Q3 2020 Earnings Call
Good day, everyone and welcome to these Fedex Corporation third quarter fiscal year 2020 earnings Conference call. Today's conference is being recorded at this time I would like to turn things over to Mickey Foster Vice President Investor Relations Fedex Corporation. Please go ahead.
Good afternoon, and welcome to Fedex Corporation's third quarter earnings Conference call.
The third quarter form 10-Q earnings release in Stat book on our website at Fedex Dot Com. This call is being straying 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 question and answer session callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
I want to remind all listeners that Fedex Corporation desires to take advantage of the safe Harbor provisions of the private Securities Litigation Reform Act 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 by such forward looking statements for additional information on these factors. Please refer to our press releases and filings with the FCC.
Please refer to the Investor relations portion of our web site at Fedex Dot Com for 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 Fred Smith Chairman.
Lastly, Romanian president and COO.
Alan Graf Executive Vice President and CFO.
Mark Allen Executive VP General Counsel and Secretary.
Rob Carter Executive Vice President Fedex information services, and CIO and be crary.
We grew area Executive Vice President Chief Marketing Communications Officer, and now Fred Smith will share his view on the quarter.
Thanks for participating on this call.
We announced last year UNEV, why 20 would be a year of challenging change and beginning in early January the Corona virus entered the picture for Fedex.
Fedex address this issue decisively with our team members safety is our number one priority and our extensive planning and execution.
Thank and perf praise from pro Fusilli, all lows at Fedex, who have kept our system operating to the great benefit of our customers.
Fedex is proud to have played a significant role in supplying medical supplies. Both donate again commercial two and within China in concert with China Post and globally, we continue to work with relief organizations worldwide.
With the curtailment of passenger flying across the Atlantic We will provide to live required to keep vinyl commerce moving.
As was the case in Asia, our Fedex team members in Europe in the Americas are dealing with this crisis confidently and with great dedication.
Again their safety is our first consideration.
Regarding broader issues remain very confident and focused on new strategic issues as previously announced.
Improving Fedex express margins and completing TNT integration.
Becoming the most successful North American package delivery company, particularly for E commerce shipments and completing the retirement and replacement of 159 very old and inefficient aircraft.
Fourth quarter F 22, after which we will be able to significantly lower go forward capex, while still funding profitable growth across the enterprise.
We also continue work on several entrepreneurial initiatives such as the Fedex same day bought rock show sensor based shipping and new digital services, which we think have great potential.
Let me now ask three Raj and Alan to provide their comments after which we will take your questions right.
Thank you Fred good afternoon, everyone I would normally begin my remarks with our economic outlook. However, given the uncertainty in the current environment, we have temporarily withdrawn or economic forecast, rather I will provide an update on our commercial responds to the Corona virus, then I will discuss how we are continuing to evolve our commercial strategy to adapt to a changing markets.
Ladies and deliver innovative solutions for our customers.
The Corona virus in the efforts to contain that represent an unprecedented challenge that we are evaluating and addressing daily.
As the chronic virus broken China, we implemented a global response plan and began managing through this crisis, but the strength of our global network, an unparalleled logistic ex logistics expertise.
We are uniquely positioned to lead in both the release and the recovery efforts.
We have been on the front lines of the relief efforts prioritizing the hanley of medical and humanitarian supplies for our customers and nonprofits well also supporting our existing customers, we're protecting our customers base volumes to the greatest extent possible demonstrating our continued business partnership with our customers. This is especially important to the millions of small busy.
Mrs who depend on us.
We will then manage incremental demand and new customers.
In February we managed to influx of shipment request to China I met limited capacity by implementing a temporary peak surcharge for U.S. outbound freight shipments and adjusting our transit commitments to try not to maximize our capacity utilization with also dynamically adjusted spot prices to and from China.
Total air cargo capacity reduction to enter from mainland China from early February to early March is estimated at 40% year over year wide belly Bella wide body belly capacity contributed to 82% of this decline.
In China, we have seen a rebound week over week since the week of March 3rd with the urgent need for stock replenishment and with air capacity shortage in the market. We believe demand will stay elevated.
We continue to adjust transit times and spot prices, specifically for China outbound to manage demand profitably. We continue to increase the transit differentials between our premium and our economy services to encourage the use of premium service for any time critical shipments given the volatility in the market.
What started as a relief and recovery effort in China now Unfortunately as global the recently implemented travel ban between Europe and you asked is expected to impact cargo capacity significantly since approximately 60% of the airfreight capacity between Europe and the U.S. on passenger flight.
We're now employing the same strategies in other parts of the world that have helped us managed to man and capacity constraints in China, including transit time extensions dynamic spot price management and will also leverage peak surcharges for specific lanes and periods of time as they are required.
For intra European business, we continue to run our air and ground networks.
Due to the Lockdowns of some areas and enhance border controls, we're dynamically adjusting our network and in some lanes, we've extended transit times.
As businesses close in multiple markets, we're seeing a reduction in volume due to fewer orders and business is simply not being open for delivery.
