Q2 2021 FedEx Corp Earnings Call
Please standby we're about to begin.
Good day, everyone and welcome to the Fedex Corporation second quarter fiscal year 2021 earnings Conference call today's call is being recorded.
At this time I would like to turn the call over to Mickey.
Vice President Investor Relations for Fedex Corporation. Please go ahead Sir.
Good afternoon, and welcome to Fedex corporations second quarter earnings Conference call.
The second quarter form 10-Q earnings release and Stat book on on.
Website, instead, Acs dot com.
This call is being stream from our website, where the replay will be available for about one year.
Joining us on the call day or 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 on this conference call such as projections regarding future performance may be considered forward looking statements. What's on the many of the act.
Such forward looking statements are subject to risks uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward looking statements.
For additional information on these factors. Please your total our press releases on filings with the FCC.
It was reported 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 day or spread Smith, chairman and CEO.
Robert should the LNR President and COO.
My glance executive Vice President and CFO.
Mark Alan Executive VP General Counsel on Secretary well.
Rob Carter executive VP, but except for making services and CIO.
We can vary executive Vice President Chief marketing and Communications officer, non current president and CEO of Fedex Express in the Mayer President and CEO of Fedex ground.
And John Smith, President and CEO Fedex straight.
And now Fred Smith will share his views on the quarter.
Thank you Mickey I'll, let me make one day administrative gone now.
Due to the cold 19 situation, where we have four members of our assets will see space sleep disturbance and one room and then five members of the U.S. and see.
Our participating by zone.
Oh with us so we may be a little clunky here handing off for the answers, but that's the reason.
Let me first like our Fedex team nearly 600000 strong.
These team members have continued to keep the world moving amid the pandemic tranche.
Transporting medicines protective gear and all the things on our customers need for daily life.
And all of our B to b customers need to run their industry.
Now our team is acting on lots of rigorous planning to transport code Nike vaccines safely and on time.
I have no prior priority as a company.
Tom Glavine on express transportation of course critical shipments is exactly what our air ground network was built to do.
And we have the experience unmatched global net working technology solutions needed to effect on really play a role in helping to eradicate this off of disease.
Particularly important has been the recent rollout of our new proprietary sensor where I'd system.
Which provides real time visibility.
Lydall ship on like the back seat.
In addition to this critical work we're in the midst of our peak holiday shipping season.
Well, we expect to record breaking volumes are still on revenue and earnings growth. During the second quarter is another reflection of the continued hard work of our team members.
And their commitment to our customers.
We're very confident in our strategy using extremely optimistic for Fedex future.
Let me now ask Brie Raj and Mike, who I'd like to officially welcome to his first earnings call as our CFO to provide their comments.
After which we will take your questions right.
Thank you Fred and good afternoon, everyone with the color on virus in its third surge in many countries the near term economic outlook remains unclear.
On the U.S. good spending is about pretend deneke levels Howard like Anthony Commerce.
Also seeing growth be on the consumer as drivers of business activity are increasingly intake and place inventory restocking and a strong recovery in capital goods spending are supporting industry supporting industrial production positive.
Positive developments on the vaccine French and strengthen the appetite for investment. However, the service sector does remain challenged on face is short term uncertainty I guess the latest iresearch.
When the health emergency and pent up services demand is released we should see a long growth runway.
International growth rebounded in the third quarter of calendar year 20, but the goods sector outperforming services global industrial production and merchandise trade volumes, our close rates fall pre Kobe recovery sentiment among manufacturing firms as solid well trade growth is becoming more broadly based around the world.
China's economy has surpassed pre corporate levels and is leaning on strong recovery on East Asia. In contrast, however, you're up has been slower to recover and sees a short time had went some virus can change that.
Well uncertainty remains high vaccine prospects on increasing confidence in the medium term outlook.
I discussed last quarter, the acceleration of ecommerce has had a profound impact on our industry. This holiday shipping season has certainly probes.
The pandemic has accelerated the growth of E commerce volumes in the first nine months of 2020, U.S. ecommerce sales grew 33% year over year on traditional retail sales, excluding auto gas foodservice and food services grew a little more than 1% year over year.
Commerce package volumes are expected to more than tripled to 111 million packages per day by 2020 stacks up from 35 million on 29 channel.
On the last call you heard me coin this peak season as the ship on as.
As we prepared for unprecedented levels of online shopping on shopping. This holiday season, we have worked very closely with our customers to get the shopper relationship early message out to consumers and we've been incredibly plays but their response.
Well that all that capacity across the entire industry has been severely constrained we have worked with our customers to develop innovative solutions to meet their capacity needs its peak.
The proactive steps, we talked to prepare for the gross the bank E commerce, including the expansion of Fedex ground seven day, a week U.S. residential delivery and that's not an automated facilities and our retail convenient network has certainly paid off.
[noise] [noise], we expanded Sunday residential delivery to nearly 95% of the U.S. population in September. Since then we have made more than 50 million Sunday residential deliveries on.
That's minimum seven day delivery has given us a speed advantage for E. Commerce that is near impossible to match without a national Sunday delivery offering.
The convenience of our reach on that work has led to record volume growth with more than 60% increase on average daily volume October 15th November area.
We're very pleased with our Walgreens and dollar General Alliance assets and the services. They are providing our customers and of course, a huge shout out to the Fedex office team, who always done an incredible job at peak.
We have also set new record highs on returns volume for the past six consecutive months with the return season. Upon US we expect these record highs to continue over the next several months.
I am incredibly proud of how we have grown our digital ecommerce portfolio Fedex delivery manager on monthly enrollments have increased more than 70% year over year. This fiscal year to date.
Of course, we are thrilled to expand our digital portfolio with the pending shop on our acquisition. It is no secret that this that's successes on commerce lies at the intersection of US upon physical network and incredible digital capabilities Raj will talk more about this later.
