FedEx Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
September 20, 2021

There are 15 speakers on the call.

Operator

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

Speaker 1

Good afternoon, and welcome to FedEx Corporation's Q1 earnings conference call. The Q1 earnings release, Form 10 Q 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 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.

Speaker 1

Certain statements in this conference call, such as projections regarding future performance, may be considered forward looking statements within the meaning of the act. Such forward looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward looking statements. For additional information on these factors, Please refer to our press releases and filings with the SEC. 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 Subramanian, President and COO Mike Glenn, Executive VP and CFO Brie Carreri, Executive VP, Chief Marketing and Communications Officer and now Raj will share his views on the quarter.

Speaker 2

Thank you, Mickey, and good afternoon, everybody, and thank you for joining today's call. 1st and foremost, I would like to extend my sincerest thanks to our global team members continue to deliver for our customers in an exceptionally challenging operating environment. We are extremely proud and grateful for the manner in which Team FedEx continues to move the world forward. The execution of our strategies continues to drive high demand for our differentiated services Despite the disruptive impact of the pandemic, the labor availability, industry capacity and global supply chains. As we look at our Q1 results, our performance was highlighted by double digit increases in yields across all our transportation businesses, driven by limited capacity, high demand and our revenue management strategy.

Speaker 2

The impact of constrained labor markets remains The biggest issue facing our business as with many other companies around the world and was a key driver of our lower than expected results in the Q1. As Mike will share in more detail momentarily, we estimate that the impact of labor shortages on our quarterly results was approximately $450,000,000 primarily at FedEx Ground. Labor shortages had 2 distinct impacts on our business. The competition for talent, particularly for our frontline workers have driven wage rates higher and pay premiums While wage rates are higher, the more significant impact is the widespread inefficiencies in our operation from constrained labor markets. To illustrate this, I'd like to share a brief example from FedEx Ground.

Speaker 2

Our Portland, Oregon hub is running with approximately 65% of the staffing needed to handle its normal volume. This staffing shortage has a pronounced impact on the operations, which results in our teams Diverting 25 percent of the volume that would normally flow to this hub because it simply cannot be processed efficiently to meet our service standards. And in this case, the volume that is diverted must be rerouted and processed, which drives inefficiencies in our operations and in turn, higher costs. These inefficiencies included adding incremental line haul and delivery routes, meaning more miles driven And higher use of 3rd party transportation to enable us to bypass Portland entirely. Now that's merely one example.

Speaker 2

Across the FedEx Ground network, there are more than 600,000 packages a day being rerouted. We anticipate the cost pressures from network inefficiencies such as the one I just illustrated to persist through peak As we navigate the labor market and impacts of new COVID waves, overcoming these staffing and retention challenges is our utmost Priority as they not only affect our cost structures and operational efficiency, but also having a negative impact on service levels. As such, we're taking bold action across the enterprise to hire and invest in our frontline team members as we prepare for the peak season ahead. These actions include targeted pay premiums, particularly for weekend shifts increased tuition reimbursement Sponsorship of a National Hiring Day on September 23 as we seek to hire 90,000 additional positions ahead of peak. Detailed volume and demand planning with customers to drive additional sorts to alleviate congestion and expanding network capacity, which I will touch on shortly.

Speaker 2

Based on these actions, Combined with our expectations for improving labor conditions, we do anticipate gradual improvement in our operational efficiency as we turn into the new calendar year. During the Q1, the team continued to execute on our strategy Even amid the challenging operating environment, as e commerce drives higher demand, we continue to strategically invest in our network to boost Daily package volume capacity, increased efficiencies and further enhance the speed and service capabilities of our networks. Our investments continued in Q1 as FedEx Ground expanded its physical footprint with a new state of the art hub in Chino, California, which began operations in August. This fully automated hub includes large package sortation as the capability to process up to 30,000 packages per hour and strategically located to help address ongoing port congestion challenges. FedEx Ground also continues See year over year improvement in last mile efficiency driven by a 2.4% increase of packages delivered per hour compared to Q1 last year, thanks to route optimization technology.

Speaker 2

As we move into Q2, we are meticulously planning for substantially higher ground capacity this peak season due to our investments in FedEx Ground's infrastructure. This includes the addition of more than a dozen new automated facilities and several other sortation equipment expansions in addition to the Chino Hub that I already mentioned. Several key technology projects are also slated for completion this fall, including the modernization of multiple sortation, Transportation management and safety systems, which will help to increase ground's network capacity by 100 of thousands of ADU as well as its Flexibility and resiliency. This brings a total capacity increase of more than 1,000,000 average daily volume compared to last peak. Another significant opportunity in our growth strategy is the improvement in the profitability of our international Express operations.

Speaker 2

We reached a significant agreement with the social partners at our Liege Xpress operations regarding the intended European Air Network Transformation. This is an important milestone in the completion of the Air Network integration, which remains on track for completion in spring 2022. That will bring the physical network integration of TNT into FedEx to a close and when combined with the benefits of our previously announced European Restructuring provides significant upside in our international profitability moving forward. In summary, we're taking bold actions in the short term to navigate through this highly uncertain environment. We remain committed to long term shareholder return, and we are very confident in our strategy for the following reasons.

Speaker 2

We have a differentiated portfolio of services to attack the fast growing e commerce market. Our business model gives us the framework to be very successful in this regard. In fact, we are working strategically with several retailers to deliver a win win win solution, Win for the retailer, win for the end consumer and win for FedEx. For instance, we recently partnered with Retailers to create a common data platform that drives optimization of our combined assets and enhancement of visibility and predictability to the end customer. Further, as the day definite residential volumes grow in our network, there's increasing opportunity to collaborate As the completion of our physical integration in Europe provides an inflection point for profitable growth.