Now, let me pull back prior to the Corona virus, the consumer sector had been a bright spot driving D to C growth in Europe.
There was subdued b to B peak in our Q3 numbers, especially from the broader airfreight market.
I'm very optimistic however, about our long term prospects in Europe, especially as we make strides towards interoperability of the Fedex and TNT networks.
Well the freight segment of area of our European business has been under significant pressure, we continue to focus on growing the personal next in the network in Q3, our international European parcel volume grew year over year with deferred growing at a faster rate than priorities.
Our European sales and marketing teams are seeing opportunity and ourself pipeline momentum remains at a high pace across all segments with continued year over year growth for the past nine months.
In Q3 ourselves team in Europe have been successfully closing business, 30% more quickly than the previous here.
And the past year, we have generated more than 12000 ecommerce opportunities, adding more than 3400 customer wins nearly half of these wins are brand new Fedex customers more than 60% of this new ecommerce traffic is international export volume.
As part of our international growth strategy, we have launched a new digital shifting to all for small business customers across 54 countries and seven languages early metrics show conversion rate from a rate quote to creating a shipment label as three axis the previous application.
Almost 2 million ecommerce shoppers and 25 key European markets now utilize Fedex delivery manager to manage their shipments.
And and that's why 20, we have also grown our convenience retail network to over 14000 locations across Europe.
Combined these enhancements strengthen our competitiveness and our position and position us very well for success in Europe for years to come.
Now, let me pivot closer to home.
When Fedex ground began at seven day delivery in January our industry, leading ecommerce value proposition became even more powerful.
Sunday residential delivery includes delivery to more than 188 million people, which encompass a 75% of U.S. GDP.
Fedex ground is faster to more locations than you P.S. ground.
Because of our seven day network transformation, 16% aesthetics home delivery package volume has been accelerated by at least one day, resulting in more than 72% of volume being delivered in two days or less in fact since now we delivered to most of the U.S. population on Saturdays and Sundays, our net speed advantage for home delivery shipments.
Increases throughout the week, let me explain.
For packages picked up on Monday were approximately 20% faster than your P.S. and by Friday. The packages picked up on Friday are now more than 80% faster than you P.S. ground for both our Fedex home delivery and our Fedex ground commercial services, we are at least one day faster and 320 million.
In depth pairs.
And that's why 20, we have however experienced some yield pressure due impart to the commercial ground volume softness, which we it's dropped believes strongly is linked to the economy. However, our transit times superiority and seven day service continues to create significant growth and market share improvement, while delivering exceptional value for customers, both small and large.
Currently our Fedex ground volumes are strong our largest retail customers volumes are rising as social distancing efforts are encouraging consumers to shop from home.
Finally, turning to our freight business Fedex freight and the LTL industry have experienced a reduction in volumes over the past year due to the slowing economy.
Despite pressure on volume growth. The team has done an amazing job driving revenue quality, we've a very strong value proposition that includes a comprehensive portfolio of solutions across our enterprise and our end to end support for our customers with that I'll turn it over to rush for his remarks.
Thank you Barry and good afternoon.
Our global team has been working tirelessly to mitigate the effects of the Corona virus on or business and the system relief efforts. We are first and foremost focused on safety in support of more than 407 to 5000 global team members and their customers who need or systems.
Fedex is one of the few companies in the World. The has the network and capabilities to keep Kommersant aid moving during this time.
We're keenly aware of this fact from the role we play and then we view it as our duty and responsibility to continue supporting our customers and communities in a safe and effective manner.
Laser focused on preparation mitigation and relief response.
We have countless mccullum examples of ways, we're working with customers to combat wireless and multiple phones, both from the U.S. and worldwide.
In addition to our extensive relief afford sunshine over the last few months, we are providing support within the United States, including the delivery of test kits masks gloves, and personal protective equipment to hospitals labs testing centers and homes.
As part of a public private partnership with many of our healthcare customers, we're working to rapidly deploy medical supplies to labs and clinics nationwide.
For example over the weekend, we worked with Roche diagnostics to deliver critical product designated testing labs across the United States.
Just one of many herculean efforts underway.
Time is off the essence when it comes to getting test kits and medical supplies to health care providers of flattens curve contain the virus and save lives I know team members a walking around the clock to respond to those global pandemic.
We're keeping their safety at the forefront before operations and have suspended signature drone karma requirements to promote social distancing.
I cannot emphasize enough how proud I am of the manner in which our people have rallied together in the face of this unprecedented situation.
This is clearly who we are and what we do.
During times of uncertainty.
One thing you saw.
Our next delaware's upon the purple promise.
Given the size and scale up for global network. We are also uniquely positioned to play a significant role in the recovery of manufacturing and other business sectors as the economy rebounds.
I don't know virus impact in February resulted in factories being shut down in Asia and lower volumes on Fedex networks as a result.
These numbers are reflected in our third quarter earnings.
However, what a manufacturing has started to come back belly capacity on passenger airlines continue to be severely constrained.
In contrast, Fedex flu 246 flights in and out of China, just last week, which is aligned with our normal flight schedule.
