FedEx Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
March 17, 2022

There are 14 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 would 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. 2nd quarter 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 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 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 atfedex.com for a reconciliation of the non GAAP financial measures discussed on this call to the most directly comparable GAAP measures.

Speaker 1

Joining us on the call today are Raj Subhulanyan, President and COO Mike Lens, Executive Vice President and CFO and 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, everyone. Let me begin by extending a heartfelt thank you to our more than 600,000 dedicated team members, especially those on the front lines We're working relentlessly to successfully deliver another robust peak season for our customers. 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 first 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 a capacity in time for peak, Experience tells us that they will operate with increasing efficiency in the weeks 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 asset 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 our focus on retaining recently hired team members after the peak season concludes. We know we have an excellent value proposition for employees, which we are strengthening even further with technology that enables Employee friendly flexible schedule options, including the ability to pick up extra shifts when convenient or 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.

Speaker 2

Now it's a good time to focus on what is ahead for FedEx. 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 to replicate. 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.

Speaker 2

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. There is solid momentum in our base business as we continue to lean into the dynamic growth of e commerce amid our 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.

Speaker 2

Said differently, we'll utilize our air and ground network 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. 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 at all assets in our network, Including stations, hubs and equipment to put the right package in the right network of the best service for our customers. And as I highlighted earlier, the focus on collaboration also Since to our customers, as we work to make their supply chains smarter.

Speaker 2

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. 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 built upon the success of station integration, which is completed in May 2021.

Speaker 2

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 will 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. 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.

Speaker 2

For example, Early package visibility enhances visibility of 3rd party trailers thus 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 or packages to customers and recipients. And trailer load scan automation eliminates the need for a manual scan, enabling faster and more efficient loading while significantly reducing package touches. These ongoing investments, network capacity, automation, and technology have helped FedEx build the most Flexible and most responsive network in the industry affording us significant competitive advantages. In closing, The successful execution of our strategies continues to drive high demand for our differentiated services.

Speaker 2

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 opportunities to move their volume from our national network to our regional and local networks, Bringing 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 or they cannot forward deploy inventory at the same scale as large retailers. Our domestic yield growth was 9.1 percent with fuel in Q2. Our general rate increase will take place in January, And we expect a strong capture rate.

Speaker 3

In January, the ground economy peak surcharge will be replaced by the new ground economy delivery surcharge at $1 Solidifying the price point for our economy product. And as a reminder, FedEx Ground Economy was formerly FedEx SmartPost. The landscape across the industry remains robust and positions us well for continued profitable growth. We are forecasting that the U. S.

Speaker 3

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 portfolio of e commerce solutions, 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. As you all know, we have a diversified customer base globally as well as here in the United States. And as such, we can confidently grow without the risk of a very large and disruptive customer negotiation.

Speaker 3

The US domestic B2B market is also expected to grow. It will grow at a 5% CAGR through 2026. We are growing our digital capabilities to provide a range of visibility experiences that will give our B2B customers greater clarity, confidence and control over their deliveries, especially in high value verticals such as health care. Turning now to international. Our successful commercial and operational execution in response to COVID demonstrates our ability to grow profitably in an uncertain environment.

Speaker 3

Demand out of Asia continues to contribute Strong revenue and profit performance and our international economy embargo and peak surcharges are contributing to our yield growth there. Q2 Express international export yield grew 12% and volume grew 7.6%, which is outstanding year over year growth. International export composite yield grew to almost $54 per package while average daily volume was more than 1,100,000. I am very proud of the international revenue quality results, especially given that we also had double digitecommerce growth internationally, which of course puts downward pressure on our package yields. International priority freight had a very strong quarter with 34 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 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 the target lanes for B2B growth where we have shared growth opportunity, most notably in and out of and across Europe. 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 around the world. More European customers will have access to next day and pre noon delivery times for their 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 Europe, giving our customers around the world more choice and flexibility while giving our global sales team more opportunities to pursue.

Speaker 3

These enhancements, along with our intra Europe road services and industry leading Europe to U. S. Service position us with a very competitive portfolio. As we approach the final stages of physical integration this fiscal year, We are increasing the FedEx brand presence 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.

Speaker 3

FedEx International Connect Plus, which launched across Europe, Asia Pacific and the United States, 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 journey. We have launched our new account opening application in 8 countries with very great results. We are seeing double digit improvement in And customers opting in for My FedEx Rewards, which, of course, is the only small business loyalty program in the industry. We've also launched our new FedEx Ship Manager application in more than 100 countries.

