FedEx Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
June 23, 2022

There are 14 speakers on the call.

Operator

Good day, everyone, and welcome to the FedEx Corporation 4th Quarter Fiscal Year 20 22 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 Corporation. Please go ahead.

Speaker 1

Good afternoon and welcome to FedEx Corporation's 4th quarter earnings conference call. The 4th quarter earnings release and stat book are on our website at fedex.com. 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. 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 vegas.com for a reconciliation of the non GAAP financial measures discussed on this call 2nd to the most directly comparable GAAP measures. Joining us on the call today, Raj Shudmuramian, President and CEO 2019.

Speaker 1

Mike Linz, Executive Vice President and CFO and Brie Carreri, Executive Vice President and Chief Customer 3. And now Raj will share his views on the quarter.

Speaker 2

Thank you, Mickey, and good afternoon, everyone. Nineteen. I'd like to start by thanking team FedEx for continuing to move the world forward amid unanticipated challenges. Eighteen. This was most recently displayed during Operation Fly Formula, where in response to the critical shortage rippling across the United States, we have moved Hundreds of thousands of pounds of baby formula from Europe to the U.

Speaker 2

S. And this weekend, our team will move 52 tons of medical relief to

Speaker 3

18.

Speaker 2

2019. Now turning to our financials. I'm proud to share that in the face of an increasingly challenging global backdrop, 2. We finished fiscal 'twenty two with our highest ever revenue of $93,500,000,000 and adjusted operating income of $6,900,000,000 As I shared on the last call, we have worked through many network inefficiencies caused by labor shortages. Although wage rates remain higher than this time last year, they are stabilizing.

Speaker 2

Still, COVID related conditions 2.0 percent. While Q4 volumes were down year over year at all our transportation segments Compared to the extraordinary fiscal year 2021, we successfully implemented strategic actions that drove Double digit yield improvement across the board with Express Composite yield per package up 20%, Ground up 11% and freight yield per shipment up 28%. We remain focused on revenue quality as one of the key levers to help offset the ongoing macroeconomic pressures and driving improved margins going forward. Turning to Express, even in the face of higher operating expenses related to inflationary pressures, nineteen. We expect revenue growth driven by higher yields as a result of pricing actions and improved volume mix.

Speaker 2

Volumes declined year over year due to our efforts to 20. Economy volume as well as slower customer demand. We will continue to leverage opportunities to maximize utilization of existing facilities 2 operational adjustments, including multiple preload and relay operations. Ground operating expenses We continue to proactively address labor availability head on through multiple levers. As we increase the frontline retention and refine the recently launched Package handler scheduling tool will not only ensure we have the right level of staffing for every sort based on volume, 2017.

Speaker 2

Additionally, we are implementing several technology based initiatives that are driving increased productivity in our line haul and dock operations 16% in Q4 compared to Q3. FedEx Freight once again delivered outstanding results with 4th quarter operating margin of almost 22%, driven by continued focus on revenue quality. Nineteen. A job well done to Lance Small on his first full fiscal year as freight CEO and to our freight 2019 and commercial teams for their solid execution. As we look ahead to fiscal year 'twenty three, we expect The macroeconomic risks both in the U.

Speaker 2

S. And globally to continue to put stress on supply chains and trade. As CEO, my focus is maximizing total shareholder return driven by improved revenue quality, higher margins and a balanced capital allocation strategy, which Mike will provide more color on shortly. Importantly, 2019. Our foundational long term investments have set the stage for another strong year driven by focus on lowering our cost to serve.

Speaker 2

Nineteen. A great example of where we are going to lower our cost to serve is in Europe. The integrated network and consolidation of many flights into our Charles de Gaulle hub allows us to improve operational efficiency and enhances our network. For instance, since April, the number of European airports we Service from CDG increased by 71%, while the number of flights intra Europe was reduced by 13%. 20.

Speaker 2

We're confident that actions like those will drive bottom line improvement in fiscal year 'twenty three. As we move forward, eighteen. I'm honored to lead our global team who enabled FedEx to deliver what's next. And speaking of what's next, eighteen. We're looking forward to hosting our investors in Memphis in a few days.

Speaker 2

Our goal for this 2 day event is for attendees to leave Now before I turn it over to Brie, I'd like to say a few words about FedEx Express President and CEO, Don Calderon, whose 40 year career with FedEx has been nothing short of exceptional. As one of the pioneers of our international business, nineteen. We helped lay a foundation for the significant growth in that sector of the FedEx portfolio. Since assuming its current role in 2019, nineteen. This launched new capabilities for our customers and led our global FedEx Express team through some of the most challenging times, including the COVID pandemic.

Speaker 2

As announced in March, Donald will move into CEO Executive Advisor role in September of this year in support of Richard Smith's transition to the CEO of FedEx Express and will retire from FedEx in December. Don, nineteen. We appreciate your service and countless contributions to this company. We wish you nothing but the best in your well deserved next chapter. And now let me turn it over to Brie, who last week was named Chief Customer Officer in a move that aligns several teams under her leadership

Speaker 4

Thank you, Raj. It's an honor and a privilege to take on this responsibility to deliver for our customers and drive quality growth for our shareholders. I'd like to reflect on fiscal year 'twenty two, then drill down to 4th quarter 'twenty two revenues. Finally, I will 20. Discuss the outlook for fiscal year 2023.

Speaker 4

Fiscal year 2022 was another year of change for FedEx. The operating environment was quite challenging, requiring flexibility and creativity on the part of our management, staff and frontline team members to ensure we deliver for our customers. I am proud of how our team rose to this challenge. We executed against our commercial strategy and remained intently focused on revenue quality across the business. 18.