Over the past couple of weeks or flights have been full and we have registered record load factors intra Asia, especially with our hub in guandjo.
Now turning to the funds Atlantic theater as of last week passenger capacity significantly curtailed.
60% of they're afraid capacity between Europe, and the U.S. is on passenger flights.
However, demand out of Europe is softening as well as factories in business as close as we heard him a lost 24 hours.
We have set up a virtual command center to monitor demand and manage in real time, all the levers, including pricing and capacity deployment.
The increase or decrease on capacity as required. So we can provide the best service for our customers and deliver clones for our shareholders.
Now turning to TNT.
We continue to make significant progress on TNT integration around the world and are on track to Delaware important milestones as we ended the fiscal year in Q4, we will complete the interoperability of intra European grown network.
This will enable us to lower our cost to serve as the related Fedex operations continued to be optimized.
We also remain fully on track for completion of the Air network integration in fall 2021.
Which will bring to a close the physical network integration of TNT into Fedex.
I have stated before the rationale behind the TNT acquisition remains sound.
Earlier this quarter, we announced Fedex express would be contracting with Fedex ground for the transport and delivery of select day definite express residential packages in the U.S.
That rollout began earlier in the month in Greensboro, North Carolina, and we're already seeing positive results.
This initiative, which we referred to US last mile optimization is one element of the on ongoing comprehensive transformation of our business to meet the challenges of rapidly changing market.
In April will expand last met optimization into Cincinnati, Phoenix, Minneapolis, <unk>, Paul North Salt Lake City, and we'll continue to roll. This all over the next 12 months.
This is the first step and evolution of our business model to reduce our cost cost to serve by moving the right product in the right now work underway cost.
On previous calls you've discussed grounds transformation to serve the dynamic ecommerce market, including weekend residential delivery handling smartpost volume in the ground network and finding new save more efficient ways to deliver large packages.
These network changes are being enabled by investments in new technology that'll allow us to make dynamic decisions about the optimal routing of any package at virtually any time within the Fedex ground network.
This will increase our efficiency drive down or cost to serve and allow us to be more competitive and more profitable even as the residential volume continues to grow.
Our investments in the technological and operational changes at Fedex ground or significant but there are necessary. They will improve productivity increased delivery density optimize the growing network and maximize capacity utilization.
And speaking of capacity given the growth of omni channel ecommerce distribution.
Also investing and smaller regional sought substation facilities as we push investment in growing capacity closer to the destination address.
All of this combines a ship Fedex ground into what will be the most cost effective transportation company, serving the ecommerce market.
Before I finish I want to be sure to talk about exceptional themselves at Fedex freight in the third quarter, despite a challenging economic environment.
Our team at Fedex freight as great value to the overall portfolio Fedex and they continue to maintain a laser focus on revenue quality and execution.
We're making progress towards the double digit operating margin goal, even in a soft volume environment.
In summary, Fedex continues to be committed to delivering long term profitable growth.
We have successfully whether the global crises before and in the near some of your focus on supporting our employees communities and customers as we walked through the Corona virus situation.
We continue to be excited about our prospects ahead, as we execute on our core priorities, including drunk driving operational excellence, but funds fund the grown company improving international profitability by completing the TNT integration and Rightsizing or Air network, we're optimistic about our efforts to evolve our business model to reduce our cost to serve with lost.
Well optimization being the first step.
But the more stable economic environment. These measures to produce strong results for the corporation.
Now I'll turn it over to Alan Graf to provide details on nonfinancial Alan.
Thank you very much Raj and good afternoon, everyone.
Our third quarter operating results declined due to a number of factors, including weak global economic conditions, including the impact of the Corona virus pandemic higher self insurance accruals.
And then favorable variable compensation comparison.
Increased Fedex ground cost from expanded service offerings.
The last of the Amazon business.
Continuing mix shift to lower yielding services.
And any more competitive pricing environment.
Prior to the outbreak of the Corona virus commercial volumes and revenues were somewhat underperforming or December expectations.
Corona virus pandemic magnified the global economic weakness.
The reversal of our corporate annual incentive comp compensation accrual in the third quarter of last year.
Well the negative year over year comparison is approximately $115 million.
Variable comp compensation comparisons are expected to be modest benefit in the fourth quarter.
Hi, or self insurance accruals negatively impact ground margins by approximately 180 basis points.
The combination of headwinds of the expansion to six and seven day delivery and the losses, Amazon volume negatively impact ground margins by approximately 190 basis points.
These factors were partially offset by residential delivery volume growth at Fedex ground.
An approximate 100 million dollar benefit from additional operating week day.
11% increase in revenue per hundred weight at Fedex freight, which helped drive their best third quarter operating income however.
Shifting of cyber week into December.
And the benefits of cost containment activities, which has lowered or year to date physics services expenses allocated to our transportation segments through intercompany charges.
Our third quarter effective tax rate increased to 25% versus 20.6% last year Prime are primarily because last year's net income included a tax benefit from the recognition of certain loss carryforwards, which was partially offset by tax expense attributable to the enactment of the lower tech.
X ray from another ones.
