Q3 2021 FedEx Corp Earnings Call
Good day, everyone and welcome to the Fedex Corporation third quarter fiscal year 'twenty 'twenty, One earnings conference call today's.
At this time I would like to turn the call over to Mickey Foster Vice President of Investor Relations for Fedex Corporation. Please go ahead.
Good afternoon, and welcome to Fedex Corporation's third quarter earnings Conference call.
The third quarter form 10-Q earnings release Stat book as well as our economic forecast on our website at Fedex Dot com.
This call is being strained for awhile website, where the replay will be available for about one year.
Joining us on the call today are members of the media during our question and answer session callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
I want to remind all listeners that Fedex Corp 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 forward looking statements for additional information on these factors. Please refer to our press releases and filings with the SEC.
Please refer to the Investor relations portion of our website.
Fedex Dot com for a reconciliation of the non-GAAP financial measures discussed on the call to the most directly comparable GAAP measures.
Joining us on the call today are Fred Smith, Chairman and CEO.
Raj Subramaniam President and COO.
Mike Lance executive VP and CFO.
Mark Allen Executive VP General Counsel and Secretary Rob.
Rob Carter Executive Vice President Fedex information services, and CIO Brie, <unk> Executive Vice President Chief Marketing Communications Officer, Joe Brannan, Executive Vice President and Chief sales Officer.
Don Colleran, President and CEO of Fedex Express.
Henry Maier, President and CEO of Fedex ground.
John Smith, President and CEO elect of Fedex ground and land small president and CEO of Fedex freight.
And now sub Smith will shape share his views on the quarter.
Thank you Becky first I want to say, how immensely proud I am of our Fedex team members.
Since our last earnings call they've completed a historic peak season.
And using the power of our expanded seven day week Fedex ground operations, our team handled record breaking volumes throughout the holiday shipping season.
They also work diligently to clear the backlog caused by the recent severe winter weather in the U S. A.
A 50 year on debt.
They work lightened day to move the backlogs quickly and as safely as possible. This includes the many team members, who typically perform other duties and volunteered their time to help.
We are sincerely grateful deny them into our customers for their understanding as we navigated the effects of.
These massive winter storms.
Our team members are continuing to move the world forward with the delivery of COVID-19 vaccines related ingredients.
And supplies throughout the U S, Canada and the more than 20 other countries around the world.
We did a great job on these vaccines during the weather event too.
Fedex is prepared to transport now vaccines for more than 220 countries and territories.
For as long as necessary to help eradicate COVID-19.
As part of our responsibility to be good stewards of the planet earlier. This month, we announced our bold strategy to achieve carbon neutral operations globally by 2040.
To help reach this goal we focused our strategy in three key areas.
Vehicle electrification, which we've been involved in for over a decade sustainable energy and carbon sequestration natural carbon sequestration.
In this regard importantly, our plan includes a pledge to help establish the Yale shatter for natural carbon capture.
The center will build on the Yale legacy of the school and the environment of World Class Research and education to develop measurable carbon capture solutions.
The initial focus on helping to offset greenhouse gas emissions.
Whoever want to current airline emissions.
Findings will be publishing shared for the businesses industries and governments globally can benefit from this work.
Is it reflected in this quarter's results continued execution of our strategies is producing strong earnings growth and margin improvement across our company.
We expect demand for our unmatched E Commerce and International Express solutions to remain high for the foreseeable future.
I am exceedingly optimistic about the future of Fedex and again.
Very grateful to our team members for their hard work.
I'd also like to thank Henry Maier, President and CEO of Fedex ground, who is retiring at the end of July.
After more than 35 years of dedicated service at Fedex.
Not much more to say about Henry on our next earnings call in June.
Let me now ask Raj Brie and Mike to provide their comments after which we will take your questions Raj.
Thank you Fred and good afternoon everybody.
Q3 was a strong quarter of growth for Fedex, Despite challenging circumstances. The team performed exceptionally well through the biggest peak season in our company's history.
This included delivering nearly half a billion holiday packages transporting the first shipment of COVID-19 vaccines here in the U S and increasing collaboration across operating companies.
Our results speak for themselves in December we achieved the highest monthly totals in our company's history in both revenue and operating profit.
Also in December were different than previous years, we better maximize our available capacity and as Brie will cover in a moment better aligned price is the incremental costs.
Peak 2020 was unlike any peak experienced before and sets a new standard for future peak seasons.
As Fred mentioned, our operations were impacted by last month's severe winter weather throughout the United States, Mike will expand more on the scope and unique nature of these storms.
And I'm sure. Many of you have seen reported in the last couple of days, which illustrate the impact. These storms had on the overall U S economy, including retail sales and manufacturing output.
We implemented numerous contingencies to mitigate the impact, including adding sorts line-haul and collaborating across our network to assist in the recovery.
I'm very proud of the team for managing through this very challenging situation.
Now speaking of the team, we announced that Henry Maier I'll try this summer and named John Smith, former President and CEO of Fedex freight is successor land small former SVP of operations at Fedex freight has been promoted to CEO and we're pleased to have all of these three gentlemen on the call today.
