federal vaccine mandate, ongoing pandemic developments, and inflation as we consider our outlook. In Q3, but the labor availability and network inefficiency component will continue to mitigate as we move through the quarter given our progress to date and plans to address this.

Speaker 4

In addition, we do not expect a recurrence of approximately $1,000,000,000 in notable second half headwinds from a year ago that included the timing of variable compensation expense, historic severe winter weather, a one time Express frontline bonus and our commitment to the Yale Carbon Capture Initiative. In summary, the successful execution during the Q2 of our I'll take a moment of personal privilege here. While not on these calls, many of you are familiar with John Marino, our longtime Chief Accounting Officer, who signed our 10 Qs and 10 ks. John has been integrally responsible for the quality and integrity of our finance. He will retire at the end of this month.

Speaker 4

On behalf of the leadership team, I want to thank him for his service and record of accomplishment. Thank you, and good afternoon to everyone on the call.

Speaker 6

Good afternoon to everyone on the call. As promised on the June analyst call, I am here to Let me start by saying thank you to our 100 of 1000 of team members. This time of year is challenging, especially for those working tirelessly on our front lines. Your hard work and dedication to keep our Purple promise for our customers is evident by the Q2 results Raj, Brie and Mike have Let me also thank John Marino for his outstanding work for FedEx as our Corporate Vice President and Chief Accounting Officer meeting on Tuesday Wednesday, 28th, 29th June 2022 in Memphis. Mickey will share details after the New Year.

Speaker 6

And I'll now pass it back to him to begin the Q and A portion of the call. Mickey?

Speaker 1

Now I'd like to open our

Operator

And we'll take our first question from Brandon Oglenski from Barclays. Your line is open.

Speaker 5

Thanks for my question. Fred, thanks for joining the call. I guess the supply chain constraints that we've seen in the past year have And pretty steep. Through your context of looking at this industry, how much of this Rate increase and inflation that we see is going to really result in stickiness or is this really transitory as we get things

Speaker 2

Well, this is Ryan. Let me answer that question of critical components like semiconductors. And the second is because of the conditions We're seeing in the port. Now as you know, FedEx gets out traffic a few miles downstream from the port and that supply chain is actually flowing pretty good to the We are very well positioned for success here. Let me also add this point that we have down the size and scale of our network is massive for us to be able to manage the costs accordingly as well.

Operator

Ravi Shanker from Morgan Stanley. Your line is open.

Speaker 7

Thanks very much. Fred, we would love your thoughts on the long term competitive environment and the parcel phase. Amazon just told us That they believe that they are now

Speaker 4

the largest parcel carrier in the

Speaker 7

country and you've seen the USPS kind of ramp up capacity meaningfully in the last decade as well. What does this industry look like 10 years from now, kind of both competitively and kind of where and just What do e commerce supply chains look like? And what part of the business would you like to concentrate?

Speaker 2

Remi, this is Raj. Let me just say this, that e commerce market is growing very strongly. As Bri pointed out the numbers in her remarks, We are in the center of that e commerce growth ecosystem. When you talk about any retailers and their omni channel story, What often gets missed is the FedEx story that's right behind it. Under the last these two fiscal years, we're going to grow more than $20,000,000,000 And so we are not lacking for growth.

Speaker 2

The when people talk about the last mile, sometimes and most times, they forget about the first few 1,000 miles. And again, some of the statistics that people see and talk about are so misleading that I don't even know

Operator

And next we'll go to Ken Hoexter from Bank of America. Your line is open.

Speaker 8

Great. Good afternoon. Raj, just as you think about the cost and you mentioned the deceleration Mike talked about, with Ground hitting the lowest margin level in nearly 2 decades, Express, it's obvious you have the structure set up for sustained growth, Particularly with Europe and TNT integration, Brie talked about that. But now looking at Ground, should we expect some of those costs to subside as the labor So walk us through your thoughts on how ground shakes out with the growth of e commerce and the impact on margins.

Speaker 4

So Ken, this is Mike. Let me just highlight a couple aspects there as you think about the second half. So Ground had the most significant impact from the labor availability challenges. So That again has significantly impacted. As we move through the rest of the fiscal year, we'll We'll see further mitigation of that somewhat in Q3, particularly in Q4.

Speaker 4

If you recall, The labor market began to turn around that period of time, so we'll be lapping some of that, plus we will have fully address the network inefficiencies. That said, We're not projecting any change in the labor Rates, because that is a step change that we think will persist.