Speaker 2

And finally, we are in the early stages of unlocking value from digital innovation. We are confident that this will play a significant part in success of FedEx for years to come as we make supply chains work smarter for everyone. Our strategy is sound and positions us well for improved returns as we move through fiscal year 'twenty two and beyond. With that,

Speaker 3

with 14% revenue growth and double digit yield improvement in our transportation segment. These results reflect the positive backdrop for growth in the parcel market, including a very healthy pricing environment. For fiscal year 'twenty two, FedEx revenue was forecasted to pass $90,000,000,000 Further, we are forecasting that the U. S. Parcel market will grow to 101,000,000 packages a day by calendar 2022, which is year over year growth of 12%.

Speaker 3

These market projections are slightly lower than last quarter as e commerce percentage as a percentage of retail declined, we saw a shift to in store shopping and buy online, pickup in store, And spending and services, of course, increased. However, despite this moderate change in e commerce growth, the secular trend of e commerce growing as a percentage of retail We'll continue to drive healthy parcel market growth. We are forecasting a 10% annual growth rate of U. S. Domestic market volumes through 2026.

Speaker 3

At FedEx in the Q1, total U. S. Domestic package volumes increased year over year by 1.5%. At Express, our total U. S.

Speaker 3

Domestic package volume grew 7% year over year. Total FedEx Ground volumes were relatively flat in the quarter. However, I'm very proud as we proactively managed our capacity for higher yielding commercial and home delivery services. In fact, FedEx Ground commercial volumes grew double digits in the quarter. In the Q1 of fiscal year 'twenty two, FedEx Total U.

Speaker 3

S. Domestic residential package volume mix was 57% versus 62% a year ago. U. S. B2B mix improved year over year in the Q1 of fiscal year 'twenty two as B2B volumes continue to recover with inventory replenishment and manufacturing rebounding as the economy opens.

Speaker 3

B2C mix continues to remain higher, however, than pre pandemic levels. In Q1, FedEx freight revenue increased 23%, driven both by increased Volume and higher revenue quality, a huge shout out to the FedEx Freight team. Great job, team. FedEx Freight Direct continues to gain Incredible momentum. Turning now to our revenue quality strategy.

Speaker 3

The continued constrained capacity in both the in international markets has led to a very favorable pricing environment. We are focused on protecting and growing volume in high yielding commercial segments, including commercial ground and small and medium segments. We have an incremental opportunity to improve large customer yields through contract renewals and providing large customers an ability to procure incremental capacity at current market rates. As announced yesterday, effective January 3, 2022, FedEx Express, FedEx Ground and FedEx home delivery shipping rates will increase by an average of 5.9%. While FedEx freight rates will increase by an average of 5.9% to 7.9%.

Speaker 3

We also announced other surcharge increases, which can be found on fedex.com. These increases will help us continue to balance capacity with demand and mitigate the impact from the increased costs that Raj just outlined. Turning now to international. We are forecasting the air cargo market to be more than $80,000,000,000 by calendar year 2025. At FedEx, we currently have single digit market share and as such, This remains a significant growth opportunity for us to continue to pursue.

Speaker 3

We expect air cargo capacity to remain constrained through at least The first half of calendar year twenty twenty two, a full recovery is not anticipated until 2024. Global air cargo capacity continued to recover in July. It is still down 10% compared to pre pandemic levels. Capacity on international lanes remains scarce, and we have seen European and APAC export demand recover to pre pandemic levels. Globally, we continue our efforts to optimize our network and customer mix.

Speaker 3

We managed to a very high percentage of and yield per pound improvement of 18% for international freight. Exports from Asia are fueled by the strong demand from B2C and B2B recovery. B2B will further benefit from a shift in demand from ocean freight to air cargo as our customers replenish stock levels in time for peak sales season. To provide access to reliable capacity in this constrained environment, we turned 6 previously ad hoc intercontinental And the scheduled service in fiscal year the fiscal year quarter Q1. 4 Trans Pacific and 2 for the Asia Europe lane.

Speaker 3

We are seeing a strong recovery in Europe as well with the overall economic recovery back to pre pandemic level. Our intra Europe cross border B2B volumes have recovered to pre COVID levels. Our growth is further accelerated by significant B2C parcel volumes. E commerce growth will be critical for both our Asian and European businesses. In Q1, we expanded FedEx International Connect Plus From Europe to 6 new global destinations, increasing coverage to 82% of global GDP across a total of 300 lanes.

Speaker 3

And on September 1, we launched FICP in EMEA across 80 origin destination lanes. For businesses looking for solution with competitive transit, FICP provides a compelling e commerce value proposition. We continue to gain new

Speaker 4

Thank you, Brie, and good afternoon, everyone. Our Q1 FY 'twenty two adjusted earnings per share of $4.37 was negatively impacted by approximately $800,000,000 in year over year headwinds. And while Raj cover the operational impacts of these challenges, I will detail the financial impacts to the quarter. Of these headwinds, the difficult labor market had the largest effect on our bottom line, Representing an estimated $450,000,000 in additional year over year cost, the majority of which impacted our FedEx Ground business. As we look into the impact of labor costs on the business, I want to break this impact into 2 components, higher wages and the impact of network inefficiencies.

