FedEx Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 22, 2022

There are 15 speakers on the call.

Operator

Good day, everyone, and welcome to the FedEx Corporation First Quarter Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to Mickey Foster, Mr. Vice President of Investor Relations for FedEx Corporation. Please go ahead.

Speaker 1

Good afternoon, and welcome to FedEx Corporation's Q1 earnings conference call. Before we begin, we want to recognize our SEC 8 ks Was filed earlier than planned due to a technical issue. The Q1 earnings release, Form 10 Q and stat book 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. We 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 should cause actual results to differ materially from those expressed or implied by such forward looking statements. For additional information on these factors, Please refer to our press releases and filings with the SEC. Please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of the non GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us on the call today are Raj Subramaniam, President CEO Mike Linz, Executive Vice President and CFO and Brie Carrere, Executive Vice President and Chief Customer Officer.

Speaker 1

And now Raj will share his views on the quarter.

Speaker 2

Thank you, Mickey, and good afternoon, everyone. I'd like to start today by acknowledging our pre announced Q1 earnings results and updated outlook we provided last week. Our network capacity did not align with the demand we experienced as the quarter progressed. But as communicated last week, We have taken swift actions to address what's within our control. Getting cost out rapidly is my priority.

Speaker 2

And today I will outline why I'm confident in our ability to drive improved performance and profitability through aggressive cost actions. Before providing more details around these actions, let me briefly discuss what happened since we last spoke to you in June. We saw a decline in our volumes during the Q1, which accelerated in the final weeks. Our softening volumes in Asia and the U. S.

Speaker 2

Efforts lagged the volume decline due to the scale of our operations. As a result, while revenue was up 6% year over year, These dynamics translated to volumes being down year over year at all our transportation segments. The volume decline directly impacted Now what matters most is what we are doing about it, and this brings me to our aggressive and decisive plan to reduce costs. I'll speak to our actions in 2 parts. First, our fiscal year 'twenty three steps to immediately reduce costs Starting with fiscal year 'twenty three, we are prioritizing cost actions to generate $2,200,000,000 to $2,700,000,000 of savings, Of which about $1,000,000,000 will be permanent.

Speaker 2

Taking each key contributor in turn, at FedEx Express, we expect to drive $1,500,000,000 to $1,700,000,000 in savings this fiscal year. The largest single expected contributor in fiscal 'twenty three will be the changes we are making to our Express Air network as we cut global flight hours. This reduction includes 11% of transpacific daily frequencies, 9% of transatlantic daily frequencies and 17% of daily frequencies in the lane between Asia and Europe. As volumes deteriorated later in the quarter, we began making these structural changes to our network. The impact of these initial changes will be fully realized in October and the benefit of our continued actions will steadily increase throughout the fiscal year.

Speaker 2

We're also evaluating additional reductions to be implemented post peak. Further, we're taking steps to enhance our ground efficiency, including reducing routes, Hours, vehicle rentals and other on road expenses. For example, in Europe, we are altering ground network routes to improve productivity, leading to a reduction of approximately 11% of routes in the UK and 12% in Germany. Now turning to FedEx Ground. We expect savings in Ground to be $350,000,000 to $500,000,000 in fiscal 'twenty three.

Speaker 2

Our approach And have canceled several planned ground network capacity projects. And as mentioned last week, we're also reducing select Sunday operations in over 170 stations. Mike will provide more details on our capital plans shortly. The final components of our expected fiscal 'twenty three savings will be from overhead expenses as we right size our overall cost structure. These actions include our plans to close nearly 140 FedEx office locations and at least 5 corporate office facilities.

Speaker 2

Additionally, FedEx Services has stopped all non critical projects. In total, our overhead reduction actions, including FedEx Services, will contribute $350,000,000 to $500,000,000 We realized nearly $300,000,000 in cost savings from these actions in Q1 and Approximately another $700,000,000 in Q2 with the remainder of the fiscal 'twenty three savings realized during the second half of the year. The second part of our cost plan is focused on permanent reductions and we have launched DRiV, a program supporting our Deliver Today, Innovate for Tomorrow strategy introduced in June. Drive is Work 2.0, the long term end to end trend optimization of our network. Sriram Krishnasamy, our newly appointed Chief Transformation Officer will facilitate DRiV and continue reporting directly to me.

Speaker 2

In total, We expect to take out an additional $4,000,000,000 in costs related to DRiV by fiscal year 2025. To be clear, these are incremental to the fiscal 'twenty three savings I just outlined. These transformational changes In closing, we are focused on actions we can control as we stabilize our near term performance and execute against our long term strategy. I'd like to sincerely thank our highly motivated team for their hard work and dedication to deliver upon the Purple promise. Now let me turn it over to our Chief Customer Officer, Brie Carreri, to discuss market trends that underpin our outlook and our commercial strategy in some more detail.

