Q2 2020 Earnings Call
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Good day, everyone and welcome to the Fedex Corporation second quarter fiscal year 2020 earnings Conference call. Please note today's call is being recorded at this time I will turn the call over time, Mickey Foster Vice President of Investor Relations for Fedex Corporation. Please go ahead.
Good afternoon, and welcome to Fedex Corporation's second quarter earnings Conference call.
The second quarter Form 10-Q earnings release instant book on our website at Fedex Dot com.
This call is being glean from our website, where the replay will be available for about one year.
Joining us on the call today are members of the media during our Q, but I'd session College is limited to one question.
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These are the host key followed by pound.
You are not.
Higher income that ice fishing color to be limited to one question in order for us 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.
Securities Litigation Reform Act certain statements in this conference call such as projections regarding future performance, maybe 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.
Slide by such forward looking statements for additional information on these factors. Please you probably the press releases and filings with the FCC.
Thank you probably investor relations portion of our website. It critics dot com for a reconciliation of the non-GAAP financial measures discussed on this call to a most directly comparable GAAP measures.
I understand the calls a day or Fred Smith Chairman.
Washington Dominion closed the shield COO.
Alan Graf executive VP and CFO .
Mark Alexee <unk>, Vice President General Counsel Secretary.
Rob Carter Executive Vice President Fedex information services it CIO.
Great career Executive Vice President Chief Marketing Communications Officer, Tom Coburn, President two year old Fedex Express entering their president and CEO Fedex ground who's on the phone and John Smith, President CEO critics, right and now Fred Smith will share his views in the quarter.
Thank you everyone and good afternoon, and we appreciate your participating in our second quarter EPS was 20 call.
Hi, guys. We've said before we continued to be on a period of challenges in changes.
Before addressing specific issues, let me take over 490000 Fedex team members around the world for delivering an outstanding peak season for our customers.
First let me.
Deal was the challenges.
The quarter just standard is an anomaly because of the compressed shipping season before Christmas.
Sustaining a significant bow wave of expenses scandal volumes that will largely fall in our third fiscal quarter.
In addition, this quarter as showing significant effects on the industrial economy due to continuing trade disputes, including reductions in international Airfreight and chapter that best me to be domestic parcel and freight shipping.
Despite these issues will remain highly confident in our strategies, which we believe will began to bear fruit bar fourth fiscal quarter, and then into Alf was 21 absent negative macro economic development.
Now the changes.
As we announced last summer that actually is aggressively expanding north American packages package services for the why but rapidly growing E. Commerce market to include glued year round, the seven day delivery.
In sourcing most smartpost volumes formally you haven't through the postal service.
Standing up more dedicated ground at large package facilities, given the remarkable growth in demand from the delivery of overshadows items.
I knew you need short all services.
Well. These are the most visible changes numerous other new technologies and an operating processes are being deployed to ensure a weekend profitably deliver increasing numbers of lighter weight residential packages.
These strategies are being well received in the marketplace with record peak volume.
Package volumes, which are substantially above last year, and well over forecast would actually service levels and high overall customer satisfaction.
In the fourth fiscal quarter, we forecast Fedex ground margins will again be and the change.
The second area of strategic changes and Fedex Express International operations to include the completion of European ground interoperability in the fourth quarter of fiscal year 20.
Also we are taking down the intercontinental capacity right after Christmas as our hopes for a restoration in trade growth Express last June that's simply not materialize due to the trade dispute.
Given these two major initiatives as Fedex Express roles in the F. was 21, we believe we will improve profitability in the segment.
Well, we have numerous other programs underway in Fedex freight Fedex logistics and Fedex office that are extremely important.
There are two additional areas that deserve comment.
Our focus on yields and Capex, which brea rising Alan will cover in detail in their remarks.
In regard to Capex, let me just emphasize we are deferring capital if not you satchel for safety service or replacement or obsolescence.
Longer term biases grew 22 year end.
The replacement of 159 age where you can any M.D.J. on aircraft will be complete.
This will lead to a significant reduction in the corporations ongoing capital expenditures on both an absolute basis and portion of revenues from F. was 23 forward.
Now Brea Raj and now I will comment then we will answer your questions.
Thank you Fred good afternoon, everyone I'll open with our economic outlook and I've directly into commercial strategy and how we're delivering some incredible solution for our customers that will position Fedex to drive increased profit.
Economic growth in the U.S. slowed in calendar year, 19, and we continue to see a split between solid consumer economy, and a struggling manufacturing sector.
Consumers are supported by robust labor market, while manufacturers have been hampered by trade policy uncertainty and ongoing inventory correction.
The latest developments on trade are positive uncertainties remain.
The avoidance of terrorists and approximately $160 billion of goods scheduled for December 15th and the reduction of tariffs on the September 1st last on a 120 billion from 15% to 7.5% isn't packs. Good news, we look forward to continued progress and the signing of a phase one deal in January .
Further we believe that the UK is now in position to manager more predictable and orderly break that.
Our economic outlook does not reflect any continued trade momentum beyond the two changes mentioned to the tariffs above our current.
And the Eurozone manufacturing production appears to be stabilizing at low level Germany's industrial sector. However, its stolen decline looking ahead to calendar year 20 European GDP growth rates will likely remain in line with where they are now.