Now turning to Fedex ground.
The outstanding margin improvement for ground in Q3 highlights the success of our ongoing strategic initiatives and investments to improve efficiency and reduce costs associated with the last mile even amid record residential volume levels.
These investments continue to pay off let me share three examples.
Number one we saw meaningful improvement in last mile efficiency as service providers improve their stops per hour, 21% year over year in Q3 <unk>.
Go to the average cost per stop decreased by 12% year over year and.
And number three we maximized our assets.
Spending for seven day operations and integrating ground economy are formally Fedex smart poles reduced our fixed cost for package by 4% year over year.
We remain very optimistic for continued profitable growth at ground.
Collaboration between operating companies continue at an unprecedented rate in Q3 this.
This month marks the one year anniversary of the launch of last mile optimization, which allows us to flex our networks for increased delivery density for residential rural and deferred packages.
<unk> will expand to six more markets effective may the first increasing to 63 markets in total and covering two thirds of the U S. GDP.
Additionally, Fedex freight has delivered more than 1.75 million shipments for ground. So far this fiscal year. This time last year freight have yet to deliver a single ground shipment that's increased support for ground kicked off in may of 2020.
Finally, turning to Fedex Express.
Our global net work is moving COVID-19, vaccines ingredient ingredients and supplies as we speak it has been a coordinated orchestration of our physical and digital capabilities.
At Fedex Express, we expect elevated pricing for at least the next 12 months.
We know however that these prices are not sustainable in the longer term and we will flex our networks appropriately as commercial capacity returns into the market <unk>.
In addition, we will continue to improve our efficiency by executing last mile optimization in transforming our European business.
Europe momentum continues with the physical integration of the TNT network, We recently announced our Europe restructuring program and we are progressing with local consolidations as planned and in accordance with local market regulations.
April will be a big months as we prepare to rollout a set of new services capabilities for our customers, which brie will provide more detail very shortly here.
We will complete their integration in spring 2022, which will bring the physical network integration to a close our Paris hub will be our main express hub in Europe with <unk>, serving as indeed does in the U S. As our second largest European Air hub, we remained focused on optimizing the network and strengthening our capabilities.
Ability to drive upside in Europe for years to come.
In closing Fedex remains committed to delivering long term profitable growth, we have the network the strategy and the right team in place as we build upon the exceptional results we've seen so far in fiscal year 'twenty one.
Let me turn it over to Barry.
Thank you Raj and good afternoon, everyone.
I did state, we are seeing strong growth and momentum.
U S. Domestic parcel market is expected to grow to 101 million packages a day by calendar year 2022 with e-commerce contributing 86% of total U S market growth.
E Commerce as a percentage of U S. Retail sales was approximately 21% in Q4 of calendar year 'twenty significantly above the pre pandemic level.
We remain excited about the diversification and the evolution of the e-commerce market.
Some of our largest retail customers reported e-commerce growth rates in the high double and even triple digits through 2020.
As the U S. Reopens, we recognized the potential for a short term deceleration in E. Commerce shopping. However, we are very confident that e-commerce as a percentage of retail has a long growth runway.
Turning now to peak it certainly was the ship Hassan we predicted a peak upon a peak we had tremendous growth with almost 500 million packages delivered and 19% year over year ADB growth to the global sales and marketing teams I could not be more proud of your execution and the men and the momentum you have created.
FY 'twenty one parcel volume growth remained strong supported by a portfolio of ecommerce solutions growing at double digits.
Of particular note our Fedex ground seven day, a week residential delivery service is one of the fastest growing services and ecommerce with 70% volume growth in Q3.
Overall year to day average daily volume growth remained strong for all customer segments. However, our U S small and medium segment grew 35% through the end of February.
In FY 'twenty, one Q3, Fedex total U S. Domestic residential package volume mix was 70% versus 62% a year ago with the increase of residential packages in our networks, we're focused on improving yield and product mix in FY 'twenty. One Q3, we increased Fedex ground economy.
<unk> by 35% and overall U S domestic residential yields by 15% year over year. It's important to note that ex Crown has formally Fedex smart post.
While E Commerce is the key driver of the overall growth in January our U S Enterprise BW volume was at pre Covid levels.
Turning to our U S revenue quality strategy, we continue to actively pursue yield management product and customer mix strategies. Our primary focus is ensuring large customer pricing aligns to their volume distribution.
We continue to manage capacity at Fedex ground prioritizing, our highest yielding Sam segment as well as our premium home delivery product as we plan for peak of fiscal year 'twenty two our peak surcharges will continue to play a critical role.
Turning now to international.
Global Air cargo capacity remains down 20% year over year as of January and.
And we expect air cargo capacity to remain constrained through the end of calendar year 2021.
We expect passenger capacity to recover but between 55 and 75% of its pre COVID-19 level by the end of calendar year 2021, with a fall of covering not anticipated until 'twenty three or 'twenty four.
From a demand perspective, APAC outbound has recovered to pre COVID-19, while Europe outbound is expecting a partial recovery by the end of 2020, one and a full recovery sometime in 2023.