Speaker 4

In the Q4, our consolidated revenue increased 8% year over year. Revenue management actions drove our growth, percent respectively despite lower volume levels. At FedEx Ground, yield management actions affecting our FedEx Ground Economy service is the 6%. In our commercial and our home delivery volumes declined 1% due to macroeconomic conditions. At FedEx Express, COVID lockdowns, geopolitical uncertainty, and slower economic growth contributed to package volume declines of 11%.

Speaker 4

In some areas, we also selectively reduced volume to ensure we could deliver the service that is expected of FedEx. FedEx Freight had a banner revenue quality quarter, growing yield at 28%. FedEx 23. The FedEx rate team continues to do a phenomenal job at managing revenue quality. Now let me take a moment to discuss 2023.

Speaker 4

We anticipate consumers will keep spending, and their spending will continue tilting towards services from goods. We expect more consumers to return to stores. With this backdrop, we do expect pressure on B2C volumes. Through May, industrial activity has been solid, But today's June flash of PMI was a sharp decline. Further, after a strong build late last year early this year, inventory restocking is slowing.

Speaker 4

Global trade growth has slowed from disruptions related to lockdowns in China and the conflict in Ukraine, limiting the flow of goods and reducing international volume. We do anticipate supply chain disruptions throughout the fiscal year. We continue to expect passenger airlines to fully recover to pre COVID levels and that that recovery will take some time. 20. Capacity on passenger airlines is expected to remain constrained in fiscal year 2023, resulting in a pricing environment still favorable to FedEx, but a little less than before.

Speaker 4

The Europe to Asia lane is estimated to recover in Q1 calendar year 'twenty four, and belly capacity on trans Pacific Airlines is estimated to recover in q333 calendar year 'twenty four. Commercial capacity between Europe and Asia is not expected to recover until q1 of calendar year 25. Our fiscal 'twenty three forecast assumes a normalized economic environment. Nineteen. The factors I discussed earlier have been incorporated into our volume forecast.

Speaker 4

Our volume forecast has low single digit volume growth. 2,000 to mitigate impact of further economic softening incorporating the lessons learned over the last 2 extraordinary years. 2. In fiscal 'twenty three, we will execute a very targeted growth strategy. We will prioritize revenue quality and are intent on pursuing business that provides attractive yields 6 months on our assets.

Speaker 4

We expect the pricing environment will remain rational here in the United States and also around the world. We believe that the systemic changes, especially e commerce peak surcharges are durable changes for the industry. We are closely monitoring Both inflation and fuel prices. And as a reminder, we adjust our fuel surcharge weekly in response to market rates. I am confident we have the tools to get to continue getting inflation plus pricing.

Speaker 4

Strong revenue quality is possible because we will target customers who value FedEx's unique capabilities. Let me talk about 4 of our favorite capabilities. First, we are the only provider to bundle our parcel and LTL portfolio. More locations than UPS Ground, and FedEx Ground delivers on Sunday while UPS does not. 3rd, we continue to evolve our digital portfolio.

Speaker 4

Express and Ground are the 1st nationwide carriers to announce we will provide a picture proof of delivery for every U. S. Residential delivery that doesn't require a signature. And 4th, we have a robust intercontinental offering for both B2B and B2B segments. FedEx provides fabulous solutions for the world's manufacturing, health care, high-tech and e commerce customers.

Speaker 4

2. In closing, this has been an extraordinary year for FedEx. We generated strong growth, executed on our revenue quality strategy and overcame industry wide challenges. 2019. Our plan for fiscal 'twenty three incorporate a dynamic environment and we have the right strategies and the right team in place to deliver profitable growth and margin improvement.

Speaker 4

2. And with that, I'll turn it over to Mike for his remarks.

Speaker 3

Thank you, Brie, and good afternoon, everyone. 18. We had a strong 4th quarter with adjusted earnings per share improving 37% year over year, revenue increasing 8% and consolidated adjusted operating margin expanding 50 basis points to 9.2%. These results reflect the outcome of the 19. Revenue management emphasis Bree described as we aggressively adjust to mitigate continued inflationary cost pressures.

Speaker 3

Notable 4th quarter year over year expense items included higher self insurance costs primarily at ground as well as a roughly $130,000,000 impact from higher rates for both wages and purchased transportation. 18. Offsetting these headwinds were favorable year over year comparisons for variable compensation of approximately $300,000,000 and last year's $100,000,000 contribution to Yale University to support our carbon neutrality goals. With that overview of consolidated results, I'll turn to the highlights for each of our transportation segments. Brown reported a 4% increase in revenue with eighteen.

Speaker 3

Operating income down approximately $260,000,000 resulting in an operating margin of 10%. Health insurance expense increased approximately $200,000,000 reflecting a higher loss experience as well as an adjustment to the reserve for the projected the claims. We have multiple initiatives underway to mitigate the cost of risk, including new vehicle safety technology and driver certification standards in our service provider agreements. The strong 11% yield at Provenet Ground was not enough to offset that 11, along with higher cost of wages and purchased transportation. Looking forward, the continued revenue quality emphasis in conjunction with specific productivity and workforce initiatives will drive improved profitability.

Speaker 3

Stabilization of the labor market will also support further traction in these areas. At Express, adjusted operating income increased by nearly 10% year over year with operating margin improving by 20 basis points 18.2%. This improvement was driven by higher yields, including the favorable net impact of fuel and lower variable compensation, protocols, but also to the routing changes to avoid layovers in locations with stricter COVID regulations as well as conflict airspace. Freight had an incredible finish to the year with revenue for the 4th quarter increasing 23% and operating profit growing 67%. These outstanding results are a testimony to Freight's continued focus on revenue quality and profitable share growth as we build on our strengths as a leader in the LTL market.