In Asia, China slowdown is expected to continue through the first half of the year, but should have summit opportunity in the back half of 2020.
Total trade between the European Union in China, So significantly in calendar year 19, a slower growth in impacts and trade tensions have weighed on trade flows.
Global trade volumes contracted year over year again in calendar quarter, three and will show contraction for the full calendar year.
We should see a return to positive growth for calendar year, 20, assuming no real escalation and trade tension.
Now turning to what we can control we are laser focused on executing strategy centered on five areas E Commerce.
No profitability market, leading revenue quality VTB growth and operational excellence in innovation Trosch will cover.
We are evolving our global portfolio and are already winning significant new E. Commerce business. While we are excited about the future of E. Commerce. We continue to have team dedicated to the growth of our core fee to be doesn't at.
Also we have found great opportunities to grow within the B to b market by leading with our innovative ecommerce portfolio, which I'll come back to in a moment.
At Fedex ground, we have the market, leading ecommerce portfolio, we continue to see strong demand across all customer segments with our new seven day service.
We will increase our speed advantage on the new year, our Sunday role that will speed up some land I wanted to fall transit days. This will increase our advantage significantly and as you know we're already faster by at least one day when compared to your P.S. with ground service and 25% of lanes.
It is also really important to note our speed advantage and seven day service is also very valuable for the premium b to b sectors, including health care and perishables shippers.
We are equally excited about our returns offerings, which are growing at double digit rates year over year with our expanded retail presence and lower turns market share I am confident we will see this growth accelerate and continue for many years.
Returns as a quickly growing market with 15% of ecommerce orders our returns.
Returns are attractive growth segment, because it's basically a b to b note.
And that's why 20, we've seen significant growth in our retail locations, including Walgreens and dollar general as well as the volume within these locations.
Year to date, we've expanded our president and 1800 dollar general stores, reaching 14000 staff, how locations where customers can comment or treat their packages.
We will continue to expand on the new year end by peak season of next year, 90% of the U.S. population will be within five miles of a fedex drop off in pickup location.
Fedex Express we are enhancing the value propositions, we are famous for our premium time definite services for commercial shippers.
We are rapidly innovating to leverage technology to increase control security and visibility for express customer base.
We will continue to lean into sensor based technology to differentiate our services for health care Aerospace and high Tech segment.
Turning to freight last quarter, we discussed our Fedex freight direct service, which provides freight deliveries right to or through the front door freight direct currently covers 81% of U.S. population is that and is anticipated to cover 90% by this coming July .
Our next Frank direct is a market leading value proposition, including a two hour delivery window to your room of choice with full packaging removal delivered of course fire Fedex team members, we have a strong pipeline and expect some prominent retailers to begin using the service in January .
The pipeline for B to B customers for free direct is also very strong as we see great opportunities to deliver to spas dental offices and school.
Revenue quality is one of our five key strategies, we will continue to deliver strong market performance. In this area first we are excited about our momentum in the small business segment.
Secondly, we continue to strategically manage our portfolio of large customers.
And finally, we continue to manage both annual increases and contract negotiations to ensure we are appropriately compensated for the comprehensive service we provide.
As an example, we announce rate increases for large packages for Jan is coming January Fedex continues to experience strong demand for transportation of larger and heavier packages the rate increases reflect our commitment to continually invest in our business, while responsibly managing capacity through our network to maintain outstanding service for these larger packages.
Turning to international and our focus on improved profitability I'm confident in our growth prospects in Europe , we have seen year over year momentum and growth in our personal volume into Europe and Intercontinental to the U.S. from Europe . We have these strongest pipeline and after vacation for commercial that I have seen since the beginning of integration we are.
Creating momentum as a result of having the sales integration behind us now.
Further we are leveraging our world class you U.S. domestic network to penetrate the ecommerce market from Europe to the U.S.
As I mentioned on our last car call, we're far less penetrated any commerce outside of the U.S. compared to our competitors. We have quickly pivoted to develop necessary solutions are confident this represents a significant opportunity for both our Europe and our APAC region.
Finally, Fedex kicked off the peak season, with a stunning cyber Monday and a feat made possible by the best team members and the business Raj will discuss peak in more detail. So let me now turn the call over to him for his remarks.
Thank you very and good afternoon, everyone.
I too would like to stop by extending a sincere. Thank you two or more than 490000 team members, who are working relentlessly to deliver a successful peak season for customers.
We are off to an exceptionally strong saw this compressed speak season as data indicates we moved 37.8 million packages on cyber Monday.
This exceeded our published projections of more than 33 million packages and represents 17% increase or cyber Monday last year.
Additionally, this number nine and December 16, just yesterday.
Both.
It's Stuart volume days spoke Fedex.
Oh Outstanding service during peak is supported by our people and the significant investments made in the Fedex ground network over the past two decades.
Now turning to Q2.
I am not pleased with our financial results and to that and we have focus areas across the enterprise on B to B E Commerce international profitable or the market meeting revenue quality and operational excellence.
The short term this includes targeted actions to shore up our financial performance.
We expect a reduction in Intercontinental and domestic air capacity post peak.
And then overall reduction of cost and Rx business.