With these projections demand trends will continue to favor freighters and integrators, we are confident in our ability to maintain elevated deal for at least 12 months.
E Commerce driving significant growth internationally, we will increasingly utilized peak surcharges in our international business.
Finally, we are executing commercial strategies to maintain and grow our incremental volume as capacity recovers.
And your Continental performance continues to be very strong our total international express yield per pound has again seen impressive double digit year over year improvements in all key markets.
<unk> volume by recovering to pre Covid levels in Europe and are fully recovered and Asia, while our overall growth is fueled by significant BTC volume.
During our fourth quarter, we will dramatically enhance our European portfolio average.
David on previous calls with the completion of the road integration last May our European road value proposition already gained significant improvement our customers have been accessing the unparalleled TNT European Road network.
In Q4, we will introduce an enhanced Europe to the U S value proposition for.
Riding an industry, leading next day service to the U S and twice the number of origin countries currently offered.
In addition, we will be launching our new Fedex International priority Express service, giving our European customers to premium services within Europe.
Offering customers choice between overnight by noon and overnight by end of day, we will be rolling out these new service capabilities for our customers over the coming months.
We will also launch Fedex International connect plus from Europe to the United States to Asia, and within Europe, providing the services across more than 200 lanes.
Fedex International connect placer.
<unk> has been designed with features or services targeted to reduce the cost to serve while delivering an outstanding customer experience and is specifically targeted to support our e-commerce customers.
The new European Transport transportation portfolio is brought to market for our refreshed and modern online shipping application that has already rolled out in Europe and across 143 countries globally.
In summary, we have great momentum coming out of Q3 and with that I'll turn it over to Mike for his comments.
Thank you Barry and good afternoon, everyone.
Fedex delivered significantly improved financial results during the quarter as we met the challenges of rising demand and limited capacity during our peak season and overcame severe winter weather in February.
Adjusted operating profit increased 120% and adjusted operating margin increased 210 basis points, primarily due to strong volume growth in U S. Domestic residential package, a 41% increase in Fedex International priority package volume led by Asia and Europe.
And solid execution of our relative revenue management strategies in the face of increasing demand across all of our transportation segments.
These gains were partially offset by for noteworthy factors for.
First higher variable incentive compensation expense of $485 million, including a $125 million special bonus for global frontline team members that Fedex Express.
Second lower revenues and higher costs due to significant weather events that reduced operating income by an estimated $350 million.
Third the estimated impact of having one fewer operating week day, which was approximately $150 million and.
And lastly, consolidated direct COVID-19 related costs of approximately $60 million, which does not capture the many accommodations. We continued to make across all our operations for the safety of our employees and to comply with various regulations and guidelines.
Given its significance I want to add further context around the adverse weather impact.
First we always anticipate and have contingencies for demand and operational impacts during our fiscal third quarter, which spans the most active winter weather months.
The mid to late February events in particular impacted many parts of the country, but where historic throughout the south central corridor of the U S.
The snow amounts in Memphis had not been seen in over 50 years prior to the founding of Fedex and when coupled with a record tying nine consecutive days below freezing had a significant impact on our operations as Fred and Raj mentioned.
Our Indianapolis and North, Texas Express hubs were impacted as well.
Demand was deferred as significant portions of the U S population were impacted by the various weather events.
Of the $350 million estimated impact $240 million at express 85 million of ground at $25 million at freight.
Despite that the express segment reported adjusted operating profit of $514 million with an adjusted operating margin of four 8% up 260 basis points driven.
Driven by a significant volume growth in both international export in U S domestic package as well as higher international priority yields.
In the quarter express absorbed $340 million higher variable incentive compensation expense and was on pace to deliver a record third quarter operating profit prior to the February weather.
Fedex ground had an exceptional peak and third quarter growing operating margin 270 basis points over the prior year to eight 8%.
Operating income of 702 million was the highest third quarter in Fedex Ground's history.
Europe grew 11% while volumes were up 25%, resulting in 37% growth in revenues.
It's more than offset headwinds, including increased payments to our independent service providers higher labor rates and higher variable incentive compensation of $70 million.
As Raj and Barry highlighted our commercial and operational initiatives are yielding and we will continue to yield profitable growth at ground as we capitalize on the e-commerce opportunity.
Turning to Fedex freight operating income increased 5%, despite the impact of increased variable compensation and the weather for.
<unk> continues to post excellent results with their focus on revenue quality aligning their cost structure with current business levels and improving operational efficiencies.
Freight also provided critical peak season operational support to both ground and express.
Our effective tax rate was 15% for the quarter due to tax benefits of $108 million, resulting from a tax rate increase in the Netherlands applied to a deferred tax balances.
And associated with a $300 million voluntary contribution to our qualified U S pension plans.
Now turning to what's ahead.
While there remains a degree of uncertainty as we begin to see progress in combating the pandemic. We are projecting full year adjusted earnings per share of $17 62 to $18 20.
Compared to $9 50, adjusted EPS in FY 'twenty.
