Q1 2021 FedEx Corp Earnings Call
[music].
Good day, everyone and welcome to the Fedex Corporation first quarter fiscal year 2021 earnings Conference call.
Okay.
To everyone and welcome to the Fedex Corporation first quarter fiscal year 2021 earnings Conference call. Today's call is being recorded at this time I'd like to turn things over to Mickey Foster Vice President of Investor Relations for Fedex Corporation. Please go ahead.
Good afternoon, and welcome to Fedex Corporation's first quarter earnings Conference call first.
First quarter form 10-Q earnings release, and Stat book are on our website at Fedex Dot com.
This call is being stream from our web site, 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 may be considered forward looking statements within the meaning of the act such forward looking statements are subject to risks uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such for.
<unk> looking statements for additional information on these factors please refer to our press releases and filings with the SEC. Please.
Please refer to the Investor relations portion of our website at Fedex Dot Com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.
Joining us on the call today are Fred Smith Chairman Rob.
Raj Subramanian, President and Chief operating Officer.
Alan Graf Executive Vice President and CFO.
Mark Allen Executive Vice President General Counsel and Secretary.
Rob Carter Executive Vice President Fedex information services and CIO.
Are you career executive Vice President Chief Marketing and Communications Officer, Don Cauldron, President and CEO of Fedex Express.
Henry Maier, President and CEO of Fedex ground, and John Smith, President and CEO of Fedex freight AFE.
After our Q and a session today, Fred and Alan will have some additional comments and now Fred Smith will share his views on the quarter.
Thank you Mickey first and foremost my sincere thanks goes to our team members for their.
For their outstanding and ongoing efforts to respond to covert 19 challenges.
At Fedex, keeping the world connected in good times and during periods of great need is who we are and what we do every day.
Safety is our first priority we have worked tirelessly to keep the world's industrial healthcare and at home supply change falling during the pandemic.
Detailed planning is underway at Fedex to distribute vaccine.
Ah vaccines at scale worldwide once approved.
Our earnings growth underscores the importance of our business initiatives and investments over the last several years.
In many ways the world has accelerated to meet our strategies and we remain very confident in the future Fedex.
This will be Alan graphs last earnings call.
And we are very very grateful for his more than 40 years of dedicated service.
Alan has been a part of every significant decision and help navigate tremendous growth spurt.
Strategic investments international acquisitions, and global end market change.
Fedex would not be to globally admired corporation. It is today.
Without Alans leadership.
Mike Lynch will assume the role of CFO, beginning 20 to September and Alan will remain a senior advisor until the end of December.
At the end of this call I will ask Alan to say a few words.
I would also like to thank John Edwards, and who is retiring from the Fedex board of directors or.
For his wise counsel and more than 17 years of service.
Our board of directors approved resolutions of appreciation for both Alan and Jon that provide in greater detail.
They are invaluable contribution to fedexs success.
How is your the highlight of the Asia 21 September shareholders' meeting and the resolutions themselves will be posted on our Investor Relations website.
Let me now ask Brea Raj and Allen to provide their comments after which we will take your questions brief.
Thank you Fred good afternoon, everyone Jack.
The economic outlook remains uncertain due to the continued impact of covert 19 around the world.
Until the back seen as available globally and the virus is contained forecasting economic recovery remains challenging.
And the U.S. spending that would normally have gone into services has shifted towards good with good spending boosted further by pent up demand.
Retail sales are growing again year over year and E. Commerce is booming at holiday levels and of course more to come on that in a moment.
Service sector severely impacted by the pandemic and high unemployment rate continues to weigh on growing.
Outside of the U.S. recovery has taken hold as well as Corona virus related restrictions have been sent me.
Manufacturing output is improving off the April though and trade activity is on the net trade global trade volumes, which declined 10% in the first half of calendar year 2020 have resumed sequential growth.
However, given the depth of the downturn downturn, we expect global GDP and trade growth on a year over year basis to remain negative for the remainder of this calendar year.
There are two trends that have had substantial impact on our industry and showcase fedexs incredible value proposition.
The first key trend is the dramatic reduction of air cargo capacity as a result of the significant loss of commercial airline capacity.
Current estimates indicate that freighter capacity now accounts for 66% of total air capacity on the Trans Atlantic Lane 80.
83% on the Trans Pacific and 80% on the Europe to Asia Lane.
Compares to pre cobot freighter capacity of 33% for Trans Atlantic, 59% for Trans Pacific and 50% for Europe to Asia.
Fedex Express is incredibly well positioned to benefit from a constrained air capacity market, we've experienced elevated demand, enabling both the expansion of existing customer relationships and the development of new customer relationships.
Ultimately we believe this is an opportunity to disintermediate traditional freight forwarders commercial relationship.
Internationally demand with the strongest on the Egypt, Transpacific Lane with lower percentage of P.P. shipment month over month, Europe's demand continues to be driven by the growth of E Commerce.
The international team has done an excellent job managing demand and Max as you will note our premium international priority package volumes were up 31% year over year, we can.
We continue to monitor the airfreight pricing environment and air freight yields remained strong we.
We are renegotiating based contracts to better reflect current market conditions and to establish longer term commitments.
The second and perhaps more profound trend is the acceleration of E commerce.
Pre cobot, we projected that the U.S. domestic market would hit 100 million packages per day by calendar year 2026, we now.
We now project that the U.S. domestic parcel market will hit this mark by calendar year 2023, pulling volume projections forward by three years from the previous expectation.
E Commerce fueled substantially by this pandemic is driving the extraordinary growth in fact, a 96% of the U.S. growth is expected to come from E Commerce well E.