This action should result in the decrease of international and domestic flight hours by about 6% to 8% year over year in Q4.
Additionally, we are permanently retiring our fleet of 10 Athree tense.
The reduction in flight hours would allow us to temporarily park 14 aircraft by the end of fiscal year 20.
We would also permanently retire number 29 aircraft over the next 30 months.
It is imperative that while we reduce our cost to serve you also drive higher yields to improve profitability.
Capacity reductions will bring greater focus on revenue quality as we generate more compensated we volume two of the network.
As Brian mentioned.
Once again implementing our rate increase in January and have added further increases on accessories and surcharges.
Yields will also benefit from gains in our share of the small and medium ship or market and renewed focus on b to b shipments.
At Fedex freight we continued to focus on yield management profitable growth and aligning our cost structure to the lower volumes throughout F. why 20.
These efforts have enabled Fedex freight to significantly offset the impact from softening economic condition.
This is yet another example of matching capacity to demand.
Fedex ground is experiencing cost headwinds as we undergo remarkable transformation to seven day service with the late Thanksgiving. This year, we incurred peak ramp up costs in Q2 with none of the revenue benefit.
Additionally, due to the slowdown in industrial production and other macro economic factors commercial traffic has not been what we expected.
Our baby business provides greater density and strong where you can be to see and so we are renewing our focus on commercial traffic, which makes up a significant portion of our ground volume.
Hello, recognizing that E. Commerce is the fastest growing segment in our business, we are working to position Fedex ground as the BDC player.
Spend years enhancing our network on today.
Fedex ground network as well equipped for handling is rapidly growing market, including seven day operations for the majority of the U.S. and dedicated large packard operations for handling the growth and heavy and bulky items moving through the ground network.
You also increasing efficiency through technology as part of this network transformation.
This includes offering technology dollar service providers, which we call dynamic route optimization or Diablo doses of them in preparing for increase residential volumes associated with ecommerce growth.
Yeah, All technology provides near real time data that service providers can use to optimize Rob priming dose.
Additionally service providers may uses data to make decisions regarding the rig mix and workforce to accommodate the increase in both small and large packages.
New technology and data visibility allows service providers to make dynamic decisions, but the most effective and proactive way to run their business as well.
All of this is expected to drive efficiency Wells Fargo strengthening the reliability of both residential and commercial Fedex ground subs.
Looking ahead, our investments in this business and sure you're optimizing capacity and productivity in the long term.
Now turning to Europe .
We are on track to meet the May 31, 2020 target date for interoperability of the intra European grow networks. This with lower costs as it related Fedex Express operations are optimized.
In fiscal year 21. The next few milestone will be the completion of the integration of the remaining pickup and delivery operations in Europe .
During the first half of fiscal 22, we've completed the air network integration, bringing to close the physical network integration of TNT into Fedex.
We are progressing towards important milestones and we have significant commercial momentum our sales pipeline is strong and activation is the best it has been since you started the integration.
As we grow our intra European parcel business.
We'll benefit from a lower pickup and delivery cost.
Looking ahead, the rationale behind behind the TNT acquisition remains sound the value that we estimated at the beginning of the process remains largely achievable.
As I've said before Fedex remains committed to delivering long term profitable growth.
In the near term, we are focused on decreasing costs improving revenue quality.
We continued to be very excited about our prospects ahead, thats weve trends from the ground company complete the TNT integration and right size our network.
Given a more stable economic environment. These measures should produce strong results for the corporation.
Now, let me turn it over to Alan Graf to provide details on off and actually Alan. Thank you very much Raj and good afternoon, everyone.
Let me start by saying our second quarter results were very disappointing.
And I will discuss the drivers and actions we're taking.
But first let me take a minute to provide further context around our strategy and the decisions we have made.
For many years, a fundamental component of our strategy and investment.
It was capitalizing on the growth of global trade, which was powered economic development around the globe since World War two.
As recently as 18 months ago, we were seeing accelerating returns from our differentiated international network with greater capabilities eminent as we continued with the TNT integration.
Well, we are encouraged by and supportive of the recent trade agreement with China.
It is clear that the dynamics of trade growth have changed and we must adapt accordingly.
In addition.
Following the passage of the tax cuts and jobs Act in December of 2017.
We reviewed our capital priorities.
An accelerated intentionally central replacement of our oldest aircraft due to the incentives within the TGC T.C.J.
These investments amidst the current environment are impacting our financial performance.
Turning back to second quarter results.
We global trade and manufacturing drove less than expected demand for our most profitable package and freight services across all our business segments.
These conditions are especially challenging in Europe , where capacity and network reduction opportunities or limited.
To the current stage of immigration.
We are operating duplicate road and air networks.
As Weve discussed cost headwinds at Fedex ground or largely driven by the expansion of six and seven day delivery due to any minimum number of employees required to staff and operate to reschedule prior to the volume and revenue coming on.
The loss of volume from Amazon has a larger negative impact to the second quarter than the first quarter since the Fedex ground contract with Amazon expired in August .
Year over year comparisons for the second quarter. We're also negatively impacted by the later timing of Thanksgiving as Rod mentioned when I can't emphasize enough.
Which resulted shifting of cyber week revenues into December .