We expect our effective tax rate prior to the year end mark to market adjustment to be between 21 and 22% for the full year fiscal 'twenty one.
We expect higher revenue operating income and operating margins on a year over year basis at all of our transportation segments in the fourth quarter, which does include one additional operating week day.
These forecast assume continued recovery in U S industrial production and global trade no additional COVID-19 related business restrictions.
Current fuel price expectations.
With this forecast, we expect higher variable incentive compensation expense in the fourth quarter as we plan to reward our employees for their achievements this year.
The year over year increase is expected to be slightly higher than the third quarter, excluding the $125 million special bonus I mentioned previously.
Earlier, Fred mentioned, our sustainability initiatives, and we will record our $100 million pledged to Yale University in our fourth quarter results.
For express in the fourth quarter, there will be no benefit from the reduction in the aviation excise tax on the cares Act, which expired on December 31.
In addition express maintenance costs will be higher year over year in the fourth quarter as we execute on our flexible air fleet strategy.
Just over a year ago, we shared with you plans to temporarily park the equivalent of seven MD elevens.
Given the increased demand, we are efficiently, adding needed capacity for our customers by investing in maintenance expense maintenance expense to utilize aircrafts from temporary storage.
As of now we plan to have no temporarily parked MD elevens prior to next peak seasons.
This illustrates our ability to flex capacity up or down in a financially efficient manner in response to changes in the market.
Our capital spending focus remains on strategic investments that will reduce our cost structure improve.
To improve our efficiency and increase our capacity to profitably meet market growth demands.
Our FY 'twenty, one capex forecast is now $5 7 billion due to changes in the timing of aircraft payments as well as the acceleration of Fedex ground capacity initiatives.
That project's two roughly six 9% of expected revenue, which is the lowest level in over 10 years.
While we have not finalized our FY 'twenty two plans capital spending will increase as we invest in capacity and proceed with investments in replacement capital previously deferred.
That said I anticipate capex as a percentage of revenue will be 8% or less which remains less than our historical capital intensity.
We will provide more specifics in June.
Looking at liquidity on the balance sheet, we ended the third quarter with $8 9 billion in cash and cash equivalents and on Tuesday renewed our $2 billion of five year credit agreement and $1 5 billion 364 day credit agreement.
The key aspect of our capital allocation strategy moving forward will be strengthening our balance sheet and repayment of outstanding debt.
Given our strong cash flows and liquidity position, we are evaluating potential transactions to reduce and refinance existing debt.
The timing of any transaction will be based on market conditions, and we would incur costs related to these transactions, which may be material.
I'll close by reiterating I have great confidence in our ability to build on the successes. We have had this year as we execute our plans to generate sustainable long term growth in earnings and cash flow.
And with that we can move to the question and answer session.
Thank you.
Ask a question. Please press star followed by the number one on your Touchtone phone. If you are calling for my Speaker phone. Please make sure. Your mute function is off to ensure your signal can reach our equipment.
I ask that you. Please limit yourself to one question and one follow up question again, Darwin and first we'll go to Chris Wetherbee from Citi. Your line is open.
Hey, Thanks, good afternoon.
Maybe you wanted to start on the ground side and understand I guess first around ground pricing too.
Progress has been made so far but wanted to get a sense of where you think you are in the process of re pricing this product for the services that youre offering and ultimately that demand in the market right now and then maybe as we think about how that mix day impact margins as we move forward for your fiscal 'twenty two.
<unk> moved very heavily overweight towards the PTC over the course of the last 12 months.
The growth and maybe that takes a little bit of market share how should that flow through your ground margins.
Thanks for the question, Chris It's free speaking.
From a yield strategy perspective, we still believe we have opportunity from a next perspective as you saw this quarter was probably the most dramatic or not probably was the most dramatic movement, we've been able to make from a product perspective, youre going to see that shift throughout this year as capacity, we anticipate capacity throughout this calendar year.
Or will be constrained and as a result, as I mentioned, we've got a prioritize our Sam growth you heard 35%. It's the best segment performance. We've got from a small perspective, so we're going to prioritize that it will continue to work our yields up in addition to that the Fedex economy product is something that we are very focused on and it will add dramatic.
Yield upside from here out.
Henry.
Hi, Chris Let me take the margin question.
First of all in Q4, we expect our teams to margins to be in the teens.
But let me let me speak to how.
How we see the business beyond that.
First we believe there is considerable operating leverage still to be realized in this business.
Strategic initiatives will help ensure the right packages around the right sort on the right day for on time delivery.
They also ensure that overnight sorts of reserve for next day volume, enabling the right balance of sort capacity in the network.
These are critical capabilities for a seven day network operation.
We're also implementing dynamic scheduling tools to match sort staffing head count more closely to volumes, thereby improving dock productivity.
And our dock expense.
And we're rolling out capabilities for certain upstream volume in the network.
Bypass station sortation and transfer directly to delivery vehicles, freeing up valuable station capacity none.
None of these initiatives require a brick and mortar.
The possible through industry, leading technology.
AI and machine learning and our developed using a safe agile framework and tools.