<unk> E commerce as a percentage of total retail has declined from its apex in April it remains elevated E commerce as a percentage of total retail for Q2 calendar year 2020 is estimated at 21% compared to 15% in Q2 calendar year 2019.
We have built a strong portfolio of E Commerce services and digital solutions that offer the best value proposition in the market with best in industrial.
In the United States Fedex is unsurpassed when it comes to our ability to make residential deliveries seven days, a week year round to optimize network capacity and enhance the customer experience Sunday coverage now reaches nearly 95% of the U.S. population.
And as I have mentioned on previous calls returns reinforces the interfyl value proposition of Fedex services and E commerce, while increasing commercial business returns drive E commerce volume into our retail channel and the first two months of fiscal year 2021, more than 50% of express and ground returns were tendered at retail increasing for.
44% for the same period last year.
In August we completed the dollar general expansion Fedex has more than 27000 staff locations with 92% of the U.S. population now living with <unk> within five miles of a fedex pick up or drop off location.
Our vast network in proximity to consumers provides small and medium ecommerce merchants with the buy online pick up in store convenience without the brick and mortar expense.
Fedex delivery manager enrollments increased more than 60% in fiscal year 2020, and today FDM enrollees are interacting with deliveries more than they ever have before.
As we look ahead to peak, we believe ecommerce will keep volumes elevated and it will be a record breaking peak, we have prepared for what we're calling the ship on and we are warmed up and we're ready to deliver.
As we prepare for a peak like know whether we continue to be very focused on revenue quality, while ensuring we are providing our customers with the best service possible. During this challenging time.
We will be Oh, excuse me, we will be implementing several peak surcharges to ensure that we are covering the increased cost of delivering shipments and those customers who are consuming the largest proportion of capacity in our network are charged accordingly.
These peak surcharges will help us manage increased demand, while maintaining strong levels of service for our entire base of customers. We're.
We're collaborating with our largest ecommerce customers to leverage capacity until about two to develop creative solutions to smooth out demand spikes during the peak season.
We are working diligently to protect our small and medium customers from the impact of most peak surcharges to ensure that their nascent recovery continues to grow postcode debt the small and medium customer segment was our fastest growing segment with high double digit revenue growth in the quarter and Fedex continues to champion and support their recovery.
Finally, as we prepare for vaccine distribution, we believe the most critical attributes needed to tackle the size and the scale of this monumental supply chain initiative, our visibility extensive temperature control and intervention capabilities. That's why we were thrilled to announce the launch offense Fedex sense of where I'd yesterday.
So were I'd is the latest in next generation sensor based proprietary Fedex technology, which provides enhanced package visibility for shipments using a contact center that transmits location every two seconds.
Sensor, where I'd will initially be applied to first overnight shipments within the U.S. domestic express network and is eventually plan to include other premium services.
We believe this innovation as a critical phase feature to the anticipated vaccine distribution efforts and the continued movement of life saving pharmaceuticals and medical supplies.
Beyond health care, we are confident this innovation will attract customers and other high value industries, such as aerospace.
With that I'll turn it over to Raj for his remarks.
Thank you Barry and good afternoon.
Let me start by first it going from sentiments about the Valiant effort of our team members. During this historic time.
We are exceptionally proud and grateful for Fedex team members, who worked diligently each day to deliver the purple promise, especially in the midst of the ongoing global pandemic. Thank you.
Thank you Tim Fedex for your commitment and dedication during this dynamic time.
But ex US nearly 50 years of experience flexing our networks to stay ahead of what's next.
Over the past couple of years, we've launched a number of strategic initiatives to directly address ecommerce opportunities.
To recap this includes expanding U.S. grown residential delivery to every day of the week.
Integrating smartpost package volume into the ground network <unk>.
Testing in technologies that enable real time decisions and optimize virtually all aspects of our operation.
Building or networks capabilities to more efficiently handle an increase in large items, such as furniture exercise equipment and Tvs off.
Offering the Fedexs first Fedex branded through the door service, which moves larger bulkier items into customers homes and businesses and accelerating the expansion of a retail convenience network with dollar general Walgreens and our own Fedex office locations.
While our.
Strategy did not change the timing certainly did the growth.
The growth that we expected to see over a period of three to five years happen in a period of three to five months.
Strong financial results for the quarter are largely driven by the excellent execution of our aforementioned future ready strategy, coupled with the acceleration of ecommerce drums.
We're also happy to note that our a b to b volumes across the segments have continued to steadily improve over the summer with grown b to B average daily volume in August exceeding prior year levels.
As we look to Q2, we enter what we expect to be a peak holiday shipping season like no other in our company's history there.
Working closely with our customers and and building solutions to enable them to succeed.
We are also adding more than 70000 positions in key markets across the United States.
New and expanded grown facilities plan prior to peak will provide additional strategic capacity, including six regional sortation facilities. Each strategically located to provide short haul solutions for large retailers for new automated stations eight new or expanded large package facilities.
And 50 exist.
50 existing facilities are being expanded with additional material handling equipment and automation, but did.
Additionally, we are optimizing views over existing capacity through seven day your own views operations, expanding and added adding shots at dozens of facilities and re purposing smartpost facilities were gone package sortation.
Many elements of the ground transformation are on track for completion. This fall positioning us to improve last mile efficiency as we serve the rapidly growing residential market.
This month, a route optimization technologies available to service providers operating out of 95% of our facilities.
On Sunday residential deliveries available to nearly 95% of the U.S. population.
Smartpost integration will be completed next month, that's increasing density and driving down our cost to serve as grown residential volume was sort of in Delaware in one network. This holiday season.
Now turning to Fedex Express fuel.