Speaker 3

Thank you, and good afternoon, everyone. As Raj discussed, during the Q1, manufacturing, global trade and consumer spending decelerated, particularly late in the quarter Our current expectations for 2022 U. S. GDP growth and U. S.

Speaker 3

Industrial production forecasts have declined by about 100 basis points since June. Data shows that U. S. Consumer spending has slowed as inflation remains a challenge. Further, coverage with pre pandemic level.

Speaker 3

From October to June, the real inventory to sales ratio, excluding automotive, increased 14 basis points, which was the fastest gain over an 8 month period in the 25 year history of the series. Also, Real retail sales, including auto, after growing 4.6% and 10.8% in calendar year 'twenty one and 'twenty two, respectively, Are now down 3.1% year over year through July and are pacing to have the worst decline since the Great Recession. Turning to our transportation businesses. I'd like to spend a moment on the dynamics occurring within FedEx Express and most specifically in Asia and Europe. Starting with Asia, our results were impacted by macroeconomic weakness.

Speaker 3

Our lower demand is consistent with the broader market with ocean and air freight rates under pressure in recent weeks. A good indicator of how quickly the market changed in Asia is to review the spot rates coming out of Hong Kong and Shanghai. In June July, spot rates were between 20% 40% higher year over year respectively. In early August, these rates fell to single digits and by the end of the month, Shanghai had plummeted to a 10% decline year over year, while Hong Kong rates were flat. Through June, which is the latest data available, we have had small market share gains in our Asia region.

Speaker 3

In Europe, the economy was weaker than we anticipated and service further pressured our results. Our network integration was successfully completed in March, But it is an incredibly complicated effort to combine 2 individual networks of this scale. Throughout the quarter, we continue to on our standard operating procedures to improve service levels and create momentum across our European division. Moving now to FedEx Ground. Revenue growth was driven by higher yield from higher fuel surcharges, base rate increases and improved volume Despite volumes being lower than anticipated, we have held market share in the United States.

Speaker 3

FedEx Ground has strong service levels, Best in market transit times and an exciting new picture proof of delivery capability. We are ready to deliver for peak. We will remain nimble in leveraging peak surcharges to balance demand and the capacity of our network as we monitor volume trends. And at FedEx Freight, momentum continues to build. The freight team delivered another strong quarter marked by 21% revenue growth.

Speaker 3

The team continues to drive disciplined execution focused on revenue quality and profitable share growth. For the company overall, we continue to execute our revenue quality strategy and pursue business that provides attractive yields. We continue to deliver new pricing capabilities, and we've taken recent actions to stay well positioned relative to the market as we approach key. We have maintained a brisk pace for repricing contracts for renewals and continue to negotiate strong increases. We just announced a 6.9 percent general rate increase this coming January in our response to inflationary pressures on our costs.

Speaker 3

We also announced our new remote area surcharge and peak residential pricing in the United States. In Europe and Asia, we will launch a new handling surcharge as well this January. In August, we implemented international fuel surcharge table adjustments for Asia, Europe, the Middle East and Africa. Fuel surcharges are important pricing tool. We rigorously monitor fuel prices to ensure that we are appropriately positioned relative to the market.

Speaker 3

We're moving with speed and agility to reposition our business model for today's operating environment. As you heard from Raj, We had a great we have great opportunity to align costs with volume levels. We are committed to doing this while executing against our commercial strategy and delivering for our customers. Importantly, we're still focused on the longer term opportunity growing in high value segments, driving improved service quality and of course delivering an outstanding customer experience. I am really pleased with how our teams have responded in this dynamic environment and we are well positioned to deliver during the upcoming peak season.

Speaker 3

Service is strong and we have a fantastic value proposition. With that, I'll turn it over to our Chief Financial Officer, Mike Glenn.

Speaker 4

Thank you, Brie. While revenue was up 6% for the quarter. Profitability was challenged with operating income down 18% on an adjusted basis and adjusted operating margin down 150 basis points year over year. At Express, adjusted operating income declined 72% due to lower average daily package and freight volume and increased expenses as cost reductions lagged volume declines. These factors were partially offset by yield management actions, including higher fuel surcharges.

Speaker 4

Package yield, including fuel, grew 16% Turning to ground, operating income increased 3% primarily due to yield improvement and home delivery volume growth. Yield including fuel grew 12% year over year. These factors were partially offset by higher operating expenses Driven by increased purchase transportation and other operating expenses. Freight delivered another strong quarter with Operating income increasing over 67% as the freight team continues to execute. This was driven by yield management set by higher salaries and employee benefits as well as lower shipment volumes.