Speaker 3

Turning to FY 'twenty three, we are projecting continued momentum With a range of 9% to 19% adjusted earnings per share improvement. We expect margin expansion at all of our 20. .:] Transportation segment on an adjusted basis as we execute on key priorities including enhanced revenue quality beyond inflation, 2019. Technology driven operational efficiency improvements and increasing utilization of our assets. As we begin fiscal 2023, we are seeing the lower customer demand trends we experienced in the Q4 continue into June and expect Q1 volumes will continue to be pressured.

Speaker 3

In addition, Express continues to experience flight constraints due to crew COVID protocols 18. As has been highlighted industry wide, we do expect both Express Air Network Efficiency and year over year volume comparisons across all of our transportation segments to strengthen as we go through the fiscal year. 2. In addition, our outlook includes an approximately $450,000,000 non cash pension headwind 22 due to lower asset returns realized in fiscal 2022. This is all below the line expense that will be recognized evenly over the year.

Speaker 3

2019. Our retirement plans operating expense will be relatively flat as lower pension expense will be offset by higher 401 expense. And as a reminder, our primary U. S. Pension plans were closed to new entrants beginning in 2020, and we introduced a new 401 ks plan with a higher company match 2 in January of 2022.

Speaker 3

Our projection for the full year effective tax rate is approximately 24% prior

Speaker 1

to the

Speaker 3

mark to market retirement plan adjustments and costs related to business optimization initiatives. Turning to capital allocation, our fiscal 2022 adjusted free cash flow of $3,600,000,000 supported the repurchase of approximately $2,200,000,000 of our stock $800,000,000 of dividend payments. In addition, we funded $500,000,000 in voluntary pension contributions and ended the year with a solid $6,900,000,000 in cash. As we look to fiscal 2023, remain focused on driving total shareholder return and thoughtfully allocating capital. First, we will continue to invest 22 and attractive ROIC initiatives.

Speaker 3

Fiscal 2023 capital expenditures are projected to be roughly the same as the $6,800,000,000 invested during 22, which came in lower than our initial $7,200,000,000 estimate as supply chain considerations extended timelines. Facility investment at ground will decline as will aircraft expenditures at Express. Offsetting that is increased investment in vehicle replacement, including rollout of our vehicle electrification initiatives as well as additional automation projects. 22. We project fiscal 2023 CapEx as a percent of revenue to be under 7% compared to 7.2% for fiscal 2022.

Speaker 3

Next, we expect to repurchase an additional $1,500,000,000 of stock in the first half of fiscal twenty twenty three. Percent. And of course, as we announced last week, we are raising our dividend by over 50%, which increases our adjusted payout ratio to over 20%. These significant shareholder return advances reflect confidence in our continued execution and ability to adapt to the evolving market. And lastly, I'd add we are projecting $800,000,000 of voluntary pension contributions to the U.

Speaker 3

S. Plans. So we entered fiscal 2023 with a strong foundation for driving improved profitability and returns. 19. We are mindful of the uncertainty across many fronts, including the pace of global economic activity, inflation, percent.

Speaker 3

Energy prices, additional pandemic developments, and further geopolitical risk. We are actively adjusting to these changing circumstances. In closing, we are focused on delivering shareholder value by driving profitable revenue growth, expanding margins, lowering our capital intensity and improving returns to shareholders. And we look forward to sharing additional insights about our plans for this year and beyond 18 at our investor meeting next week here in Memphis. Now we'll be happy to address your questions.

Operator

18Q. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our 2nd. And our first question comes from Brandon Oglenski with Barclays.

Speaker 5

Hey, good afternoon, everyone. And Raj and Brie congrats on the new roles obviously. Look, guys, I know you want to discuss The future next week and we'll be in Memphis for sure. But Raj, could you just give us what are your priorities for FedEx? Obviously, This is a pretty big change after 51 years under prior leadership and very big shoes to fill after Mr.

Speaker 5

Smith. And one thing that keeps coming up on Cause revenue quality. So could you just give us a little bit more insight into that perceived change, at least that I'm picking up on?

Speaker 2

And thank you, Brandon. I will start here and then have Brie talk a little bit more about revenue quality in a minute. But Firstly, you're 100 percent right. We're building on a very strong foundation and very nineteen. Fortunate to have had the opportunity to work so closely with Fred over the years and we have a strong foundation to build from.

Speaker 2

My strategy is pretty 3rd forward. The number one element we talked about is revenue quality and again Lee will comment more about that. The second part of Strategy is going to be to improve operating margins in each of our operating companies. And we'll be extremely disciplined on our capital allocation

Speaker 4

2. Sure. Thanks, Raj. I think, yes, we mentioned revenue quality a couple of times. We're operating in a very large market, and it's not a homogenous market.

Speaker 4

We have spent a lot of investment getting to the place we are today, and we are incredibly proud of that value proposition. And so we're very focused on customers who value that. And so we're being selective in this market. We're targeting B2B. We're targeting small business.

Speaker 4

20. And we're really targeting customers that value the speed and the reliability we provide.

Operator

And our next question will come

Speaker 6

from

Operator

Jack Atkins with Stephens.

Speaker 5

Okay, great. Thank you for taking my question. I guess, Brie for you, You noted in your comments that you expected continued above inflationary pricing. I guess when we look at Ground in particular, It doesn't feel like we've been able to see that over the last year at least, with margins down 250 basis points or so. Where do you think the disconnect is there?

Speaker 5

And I guess as you look forward, perhaps is it a function of maybe The benefits from the pricing initiatives are going to be coming in 2023 and we're seeing some lessening of some of these inflationary pressures. Maybe if you could just kind of help us walk through that, That'd be helpful. Thank you.