So with all of that in my view is we continue to transform the Fedex ground business Fedex Ground's Best days are still ahead of her.
Alright, thanks for the time.
And next we'll go to Ken <unk> from Bank of America. Your line is open.
Great good afternoon.
Let me switch over to express and I guess, if you exclude the weather impacts for eight goes up to maybe upper single digits in terms of margin maybe you could talk about the free the return of <unk> to be on the express side. Thank you for anything that you were just talking about ground. Maybe you were talking about pricing starting to disappear in 12 months.
So how do you look at this business you see transitioning back to double digit margins or is there some structural change that keeps that these.
Single digit levels.
I can't it's free I'll start with the pricing and the Yelp element and then turn it back over to Don and Mike from a yield perspective and from a beta b as we mentioned as of January here in the United States, Our <unk> volume was back to pre COVID-19 level.
The mix within the <unk> wasn't what we historically, we have seen it was obviously heavy health care heavy retail heavy attack.
We have not seen it fully come back in the automotive and industrial so we think that there's some upside there when you look at the <unk> volume outside of the United States at a haul holistic level, we're back but Europe is not so we see there still opportunity intra Europe and Intercontinental outbound from Europe. The European team has done a phenomenal job.
A shoring up volume, but it is BTC volume that they've shored up that GAAP with so I still think that there is some beta be upside coming out of Europe still from a yield perspective were for.
Feeling pretty confident in our yields throughout this calendar year from an international express as well as the domestic express there is pressure on the yield from a weight perspective, because of the E. Commerce mix will continue to increase outside of the United States at express. So overall, we're quite comfortable from a yield growth and opportunity perspective.
For the next 12 months and I will turn it over to Mike.
Yeah, Chris as I said this is Mike we certainly in the fourth quarter, we will see margin gains at all three of the transportation segments, you can't get to the guidance that we put out there without <unk>.
That are falling into place as well as the other context I gave you.
And we're highly confident we can build on the momentum here with the strategies and the plans that have been outlined but we're not going to be given forward margin expectations. We will have more to say about our outlook for 'twenty two in June.
Don.
Yeah, Mike and Brie, just add a few things.
To your to your comments one is a garage you had mentioned in his prepared remarks.
But the strength for the quarter.
It was a strong quarter for us highlighted by the best December who we've had in the company's history.
On track to provide that same level of performance for the quarter until the weather here.
Now this is not a comment about would have should have could have but it really is wanted to highlight the strong fundamentals that exist in the express business right now.
We're extremely confident.
All the fundamentals that will continue to deliver into the fourth quarter.
Evidence of what we've seen.
We had $1 $9 billion.
Revenue growth in that quarter, I think our excellent sales team around the globe.
And the wonderful job that the express operating unit did in terms of monetizing and turning that into a strong performance.
As it relates to what we're seeing from a yield perspective.
I agree obviously with brief assessment, where some see some fundamentals in our international business.
The other quite clear to us in the short medium and maybe in the longer term one inventory levels remain low.
Supply is soft and.
And demand is very strong and we think that demand is going to even increase.
The stimulus checks come into the marketplace. So we think if you look at it in terms of our Tri factor of those fundamental economic issues that we have should continue to benefit us, especially in our international business going forward.
Thanks, Bob appreciate it.
Yeah.
And next we'll go to Allison Landry from Credit Suisse. Your line is open.
Okay. Thanks, Good afternoon, sorry, I was on mute.
Just.
For a little bit more of a ground revenue per piece.
And specifically I think for a brie, our Halloween could you maybe talk about or breakout for constantly.
No.
The other day from base price for us.
Peak for charges and then mix.
I guess, what I'm trying to think through it.
Part of that think about the sequential.
Yield change in Q4 normally I think it's up about 4%, but obviously, maybe the peak surcharges fall off you have some incremental surcharges and price.
Just looking for a little bit of context.
Breaking out the contribution from other different pieces there. Thank you.
Hi, Allison for.
From a pricing strategy perspective, obviously, the vast majority of our <unk>.
Volume is on highly complex contractual agreements and so its quite difficult.
Streamline and break that out for you right now, but what I will tell you is for a Q3 perspective. When you saw really is very much focused on Fedex ground economy product, we know the spread between the Fedex ground economy, and our Fedex ground home delivery product that yield spread historically has been too wide. So we are.
Very focused on prioritizing capacity at the higher yielding home delivery product and so youre going to see two things happen, you're going to see us get more capacity to home delivery at higher yield and youre going to see us increase the yield throughout this calendar year, both through peak surcharges as well as through.
Gi strategies and quite frankly, just contractual discussion. So that's really our focus is closing that gap prioritizing capacity for home delivery and making sure we've got capacity for our small and medium customers.
Okay, and just any color on sort of.
For peak surcharge impact was in Q3 for the dollar perspective or a percentage perspective.
Yeah.
We're not going to give that out at this time Allison.
Okay.
Yes.
And next we'll go to Jack Atkins from Stephens. Your line is open great.
Great. Good afternoon. Thanks for taking my questions. So Mike I guess, maybe this one's for you when I think about the fourth quarter implied guidance.