Turning to revenue quality, we have remained laser focused throughout this peak on ensuring capacity for customers is that the right price, enabling us to provide the best possible service for all of our customers.
Oh revenue quality strategy requires the right balance of yield management surcharges and of course product and customer mix.
As discussed last quarter the implementation of several peak surcharges has played a critical role on our revenue quality strategy does peak, helping to offset of course, the additional expenses associated with the unprecedented volume on that and the virus surging.
I believe peak surcharges for the holiday season are the new normal for our industry.
[noise] and I find 21, Q2, Fedex had a total U.S. domestic residential package volume of 67% versus 57% a year ago.
With the increase of residential packages in our network weve been very focused on effective yield on product mix.
Why 21 Q2, we have increased smart gross yield on more than 20% year over year and overall U.S. domestic residential yields by 10% year over year, we announced yesterday that we would modify several surcharges post peak and those will be effective January 18th 2021.
Finally, paramount to our revenue quality strategy is the growth of our small and medium segment.
As such we continue to protect the majority of our small and medium customers from a smart post peak and temporary surcharges, we are taking market share in the small and medium segment and it is our strongest growing volume segment year over year.
We are increasingly digitizing our go to market strategies to improve their customer experience, while continuing to help small and medium business is net says grow their business. Despite the challenges they have faced this past year.
As Fred discussed Fedex is proud to be one of the two primary primary carriers of the COVID-19 vaccine in the United States, We will play a critical role on the distribution of vaccines around the world the months to come now.
Now, let me turn to on the rationale [noise] correct.
Current estimates indicate that as of October the global Air cargo market capacity was down 23% year over year due to the significant reduction in passenger aircraft flying.
Your carpet demand is expected to recover to pre cobot levels faster than passenger capacity for key intercontinental lanes, creating an opportunity for Fedex.
Currently either the U.S. and easier to your on passenger capacity is expected to recover to pre cobot levels by 2023, and you got to U.S. is expected to recover by 2024.
Our goal is to profitably take market share income and keep that be on the capacity shortage internationally.
As such we are prioritizing business from small and medium customers and reprioritizing any volume from resellers, ensuring we protect the business that will stay with Fedex, but the long term we.
We are balancing near term profitability, while strategically growing our customer base internationally.
Constrain capacity, we have adjusted transit times and embark on our deferred services.
We will continue to lean into international ecommerce as it remains a significant international market opportunity and.
It will also enable improved flight density to further increase the revenue per flight equal.
E Commerce, well, however, dr. lighter international parcels, so yields per pound will become increasingly important metric.
In Q2, 21 International export Air Express yields per pound was up double digits year over year globally.
So in summary, I'm incredibly pleased but on performance during this past quarter, we've nimbly navigated the ship on all while planning for key initiatives that will positively impact our business for many years to come and with that I'll turn it over to Raj for his remarks.
Thank you Brie and good afternoon everybody.
Let me start by echoing Greg's sentiments banking, our global team members, especially those on the front line.
While working diligently to keep the world in motion during this truly on leases into tight.
We are in the midst of an extra ordinary peak season, but it's difficult.
As we had a record breaking volumes and deliver a strong services for our customers.
Well on a regular basis and falls in November and December or preparations. This year were Muslims. The made in many ways. We have been operating at peak levels and smart you disorders, and we call them as volume.
We make.
Meticulously losses included collaborating with our customers on innovative solutions and enhancing capacity through new and refurbished facilities and leveraging the flexibility.
To ensure we are well positioned to go to work.
Oh, the shipping season day.
As we handle these record volumes were also delivering the first wave of over 19 Bakken shipments.
On December 14 to five.
He's on.
But I suppose.
Worse, U.S. vaccine delivery, the Boston, but what's going on in Boston, Massachusetts.
Well it seems John's right on sort of additional vaccine shipments internationally as they become available.
Some of the most important war the history up on a company.
On on Oh could be positive for.
Hello, and the standard.
And that's not on either on.
Our unparalleled access network.
For price definite shift moves such as these vaccine.
The scale of the Fedex at work is massive.
On price of 680 aircraft.
You want on thousand Bagels, and most importantly, our nearly 600000 dedicated team members are on the world.
Power on networks and stuff that Fedex can pick up a.
The most anyone on the World and then the world's most any other one on the all the them out on a couple of days.
The distinction between on networks means that each will have dedicated resources they need to deliver quickly and sales.
And it is precisely this oh.
Critical in Dublin, Oh, very important mission that had a mission to distribute golden moving back seat.
But the global accounts crisis on this.
While net world hours.
Our scale gross.
This is who we are and what we do.
Now turning to Q2, we delivered strong results across the board, Mike will provide details, but I'd like to highlight that we had.
She volume yield a significant Robert growth.
Oh work on this and segments is for.
This is also a larger one by many of the strategic investments on decisions. We have put in place over the last 18 months to address the growing E commerce market.
Include exercising the U.S. ground residents was notably every day of the week.
Integrating smartpost package volume, but rather more simple density.
Testing in technology, instead of moving real time decisions and optimize the critical last mile.
Building on networks capabilities, net aside and services more efficiently and let me squeeze in large volume.
And actually waiting to expenses before we get a convenience that work with dollar general Walgreens and of course, our on box office locations.
These initiatives increased density.
Some other efficiency on outlets repair.
Indeed, Q2 was a critical for Fedex ground on the combination of many of these phone based so it is now.
Now turning to Fedex Express they simply had a better quarter. This record revenue performance is a direct reflection of the goal.
Well I suppose seems a laser focus on executing our profitable growth strategy and operational excellence.
The TMT physical integration remains on track.
Even on that shutdowns are dependent on.
We continued to build a strong portfolio leveraging the benefits so far the network integration Hazel paves the way for us to assess euro four years to call.