Speaker 4

Of the $450,000,000 we estimate that $200,000,000 was incurred in higher wage and purchased transportation rates. This included higher wage rates and paid premiums for team members and higher rates paid for 3rd party transportation services. In addition to the higher wage rates, we estimate that network inefficiencies of approximately 250,000,000 contributed to the total impact of labor shortages on the business. These costs include additional line haul, Higher usage of 3rd party transportation, cost to reposition assets in the network over time and recruiting incentives, all to address Staffing shortages.

Speaker 2

Beyond the

Speaker 4

labor impacts, our results for the Q1 also included the following headwinds: An additional $135,000,000 in our healthcare costs due to lower utilization a year ago, $85,000,000 related to investments in the ground network, which represents the cost of bringing online 16 new automated facilities and expansions at 100 facilities, which are critical to improving service and adding capacity to meet growth for Peak and beyond. And at Express, we had an estimated $60,000,000 in incremental air network costs due to the impact of COVID restrictions on our operations, including limitations on layovers, supplemental crews to ensure service continuity, and immigration restrictions. In addition and as a reminder, our prior year results at Express included a pretax benefit of $65,000,000 from a reduction in aviation excise taxes. That said, our first quarter results did come in lower than our own expectations as difficult Labor conditions persisted throughout the quarter. As a result of that, variable compensation was not an expense headwind in the Q1.

Speaker 4

With that overview of the consolidated results, let's turn to the highlights for the segments. At Express, results declined due to the higher Operating expenses from staffing challenges and COVID related air network impacts I discussed. Profitability was Also impacted by fewer charter flights compared to the surge last spring during the early months of the pandemic. While we've covered the impacts to Ground results in detail, I would like to call to your attention to an enhancement in our reporting included in the release and the 10 Q. As a result of business growth and our unmatched 7 day operating network at Ground, we are now providing additional Beginning with our Q1, we are breaking out ADV statistics for FedEx Ground Commercial, home delivery and economy services.

Speaker 4

Turning to freight, we reported a record operating margin of 17.3% for the quarter as our continued focus on revenue quality and profitable growth drove average daily shipments up 12% And revenue per shipment increased 11% as Brie highlighted previously. Now let's pivot to capital spending. During the Q1, we spent $1,600,000,000 in capital as we continue to invest in our strategies for profitable growth, Service excellence and modernizing our digital and IT platforms. Our capital forecast for fiscal 'twenty two remains at 7 point $2,000,000,000 less than 8% of anticipated revenue and includes the following key elements. 1st, More than 50% increase in capital spending at ground year over year for capacity expansion and new facilities to capture opportunities from growing e commerce business.

Speaker 4

And second, fleet modernization at Express with continued investment in 767 and 777 aircraft, which not only has a high financial return, but is an important part of the strategy to reduce our carbon footprint. In evaluating capital investments, our return on invested capital on existing capital and new projects is a critical metric to managing our business. And we have a rigorous approval process in place on all new capital projects. As we look at investments, We set the internal rate of return hurdle above our weighted average cost of capital, which varies based on the nature of the project. And in the future.

Speaker 4

We ended our quarter with $7,000,000,000 in cash and are targeting over $3,000,000,000 in adjusted Free cash flow for FY 'twenty two, which puts us on pace to deliver over $7,500,000,000 in adjusted free cash flow For FY 'twenty one and 'twenty two combined are exceeding our historical levels. We continue to focus on Full capital allocation and strengthening our balance sheet in fiscal 2022. During the quarter, we repurchased 1,900,000 shares totaling roughly In addition, we plan to make a $500,000,000 voluntary contribution to our pension plan this year. We are lowering our fiscal 2022 guidance to reflect Our first quarter results which were lower than our expectations. As we look to the rest of the fiscal year, we expect certain to extend longer than we originally forecast in June.

Speaker 4

So for fiscal 'twenty two, we are now forecasting Earnings per share of $18.25 to $19.50 before the mark to market retirement plan accounting adjustment And earnings per share of $19.75 to $21 before the mark to market adjustments and excluding estimated TNT integration in expenses and costs associated with business realignment activities. And our effective tax rate projection is 24%, again prior to the mark to market retirement plan adjustments. While our outlook reflects more uncertainty moving forward, It represents adjusted year over year EPS growth ranging from approximately 9% to 15.5% following our record fiscal 2021. As you all know, we are navigating an inherently uncertain macro environment and managing several unknowns. The pace, shape and timing of economic recovery given the dynamics of the pandemic, including the spread and response to new and existing COVID variants, The uneven nature of global government restrictions, disruptions to global supply chains and of course, recovery in labor availability.

Speaker 4

Our forecasts assume continued growth in U. S. Industrial production and global trade, a gradual improvement in labor availability, Current fuel price expectations and existing tax regulations. With respect to labor, We are assuming that the combination of these actions we are taking that Raj outlined, combined with a steady increase in labor availability as we turn into calendar 'twenty 2, will allow us to add team members which will drive improvement in our efficiency, productivity and cost structure. While we are not providing specific 2nd quarter EPS guidance, I do want to highlight a few key assumptions Within our outlook, overall for the Q2, we anticipate a similar level of headwinds in Q2 as we experienced in the Q1 As the challenges and impacts to our operations from the labor shortages are expected to persist through the rest of calendar 2021.

