Q4 2020 FedEx Corp Earnings Call
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Good day, everyone welcome.
Corporation fourth quarter fiscal year 2020 earnings conference call.
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The call.
Foster Vice President Investor Relations for Fedex Corporation. Please go ahead.
Good afternoon, and welcome to Fedex Corporation's fourth quarter earnings Conference call.
The fourth quarter earnings release instant book on our website at Fedex Dot com.
College being stream from our website.
The replay will be available for about one year.
Joining us on the call today are members of the media.
During our question answer session callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
Well I'd 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 and.
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 non-GAAP financial measures discussed on this calls to the most directly comparable GAAP measures.
Joining us on the call today are Fred Smith Chairman.
Raj Supermini, President and COO.
Alan Graf executive VP and CFO.
Mark Allen Executive VP General Counsel and Secretary.
Rob Carter Executive Vice President Fedex information services and CIO.
We career.
Executive VP, Chief marketing and Communications Officer, Don called <unk>, President and CEO, Fedex Express Henry Maier, President and CEO, Fedex ground, and John Smith, President and CEO Fedex freight.
And now Fred Smith will share his views on the quarter end here.
Thank you.
Thanks, everyone for participating on this call.
Before I begin let me take a point of personal privilege.
And congratulate David Abney, who just retired as you P.S. CEO I.
I believe David Jordan.
Yes, and 74 right out of Delta state not far from here.
David is unable competitor gentleman on a fine man and all of US should Fedex wish you well.
And your retirement I understand it will be staying on as executive chairman for for a time, but I wasn't sure I'd get a chance to do this again before he left so.
All the best David.
We said on this call last year that bought 20 would be a challenging a year of challenging change better but.
And that has certainly been occasion.
We told you about a number of strategic initiatives.
We have had underway to navigate that challenge and change then beginning in January we began to deal with covered 19.
In China, then in Europe, and then of course in United States.
I reported on all the work we've done in those areas of the world to respond to the pandemic during our quarter three earnings call on 17 March.
We've made every effort to keep our team members in the public safe as we've dealt with this terrible disease.
And we're very proud of our team members and the role they play than keeping the global industrial and at home.
A lot of change open.
My motion share appreciation goes to our team members around the world for their herculean efforts. During this time, we are so proud of them.
Let me take another point, a personal privilege and note. In addition to dealing with Cowen nine King and all and professional bases.
Our family has dealt with this awful virus up close and personal.
So we offer our sympathy for all those who have suffered.
We've covered 19, our deepest condolences to those who have lost close friends and loved ones.
And will honor the memory of all those taken.
From us to saying ends days to calm.
So let me now I ask three Raj and Alan to provide their comments with more details after which we will take your questions right. Thank you Fred good afternoon, everyone. The economic outlook is highly uncertain, making forecasting incredibly challenging around the world. We saw a marked decline in global economic activity in the fall.
Final quarter of fiscal year 20, However to date, we have experienced week over week improvement in our business and hitting the bottom in mid April.
As we enter fiscal 21, there are signs of tentative economic recovery underway.
Here in the United States to covert pandemic has accelerated ecommerce adoption, while depth detrimentally affecting the business to business segment.
Several years of retail share gains have been compressed into a few months in the United States with E Commerce as a percentage of U.S. retail increasing from 16% in calendar year, 19% to 27% in April 2020.
The growth rate of E. Commerce in April was partially result of the shrinking denominator as a total as total retail contracted.
We anticipate ecommerce as a percentage of retail will stay elevated.
This shift has left an indelible mark on the retail industry, causing the bankruptcy of some chains that have been around for decades, while helping those retailers with a strong omni channel strategy flourish.
For Pfenex surging ecommerce sales from our large customers drove significant Fedex volume in Q4, and a sizable mix shift from commercial b to b to home delivery Sosh B to C volume.
Q4, Fedex total U.S. domestic residential volume was 72% versus 56% a year ago.
Since the end of April However, we have seen week over week growth and our business to business segment.
Needless to say, we've been very focused on improving revenue quality given the high demand again limited market capacity at a higher cost to serve.
Fedex ground B to C yields remain above market, despite pressure from large customer Max and I moved to shorter zones.
In early June we announced that we were implementing three temporary surcharges, including a smartpost surcharge or 40 cents per package and oversight surcharge of $30 per package and a residential delivery charge of 30 cents per package to offset incremental expenses incurred in our networks. The residential delivery charge affects a small number of our largest customer.
Had surging volume.
We're also working closely with our largest ecommerce customers to establish peak plans, which did which include differentiated residential surcharges for the month of November and December. These peak surcharges will help us match increased demand, while maintaining strong level service for our entire base of customers.
These revenue quality actions are driving contribution to the bottom line, while ensuring we to liberty outstanding experience that Fedex customers expect we're all in on E Commerce, and we're going to continue to profitably grow share in the space.
Revenue quality efforts also mean that we continue to focus on profitable share growth in the small and medium segment.
We have continued to champion small and medium businesses and support their recovery.
Through collaborations including annex Dan for small Fedex has joined a coalition of company supporting small and medium businesses.