We are spending in our fiscal 2020 earnings forecast for consolidated and segment results.
Due to the great uncertainty caused by the core krona virus pandemic.
Well, we cannot currently predict how long the economic impact of the pandemic will last we do remain confident in our long term strategy and our ability to adjust to market conditions.
We will continue to manage network capacity at Fedex Express by reducing international flight hours in the fourth quarter, if global economic conditions deteriorate further.
However, if global airfreight demand increases as the world recover some of the Cobas 19 pandemic Rick.
Ability to flex or network to meet the needs of customers.
We expect continued revenue growth at Fedex ground during the fourth quarter.
However, we expect higher operating costs and the expansion to your around seven day residential delivery and weak economic conditions will negatively impact Fedex ground results in the fourth quarter.
To further mitigate near term headwinds and position us for future earnings growth, we are talking costs throughout the enterprise, including continuing to retire our oldest at least efficient aircraft integrating two into and lowering our residential delivery costs by having Fedex ground deliver Fedex Smartpost and certain Fedex Express path.
Packages.
In addition to these cost actions.
For 21 performance should also benefit benefit from the lapping the losses, the Amazon business lapping the cost of Fedex ground seven day delivery expansion.
One additional operating week day.
Increased synergies from the TNT integration.
Total market share gains and a rebound in demand for services.
The Corona virus pandemic subsides.
We expect to finish up why 20 with capital spending of approximately 5.9 billion.
Given the uncertainty in business conditions, we are reviewing in great detail, our planned spending for roughly 21.
Our capital intensity is expected to decline after F. R 22, as committed aircraft deliveries or substantially lower and that's why 23 and beyond.
Let's finish my remarks, I went to congratulate Mike wins were being named my successor.
He has been an invaluable part of the Fedex Finance organization with his leadership of our Treasury Investor Relations and strategic finance teams.
He is uniquely qualified to guide our company to improve financial success.
As to the outlook, although we have been performing well and March up to today.
As Raj discussed.
There is so much uncertainty that we cannot give guidance or comment on any question related to near term financial performance.
Now the operator can begin the question and answer session.
Thank you at this time, if you do have a question that will be one again, we do ask that you. Please limit yourself to one question, we'll hear first today from kids Hexter with Bank of America.
Hey, Great I didn't know if this is for Roger out I guess I'll just leave it at a general question, but as you as you look forward on your canceled outlooks what worries you. Most here is it as the the scale of the recession, maybe you can give some insight into what made you cancel the outlook.
Is it kind of the rates the increase in their rate not offsetting the decline in demand.
And that the scale of that demand decline, maybe just give some parameters on that thanks.
Okay and this is Raj I think a if you think you know the last couple of weeks, we have seen as I said earlier and increased demand.
From Asia moves in you know have you seen a strong demand for Fedex ground here.
In the U.S., and especially home delivery and even the commercial volumes have been quite stable and you know we would we do not know now is how this is pandemic evolves and what happens to demand for instance, we do not know Oh, how your demand is going to come through here as some order then manufacturer.
You're starting to shut down there. So there's so many unknowns at this point as Alan said the first two weeks of March have been good, but there's no way for us to predict forward what the next few weeks hold for us.
I think as you've probably heard from a lot of people out there Kim.
You know if it's a V shape. It's one thing is it's a U shape its something else completely.
We are really managing this business almost on a day to day basis. We certainly think we know what's going to happen. The next week, but I have to tell you.
Every 24 hours something new happens Europe had been doing well now it seems to Europe and UK are starting to shut down a little bit more of the demand is probably going to be less you know I would have told you. It was three days ago.
We can't tell you about Asia is the same thing or is this is this a a bubble or is this going to continue.
I do know that we have great plans in shape from the cost side to go either way and Ah. That's the best we can tell you right now because it is just so on certain out there.
Well move next to David Ross with Stifel.
Yes. Good afternoon, just a question on the transition of Smartpost, bringing in house to ground.
Given everything that's going on now are you slowing the migration away from the postal service or speeding it up and then once it's all within the ground segment, what happens to the Smartpost product.
[noise] or David I think of you know we are continuing the process of moving smartpost into Fedex ground as Weve previously discussed and this was a purely an economic in decision. That's all was and the reason we're doing it is what you have two reasons. One is of course density match.
King stops in the Jason's, who drives significant stop efficiencies for US and then second is our enhanced technology then over there dynamic route optimization, it maximizes productivity up or opportunities some of our planning. So we put that together and we know we were continuing apace and a you know we have roughly halfway there and you know we will continue to keep more.
Forward for the rest of the rest of the calendar year in terms of product 11 Brea answer that question. Yeah. It's a great question. We continue to believe that we need to distinctive products. We will have our home delivery product as well as you know what is currently the smart post product it will be rebranded into future. We will give sub pound volume to the post office.
With as that make sense, but we believe we need to separate products because the slower economy product, we will flex that transit as required and we will also flex that trend that for peak, we really do think there are two distinct markets that we can grow into with this portfolio.
And from JP Morgan, we'll hear next from Brian Ossenbeck.