Your worn Mark the historic start to fiscal year 21, driven by strong revenue trends globally and loved lets execution of our ongoing strategic initiatives with air capacity at a premium we are positioning of our assets towards our most profitable customers to enhance the revenue quality we can.
We continue to pursue actions to further transform and optimize the Fedex Express international business, particularly in Europe.
Floating expansion of our E commerce capabilities right.
The rationale for the TNT acquisition remains sound and the benefits will accelerate as we complete food network integration over the next 18 months.
We expect to complete the final phase of international and network interoperability in early calendar 2022.
The acquisition of TNT provides us with a strong portfolio that we can build on and compete with in Europe.
Having said that we clearly understand that there's a significant opportunity ahead of us to improve our performance in the region.
Our European team is hard at work to execute that mission.
Let me also take this opportunity to highlight Fedex freight for delivering outstanding results this quarter, including record quarterly operating income and the highest operating margins since fiscal year or six these.
These results reflect freights commitment to profitable growth and revenue quality and laser focus on safety and the ability to manage the network to volume levels.
Collaboration between operating companies reached historic levels in Q1.
Last mile optimization, which allows us to flex our net will reduce cost increased delivery density for residential in rural packages. That's successfully launched in 57 origin markets.
Fedex freight has provided more than 20 million miles of road, an intermodal support and delivered more than 750000, non conveyable shipments for Fedex ground. So far in fiscal year 21, the <unk>.
To put this in perspective.
Great.
Never delivered a grown package before may of this year so.
To support in Q1 alone far exceeds the less than 1 million miles that freighted provided grown throughout fiscal year 19.
And our Fedex logistics and Fedex Express operating companies continue to work together to secure their charters for customers in the U.S.
Before I close I'd like to circle back to Brians comments about yesterday's launch of sense of what I'd and the value or sensor based technology brings to the health care industry. We recognize that's shipping vaccines is complex and critical work.
The Fedex network is well positioned to handle these shipments with our temperature control solutions real time monitoring intervention capabilities and of course are unparalleled network.
Today, we have more than 90 cold chain facilities across the Americas, Asia, Australia, and Europe and plan to open additional facilities in the coming years simply put Fedex is the transportation and logistics provider with the network technology and know how to distribute vaccines when they are ready.
Let me close by making three broad points number one.
Everyone is of course, a where the value our global network provider to the movement of the industrial economy highlighted with such clarity by the health care sector in recent times.
It is now also abundantly clear the critical role that our industry plays in the growth of E Commerce.
Number two within.
Within our industry, the Fedex portfolio is becoming increasingly differentiated.
And number three.
Our foundation is solid and I'm confident that the best years for Fedex are ahead of us.
No.
Before I hand, it or let me also add my sincere thanks and appreciation to all of them full is more than 40 years of service to Fedex and incredibly almost 30 years as CFO is going to.
His contributions to Fedex or legendary and on a personal note I have certainly benefited from his wisdom and counsel, especially during the past 18 months.
Now, let me turn it over to Alan be graph for his final quarterly earnings remarks, as Chief Financial Officer of Fedex Corporation.
Well, thank you very much Raj and good afternoon, everyone.
I'm very proud of our first quarter performance adjusted operating margin improved 240 basis points year over year to 8.5%.
As Fedex Express adjusted operating income more than doubled and adjusted margin improved 390 basis points.
Fedex ground operating income increased 30%, despite a significant mix shift to residential delivery and.
And Fedex freight operating income increased 41%, despite a 9% decline in average daily shipments.
All totaled our first quarter adjusted operating income increased 56% year over year.
Primarily due to international priority volume growth of 31%.
Surge in demand for U.S. residential delivery.
Yield improvement at Fedex ground and Fedex freight.
A $130 million benefit from an additional operating day.
65 million benefit from a reduction aviation excise taxes provided by the cares Act and a better alignment of our expenses, especially at Fedex freight.
These factors were partially offset by higher costs, driven by the package volume surge and expanded service offerings at Fedex ground in.
Increased variable compensation expense.
And an approximate $100 million in Coburn 19 related cost to ensure the safety of team members and customers.
Variable compensation expense increased $195 million year over year.
With approximately half of the increase due to a reversal of long term incentive plan accruals in the prior year period.
Our effective tax rate was 22.5% for the first quarter compared to 25.2% in the prior year period.
This year's tax rate was favorably impacted by changes in our corporate legal entity structure and.
And increased earnings in certain non U.S. jurisdictions.
We ended the quarter with $7 billion in cash and cash equivalents and with 3.5 billion available under our credit facilities.
Last month, we issued $970 million of pass through certificates with a fixed interest rate of less than 2%.
The certificates are secured by 19, Boeing 767, and 777 aircraft.
This transaction provides us additional liquidity flexibility as.
As we move forward and affirms the availability of financing and the cargo aircraft market. Despite the uncertainties and unprecedented disruption in commercial aviation.
Looking forward, we are not providing a forecast of expected earnings per share for fiscal 2021.
Well business demand improved in the first quarter continued uncertainties cloud our ability to forecast full year earnings call.
However.
Based on the current trends in our business, we anticipate increased demand to result in higher revenue and operating income at Fedex ground and Fedex Express for the remainder of fiscal 2021.
In addition yield management and improved productivity is anticipated to contribute to revenue and operating income growth at Fedex freight and therefore 21.
If our current trends continue we express certain expenses, including higher variable incentive compensation accruals.
And increase supplies and other costs related to the cobot 19 pandemic to remain headwinds in fiscal 2021.
We incurred 49 million and TNT integration expenses in the first quarter.
Down from 71 million last year we.
We expect to incur approximately 175 million of TNT integration expenses this fiscal year.
Yeah aggregate TNT integration expense is still expected to be approximately 1.7 billion through the completion of our physical network integration and therefore 22.