Speaker 4

To address the changed environment, We're focused on what's within our control and moving with urgency to take costs out of the network. Our team is operating The $2,200,000,000 to 2 point $7,000,000,000 fiscal 'twenty three savings we're targeting are relative to our initial plans heading into the year. The majority of this year's savings will come from Express where the demand change has been most pronounced. We expect about $1,000,000,000 of our fiscal 'twenty three savings to be permanent in nature with slight reductions the largest component along with corporate and back office costs. These permanent cost reductions were not part of the deliver today, innovate for tomorrow strategy we shared in June, profit improvement objectives we shared at our June investors meeting.

Speaker 4

We have launched efforts to accelerate initiatives, identify incremental opportunities And implement metrics to track progress under the DRIVE program. So next I'll give more details on the targeted $4,000,000,000 savings by 4 largest areas of opportunity we are actively advancing are first, restructuring the air network operating expenses via dock productivity initiatives, network and line haul efficiencies and reduced liability costs. Approximately $1,500,000,000 will come from shared and allocated overhead expenses led by procurement savings, Back office automation and infrastructure modernization, increased deployment of digital self-service and further consolidation of shared service functions. Moving to our capital spending plans, We've reduced our forecast for capital spend for fiscal 2023 to $6,300,000,000 compared to our prior $6,800,000,000 forecast. We're intensely focused on allocating capital to the most attractive ROIC initiatives.

Speaker 4

Our liquidity remains a source of strength as we ended the quarter with $6,900,000,000 in cash. And based on our cash flows and liquidity, we remain committed to our capital return strategy, including our plan to repurchase $1,500,000,000 of stock in fiscal 2023. We expect to purchase $1,000,000,000 in the second quarter. Our capital return strategy reflects our confidence in our business despite the headwinds we're currently navigating. With significant flexibility to maintain our balanced capital allocation and preserve a resilient balance sheet.

Speaker 4

Now turning to 2nd quarter guidance. While we continue to drive aggressive cost reduction actions, we expect business conditions remain challenging in the Q2. As a result and consistent with the update we provided last week, currently expecting revenue of between 23.5 to $24,000,000,000 in the fiscal second quarter and adjusted earnings per share excluding costs related to business optimization and realignment initiatives of $2.75 or greater in the 2nd quarter. For the remainder of the year, While we are not providing guidance given current uncertainties, our plan is based on an expectation that the weak trends we saw quarter and driving our cost takeout initiatives for the fiscal year. Longer term, we remain committed to our Fiscal 2025 targets for operating margin improvement, return on invested capital and capital intensity that we shared with you in June, We're leaning more heavily into cost actions to get to those goals.

Speaker 4

The start of the year presented greater than expected challenges, But I can assure you that we are moving with urgency to address these pressures while remaining focused on creating long term value by prioritizing revenue quality, expanding margins and elevating financial returns to profitable growth and reduced Capital Intensity. And with that, we'll open it up for your questions.

Operator

In the queue. And we will take our first question from Tom Wadewitz with UBS. Please go ahead.

Speaker 5

Yes. Good afternoon. Wanted to see if you could Maybe give us some more perspective on some of the biggest cost reduction actions and just kind of your level of confidence on the execution. It seems like, I guess, parking the planes and taking out capacity is something you've done in prior downturns, but Perhaps rationalizing sorting centers seems like a new thing in ground. And I guess the labor markets, maybe it's a little tougher to take labor So I just wanted to see if you could give maybe a bit more detail on your visibility to those cost

Speaker 4

Sure, Tom. This is Mike. So you're correct in observing that the biggest order of magnitude of the cost reductions is from flexing down the air network. So that will come into play particularly as we move through into the second half of the year as Flight reductions take effect in October and into November. So the ground, you spoke of the Facility and sort rationalization.

Speaker 4

What that does for us is as volume fell down below expectations That leads to inefficient line haul because load factor is down and so thus you're running More line haul than you need for the volume you have. So by consolidating sorts and rationalizing facilities, that's just an example of how we can optimize against The lower volume. I also highlight that within the capital spending projections, we have deferred a number of planned Brown facilities and we actually canceled a few that we're literally about to initiate. So we are moving quickly on this And fully acting to realize the full potential there. So we have clear plans to get at all of these.

Speaker 4

We have a long list and they all add up to a very solid number and the team is focused on execution.

Operator

We will take our next question from Brian Ossenbeck with JPMorgan. Please go ahead.

Speaker 6

Yes, hi. Maybe just more a basic question. Raj, can you just talk about the I guess the reason why this is only a FedEx issue at least at this point in time. Why haven't peers called this out? They all seem to sound like things are actually working pretty well in their favor, at least not nearly as much of a fall off As you've highlighted, so maybe you can just address that and why I waited a week to talk about the costs which we're all waiting for.