Speaker 2

And Ken, let me add to that by saying this much. Firstly, First and most important point is the demand for our services when start to recede in the second half, the investments that we have made Get more efficient as we go into the second half in the technology investments that make us more efficient as well. So we expect in the second half the our e profit and operating margins to improve year over year and we get double digit. So, I guess that answers that question.

Operator

And next we'll go to Tom Wadewitz from UBS. Your line is

Speaker 9

open. Yes. Thank you. I wanted to Get a little more color on the labor market. It does seem like it's pretty tightly tied in ground to your margin performance, whether you get traction on labor and kind of how rapidly that develops.

Speaker 9

So I guess is the assumption that you have that you convert A lot of the peak season labor to kind of ongoing. And then How much visibility do you have to that? And I guess also it seems like you're pointing to stability in your costs Per hour, let's say, for labor or you are assume are you assuming some further inflation and sequential increase in the cost per hour as

Speaker 2

you look Thank you. Thank you, Tom. On the labor front, the We had obviously headwinds in the 1st two quarters and we actually landed pretty much where we thought it was going to be. Now we're seeing because of the actions you're taking considerable traction on the labor front. As I mentioned to you in my earlier remarks, Just last week, we had 111,000 applications for FedEx.

Speaker 2

That's the highest in our history. Again, to Put that in context versus what we saw in May, that was 52,000. So you can see We're making a lot of progress here. And so we are essentially staffed up for peak, and we think that we can hold on to The required labor to the second half. So that projections that we talk about now incorporate these assumptions.

Speaker 2

I don't know, Mike, if you want to add No,

Speaker 4

Tom, you're thinking about it in the right format there. Certainly, in December here, As the peak volume surge, we are continuing to navigate the network inefficiencies. But coming off a peak, when the Package handler count would otherwise perhaps go down further, we will stabilize that at a different level in order To optimize going forward and just to reiterate, we're not assuming any reduction in the Base pay rates as it were of labor in the market because I think that's well documented. That's here to stay and we're managing to that

Operator

And next we'll go to Chris Wetherbee from Citi. Your line is open.

Speaker 5

Great. Thanks. Good I wanted

Speaker 8

to talk about the guidance a little bit and sort of make sure that we understood the main drivers of the increase, particularly in the back half of the year. So we have some of the cost dynamics easing I think into the back half. Obviously, comps from year over year are more favorable. But if you were to look at the back half and think about Ground Relative to maybe Express, if you can help us sort of parse out where you see the better opportunity and how that's reflected in the new guidance.

Speaker 4

So Chris, let me go at it this way. So first, the 3 key components For driving the second half of the year are the pricing initiatives. We're being very thoughtful about the various pricing levers And initiatives will recall that the GRI goes into effect in January and that the Certain surcharges that we announced back in September, first of those hit in November, so we only had 1 month in the second quarter, so that will hit the whole year as well as The ongoing contract renewals. So those are three key things to keep front and center when you're thinking about Drivers for the second half of the year. As far as the broader guidance overall, Q2 was above our expectations.

Speaker 4

As Raj mentioned, the labor impacts actually came in right in line with what we anticipated back in September, but we executed strongly on our And we were able to accommodate incremental demand, particularly from Asia Pacific. So the combination of the second quarter, Our outlook for the impact of the ASR on share count is the last component in terms of when you think about the pieces of the overall

Operator

And next we'll go to Jack Atkins from Stephens. Your line is open.

Speaker 10

Okay, great. Thank you. I guess a question here for either Brie or Raj. But when

Speaker 9

you think

Speaker 10

about your opportunity set in Europe, Particularly on the revenue side, can you maybe talk about the cadence I'm unlocking some of the revenue and market share capture opportunities in Europe once the integration of TNT is Finally complete here in April. Maybe help us think through what a Fully integrated physical network with FedEx Europe and TNT will give you and how will that help you With allowing for improved European profits overall?

Speaker 3

Well, I think the short answer is we think post April that we have the best value proposition if you look at the combined bundle of intra Europe ground as well as intercontinental coming in and out of Europe. So we're up From Europe into the U. S. And that combined with our leading ground service, we think that that is just a great value proposition. As I mentioned, we're also making some stability.