RF or 21 capital expenditure forecast has increased slightly to $5.1 billion driven by additional capacity initiatives to support increased volume levels. The news.
The new forecast is 800 million lower than last years capital spending.
I'll conclude by re emphasizing that we expect to continue to benefit from our strong position in the U.S. and international packaging freight markets yield improvement opportunities and cost management initiatives.
Now the operator can begin the Q and a session.
Thank you at this time, if you do have a question. Please send off by pressing star one again that will be start one for questions.
Well hear first today from Tom water, what's what.
Yeah, Hey, good afternoon, and a l. and congratulations again.
Great great career, and Oh, Wow, what a weighted or a you know sign up with such a strong quarter.
The let's see I wanted to ask how you think about the trends in the business.
In terms of you know where there's some things that you think fell off in the quarter would fall off or do you think the performance you know express ground from a.
From a revenue and margin perspective or are likely to continue in and got a forecast or any kind of a you know accordingly.
<unk>.
Tom Thanks for your kind comments I appreciate them.
I will say this knowing that I was going to get a couple of forecast questions I'd.
I didn't work really hard this time to give you. Two however is on a re emphasize in my opening remarks.
And I would think if you would go back to those that's about as good as you're gonna good for me today.
You know Mike Glenn This is probably going to be in the same boat in December as I am today with all these uncertainties, it's just really too difficult to say, but.
I do so I did say if current trends continue I thought we'd improve our overall operating incomes at all three of the major up gross and 2021.
Okay. I mean was there anything that was one time, it's kind of in the quarter or not.
Well Fortunately for me I'd planned years in advance to have one extra operating day this quarter, what I knew I was leaving.
But other than that nothing.
Well hear next from active receiving.
Great. Good afternoon, congratulations on a great quarter and Alan Let me Echo Tom Congratulations on your retirement.
I guess this one for a barrage, but I would appreciate brief thoughts as well you know that the pulling forward of your.
2026 domestic growth expectations for it to you know by three years to 2023 indicates to me then what you're seeing is more than sustainable. So my question is you know you.
Yeah. When you think about your express your ground, you're afraid that works you where do they stand today in terms of capacity utilization there how do you think about balancing the need to be.
To remain capital disciplined and upgrading your revenue on one hand versus the desire to grow participating in touch.
It's a strong market tailwind on the other it.
Let me start first and then break can add to it clearly a we think the same thing I think the market or the E. Commerce market is large and it's growing in the growth has accelerated as a full followed by three years and so you know that's clear now Oh. The second thing that is clear is the value.
Fedex provides to the growth of E. Commerce, we work strategically with several of those retailers around around the world and particularly in the U.S. to provide the solution. So we are you know we work with you and you hear stories about ecommerce growth across the across different retail.
Across different retailers, you can bet that Fedex is behind behind those stories.
And thirdly, we are going to be very disciplined in how we manage capital and our revenue quality going forward.
And but you know we are most importantly, working to provide the best solution possible for our customers working hand in hand to create no to be creative in solutions for their ecommerce.
Working strategically with them so brief.
Really not much the ideal I think I will say as Henry and I are lock step, we're trying to thread that needle of improving quality, but also again a reminder, we keep talking about Sunday as a delivery advantage from a customer perspective. It's also an incredible advantage from a capacity perspective, and we are strategically levering that leveraging that partnering with customers who can pull vault.
Im forward into the weekend and I really don't think that that has been factored in previously and that customers understand nothing it's a huge strategic advantage going into peak this peak and several peaks in advance pretty there's another one there why don't you take it because we just send it to you there sure I've also got a question about at Walmart, New subscription service Walmart plus so.
You know I can't talk a lot about the relationship obviously, it's one we value very much its strategic it's long term and we're committed to growing with them. We have a very very healthy partnership there were very excited about that there was also some questions here about same day I want to highlight as we think about the market growing the markets essentially going to double in size by 2020 Soc.
So when I get those numbers I think that the other thing that's been lost as that market's going to double by 2026 same day from an E. Commerce perspective. It remains a very tiny percentage of the market. So we continue to be focused I'm on the remainder of the market that we're very excited about our partnership with Walmart.
I should note when you talk about the seven day network, it's not only capacity and.
The advantages that garage and bring mentioned it also is a very cost effective because it spreads to fix cost to cost many more units.
Well go next to Chris Wetherbee with Citi.
Hey, Thanks, good afternoon.
I guess I wanted to ask about sort of the pricing strategy going forward. So surcharges are coming in and appear to be having say.
Impact on yields, particularly on the ground side and.
You think about sort of the next six months.
Six months or so how are you.
How you might actually depressed pricing opportunity how much do you think you need to report that this could be a little bit more.
Yes, good being a little bit more temporary and how much in Turkey and the longer term.
Contracts.
Well.
Yeah.
[noise] I, so I think everybody's aware from a domestic perspective, we put into our surcharges on June eight that was the 30 cents to 40 cents for Smartpost and 30 cents being for the residential surcharge as we have announced that we had to increase those surcharges as we head into peak the oversized portfolio will increase in early October.
And then we will increase our holiday surcharge as from November through January 17th. So surcharges are certainly an important part of our revenue quality, but I would say that they are one piece of that we have actively had conversations about our top 25, and now moving to our top 100 customers and we've got a multi too.
Tiered strategy here as I talked about earlier, we are rewarding customers that can pull volume forward. We are rewarding customers that can integrate their supply chains that are open to longer term contracts and of course, you know from a capacity perspective, we are no longer just taking it down forecast we are working with customers and we are having kind of.