Speaker 4

Sure. Happy to, Jack. So I think from a revenue quality perspective, If you look at the Q4, we're actually quite pleased with the revenue quality that we were able to secure at FedEx Ground. I think 2 other things that is important to note within the mix 6. We're also very pleased that we got the right mix.

Speaker 4

B2B is actually up and small business mix is up in the 4th quarter. So we're very pleased with that. I will say what is pressuring and honestly what will pressure us as we move forward is weights will come down depending on the economy. So that is putting some pressure. And then of course zone also is impacting that.

Speaker 4

But within each cell at FedEx Ground, we're quite confident that we are getting more for each package that we move. We're very pleased with the progress.

Speaker 3

And Jack, this is, this is Mike. I want to make sure we emphasize too, it's not singularly driven by revenue quality in terms of how we drive Ground margins further going forward. We won't repeat the labor challenges of last year, obviously, but In terms of the active initiatives we have underway, we'll get further maturation of the productivity initiatives that we started last year. We've got additional ones coming on later this year. And I alluded to, we've got multiple efforts To mitigate the liability costs, and we wouldn't expect the rate of increase that we have experienced the last couple of years on that front.

Operator

And our next question comes from Chris Wetherbee with Citi.

Speaker 7

Hey, great. Thanks. Good afternoon. Wanted to ask about the guidance, the EPS guidance. I guess, it sounds like there are some headwinds or at least normalizations in your economic forecast as you think forward.

Speaker 7

Yes, from an earnings perspective, obviously, it's a wide range, but the upper end of that range is a nice acceleration in terms of earnings growth from what we've seen. But I know there are some headwinds that you had been facing in 22 that presumably turned to tailwinds or at least sort of get mitigated as we go forward. But I kind of wanted to square the sort of body language around the economy being a little bit softer, but with the optimism about earnings power accelerating from where we are. So can you just

Speaker 6

help us a little bit with that?

Speaker 3

Well, Chris, this is Mike. I'll give a little context around our thinking around the range and then Brie can Further backdrop for the economic perspective, but yeah, we certainly are mindful of the Conditions and uncertainty in the environment ahead. It's a wider range than we put out there last year exactly for that consideration. At the same time, though, we're confident that it's a balanced and achievable outcome that we can navigate amidst The uncertainty that's out there. So we felt that it was appropriate and where we need to get to.

Speaker 4

I think the only other thing that I will add as we kind of look at our number 1, from a volume forecast perspective, we were conservative And the range in the volume itself. And then as we go through the year, the comps in the back half, especially here from a domestic perspective, they're Actually, a little bit easier for us. So we've taken both kind of the economy into consideration, the size of the market and obviously the year over year. But right now, we feel pretty good about the range we have.

Operator

And our next question comes from Amit Mehrotra.

Speaker 8

Hey, thanks operator. Hi everyone. Raj,

Speaker 3

congrats on

Speaker 8

the appointment. Wish you really all the success in the world. I guess you guys are preparing to provide some mid to long term profit targets next week and it's been a while. So I think that will be quite welcome. But the question really is we've seen a lot of uncertainty over the last several quarters.

Speaker 8

It's an incredibly fast moving market. Inflation is really high. And that's actually caused you guys to miss even the nearest of Profitability targets. And so the question is, as you guys prepare to come out with these multi year targets, most likely for each of the businesses, Where does the confidence come from

Operator

that you're going to be

Speaker 8

able to hit those targets? And Is there an element of cost or idiosyncratic opportunity related to efficiency where Gives you guys and should give us confidence in being able to hit that given the experience of last year. And Mike, just related to that, If the company is asking investors to gain confidence in multiyear targets, I think it would be helpful to have some goalposts here and now around 2023, around what underpins the 15% EPS Growth in 2023 with respect to ground margins and Express margins. Hopefully, I don't know if you guys are willing to engage with that question, but I think it would be helpful To set that up ahead of giving these multiyear targets. Thank you.

Speaker 2

Ahmed, thank you very much and I also appreciate your question. We have the last year has been quite challenging from many respects as we build out our networks And expanded our e commerce portfolio and then we had the labor challenges that were quite unexpected. They took $1,400,000,000 in FY 'twenty two because of unexpected labor Challenges, 1 some due to network inefficiencies and some just rate. So as we look ahead, The foundation that we have built, the e commerce portfolio that we have and the we are in the center of Ecosystem for e commerce and for several customers that we are essentially critical infrastructure for e commerce. And we are doing a lot of things to make sure that we improve our productivity through technology initiatives that will launch In this fiscal year 'twenty three, we will continue to focus on as we talked about revenue quality before, I think the market is there for that.

Speaker 2

And then improve our performance in Europe. And so I think there are several things that we can do to Given the confidence in our ranges we gave you. Mike?

Speaker 3

Yes, Amit. Well, 2. First, certainly, look, I highlighted 3 specific elements for ground Cost improvements and efficiencies that we will be elaborating on further details next week. And as I said, 2, we expect margin improvement at all of our transportation segments and the most significant one will be at ground relative to FY 'twenty two Looking at FY 'twenty three. So appreciate the feedback there and absolutely understand that we need to give specifics and what are The actions that will get us there.

Speaker 3

I will take one exception there about targeting this comment you made. Our 2,000. Our annual EPS for fiscal 'twenty two fell within the range of guidance that we gave you a year ago. So while I appreciate there may have been Different twists and turns along the way in terms of how we got there. It was indeed within what was a pretty narrow range, all things considered.

Operator

Our next question will come from Tom Wadewitz with UBS.

Speaker 9

Yes, great. I appreciate it. And also I know others have said this, but Really looking forward to the further detail next week and the kind of, I don't know, new direction or new elements of the strategy. So looking forward to that.