Speaker 3

So when we talked about the new FedEx Ship Manager online, we've already launched that in Europe And we've had great traction with it. So when we think about kind of post April, we've Got a great portfolio for B2B and we are growing in e commerce, which has been something that we haven't been able to do. As you look at the Revenue quality out of our European business as well. We feel really good about the business right now. And Jack,

Speaker 2

let me add one point to what Brie just mentioned. The ability for us to access low cost intra European networks for Europe, that's the cost advantage as well in addition to all the portfolio and revenue opportunities that we just talked about.

Operator

And next we'll go to Duane Pfennigwer. Your line is open.

Speaker 9

Just on the balance sheet and maybe the answer is we got to wait until June and look forward to Seeing you in Memphis, but how do you think about the balance sheet longer term and the balance of share repurchase relative to balance

Speaker 4

Yes, Duane, this is Mike. I think there's certainly Opportunity to explore that further in June, but I would just emphasize that the announcement of the authorization It's just a logical evolution in where we have been in terms of capital allocation. We paid down some debt in Q4 of 2021. We increased the dividend 15% This past June, we continue to thoughtfully invest in the business for efficiency as well as growth. So part of the overall capital allocation, and so that's just the next step along the way.

Speaker 4

And

Operator

Goldman Sachs, your line is open.

Speaker 5

On the labor front, can you Talk a little bit more about your progress on getting your core positions filled sort of Full time folks versus just the seasonal hires that you needed. Just a point of clarification. I just want to make sure I heard right on the margin for Ground. Were you saying the whole second half would average double digit?

Speaker 2

Yes. The answer to that question, Jordan, is that we are targeting second Double digit margins for the second half and improved year over year margins and improved year over year operating profit. So in terms of Your other question, I'm sorry, say that again, I'm not in question.

Speaker 5

In terms of actually the hiring The core positions, not the folks that you need sort of year round, what progress have you made on that Versus just sort of the 80,000 or 90,000 people you needed for peak.

Speaker 2

So And that we have the labor situations

Speaker 4

Hey, George, this is Mike. Another Fast aggressively addressed the situation and the flexibility in targeting and engaging employees such That it's not as binary as full time part time there and that there's the scheduling, labor

Operator

And next we'll go to Brian And Austin Beck from JPMorgan, your line is open.

Speaker 11

Hey, good evening. Thanks for taking the question. Couple of follow ups for you, Mike. You mentioned the vaccine mandate for federal contractors. Obviously, that was put on hold by a court last week.

Speaker 11

So did that actually give you some with I guess can you tell us That was a factor in terms of hiring people and if that was And the ASR impact on EPS, I think it's 80% complete when it's agreed upon. So imagine you can

Speaker 4

Yes, Brian, it obviously depends on the Precise timing and market conditions, but it would be somewhat north of $0.20 per share for the Overall annual EPS. As it relates to the hiring, as Raj said, We set a record in terms of applications 2 weeks ago for hourly Positions vacant. So we expect to continue to see progress on that front and

Operator

And we'll take our next question from Scott Group with Wolfe Research. Your line is open.

Speaker 12

Hey, thanks for the question. So we're going to as we start to lap some of the tougher yield comps, how are you thinking about yield growth in the back half of the year? And then Raj, I want to just ask you big picture or Fred, although it appears you maybe talked about some initiatives, but Any way to quantify what you see in terms of the initiatives or the opportunity set?

Speaker 6

This is Smith,

Speaker 5

there

Speaker 6

is a massive margin improvement opportunity. Raj, you can talk about the rest of it.

Speaker 2

The core business is very strong. We are in the middle of a Very robust market and a pricing environment. As I've said before, on the e commerce market growth, We are in the center of it. We are in the center of this ecosystem. And this has got both volume and yield opportunities.

Speaker 2

Our core B2B business is very strong. In addition to that, we have 3 levers. One is the ability for us to optimize across our operating companies And to make sure the light packet goes in the light network and be very smart about how we spend our assets and use our capacity. The second is the turnaround opportunity Or the upside opportunity, I should say, in Europe as we finish up the physical integration. And lastly, The ability for us to deliver value for all our stakeholders from our digital innovation, there's a lot of work going on in this regard.

Speaker 2

We are sitting on so much global insights about the global supply chain. Regan, do you want to add to that?

Speaker 3

Yeah, absolutely. Just want to kind of just double click on the pricing environment in the back half. Yes, the comps are aggressive, But we still believe that there is upside from a revenue quality perspective. We're expecting a higher than normal capture of our general rate increase. We are making structural Changes in all of our contracts as we move forward.