A balanced converts conversation between base yield surcharges and capacity management. So it's a multi tiered strategy. Most importantly, we're planning for the long term, we want strategic relationships want a partner with customers that are going to win in the market and we think we're doing a really good job of that and my hats off to the sales team because they've just done an excellent job at that.
Well move next to Allison Landry with credit Suisse.
Thanks Kathleen.
So your your main competitor signaled that X gene a could be a big focus for cost reduction. It is and maybe give me think Bradley fedexs overall cost structure or do you also see opportunities to lower EPS DNA you know in other words, what are some of the incremental cost opportunities that you have.
Going forward beyond the TNT integration Smartpost integration et cetera that that you might be able to think about in terms of margin improvement going forward. Thank you.
I also think it we've done a really good job with US today are obviously was one of the headwinds is a good one.
Is is if were able to pay additional incentive compensation to our teammates for the great job that they're doing versus what we've been able to do in the past I think our S. Sooner is structured such that we can grow.
We can grow very rapidly with very little addition to our EPS DNA going forward, we're becoming much more productive I even have bought some of the accounting department.
I'm very excited about where we stand in that regard or will continue to work very hard on productivity and density and stops per hour or new airplanes are providing us greater reliability and at lower cost almost anywhere that you can measure it and those will continue so I think that there were rigged for not only great pricing and revenue per phone.
From us, but also cost performance going forward.
And from Goldman Sachs, well move next to Jordan Alger.
Yes, hi, congratulations Alan.
All right.
My question is on margin seasonality realized not.
It certainly typical year.
Yes, just to make no or.
Typical at the well gladly express margins are actually moving through the quarters from here or what could be.
Well it could be something that alters the normal patterns. Thanks.
Yes.
I'd say the history is probably not as good a predictor of this year as it otherwise has been.
You're right about normally our summer there's are weaker in our fourth quarters are stronger.
But the acceleration of the traffic that we've been able to handle this quarter or was so much bigger than a year ago as to be almost unbelievable when covert hit obviously, we took some hits so it's gonna be spotty.
And you know I'll stand by my two however is in my reemphasize is as the rest of my forecast.
Well move onto Duane Pfennigwerth with Evercore ISI.
Hey, thanks, so much for the time.
A question for you on Europe somebody investors, we spoke with we're looking for better quantification of what it turned in Europe could be worth can you.
Can you speak to how much TNT is holding back express margins currently and maybe can you frame the opportunity for for profit improvement in Europe.
Let me start and I'll give it to dawn call run for his comments, obviously, we're not going to be able to quantify the level that you that you like however, we are [laughter] clear.
We are [laughter] clearly that's our biggest opportunity ahead of us and international markets is to make sure that we.
Perform better in Europe, I think a you know the integration activities of TNT have gone a pace and we are we know who they are we are in a position now to take advantage of the portfolio that we have.
To.
To do exactly that just remind you before didnt see acquisition you know we were heavily geared into Intercontinental I Express an intra European Express we were good but we didn't have a presence and intra European ground or the domestic markets now we do and so this portfolio is going to stand us in good stead and we believe those are you know good.
When you add of us and the team is very focused on executing against that plan, though.
Thanks, Roger a couple of comments one about express I'll quickly go to we're not playing far in Europe first I want to thank and recognize the Amazing Express unit men and women of that team that put together a fantastic first quarter.
Great planning, but even better execution supported wonderfully by our commercial partners in sales marketing and I see that really made according to the historic looked at it is.
However, I would express it as a coach from new England ones third we have moved on to quarter two were going to head down and we're focused on peak season planning as well as opening a pay a vaccine is it was around the corner and we're uniquely positioned as Ross said earlier.
To handle that with our global network. When you think about Europe, though you need to think about what what Raj said earlier, we're we're essentially where we told the street.
The Street, we would be in terms of our transformation integration.
By April of 2022 were will be hopefully be fully integrated on the air side, but we have really solid plans for European theater, we have an excellent team on the ground, but supported by amazing team globally yeah.
As we are in a restaurant our units in regions, we're focused on execution or just maybe if you. If you watched the team execute on these plans are solid and we have a track record of making things up and we expect that to be the case in Europe as well.
Well move on to Scott Group with Wolfe Research.
Hey, Thanks afternoon, guys and best of luck in retirement now so I wanted to ask is if the demand is still there as we get into peak season does the ground network have the capacity to maintain 30% volume growth and repeat and then.
Express yields were still down year over year in the fall.
While the pricing strategies going on do we see opportunities to start seeing express yields increases.
Scott This is Henry Maier, we've been operating at peak since March so the stepping off point for peak. This year is frankly, not as much as it's been in years past.
You know it's important to point out here some of the things that have already been said Oh well.
We're operating of a seven day network every day of the week year round.
We will have smartpost fully integrated into the ground network by P., which allows us to re purpose 28, former smartpost facilities for large and small packages operations and ground sortation and I might add that's pretty cheap capacity to get were running much higher yield yielding packages through than we have in the past.
Yes.
And you know as Fred pointed out better asset utilization lower fixed cost across the whole network.
In addition, you know you saw the announcement on 70000, new hires for peak that's on top of a historic number of employees at Fedex ground right now.
Our service providers have stepped up and hired tens of thousands of new driver since all of this began back in March.
We're adding six regional sort facilities for new automated.
Stations, we have about 50 projects underway, which include expansions of existing facilities.
Additional automated sortation capabilities and material handling and then all the other things that we typically do at peak in terms of being able to squeeze additional capacity out of the network for a fairly short period of time. So we're highly confident that we're going to have a great deal. This year, it's going to be busy but.
Nevertheless, I would say that the ground team is ready.