Speaker 6

When you look at

Speaker 9

the fiscal 'twenty three because that's what we're focused on today, 2. Can you give us a sense of just magnitude of some of these big pieces? Is it 2 thirds of it is revenue quality that's giving you the growth And cost is smaller and cost can grow over time? Or is this something that Cost is a pretty big component of your margin improvement, your earnings growth. Just trying to get a sense of the kind of relative frame of that.

Speaker 9

And I guess I would also kind of look back to the analyst meeting 10 years ago where you had the Express Improvement Program And you had a lot of improvement, but it took a couple of years to see that. So I guess just trying to figure out how quickly we see some of the cost productivity measures come through and how big of a component that is versus price and revenue quality in fiscal 2023?

Speaker 3

Okay, Tom, there's a lot packed into that. Again, much of which in terms of flushing out details in that is Something that we can elaborate on and spend a whole lot more time on next week. But as Brie mentioned, The volume growth in the projection here for 'twenty three is low single digit. So while there is continued yield opportunity because of the inflationary environment and because of the capabilities and value that our networks provide, We do have meaningful significant cost and efficiency initiatives underway. I talked about how we're lowering Our facility investment at Ground, the emphasis now is on utilizing the capacity that we have, Sweating the assets and driving further efficiencies and productivity there.

Speaker 3

You know, Raj mentioned about how we schedule our people in that to get it optimally targeted and resourced per sort percent. So, you know, there's no sort of single magic bullet to point to there, but it's a number of concrete, Real initiatives across the enterprise that will allow us to achieve the results that we need to get to.

Operator

And our next question will come from Jon Chappell with Evercore ISI. Thank you. Good afternoon. Brie, there's been a high profile entrance in the market, so to speak, who's clearly over hired, added a lot of capacity and others talk of trimming a significant amount of capacity in the next 12 months or so. As you think about the network in general, what's FedEx's opportunity and its risk from maybe some laying off some people where you've had some labor issues in the past And also spare capacity and what that may do to pricing in the business over the next 12 months.

Speaker 4

Thanks, John. A very fair question. I think a couple of things. Number 1, we've absolutely planned conservatively 2,000 so that we really can focus on those customers that value us. We have over the last couple of years done, I think, a tremendous job negotiating mid to long term contracts that I think puts us in a really good place to stabilize the base of our volume.

Speaker 4

So to Mike's point, If things do soften from an economy perspective, I think we're in a really good position and we're going to focus on disciplined revenue quality, Disciplined targeted growth, and that will be kind of our primary focus versus kind of filling the network from an alternative perspective. So I feel pretty good about where we are despite some of the competitive activity and some of the other headlines while reading.

Operator

And our next question will come from Allison Polnick with Wells Fargo.

Speaker 10

Hi, good evening. So first on the labor inefficiency, is there a way to quantify what that headwind was to ground? I know that you quantified the absolute wage increase. And then 6. In line with that, a lot of productivity initiatives out there.

Speaker 10

Based on your volume outlook, is there a way to think or quantify what those eventual 2019 productivity initiatives will contribute to margin expansion in 'twenty three, particularly in ground? Just any color there? Thanks.

Speaker 3

Okay. So Allison, yes, this is Mike. The ground network inefficiency aspect of the labor availability For FY 'twenty two, we pegged that at roughly $300,000,000 So that was certainly most prevalent In the first half of the year. So I think that addresses that. Second part of your question?

Speaker 10

In the context of your low single digit volume increase, a lot of productivity initiatives, I think you talked about the technology and the software related to the dock, eighteen. Some improvement on that side. Is there a way to better understand what that contribution to that margin expansion would be from some of those initiatives as we look to 2023 here?

Speaker 3

Yes. So, you know, LaRaj highlighted the you know, just the first leg of that, roughly 6% improvement just quarter to quarter. So, That gives you a flavor of the opportunity ahead there. We certainly I talk about the liability and the cost of risk. That was a significant impact to the margin and bending that going forward.

Speaker 3

That's going to definitely You provide opportunity there to the question earlier about the labor market easing. We are hiring fewer new people. That is supportive too of more efficient and a more safe operation too people that are more experienced. So again, all these elements come to play and we have a lot of good plans behind it that The team will be happy to speak further to next week.

Operator

And moving on to Jordan Helga with Goldman Sachs.

Speaker 6

Is there any way to at least give some big picture view how to think about the components of the yield improvement, whether it be fuel surcharge, core price, mix as you've referred to revenue management or other surcharges, just some picture how to think about these very large improvements. Thanks.

Speaker 4

Thanks, Sharon. Appreciate the question. So specifically for Q4, fuel was the largest driver of the revenue quality. We also did a quite frankly, as I mentioned earlier, I thought the team just did a tremendous job within our portfolio of managing to hold on to The really our best and most profitable volume. So when you look at kind of the volume decline, we actually moved the right way.

Speaker 4

But in the Express company domestically. We had lower volumes on deferred than our overnight from a year over year perspective. When you look internationally, the intercontinental, the team did a really good job of stabilizing volumes there. And actually, we decided to let some international domestic volume go. And then the same thing happened within ground.

Speaker 4

You'll see the huge difference in ground economy decline versus actually 6. We did a really good job of stabilizing the commercial on the HD, of course, our highest value proposition product. So from a revenue quality perspective, while 2 was the largest driver. We also did a great job. We continue to get inflation plus renewals, and they're really working on making sure from a mix perspective, we get the revenue for the most premium part of our portfolio.

Speaker 4

So I hope that helps clarify that.

Operator

And our next question come from Ken Hoexter with Bank of America.

Speaker 7

Great. Good afternoon. Raj, Brie, congrats on the positions and really almost the entire eighteen since the start of pandemic. So again, mirror everybody's sentiment about next week in the conference. But it seems like you've had a Coming out of that maybe a week ago, a big capital and return focus, the involvement of an activist.