Speaker 6

And then just because of the significant downdraft in Express, can you give us some recent stats in terms of just how quickly it fell and how should

Speaker 2

Okay. Let me start and then Rick can talk about some of the trends you're seeing. Listen, I can't comment on what our competition is seeing or not seeing. All I can say is the Trends that we are seeing in the marketplace and we want to get out ahead of this. And listen, the whole At the end of the day, the macro is going to ebb and flow.

Speaker 2

It's really the activities that we do that matters at the end of the day, and we want to take control What we can control. And that's why we are being very aggressive on our cost actions. And again, We'll let the economic environment, things that we don't control, that will do what it will do. We'll just we will focus on the issues that we can control and primarily on the cost side. I'll let Brie talk about the revenue trends.

Speaker 3

Sure. Thanks, Raj. Brian, just to kind of reiterate what we when I know we had a lot of opening comments, but when we look at kind of the background,

Speaker 4

We really

Speaker 3

did break things into 3 categories. In Asia Pacific, we absolutely believe that this is a market trend and not a FedEx trend. As I mentioned, our market share studies, they are a little bit of a lagging indicator, but we do see that through June in our Asia Pacific region. We actually gained market share and that's why I shared those spot rates and how quickly the market changed in August. And we do believe the Our market is experiencing that in Asia.

Speaker 3

In Europe, similar story from an economic perspective. We think that the economy got worse throughout the quarter. We, however, as we acknowledge, did not have the improvement in service in the quarter that we had expected. We actually saw some plateau in And then here in the United States, as I mentioned through June, we can see that we've held market share. If you Actually look from a nuance perspective, I would say that the one nuance within the domestic performance is that from a FedEx Ground Economy We have prioritized revenue quality and so we have let some volume go.

Speaker 3

That was very conscious, and we have seen that kind of persist throughout the quarter. So overall, we do think that the entire market is experiencing what we had from a macroeconomic perspective. And then for Q2, you've got the revenue range and I would say that September is right in that range.

Operator

We will take our next question from Brandon Oglenski with Barclays. Please go ahead.

Speaker 7

Hey, Raj and team. Thanks for taking my question. And definitely appreciate the new cost plans, but maybe we're going about this all the wrong way because there's been plenty of cost improvement plans in the So can I ask a pointed question? Have you done a price review like what is not working in the last 20 years that's driving lower profitability in your network relative to your competitor. Is there a certain product or customer or region that just isn't working?

Speaker 7

And I can tell you from the outside looking in, TNT seems to have been an unmitigated disaster here that just isn't delivering because you guys are calling out European And then from our perspective as well, dual express and ground pickup and delivery networks, I get it. I know that express and ground have different dynamics. However, your asset efficiency is literally half that of your nearest competitor, which is unionized, if I might add. I guess, why not use this downturn to put more concrete plans in place to exit markets or regions that aren't working? And the $1,000,000,000 in permanent cost out, obviously a step in the right direction.

Speaker 7

But I guess how can you address the deficiencies in the network as you see them?

Speaker 2

Well, thank you, Brandon. I think we are absolutely fully committed to taking The cost levers out, we talked about in 3 buckets fiscal year 'twenty three, the $2,200,000,000 to $2,700,000,000 for cost Take out here, we're talking about $4,000,000,000 between $23,000,000 $25,000,000 and then on and the network 2.0 of So those are significant numbers. We are confident in these numbers. We have identified domains with targets. We have people who are focusing on run the business and people focus on transform the business and we are using cutting edge technology and some of it's already coming on live here.

Speaker 2

And all of this is in motion as we speak to deliver value as quickly as possible. So we are confident, we are committed and this is definitely the focus of the entire team. As far as TNT is concerned, since you asked that question, you got to go back and look at the A little bit of history here. There's a portfolio gap that we had in Europe that our competition has been in Europe since 1974 And it's a very important business and profitable business for them. We had to fill that portfolio gap.

Speaker 2

Now has integration gone exactly the way we thought it would? No, because of we had the cyber attack, we had COVID, we had all kinds of things in the middle. But the integration is now complete. And that part of it is done. We had the service issues are getting better And we have in our portfolio to sell in Europe that's unmatched and sales is getting on the front foot.

Speaker 2

So this is This is the starting point, we would call, and that's why we are confident of the improvements that Europe is going to deliver for us over the next 2 or 3 years. And again on the issue of Network 2.0, it's very easy to say, yes, put it together and look at the numbers. Yes, that's Right. But the complexity from technology perspective, from facilities perspective, other issues is far greater. And most importantly, we have $4,000,000,000 of in network efficiencies we can get relatively easier than that.

Speaker 2

And by the way, we're building technology that will enable us to get to network through auto. So we think it's the right sequence.

Operator

We will take our next question from Jordan Alliger with Goldman Sachs. Please go ahead.