Let me take the international yield question. So I think most important to understand is that if you look at the yield half of the impact for both domestic express as well as international Express with fuel when you strip out the fuel impact there was pressure from a weight per package perspective, and the growth of ecommerce led by.
Roast when we're very excited about this growth <unk>, a Europe outbound from an E commerce perspective that being said, we're doing a really good job partnering with Don and his team on density and the yield per pound is up significantly you can't just look at international and.
Express yields quite frankly, just that the shipment level, you've got a look at yield per pound overall from a network perspective total express yields per pound is up 11% year over year. So we felt really good about the overall performance from a yield perspective like those things taken into consideration.
Wells Fargo, we'll move next to Allison Poliniak.
Hi, guys good evening.
So just keeping on ground nice incremental operating leverage within that business.
Well actually you had talked a little bit about you had some maybe some obviously some anymore incremental opportunity out there, but if you look at that business. Today, you know where do you think longer term is there anything structural that would hinder you guys getting back to sort of that mid teen operating margin level in that business.
I first firstly that the most important thing about our network that we have put provided with the ground is the better value proposition in the marketplace that'd be provider customers and I think that's translating into more business and more profitable business.
And the things that we have put in place not yesterday, but over a period of the last year or two is now as Fred pointed out it is paying off in many ways. So the target is of course is going to to both improve revenue and margins as we go forward and we believe we have the structure to do just that I don't know Henry if you want to add any more to that.
Well so let me just say couple of things to add on to Rogers comments on that.
On the first quarter fiscal 21 was a fedex grounds highest quarterly revenue and operating income a quarter in history.
In spite of that those results flow from.
A number of steps, we took several years ago to transform Fedex ground that position Fedex to prosper in a market increasingly dominated by E commerce.
I've spoken of the integration of the ground and Smartpost networks I spoke of the expansion of seven day.
You can't do any of this without the introduction and use of World class technology.
We're we're about a week away from.
Heading completely rolled out our advance route optimization software.
Software too.
To all the drivers I should point out to you that this was developed using safe agile methods and was rolled out across our network in the middle of a 100 year pandemic in 13 months.
That's that's pretty damn good if you ask me.
I'm not.
Not only does this enable our service providers to better plan routes fleet type.
Number of trucks types of trucks volume on trucks on a dynamic daily basis, but it's already improved significantly final mile efficient efficiencies, specifically increasing stops per hour.
And then in the network in spite of everything we've.
Already talked about in Q1.
The integration of Smartpost finding in the networks improved density both on a square mile basis, and on a delivery basis driving the average cost of our stops down.
So I think we're.
Where we sit today our best days are ahead of us and we still have a lot of work to do here.
Well hear next from Brian Ossenbeck with JP Morgan.
Hi, Good evening. Thanks for taking my question I, just wanted to come back to execution into the holiday peak season, Yes last year that was a good start for cyber Monday coming in.
The planned near term in the same period here with a lot more volume, but also a lot more initiatives and levers to bounce all out some of which are you've talked about here announced recently so stepping back and how confident are you that it's enough to have assessed will peak and then do you feel like you can make adjustments and recover if needed.
Well, let me start and then but Brian Henry can add I think what you know is this is going to be a big like none other but we believe that we have no the capabilities and the flexibility to do a lot I think.
I think the number one thing that the customers now looking for his capacity and we are working strategically with them to make sure that we can deliver that again, you know having operations seven days a week helps it helps it helps a lot here too and the technology that we have.
So between the fiscal flexibility than we have in our infrastructure that we put together with the technology that we have and the customer solutions are put together, we're thinking that we're going to manage through this be quite well, let me turn to breed for her comments.
Certainly, let Henry talk about that the physical capacity elements that from a customer perspective, we're really working hard to set expectations with our E. Commerce merchants I think they are very well aware that this is going to be a peak like no. Other I'm. The most important thing for our customers customers is to set appropriate expectations and give them transparency to.
The appropriate transportation commitment and we're working very hard to do that to set expectations to get visibility into expose that her all our digital channels and our customers digital channels. So we're working very hard you also saw that we adjust our peak search surcharge specific to cyber week to make sure that customers really paulson their volume.
And that we help Henrietta team wherever we possibly can and or anything else.
Yeah, I think the only thing I would add here is that even at the operations level, we have conversations almost daily with all of our top customers you don't want to.
Once again. This is you know this is not a new event at peak, but this has been ongoing since all of US began back in March.
You know when you're operating a seven day network.
Well, let me back up and say, we're in a new normal here.
And there is a new normal for Fedex, but there is also a new normal for all of our customers and when you're.
And when you're operating a seven day network, we have untapped capacity.
Existing within that network, if customers want to take advantage of that ONTAP capacity.
For example.
We have ample delivery capacity on Saturday Sunday Monday.
We have ample pickup capacity.
On Friday, Saturday and Sunday, if everybody wants to ship on Monday, then we're going to have to have conversations with people about how we modify that demand to fit the available capacity, we have on one day a week if.
If if customers flexible I think we can accommodate most of what people.
People wish to ship this year at peak.
Helane Becker with Cowen has our next question.
Thanks, very much operator.
He dairies.
Yeah.
Yeah.
Yes, yes.
And John Thank you for all the work you do on behalf of the children seem to that work is very important and very appreciate it.
Into onto my question.
Can you just talk about the vaccine in your distribution capabilities in the sense of you know the ability to to either store.
Good.
The vaccine that has to be chilled to minus Celsius and.
And you know how if you.
If you've thought about how that gets handled in places like India and.
Africa, and Brazil, you know were in some cases, we have very strong networks. You know how we should think about your ability to participate in that thank you very much.
So actually we talked about earlier and they are you know it's all we recognize moving vaccines across our global network is is very critical work and we believe that we have the network the technology.