Historically you see.
Fairly significant ramp in earnings from the third quarter to the fourth quarter and when you normalize for for the weather and the lower tax rate.
Your guidance implied guidance is for maybe a 17% increase in earnings from third quarter to fourth quarter typically at $50 to 60%.
I'm just curious if maybe if you can walk us through some of the puts and takes there or is it a factor of just the broader economy and some uncertainty there just some conservatism in general just can you help us think through the implied fourth quarter guidance and why you wouldn't see more of a normal seasonal ramp there. Thank you.
Jack I'm not going to get into day Comping all all of the.
Puts and takes that come into seasonality I guess I would refer back to what I mentioned and effective tax rate for the year of 21% to 22%.
That implies a higher tax rate in Q4 that are typically you can you can rule of thumb for a full year statutory federal rate is 21%.
We are for for state and other sorts, so 25 on a.
A kind of normalized basis, but as a as we've mentioned on the calls we have had about $300 million of discreet.
Events through year to date in Q1 to three.
So I.
I think when you when you kind of normalize for that and look at our underlying operating performance. There. It is a it is a very strong Q4 and I'll leave it at that I talked about some of the other.
Elements that will play into Q4 earlier, so I won't I won't rehash, those but I think when you had.
One other piece it altogether.
It'll be a very solid operating Q.
Q4.
Okay. Thank you.
Okay.
And next we'll go to Jordan <unk> from Goldman Sachs. Your line is open.
Yes. My question when you think beyond the fiscal fourth quarter of this year and for the next fiscal year.
You start getting tougher.
Other volume comps, especially in ground is your expectation all debt with e-commerce for our continuing even at a decelerating pace that you can still grow.
All volume levels.
Sure.
Year over year.
I guess the short answer is yes were anticipating that the market growth, 90% of the market growth is going to come through E. Commerce, We've got a long term outlook at more than 10% CAGR from an e-commerce perspective for the Shannon a short answer is yes, and Mike I'm sure would like to add something.
Yes, Jordan.
We're through a lot of numbers at you bet as Brie mentioned, we went from 62% to 70%.
Residential.
Mix and Fedex Ground's margins were up 270 basis points.
So I think that speaks to how we plan to execute on the continued growth of e-commerce.
Yes.
And of course, we will be giving.
And FY 'twenty two.
Earnings forecast in June.
That has been something that has not been available during the pandemic.
From a lot of companies, but with the forecasted Mike just gave you for the fourth quarter you would anticipate.
Full year FY 'twenty to range at our June call.
Okay.
And next we'll go to Brandon <unk> from Barclays. Your line is open.
Hey, good afternoon, Thanks for taking my question.
Mike can you talk to the outlook.
How do you think capex is going to be below 8% of revenue.
Sure.
Thank you both for Amit.
Project I think you mentioned accelerated.
Some of the ground investments.
Brandon you broke up a little bit, but if I.
Understand asking about the Capex references.
So <unk>.
As we said volume grew 25% at ground and so as we came through December evaluating and looking at what's ahead and the opportunity there we see that as opportunity.
Also.
If you look at our when you get the chance to look at the Stat book in terms of the maintenance Capex you can see that our.
Facilities and vehicles, we deferred a lot of that this year. So there will be some amount of those that are going forward as well. So we'll be we'll certainly give you more specifics on that when it comes to June.
Yes, Mike I guess I was asking.
For the longer term context, what are the type of return.
This project.
I think the question is about returns you broke up again.
I will say with with very absolute confidence that all of these investments, we're making will generate a solid return on investment just as the investments. We've made in the last few years are showing results today.
Thank you.
And next we'll go to Matt.
Maritime from Deutsche Bank. Your line is open.
Thanks, Operator, hi, everybody.
Henry I was hoping I could ask you about current margins.
I think the key question.
Discussion point with all of that.
Is the long term outlook for ground margins given the secular shift the BDC and the density challenges that obviously come with that for you guys have made.
Incredible progress on pricing.
And operation.
I was just wondering if you can update US you gave a little bit of it last quarter, but hoping you can update us on what you think the sustainable margin for.
Brown for ground business are on an annual basis.
And then when do you think you can get there and just related to that you guys called out $350 million of weather.
Hoping you could talk about what the what the attribution to ground business less than that.
Thank you.
Matt This is Mike as I said in my remarks.
$85 million.
The.
Of the graph of the weather was ground.
Again.
We've said, we've given your fourth quarter guidance, we'll have more to say about future outlook.
For FY 'twenty two in June.
But we're very confident of our ability to build on the momentum of generating increased returns and profitability at ground.
Can I ask it another way then since it's the same question in the spread between price and cost in ground was in excess of 300 basis points for package as BBC.
Recovery is there any reason why the spread.
Between price and cost per package should moderate over the next four to five six quarters.
Well I think the last two quarters, we've given you some guidance on what we've seen unit costs do as we move through the pandemic and we move through the shift.
And the mix of our business.
<unk>.
Obviously, we're going to lap.
Some of those results, but we've had significant reductions in.