Speaker 8

Yes. Hi. A Question for you. In light of what could you have done different in the quarter? I guess the magnitude of the Express drop off was so sharp and I guess that Line decelerated, but I'm just curious, like how did it catch you so off guard?

Speaker 8

How do you protect against that in the future? And I would have thought that with the contractual customers you've had, you might have had more of Heads up that this deceleration was coming. So maybe you could talk to that. Thank you.

Speaker 2

Let me Talk about timing and then maybe, Brie, if you want to add about what's up on the customers. But the volume did drop off Quite suddenly towards the end of the quarter. As you know, we have a complex system form in which multiple constituencies around that. And there's a time lag between the actions we can take on reducing the line haul network and that's all it is. So as I said in October, you'll see the full benefit of those takedowns.

Speaker 2

In terms of customer trends, I don't know, Brie, if you want to add anything more.

Speaker 3

Yes. What I will say is that from a customer perspective, our customers are incredibly sticky. And what we experienced, especially in August, both in Asia and here in the United Perspective, we are working with them furiously to help them manage their the difficulties that they're experiencing in their own business. But from a customer stickiness perspective, this is absolutely a reduction of demand within their own business, not a share loss implication.

Speaker 4

Yes, Jordan, this is Mike. We also are very intently focused on identifying these variable And shortening the time span of which we can realize the reduction there. So again, there's a span and continuum across different Lines of business and nature of cost, but we are intently focused on shortening that horizon.

Operator

We will take our next question from Helane Becker with Cowen. Please go ahead.

Speaker 9

Thanks very much, operator. Hi, team. So just kind of wondering if you could be more specific on flights that you're reducing and Parking aircraft to get to this $1,600,000,000 number. Like how should we think about The trade lanes that are going to be impacted and maybe the number of aircrafts that are going to be on the ground and or do you change Your Boeing delivery schedule.

Speaker 2

Let me hit the trailings first and then we'll go to aircraft. I think we have taken down 11% of plan specific Daily frequencies, 9% of transatlantic daily frequencies and 17% of daily frequencies in the lane between Asia and Europe. And we will continue to look at it and we'll see what needs to happen post peak depending upon how

Speaker 4

the volume goes hold. Mike? Yes, Helane, in taking that down, we're maintaining connectivity and service in the network, but there's lower volume, so we need less lift. So as a result, we identified the need to the opportunity to park Aircraft, just as we have demonstrated in the past. So the equivalent of about 8 narrow bodies is what we will be idling temporarily.

Speaker 4

And so as you can appreciate that defers maintenance spending that we otherwise would have had and of course you save the operating costs of not flying. So We'll continue to take that approach for how conditions unfold.

Operator

We will take our next question from Chris Wetherbee with Citi. Please go ahead.

Speaker 10

Hey, thanks. Good afternoon. I guess I wanted to understand the process of the cost outs, particularly this So I think you guys mentioned that $300,000,000 of cost savings is in the fiscal Q1, another $700,000,000 is realized or expected to be realized The second quarter, so that's about 40% or so of the full year, yet the results are running at a level that is about half of what we expected Just a week or so ago. So is this the kind of run rate we should expect as we move into the back half of the year with that Your $1,200,000,000 to $1,700,000,000 of costs coming in or is there improvement? I guess I'm just struggling particularly with the Q2 with the $700,000,000 of cost savings relative EBIT for the total company, which may be in the neighborhood of $1,000,000,000 or a little bit north of that.

Speaker 4

Okay, Chris. So this is Mike. Let me take that in 2 parts. First, you asked about the Q2 and that. So As we emphasize, we saw the downturn in the demand in the latter part of Q1.

Speaker 4

And as we expect those trends to persist throughout Q2, While we've accelerated or we'll realize more of the cost savings in Q2 as you highlight, we also have 3 full months of that change in demand that occurred late in Q1. So that certainly pressures Q2 margins. As we go through the year, the savings build and we expect then that the pressures relative to Q2 will mitigate as we go through the be less as we go through the year.

Operator

We will take our next question from Tim Hoexter with Bank of America. Please go ahead.

Speaker 7

Hey, great. Good afternoon. Just before

Speaker 11

I get to the question, I just wanted to understand why you chose to launch your Q and A with CNBC versus hosting a conference call. Just want to understand the philosophy of what we can of the message going forward and how you plan on distributing it. Obviously, you had technical issues today, but just to try to understand Why you chose that route in getting a message out. But my question is, how do you solve the fastering ground contractor issue? It seems like you talked about purchase transportation cost scaling.

Speaker 11

You mentioned in your statements, you've pulled some networks. Some have turned their routes in, it seems like. It seems like there's really deep concern. Is there opportunity to use this kind of, I don't know whether the cost savings or something

Speaker 4

Okay, Ken, this is Mike. First, as it relates to your question about the pre release, so we felt that was appropriate for the circumstances, It's consistent with market practices and quite frankly allowed us to use more time today to be talking about how we're going to address it and our future plans.