And finally Fedex freight.
Sadly for double digit operating on it.
The frequency remains focused on crop corn gross and whether we bought it.
On the says what's the so Q2 was a direct result of the strategy would you start nearly two years ago, and we are well positioned for the future.
During our September shareholders meeting, we used the views on used to these operating principles, which are compete collectively operating collaboratively and innovate businesses.
The shift in on operating principles on the step.
Step in a long term future already started.
Let me take a moment to talk about each day tour.
Collectively remains on cool each Fedex operating company offers a unique value proposition on <unk> vital role in delivering on customer expectations. This is when these companies compete collectively under the power from Fedex, Brad that'd be on.
While new opportunities for our customers breeders already touched on the various ways around leasing value for our customers and so I would focus on the two new principles.
Operating collaboratively and innovate visits.
Operating income.
An important and strategic shift for Fedex Wow works his expertise that life within our operating companies are on.
Well remain independent.
We are building a holistic collaborative approach to compete in the dynamic market.
Operating collaboratively we help ensure we have a weighted package on the right network the white costs. So.
We have discussed various examples of collaboration on previous earnings calls, including last mile optimization, and Fedex freight ongoing support on whether it's through.
Just a couple of ways adapting collaborating on utilizing different elements supporting the war increases efficiency and reduce costs.
The Biochrom simple interface. This is.
It's how we were going on where the future for our customers shareholders and team members the size and scale up on that work and the many millions of packages that sounds worse every day gives us the birds eye view on global supply chains in front us.
Beyond our physical infrastructure is the technology that thrives on that work generates a significant amount of David.
The focus is using this data and technology to unlock smaller performance sales and customer relationships and drive greater efficiency.
Over the recent weeks and months, we have made significant strides on our journey to innovate digitally.
First the formation of Fedex day to works and new organization focused on putting a day during the contests and using it to transform the business on physical experience with our customers on team members.
Second is the recently announced agreement to acquire shop Robert.
This last fall will accelerate our ability to play a larger role in ecommerce, but connecting brands on margins to new shoppers Dusty moving online shopping experiences on ours existing customer brand advertising base product just moving them to know professionals will drive significant value that's expense.
Conversely.
This recent visit the momentum combined with our ongoing collaboration with Microsoft and launches and a sense of where I'd and Fedex alone will allow us to fund this immense data.
Like the weighted to find new ways to work even smile.
As Fred said.
I remain very confident.
Strategies and the future of Fedex.
That let me turn it over the Mike or there's nothing on the call as Chief Financial Officer.
[noise], Thank you Raj and good afternoon, everyone before.
Before I move into the financials I'd like to highlight a few points as the new voice on the call for.
First I'd like to recognize the legacy of Alan Graf in building a world class team I now lead and thank him for his leadership and guidance along the way.
The value isn't standards. He instilled exceptional foundation for me to build upon in the years ahead.
Next I have appreciated the opportunity to meet with many of you on the call today over the past few years I hear your perspectives.
I look forward to continuing that important dialogue and sharing what's ahead for Fedex.
And hopefully what they post cobot environment, becoming more visible the opportunities connect works to connect will expand on the months ahead.
Finally, I must say how inspiring it has been to see team Fedex inaction from my vantage point.
On the executives on this call to the frontline team members working tirelessly as we speak to deliver in this unprecedented environment.
Reinforces what we have said before that the strategies, we have in place on future ready and making truly excited for what lies ahead.
Turning to the results I'm very pleased with our second quarter performance.
Second quarter, adjusted operating income increased 121% year over year.
I merely due to international priority volume growth of 32%.
Continued strong demand for U.S. residential delivery.
Pricing initiatives.
Operating margin improvements across all our transportation segments and.
On a $70 million benefit from a reduction in aviation excise taxes provided by the carriers Act.
These factors were partially offset by higher costs, driven by the package volume surge and expanded service offerings at Fedex ground.
An approximate $215 million year over year increase in variable compensation expense.
And on an approximate $50 million in cold at night to related costs to ensure the safety of team members and customers.
These COVID-19 related costs that we have quantified are limited to increased operating expenses related to personal protective equipment.
Medical a safety supplies and additional security and cleaning cleaning services.
And they do not include cost of network contingencies, including additional personnel in place to support our operations to the covert pandemic.
For the quarter, all three of our transportation segments posted strong results.
Driven by the strong global volume growth Express revenues increased $1.3 billion.
Coupled with solid operational execution express generated an adjusted operating margin of 9.1% up more than 500 basis points.
Record second quarter, adjusted operating profit of 943 million.
The ground segment operating margin improved 110 basis points to 7.5% as our strategies to capitalize on the rapid growth of E. Commerce continued to advance.
The freight settlement or are they still are 13% operating margin. The second best second quarter margin in 15 years by focusing on revenue quality and aligning cost of volumes.
We incurred a pretax noncash mark to market net loss of 52 million related to amendments to the TNT Express Netherlands pension plan.
Benefits will be frozen and affected employees will begin, earning pendant Ben pension benefits under a separate multiplayer employer defined contribution plan.
Our effective tax rate was 12.8% for the second quarter compared to 2.1 per se in the prior year period.
This year's tax rate was favorably impacted by a tax benefit of 191 million, primarily attributable to favorable depreciation guidance issued by the IRS during the quarter.
That compares to the prior year period, which included a tax benefit of $133 million on substantially lower earnings.
We ended the quarter with $8.3 billion in cash and equivalents and with 3.5 billion available under our credit facilities.
Looking forward, we are not providing a forecast of expected earnings per share for the remainder of fiscal 2021.
Well could business demand continued to improve in the second quarter.
The current rising COVID-19 cases globally adds significant on certain due to demand forecast.