Speaker 7

You've now talked about lowering CapEx. Maybe talk about what's getting removed From the CapEx or how your thoughts on investment shifts from your prior kind of growth focus And how we should think about that. Obviously, you've built a huge cash balance now. And maybe talk about your thoughts on capital allocation And distribution going forward? Thanks.

Speaker 2

First of all, just say the conversations with But there are been activists here, but then I'll let Mike talk about the specific question here. We have been working on Investor Day for nearly a year and the strategies And the dividend plans are well in place. And so we had very strong plans and then we long Any conversations that we had with anybody? And then when we had the opportunity to sit down with them, it was just clear alignment on where we were headed. That was I wanted to make sure that you understood that, that these plans have been well in place for a long time and a key part of that equation is what Mike is going to talk about now.

Speaker 3

Well, Ken, you're trying to ask you're trying to give me to give away everything from next week, but I'll just I'll I'll

Speaker 2

say, look,

Speaker 3

we've highlighted before that we were at a significant 3rd phase of re fleeting the Express Air Fleet. And as I said, that is going to come down. We can detail more of Going forward, we've built up the ground network with the capabilities that are industry leading And are going to be able to continue to realize value from that going forward and we'll further utilize that so we don't need to invest as much in The hard assets will certainly be investing in technology aspects to more fully utilize it in different and creative ways. So it's just a natural evolution from building to having these capabilities and now Transitioning, but I would remind you too, we repurchased roughly 3% of our shares last year. While the dividend increase was certainly very significant, we've long been looking And striving to increase that.

Speaker 3

In fact, it was the 2nd largest percentage increase. A few years ago, we actually had a larger percentage increase. So Again, it's just a natural evolution of where we are in terms of capital allocation and driving improved returns. And I look forward to elaborating further next week.

Operator

And moving on to Brian Ossenbeck with JPMorgan.

Speaker 11

Hi, good evening. Thanks for taking the question. So I want to come back to the impact of fuel. And Brie, you mentioned it didn't sound like there's any demand destruction or Trade down mix is actually better. So if you can elaborate on that, if you expect that to continue given where fuel prices are, where surcharges are?

Speaker 11

And then Mike, can you just talk about how much of an impact fuel is on a net basis as mentioned a few times in the press release? And what do you have baked into the guidance next year.

Speaker 4

Hey, Brian, you're right. In Q4, we didn't see a lot Of trade down, there's a couple of reasons for that. Obviously, from an intercontinental perspective, capacity is still quite constrained. If the economy does continue to soften, do I anticipate that there will be more demand for deferred portfolio? I absolutely do.

Speaker 4

But we are very focused on customers who have a bundle, who have a deferred need and have a need for our premium portfolio. And so as we look at that targeted growth, we will be very thoughtful about not just attracting customers that rely solely on our deferred portfolio. It really is about bundling, to make sure that we maximize the value of our networks. Hope that helps clarify.

Speaker 3

Yeah. Brian, look, you know, There's many elements of fuel as a when you aggregate it, and as Brie has highlighted before, It's a fundamental component of the overall pricing construct. So I'm not going to parse it out in terms of one specific aspect of it. But I would say in terms of the guidance that we have, the fuel price assumption that we have in there is not as high as current fuel prices. So that is maybe a little more help for you on that front.

Operator

And our next question will come from Bascome Majors with Susquehanna.

Speaker 11

Yes. Thanks for taking my questions. I understand that you're modeling and guiding to the projections that you have out there. I know a lot of investors would love to see the economy come out with that. 20.

Speaker 11

But as we discount particularly worse scenarios, can you walk us through how the business in your mind would perform In a moderate to deeper recession, and whether or not there are any nuances we should consider versus the call it 40% EPS drawdowns we've seen historically in that type of environment? Thank you.

Speaker 2

Let me begin this and then have Mike Aubrey jump in and help me here. Firstly, let me just 6. To say that, yes, we have economic projections today out there and we some of those projections may come down And we are prepared for that. And what we are prepared to pull some levers here, we're already moving, making sure that significant cost controls and we're operating in a very constrained environment from that perspective, but we will adjust networks. We will just take down flights as required.

Speaker 2

We will just match the capacity to demand. And that's the beauty of having a big network is we're able to flex up and down. We have demonstrated that historically as well. And so yes, there's a range of outcomes that we are ready to deal with. We are definitely not assuming a prolonged deep recession.

Speaker 2

That's not what we are assuming here. But we have some flex for some slowdown on our economy. Mike? Yes, Vasquez. I mean, look, just to give you some

Speaker 3

parameters around how we have adapted and adjusted previously when The trade or macroeconomic backdrop can change on you. You know, in February of 2020, so just before the pandemic, You know, obviously, we were seeing significant shifts in trade policy and demand. And as a result, we had lowered our frequencies across the Trans Pacific by 20% from the prior year. Well, then fast forward A few months later, the pandemic in that when we had to completely realign and shift instead of, you know, temporarily parking airplanes, We were trying to get more lift back in the air to support commerce, to support the pandemic efforts in that. So certainly, 1, we've demonstrated historically and 2, I think as an organization the ability and the 6.

Speaker 3

At which we were able to adjust amongst all of our networks during the pandemic

Operator

Thank you. And our next question will come from Helane Becker with Cowen.

Speaker 12

Thanks very much. Hi, everybody. So thanks for the time here. My two questions are this. The passenger Since your airlines as you know are hiring every pilot they can possibly get.

Speaker 12

And I probably asked you this question before, but How are you thinking about hiring and retention so that you can continue to master your network? And the other question is, I think There was an announcement earlier this week that you took 150 electric vehicles from BrightDrop. So I think that's out of the 2,500 van order. Can you talk about the CapEx related to that and how you're thinking about sustainability efforts? And if you're going to do it next week, that's fine.