The solutions or to do do do just that we have engaged with several for customers who are in this vaccine production mode.
And we are planning appropriately for it and we will you know again the timing is a TBD at this point, but you know the capabilities that we have in around the world, including the physical network storage solutions as well as the and a sense of where I'd that we just launched and enhanced visibility platform.
And the ability to intervene as needed is unique and I think we are wells are well situated to handle handled this vaccines, let me turn it over to dawn for them because lot of those are going to try them to express network. Thank you Raj and thanks for the question that I would like to add a little bit of coal to its because we look at this really is a supply its supply chain design.
<unk> opportunity first of all for many months as you can imagine we're talking with the major manufacturers and customers in the health care space, along with HHS CDC and the FDA. So this will be clearly are a global team effort. What's unique about this opportunity when you think it through his he's a very good chance that.
The robbery ingredients are gonna be David one country the manufacturing of these.
These vaccines in another country another region and the consumption of the need for this is globally and this is why we are uniquely position. When you look at the 220 countries that we serve well over 600 aircraft that we have in our network and the ability to integrate that with our air and ground Oh, we're uniquely positioned to support this critical initiative.
And we are ready for it we're planning we're planning for the mother of all pigs, but within that we're also looking at you know <unk> the ability to move on a global basis. These vaccines when they become ready, we're obviously hopeful like everybody else's data sooner rather than later, but when they do come and they came off the manufacturing line, we'll be able.
To support those manufacturers on a global basis.
Oh next to David Vernon with Bernstein.
Hey, guys. Thanks for taking the question Henry I wanted to come back to the topic you brought up around I'm kind of looking at customers. The flexibility anecdotally, we've heard from a couple of different shipping because what we see is that that somebody else I'm trying to get the course for the ground network, maybe lobbying a little bit I just want to give you a chance to comment on how you feel service levels are trending I'm also.
So as you think about the next two to three years, given the pull forward and volume growth you're going to push into the network has that changed your thinking about the size of the Capex and go up for the ground segment. Thanks.
Well, David I've been in this business for 40 years I've never seen a more difficult operating environment than the one we're in.
We're dealing with.
500 year pandemic absenteeism as a result in certain facilities.
Wildfires hurricanes social unrest, unlike anything I've seen since the sixties.
I live through the 60, so I remember it.
All of that places some pretty.
Pretty difficult challenges on an operation when you're trying to run a national network. This is highly engineered and as precise as long as we operate.
Fedex ground people have worked tirelessly through all of this.
And I have eternal confidence that we'll continue to provide world class Transit service going forward for our customers.
The issue of Capex.
You know I would say to you that.
We have been varied.
Very diligent in the past about this I made a comment about the smartpost, they've got 28, smartpost facilities, where we purposely for ground.
That's that's pretty cheap capital when you consider the fact that we convert those buildings for ground growth. Then you know there are essentially are already included in the network footprint notwithstanding any of that we're going to have to invest in the ground network going forward for growth.
This is I mean, if we gave you the statistics on E commerce between now and 2026, you know we can squeeze more capacity out of this existing network, but we're not going to be able to maintain these growth broke rates unless we invest in it and I can assure you that that work is something that.
It is ongoing and almost daily at Fedex ground.
Thanks.
At Hartford with Baird has our next question.
Hi, Good evening again, Oh, congrats on your career and retirements or just to kind of follow up on Capex and just cash management.
As weve transitioned over to Mikes leadership can you provide a little bit of perspective about how you're thinking about liquidity going.
Forward you know, we've got a little bit of a different operating environment Express standpoint, you've got free cash this quarter, you've got plenty of liquidity on hand.
How do you think about capex needs over the next few years and and uses of incremental free cash flow and cash on hand that pay down et cetera.
[noise] appreciate the question we.
We are a first and foremost going to repair our balance sheet.
We borrow significant amount of money in anticipation of liquidity needs that Fortunately, we did not have to have a but I can tell you back in March when we were sitting around the table here. We we had no idea what to expect and so we got prepared the best we could I think you could see from my.
Comments, we have over $10 billion of liquidity today.
Obviously, you know we expect to have improved free cash flow and so we'll be <unk> in repairing the balance sheet first.
But we haven't forgotten about returned to shareholders or recall that over a number of years, we bought a significant amount of shares at a price of about $153, which looks pretty good today didn't look so good in March.
And Ah obviously, we have a frozen dividend right now because of our agreement with our bank. So we'll be looking at all those with first almost as a balance sheet repair.
Oh that they broke trial with Deutsche Bank has our next question.
Oh, Thanks for squeezing me in.
<unk>.
Roger I was just hoping.
On the ground business, one thing that we noticed the leases that purchased transportation costs.
Could you could go up on a per pieces.
You guys are doing on Smartpost redirect should there be [laughter] can there be potential for purchase.
Okay Chicago.
To be moderate significantly.
<unk> piece of the cost structure I think it's important address it and then just.
Higher level, you know if we're sitting here.
August or September of 2021, obviously, 30% growth in ground is not sustainable.
Acuity I understand the secular benefits, but if we're sitting here. This time next year. The economy, hopefully is pivoted excuse me other vaccine, maybe more balance sheet goods and services.
Nick.
How is the profitability structure of the business in that.
Thank you.
Well I'll address the purchase Trans question purchased transportation was driven by volume on in all of our transportation is purchase at Fedex ground.
We don't have company owned equipment, we don't have employee drivers so.
As you know the volume goes up the purchased transportation costs are going to go up.
I think that something that may be somewhat obscure.
Obscuring.
Some of the numbers in there was the fragile silver of Smartpost ground because packages. The formally were treated as postage because we pay the post office to deliver them are now part of Brown settlement.