Speaker 3

This is the 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 the door more than a minute faster than they could previously. We will launch this new FedEx Ship Manager in the United States in 2022. In summary, we are very confident and 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, Breen, and good afternoon, everyone. Given the historically challenging nature of peak season along with the continued staffing challenges felt by numerous companies around the world, we're quite pleased with our Per share was unchanged year over year. This year's effective tax rate was significantly higher as last year's earnings included a $0.71 per share discrete tax benefit from favorable guidance issued by the IRS. As we anticipated, most of the headwinds we experienced in the Q1 persisted through the 2nd quarter, which dampened our Q2 profitability by an estimated $770,000,000 To further unpack our 2nd quarter results, I will highlight several key drivers. The difficult labor market once again had the largest effect on our bottom line, Represent an estimated $470,000,000 in additional year over year costs.

Speaker 4

As I did last quarter, I'll separate the effect of the labor market into 2 components, Higher rates and network inefficiencies resulting from labor shortages. Of the $470,000,000 we estimate 230,000,000 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. We estimate network inefficiencies resulting from labor shortages increased Cost by approximately $240,000,000 These costs include additional line haul, higher usage of third party transportation, Cost to reposition assets in the network over time and recruiting incentives all to address staffing shortages. Beyond the labor effects, our results for the Q2 also included the following headwinds: $90,000,000 related to investments in the ground network, As Raj outlined earlier, that are critical to improving service and adding capacity.

Speaker 4

An estimated $75,000,000 in incremental air network costs at due to the continued effect of COVID restrictions on our operations. And lastly, a $70,000,000 effect year over year from higher federal taxes as the waiver ended on December 31, 2020. With that overview of the consolidated results, let's turn to the highlights of 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.

Speaker 4

Round 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 adjusted operating income increased to over $1,000,000,000 and reported an adjusted operating margin of 8.8%, Which was driven by higher yields and international priority volume growth, which more than offset the negative effects of continued staffing challenges and COVID-nineteen related air network 7% as revenue for Q2 increased 17% year over year and operating income increased 33% year over year. Our Q2 results include a net pre tax non cash mark to market loss of $260,000,000 related to the termination of the TNT This afternoon for more details on these charges. Now, let's pivot to capital spending. Year to date, we spent $3,100,000,000 in As we continue to invest in our strategies for profitable growth, service excellence and modernizing our digital platforms.

Speaker 4

Our capital forecast for fiscal 2022 remains at $7,200,000,000 and less than 8% of anticipated revenue. We ended our quarter with $6,800,000,000 in cash and are targeting approximately $3,000,000,000 in adjusted 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 continue to focus on balanced Capital allocation and strengthening our balance sheet. As a result of this flexibility, I am pleased to announce our Board has approved a new $5,000,000,000 share repurchase authorization. And as part of this program, we expect to enter into a $1,500,000,000 share repurchase program that will be completed by the end of the fiscal year, which is on top of the $750,000,000 of repurchases in the first half of the year.

Speaker 4

This new program highlights the tremendous confidence we have in our business and underscores our commitment to driving value for our shareholders. 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 and we expect to make an additional $250,000,000 contribution in February. As for our FY 'twenty two guidance, we are raising our full year adjusted EPS range to $20.50 from our ASR transaction. This improved outlook represents another outstanding financial year with a year over year increase in adjusted EPS ranging from 13% to 18% following our strong 2021 results. While the Q2 exceeded our expectations, uncertainty remains across many fronts, including the labor market.

Speaker 4

We are closely monitoring developments related to the federal vaccine mandate, ongoing pandemic developments, and inflation as we consider our outlook. Labor headwinds will persist in Q3, but the labor availability and network inefficiency component Network inefficiency component will continue to mitigate as we move through the quarter given our progress to date and plans to address this. 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 strategies amidst a very dynamic environment gives us confidence in our updated outlook for the remainder of fiscal 2022 and beyond. In closing, I do want to take a moment of personal privilege here.

Speaker 4

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 financial information. And after 23 years with FedEx. He will retire at the end of this month. So on behalf of the leadership team, I want to thank him for his service and record of accomplishment.