We've also taken our immensely popular small business Grant contest and in May offered in a mill an additional $1 million in support small grant that will support 200 small businesses struggling in the aftermath of cold it.
We also announced a new alliance between Fedex and Big Commerce to how small businesses get up and running online fast and affordably.
As I have mentioned on previous calls returns are critical component of our ecommerce strategy a return to growth doubled enough why 20 compared to the prior two years, we simplified the returns process through the launch of Paperless returns and through the end of May have rolled up more than 4800 drop off and pick up locations with our dollar general collaboration to further expand.
Our retail convenience network.
In addition to E. Commerce, we continue to focus on B to B opportunities Fedex is providing unparalleled product and service and the business to business space for almost 50 years, we're focused on driving growth through increased penetration at health care, specifically in med device pharmaceutical and testing equipment segment were also seeing opportunities emerge within the industry.
Ill sector.
Shifting now to international in mid March Asia Pacific Outbound average daily volume grew substantially over pre cobot 19 levels fueled by P.P.E. demand surge. We're also experiencing Europe outbound growth on the Trans Atlantic Lane due to limited capacity and surging ecommerce volumes.
We've been able to improve our base load with airport to airport moves charters and complex premium air freight services.
In April we implemented a global temporary surcharge on all Fedex Express and TNT international parcel and airframes shipments to bounce demand against air cargo capacity.
Total intercontinental volumes exit at night with year over year growth.
As we plan for 21, we anticipate <unk> air cargo capacity recovery will take at least 18 months to returned to pre cobot level, we're actively pursuing opportunities to increase both market share and revenue quality, especially for international priority freight and international economy freight services.
We are renegotiating customer contracts to better reflect current market conditions.
Our capability on Intercontinental lanes of highly sought after and demand is growing as country restrictions are lifted and manufacturing begins to ramp up again.
We have added extra capacity in the short term to support this demand and help our customers as they restart their business activity.
We're well positioned to profitably gainshare from the freight forwarders.
We're also enhancing our ecommerce capabilities in Europe.
Commerce demand there has accelerated as a result at the pandemic and it's helping to offset the softened b to b market across Europe.
In closing I am confident we have the very best value proposition in the United States for both B to B B to C. And we are profitably winning market share. We have our teams focused on taking this playbook to Europe as we complete the TNT integration our international business is poised to benefit from the continued contraction of commercial capacity and our best in class Global net.
Work with that I'll turn it over to rush for his remarks.
Thank you Brian Good afternoon, Fedex continues to play a pivotal role on the front line of the cold and 19 pandemic and I'm exceptionally proud of the way or more than 500000 team members to respond to.
The safety and well being up or team members and customers remain our first priority.
Well, the securing P.P. or adjusting our operations, we have kept and we'll continue to keep safety at the forefront of everything we do.
Doing it right what I said in March Fedex is one of the few companies in the world that have some network and the capabilities to keep critical supplies and supply chains moving during this unprecedented times.
This is due in large part to the resilience of our extra ordinary team members, who services are essential.
Like Fred Let me also extend my sincere thank you.
Our global team for the herculean efforts in helping keep the world in motion <unk>.
This is truly who we are and what we do.
We fully understand the quarter.
Friends varied by international region by market segment and by month.
Let me take a moment to highlight a few of these.
Is your volume strengthen throughout Q4 as demand rebounded significantly post locked down and belly capacity on passenger airlines continued to be severely constrained.
In the U.S. commercial would be to be volume decline as retailers close to brick and mortar locations.
Meanwhile, B to C volume and residential deliveries sword as a result, or Fedex ground network has been teaming with peak like residential volume for the past few months.
Enterprise commotion volumes hit bottom in middle of April.
We have been steadily climbing back since then would they all work day a week over week improvements.
Well he has already discussed many of the revenue quality actions, we implemented in response to this dynamic environment.
In addition to get put in place significant safety measures, including providing P. P. For all team members in student instituting routine monitoring and increasing cleaning and sanitation standardization for all our facilities.
We launched the air operations coordination center to effectively match capacity to demand through this coordinated approach, we don't use U.S. domestic flight hours in the fourth quarter and redeployed to international.
Additionally, we for more than 100 charters in Delaware 1000 Ocean container so P.B.
Prior to covert 19, we forecasted flight hours to be down 7% year over year, and we were on track to meet that goal.
However, as mentioned earlier demand for Fedex capacity continues to soar as we maintained essential services amid the pandemic as a result or flight hours were up 2.6%.
As business graduated or trends in Europe, we expect to continue to see the benefits of constraint yeah capacity.
Freighter capacity now accounting for 75% of total capacity the Trans Atlantic Lane <unk>.
Our next capacity remains a premium.
Increasing international unprofitable. These a major priority for us in Europe is our biggest opportunity in Q4 as scheduled we substantially completed the interoperability of the intra Europe and grown network.
In fiscal year 2021, we'll complete the integration of line haul and pickup and delivery operations and start offering enhanced portfolio of international services.
We will leverage the capabilities the T N D adds to our portfolio, which are expected to improve or European revenue and profit profile.
Due to delays caused by corporate 19, we're now planning to complete the final phase with the Air network integration early in calendar year 2022.