Speaker 4

Consistent with the Q1, we also expect headwinds in Q2 to be driven by our expansion to ground, higher healthcare expenses, COVID related air network inefficiencies are expressed and the benefit in the prior year of reduced aviation excise taxes. That said, while these headwinds will persist in the Q2, we expect strong performance in the second half of fiscal 'twenty two. We remain confident that our long term strategies will allow us to realize the benefits of growth investments in the future. And next, we'd be happy to address your questions.

Operator

And we'll go first to Scott Group from Wolfe Research. Your line is open.

Speaker 5

Hey, thanks. So guys, it strikes me that everybody in transportation right now has a lot of pricing power And everyone's dealing with tight labor capacity and inflation, but every other transport company is reporting margin Improvement in earnings growth. So I guess my question is, why do you think you're seeing a bigger impact than anybody else In transportation and outside of just adding more capacity and spending more, what sort of meaningful significant changes Do you think you need to make or are you contemplating making to start realizing more sustainable improvement in margin, earnings, returns, all that? Thank

Speaker 2

you. Let me start by saying that we Definitely do not see this as an us versus them situation at all. In fact, the Minneapolis Fed noted that firms in every sector difficulty in attracting labor and that 68% of the Fortune 100 companies supply address supply chain and labor disruptions over the past quarter. So the situation is very complex, not just the availability of workers, workers impacted by safety concerns with COVID and of course, the very real issue of childcare. And our labor markets and broader economy cannot function properly and if schools and daycares cannot stay open.

Speaker 2

So Our approach to our teams and our people first culture combined with the flexible operating model and ground has positioned us to remain competitive in this market. And we are Highly confident that the actions we're taking to address the shortage as I outlined in my prepared remarks. Let me just also add that we are very confident in our strategy. I mean, where the market is growing, we have a Differentiated value proposition, we have a network, an operating model that makes it very that makes it good for us to succeed. And so we are confident in the long term strategy here.

Speaker 2

And as Mike said, we expect to see in The calendar year, the new calendar year, the labor availability continue to recover. Mike?

Speaker 4

Yes, Scott. I would add, I think you can't just characterize all transportation companies in one Singular bucket there and assume that everybody has the same considerations in terms of the nature of the business there. We've tried to explain with great specificity how this operationally impacts us and thus The financial ramifications of that. So look, we fully recognize that the Q1 wasn't What we anticipated, we've taken a number of actions to address that. We will continue to identify further actions.

Speaker 4

But I will fully say if the circumstances don't change as we identify here, we absolutely would need to revisit The pace of the plans that we have. The strategies are sound, but we would absolutely need to think about the pace of things given the environment that we're operating in. So I think Brie highlighted the characteristics of what growth Is and will continue to be in the business, so that remains the underpinning going forward.

Operator

And next we'll go to Brandon Oglenski from Barclays. Your line is open.

Speaker 6

Hey, good evening everyone and thank you for taking my question. Mike, can I just follow-up on that? I think the frustrating part from an investor perspective, you guys have definitely seen a pretty substantial growth in the Decade definitely put the capital behind that, but margins are actually lower now than they were at prior peak. Returns have obviously come down. And we do hear lots of bold actions how to sustain forward growth.

Speaker 6

But I guess I'm going to ask the question just the same way, like what is being done in a bold way to True returns and profitability across all these networks. And is there a way to look back and say, hey, we've been investing in the 777 and 7673 Yes. Express margins aren't showing much traction. How do we review those prior plans to ensure that they deliver in the future? Thank you.

Speaker 4

So Brandon, let me first you mentioned about Express investment in the aircraft there. If you rewind roughly a year and a half ago, we were in the midst of talking about parking and reducing capacity a number of our MD-eleven fleet. Obviously, the market changed radically here and there was the need for And the additional capacity and the opportunity there, so we unpark those. Should things change going forward, that remains Flex lever and it absolutely is the case that having a higher proportion of the newer, more Efficient aircraft, which the 767 and 777R in the fleet will drive improved economics and margins at Express. So Again, we're ongoing looking at these different network initiatives and So that absolutely remains a long term winner in terms of the fleet renewal and we will continue with that.

Speaker 4

What was the second part here? You started off with another aspect.

Speaker 6

Well, Mike, the first thing I think here for a lot of your investors That the growth is very evident, especially in the last few years. It's just that margins have not improved. So there's always a plan to improve margins, but it doesn't seem to come through. So what are

Speaker 4

Well, Let me just step back a little bit. We had record results in 2021 and improved margins. Our guidance, albeit lower than what we shared with you 3 months ago, is if you look at the operating earnings, in fact, it's double digit at the low We had some discrete tax items there. So indeed, we are focused on driving improved margins, Cash flows and returns and feel that we're projecting another record year on top of a record year. So again, We are absolutely committed to continuing that trajectory.

Operator

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

Speaker 7

Hey, thanks for taking the question. I want to Mike, it's helpful to kind of run through a number of the items that were impacting the quarter. But if I were to sort of exclude those items and look at sort of the cost inflation on the package business, the Express and Ground package. It still looks like I'm getting about 9% cost inflation on essentially flat volume. So I was wondering maybe if you could help us understand ex some of the items that you've talked about, what's driving the Inflation at such a high level when we're not seeing the volume growth in those individual segments.

Speaker 7

I mean, do you Expect that to sort of change and do you think margins expand in both of those segments for the full year?

Speaker 4

Let me take a swing at that first. So as it relates to the Cost inflation and taking that category broadly, let me just clarify what's in our outlook. The network inefficiencies Inherently are contributing to that cost increase that you're talking about. We expect those to mitigate and work away. In our outlook that we're giving you here, we're not assuming any change in terms of the current labor market in terms of wage rates in that.