Yeah, Hi, good afternoon. Thanks for taking my question just wanted al if you could ask you could get little bit more detailed rather on the cost initiatives. It sounds like you're doing some things we've heard of before retiring the sleeping team team doing the ground to express, but what else is.
On the radar realizing it's uncertain at this point can you commit to anything else given the outlook has been called and there's a lot of moving parts out there. Thank you.
Well I do want to emphasize Brian that.
And also to the last question as we continue to grow ground in gross densities, we are lowering those costs at a rapid clip.
And that that is a big part of what's going to I think benefit ground greatly as we look at what going forward. That's not a Q4 comment that's just where we need to be strategically the same thing with the mountain flight hours that we've taken out right now as we continue to.
Right size, the the Intercontinental Air Network at Express those two are the big giant buckets.
But everywhere else with technology and productivity.
We if we can as we continue to grow.
We think that we will be taking out a lot of additional cost just from efficiencies.
Weve frozen and reduced our overhead.
I have a number of scenarios are good and not so good where we'll know what steps to take as we go through this and as I've said. This is a day to day and week to week look right now and we're managing as we go and I'm confident that will be successful in doing that short of some really bad outcome that I don't know that anybody's project.
Looking at this point.
Well move next to you'll be assist top water assets.
Yeah, good afternoon, and Ah I want to say congratulations held on Europe, and that's retirement I've covered the company a long time and then you've always been the CFO. It's.
Great to work with you over the years, congratulations like as well.
The let's say you wanted to ask you on the a express b to C shipments a that are going to be delivered in ground.
Maybe if you could offer some thoughts on kind of timeframe for how long it takes to roll it out and how do we think about the magnitude of cost savings it seems that could be large but.
It also might require reengineering of the pickup and delivery routes a in express to to realize the cost savings I wondered if you could offer some thoughts on that thank you.
Hi, Tom This is Raj. So yes, we have started this process in March as I said before and the rollout is fully underway. A you know we will yeah, we'll be in the rest of the country by in the next 12 months and Oh I already talked about the market's that'll be in April so its a.
It's a vast moving program and its you know as we.
As a as the markets growing for BDC, there's not there's an opportunity to rationalize the last mile optimization, specifically on the residential side at this point you know when we were not going to be able to quanta tell you. The quantification of the benefits and though you know there's lot more to come here and I know, but <unk> for good reason I don't want also to.
Like about what comes next on this in this regard.
There are topped out why Tom Thank you for those kind remarks I appreciate it.
Mike's going to be a doing a great job you all are in good hands with him.
A couple of things.
Express is going to grow.
And it's going to be delivering.
Ah items that require aviation and are going long distance that are time sensitive.
So we'll manage that at the same time, we're managing the flow of a slower moving pieces that have been in express to ground because they can make the delivery time, that's just a normal evolution that we couldn't do a couple of years ago, because we didn't have the technology to do it.
Now we have the technology to do it as Raj says, we're about halfway through that.
And as we continue to ramp up our technology investments.
We've got other things on the horizon as well so there's a complete program of how we're transforming the operating that works with Fedex Corporation to what we think the future market is gonna be which is a lot more E. Commerce, hopefully, we'll have an international growth again, and that's where we're moving too.
Hi, Goldman Sachs, well hear from Jordan Hollister.
Yes, Hi, <unk> question, you had obviously pretty strong growth in ground in the quarter and.
Made with all that's going on it'll it'll continue to be pretty solid as people order from home. You also mentioned a headwind this notably the six and seven day delivery Amazon.
Yes, the self insurance Navy in there.
Well I think they're still Costa said to roll that out in the sort of.
Pretty road sort of for the growth I mean, do you expect it diminishment in the magnitude of the headwinds as we move forward into the next quarter or did they stay sticky and for the near term.
No I expect the headwinds to diminish.
You know, there's a lot of things that we piled up on ground from a strategic standpoint.
No we were going to wait wait until Sunday, We said no let's get it let's get it going we.
Took that the Amazon traffic it out for stroke treatment for strategic reasons as you understand.
On our P.L.P.D., it's been very frustrating, we're working everyday to improve our safety and every one of our company's at ground. In particular, we are rapidly expanding the use of cameras and video recorders and where we do that we see the severity in the frequency of accidents declined significantly.
But we have a backlog of backlog of old claims that has continued to harness a bit and we had it took another significant charge in Q3, hopefully that's behind US a we're learning how to manage is much better in today's litigious Society and I think we will.
Improve both the severity and frequency and how we handle these things and I hope that we can put up behind us as well.
I'm very excited about what I, what I know is gonna be our cost structure ground, particularly in the next 12 to 18 months.
And we have to get to the low cost producer and we are committed to do so.
If I can add to that Jordan is that the customer demand is very strong as the value proposition that breed talked about earlier, we are now the market leading player in ecommerce.
In the United States and the demand, we're seeing from small medium and large and you know it in a is very very good and now we have a very very diversified customer base and because we can leverage off of that.
Oh onto Scott group with Wolfe Research.
Hey, Thanks afternoon, guys. So.