Speaker 4

And now before we move to the Q and A, our Chairman and CEO, Fred Smith, has joined us and would like to share a few words.

Speaker 5

Thank you, Mike, and good afternoon to everyone on the call. As promised on the June analyst call, I am here to answer any questions Specifically for me, 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. But your hard work and dedication to keep our Purple promise for our customers As evident by the Q2 results Raj, Brie and Mike have covered well today. Let me also thank John Marino for his outstanding work for FedEx as our Corporate Vice President and Chief Accounting Officer over these last 23 years.

Speaker 5

I'm pleased to announce We'll be hosting an investor meeting on Tuesday Wednesday, 28th, 29th June 2022 in Memphis. Mickey will share details after the New Year. And I'll now pass it back to him to begin the Q and A portion

Speaker 1

of the call. Mickey? Now I'd like to open our question and answer session. And please remember callers are limited to one question so we can accommodate everyone.

Operator

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

Speaker 6

Hey, good evening everyone and thanks for taking my question. Fred, thanks for joining the call. I guess the supply chain constraints that we've seen in the past year have been 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 Or is this really transitory as we get things moving again?

Speaker 2

Well, this is Rod. Let me answer that question. The supply chain constraints we're seeing today are 2 fold. 1 is because of the lack of supply of critical components like semiconductors and the second is because of the congestions 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 United States.

Speaker 2

And of course, We're also flying over the top and delivering high value goods from the global economy through the system. We expect The supply chain constraints will stay for some time. The air cargo capacity is going to be constrained for some more time And we are very well positioned for success here. Let me also add this point that we have the network flexibility to Scale up and down, the size and scale of our network is massive for us to be able to manage the costs accordingly as well. But for the

Operator

And next we'll go to 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 space. Amazon just told us that they I believe that they are

Speaker 4

now the largest part of

Speaker 7

the carrier in the 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

Speaker 2

of both

Speaker 7

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 in?

Speaker 2

Ravi, this is Raj. Let me just say this that e commerce market is growing very strongly as Brie 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, You know, what often gets missed is the FedEx story that's right behind it, underneath it. And as you can see from our growth in the last These 2 fiscal years, we're going to grow more than $20,000,000,000 And so we are not lacking for growth.

Speaker 2

When people talk about the last mile, sometimes and most 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 what to say about that.

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 decelerating labor impact that 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 T and T integration. Brie talked about that. But now looking at Ground, should we expect some of those costs Subside as the labor you mentioned gets easier.

Speaker 8

Maybe just walk us through your thoughts on how Ground shakes out with the growth of e commerce and the impact on margin.

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 margin and profit this quarter. As we move through the rest of the fiscal year, 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. And Ken,

Speaker 2

let me add to that by saying this much. Firstly, the first and most important point is The demand for our services is very robust. The pricing environment is very robust. The labor headwinds start to recede in the second half. The investments that we have made get more efficient as we go into the second half and the technology investments that make us more efficient As well.

Speaker 2

So we expect in the second half the our e profit and operating margins to improve year over year and we get double digits. So I That answers that question.

Operator

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

Speaker 8

Yes. Thank you. I wanted to get a

Speaker 9

little more color on the labor market. It does seem like it's pretty We tied in ground to your margin performance, whether you get traction on labor and kind of how rapidly that develops. 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 kind of 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

Speaker 6

say, for labor, or you are assuming some further inflation and sequential increase in

Speaker 9

the cost per hour as you look at

Speaker 2

Thank you, Tom. On the labor front, we had obviously headwinds in the first 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 one 111,000 applications for FedEx. That's the highest in our history. Again, to put that in context versus what we saw in May, that was 52,000.

Speaker 2

So you can see that 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 through the second half. So that projections that we talk about now incorporate these I don't know Mike, do you want to add to that?

Speaker 4

No, 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 account 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.

Speaker 4

That's here to stay and we're managing to that going forward.

Operator

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

Speaker 8

Great. Thanks. Good afternoon. I want I wanted 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 So we have some of the cost dynamics easing, I think, into the back half. Obviously, comps from year over year are more favorable.

Speaker 8

But if you were to look at the back half and think about Ground relative to maybe Express, if you could 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 Three key components for driving the second half of the year are the pricing initiatives, The labor aspects that we just covered as well as the headwinds we had second half of last year. So as Brie mentioned, We're being very thoughtful about the various pricing levers and initiatives. So recall that the GRI goes into effect in January And that the surcharges, certain surcharges that we announced back in September, first of those hit in November, so we only had 1 month In the Q2, 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.