You are heavily focused on improving our efficiency and effectiveness by streamlining our organizational structure from six global regions to three within Fedex Express.
Now turning to the U.S. and the booming ecommerce market the trends we experienced during the quarter validated I'd, rather put an exclamation point on the importance for strategic initiatives that directly a gross ecommerce.
This includes Fedex ground seven day operations investments in technology that optimize last mile deliveries over the threshold deliveries through Fedex freight direct and integration of Fedex Smartpost volumes to increase delivery density.
In many ways the macro trends accelerated to meet our existing strategy and what we expected to happen or a few years happened in a matter a few months.
Fedex ground.
Employing several initiatives to maximize our capacity.
These include leveraging or seven day ground network report posting smartpost facilities, while small or large package sortation, adding new low cost regional sought facilities designed to handle shorter zone residential volumes into certain key markets.
The flexibility and automation or the Fedex ground network made it possible.
Quickly react to challenges faced by ecommerce shippers you didn't benzene imbalances an increase in fulfillment from store.
The network wide rollout of dynamic route optimization technology has continued through the pandemic and will be completed prior to peak 2020.
The strategic steps, you're taking to manage yields and improve efficiency you know operations, specifically the last mile little position Fedex ground for sustainable industry, leading margins.
In response to these emerging trends. We also continue collaboration across our operating companies to optimize our resources. For example, Fedex freight that's provided more than 1 million miles rodent intermodal support prophetic products ground.
Late April.
In Q4 alone the delivered approximately 270000 large ground packages.
Another example is reducing cost and increasing delivery density, particularly through our last mile optimization efforts announced earlier this year.
Last night optimization, which is delivery of specific Fedex express residential in rural packages, but Fedex ground and successfully launched in 26 origin markets with an additional seven markets schedules in July.
So just a few ways, we adapting and adjusting and utilizing different elements of our network do increase efficiency and collaboration.
Before I close I wanted to highlight our announcement last month with Microsoft.
Our first solution Fedex surround.
Provide companies with greater visibility agility and predictability in managing high value shipments.
It allows us to create new value and for the differentiation, while growing our multi year items.
The only the first step I look forward to shedding additional initiatives as we re imagined Fedex at the intersection of physical and digital networks.
We are confident in our strategy and we are invigorated by what the future holes for Fedex.
Now, let me turn it over to Alan for his remarks. Thank.
Thank you Raj good afternoon, everyone.
Virtually all our revenue and expense line items during the fourth quarter were affected by the Kroger 19 pandemic.
Well commercial volumes were down significantly due to business closures across the globe.
We experienced a surge in residential deliveries at Fedex ground and in transportation and charter flights at Fedex Express, which require incremental cost to serve.
We also incurred an approximate 125 million increase in operating costs related to personal protective equipment and safety supplies as well as additional security and cleaning services to protect our team members and ensure we are safely providing essential services to our customers.
In addition.
Over year fourth quarter operating results declined due to an approximate 100 million negative dollar impact from one fewer operating weekday.
Increased Fedex ground costs from expanded service offerings higher bad debt expense increased self insurance accruals and the elimination of the Amazon business.
These factors were partially offset by strong residential delivery bomb growth at Fedex ground.
10% increase in revenue per hundredweight at Fedex freight.
A favorable net impact from fuel.
Results also benefited from cost savings initiatives, including.
Lower variable incentive compensation expenses.
Emperor reductions in certain Workforces delay nonessential maintenance projects and facility investments and reducing other discretionary spending.
The Cures Act includes provisions for relief from Air cargo and aviation fuel excise taxes from March 28, 20, Twond through December 31 2020.
The benefit of $37 million was recognized for the two month period. This excise tax holiday was in effect during our fourth quarter.
Our fourth quarter tax rate includes a benefit of $71 million related to the cures Act provision, which allows our tax loss to be offset against income from prior years, which was tax at higher rates.
This benefit was mostly offset by a noncash expense of $51 million.
<unk> change in our deferred tax balances related to foreign operations.
Fourth quarter results also include goodwill and other asset impairments of approximately $370 million primarily related to goodwill impairment at Fedex office.
Declining print revenue and a decline in market multiples for the retail industry lowered the current fair value of Fedex office for the purposes of the goodwill impairment accounting test however.
Fedex office remains a great investments and an increasingly valuable asset for E commerce, such as our return solution, where you discussed earlier.
Hi margin packages dropped off and picked up at Fedex office locations drive profitable growth for Fedex Express and Fedex ground.
During the quarter, we took several actions to increase liquidity and strengthen our financial position.
In March we extended our 1.5 billion dollar 364 day credit agreement as well as our $2 billion five your credit agreement.
In April we issued $3 billion of senior unsecured debt and use the proceeds in part to repair the borrowings under our credit facilities and commercial paper program.
In May we amended the credit facilities to provide additional financial flexibility through the end of fiscal 2021, given the current environment.
We ended the fiscal year with $4.9 billion in cash and cash equivalents and were 3.5 billion available under our credit facilities.
Looking forward, we're not providing a forecast of expected results for fiscal 2021, as the timing and pace when economic recovery or uncertain.