The headwinds of expansion to six and seven their delivery the loss of Amazon volume and cyber week shifting to the third quarter accounted for approximately 60% of the ground margin decline year over year.
Hi, or self insurance accruals also negatively impacted ground margins by approximately 90 basis points.
Packaging for yields across our businesses has been negatively impacted due to a mix shift to lower price services lower weight per shipment and increasingly competitive pricing environment.
Depreciation increase was strategic investment programs.
During the modernization of Fedex Express aircraft them hubs and investments in technology to across the enterprise that will further optimize our networks as well as enhance safety and capabilities.
Partially offsetting these negative factors, where the benefits from a tax benefit of $133 million from the recognition of certain foreign tax loss carry forwards.
An approximate 65 million decreasing verbal incentive compensation.
And increased revenue per shipment at Fedex freight is doing quite well.
[noise] Fedex Express recorded asset impairment charges of 66 million related to the permanent retirement of Gen. Airbus Athree Tenthree hundred aircraft and 12 related engines.
The company is continuing to evaluate this additional aircraft retirements are warranted.
For fiscal 2020, we are now forecasted adjusted earnings per share.
$10.25 to $11 in 50 cents.
Our revised guidance reflects lower than expected revenue in each transportation segment.
The unexpected expenses driven by the continued mix shift residential services.
In response, we are implementing reductions to the global Fedex Express Air network to better match capacity with demand.
We're also further restricting hiring and pursuing optima opportunities to optimize our networks, including investments in technology.
You bet, improving our productivity and continuing to lower costs.
Year over year, adjusted operating profit comparisons comparisons should improve in Q3 in Q4 relative to Q2 and as Fred said, we're optimistic about a 421.
We now expect to incur approximately 325 million TNT integration expenses enough for 21.7 billion total food for 21.
We expect to begin realizing synergies from the integration of Fedex Express and team to ground networks joint Jeff Why 21, and these synergies are expected to increase significantly after the completion of the air network integration in F. Why 22.
Improving residential patches density is a key aspect of grand strategy to combat residential delivery cost challenges.
We expect delivery density to improve as we further integrate the delivery of Fedex Smartpost operations into our standard ground operations in calendar year 2020.
Grounds performance will also benefit as we roll out technology solutions like dynamic route optimization more automated small package. So others can more locations in 20 Twond.
All right for 20 effective tax rate prior to the year in Mark to market retirement plan accounting adjustment is now expected to be 23% to 26%.
We continue to expect airports want to capital spending to be approximately 5.9 billion.
And then for 21 capital spending is anticipated to be similar to 420.
We are continuing to review our planned spending and as Fred stated earlier, our capital intensity is expected to decline significantly after upwards of 22.
As committed aircraft deliveries are substantially lower.
Slide 23 and beyond.
Our forecast assume moderate U.S. economic growth current fuel price expectations.
No further weakening in international economic conditions.
Further ramping and anti trade measures and or adverse changes in international trade policies and relations would likely drive additional weakness in our business.
In conclusion, we are disappointed with our current results, but we're optimistic or long term performance will benefit from.
An increased focus on revenue equality.
Reductions to the global Fedex Air network to better match capacity with demand.
A more competitive solution for European customers to the completion of our TNT integration.
Modernization of our expressed aircraft fleet and hubs.
Better utilization of our Fedex ground assets from the expansion to seven day operations.
Improved residential density through the further integration with Fedex Smartpost packages into standard ground operations.
And continued investments in technology across our business to automate and optimize operations reduced costs and enable more real time decision making.
With that operator, we'd now can open up for questions.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please cignal AI pressing star one on your telephone keypad. If we're using if speakerphone. Please make sure. Your mute function has turned out to all your signal to reach our equipment. We ask that you limit yourself to one question again press star one to ask a question and we'll pause for just a moment will ever an opportunity to signal for questions.
And our first question today will come from Allison Landry with credit Suisse.
Thanks, Good afternoon, excuse my voice.
But he asks about the.
The ground segment, and specifically that the 6% inflation and cost per piece in that flat revenue per piece.
Which I think is the biggest delta going pretty far back in history I know, there's an element of timing of the cyber week, but how should we think about the cadence of these metrics in Q3 in Q4.
So just trying to understand how we can get comfortable with the margins snapping back to add to the double digit level by coupon. Thank you.
Oh listen thank you for the question, let me just off and then I will have Andrey answer though.
Details here, but the.
The most important thing.
Happened to US here was the timing we have as we on the calendar we incurred a lot of the costs of running up to peak in Q2 with none of the revenue benefits as we talked about and you know you combine that with the slowing down of the commercial segment.
Resulted in the results.
For Q2, let me turn it over to Henry to see where yesterday.
Yes, Hi, Allison.
To add here is is that.
Most of the cost or San is the timing of peak and six and seven day operation.
Being set up we began operating seven days a week on November 3rd and it's going to take awhile for the volume and revenue in the network to catch up and cover the expense.
And I think I didn't hear them.
Part of your first question, but I think it had something to do with.
Yields on I think that is.
Raj probably said is.
Due to mix.
Our next question will come from Chris Chris Wetherbee with Citi.
Hey, I guess, a one to pick up.