Speaker 3

We're just over 50% now of our customer base that we have renewed. So we still have some work to do there and some We've also seen small business with our fastest growing segment again last quarter. So that, of course, is a great Lift from a yield perspective. So yes, we're clear eyed that the comps are aggressive, but we still feel pretty confident in the pricing environment as we move forward. And we think we're doing a good job of managing kind of revenue quality as well as product and customer mix.

Operator

And our next question comes from Helena Becker with Cowen. Your line is open.

Speaker 13

Thanks very much, operator. Hi, everybody. I'm just a few questions. The first is, Mike, would you still consider share repurchase As aggressively as you are, if Congress instituted a tax on them. And the second question is with Sustainability and how you're thinking about improving or reducing your carbon footprint either Through use of SAF for the aircraft fleet or shifting to different Electric Vehicles and so on and just kind of wondering how you're thinking about that maybe longer term over the next 5 or 7 years.

Speaker 4

So Helane, this is Mike. I'll take the first part of that. Yes, we are aware of proposed Legislation related to the repurchase, as you mentioned there, our transaction will largely complete in December. So we'll just have to see how that would play out subsequent to that, but That's the accelerated share repurchase who delivers much of it upfront.

Speaker 2

And Helen, on the carbon neutral goals, we have announced and we are very proud of it, We announced that we achieved carbon neutrality across our global operations by 2,040 and we didn't do this casually. We thought about this a lot. And vehicle electrification is a key path to our success here. We are expanding the use of electric vehicles that lead to significant reductions. We expect that 50% of FedEx Express Global POD vehicles will be electric by 2025, rising to 100% of purchases by 2,030.

Speaker 2

So we're making good progress there. We have line of sight on the over the road vehicles. On the SAFs, yes, we will obviously look at that, but It represents very small piece of the demand and also the cost is not where it needs to be yet. So we know that there's some fundamental research needs to be done to really address this issue. And that's part of the reason why we're investing $100,000,000 With the Yale to create the Yale Center For Natural Carbon Capture and again the initial work The focus on to offset the, equivalent of current emissions from the aviation industry.

Speaker 2

So lots more to come here. But again, this is something we are very serious about and

Speaker 1

We couldn't hear the question. We're having technical difficulties, and we're trying to

Speaker 10

figure it out right now.

Speaker 5

We'll take our next question from Jeff Kauffman from Vertical Research Partners. Your line is open. Please go ahead.

Speaker 14

Thank you very much and thank you for taking my question.

Speaker 6

Fred, while we have you

Speaker 14

on the phone, I was just Curious, there's legislation moving through Congress to affect trade with China. I know there was news about a groundbreaking digital Trade agreement between the UK and Singapore. I know this has always been a popular topic with you. What is your view on the status Trade policy out there and can you talk a little bit about any catalysts that might occur that might be beneficial to the company Coming up.

Speaker 6

Well, we have expressed To both Republican and Democratic administrations that we feel that it was a major mistake for the United States To walk away from the Trans Pacific Partnership. What that agreement did was And of course, given the leadership of Japan, the other participants did go forward with it. So the best way to normalize the relationships with China is to Sign TPP and get a more normalized trading relationship, which China would like to then join. And on the broader issue, obviously, the great Secretary of State, Cordell Hull said Decades ago, he and Roosevelt were really the architects of United States promoting open trade. It's When goods cross borders, armies rarely do.

Speaker 6

So the best way to keep a harmonious relationship with China is Not to disconnect to trade where we can and that's what we support. And I'm hopeful that At the end of the day, that cooler heads will prevail and we'll join the TPP and we will Trying to have that constructive relationship with China. The reality is people forget about this And all of the populous politics, the trade that the United States promoted In the last 30 years, gave each household in the United States an increase in disposable income of about $10,000 or $11,000 I mean, it was a huge benefit, an enormous tax decrease. So we're strong free traders. And we think we should Stay engaged in China and we hope the administration does that.

Speaker 6

And I quite frankly am optimistic because I think At the end of the day, that view will eventually prevail. Particularly in a period of labor shortage, it's impossible for the United States to manufacture

Operator

And next we'll go back to Baskin Majors from Susquehanna. Your line is open.

Speaker 9

Yes, thanks for taking my You own the largest less than truckload business in North America. It could do potentially close to $2,000,000,000 in EBITDA this year. How do you get investors to focus more and give you more credit for having that valuable asset?