Speaker 4

As far as the broader guidance overall, Q2 was above our expectations. You know, 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 revenue quality initiatives. We managed and deferred various expenses, and we were able to Prominent incremental demand particularly from Asia Pacific. So the combination of the second quarter, Our outlook for the second half of the year and then of course the impact of the ASR on share count is the last Component in terms of when you think about the pieces of the overall annual guidance change.

Speaker 4

So hopefully that helps frame that.

Operator

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

Speaker 5

Okay, great. Thank you. I guess a question here for either Brie or Raj. But when you think About your opportunity set in Europe, particularly on the revenue side, can you maybe talk about the cadence of unlocking some 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.

Speaker 5

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 will have the very best coverage of overnight service, across Western Europe from from Europe into the US. 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 pretty significant investments in our digital Capability. 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.

Speaker 3

So when we think about Post April, we've got a great portfolio for b2b, and we are growing in ecommerce, which has been something that we haven't been able to do. As you look at the details that We released, you'll see that we're actually making room for growth for intra Europe. So we're trading up from our international domestic Portfolio in Europe. So we're making the right portfolio and customer mix decisions to also really make sure we get the highest revenue quality out of our European business as well. We feel really good about the business right now.

Speaker 3

And Jack, let

Speaker 2

me add one point to what Brie just mentioned. The ability for us to access low cost intra European networks for our international business in and out of 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 Pfennaworth from Evercore ISI. Your line is open.

Speaker 10

Hey, thanks for the question. 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 sheet improvement from these levels.

Speaker 4

Yes, Duane, this is Mike. I think certainly Opportunity to explore that further in June, but I would just emphasize that the announcement of the Authorization is just a logical evolution in where we have been in terms of capital allocation and strengthening the balance You recall we repurchased we paid down some debt in Q4 of 'twenty one. We increased the dividend 15% this past June. We continue to thoughtfully invest in the business for efficiency as well as growth. So this initiative is just is Part of the overall capital allocation, and so that's just the next step along the way, and we can Elaborate more and explore further in June.

Operator

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

Speaker 6

Yes. Hi. Just a question on the labor front. Can you talk a little bit more about your Progress on getting your core positions filled, sort of the 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.

Speaker 6

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.

Speaker 6

I'm not I didn't quite understand it. Mark, my question was in terms of the hiring that You've talked a lot about the applications that have gone up. I'm just wondering in terms of actually the hiring of the core positions, not the seasonal employees, But 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 we're hired at the rate of 10,000 to 12,000 per week since Q2. And again, our objective here is to make sure that We know that these team members stay with us post peak and that we have the labor situations To make our networks more efficient, the whole problem was our networks were inefficient. And now even as we speak, We are, you know, rerouting packages back to where it should be in the 1st place, and that's that's what's going to make the difference.

Speaker 4

Hey, George, this is Mike. Another aspect as we've aggressively addressed employees such that it's not as binary as full time, part time there and that the scheduling flexibility helps as well in terms of Navigating availability when and where you need it.

Operator

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

Speaker 11

Hey, good evening. Thanks for taking the question. A 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 cushion to work with? I guess, can you tell us if that was And a factor in terms of hiring people and if that was a headwind that you're now sort of relieved of? And then also can you just you mentioned the ASR impact on EPS. I think it's 80% complete when it's Once agreed upon, so imagine you can put a number around that for us. So please do that if you can.

Speaker 11

Thank you.

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 balance of the in terms of 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 at Vacant.

Speaker 2

So We expect to

Speaker 4

continue to see progress on that front and we'll be very mindful of how that evolves.

Operator

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

Speaker 4

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, It does seem like there's a massive margin opportunity for the corporation relative to peers. You've maybe talked about some initiatives, but any way to

Speaker 6

quantify what you see in terms of the initiatives or

Speaker 4

the opportunity set? Sorry, what you see in terms of the initiatives or the opportunity set?

Speaker 5

This is Smith here. There 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, our core B2B business is very strong.

Speaker 2

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 right package goes in the right network We can be very smart about how we spread 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 to the point that Brie talked about in detail earlier. 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. We are sitting on so much global insights about the global supply chain every single day, and we're working with our customers to provide those insights and there's value there as well.