Speaker 2

As far as the perceived issues on the ground side, let me just assure you, first of all, The service levels at FedEx Ground are now reached pre pandemic levels and we are very well positioned for peak. The 6,000 contractors, we have 96% of them have signed the peak incentive program. And to put that in perspective, this is running ahead of where we were last year. So a lot of those were in the media. They're all much more of Perceptions is a reality and we are well positioned for peak and we have the support from our team.

Operator

We will take our next question from Amit Mehrotra with Deutsche Bank. Please go ahead.

Speaker 12

Thanks. Hi, everyone. Mike, I just wanted to ask about the cost out initiatives this year, and if it's a gross or net number, Because obviously the company has a $90,000,000,000 cost structure. If it's not net, dollars 2,200,000,000 to $2,700,000,000 it may sound like a But if you have 3% inflation on that number, it wipes out the entirety of the cost savings. So I want to know How you think about that, if that's a fair or unfair way of characterizing it?

Speaker 12

And then just very simply, are Express profits going up from here In the fiscal Q2 or are they going down from here? If you can just answer that as well. Thank you.

Speaker 4

So Amit, first, as we said, the 2.2% to 2.7% is relative to our cost Plans that we had coming into the year. Now as you rightfully observed, we as everybody else in the world is experiencing I guess the best way I could characterize it for you is on an absolute cost basis, the first quarter The largest of the absolute year over year increase. As we move through the year, that will mitigate As the cost initiatives take traction here and that will offset the cost inflation down the road. I'm sorry, what was the second question?

Speaker 12

Well, just if you're just giving me a chance to follow-up on that. And then the second question was, If Express profits are going up from where we were in the fiscal Q1, the 1.7% margin or even just absolute profits, are they going up Or are they going down in the second quarter? And the way you characterized the answer just now, it just seems like There's still no if inflation offsets the growth cost takeout, then basically all of the revenue decline And so I just wanted to understand how you if you agree with that or how you think about that?

Speaker 4

No, it wouldn't drop to the bottom line because of the actions we're taking. We're reducing costs to adjust to a lower demand environment. So while that doesn't leave us at the expectations that we highlighted that we outlined in June, It's certainly the case that we're significantly mitigating that as we go through the year. As it relates to Express, I would as I highlighted earlier, the demand downturn, particularly at Asia Pacific and Europe Occurred late in Q1. So Q2 will be we'll see margin pressure again At Express, not dissimilar to what we experienced in Q1, but the structural initiatives really gain hold at Express as we move through Q2.

Speaker 4

So as you think about the overall cost outs, Express has more as we move through the year

Operator

We will take our next question from Jack Atkins with Stephens. Please go ahead.

Speaker 7

Okay. Thank you for taking my question. So I guess, Raj, going back to a comment you made earlier about the team,

Speaker 5

Do you feel like you've

Speaker 7

got the right senior team in place to lead FedEx into the future? There's a clear lack of outside talent on the senior executive committee. Your largest competitor has really benefited from bringing in some outside talent over the last 5 or so years. Do you think it would make sense for FedEx to do that As you look forward to really put in some best practices that have helped drive improved profitability returns, it seems like that's sort of

Speaker 4

a missing element to the story here.

Speaker 2

Jack, I think I'm very, very confident in the team that we have. There's a lot of experience here. We have Several new players in place. The team is very, very excited. Obviously, we'll look at external talent.

Speaker 2

We already bought an external talent Several areas of this company, so they're not at worst that at all. It's just that we have a very, very good team, Jack, And I'm very confident that we can develop.

Operator

We will take our next question from Jon Chappell with Evercore ISI. Please go ahead.

Speaker 8

Thank you. Good afternoon. Bria, I wanted to ask you about the service challenges that you referenced. Just want to make sure, is that strictly in Europe? We're now 6 months past The finality of the integration of TNT, are you confident that those service issues are behind you?

Speaker 8

And then the final thing, as you think about cost cutting across All the regions, is there a risk that cost cutting could exacerbate some of

Speaker 4

the service issues going forward?

Speaker 3

Great question. And let me answer the second part first. The answer is absolutely not. At At FedEx, one of the things we talk about a lot is quality driven management and core service actually costs more. And our teams are completely aligned that we are going to reduce costs and continue to improve service.

Speaker 3

And I cannot emphasize for e commerce. When we're talking about service in Europe, as Raj mentioned, the March integration of the airline was successful. We successfully integrated the airline. It was very complicated and we did suffer some service challenges in March. As we stood in front of you in June, we absolutely had improvement from that March point.

Speaker 3

We did expect continued improvement in July August. And what we experienced in Europe was a plateau in that service improvement. And I want to be really specific. When we get into Europe, The international domestic market, so when we talk about like our U. K.