You know lots of concerns in the market broadly about balance sheets cashflow, maybe out what are you guys doing to support the balance sheet, what's the the level of flexibility on Capex for next year and then.
Separately, just telling me it's on the express that can you just kind of like did you still take out the 7% of the capacity you talked about last quarter and anyway to think about fuel in this environment I know that's a few questions. Thanks, [laughter], a little more than one or so let me hit the big one I mean, obviously, we've got okay.
And just scenario planning for cash flow right. I mean, you got to have liquidity. That's what everybody is looking for you know were part of the a for a group that are submitted our request or do you want them to the government about some liquidity.
Support.
We have a.
Doomsday scenario war weekend definitely cut as much capex out of 21 is we need to I don't think we're going to hit that I think our cash flows are going to be strong, but I can't tell you that until we get through the Corona virus.
Nobody knows when that is gonna be so we're managing the heck out of it right now Oh, we have we just increase our revolver.
We have many many many unencumbered beautiful new aircraft that we could use if we needed to for liquidity. So I think a as compared to my friends in the passenger business. We're in really good shape in that regard.
As to fuel.
If it stays down here it should have somewhat of a benefit but you know the fuel surcharges just one of the surcharges that we that we use in managing our business. So.
Well see how that goes weird committed to you I think 6% to 8.8% of flight hour reduction in Q4, I would say today, we're not there because we're flying more in Asia than we had expected to but we're pretty close to that range.
Yes.
Moving next to Allison Poliniak with Wells Fargo.
Hi, guys good afternoon.
And your comments on Asia and manufacturing you know number of industrial if you're talking about the increasing need for speed, it's the supply chain.
I know you were talking I think you had mentioned you're back to capacity there how quickly can you evolve or add incremental capacity American maybe supply the increased demand over the next few weeks any comments there.
Oh, yes, that's that's the value of or Fedex, you know network, and we were able to flex up or down as needed. In this particular case as you know we talked about the flight hours earlier or planned flight schedule is to be down, 7.5%. However, tactically deploying excess sections that we see the Albert.
Unity to move additional profitable business in this capacity constrained environment. So you know it is a you know is that's again you know we are a key player in connecting global Commerce, and this fact becomes ever more him evident in this current circumstances, especially out of China right now.
From credit Suisse, we'll hear from Allison Landry.
Good afternoon, thank for taking my question.
So just considering the prospects or a global or you're right the sashaying or severe downturn, how should we think about the decremental margins at it spread relative to what you thought in the second half of fiscal 2009, and specifically could you frame need that structural changes you've made in the business during the Pip and even in more recent years.
That maybe you could result in some downside protection relative to historical decadent, though thank you.
I've been through a few of these my for your career at Fedex soon.
We've always rebounded very well from an always manage them very well, obviously, you're talking about a you know one of our scenarios its way down on the on the realm of.
Likelihood or possibility as of today, but we still have to habit. So it's all the normal levers that you would you would imagine what would be but you know as one as is probably would not because from my point of view.
The company, that's best position to continue to keep global supply chains up as we fight this virus and then rebound from it I.
I think we're in great shape in that regard and so it just depends on how long it lasts.
And how much demand there is but there is gonna be demand people are gonna be needing medical supplies people are going to being union to eat.
For people that can run businesses are going to run businesses and they're going to rely on us to help them what their supply chains and I'm confident in that.
Well move next to bring in Oakland ski with Barclays.
Hey, good afternoon, everyone and thank you for taking my question. So I guess, it's what I had the strategic rationale behind bringing Smartpost in house, we give you trying to drive because every density obviously the residential stops but at the same time, you know a purely analytical prospective isn't this potentially.
Routing revenue base with the five dollar price passively you know now being certified $8 network or is that over the difficult I guess you.
Well I'll talk about the cost part now I'll turn it over to bring to talk about the dilution part.
Every time, we have a match or near matches the smartpost package in our ground network.
Our cross are significantly below the postage for Smartpost.
So, it's just math and the more of those we get out there. The more productive then our independent service providers can be with everything else that they're delivering so it has a wonderful effect on productivity and the cost per package across the entire network.
And it's working extremely well at breed talk about the a marketing part.
Sure as I mentioned before there's a couple of different nuances for my features a service perspective, but they are important the first from a home delivery perspective. It is a guaranteed product the smartpost product its not a guaranteed products. So if you need that peace of mind, you're going to pay for it and we continue as I mentioned earlier, we have studied this with a lot of rigor and a lot of.
End up analysis, there are two distinct markets. There. In addition to that we have a variety of different features a service on the home delivery products. There are different features of service from a consumer perspective, we called on consumer delivery options that are available on the home delivery product, they're not available on the economy product and as I mentioned earlier, we do believe that a portion of.
The product the sub pound well continue to be delivered by the post office. The study. That's we think this is the right portfolio were very confident not decision.
[laughter].
Moving onto Jack Atkins Stephens.
Hey, good afternoon. Thank you for taking my question can you talk about what you're seeing in terms of business trends and one of your core be happy customers. It certainly sounds like do you see traffic has been strong over the last couple of weeks, but what's happening with that core b to b. They have you see or change there as it allows you know two three weeks.