Well for left off on that on the ground side, and maybe understand things a little bit better and then kind of get into those cost inflation, what we're seeing years.
The couple of different items, there that I think were somewhat unique to the quarter I think about 60% of the margin degradation that you called out.
Got the six and seven day, plus the timing shift of cyber week at 90 basis points for insurance.
Do you think about.
Revenue growth of 170 plus million dollars.
Profit still fell by almost $40 million. So how do we think about that sort of when I look too.
Injured million dollars incremental costs, you incurred outside of those specific items.
How do we think about sort of a walk from that kind of core run rate to something that I guess looks like.
For Q.
This is Raj again, and thank you, Chris I think I'm not sure what what else can add other than to say that that we had a run up on costs and putting a seven day operation in place and then getting ready for peak. So we go there was a significant demand.
Seven day, we are going to be differentiated with the competition than the customer demands very high and that's going to come on post peak and you know that's going to be very helpful for us and then.
And it will cover or do you see in the industrial segment of the economy and driving B to B, which is a renewed focus for us that will be very helpful. Henry.
Well I'm not sure what more I would add there I mean, we've we've talked about this mostly most of the cost 60% of the of the margin impact as Alan pointed out is the timing of key.
This year and by the way it's a.
It's a peak that six days less than last year. So you have.
Bob.
You have this volume.
Yes, we handle in a much shorter timeline that it did last year.
Thanks, more drivers that takes more package handlers that takes more line haul et cetera across the operation to get done and then there was about wave of cost.
The implementation of six and seven day.
The wasn't in these numbers last year everyday Fedex ground is now service today and it takes a minimal number of people in order to staff. These operations.
To provide.
The service.
Our next question will come from Jordan Alger with Goldman Sachs.
Hi, I'm sorry, following up on that again, I mean, I understand the timing issues and.
And the mix shifts et cetera, but.
Can you maybe talk a little bit more going forward.
You know how do we avoid.
These sort of issues because.
Seem to me it at the macro I really didn't get that much worse. So this must be largely cost related and what have you and I just wanted to make sure that going forward with the stuff that you're doing.
You know this this type of event and timing that we minimize because I'd imagine we knew about the shorter peak season. So I'm just a little confused because the hit was just so big.
Well.
This is Matt there I don't know again, how much more that right you can Henry and Allen, who can say about its standing up to six and seven day network.
It was very expensive for us and the.
The expats for peak in general, which is always put up front.
Was was the total drag and we certainly anticipated some of it.
But.
We probably underestimated the cost of standing it up and then when we went into the peak season as Raj also said.
We had an unbelievable response, we had 37 million packages on cyber Monday and our plan was for 33. So we have said clearly that we believed by the fourth quarter grounds margins will be back into the teams we're not.
Well to show you our spreadsheets.
But that's our cost projections and yes. There's no question, we we spend more to put the network up then we than we thought but whenever put up a six or seven day ground network before so from that things are there little bit of little bit of new ground for us, but no question, we missed on the cost side.
But it's up and operating as Raj said, we've probably never had a response in the recent past from our ground customers like we've had where you can perhaps add to that.
On a seven day and it's it's a entirely.
Differentiated product and it's also something that's going to substantially changed ecommerce business and the last weekend that just finished we delivered over 14 million packages on Saturday and Sunday, we weren't even delivering packages on the weekend a couple of years ago. So we're pretty confident where we're going.
And clearly we didn't do the.
Great job of forecasting our cost and we were hit with a couple other things like the insurance reserves, which are looking backwards. Some period of time, that's basically because of the.
Litigious Society, we live and on the more extensive to required to drop rate of transportation company and in general which is a huge issue too small transportation company. So we've answered it three times and where we're pretty confident about the fourth quarter and we gave you should aim of stakes, but I don't know this.
Productive to cloud this ground anymore.
And with Stephens, we'll hear from Jack Atkins.
Good evening and thank you for the opportunity. After question. So I guess, you know asking a ground question not related to.
Good day, but kind of thinking about your pricing commentary both in the press release and in the 10-Q.
You referenced increase pricing competition, there, which is sort of eroding pricing power and we certainly saw it this quarter. So whether it's Henry Roger brand could you maybe talk about sort of what's going on there from an industry perspective, and why is pricing power eroding eroding given they obviously significant demand for our resources.
Hello.
Yeah, Great. Great question. Thank you Jack I think a couple of things to clarify one as Henry mentioned the primary yield pressure, we felt a ground in the past quarter was really due to a next and the pressure on our commercial business, which is obviously I know a very important segment to asset that was linked directly to decrease in industrial production when we think about weather.
When you quality.
And our ability to continue to command a premium in the market, which we do in every segment that I measure, we actually get our competitive premium over the service number one the seven day value proposition is opening doors like it never has before for US. So we really do believe that that gives us great ability to negotiate number two we are manner.
During the revenue quality, ensuring that every pricing Sal contribute. So you saw that address addition, what we made for large packages, but as we're managing our large customer portfolio, if not all customers are equal or making sure we get the b to b and the B to C bundle and we're also making sure that when we grow with seven day that we've got a strong mix a small business.
Which we have seen I just looked at the seven day activation report and it is very strong customers actually switching to Fedex during peak to be ready for the seven day launch in January which is really something quite on precedent.