As well as operating costs and clouds, our ability to forecast full year earnings.
However, based on the current trends in our business.
We anticipate increased demand to result in higher year over year 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 that's why 21.
Yes, our current trends continue we expect higher variable compensation accruals and increased labor costs to be incurred during the remainder of fiscal 2021.
In addition, we expect a higher effective income tax rate for the second half of the year versus the first half.
During the third quarter, we also expect to see headwinds from aircraft maintenance cost at the end of benefits from the cares Act.
In addition, the third quarter, we'll have one fewer operating week day versus last year.
We incurred $48 million of TNT integration expenses on the second quarter.
Down from 64 million in the prior year period.
We expect the aggregate integration program expense to be 1.7 billion through the completion of the physical network integration of TNT Express into Fedex Express in early calendar Twentytwenty two.
As we approach the completion of the physical network integration in early 20 to 22, we are evaluating opportunities and pursuing initiatives. In addition to the integration to further transform and optimize the Fedex Express international business, particularly in Europe.
The cost of the shopper acquisition, which was highlighted earlier will not be material and will be funded with existing cash balances.
We expect to complete the transaction this month.
We continue to expect our EPS slide 21 capital expenditures will total approximately 5.1 billion, which is 800 million lower than last years capital spending.
Well, let's finalize our flight 22 capital spending plan until our fourth quarter.
We expect that our flight 22 capital spending will increase versus this year.
Yeah. The F.Y. 22, we plan to make additional investments in our Fedex ground network driven by the surge in E commerce demand.
Our capex focus remains on strategic investments that will reduce our cost structure improve.
Improve on efficiency.
And increase our capacity to profitably meat market gross demands.
I'll close by reiterating our excitement and confidence in our future as we continue to benefit from our strong position in the U.S. and international package on freight markets.
Yield improvement opportunities and cost management initiatives.
And with that we can turn to the question and answer session.
Thank you if you'd like to ask a question on todays call. Please press star one on your telephone keypad.
If you are listening today, using a speakerphone you may need to pick up.
The floor price.
If you do find that your question has been addressed.
Our Q.
From the Q.
The assets you limit yourself to one.
Question.
Go ahead.
First question David.
Stifel. Please go ahead.
Yes, thank you very much.
Henry probably a question for you on the ground side.
And seeing growth there and I know, there's a lot of investments going on to make sure. All the packages get delivered right now, it's only showing about a 10% incremental margin and everybody wants to get back closer to mid teens.
How should we think about.
Everything going on at ground.
On the investment bank on the margin and the consolidation of Smartpost into ground, helping the margin as we move over the next couple of years.
[noise] Thanks, David.
Well as Mike said margins on the second quarter improved 110 basis points on operating income improved 61% year over year.
Given the very unique environment, leading up to peak, our resource ramp up look very different than it had in prior years.
Peak preparation expenses were much higher and occurred much earlier than in the past as we anticipated the potential impacts of Cove it on resource availability.
And the timing of customer volume coming into the network.
We are and have been we have been and continue to be extremely aggressive on the hiring a new package handlers.
In fact, we are still on boarding record numbers of package handlers as we speak.
We recognize new challenges for service providers, and adding drivers and vehicles.
So we pulled their peak settlement rates afforded by a number of weeks to better enable their businesses.
To be ready for peak.
All of these things drove higher than normal operating expenses associated with peak preparation than we normally incur in Q2.
[noise] merits and accruals revert a variable comp also affected year over year comparable sales.
Our investments in preparation for this years peak included capacity additions on the shape of six new regional sort facilities for new automated stations.
Eight new or expanded large package facilities.
And expanding more than 50 facilities with additional automation and material handling equipment.
A number of these facilities came on line much later this year that is acceptable.
Then in years past due to permitting and construction delays due to covert related shutdowns last spring.
In fact, if you think about a regional sort facility, which employs about 500 handlers. The last one came on line the weekend before Thanksgiving, which would have been on four to six weeks later than would've been acceptable in any other year.
It's pretty standard and in the second quarter, we expanded our coverage of seven day residential service from 60% to 95 per cent for the U.S. population.
This expansion required. The addition of sorts in an automated package processing facilities as well as the addition of Preloads that formally didnt exist on Sunday and roughly 50 stations.
Finally.
Assuming no significant change on business conditions as we see on today.
We expect margin improvement to continue year over year on each of the next two quarters.
Thanks for your question.
And we'll go ahead.
Brendan.
Oh.
Hey, good afternoon, everyone and thanks for taking my question. So I'll, maybe this one's for Raj or Brie can you guys just dig a little bit deeper into the shop on their acquisition because I think in the prepared comments and also to really like you talked about how we really want to integrate better with retailers and customers on basis. So is this more.
You know about the current user base of shock runner on this you know offering incentives to the retailers there or is this even more a play on the technology on the company. Thank you.
Thank you, Brian Let me start and then I'll turn it on would agree with.
Firstly, you know just.
With respect to here.
On the technology on the town are very critical components of this and the fact that the technology platform that connects brands and merchants are to consumers is very important and importantly also is the combination of those capabilities with Fedex is movies on physical and digital.
The structure and you know we have it is sharper on our being in a SAP is E commerce platform, but directly connects online shop or the brands and merchants that they love in front us operating member benefits on the seamless checkout and you combine that with all together on a go on to create a more open platform.
Foams ecosystem.
Monkeys and shop. So we think it's just like marriage or we think this is going to be a very successful actually married and technology.
Along with our capabilities on a where do you want to add a couple of points zone.
Sure. Thanks, Raj, where we're very excited about the shop on our acquisition and having Sam and his team join US you know we have some interesting product capability that I'm not going to able to share all the details at this point, but I think that's three things from a go to market and a value driver that we see in the very near term as we are looking at the shopping center.