We will continue managing that were capacity flexing, our networks and adjusting as needed to align with volumes and operating conditions.
However, some of the higher operating costs related to the pen does that make that we experienced in the fiscal fourth quarter will persist in fiscal 2021.
Despite the cobot 19 related delay of completing our air network integration into early 2022, we still expect TNT integration expenses to total approximately $1.7 billion.
We expect to incur a $170 million of integration expenses in fiscal 2021.
Integration expenses will be much slower in fiscal 2022, as we complete the physical network integration of TNT into Fedex Express.
During the first half of fiscal 21, we will complete the Integrational Fedex Smartpost package isn't to standard Fedex ground operations.
We will also continue to focus on last mile residential optimization.
Directing certain U.S. day definite residential Pan Rural Fedex Express shipments into the Fedex ground network to increase efficiency and lower our cost us or.
Capital expenditures for fiscal 21 are expected to be approximately $4.9 billion decrease of $1 billion year over year, due primarily to lower vehicle spending and the delay of certain facility investments.
Well aircraft spending is slightly higher year over year.
Spending is significantly lower than planned as we adjusted our aircraft delivery schedules to defer capex into future years.
Our firm orders for aircraft include deliveries through for 25, and our latest adjustments, resulting in the smoothing of our aircraft capital spending through for 24, when it starts to come down materially.
Strategic investments in safety technology equipment, and procedures will remain at critical focus across our businesses for 21.
We will also continue to focus on lowering cost through investments in productivity enhancing technology.
We do not anticipating despite making contributions to our U.S. pension plans during fiscal 2021.
Following 1 billion dollar contributions during each of the last two fiscal years.
We don't do also do not anticipate contributions to or U.S. pension plans will be required for the foreseeable future.
Based on our funded status and the fact that we have a credit balance related to our cumulative excess voluntary pension contributions over those required that exceeds $3 billion.
Despite the recent stock market volatility.
Our U.S. pension plans returned 15% for fiscal 2020, and the funded status of our U.S. pension plans at the end of the fiscal year was 90%.
Our liability driven investment philosophy helped preserve and protect orphan status.
I'll conclude by Reemphasizing that we have reduced or capital spending plans and have taken cost and revenue actions to mitigate the impact of the pandemic.
Well the near term outlook is unclear, we expect to continue to benefit from the global recovery as we leverage the strength of our unmatched air network, and U.S. residents and capabilities or yield management efforts and multiple initiatives to improve our financial performance.
Now the operator can begin the question and answer session.
Thank you if you'd like to ask a question on today's call. Please press star one of your telephone keypad using a speakerphone. Please pick up your handset before passing the corresponding digits.
Fine that your question has already been addressed you may pass starts to remove yourself for next year.
Please note that we ask you to limit yourself to one question once again that start one just one question Q.
Well take your first question Scott Schneeberger with.
Jamie Please go ahead.
Oh, thanks very much.
One of the acquire a bit more about <unk> about the trans Atlantic Trans Pacific and charter flights you provided some metrics on how many do operating just curious what do you view with the competitive environment going forward from the passenger airplanes and how long you think you will have the saw its.
This this marketshare advantage, where you're able to price tags.
Yeah. So.
Scott. Thank you for that question, we expect that the.
The passenger airline capacity is gonna be down.
For some time to come and a significant portion of air cargo into Continentally goes on.
On on passenger aircraft and that kept that that traffic is now going to flow on Fedex capacity, which is a premium it's both on the finds Atlantic and planned specific open the door to door to address some specifics about what we have done so far on what we expect to happened here.
Scott. Thanks for the question, we continue to see strong activity on both.
The transpacific going I'm coming both in the United States as well as the backdoor into Europe, we continue to run our p. not going to have schedule, but what we're seeing because of the significant reduction in passenger capacity. Most of the passenger airlines were essentially running anywhere between 10, and 15% well their normal flight activity.
On a year over year basis, that's obviously presented some opportunities for us on the supply and demand cycle I'm on the transpacific, we run anywhere between 30 and 50. After section so weak supported by charter activity, we're beginning to see that activity picked up on the trans Atlantic as well so as we optimize our network.
Your globally and reposition aircraft to take advantage of that we think the transatlantic once the demand begins to pick up.
A little bit more European side, there's an opportunity for us there as well as we've talked about before and any typical year almost 70% for the commercial cargo that moves between the U.S. in Europe moves into bellies passenger airlines. So even as these aircrafts slowly come back on online.
No were there will be nowhere near where they need to be to meet what we think will be the demand does the European economy begins to awake and we think that puts us in a position to take advantage of so global fleet that we operate around the world.
Well go hunting take our next question David Friedman with Bernstein. Please go ahead.
Hey, good but they can decline I wanted to ask a question on the ground, but maybe Henry or Raj you could help us understand a little backlog.
Yes.
Right sort of better incremental.
20%.
An operating profit I know there were some mixed shifts in there.
This is something we need to kind of Wow.
Hello.
Sorry.
I couldn't be more permanent like how do we get the incremental.
Operating leverage to kind of gets a little bit better than that.