Speaker 12

I can wait.

Speaker 3

Helane, first on the electric vehicles, that is when I spoke earlier about increasing our investment In vehicles across the board, the principal element of that is our continuing with the pickup and delivery electrification at Express. So that is absolutely a key plant going forward. And, you know, look, we're fully committed to reaching the goals by 2,040, and that means we've got to get going now on on that replacement. I'll let Raj address the pilot consideration, but thanks for

Speaker 2

the question. Yeah. Thank you, Elaine. And yeah, The pilot situation, just wanted to make 2 points. Firstly, I want to say thank you to our pilots who have done a tremendous job during this timeframe And a big part of the value that we provided here.

Speaker 2

And secondly, because of the work environment that we have in FedEx, there's no dearth of People want to get into the FedEx poll. So that we're not seeing that as an issue for FedEx.

Operator

2019. Thank you. And our next question will come from Scott Group with Wolfe Research.

Speaker 8

2. Hey, thanks. Good afternoon. Mike, you talked about Ground seeing the biggest margin improvement this year fiscal 2023. I'm wondering, do you think we see that margin inflection in Q1 and

Speaker 6

or if it's more later in

Speaker 8

the year? And then just Maybe bigger picture for Raj. I think there's a lot of hope or expectation for next week that we're going to hear about big strategic changes

Speaker 2

and focus

Speaker 8

and FedEx and cost reductions and things like that. And Understandably, we're not hearing about that today. But do you think would you agree that we should be Seeing and hearing about big strategic changes next week?

Speaker 3

Well, Scott, first this is Mike, just to clarify. Look, for Ground to have the largest margin improvement Of all the segments within the guidance we have here, yes, it is the case that we have to see margin improvement certainly in Q1.

Speaker 2

And Scott, yeah, you're definitely not going to get me to give away the story for next week today, but I'll just tell you this much 2? That's historically, Express focused on time definite services, Ground focused on day definite services and it It is fantastic and we actually gained a lot of share in the U. S. Domestic market over the last 20 years. And What has changed in the last 3 or 4 years is the emergence of e commerce and residential delivery and the emergence of day definite networks day definite packages on both networks that gives us the opportunity to optimize across.

Speaker 2

And we launched operate collaboratively A few year or so ago now, and we'll talk more about that next week.

Operator

And our next question will come from David Vernon with Bernstein.

Speaker 6

Hi, good afternoon guys and thanks for taking the question. Raj, I know you don't want to detail too many of the plans for next year and listen about that, but I want to think it would be helpful, I think, if you could talk us through kind of the operational situation. How outside of just labor cost pressure, was there an impact on service levels over the Because of the staffing challenges and where are we on service kind of today from maybe where we would have been? And I think we expect out of the service levels in ground, these metrics are all opaque and public data on this stuff, but we continue to hear from contractors and some shippers that service levels may not exactly where they want to be, trucks are taking too much time to go out of buildings, It'd be great if you could just talk to us a little bit about how the productivity growth and where we are in recovery on the productivity side.

Speaker 2

David, you're breaking up a little bit, but let me answer the question that I thought I heard. I think firstly, Yes, a year ago, you know, but this time we saw significant challenges On the labor front, that the labor availability started to go away from us and the volume was very strong. And that resulted in inefficiency to the network and also service challenges. By peak, we had unwound the most of the network inefficiencies and we have heavily focused on improving our service. And this is a conversation that we have every week.

Speaker 2

And I'm glad to say that week over week, month over month that we have improved our service to a point now we are, I would say, back nineteen. We will not relent here. This is going to be a purple promise and service differentiation is a key

Operator

nineteen. And our next question comes from Scott Schneeberger with Oppenheimer.

Speaker 3

Thanks very much for

Speaker 13

I would like to focus my question on the smallest, but certainly Most impressive segment this quarter being freight. Mike and maybe Lance, if he's on, just What do you view for the industrial economy here, the where we are in the LTL cycle and kind of a cadence of what we should expect Over the course of fiscal 'twenty three for this segment as the margin expansion has been nothing short of impressive, 500 basis points plus quarter over quarter and year over year. So just how should we think about modeling that going into the year? Thanks.

Speaker 3

Well, Scott, as I said, we expect margin improvement in all of our transportation segments. Look, the freight LTL business has certainly evolved from where it was a number of years ago. You have a much greater discipline in terms of when the environment changes, in terms of pricing discipline. When demand is strong, there is not the degree of capacity adds, which then It is excess capacity when you go through a little more of a cyclical change. So we're very put in the discipline within both the industry overall as well as the approach we're taking to it in terms of continuing to drive freight margins from an Outstanding year, upward from there.

Operator

And moving on to Todd Fowler with KeyBanc Capital Markets. Great. Thanks and good evening. So Brie, I just wanted to make sure I understand the volume expectations. I guess number 1, the low single digits is that across both Express eighteen.

Operator

And then number 2, it sounds like the shape is slower in the first half with an easier comps in the back half. I Want to make sure I got those pieces right. And then if you can help us understand on the ground economy side, how much volume is still left to call in that business And the thought around calling that versus the ability to move price up on that business. Thanks.

Speaker 4

Okay. I'm going to try to get it all, but please feel free to ask again if I didn't miss the whole question or question there. 20. Okay. So I think the first question was when we're looking at the volume between Express and Ground and we're saying low single digits, the low single digit is the total volume.

Speaker 4

From nineteen. A ground market perspective, we still believe in the secular growth of e commerce. We have been looking The e commerce as a percentage of retail, it's still last number I looked at was just above 21%. Pre COVID, you were like 16%, 17%. So we still believe that Ground has the largest growth opportunity and that is reflected in our range for this year.