Acquisition. The first is that we have to logistics capabilities to create greater certainty what the existing shop on our offering to consumers. We can work, but their brands to make the reality I'm, even more efficient on their current offering second and you know what their order caught a catalog and their data visibility into these brands we.
On the upstream earlier this is an incredible advantage from a logistics optimization start when you think about the post purchase experience and you can take a shot partners order catalog without post purchase visibility into a trend that we think that we will have a best in class post parse casts a consumer.
And so those are the first three things out of the gate, but without a lot more to come on we're super excited great question.
And we'll go ahead and.
Question on from Bascome majors with assets.
Please.
Yes, thanks for taking my questions.
Looking forward are there so many cross currents driving really good results in parts of the business needs and challenges than others right. Now I was hoping you could talk about some of the Fedex verticals, we they like customer or type of business or product.
I really still quite a bit below the pre kobe baseline and whether.
Whether or not you're excited about recovering in that space as we get deeper into next year, you'll be on thank you.
Well, let me let me start by.
On that we are excited about our performance across all our segments of the business. This quarter I mean, it's it's actually you know.
I'm excited to see the progress we're making here.
Okay. You know obviously the fastest growing segment is E commerce and and as we improve.
The continued improved density on other metrics in our system.
Performance on going to contribute even get better but your point.
No.
Industrial production and the ER business segment is just sales coverage and that you know, there's there's upside opportunity here the ministry to sales ratio is at all time high or low on for retail and it is what six year local manufacturing so that they come back on the minimum restocking happens over the next few months you know that.
It should be an upside on or this is a low. So we are excited about the progress we have made a in the E commerce sales growing very fast in that space and investments and remain on its actually feeling right into it.
On time or the on the international segment.
We have seen we are clearly the capacity that we provide today. The premium we expect that advantage to continue and that business has continued to book or and the B to B segment income side, that's to be on top of our current trends. So that that's what we expect I know there were holding nicely there's a choppy in the <unk> in the <unk>.
Short term, but the medium zone.
We're optimistic about where these trends are going on I don't know brief you on add to that.
No no I think you covered I think the only other detail, but I would add is you know we're not quite there yet from a recovery from <unk> perspective, we have seen strong momentum and some early early signs coming out of Europe. That's obviously, where it's most important you asked for my business next perspective, and my hats off to the European team. They have done some incredible work.
That's year on whether it'd be it'd be business has not come back. So that is I'm added up to where we're at right now for sure.
And we'll go ahead and take our next question from Scott Schneeberger with Oppenheimer. Please go ahead.
Oh, thanks, so much.
Thats a great segue to my question I recall, you, saying on last call last quarter call that you had the b to B gross volume in August I was just curious to hear how that has trended. Since then and on you said agree yeah, just if you could differentiate between yet.
Yes, some transition expense.
Okay, I'll stop and you know weve been done on break and help me.
Look on the United States, so they'll be on the baby's started to go into foster direction. The beginning of Q2 and just lengthened over the quarter.
As is the industrial production.
I started to lap the.
I did make a crisis here and then coming back on another side.
Cross the world, China's leading the way and done so.
Economic recovery and manufacturing on Europe is lagging behind so in Europe, we have seen growth was primarily driven by B to C.
The on the B to B is a you know it's still on the recoveries that below we're prepared to make levels. Some non do you want to comment on international segments.
So Roger I think that's helpful and then.
Not to watch it out on the fact that certainly the optimism comes around.
Continuing role, though on the dots needs on a global basis a decline in these countries.
Oh President companies begin to recover it opens back up we expect to see.
Our view that the volume recover remain uncertain.
And it's probably on as well, we're beginning to see some signs of life that on European business on the leasing side as well on a few data points, but certainly introduces some some optimism on that day.
Robert growth right now is to revive you see.
As the B to B continues through <unk>.
From a sequential basis certainly this is David.
Your next door.
Okay. Thank you don't see anything else.
No I think it's covered net okay. Thanks.
And we'll go ahead and our next question from.
With Deutsche Bank. Please go ahead.
Thanks, Good evening, Mike you talked about showing year on year margin improvement in the second half on a year over year basis.
To be fair the bars, a little bit low on that and I was just hoping you could give us a little bit more color around that you know do you think the year on year margin expansion accelerates. It was great to see it in the fiscal second quarter for the first time on a long time, but do you think you know at some of the costs subside that were specific to the fiscal second quarter.
That we might be able to see some acceleration in that year on year margin expansion I mean, just the broader question to Mike. If you could address you know the problem for the last several years. Obviously has been you know the the growth in ground has been fantastic, but the margins have been impacted.
Impacted negatively as a result of that growth wouldn't pricing initiatives and the yield that you guys are showing which was incredibly impressive can we say now that the bottom a day for gross margins in subsequent quarters should see gains on the back of what we've been achieving over the last several quarters.
[noise], Okay. There was a lot of questions in there let me let me try and you know just say look we certainly highlighted that we are incurring incremental costs and contingencies related to the pandemic on that that continues to create uncertainty and our near term forecasts.
But as Henry outlined we're very confident about the trajectory of the ground business and the initiatives. We have in place you know just to elaborate a little further I mentioned that were yes.
We anticipate spending more on capital expenditures on our in our ground business for next year.
The increase in facilities, which yeah, that'd be both new automated facilities as well as the mix of expansion of existing ones.
That's not the only lever we have and are working on to improve ground margins and profitability.
We also will continue to deploy technology to further enhance that asset productivity as well as deeper collaboration with our customers to offer optimized the when where and how we received the shipments.
So, yes, I'm not going to put a a point forecast on things, but we're trying to paint the picture here for you of the all the initiatives and things that are coming together that are going to drive that going forward.
Oh go ahead and take our next question, Tom Wadewitz with yes.
Yeah, good good afternoon.
I wanted to see your express.