Speaker 4

Baskin, we appreciate the question. We are very proud of the results of FedEx Freight, And we see great opportunity going forward. It's a key part of the overall enterprise strategy. Raj highlighted some of the Collaboration initiatives, it will have a key role as well as it grows the very successful FedEx Freight Direct Product that being well received, and so I think it will be just continuing to focus on The success as the largest LTL carrier in terms of the revenue quality and sustainability of the performance of the freight business as a standalone as well as the synergies that will accrue So the overall enterprise as we increase collaboration beyond what Raj highlighted earlier. And let me just reiterate that FedEx Freight is an important part

Speaker 2

of our overall enterprise strategy. And our results FedEx Freight, our outstanding margins illustrate that our strategy is working.

Operator

And next, we'll go to David Vernon from Bernstein, your line is open.

Speaker 5

Hey, good afternoon, everyone. Thanks for taking the question. Raj, I'd love to see if The profitability of the domestic segment versus Europe.

Speaker 1

Can you give us a sense

Speaker 5

for whether you're making money in Europe today and what the margin level is and where it can go to?

Speaker 2

We're not going to break out the numbers for you that you asked for, but let me just address it qualitatively. The rationale for the integration remains as sound as it was when we made the acquisition. The portfolio in Europe, We're talking about international in and out of Europe InterContinental, we're very strong there. Intra European Express, we're doing pretty good. It's intra European ground business that we didn't have very minimal share.

Speaker 2

Well, with P and C, we have the best player in that business. Now that being part of this portfolio and we are we'll stay very disciplined on the international domestic business, we now have the portfolio to make it successful And piece it all together, not only will we from a customer value proposition perspective, but also from a cost of moving International, especially economy goes on the road. So I hope that answered the question, but we feel that And also, the restructuring program that we announced earlier this calendar year is on track to make sure that we are as efficient as Well, in Europe. So there's a lot of things going on, very excited about what April 22 brings.

Speaker 4

Yes, David, it's Mike. That it's just Important to reiterate that completing the physical integration here at the end of this fiscal year really sets the foundation

Operator

And next we'll go to Bruce Chan from Stifel. Your line is open.

Speaker 5

Hey, thanks operator and good evening everyone. Maybe just another one on the LTL side, because we've spoken a bit about the ground network expansion here. But So for LTL, you've got several peers that are adding some meaningful terminal capacity. Maybe you could just give us a sense of where you are right now in terms of freight facility utilization and then Whether you plan to grow the network there as well. Thank you.

Speaker 2

The LTL side, we are Our utilization is strong, but we are very disciplined in how we manage that business. The revenue quality and efficiency are watchwords as we We are the number one revenue share in this segment. And so all I would say there is that the demand Our business continues strong, our revenue quality remains strong and we will be very judicious on

Speaker 4

how we add capacity. Yes, Bruce, this is Mike. ADS grew 3% in the quarter. The revenue quality focus came through in the bottom line, and we continue With our initiatives to incorporate technology into the LTL business To do exactly what you ask about there and enhance the efficiency and utilization of our assets.

Operator

And our last question comes from Todd Fowler with KeyBanc Capital Markets. Your line is open.

Speaker 5

Great. Thanks and good evening everyone. Just to close out on ground margin, It sounds like that you've got some stabilization now as we move into the back half of the year. But how do we think about the longer term path To moving beyond kind of the high single to low double digit margin range you've been in, obviously, there's been a lot of revenue growth in the segment, but How do we move kind of beyond the margin range of the past couple of years? Is that something that you need to price to get the margin level up?

Speaker 5

Is it getting some of the efficiencies? And how do you think about normalized incremental margins there? Thanks.

Speaker 4

So Todd, this is Mike. I know We threw a lot at you as it relates to the initiatives there, but they will continue to build in terms of labor It's one piece. We talked about the new facilities we opened. Those facilities aren't as efficient at the outset. We are making we are seeing that from those that we opened last year.

Speaker 4

We're also exploring Different ways to even fuller utilize the technology elements that Raj highlighted. So there's a number of components there They come together to driving ground And so we're very optimistic about the trajectory there and getting past this headwind of the labor right Now really be a good launching point for these other Aspects to gain even more traction.

Operator

And we have no further questions in the queue. I'll turn it back over to management closing remarks.

Speaker 1

Thank you for your participation in the FedEx Corporation's 2nd quarter earnings conference call.

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Earnings Conference Call
FedEx Q2 2022
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