That work will be done by by the end of October with.
Exceptions.
The ground network is highly variable and highly flexible we can scale up we can scale down based on the volume we contract with 5300 small businesses that employ something north of 130000 employees.
They see the changes in the volume at the micro level much faster than any of us could see a operating out of a corporate headquarters structure and they react almost instantaneously to any changes in volume both up and down so.
So Bob this is not something that we haven't been through before I mean, we've done through up cycles and down cycles, sometimes it takes us a little bit longer to ramp up if we don't see a common like this this particular.
Cobot 19 event, but Oh sure you know that we can take the costs out of this network really quick if we have to.
And from Bank of America, we'll go to Ken Hoexter.
Hey, great good afternoon phenomenal quarter, Alan and congrats on a beginning your next phase and thanks for the comments over the past two decades, maybe just my question is on maybe for Raj you know on the thoughts on margin benefits from express to ground I know Henry you just mentioned kinda that parcel side.
Out of it but you've also talked about moving express packages over to Graham can you talk how that transition is going on volume or on margin side.
Then just a clarification Allen have you delineated the benefits from the surcharges in terms of dollar size scale.
Oh I answer the second one no we haven't because it's all part of one giant orchestra.
One conductor at all the pieces flow together.
And on the first one let me just make sure you know wasted b to C or the residential volume continues to grow a definite and that was just the opportunity to optimize between network. So the residential and rural packages, we were able to move from one that works. The other us as you know an optimized as a service.
So you know well, we'll see where it goes a you know as I told you we launched it in a in a few markets and we'll we'll monitor as we go forward here.
And at this time I'd like to turn things back to Mickey Foster for closing remark.
Okay. We have some final comments by Fred Smith.
Sure as I said at the beginning or I was going to give the microphone over to Alan do make a couple of remarks, let me reiterate what I said at the start in several of.
Our colleagues have said here at the table on behalf of the board and the strategic Management Committee.
We thank Alan for 40 plus years of.
Outstanding leadership didn't in this company he's been a.
Great comrade in a row.
Brilliant man not only in business, but his accomplishments and contributions.
And so many philanthropic endeavors chairman University of Memphis probe.
Pro Bono very heavily involved in establishing the Fedex family House she intrusion.
Where I could spend half the.
After the evening here talking about Alan in that regard, but as I said. This is an earnings call. So I'll make a more fulsome remarks at the shareholders meeting.
Next Monday, and let me turn the microphone over to Allan who will say what he wants to say and then make he'll tell if the meeting Alan well. Thanks Fred.
In the fall of 1991, Fred took a chance on a 38 year old treasurer, despite a significant amount of pressure to bring in a proven seasoned CFO.
When he told me he wanted me for the job you city.
The city had a tremendous amount of confidence in me and challenge me to always think long term and strategically.
Among among other things spread was very clear that I should always communicate what I thought no matter how against the grain it might be.
That was great advice, and it's been the basis for our partnership ever since.
As I finish my last of around 120 earnings calls.
I want to give you a few thoughts of mine about where we are and how optimistic I am about the future Fedex.
Believe it or not.
I always look forward to these calls.
No matter if the news was good or bad.
I've thoroughly enjoyed preparing for the very excellent well thought out strategic questions I expected it to be asked.
Well they offer there not be get these insightful in penetrating questions I did enjoy the occasional battery.
I always endeavor to answer questions from the strategic viewpoint.
Hoping to import a deep transparent description to help you see what I see.
Over the years any accomplishments attributed to me truly belong to an unbelievably dedicated and talented team.
I'm, referring not just to incredible World class Finance organization, but.
So to all of my 500000 teammates with.
With whom it has been an honor to serve.
I'm extremely optimistic about the future of Fedex.
Over the years, we have invested in building unmatched physical and technological networks that are keeping the world supply chain is moving with very high levels of reliability.
Although our capital investments have sometimes been question.
The past quarter provides a strong indication that these are providing increasing returns and I am certain that that will be the case moving forward.
Well at the end of that for 2019, we made the strategic decision to go all in on E Commerce.
Moved away from a large customer to focus on the broader market we may.
We moved to a seven day, a week ground operations, allowing us to handle significant additional volumes using existing capacity.
We move Smartpost packages into the ground network and re purpose smartpost facilities to handle handle higher yielding home delivery packages we had.
We added advanced route optimization technology, maximizing route efficiencies and increasing stops per hour.
We serve every address in the U.S. and 92% of the U.S. population lives within five miles of the Fedex pick up or drop off location.
We are modernizing our fleet and major hubs lower cost and handle additional volume.
We are transforming our international business and the benefits of the TNT acquisition or beginning to accelerate.
We have the right strategy in place and our team is executing at a high level.
We are a high energy organization and our own.
And our always on the office.
And now I'm excited to hand, this and CFO mental to Mike wins.
Nice performance during his tenure at Fedex has been outstanding.
He has a full confidence of Fred the board of directors and this.
And the strategic management Committee he.
He will be Super and I look forward to watching him.
It has been a great ride and it'll be forever grateful for my time at Fedex.
Yeah My teammates thank you for everything.
I will Miss you.
And I enjoy will enjoy your future success.
Well my wife, Susan Mcgee.
Daughters, Bridget and carry and their families.
Our love and support.
And patients had been my cornerstone.
I wish everyone. Good luck and good health.
Thank you and farewell.
Your hair.
[noise]. Thank you for your participation in Fedex Corporation's first quarter earnings Conference call. Please feel free to call anyone on the Investor Relations team. If you have additional questions on about Fedex. Thank you very much bye.
And again that does conclude today's conference. Thank you all for joining us.
[noise] Hmm.
HM [noise].