For me has been very very impressive you you're doing a great job capturing the opportunity.
I think in a variety of measures.
Well, one in particular that strengthen international air freight rate on.
I was just wondering if you could give some kind of help.
But thinking about the magnitude of that and you know how should we think about that as a potential headwind in the future is that something to be concerned about if you get a back half of <unk> or are you.
As you go into fiscal 22 assets you might have some give back on.
On net benefit.
Benefit from really high international Air freight rates.
[noise] non U.N. ER right, you want to talk about that or yeah.
Let me, let me kick it off and on Duncan answer I think they are you know the point about when when the capacity or supply and demand. That's the balance is this of course, we have to look at and we feel that the demand is.
As bad comes back on capacity will be in short haul for quite some time and our our Fedex capacity will be a significant premium and we pointed out in our remarks, you know the you know the there's quite a bit of runway ahead of us in this regard.
Let me turn it on to dawn on business.
Thanks, Robert Thanks for the question. So let me frame it from a from a market perspective I appreciate the comments.
On the expresses tier performance, obviously really proud of what we've delivered over the last couple of quarters.
When you look at the air freight market, obviously, but.
Derivative of supply and demand the conventional wisdom and in market forecast would suggest that we don't get back to pretty cool, we're constantly in the marketplace per se.
Somewhere in the range of 18 to 24 months. So we've got to be Truman, we do well.
I think the continued.
A reason to be optimistic.
Well the supply and demand situation as it relates to our business going forward Robert mentioned.
We continue to roll out around the globe in the quarter.
Recover they'll recover I believe the faster pace.
Doug.
So, but my sense is again.
We don't book, that's a pretty good levels on commercial.
I'll tell you the marketplace for 18 to 24 months and economies.
Oh, Oh price no.
Chris It's an opportunity from a price.
Brie, unless you want to add to that.
I think you've covered it on.
And once again, if youd like to ask a question you May press star one on your telephone keypad well go ahead and take our next question from Jack Atkins with Stephens. Please go ahead.
Hey, good good evening. Thank you David My question I guess that's helpful. Mike.
What's your cash flow if you don't mind.
You know there's been a day.
Good day operating cash flow for the first six months of this year on a year over year basis. It's like a good portion of that flow payables is that related to the payroll tax accrual holiday later, the cures Act first of all that I guess more broadly with an increased focus on capex discipline now.
Just me being sustainably free cash flow positive moving forward barring some slipping on for saying from a macro perspective. Thank you.
It's hard to answer to your first question goes to two big drivers of that but we made a billion dollar contribution to our pension plan.
In the prior in the first half of last year, and then you are correct that the deferral of the payroll taxes under the cares Act yeah. It shows up there at this point the benefit from that we've deferred just north of $600 million of payroll taxes under the Kazakh and those will pay back in calendar <unk>.
Anyone and 22, Oh look it remains we are fully focused on improving returns on free cash flow, but.
But I don't want to get into giving you a forecast at this stage of the game, but where we're definitely priorities prioritizing that as well as improving our capital efficiency.
Yes.
Oh go ahead.
Next question.
With Goldman Sachs. Please go ahead.
Yeah, Hi.
A little longer term color on right.
Around margin thoughts on sort of way.
The higher amount of residential packages that as like the sales system from here I guess some of the sales opportunities you're doing around the air ground optimization thing possible adjusted house et cetera that you could just obviously a good start on the ground side Im just sort of curious how you think about ground out over the next year or two.
Alan and where Directionally, where that could go direct.
Hey, Jordan this is centered on there and I was like.
Said, we expect margin improvement each on the next two quarters year over year.
I think the important thing here as you think about residential is you've got to you got to focus on the transformational initiatives that have been accomplished on the ones that are yet to come on.
We talked about seven day, you're around 95% of the U.S. population.
I've spoken on this call before about the great route optimization technology, we rolled out.
Put in the hands of our service providers on the.
On sourcing the Smartpost volume has allowed us to experience on a very real return on these strategic investments.
For example.
We've seen a 22% improvement on stops per hour due to year over year.
The average cost per stop has been reduced by 15% year over year.
And.
Causing our assets to sweat.
Seven days a week once again, the insourcing of Smartpost has allowed us to reduce our fixed cost per package by 9% year over year on the quarter.
And we've also seen a material reduction in miles per stop.
These are all these are all of the input cost trends you need to see to win and ecommerce.
So I would tell you that from where we sit Fedex ground today, we couldn't be more positive about the future.
You want to take the Alamo question Bert.
From that from an Alamo perspective, obviously, we're excited to turn that back on you know I think I covered di di percentage on presidential that's already in the network right now so that remains on upside opportunity. We have gained share consistently over the last 20 years and we're very very optimistic about the future and opportunities that's why.
I continue to share the growth of ecommerce on those numbers on 111 million packages in the market I 2020 Sachs. There's some significant room for growth. There. So we're really excited about that Fedex found out like that.
Can I just add a couple of things here I mean, they've bought a headwind Brie said the two areas. One is improved density and efficiency depend on them and we already gave evidence on some of those and thus expect those trends moving forward on second and as long as Rami qualitatively talk about so those look for.
So we are optimistic about what Wellington, Delaware with this increased volume, but again thanks.
Oh go ahead and take our next question from Scott Group.
Research. Please go ahead.
Hey, Thanks afternoon, so I want to stick on on ground.
He is do you think that is the 7% yields gross sustainable.
And maybe since ground margins are at double digits do you think there's opportunity there to push that ground yield even further and then just with the price I mean do I.
Yes directly do you see the opportunity to get to double digit margins for a year can you get to low teens margins for a year in Grand I guess, that's what everyone is trying to figure out.