Given the current virus impact and you know if you think about your leverage to small and midsize businesses.
How do you think those particular customers are going to trade. If we look out over the next few way.
Yeah. It's a great question, let me, let me talk about our B to B base I'm because it does vary around the world here in the United States on as Raj mentioned from a commercial business. We see that currently today. It is quite stable from an Asia perspective, we're actually quite optimistic.
I I stock replenishment perspective, we have seen throughout the month of March really day over day week over week improvements from a volume and the vast majority of what we have coming out at the age of the vast vast majority actually is commercial traffic.
What we talked about this morning actually when we looked at the Chinese recovery, what we've seen is 90% to 95% of large manufacturers in China are now back to work and some capacity closer to 65% to 70% of small businesses in mainland China are coming back to work from a manufacturing perspective. So we.
Believe output isn't around 65% to 75% and we are seeing that rebound. So from an Asia perspective, we feel really good large customer leading small customer coming back from a China perspective, Europe right. Now you know we can't predict because it has had the most change I would say in the last 24 to 48 hours you've all seen.
In the media, we do anticipate by the end I have the week to be incremental manufacturing closures in Europe. So we are anticipating more softness there in Europe, but the U.S. is strong in Asia is then in really good shape as we speak today.
And from Cowen we'll hear next from Helane Becker.
Thanks, very much operator, Alan I can't believe it an error for you in for me very sad that congratulations and best wishes on your retirement.
My question, it's really for Fred you know there with the water team in the world in 2018 that affected you guys with good between quarter to cover.
Talk about how do you think.
This whole krona desire to the way the root that's business is that all.
Thank you.
Well.
Helane. It is indeed, an end of near I've tried to talk a Alan out of it I told them. We were just getting started here but.
I think he's got his priorities right with Susan I noticed and his family, but he still the CFO till September the 21st at Midnight, then I'll have a lot more to say about.
About Alan on.
The next couple of calls.
So.
Helane <unk> I think one of the things that we've been in the midst dog than it's been a bit of a disappointment to D.S. and see a knee in particular.
That we haven't gotten across to people have fundamentally changed a world was before the Corona bars.
I mean, we were the first people and the.
Fall of 2018 in fact, it was on one of these analyst calls that basically we shed Europe is essentially moving into a.
A a business recession.
Because when the trade war began in March of 2018.
In the President famously said trade wars are good and easy to when people Miss the point that the.
It wasn't just China that was was in the the the sites. It was Europe and it was a record shake bullet that they did Germany. So by the by the fall of 2018, we began to see that and if you look into pmires.
From that point forward really until the last couple of months of 2019, they look like a ski slope and then they they flattened out so we've done a wonderful job I think of I'm trying to deal with that we.
We were hopeful there was going to be a China a deal on the trade side in the spring of 29 team.
In fact, we were told that was the case it didn't it didn't happen, we would probably done some different things.
Have we done not down a bit more optimistic than bag. So fundamentally the major change that's gone on and Fedex should then talking about it for a long time is the reduction in world trade and they are rising of.
Protectionism, and mercantile's, and a lot of tariff and non tariff barriers.
So you add the Corona virus on top of that and World GDP growth. This year is going to be extremely small and I know we've suspended our economic.
Outlook. So I I think that's number one is you're going to see probably less.
International trade because of those political trends, maybe it will turn around but there's nothing that seems to be a catalyst at the moment that says that.
Second I suspect this will be somewhat more short term then.
Long term because people forget that there was a tremendous a flu epidemic I think it was in 2009 and lot of people thought that things would would change permanently as a result to that they didn't.
Now the Corona virus or maybe a little bit difference because it's so.
Virulent are obviously in terms of of the contagion it doesn't seem to be as dangerous to most people, but the lethality for older people with underlying diseases is is quite stark.
So if I had to speculate and that's all it would would be having said all the.
Hi, auto and <unk>, which now the a for a boards and so forth based in the near term you're going to have a lot more use of video conferencing and.
In a very prudent steps to minimize a lot of business travel.
Travel I think I think that's going to be one of them and then third.
Oh, we're already in the midst of this E Commerce Revolution.
And we leaned into it is we've we've said, particularly as we went into this fiscal year I.
I don't think that that's going to stop and I think the major retailers are very heavily focused on that and people are mission I understand the ecommerce market is not just one.
Model as a market, there's sort of the tier one set of inventory tier two in tier three tier one.
Are the things we use every day paper towels, and consumables and one thing and I believe if I'm correct in Amazon announced today or recently that they were going to restrict.
A lot of the non essential.
Products. So you see the big retailers in our big customers.
Moving to to be very effective competitors into this tier one and to get to rise and Alan's point again.
We're very confident we're the low cost producer, we Didnt then source smartpost because.
Ah we felt it was a good idea we did it because the basic math said that we should end with this the tier one short haul E. Commerce. We think we can be the low cost producer in the market leader there and in fact, we don't think it we know it.