Speaker 4

So Just to give you an illustrative example here, a year ago, our At our Express major sort locations, The hourly rate is north of a 25% increase. So those are the that is the reality of The labor market right now, and so thus, as Brie highlighted, we are taking a number of actions To recognize and address that, you know, maybe if I help talk through as we go through the year here, I think maybe part of what you're also there. So again, like I said, more efficient operations as we go through the year. The pricing actions that we announced yesterday combined with our ongoing efforts, those largely will impact the second half of the year. Raj highlighted a number of the adaptations we're making in our operating plans as well as some of the technology and other initiatives We're bringing on to execute more efficiently.

Speaker 4

And then just to tie off some aspects here, we will have some tailwinds in the second half. You may recall we had the severe weather situation in the Q3 of last year. Variable comp will be a tailwind in the second half of the year. And then there was 2 other items with the frontline bonus program and then the recognition of our yield contribution. So Trying to put all that in context for you there.

Speaker 4

Raj, anything else?

Speaker 2

I was just going to cap it off, Chris, by just saying that we

Operator

And next we'll go to Ravi Shanker from Morgan Stanley. Your line is open.

Speaker 8

Thank you. I just wanted to follow-up on The last comment because again some of the items that point to the second half being materially I mean, those don't seem operational, those are like almost one time mix. So I'm just trying to get a sense of How you have this confidence in second half being significantly there in the first half. And the reason why I asked the question is because

Speaker 4

Robbie, you broke up some there, but there was a reference to some of these items being non operational in the second half. I guess maybe I'd Turn it around the other way and say if we were

Speaker 8

Sorry, if I can try again, if my supplement signals weak. I'd wanted to get a little bit more detail into why you think second half is going to be materially better than the first half because some of the items you quantified, the yield contribution, the variable comp, etcetera, those seem kind of non operational, almost one time Nature kind of so again, do you really feel like the top line is going to accelerate, the volumes going to accelerate? And the reason I'm asking this question is because you basically cut your full year guidance by approximately the magnitude of the first quarter miss, which does not seem to imply that you are expecting the labor cost experience to continue for the rest of the year?

Speaker 4

Well, we're not sitting on our hands amidst these circumstances. We're taking actions to mitigate it. So I wouldn't Characterize it as just singularly looking at Q1 and changing as a result of the outcome of that. So we're aggressively managing Every aspect there, I guess I might turn it around the other way and say if you looked at our results in Q1, absent The labor availability challenges, it would be extraordinary and thus We realize the absolute number matters and so we're taking actions on a number of fronts to That will make the second half exactly as we outlined. I'll let Brie address your volume question for later as we go through the year.

Speaker 3

Yeah. I guess the only thing to add is we're still pretty bullish on the volume growth and our ability to take share both domestically and internationally. The Q1 of our fiscal year is the hardest comp year over year from a growth perspective. So for sure we had to say earlier, I think there was a comment earlier about kind of flat Volumes, we have to put that in perspective. And we have record high volumes within the network right now.

Speaker 3

As we look towards peak, we're going to see growth on what was a Tremendous growth at peak last year. So we're pretty confident in the volumes. And again, to complement what Mike shared, as a reminder, a lot of our increase Our GRI will happen in January, so will happen in the back half, which is obviously a big driver of back half performance. And then Thanks. John's got some great technology that's coming into market as we head into peak and in the back half.

Speaker 3

It's going to help us be more productive. And Karen Redington and the Europe team has some incredible work going on as they finalize the integration of the Air Network. And we've got some other work going on there to improve European profitability. So we are pretty confident in the back half of the

Operator

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

Speaker 6

Thanks. So Raj, I think there was a

Speaker 7

comment in the release kind of talking about some deceleration on some of the e commerce and with ground volumes down 10% year over year, international domestic down 13%. Is that part of what you're anticipating for labor to improve? Or maybe just talk about the top Brian, you were just mentioning still seeing strength and a good network into peak, but yet these numbers indicate and kind of what we're hearing From the market that we're seeing some of this deceleration as you had in the print. So maybe just talk about the volume side a little more.

Speaker 2

Sure. I'll start and I'll turn it over to Brie. No, absolutely. We are actually seeing very strong volume to add to what Brie just said. The only reason we're seeing a Volume in the Ground segment is because of the economy product, which is broke out for you for the first time.

Speaker 2

And our even from a The commercial volume is growing strongly and even our HD volume on a very tough year over year comp is still growing on top of that. And international is growing very strong. So no, the only place we're not going there is restructuring our international domestic businesses. But our IP business, our IE business, export business is very, very strong. So No, the demand for our services continue to be very strong because of the differentiation that we are providing in the marketplace And we continue to gain market share around the world.

Speaker 2

So, Brie?

Speaker 3

Yeah. I think Raj kind of outlined it pretty clearly from a volume perspective As we get beyond, I guess the one thing I should add that maybe wasn't clear into my opening remarks is that we are constraining demand right now. You know, as Mike and Raj talked about the labor, we are doing everything we can to strike that right balance of growth with service. And I will tell you that as we've done that, you can see where we've constrained it. It's the FedEx economy product.

Speaker 3

It's the least profitable product. So it's the right place to constrain growth. And we have made sure that we are not constraining growth in our highest profitable segments. That's small and medium and that's our commercial. And you saw those And commercial numbers that I referenced earlier.