[noise]. So we're going to continue to execute on our revenue quality strategy and we think that there has been some fundamental shifts in the market and you saw the beginning of that this quarter with a 20% increase on our smart post product and a 10% increase that's on a yield on.
The residential as net we believe surcharge as it will be a part of our pricing strategy moving forward for E. Commerce. They are a necessary part. We also are going to continue to work on our product on a cost our customer segment Max on what do I mean by that we are leaning in channel our home delivery product for gross it is the best value proposition.
And the market no one else can do seven day, and we expect to continue to get a premium. We also expect that that will continue to drive market share on small and medium customers, who cannot move to a local operation and they really do value. The national speed advantage that we have so yes, I can tell you that I expect a strong year.
Performance at the Fedex ground on portfolio and more confident that we have started to change some industry trends this year.
Scott on my Crystal ball doesn't go out much more than six months.
So I will stand by my statement about the next two quarters I am highly confident of double digit margins.
I don't know, whether I want to get into a debate with anybody on this call about teens. So.
Our next question.
Evercore.
Please go ahead.
Hey, Thanks, maybe a question for Raj on collaboration can you offer any metrics on the degree of collaboration between the segments year over year for example.
How much express volume ran through ground you know this quarter versus you know the year ago period.
Okay.
Oh, we're we've moved on more than 10 million packages a day from experts to ground lease on primarily on the these are rural and residential packages or that you know because of E commerce and the ability for us to have a day its definite system on lower cost day different system and were more than 10 million packages.
So into the into the ground system.
In addition, Fedex freight has done a lot of work Fedex phone as well.
On 40 million miles up 80% year over year.
1.5 million packages the freight.
It's hard to handle that because it's up more than 435 per cent, though several assets numbers, but the collaboration is very active and we are making sure that we put the right package and the right network on the like foster so.
Thanks, what inning would you say were in.
Yeah.
Did you say what inning.
Collaboration what any garage plays question moving or write plays cricket [laughter] assets or anything could get too, but yes. No. We are just getting started if that's what you mean.
Our next question.
Yes.
Thank you GAAP.
I was hoping you could give us a little bit more clarity on on the increase in Crown Capex and simple 22, I mean, I guess first book the magnitude of the I'm not picking up the big ticket.
<unk> spending and more importantly, I think you previously talked about not needing to add incremental yeah major hub capacity given that that the growth over the next several years likely comedy on shore like the Paul and therefore, you could price volume out to the second tier and satellite facility and really start to elaborate on the investment that you made.
On the Port I'm, sorry is that still the right way to think about it.
What what sort of thing that nature on I'd be increase in Capex. So just want to GAAP to understand.
You know any sort of additional detail too.
Yeah, So we get a clarification on that thank you.
Hi, Alan send its Mike. So you don't have a specific number to give you on that as we are as I said in the midst of formulating our plans and putting it together for for F Y 22, but unquestionably the sustainability and acceleration of the E Commerce business.
We have seen that everybody has highlighted is here to stay.
Brie spoke of this this tremendous shift.
And the mix of residential business and.
With with not that much advance notice yet ground as quickly adapted adjusted and was able to increase margin. So that's a a testament to the execution of the team on all fronts. The commercial teams. The operational teams. So that volume is going to keep coming so it it's essential that we do invest.
In certain assets going forward, but it's not going to be the same nature and configuration as Ah you might historically have considered it. So you know I I mentioned its facilities. Its technology, it's how we work with customers, but all that Henry elaborate a little bit more on just kind of the nature of the firm.
Facilities on how that works here, so you have a better sense of it.
Yes, Thanks, Mike Allison I think the way you should think about this is we're going to invest much much more heavily.
On the edge of our business.
Which is the last mile space.
So if you think about this.
Our focus is going to be on much smaller automated satellites and stations.
On a regional sortation facilities, which if you're not aware sort about 12 to 15000 packages an hour they they tend to.
Be inbound only so that we can process.
Direct loaded volume from large retailers.
They are much less costly to build and operate because what we do as we go in and we modify an existing building and we are able to get these up much quicker in fact.
The time to get them up and running as measured in months instead of years like some of the bigger construction projects we've had.
On there there certainly design for the sortation of regional packages and I think when you think about regional you should think about overnight mainly.
And you know one of the great advantages. They have is is that they can serve as a relief valve force spillover sortation at peak.
There's a lot of other levers we can pull here you know the.
Ideal situation for us is to be able to low direct van not have to go through a destination facility on investing heavily on technology tools that will give us the ability to do that.
There's a lot of Oh.
Things, we do particularly this time of year at peak with mobile Dockson axis and the ability to waive dispatch and run dual preloads on facilities that allow us to do dual use.
Facilities on when volume is at the level. It is now that don't require us to invest in the traditional brick and mortar and all that being said, we're always going to have brick and mortar in our business, but many of the transformational initiatives I've talked about are intended to give us better real time in for.
Nation about what's coming so we can make decisions that reduce our input costs are the main area would be re handles so that we can bypass the brick and mortar facility altogether and load right to a vehicle that's going to go deliver those packages in the neighborhood. So if that answers your question.
Alan That's you know that's density yet again, you've heard US said numerous times, but that is that is density and how we manage that yet again.
And we'll go ahead and take our next question from Brian Ossenbeck with Jpmorgan. Please go ahead.
Yeah. Thanks, good evening. So in other words, you Henry I can you just talk about peak season costs, how they came in versus expectation. It sounds like you to make a few adjustments obviously with everything that's what's happened. So if you like are well suited to handle the recipe and the returns after that and then maybe you can just give us an update on exactly what you're talking about maybe needing.
The shift some customers over to the weekend, possibly incentivizing them to change their behavior a little bit.
Imagine that's probably not the case anymore, but if you can give us an update on that too I appreciate it.
Okay I'll take the first part and then I'll, let Brian take the.
The second.