David Let me start off and now I'm talking to Henry Firstly, I think the the strategic thing initiatives that we have deployed in Fedex ground over the past few months it literally the investments we've made over the over the past few years, you know have definitely paid off in this time frame.
And you know basically being a bit better most from and we have a faster service than our competition and <unk> and we have a good revenue quality and a better profit of profitability in this business, let me turn in order to Henry to answer specifics.
David This is Henry Maier first we run one of the most highly automated networks in the world if not the most highly automated.
Operating a seven day network gives us the ability to efficiently utilize our assets seven days a week.
The large package facilities that we've added over the last year year and a half.
Put those packaged characteristics in the building, that's more efficient and able to handle them, but it also makes hubs and automated stations more efficient because it gets those packages off the belt nos disorder.
We.
Yeah, we talk to you before about the Smartpost transition into ground that provides us with a much better delivery density and the technology, we've deployed over the last year and dynamic route optimization.
Maximizes the stops per vehicle in the network wall off affording those businesses, Rob sequencing that drives fewest number of miles between stops.
Well go ahead and take our next question Sam.
With.
Please go ahead.
Hi, Thanks, Congrats on the.
That's a difficult environment. So I just wanted to follow up on the last question.
Related to ground margins I mean, obviously screen too.
I understand that BDC mix shifts is Detrimentals war density last mile density packages per stop and obviously up sequentially.
Revenue for piece was actually up and cost for pieces answers down. Despite the big mix shift is obviously really interesting an intriguing. So I guess in that context I understand all the stuff you're doing I was hoping maybe you can provide some numbers around that in terms of you know.
Packages per stop.
What level given the Smartpost redirecting.
Was there any difference in terms of how a BDC package.
Network in the context of Kobe, because people order patterns are changing.
Your friends in how the BDC package was evolving and your neck in your network that helps kind of fixed cost absorption in the March as you were able to provide a cheap.
Hey, I meant.
The what all I can say here is that you know we had an acceleration of b to C. Over the life you know us as the percentage of E commerce, especially as a percentage of total retail moved from 15%, 28%. We had a significant shift in the in terms of how much b to C volume grew.
And.
And our investment that it made on our seven day network.
And all the other things that Henry you talked about earlier, just you know it is the the market trends accelerated to meet our strategy. So to speak and so you know there's no more sicker than that I think we were just you know we were you know we're leaning into E commerce, the something very important <unk> strategic.
Priorities going going forward and that the market moved faster than we expected I don't know brea or Henry.
More than that.
No I certainly have covered the revenue quality, we're very very pleased with the team has done commercially on that the revenue per piece from a b to C perspective overall very very happy with the capture on the surcharge, we're trying to implement a two tiered strategy, where we actually push the revenue quality for the customers that create the third while protecting our.
Small customer share and that's worked out quite effectively we continue to have you know as very rigorous conversations with our largest customers as we head into peak planning trying to find win win solutions, but overall the revenue quality team has just done on some tremendous work last quarter anticipate that will continue.
Yeah, I don't know there I have anything to add to any of that I would just sit down I mean, the biggest driver in this business is delivery density.
You know.
Putting up a very efficient fleet of vehicles on the Street every day with the technology tools necessary to to.
Sure we have lower unit cost.
Well go ahead and take our next question Jack Atkins with Stephens. Please go ahead.
Hey, good afternoon. Thank you for taking my question and I don't mean to belabor the point on ground, but I guess.
What books and trying to understand that you guys have clearly got excellent job driving.
Topline growth within the segment, even through an extremely volatile macro environment.
At what point are we going to start seeing the leverage swaps in the in the model within ground.
Well that delivery density and your pricing action Rumble, those began to yield improved margins and profitability there.
I think that's that's what we're really trying to understand.
Hey, Jack this is Alan.
Take my.
My friends arrest over here I.
I think they're showing up in the fourth quarter I don't know him by smoking margins and grow like we are not even close.
We're operating wide open full throttle seven days a week at Max peak capacity when you do that you're going to occur a lot of costs until you get your feet on the ground because it came on upon us so rapidly so they'll be a period of time or we continue to catch up with ours sorting facilities and our capabilities and our independent service provider get their legs.
Their feet on a more consistent basis more routine, obviously residential deliveries and the growth of b to C or less productive and b to b.
But as Ray mentioned in her opening remarks database coming back.
So we're working on every single aspect, we can mix small and medium customers and cost and I think I mentioned lowering cost twice in my opening remarks, and we're seeing that happening so.
I think that's the answer I mean, we're going to we're gonna continued to leverage this network.
And our feet understand we're going to continue to deliver good results I believe.
Oh go ahead and keep our next question, Chris Chris Wetherbee with Citi. Please go ahead.
Hey, Thanks for taking the question.
So I know you're not giving guidance for fiscal 21, but if you maybe you can help us sort of walk through some of the puts and takes if the business has really bottomed from the impacts of coated in April and we're seeing sort of improvement from here would seem that you're beginning to lapse double.
More substation substantial headwinds from adding capacity on the ground side.
You know and some of the some of the benefits at your should be getting from maybe taking some flight hours down all that should begin to accrue. So I guess, maybe when you think directionally about fiscal 21 can you help us a little bit in terms of some of those puts and takes should we seasonal things that were headwinds in 20 turn into Tailwinds and 21.