Our unit costs as we as we've gone through the last year as a result of many of the strategic initiatives, we've outlined here and Lauren frankly in Ross's comments.
We continue to see considerable operating leverage in the business and we would expect margins to improve over time.
Thank you very much appreciate it.
And next we'll go to Tom <unk> with UBS. Your line is open.
Yes, good afternoon.
Let's see I wanted to I think one other questions it seems to come up.
Learn about potential you have.
That strength in international weighted.
Total for express.
Some of that profitability is going to go back.
Goodbye.
Presumably that's not very quickly and debt.
We retain a portion of it.
I wanted to see if you could give us a sense of the potential offset.
From your cost initiatives.
Those numbers if you look at a couple of years are they potentially.
In the same magnitude.
Thinking in particular of integration.
Shipments for express and ground that that's helpful on the cost side and potentially TNT and maybe do you have other things in line.
Thank you.
Okay.
So Tom this is Raj.
I'll address it overall obviously.
Possible to give out numbers.
The individual items that you just talked about however.
Adjusted broadly, but for saying that that the capacity and the commercial carrier passenger carriers, we don't expect it to come back in the next 12 months, maybe more and we expect that premium to remain for that period of time.
Even if it does come back we have the opportunity to do flagship flex our networks we can.
We have demonstrated the capability to flex up and we will be able to flex it down as needed and.
They become our partner networks to move deferred traffic certainly theres a lot of activity that's going on to continue to improve margins.
Fedex Express transformation in Europe is one of the expansion of last mile optimization is another and various other activities. So we feel very confident about the future of our express.
Around the World I don't know, Dan if you want to add anything more to that.
I think you hit a garage, but clearly we have a playbook.
Margin improving margin expansion in both our domestic and international business.
I think you touched upon it I did in my earlier comments about why we're confident over the medium term.
The supply and demand curve works in our favor.
<unk>.
This is lightning, we can think youll continue to remain that way.
Will people start traveling again and an intercontinental basis, we don't think that happens for the next 12 to 18 months because of the various levels of quarantine restrictions.
All parts of the globe.
We're working with one of the things that.
I would want to highlight to you didn't talk to as last mile optimization plans and the impact that that has on our margin I think our chairman says.
Density is our destiny.
We can continue to improve the density and the EBIT around networks.
It's very much margin accretive we're celebrating the one year anniversary coming up on last mile optimization, working very closely with with Henry and his team were driving a significant amount of volume.
Through the ground network and that those numbers are accelerating on a sequential week over week month over month basis. So theres a lot of levers that we can pull.
In our business the European transformation the domestic transformation.
We are.
Multiple playbooks in play as we speak to continue with our margin improvement and expansion.
Let me add something to that.
The Alamo the Alamo.
Initiative.
Benefits in.
In two ways one it takes.
Lower yielding.
Residential packages and differed packages and rural packages out of the express network.
Lowering the express system to concentrate on the high priority B to B and the verticals, particularly those that.
Require our ancillary services like <unk>.
<unk> D, which is on every single.
Box of vaccines that we're now delivering I mean, it's almost been flawless the.
Execution of that.
Can count on your hand, the number of the issues with.
The number of <unk>.
Actions, we have delivered in the millions.
<unk>.
So express is able to be more express.
And B to C and the.
For less dense areas more cost effectively serve so it's not just one sided it helps on both sides, which is what Don mentioned about the density.
Because as we give more residential packages that are not express in nature time definite for.
Or something and somebody needs and our residents are express has to deliver that helps graf.
Density is cost as asset utilization.
And I think one other things that I listen to these calls.
The last call. We had 13 13 questions on ground margin I don't know, we're not gonna have 13, this time, but we probably got half a dozen so far.
That would be close.
One other things Thats, that's hard for us to communicate to this group as Henry has mentioned is the fantastic.
Fact of this technology that we've been rolling out we don't.
You know.
Advertise it all the time, but Rob and his team and some of the fantastic work, we have going on in other ways. That's why the confidence level is so high that we can achieve these things in the future.
So what you all want us to do is to give it to you in our quarterly forecast and so forth, but some of the numbers that Raj laid out there for you I mean, there are stunning.
And the productivity improvements.
So.
I think it's important to look a bit at the bigger picture of some of these things.
And finally I'll say.
We have a plan to improve express margins with a lot of passenger capacity in the marketplace.
And our plan to improve it without a lot of passenger thing in the market, it's not an either or situation.
And so those are the two recurring questions that come up in these calls.
E Commerce is going to go.
Back because everybody.
<unk> is over and your margins arent going to get better and we're not going to do well in express because of passengers coming back those are inherent in most of the questions. These last two calls both of those are wrong. So.
I felt I had to step in and filing a dropdown to <unk>.
Answer any question, but youre going down the rabbit hole on both of those areas.
If I can do it.
Of the one of the I think it looks like the magnitude seems like they are pretty big programs in pretty favorable. So I think my question was just trying to understand.
If you're going to give us a sense of the magnitude at some point, but they may I mean, what youre doing make makes a ton of sense it seems to be.