Well, let me talk about peak first of all we haven't actually had a conversation about that and since we're in the midst of US let me begin by saying I couldn't be prouder of the ground team.
And what they've been able to accomplish this year just like about everything else on 2020, which has been an extraordinary year peak this year, it's been pretty extraordinary.
All the things I talked about in terms of investments.
Resources capacity.
<unk> are all really driving one of the best peak seasons, we've ever had in spite of coal.
Cobot and all the other challenges we've had in this business.
On average Fedex ground has delivered 20 to 25 or 30% of the volume of day early.
And the average package spends about 2.4 days in the network in terms of transit, which is faster than last year in spite of the volume and the challenges I outlined.
I think I think the issues this year on the cost side were.
Timing and a lot of on Knowns I talked about the building. The facilities you know came on much later this year.
Because you know most governments were shut down for two months so.
So we couldn't get permitting.
At that rate.
Really slowed the timeline here and even though you know our our property on engineering team did a fabulous job.
In the race to the finish line here to get them up and running facilities came on a lot later this year the normal.
In terms of the other resources, particularly in the in the case of handlers I would just say two things when you bring on resources at the rate, we're bringing them on they're not very efficient.
You know it takes time for these people to be taught their job and you know theres. This ramp up of 234 weeks. It takes for a handler to learn their job done.
Once again I mean, we've got a sizable portion of the handler workforce that is not as productive as they could be.
I think I sat on the.
The call at the end of Q1 that our facilities are not designed for social distancing.
So out of an abundance of caution and keeping safety above all in on our business. You know we've got a we've got a staff and man. These buildings on such a way that we can keep our people safe father at work.
The unintended outcome of that is is that we don't get the desired or engineered throughput through all these buildings, we would in a time pretty cove it.
So you know those are the things that are are probably most material to a to the cost side of this.
As I said I'm also earlier in the earlier question.
We pulled peak settlement for our our or service providers forward, because we knew they were going to have challenges with the recruitment of drivers and we recognized early on that vehicles were insourcing short supply once again on automotive manufacturing plants were shut down for two or three months.
In new and used vehicles on the market right now are almost impossible to find.
That meant the rental vehicles had to be procured much earlier and with commitments that were much longer than normal on.
We made adjustments to settlement in those situations to try to defray some of the costs for our service providers.
Finally, let me just say one last thing.
Our eyes species have done an unbelievable job. This year peak I've lost track on the number of days, we've had peak package delivery days peak stop days et cetera, and they have stepped up every step of the way this year.
And I would reinforce again that the the ability and flexibility of those small businesses to make decisions on the fly up based on local conditions on and the data we push to them about what their delivery is going to look like the next day is nothing short of unprecedented.
Precedented and is truly a differentiator on our business.
And to answer the second half of your question you know I think jump brand and on her sales team have just on an incredible job leveraging our weekend capacity you know the incentive as he is the weekend or you lose the capacity on and that has worked still we have opportunity. Yes, I believe we have incremental opportunity to further improve the product.
David and density on the weekend, but again, we have created a act at peak capacity strategy that does require customers to Paul's their volume more equally throughout the week on and our best largest customers are doing just that with us they've been great partners and I think you'll continue to see asks do a good job at a peak nothing part.
And we'll go ahead and take our next question from Allison Poliniak with Wells Fargo. Please go ahead.
Hey, good morning, So just to follow on that question you know just here going back to that and working like every Taliban balance a peak I guess one was there a noticeable I would say pull forward of that some of that volume is in November that was noticeable to you and it sounds like kind of volumes are you seeing some level of operation on balance our balance in December in terms of the peak.
Any incremental color you can give there.
Sure you know, we we really weren't hoping to change shopping behavior, and we really didnt see that to be completely honest and we have seen on you know as I wrap up I think there's probably more awareness from consumers on the unprecedented year, we're having what we did see as you know the crown team on the sales in hand and such.
Great job educating the merchant and the customer that we saw a lot better planning on as a result, we saw volume and we are seeing volume earlier and the express network. So it was successful on that we were able to move some of the higher value ecommerce entity Express network and we have been successful and smoothing day, a week, but then Henry.
At work, we were now at the on excess successful on getting all consumers to shop before the cyber weekend said that that remains to go on let's just say.
And we'll go ahead and take our next question from David Vernon with Bernstein. Please go ahead.
Hey, good afternoon, three on one of the follow up on that topic around sort of collaboration right. Your reported some pretty healthy way purchases on the BDC 520 per cent bus markets I guess on close for the residential on how the discussion going on but what can you tell.
Sales at this stage are they accepting that the.
Yeah, Hey, can you get or how are they thinking about your product in the context of what.
Pretty significant rate increases and if you think about the negotiations on going forward are they are they being more willing to participate with you on things like Joe process Day week index and back on itself on that would help you kind of build a deeper relationship on the on the customer side.
Yeah, I would say in general the conversations have gone very well you know the largest and most successful retailers on the U.S. They understand how important you know Fedex logistics assets to quite frankly to their gross strategy and so I think we've had some tremendous success I do want to be clear on net smartpost. It why.
It's about trading out as well you know that's a big part of the strategy. So the customers that understand the value we bring on they've been great partners on that's enabled us to move forward and for those who don't value our speed and our differentiated value proposition as you can see on our gross numbers there were lots of customers who get value that so you know, it's it's not a one.
Size fits all but overall I would say that that the team's done a great job and net come January we've already had on we have a fall gels calendar for January its fall as she moves into peak planning for next year and I think this year has set new precedent that's for many years to come.
And that does conclude todays question and answer session I'd like to turn.
Thank you Mr. foster for any additional or closing remarks.
Thank you for your participation in Fedex corporations second 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 bye.
Once again that does conclude today's conference. We do appreciate your participation you may now disconnect your phone lines.
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