Chris we're not going to talk about 21.
As we've said all along I can't predict what the demand is gonna be so it's going to be very difficult to answer any questions associated with 21.
Our next question from Allison Landry with Credit Suisse. Please go ahead.
Thank you I was hoping you could maybe give us your overall thoughts on the domestic pricing environment. That's ground dark spots I'm. Obviously, you guys that he left that's offset pop secret that the beat its a mix impacts that you see a structural increase in that in the price a little floor for power. So as I was.
Both of the pull forward E commerce and sort of absent that that your competitors taking.
Yes.
Structurally we do you know obviously as I mentioned in my script that we believe that ecommerce will remain elevated as a percentage of retail and that obviously capacity as a finite commodity in the market. We see a very rational market and we you know we really see a great partnership with our largest customer. So we are worth.
Working with them absolutely to find a win win solution, but part of that is that we will as I mentioned and finance peak surcharges. This is part of the new normal it will not be just for this fiscal year I anticipate customers to pay more for pricing in November and December moving forward and I do think that that will be a structural shift in the market.
Yeah.
Once again that styling if he'd like to ask a question on today's call well take our next question Jordan Allergan.
Goldman Sachs. Please go ahead.
Yes Hello.
One question for you.
Yeah no.
Gallons per say I'm just curious.
You mentioned that we got the weak volumes have gotten better presumably maybe the b to C or the essential Nike problem going on but hopefully be to be as we noted coming back. Let me think backplane profitability, which was great you got back to double digit it's just a class of volume broadly.
Just sort of stay there or how are those comments you made on mix SMB and cost enough to keep you there.
If we back off some of the Super growth on ecommerce site and maybe they maybe the trends are saying exactly where they are I didn't know so I'm curious your thoughts.
Again I can't.
Can't tell me much about 21, because I just don't have a feel for what's happening.
As nor does anyone else I mean, the virus, assuming the coming back and a lot of states openings are slowing down.
People are delaying their openings Microsoft shut in retail stores, just a lot of things that are going on here that that make it extremely difficult to answer that question.
So from a strategic standpoint, I feel extremely confident about where we are.
If things go well, but that's a strategic comment not enough for 21 comment along the lines of how Raj answered that question.
Well take our next question from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, guys. So I know no guidance for next year, but maybe I was just help us with some of any discrete item pensions tax rate and anything that sort of outside the macro or that you can that you can give us and then.
Any chance you can give us some of the monthly volume trends at ground didnt expressing and sort of what you're seeing in June I know you don't typically get bad, but since you're not giving guidance, maybe you can give us a bit more color on some of the real time trends.
Thank you.
Scott Who's gonna be present in the United States that will help me a lot with the tax rate.
Also obviously revenues and profitability than where they are around the globe. So the tax rates pretty wide range for me right now Ah Tony I'm really proud of our tax team to be doing what they've done and how they held it down enough for 20, what's your spectacular.
I believe breed did discuss how we were came off the bottom pretty nicely in April and we improved and so that's in history lesson the rearview mirror.
Anybody's guess about going forward, but I think we're well positioned if we can continue.
Well go head to take our next question from Sean.
Yes. Please go ahead.
Yeah good afternoon.
So you've had quite a bit of discussion about changes in ground and highlighted some of the drivers of it fit a efficiency I wonder if you could spend a few minutes on express and to delve a little more into some of this structural changes that are.
Or taking place cost structure changes.
It could affect margin performance in express I think of the obviously some of the BDC going into ground [noise].
And whether that has margin impact a in the medium term.
Pass the reduction that you had talked about before maybe that's not taking place, but just kind of you know comments on cost structure and what's happening in a in express thanks.
Well, let me start down here to dawn, but you know they've been extremely disciplined and how we manage their cost structure and express all the way from managing a capacity and redeploying to where the demand is I mean, we have that's it talks about the weather a coke capacity coordination center, where we are actually moving the capacity a very dynamic can lead to the places where we can.
Maximize our revenue and profitability Oh, we have a stream down or organization structure and we all you know we are moving forward or last mile optimization program to make sure that they'd be put the residential packages and the right network to reduce cost and improve density let me turn it over to dawn for any anything as he wants to add sure. Thanks Raj <unk> from <unk>.
To provide a little bit of call. It two what we're doing it expressed on a transformation journey.
So.
As we transition to 21, and 22 and can be on for us it ought to be stops or without a profitable and optimal growth strategy. We worked very closely with our commercial partners. Both in sealing lot sales and marketing to ensure so getting the proper topline growth. So any ongoing business concerned they need to be growing top line, taking market share was clearly.
Focused on that what I'm really excited about is the introduction as Raj mentioned of our new Mega region approach essentially taken our international regions are global regions from six to three thought not only because it out a level of efficiency and effectiveness, but it adds a tremendous amount of velocity into our decision making process. So were not only do have the right constructs.
In place, but I'm really excited about the people that we have any the folks that we have running that that organization I think and I expect great thing from them going forward on a transformation side. This is a global initiative each of our Mega regions has a significant role and that transformation. It's just not the U.S. So Europe are going into it.