Speaker 3

Market or we talk about the France market, that domestic service is actually really, really strong. And that is our number one focus from a service perspective. And yes, I am confident that Karen and her team will continue to improve there. But I just wanted to kind of give you that background of kind of where we're at and what we're looking at moving forward. And absolutely, our entire team knows reduced cost and improved service.

Operator

We will take our next question from Ravi Shanker with Morgan Stanley. Please go ahead.

Speaker 13

Thanks, everyone. So regarding the GRI you announced, how do you reconcile pushing through your biggest rate increase in history at a time when your volumes are falling double digits. I mean, isn't that going to exacerbate the volume decline?

Speaker 3

Fair question. I think the answer is inflation. Last year, we had a 5.9 increase and post and by the way, we have just an incredible insight into our pricing discipline and the market and the commercial tools the team has are just Best in class. So last year, we did a 5.9%. It was incredibly sticky.

Speaker 3

We had continued cost increases throughout the year, And so we felt that the 69 was appropriate for this year's GRI. We will monitor Post implementation stickiness. And of course, we're constantly looking to balance the yield and the volume and make sure that we get the right volume

Operator

We will take our next question from Ari Rosa with Credit Suisse. Please go ahead.

Speaker 13

Great. Thanks. So, Raj, if I look at FedEx Freight, it's now producing almost 4 times the operating income of Particularly as we head into a potential downturn. And then to what extent if we see some of the strength at freight starting to wane, Is it possible that starts to eat into some of the gains that you might see from cost savings at the other units?

Speaker 2

Yes. Thank you, Ari, for that question. First of all, let me just say, our FedEx freight team has done continue to do a phenomenal job of both managing revenue quality and our operating efficiency to generate fantastic results. And they also form a great piece of our portfolio and also provide synergies on the cost side. The point that you made is important because But we have when there's a significant change when we went through a last downturn that we there was very much focus on revenue And as even through the downturn, actually the margins expanded.

Speaker 2

And so we are very disciplined in this area. And we are executing the plan. We'll have to watch how the market conditions change or volumes Actually, as you can see, have declined and yet the margins have gone up. And the team has done a fantastic job. I expect them to do that going

Operator

We will take our next question from Bruce Chan with Stifel. Please go ahead.

Speaker 13

Yes. Thanks, operator. Raj, Brie, I just want to go back to some of your earlier comments and maybe just ask it bluntly. When you think about the miss, how much of the shortfall was volume related and how much was from Those European service issues. And maybe just to follow-up, you can give us some color on what exactly you mean by service issues.

Speaker 13

I might have missed it, It's not really clear to me what that means. Was it, I guess, customer attrition? And if so, can that come back? Thank you.

Speaker 3

So the short answer is the vast majority of our volume Myth was macroeconomic. We talked about it kind of when you think about the myth, it really was predominantly at Express With Asia being the largest issue, we believe that was entirely macroeconomic. And then when we get into Europe, there was a split between service and the macroeconomic decline. I will tell you 2 things. From a service perspective, when we say service issues, specifically what we're talking about is on the Express portfolio within Europe across the European network is that we are not hitting that time definite mark At the level that we expect of FedEx.

Speaker 3

And so we need to kind of increase that service commitment there. What I will tell you is that the sales team and our Customer base absolutely wants FedEx participating in this market and we have had strong indication

Operator

We will take our next question from Abascal Majors with Susquehanna. Please go ahead.

Speaker 14

Raj, you've managed through a lot of change at FedEx since 2016, just convention, the TNT acquisition, the cyber attack, the trade war downturn and the pandemic, Change in leadership from a founder and whatever we're going to call the cyclical reversal, let me look back on it in a few years here. But as you step back and reflect, Are there any managed mistakes that FedEx did make? And if so, what can you learn from those mistakes to set your customers and your shareholders up for

Speaker 2

And I mean just think about this for a second. You see when 2016 was we were primarily in the B2B space And when you look ahead of the market, we saw 90% of the growth for the next 5 years is going to be e commerce driven and 10% B2B. Well, you look back now and look at that timeframe, we see almost not 90% but more than 100% of the growth came from e commerce. So we actually You know, expanded our e commerce portfolio in a big way and expanded our operations. We are very, very proud of the work we did, you know, in creating this We also did some of the most important work in the history of the company, especially with Express by delivering vaccines and healthcare Around the world and especially in the time of this great pandemic where operating a network like ours around the world was Extraordinarily complex with changing circumstances.

Speaker 2

I'm extremely proud of the team for having executed that. So this is the timeframe we're talking about. So what we did not anticipate, to be perfectly honest with you, was the tremendous inflation of costs that hit us squarely last year. And that was what really got us. And even with that, We had tremendous results in fiscal year 'twenty two from an EPS perspective.