And and ER, so weve leaned into it painfully, but we said data to first of the year that this would be a year or challenge and change and as I said now you have the cronto environment or Cronto virus on top of it. So those are the three things I think are going to change probably show for global GDP growth.
And international trade, we think we can take significant market share there, but we have to be very.
Very disciplined and and a number two I think you will have some changes in business travel.
Maybe all travel, but certainly business travel.
And and then third I think the E Commerce Revolution will continue and we plan to be a big part of that.
Yeah.
Okay next two cities Chris Wetherbee.
Okay. Thanks, Good afternoon wanted to come back to ground for a moment did and maybe try to better understand what we think the cadence of sort of improvement in the margins might be yeah, I understand it's very difficult.
To provide guidance in the circumstances, where at now, but just given the progression that we've seen so far pre virus. It would seem like there's been a little bit of stagnation of the ability to kind of moved at March backup you called out 370 basis points of specific impacts, which kind of gets us closer to flattish from <unk> perspective, despite significant revenue growth. So.
Maybe it's smart post it maybe just a matter of time for that build density drive some better that are a incremental margins, but but if you could just give us a sense of what that trajectory might look like what needs to happen to get those margins just aren't moving back just given how robust the topline is right now.
Well I don't know how to tell it any better than I have so far or Chris I can't really give it to you.
About Q4, I can't tell you that as I said, where you got out there were Saturday and Sunday.
Because we made the strategic moves you get out there and do it I think that will pay off my big way.
And we start to lap that next fiscal year.
We are half way through about technology implementations on our <unk>, our route optimizations and our scheduling we're growing the densities as we grow the business every one of those things is driving down cost per package, we did get out with some of the.
Tier one close zone pricing.
Anticipating that we would overtime get our costs down there so those would be more profitable and so yes, that's part of it as part of the strategy, but as I've said it before me I know or the costs are heading I know, what we're doing to to get closer to.
Customers on both sides of the equation, where the traffic has an origin or was it has a destination we're doing a great job with that we've talked about the original sort facilities that were putting up so there's so many things underway and more to come or those again, we're we're completely transforming ground.
We're not having the yields overall on a total standpoint, because we don't have the b to b traffic, we thought we would have been well well, we're managing through that and.
And we'll get back on pace on that as well.
And just one thing to add here on the good news years to customers are.
They are taken into service and we're taking share, especially in the ecommerce space and I think when you put the two factors together is that something to positive outcome for ground.
Well move next to bear fruit with Baird.
Hi, good afternoon, and a Allen yet.
Your Oh congrats on your retirement raws, just some further perspective on on air Freighted load factors and how.
It's both likely to play out given.
Yeah.
Presumptive b to B business headwinds in Europe, and and the U.S. to calm but specifically.
Europe, how long do you think this.
Just a man to supply.
Webroom these high load factors to persist out of Asia.
How long do you think.
That will be.
Until we start to see the market respond with more.
Oh afraid or perhaps than some of the ability space capacity come back online with some risk economically in civil war developed markets like anyway to kind of described as you see it right now.
How long we should be writing this very very robust load factor that we're experiencing in Asia at the moment.
I'm not sure how best to answer the question other than to kind of go through what we just went through the you know the demand we're seeing out of Asia right now he's quite robust and they look for you know you know would look would then frazier load factors at a record which is a which is also very interesting.
Asia, Europe, and Asia to U.S. and the <unk> manufacturing is coming to the capacities coming back online and you know Andy.
Capacity of Air freight is down so net net a we're seeing the demand and you know we wish we should see that go forward.
As far as Europe is concerned.
Already very early to tell good dealing with information that's fully 24 hours old and trying to predict that out is impossible. One thing that I know, though is that you know 60% of the trans Atlantic.
Traffic when done belly capacity and that's that capacity comes down to capacity is gonna be severely constrained that much I can tell you know as it as far as the demand we have to wait and see in its too far too early for me to say anything about that right now.
Thank you.
[noise] here now from Bostco major specifically Honda.
Yes, thanks for taking my question.
Could you update us sort of how far along your with your ground to live reporters and to grow share in the contracts that are going to enable the smartpost an express last mile integration in any thoughts scenarios, where you've already got that structure in place. There have you seen the volume and density economics change favorably as you'd expect it. Thanks.
So nearly half of the Smartpost volume Connelly's, Delaware by ground service provider business, and we expect to be mostly complete by the end of calendar year 2020, and there was some of the exceptions that breed talked about earlier.
As to the contractual relationship with our independent service providers. These are great partners. They run very efficient businesses. They love the additional volume that they're getting we work with them on a continuous basis to make sure we're giving them everything they can we're helping them with their scheduling helping them build their density so they can make their business.
It's more profitable so it's a great relationship.
And at this time I'd like to turn things over to Mickey Foster for any closing remarks.
Thank you for your participation in Fedex Corporation's third quarter earnings conference call feel free to call anyone on the Investor Relations team. If you have any additional questions on Fedex. Thank you bye.
And again that does conclude today's conference. We do appreciate you joining us today.
Hmm.
Oh.
Uh huh.
[noise] mm.
[noise].