Speaker 2

There's significant opportunities to go beyond our base. Brigitte, do you want to add to that?

Speaker 3

Yes, 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 upside potential. We've also seen, small business was our fastest growing segment again last quarter. So that, of It's 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

Operator

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

Speaker 12

Thanks very much, operator. Hi, everybody. Two 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 regard to 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. Yeah, 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 Delivers much of it upfront.

Speaker 2

And Helen, the On the carbon neutral goals, we have announced and we are very proud of it, the fact that 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 one So here we are expanding the use of electric vehicles that lead to significant reductions. We expect that 50% of FedEx Express Global POD vehicles By 2025, rising to 100 percent of purchases by 2,030. So we're making good progress there.

Speaker 2

We have line of sight on the over the road vehicles. On the SAFs, yes, we will obviously look at that, but SAF 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 will focus on to offset the equivalent of current emissions from the aviation industry. So Lots more to come here, but again, this is something we are very serious about and working with the best minds to get the answers.

Speaker 12

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

Speaker 4

Thank you very much and thank you for Thank you for taking my question. Fred, while we have you 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

Speaker 11

this has always been a

Speaker 4

popular topic with you. What is your view on the status of trade policy out there? And can you talk a little bit about any

Speaker 5

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 bid was to allow us to deepen our trade ties with Our other trading partners 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, we feel very strongly as our great Secretary of State, Cordell Hull said Decades ago, he and Roosevelt were really the architects of the United States promoting open trade. It's When goods cross borders, armies rarely do.

Speaker 2

So the best

Speaker 5

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 Try to have that constructive relationship with China. The reality is people forget about this And all of the populist 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. And I quite frankly am optimistic because I think at the end of the day, that view will eventually prevail.

Speaker 5

Particularly in a period of labor shortage, it's impossible for the United States to manufacture all the goods that

Operator

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

Speaker 2

Yes, thanks for taking my question. 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 to the overall enterprise As we increase collaboration beyond what Raj highlighted earlier.

Speaker 4

And let

Speaker 2

me just reiterate that FedEx Freight is an important part of our overall Enterprise strategy and our results on FedEx Freight are outstanding margins, illustrate that our strategy is working.

Operator

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

Speaker 7

Hey, good afternoon, everyone. Thanks for taking the question.

Speaker 6

Raj, I'd love to see if you can help us really understand kind of what that

Speaker 7

opportunity is inside of Europe. I remember when we when you guys first announced that acquisition at TNT,

Speaker 3

You shared some information around the profitability of

Speaker 1

the domestic segment versus Europe. Can you give us a sense

Speaker 6

for whether you're making money in Europe

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. Is the intra European ground business that we didn't have very minimal share?

Speaker 2

Well, With P and T, we have the best player in that business. Now that being part of this portfolio and we will 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 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 The calendar year is on track to make sure that we are as efficient as possible in Europe. So there's a lot of things going on.

Speaker 2

Very excited about So what April 22 brings.

Speaker 4

Yeah, David, it's Mike. It's just important to reiterate that completing The physical integration here at the end of this fiscal year really sets the foundation to enable There's opportunity going forward and we can certainly expand upon that in further detail when you all come visit us in June.

Operator

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

Speaker 8

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 Whether you plan to grow the network there as well. Thank you.

Speaker 2

The LTL side, we are our utilization is But we are very disciplined in how we manage that business. The revenue quality and efficiency are watchwords as we are the number one revenue share in this segment. And so all I would say there is that the demand for our business continues strong, our revenue All do remain strong and we will be very judicious in how we add capacity. Yeah, Bruce, this

Speaker 4

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 13

Great. Thanks and good evening everyone. Just to close out on ground margins, 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 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 Beyond the margin range of the past couple of years, is that something that you need to price to get the margin level up? Is it getting some of the efficiencies?

Speaker 13

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. You know, 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 those assets, the technology elements that Raj highlighted. So, there's a number of components there that come together and will be integral to driving ground profitability and margins higher. And So we're very optimistic about the trajectory there and getting past this headwind of the labor right now really

Operator

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

Speaker 4

Thank you for your participation

Speaker 1

And the FedEx Corporation's 2nd quarter earnings conference call. Feel free to call anyone on the Investor Relations team if you have additional questions about FedEx. Thank you very much.

Operator

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

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FedEx Q3 2022
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