This is Raj again at the world the risk of being up and if you have I cannot emphasize the focus on revenue quality. We are you a renewed focus on b to b.
Gaining on small and medium segment and all the things would be just talked about very important for us.
Your next question today will come from Scott Group with Wolfe Research.
Hey, Thanks afternoon, guys. So Fred I want to ask it we've got record low margins I think here and.
I hear you can talk about restricting hiring but why are we talking about more drastic cost and headcount reductions in it I know, it's maybe a different but it strikes me that some of the rails are cutting headcount 10, 15% without.
Severance costs.
So we have any opportunity to do anything like that and then just separately I know you're talking about express profits improvement next year, you have any visibility on ground profits for next year.
Well I have to ask Alan if he is prepared to make a forecast for F was 21, but.
Which I doubt because again forecasted to me if the [laughter], but.
The reality is to your first question.
The rails are not even though remotely comparable business to two Fedex, it's essentially a.
A business of maintaining tracks and automating to the extent possible you have oh, our 60%. It's it's not labor intensive is getting less labor intensive and one.
Follow the Preceptorship Hunter Harrison and.
Smart railroading or whatever it was it calling that's watch, allowing the precision railroading, that's what's allowing the rails too.
To lower the.
To lower their cost they are cries on monopolies.
Certainly in the geographic areas and certainly do particular customer so I don't know that rail is.
As a significant.
Second part about this business is where in many ways hope to our customers for.
Long term relationships and if you walk away from customers and disadvantage them and if you break the morale your true bye.
Not investing and service quality that has long term deleterious effects that certainly has been a consideration in Europe for mentioning in Ah TNT. So.
Of course, we could have done some more drastic things, but I think at the end of the day the.
The focus on the short term.
Financial results are only based on what we see for the fourth quarter and a 21 and the strategies we're exercising.
We have not decided to go down that road now maybe maybe somebody else feel differently about that but I don't think you can keep the purple promise laying off thousands of people and I think that that's one of the considerations and then we had in Europe is to make sure people over there we acquired with TMT were fairly treated.
We're investing in delivering that kind of Fedex service. So it's a value judgment no question, we could have been more draconian I guess in certain areas, but were as we've said several times.
Pretty optimistic about where we're headed and going ended January assuming there's no more macro economic deterioration.
I might also say.
No I think in this country.
There's a little bit of.
Misunderstood estimation, what's going on in the rest of the world. The E Commerce growth the technology sector that we had the tax cut.
All of these things that let us to have hi, increasing employment, which led us to have.
A reasonable GDP growth, that's virtually not true anyplace else in the world.
And the industrial economy, particularly in Europe , which was hit by the Ricochet bullets of the of the U.S., China Trade War.
Almost went into recession. This time last year and it still hasn't recovered in Germany. In particular is extreme and I think one of the things that Roger said and Bria said, it's extremely important here the U.S. industrial economy, which is much more tied due to international trade.
And of course, CGM strike and now the Max shutdown, it's it's been negative for months now and so our b to B ground volume is growing.
And our what does it beyond which are a freight volume that's a up a little better about flat, it's flat to down yeah and show that's a reflection of the industrial economy added large truckload carrier that just went bankrupt celadon. So it's really a tale of two.
Two economy.
And the stock market of course is very bullish by the industrial economy does not reflect.
Any growth.
That all worldwide the speaker.
So let me let me try to give you will get more.
Detail on on that.
First of all a couple of things we didnt mention about are missing in the second quarter, we got substantially less commercial volume at round and we had forecast.
Which was a big impact.
Hi density higher yield heavier packages that didnt materialize or commercial growth is about flat.
Secondly, we operate in extremely competitive labor market. These days.
We've seen wage inflation in certain markets. We've increased competition for personnel that was a little higher than we anticipated.
So having said that.
We are at the bottom.
Our adjusted operating profit decline year over year.
This horrific and it's going to improve is going to improve in Q3, and it's going to improve substantially in Q4 versus the prior years adjusted operating.
Income there won't be Mrs. So bad we might.
We might not be back to where we were last year, but we will be a lot closer. Obviously, then how wildly we were.
The second quarter.
The other thing is is that.
I think if you think about all positive things we've said in that we're seeing.
As we get into 21.
We will start lapping Amazon, we will have a lot more of the six and seven down or belt, and we're gonna be delivering millions of packages on Sunday for the rest of this fiscal year rolling into 21.
Finally start getting turning the corner in Europe with the operational synergies that will start soon and those will grow during the year.
I've got nothing in this current range for any sort of the trade deal because we haven't gotten one yet.
We have some upside there if that happens more you'll have more upside in the 21 so.
We're not giving specifics we're at the bottom or we're going to come up off the Matt we're going to improve through the rest of this year and into any of them next.
Our next question today will come from Allison Poliniak with Wells Fargo.
Hi, guys I'm, just kind of getting back to your commentary around Europe , obviously seeing some stabilization there are the German sentiment and tax is starting to trend a little bit more optimistic we I guess any color on media potential improvement there and your ability to flex that network as you're bringing some of the aircraft part income aircraft now.
Yeah again, thanks for that question, Yes, we know we are actually.