Speaker 3

So I would say number 1, we're confident in the secular growth opportunity for FedEx. 2, we feel we've been gaining share. My last market share Report shows that, and then where we are having to constrain because of the labor issues, we are doing so in a very disciplined manner.

Operator

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

Speaker 9

Yes. Thank you. I wanted to go back to labor. I mean, it seems like your guide really in a pretty big way hinges on that Assumption of improving labor availability in second half. So I guess just two elements to that.

Speaker 9

Do you feel like you have much visibility to that improvement and what maybe have you seen that would give you confidence that that's happen. And then I guess a component within that, if you go into peak, it would seem like if you can't staff the So it's ahead of peak and you have to hire, I don't know what your number is, 50000, 70000 people that that could that problem could get worse Before it gets better, so I guess visibility on your labor and being okay during peak as well. Thank you.

Speaker 4

Thank you, Tom. Yeah, the

Speaker 2

number is 90,000 and we are well on our way here. Now We have the last two weeks, we have seen pockets of opportunity and positive Changes that we hadn't seen in the Q1, so that gives us a little bit of encouragement. And this is a systemic issue. And so yes, we're making some assumptions here In terms of labor availability, but if we staff up for peak, then hopefully the Q3 will be in good shape. So We're making we're not making dramatic assumptions here in terms of Q3 and Q4, but we are assuming that Q3 is going to be better than Q2, is going to be better than Q1.

Speaker 2

And the early indication, just very early indication is that that's indeed the case. So I don't know, Mike Want

Speaker 4

to add anything to that? No. Just to reiterate, when I broke the labor impact into 2 pieces. The part that we're assuming that does mitigate, as Raj outlined, is the impact from the availability. Again, the market Wage rate is what it is, and we can assume nothing different than that.

Speaker 4

And that is what is baked in to the outlook.

Operator

And next we'll go to Brian Ossenbeck from JPMorgan. Your line is open.

Speaker 6

Hi. Thanks for taking the question. Just wanted to ask, Brie, about the trends in pricing. Obviously, we saw the GRI yesterday. You talked about that briefly.

Speaker 6

You've got some new surcharges in place, fuel is going up. But I think you mentioned in the prepared remarks, there's some availability for people, the larger shippers to get Passing now at current rates. So maybe you can just instill that, those two factors. What do you feel about getting price in the market to capture and get ahead of Some of these costs and then maybe you can clarify the comments on the larger shippers, we generally cause a lot of these surges from a volume perspective. Thank you.

Speaker 10

Got it. Thanks, Brian. Good question.

Speaker 3

To be really clear, when we're talking about incremental capacity, one of the key elements of our revenue quality strategy, which has Application here in the United States as well as on our intercontinental. As we talked about it, I talked about the 6 new flights that we launched from an Asia outbound perspective. As we and that was primarily quite frankly a transition from ad hoc to scheduled service to improve reliability. But that allows us to plan and predict and it also allows us to sell differently. As we sold into those flights versus So a lot of that was kind of catch up and spot rate.

Speaker 3

We are making sure that we are bringing on customers at current rates And we are measuring kind of those current rates. So if a customer had ex use of our intercontinental lift prior For the last 18 months, we've contractual terms there. But as we increase the capacity we give those customers, that incremental business comes on at a higher rate. So we're really trying to strike the right balance with our customers, give them the predictability that they need and honor our existing contractual terms, as well as we expand capacity, give them availability to that capacity, at an incremental current market Right. So really trying to strike that right balance.

Speaker 3

So that's what I was referring to. It's predominantly in the intercontinental side, but of course, it does have application from a peak perspective. As we've brought on new customers this year and we look at our surging customers, they obviously those peak surcharges help them get the capacity they need so they can have a successful peak. I hope that helps answer your question.

Operator

And next we'll go to Jordan Alliger from Goldman Sachs. Your line is open.

Speaker 6

Yes, hi. Just on the new ground buckets that you've broken out, Maybe talk a little bit about the three pieces and would you expect going forward roughly similar trend lines with the commercial Sort of outpacing everything, but still positive on the home delivery. And as you mentioned, the constraining capacity to keep limiting the last piece of the

Speaker 3

business. Great question. So for this Fiscal year as we talked about inventory levels are at an all time low, and all of the economic indicators that we're tracking saying that we're going to have a very A strong growth year from a home delivery perspective, I do think that you will see, you know, we will

Speaker 9

say moderate growth for home delivery given

Speaker 3

the lapping of last year's Growth for home delivery given the lapping of last year's very, very strong growth. So I think you're going to see Some good home delivery growth. And from an economy perspective, this particular quarter, you saw the 30% year over year decline. I do not think you will see that Trends continue. John and I are working and we've got some really great new technology coming to market, a new feature called sort to due date, which is going to allow So I think you'll see us find a better balance of the economy to home delivery, but directionally commercial will grow the fastest, followed by home delivery, followed by economy as we think about this fiscal year.

Operator

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

Speaker 1

Hey, good afternoon. Brie, just following up on that sort of growth outlook. You put out some numbers out there on 10% market growth, Residential for the next couple of years. Is it your expectation that pricing and the operation will be at a point where You can kind of participate at an above market growth rate from once you get past this period of volatility or do you intend to Kind of grow the ground business maybe a little bit lower than the overall market as, some other competitive advantage at the back get the lower end of the service package.

Speaker 3

That's my favorite question yet. Yes, our intent we have the best value proposition in the market. We have the best 7 day transit and coverage in the market. We feel really good about our value proposition. As I mentioned earlier, We are actually right now controlling demand because we're trying to balance service, in the current labor environment.