National player, we're going to do this in a very collaborative fashion. The transformation begins with the reengineering of the airline as Raj told you we had.
Exactly reengineer the network to take out almost 7% about flight hours and in this particular quarter.
Then opportunity presented itself to redeploy those assets in a very accretive way, which which we've done won the transformation side. We just heard us talk about last mile optimization programs in terms of building as Henry and Raj talked about that last mile optimization to assist in the delivery density tougher resin.
Central packages, so there's a series of initiatives strategies and tactics, we have placement.
As Alan said earlier, I'm very optimistic as well on the things we can control.
Ability to execute it is coming at it could have very high level, so assuming a normal environment seemingly focus on those issues or the controllable we feel like we're in good place on our Tourette transformation has expressed.
Well go ahead and take our next question.
Mr.
Bank of America.
Hi, good afternoon, great job on the ground margins for you you mentioned a improvement in B to B that you've seen can you give us some thoughts on the b to C fall off and the mix as we move into the new year and I guess Allen in that same vein you did any impacts on a billion dollar cuts on that network optimization program.
On the ground express mix.
Yeah.
I think as Alan mentioned, you know I'm, obviously, not going to forecast volumes enough why 20 wine, but when I certainly can tell you is I believe that the E commerce change and structure. All we have seen a huge uptick and the categories that people are willing to purchase online certainly moved into higher value. We saw this trend obviously pre kobe, but it has accelerated when you think about.
Like furniture large packages on high value electronics. In addition, we saw a huge change and who is buying online over 65 finally moved to online how many ecommerce perspective I do not anticipate that these buying behaviors will revert back post cold that you might see some as a percentage of IEC ecommerce decrease if.
As retail itself grows but overall I believe that ecommerce will continue to stay elevated and that will create damn strong demand for ground for sometime in the future.
Yes, and can obviously, we know where the biggest cash flows are coming from inside the company right. Now so we're going to continue to invest heavily in ground.
And in ground will not see any reduction probably an increase year over here in the mountain capital that we put them, they're doing a great job with it.
We're going out very creative ways, how to make it.
Be more productive and obviously was seven days a week wide open a their sweating the assets a lot more so it's just a spectacular performance.
Well go ahead and keep our next question from Helane Becker with Cowen. Please go ahead.
Tie in thank you very much operator, hi, everybody I appreciate the time on I feel like I asked this question a lot, but as you think about you know kind of developments in the world and what's going on in China. Specifically is there any time, where you have to read.
I think the going show hub.
I would say Asia Pacific conducting point.
At this point you know we <unk>, we are glad that we have a hub in gone Joe and the traffic is you know flows we have a lot of traffic flowing to that hub and a you know we're its a central some tried for a lot of the traffic that flows foundation.
Region.
Hello, and you might imagine, though that we always think about this from a lot of different reasons, mostly not political mostly a natural disaster. So that we have you know as you know we have problems all over the globe and we can react if we need to.
Well go.
Next question from Ben Hartford with Baird. Please go ahead.
Good evening, everyone Raj or does it is just thinking about completing.
The global Internet work that you talked about in early 2022.
Think about that footprint, particularly in Europe.
The ground perspective, what TNT broad anything else that you might look at going forward to complete that ground network more on the B to C side are there in the form of a partnership or an acquisition as we think even beyond 2022 any perspective there.
Its you know well first of all you know with as GNC, yeah, but with all the activities. We've already done in the last few months and whats coming in fiscal year 21.
You know have a fantastic growth network on the ground in Europe, and we will leverage that you know for B to B N B to C traffic and you know and as far as air.
As we said we you know we probably a cat early in calendar 2022 love their networks integrated but I think you would the TNT has now that's part of the portfolio you have a great opportunity due to really improve the revenue and profit profile in Europe b to B M B to C.
Hey, Ben or we've built home delivery from scratch inside of ground so that should.
Maybe answer part of your question.
Our next question from Bascome majors with Susquehanna. Please.
Yes. Thank you so the the debt covenant easing negotiated a month ago lets you take leverage above four and a half times, either <unk> or for a couple of quarters over the next five quarters I believe that looks like a lot of breathing room, even considering what code, which doing the profitability.
For the.
And the debt in years Ah you data to add liquidity in the last few months, so either acquisitions sized above the top in variety on the table for Fedex over the next six to 18 months.
And are you seeing any motivated sellers in the domestic or international marketplaces at this point. Thank you.
Hey, basking, if you would have been sitting in my shoes, you to try to even get a wider.
Leniency on our debt covenants, because we had no idea where this was going and so we did what we thought was the best balance between.
Increasing our liquidity significantly enough to what we thought might be the worst case.
Got it to make sure that we could maintain or operations because we are in central service and we felt it was important to do that so.
That didn't have anything to do with our corporate strategy other than simply that.
In fact, it's our objective over next few years to.
Begin to you know to improve our balance sheet significantly by obviously growing the equity part and cash flows and paying down some of this debt.
And of course, we are going to comment on any corporate development activities.
Well go ahead and take our next question friend, David Ross with Stifel. Please go ahead.