Commercial velocity that we're seeing in Europe is quite good as we've talked about earlier.
Is the best we've seen since the beginning of the integration and or when the parts of volume growth intra Europe than in Europe .
So I'm starting to pick up here, so and they are the same time.
Oh, we are starting to kick off or integration milestones and you know next you know as I pointed out earlier, we will you know by end of May.
This fiscal year 20, we are expecting to be interoperable and then proceed on to discover 21. So we're not waiting for the full integration to get all the benefits generating generating those as we speak.
And we are seeing the volume growth coming good commercial velocity, and then turn it over to dawn for any comments you may have on on Europe .
Thanks Roger.
For the opportunity to get a little bit of Carlo to what you've already shared like you and the rest of the team I remain very confident in Australia in Europe , and what we're seeing relative to the claims were executing.
I think it would would help a little bit when we talked about interoperability and integration on the ground to kind of define what that means so what that really use its our ability to flow volume between network supporting.
By the proper technology allows us to do that in a very efficient way. So what does that mean, so with that allows us to link import and transit clearance processes enables crossword capabilities.
In a dual network it allows us to enable into sub capability wingstop hubs in our ground networks. So what are what are we seeing over the short term in what are we seeing an odd business right now so.
As we communicated on previous calls we will remain on schedule to have grown interoperability completed.
By the end of this fiscal year, which which is made for us and on the air side in October of 21 calendar 21.
We realize benefits each and every day as we complete our integration tasks did you have an example, we've stepped up almost 1800 lanes in our European theater.
Thats, 40% of our total wanes, even faster by one or two days and our customers are responding very positive to that Raj and breach talked about your the pipeline activity and that's all willing good, but but what I measure our results out of what we're seeing no real claims in our trucks and we're seeing some nice revenue momentum in our business right now.
That's really where we began to begin to see the synergies in these leverage in our business as we integrate the networks and at the same time, we add possible falling into it that's where the music really begins to happen. So I feel very positive about where we are we remain on schedule, we have the European team.
In here last week Raj and I'm in Embry and Joe We spent a lot of time since Amsterdam would the team. So we're we're on schedule as we've communicated we're beginning to see some of the benefits. It will continue to see the benefits as we transition in the back half of this fiscal year into up into the next.
Fiscal year.
And our next question will come from Scott Schneeberger with Oppenheimer.
Oh, thanks, very much on touching on on 10 tier you essentially reiterated its kind of at the time frame of of integration I'm. Just curious and you mentioned the sales pipeline is strong and I think it was activations were the best that they've been could you elaborate a little bit on that in please speak to the competitive diner.
I mean, you're facing as you're trying to re penetrate there. Thanks.
Well I think we've really answered. This is broadly speaking I think Don and Raj and I've covered most of this I think it two things one to dons point commercial volume intra Europe for parcel is growing and we're very excited about that growth. It has been the strongest we have seen the next.
Lever, we really are pulling as quickly as we can is e-commerce from a competitive comparison and with that are in our express business that is something that our competition is ahead of us they have about 5% to 6% or 5% five to six times the amount of E. Commerce volume that we have intra Europe . So that is really Boeing net result.
We are moving very quickly a year ago justified to think contacts we had nine leaves on E Commerce and I'm, giving you that number to show the momentum that we have we are now actively managing a thousand e-commerce customers through our sales paper and intra Europe alone. We have very quickly quickly pivoted because of the economic.
Conditions, we have to grow in E Commerce, and Dons point than European network is ready to grow from an E. Commerce perspective, as we've been able to improve our value proposition and growing Europe . So number one for growing commercially intra Europe number two we've got strong momentum from an e-commerce in Europe , it's coming now.
Yes.
One thing I would add to Doug good good there what's encouraging to me because the fact that this growth is happening in light of what's not a very strong macroeconomic set of circumstances. So team is out there. We believe it is taking share there they're growing our business aggressively. We're hoping is both I think frozen and Alan mentioned earlier on a more macro level.
With certainty that comes along with with hopefully some good news on on Brexit also has just.
We encourage all that we haven't dial back into our plan. So.
I like where we sit I like how the team is executing.
Right right now as we go into the back half of the year.
Yes.
Next we'll hear from Ben Hartford with Baird.
Hey, good evening, just interested in your perspective on maybe five and.
What changes if any it may have to.
The way that the growth model is constructed or any potential benefits of that may bring about and the market. Given some of these disruptions just would appreciate an update there as it relates to every five in some potential consequences.
Hey, Dan it's Henry there.
85 legislation relates to the legal test under which an individual's employment classification should be determined under California law.
Since 2011, Fedex ground is only contracted with independent incorporated companies not individuals and they must classifying treat their staff as employees under applicable state and local laws. So at this time, we don't believe it impacts us. Thanks.
Our next question today comes from Brandon Oglenski with Barclays.
Hey, good afternoon, everyone and happy holidays.
So I guess, even you know.
Coming back to the analog between the rails I guess the question does make sense from the perspective that the rails didn't earn a great return on capital for a long time, then there was a bold new way to run the business and so I guess along those lines you know when should shareholders expect that Fedex goes on or like a portfolio product to review of everything offered at express and whereas the play.