Speaker 3

So that is absolutely our intent. The market is growing. We've got a great value proposition. I can't think of a better time to lean in to growth here in the United States.

Operator

And we'll take our next question from Todd Fowler from KeyBanc Capital Markets. Your line is open.

Speaker 6

Great. Thanks and good evening. Mike, I understand kind of the thoughts around not being too specific about quarterly But I do think from a Street perspective, kind of the volatility from quarter to quarter can be an issue. So I just want to make sure, are you saying that in the second quarter, you're Seeing a similar $800,000,000 magnitude of year over year headwinds. And then secondly, when we think sequentially, the 2nd quarter Operating income is flat or down a little bit from the Q1.

Speaker 6

Is that going to be a similar cadence this year? Are there some other things that we think about just as we move into the Q2 from a seasonal standpoint. Thanks.

Speaker 4

Sure, Todd. Yeah. No, that's a Fair characterization when you, when I said that the headwinds would be similar to the 800,000,000. Look, You know, the pandemic and many other factors impacting our market, including the supply chain disruptions, I think you have to kind of take pause in terms of assuming typical seasonality across the board. Yes, there is a degree On that because the dynamics are much more fluid than they were and that's why we're trying to outline that as best we can, but We're navigating those changes along the way, but we're very confident in what we shared with you.

Operator

And next we'll go to Amit Mehrotra from Deutsche Bank. Your line is open.

Speaker 11

Hey, I just wanted to follow-up on that last question. So, just want to understand. So, you're obviously entering peak season, higher B2C mix, margin pressure, density pressure. So you typically see a pretty notable step down In gram margins fiscal 1 to 2Q, is that the same cadence? I mean, because 1Q is obviously pretty low to begin with, Just trying to get an understanding of that.

Speaker 11

And just as a high level, do you think ground margins can be up year over year this year? Thanks.

Speaker 4

So Amit, I'm just going to stick with it. We're not giving a more margin forecast. What we outlined was that we expect operating profit to be up in all the transportation segments. So I'm not going to get into giving a specific margin forecast by quarter. And again, the seasonality is We don't think it's value added to kind of get into trying to parse that at a level of precision given the dynamics of the market right now.

Operator

And next we'll go to Helane Becker from Cowen. Your line is open.

Speaker 10

Thanks very much, operator. Hi, everybody, and thank you for the time. So we've been actually doing a lot of work, as you know, in the China area, and you guys have about 30,000 people employed there. I think it's getting increasingly more difficult to work there. So can you just talk about how you're thinking longer term about being in that market versus moving more capacity offshore to places like where you have regional sorts like Japan or back to the Philippines?

Speaker 10

Thank

Speaker 2

you. Thank you, Helane, for that question. We actually have 12,000 employees In China, we have as you know, we have been in business in China since 1984. And we have serving our customers there in this extremely important market. We value our business in China, and we are committed to continuing to improve our value proposition there.

Speaker 2

Our growth in market is very strong and our operations in our Hub Bin Guangzhou is going smoothly. And we also just opened up new air operations from Beijing. So China remains a very important market for us and we are very committed to it.

Operator

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

Speaker 12

Okay, great. Thank you I guess just to go back to the CapEx and return discussion for a moment. Mike, thank you so much for the additional sort of comments around returns and free cash flow. But I guess when we think about sort of the longer term targets for the business, you guys have always sort of talked about this Double digit consolidated operating margin. We haven't really come close to it since fiscal year 2016.

Speaker 12

You raised the CapEx as a percentage of revenue targets in the proxy several weeks ago. Can you talk about why it makes sense To raise your long term capital spending plans, when the business still isn't achieving The long term targets you've set for it from a margin perspective, just help us square those two things.

Speaker 8

I think that's an issue

Speaker 12

that a lot of people are having trouble justifying.

Speaker 4

All right. Well, Jack, first, look, Let me just say, because you brought up about ROIC, just and I'll expand a little bit about on the remarks I made earlier there. We're obviously referencing to our WACC when we compare ROIC, which we put in the 7% to 9% range, which I think is consistent with what We see in many of your analysis. But when it comes to the ROIC itself, there's a number of Different approaches and methods that practitioners use. So there tends to be variability in the absolute as well as Comparative measurements, but that said, we're revisiting the various aspects of that so that we can maybe expand the context Around our discussion of the topic, but I will say regardless of how you calculate it, our ROIC does remain above our WACC.

Speaker 4

So, you asked about the LTI plan. Look, I'm not going to speak on behalf of the Board, but I will give you some context around Partly about what I mentioned too, 3 months ago. So again, we had record earnings in fiscal 'twenty one amidst an unprecedented global Pandemic and and delivering, you know, the lifesaving vaccines around the world. And and we've talked about the the radical changes in supply chains, customer Expectations and all that. So we did indeed accelerate purposefully some investment opportunities for capacity expansion And, of course, the replacement of the aircraft I mentioned before.

Speaker 4

So as I did specifically say on the June call, The FY 'twenty two to 'twenty four LTI plan was set 8% to account for these opportunities. And that target, It is below our historical capital intensity. Fiscal 'twenty one was 7%, but that was the lowest in 10 years. So Again, there's absolutely a focus on returns and I think that we will continue to Address your considerations there. And I would also highlight, because there was a question earlier about ground and investment there, we're making We talked a lot about how we're utilizing our assets differently, more efficiently, Investing in smaller units of capacity, we've got the 1 single hub, but there's no other hubs on the drawing board.