Speaker 2

And but we absorbed a lot of costs From the inflation side of the house. And then of course, and now that we're dealing with this situation, we had to build capacity And now we have more capacity than we need. So could we have timed that a little better? I don't know how you can calculate it. It's like you can't build half a building, can you?

Speaker 2

So it's It is now we are in a position to, you know, as we laid out at the investor meeting, We are focusing on the things we control. Our focus is now on improvement of margins, improvement of ROIC and improve our capital intensity. That's what we're going to do. And this, again, Economic upturn

Speaker 4

or downturn, forget about that

Speaker 2

for a second. Let's focus on the things we can control. And that's why this tremendous cost focus and the structural costs that we are talking about, that's going to get us to these targets.

Operator

We will take our next question from Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Speaker 13

Great. Thanks and good evening. So I just want to make sure I understand the underlying macro assumptions. Mike, is it that the trends that you saw in August that that's Kind of the run rate now going into the Q2, or do you expect some further deceleration from where we were in August? And then Is there a risk that there's contagion, where we see weakness in Asia and then that comes into the U.

Speaker 13

S? Just kind of How are you thinking about the geographic piece of it? And then lastly, we typically see price follow volume. And so is there a risk

Speaker 4

Okay, Todd. So yes, the basic underlying planning assumption that we are using is that the demand levels that we experienced in late August We'll continue through the rest of the year and so that we're taking actions accordingly to react to that. So That's the operating assumption now. I don't have a crystal ball about contagion in that, but rest assured we are going to be continuing to focus on the things we can control. And if we need to make further adjustments and reductions in the cost structure, we will move quickly and decisively.

Operator

We will take our next question from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Speaker 6

Thank you very much. And thank you for the guidance on the cost savings as well. I just wanted to ask because I noticed that the other Corporate and overhead part of operating income was about $100,000,000 higher than year ago. It costs money to park Planes and I don't know if you're furloughing pilots or you're reducing those hours. It costs money to reduce routes or consolidate storage through shutdown offices.

Speaker 6

Do you guys have any estimate for where those costs How much they're going to be? Were they running through the regular P and L during the quarter? Or was that the $100,000,000 in incremental costs that I saw going through kind of corporate office and other.

Speaker 4

Jeff, yes, let me just specifically address the $100,000,000 you can Put it into 2 pieces. We had a specific customer bad debt reserve that we booked for $80,000,000 at FedEx Logistics. And so while we are pursuing legal action, it was the appropriate reserve to take at this point in time. And then while we separate it out in terms of our adjusted earnings, there's also $24,000,000 of our business realignment Is in that corporate other line, so maybe that gives a little more context for what's there.

Operator

We will take our

Speaker 4

next question.

Speaker 7

I would

Operator

like to

Speaker 4

clarify as far as any other no charges or anything That was specific to the items you were asking about. And there is also no furlough of

Speaker 2

the pilots. That's not even a

Operator

We will take our next question from David Vernon with Bernstein. Please go ahead.

Speaker 2

Hey, good afternoon. So I

Speaker 8

appreciate the added color on the cost saves, but reductions from baseline Kind of difficult to book as profitability. 10 weeks ago, we were looking at low $20 EPS number going to something in the low 30. Is there any to think that those targets for earnings power have actually shifted as a result of what's happening in the market right now? Or are we just pushing those out? And does the $4,000,000,000 of extra cost base just kind of get you back to that 10% margin level?

Speaker 4

I think, David, the way to frame it is that we fully Recognize that the external environment has changed more than we expected. So we're focused on delivering the margin improvement, Lowering the capital intensity that we highlighted, but it's absolutely the case that a greater emphasis will be put on the cost reductions. And so that's what we're highlighting here today and we have the specific initiatives and plans in place to go after that And realize that as supportive of

Speaker 2

the goals that we outlined.

Operator

We will take our next question from Jairu Nathan with Baidu. Please go ahead.

Speaker 8

Hi, thanks for taking my question. So I just wanted to clarify, are there any should we account for any cash restructuring expenses or anything of that sort for these cost savings?

Speaker 4

So to clarify for the Cost savings that we've identified for FY 'twenty three, no, there's nothing associated with that. Now previously, as we talked about the Broader Business Optimization Initiatives over a number of years. We scope that that could be potentially In the $2,000,000,000 range, but that is over a longer time horizon. But the near term cost initiatives,

Operator

That concludes today's question and answer session. At this time, I will turn the conference back to Raj Subramaniam for any additional or closing remarks.

Speaker 2

Thank you very much. And in closing, let me just say, this goes without saying it was a challenging quarter. This is a real critical moment in time for FedEx to execute and I'm very confident that we will. The actions we are taking

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
FedEx Q1 2023
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