Speaker 4

We've got Ground going faster than I don't think that would be a surprise to anybody on this call. And then as I mentioned in the back half, the comps, especially for ground, do get better. Percent. From an economy perspective, FedEx Ground Economy, let me be specific there. I think you're going to see Q1 volumes look Similar to Q4 and then we'll start to build back from there.

Speaker 4

Like I said, You know, we really do need the economy product. It allows us to sweat our assets, and it is a need in the market, especially as things soften. And I want to Sure that my opening remarks didn't confuse anybody. We're very clear eyed about the economy in which we're operating. When we said normalized economic environment, I meant We're not planning right now in our current forecast for a recession to Raja's point.

Speaker 4

So I do anticipate that if the market softens, the economy product will have to play a larger role. But like I said earlier, we really have to get the bundle. And there's the vast majority of customers who have a home delivery need and a ground commercial need You have either a returns line that needs to use the economy product. They have a different SKU that has lower value. So that bundle is really important to us and we have to make sure that Products there to defend.

Speaker 4

And so I think long answer, but you'll see us build back some economy volume later in this year, I believe.

Operator

And our next question will come from Bruce Chan with Stifel.

Speaker 7

Thanks, operator. Afternoon, Thanks for squeezing me in here. Just want to come back to the revenue quality discussion. Brie, you talked about growing share in SMB and I think B2B is part of that. Can you give us a sense of what commercial initiatives you're putting in place to make that share growth happen there?

Speaker 7

And then maybe also where do you stand right now in terms of SMB share? Where is that coming from? And where do you think it can go? Thank you.

Speaker 4

Yes. Great question. So from a B2B perspective. We've got a lot going on to improve our market share. And again, we're running a massive business.

Speaker 4

So I'll try to be specific Without going kind of through every country in the world, from a B2B, I guess one of the primary things that we're working on and you're going to hear a lot about next week is our visibility tools. As you're talking about managing very complex supply chains and you can imagine the amount of change that our customers have gone through over the last 2 years. Visibility is critical. And then honestly proactive visibility and having the tools to help customers reroute Around a weather disruption, reroute around a port congestion. So we are really excited about our FedEx Surround platform that we've talked a lot about.

Speaker 4

This helps our largest customers and in particular our B2B customers really navigate and manage their supply chain. We are adding new capabilities onto this tool to allow us to intervene for our healthcare customers so that if there is a service disruption, we can intervene and re ice or put something in a cooler. So I would say thematically for B2B, really giving customers the data, the tools, the insights and then quite frankly having the intervention capabilities that FedEx Express does No one can touch our value proposition. Small bundle or small customers need simplicity. And they tell us that over and over again.

Speaker 4

If you're a small customer, You're running just about every function in your business. And so if you've got a one stop shop like FedEx with an LTL provider The national coverage, it works really well. We've got the industry leading Loyalty program, and I think the pricing team has done a really good job using earned discount and some of our tools to really reward small businesses 2,000 for that bundle. We'll talk about a little bit more next week. But like I said, I think we're pretty happy with our small business.

Speaker 4

And as I mentioned in Q4, Our small business mix did improve. And I guess sorry, one other thing. When we're talking small business, not all small business Is created equal. There are a large amount of very price sensitive lightweight small businesses. That is not who we're targeting.

Speaker 4

So we're being very disciplined. And on the portion of small business that we really are interested in, we're very confident in the momentum we've got.

Operator

And our final question will come from Jeff Kauffman with Vertical Research Partners.

Speaker 11

Thank you very much for squeezing me in and a real exciting time. Congratulations to everyone looking forward to Memphis next week. Mike, I just wanted to get some clarification here. Two parts here. Number 1, the drop in CapEx Projection from $7,200,000,000 to $6,800,000,000 I think you implied that was more of a timing issue because of supply chain challenges.

Speaker 11

So should we assume that that $400,000,000 comes back as we head toward fiscal 'twenty four? And then secondly, I want to follow-up on Helane's Break drop question. We actually had a chance to see the vehicle at Ag Expo and the intel we got was it's not costing much more than a Mercedes Sprinter, But the TCO is dramatically lower between the maintenance and the fuel savings and a positive benefit percent. As these trucks come in in terms of

Speaker 6

P and L to the

Speaker 11

fleet, could you address both those issues, please?

Speaker 3

Yes, sure. No, thanks, Jeff. So, yes, let me clarify on the CapEx. So indeed, it was the case that $400,000,000 lower came in this year because of, for instance, we simply couldn't get some of the replacement vehicles In the timeframes anticipated given supply chain delays with the manufacturers there. Certain facility projects Just didn't move at the pace as anticipated.

Speaker 3

So all that said, the $6,800,000 for the current fiscal year considers that Those will finish out and plus the other spending I outlined there. So I guess you could say if it had been 6.2% last year, it would have been 6.4% this year, but or 7.2% last year, it would have been lower this year. But again, at the end of the day, 6.8% last year and 6.8% this year. And then look, on the BrightDrop electric vehicle, it is indeed the case that And we look at this from a very focused financial and economic perspective too in terms of Our acquisition of this fleet, obviously, it's a key underpinning Of our carbon initiatives. But you're right, it does have much lower maintenance costs going forward, a lot You were moving parts, so on and so forth.

Speaker 3

So again, the total cost of ownership over the long run, we definitely

Operator

nineteen. And that does conclude the question and answer session. I'll now turn the conference back over to Mickey Foster.

Speaker 1

Thank you for your participation FedEx Corporation's 4th quarter earnings conference call. Please feel free to call anyone on the Investor Relations team

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FedEx Q4 2022
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