Speaker 4

Brown can generate a higher ROIC at different margin levels than it did, call it, 8, 9 years ago. So Again, that's absolutely factors into how we look at these things.

Operator

And next we'll go to Allison Poliniak from Wells Fargo. Your line is open.

Speaker 13

Hi, good evening. Brie, I think you had mentioned a low single digit Share internationally, it's certainly unique environment, limited capacity. Can you maybe talk to how you're focused on expanding share, things you're doing there, but more importantly, What you're doing to try to retain some of that sugar capturing today once capacity eases at this point?

Speaker 3

Great question. So a couple of things. Number 1, when we think about our international business, our largest growth opportunity is Europe. So when we think about what are we doing to gain share, well, 1st and foremost, we're going to complete the physical integration, which is obviously critical. But when I think about Europe, There's three lines of business.

Speaker 3

There's the intra Europe. We bought TNT. It has a very comprehensive and very unique value proposition because it's got the parcel and The freight network enter Europe to grow our cross border business, and we're very pleased with the momentum there. From an international perspective, late last Fiscal year, we expanded our intercontinental value proposition between Europe and the United States. We now have 90% of businesses in EU 'seventeen have access with the fastest overnight service into the United States.

Speaker 3

So we have the leading intercontinental value Opposition from Europe to the U. S, it's a great bundle to sell to B2B or commercial customers, sell to intra Europe as well as the intercontinental. And then thirdly, when I think about Europe, it's we are absolutely under penetrated in e commerce both within Europe as well as from Europe to the United States. And we, as I talked about, have launched the FIC product, which is really a very competitive product. It's got quick transit times, but has very different features of service for the last So it allows us to lower our cost to serve because the features on the last mile delivery, look a lot more like the ground domestic network.

Speaker 3

So That's our primary focus from a Europe perspective. I will say we are also underpenetrated between Asia and Europe, and we've got great momentum in that lane. Similar metrics, we have sped up our service into Europe from Asia. In addition to that, we are launching the FICP Product between those countries, obviously Asia into Europe is a very large e commerce market. And again, we're underpenetrated there, Really pleased with the momentum of our FICP products.

Speaker 3

So I hope that helps clarify. I also wanted to go back. I just looked at my notes, Commercial and home delivery here in the United States as we think about the rest of the fiscal year are going to be neck and neck from a growth perspective. So as I talked about commercial growing faster than home delivery, going to be pretty darn close as we look at the volume growth this year.

Operator

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

Speaker 14

Yes, good afternoon. When I look at the LTL freight business, it seems to be performing much better relative to Leisurely expectations compared to Parcel. Yes, that's still a manual labor intensive business that requires a lot of drivers, line haul, freight handling and bodies to do that. Can you characterize why you think that you haven't had these labor driven struggles in that part of your business that seem to be plaguing The parcel businesses, particularly domestically and any best practices or lessons you can learn and apply elsewhere? Thank you.

Speaker 4

Bob Baskin, this is Mike. So first, I'll let Raj address more broadly. But just to clarify, within that 450 number of labor impact. There is an impact there for freight in terms of the same considerations that we talked about there. So I don't want to Have the takeaway or imply that the freight team isn't dealing with similar considerations there.

Speaker 4

But I'll also highlight, as I mentioned to Scott early on there, that different networks and different transportation Businesses can have different characteristics in that. So Raj, you want to talk about the great things at freight?

Speaker 2

Well, we are extremely proud of the FedEx Right team and you know but they're also leading with exactly the same set of challenges and but you know we have The team has done a fantastic job of managing through our revenue quality and operational efficiency despite these challenging And it's obviously a very, very key part of our portfolio. Having said that, with 20,000,000 packages on the ground network Per day, the U. S. Domestic parcel network is a very different set of challenges than Dealing with a much smaller set of shipments that go through the freight system. So look, on your point about sharing best practices And making sure that we do the right thing across our operating companies that goes on every single day.

Speaker 2

And we are the operator collaboratively is a big mantra at FedEx now. And we are definitely doing that. So again, I'm very, very proud of what the freight team has done here.

Operator

And next we'll go to Duane Pfennigwerth from Evercore ISI. Your line is open.

Speaker 9

Hey, thanks. So just on the $200,000,000 wage pressure and the $250,000,000 in inefficiencies that, that triggered, Just to dive a little deeper there, was this a turnover issue or an investment for growth issue? Are people leaving at a faster rate? Or are you struggling to staff to grow? And if it's the latter, given the environment, why grow?

Speaker 4

So I think if I understand the Question, I mean, it is a staffing availability issue on the $250,000,000 piece of it. For the $200,000,000 it's the rate. So just to reiterate that, and like I said, we Fully expect and are beginning to see some improvement in the availability, but should not should plans not proceed As we fully expect, and like I said earlier, we would need to obviously reassess the pace of Implementing the initiatives there, but the opportunity remains nonetheless. We just need to be mindful of the overall environment. Yes.

Speaker 2

And I would just add one line to that is that if that were to happen, there's obviously much broader implications that's way beyond FedEx.

Operator

And now I'd like to turn it back to Mickey Foster for closing remarks.

Speaker 1

Thank you for your participation in the FedEx Corporation's Q1 earnings conference call. Feel free to call anyone on the Investor Relations

Operator

And that does conclude our call for today. Thank you for your participation. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
FedEx Q1 2022
00:00 / 00:00
Remove Ads