Yes, good afternoon, everyone I'm, what I'm talking about Fedex freight much better yield growth and the overall LTL market a 10% on on average between the priority and economy.
Just give some color there was it due to the freight that I.
I guess the work that freight was doing for ground that you mentioned that may have been at a premium.
Or was there any calling of customer.
Business and the overall down draft.
Well. Thanks for the question. This is John no one of the things that we've been doing a lot in the past is helping ground what their line haul operation both from a over the road as well as intermodal, but just recently about three months ago is where we burst.
Delivered an actual ground shipment to a customer and we've grown at very rapidly and the reason that Oh, we had played into that so easily is the development of our Fedex freight direct.
And what that has allowed us to do to have the right equipment to help our ground partners and the on the home delivery side. So we see not only a an upside.
For a girl and Fedex freight direct but also the ability to help our ground partners, making sure as Rob said earlier, putting the right freight in the right network.
Let me also out here that the freight team has done such a phenomenal job managing revenue quality or over the last few months and yours and I think you know is as much as all the things that John talked about attitude <unk> base business the way they manage their just really phenomenal so hats off to the team.
Our next question from Brian Ossenbeck with JP Morgan. Please go ahead.
Hey, Thanks, Good evening I wouldn't ask about Capex, how much of the reduction for next year would you view is sustainable at a lower run rate, where she is something that's more deferred into the future.
And then just maybe the bigger picture if you can visit the views on capital intensity of ground in express, especially in the U.S., but when you're looking at more growth that sort of zone lightweight or oversized and in hard hard to handle a is there any more room to reallocate the domestic fleet or nationally. If this continues and you know how much lower.
Okay and ground move from a capex intensity standpoint, as it gets faster and you add more regional sort facilities.
[noise] depends.
Obviously.
It depends on what happens to the global economy, United States, GDP and everything else going forward I thought we took a pretty bold move by.
Reducing a $5 billion from what we spent this year frankly, we had a demand for even more than that so we actually reduced more from the original planning.
Ah than we would've otherwise done weve smoothed out airplanes those are not additions to capacity again, there was a replacement.
And ground is mostly for growth.
And ground is a very efficient user of capital.
Particularly at the short zone, and I'm going to let Henry think about how he wants to continue what I'm, saying here, but sort of chugging along for a second but a ground is a very efficient user a capital, particularly what their model Henry.
Yes, thanks Alan.
Well, let me just let me just talk about a couple things here one is the regional sort facilities are our low cost.
Mainly short haul inbound sortation facilities.
I mean, it's brilliant what the team came up here because we can put them up pretty quickly in existing built buildings on all they're nowhere near as expensive as building a hub.
Longer term and I I get shorter term and longer term or near term and longer term I think the bigger issue. We have with respect your question Brian.
Is banned positions and the ability to load bands and existing and aligned stations.
We use a lot of very novel.
Quite inexpensive material handling for that.
Sooner or later, he just run out of parking and your run out of.
A a band position so.
You know, we're gonna have to do something in that regard.
Probably more so than we've done in the past given the.
You know the network changes, we're seeing in the business has been that were get shorter.
Well go ahead.
Question from Todd Sally.
Capital working.
Capital markets. Please go ahead.
Great. Thanks for getting select correction there I.
I think this follows up maybe on the last question can you just common in general you know where do you see capacity on the ground side and thinking about if we see b to b volumes kind of refer back to pre coldest levels kick in the network handle both the acceleration that you've seen and b to C. As well as kind of normalized speed to be environment or does it require more in fashion.
Mitch you know at some point in the future and then also Alan could you care to comment on maybe what the margin impact from the seven day roll out here was in the fiscal fourth quarter. Thanks.
And we want to take that.
[laughter].
I'm, sorry rollout of moving parts. There. So let me to say I think we've covered the the a capex capacity question I mean.
It's something that we.
Spent a lot of time on here and we manage it all the time, we've got great engineers here.
The plan this network several years in advance.
You know we are we are as Alan said prudent.
Users of the shareholders money here.
We don't invest and things that don't produce a return.
But all that being said sooner or later you run out of UBS facing passes it for the volume we're saying.
Right now we don't see in the near term or problem, if if a need to be comes back.
But.
Nevertheless, we're going to continue to invest in this network. So we can continue to grow it.
Thanks.
I would say that thank goodness, we had a seven day network when this absolute tsunami of packages hit us.
Because it helped us manage and smooth the ability to deliver all those packages that we otherwise not what I had so it was a positive in the quarter. Yeah. I just want adds the same pointing to strategically or <unk> leaning into E commerce and all the moves would be made earlier in the year about seven day.
The and the large package.
Moves to set us the smartpost those are all over right moves it just the markets just accelerated and though we strategically but we are extremely well positioned to play play in E Commerce and B to B of course.
This concludes today's question and answer session I would now let's turn the call back over to Mr. fostering for any additional my closing remarks.
Thank you for your participation in the Fedex Corporation fourth quarter earnings Conference call.
Feel free to call anyone on the Investor Relations team. If you have additional questions about Fedex. Thank you very much.
Once again that does conclude today's conference. Thank you very much <unk> you may now disconnect your phone lines.
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