I want to get those products, you know, earning their cost of capital in the future because there's just a history of that not happening.
This is Alan where we've done that.
We were asked earlier about as or some big bold move I don't think you have any idea how big a percent reduction of flight hours is but it is tremendously large.
We're not going to grow our fleet were just replacing it with exciting tightening up and reducing flight hours.
RECIST domestic margins are fine.
So its international that we've got to keep working on we've been dragged down by two into some of them. Its self inflicted some of that macro we're handling the flight hours I like where do you and everything that we can that we should be doing.
Well, our capex is going to drop significantly after we get the past for 22.
So those are essential aircraft replacements, which which we need.
We are fly more flight hours and will be retiring MB elevens faster than we anticipated, but we don't expect any growth there beyond that.
I think a 6% to 7% persona revenue and 23 and beyond we'll start to show a significant improvement in our Oh I see Anoro easy.
So as I look out there again its.
I'm frustrated I am sure or investors are frustrated we're here at the bottom but.
We can see away out.
Next we'll hear from Tom Wadewitz with VBS.
Yeah. Good afternoon I appreciate the question Alan you just.
Mentioned that the demanding to to the cost take out from the I guess, 8% Air network capacity reduction is pretty significant is there anyway that you can help us think about how to translate that to cost.
I think in the past you had talked about international like is U.S. frequencies being kind of.
$50 million to $100 million and operating income impact for taking out a frequency I. Just you know is area. This hundreds of millions of dollars. The cost savings is it 50, just anyway can help us think about the magnitude. Thank you.
Well getting them exactly those details because it depends on where the flight hours are and everything else. It's a significant number.
And at the same time, we'd expect to be improving the revenue quality on it.
Significantly so we should get it from the topline and the bottom line.
And I'll turn over to Don I mean, he's been leading the planning on this and I think its outstanding.
Thanks, Alan I won't give into a specific on the numbers. It because you suggested the where I can tell you.
We've made so we we have made and we're continuing to make sure the significant reductions in our flight hours both in the U.S. as well as outside the U.S. is because we mentioned our business or the U.S. is in a pretty healthy position, but we lost a significant customer. So what are we done in response to that well we're we're.
This can cost out about us business inclusive of flight hours in a significant amount labor savings aircraft maintenance in vehicle saving so we're looking if this.
However, we are not only in terms of what we're doing in the flight hours, but no corresponding costs that are associated with that both in the U.S. and our Intercontinental business.
The number that Alan it's because quoted six to eight is inclusive of both but we're looking at it flight hours everywhere and in ways that we can optimize our network and match lift to load.
Our next question will come from the Helane Becker with Cowen.
Thanks, very much operator, hi, everybody and thank you for the time I just want a follow up on the flight hours question.
We estimate that.
Public data that about half you're right you're pilots will retire over the next decade.
And I'm just kind of wondering.
Yeah, Hey, the pilot hiring and your ability to attract you know pilot to the.
To the company and B, how much of the reduction in flight hours is the result of the pilot retirement.
Let me start off from this one and have done.
Speak to a dishes smis speaking.
First of all.
When the.
Economy started or.
Deteriorating a year ago and.
Europe .
And.
We were hopeful for trade deals.
As we went into fiscal years, we expressed to you in the June analyst call.
We began to.
Put constraints on.
Pilot hiring.
And we have not been hiring pilots for sometime now.
On an attrition basis I believe.
John and Greg Hall, our head of Air operations told me that we will have a net reduction of several hundred pilots next year just due to retirement.
And of course that corresponds to the to the flight hour reduction. So this is something that we've been thinking about for a long time, if things didnt materialize.
In terms of female pilots Fedex has been a leader in this has been something that's.
Been a.
Project them on for a long time female and minority pilots, we we percentage wise at one point I'm far away from the express business. This level of details are onetime we had the highest percentage of both I'm sure. That's different now, but we we worked very hard and we participate in.
And female a minority hiring longer term.
We are among the prize jobs in the aviation industry and we do not have any.
Robin tiring.
Aviators today, but in the future or would the military releasing so few of them.
That may be that may be.
Front story, but.
Craig has done a great job for Don.
Developing grow your own pilot program. So we put a lot of thought in this our pilot attrition is going down and so were.
We we anticipated this Raj Don you want to say just just one thing I'd like to add to that I've had the opportunity since I've been in this role to spend a lot of time without pilots and we have an absolutely amazing group of pilots without question the best in the industry.
And then the best source of our pipeline. So because of brand is so strong because they do such a great job for US there. They are helpful. In the recruitment of pilots across the world. So first of all we have an amazing Hooper pilots.
The do it a fantastic job for us as they have during this peak season, I mean, there the distressed reliability of our aircraft and what our pilots are doing is nothing short of amazing so they're the greatest source of recruitment that we have.
The best pilots in the industry Barr Nunn.
And that concludes today's question answer session. Mr. Faster at this time I'll turn the conference back over to you for any additional for closing remarks.
Thank you for your participation in Fedex Corporation second quarter earnings Conference call.
Please feel free call anyone on the Investor Relations team. If you have additional questions about Fedex. Thank you very much.
And ladies and gentlemen that does conclude our conference for today, we thank you for your participation.