A big factor in the results.
Anyway.
Thanks for all the perspective on them.
The next day.
From Evercore ISI your line is open.
Hey, I guess that rolls out asking seven more ground questions.
Just just a couple for me how much of that $350 million is cost versus volume pushed out into this quarter.
Well I will tell you most of the 350 million was revenue related we did have incremental costs at express for of course beyond normal expectations for de icing and snow removal.
Additional labor costs, and then I think a couple of you have noted that we had a significant event with one of our facilities in the Netherlands, there as well with a roof collapse. So that that is a net cost that was in the number as well but the.
Principally it is revenue from that and I'll, let <unk>.
Brie talk about.
The overall evolution.
Where we are now yeah.
I guess the best way to think about March is the fundamentals are back. So we're very confident if we take February our fundamentals look a lot like they did in January would be to be a strong F&B is back ground in good shape. So it was February revenue, but we feel very confident about the fundamental for March.
And then just a quick high level on on vaccine distribution I Wonder if you could talk about any surprises versus your initial expectations either the level of activity you've seen.
This segment is being utilized and thanks for taking the questions.
Thanks for giving me at all.
Turning to brag on my team a little bit so I guess, if there's any surprise me and it shouldnt have as Alan.
Amazing the team is provided this exemplary service Richard Smith and his organization have done yeoman's work to make sure that these vaccines moved through our network as Fred said at extremely high level of efficiency.
Handful if that shipments that did not meet service I think what's important to note, though when we talk about the vaccines.
Not the raw in absolute numbers that move.
Our network in the Grand scheme of things when you look at almost 20 million packages a day moving to our network. This represents a very small portion of that but what is important to note is the profound impact that these shipments have when they get to destination.
And it really just validates our purpose and it's one we take very very seriously the model lives that we potentially save them. Other people, we put back to work amongst small businesses reopen the borders that can can reopen back to normal levels. That's really the story on vaccines and that's what we're most proud about.
So I guess the surprise it really shouldnt have been.
The amazing work that our team has done to to galvanize and be energized around this purpose and they take that purpose very personally.
For every morning.
Thinking about the mission that we have to get these vaccines to market. So we can get them and folks are so.
I couldnt be more proud of the team and the weighted brought these vaccines to market globally. So.
Thanks for asking that question Yeah. Let me also jump in on that I couldn't wait to.
This is one of the most important work that.
That we have done and to do the work to be honest you need a network and by that I mean are you able to pick it up in any one part of the world and deposit and then the other part of the world in a couple of days. So that requires a network and only a couple of people are going to actually do a couple of companies can actually do that and we do that very well, but you also tied to it.
Technology component the sensor what I'd that Fred talked about that as we roll that out last year.
Perfectly timed for the vaccines provide unprecedented visibility and we also launched Fedex round last year, which provides.
Mmm <unk> predictive capability of what is going to happen you put it all together, we have the best service possible and as the chairman pointed out extremely low level of failures. So again, we are very proud of this work and continue to do our part and and ending this pandemic.
And next we'll go to Allison <unk> from Wells Fargo. Your line is open.
Hi, Thanks for taking my question just wanted to circle back on the New service capabilities that you talked about with international is there a way to help us understand or quantify sort of end market for youre expecting there Phil.
What drove the development of those products and any thought on sort of Max I'm, assuming it would be sort of at a better mix business for you longer term any thoughts there.
Sure. So I think when you think about what we're going with what we have going on in the fourth quarter, we really actually have three kind of expansion from a service perspective, we will have how should we do have the fastest intra European ground network.
As we completed the TNT ground network integration that will provide growth both from a <unk> perspective, as well as a b to C perspective. So we are absolutely looking to take share intra Europe, and we see that with the fastest network in your App. We're confident we can do that when you think about the intercontinental we actually today.
Have the leading value proposition from Europe to the United States and we're going to double that so we are going to have a dramatic advantage over both U P. S. N D. H out we're adding nine origin countries. So it's going to allow us to really expand both our b to b share as well as our beta see sure.
Outside of the major markets in Europe, and then third as you were talking about F. ICP. The same story outside of the United States is playing out everywhere in the world with more than 85% of our parcel growth opportunity coming in E. Commerce, and we did not have an international product that really had the right features or services for surveying.
This massive growth opportunity and we are underpenetrated full disclosure, we are behind both DHL and <unk> in this market today. So we see there only upside when you think about F. ICP. Its features or services are different from our core <unk> products and a couple of ways number one we've changed the clearance capabilities. So we now have low value clearance capabilities and what.
We call type 86, which makes it a lower cost entry for the customer we are automating our clearance capabilities, which reduces the cost to serve we are changing the terms and conditions on a number of attempts that we will make at the last mile and of course for rolling out retail access points in Europe as well so that we can provide that.
Access directly to retail again lowering the cost to serve so in all three of these segments. We believe we've got market share upside, but probably most specifically on the overnight services to the United States at the <unk> play.
It's a rapidly growing opportunity for E Commerce, I hope that helps clarify that.
Great. Thank you.
And next we'll go to Scott Group from Wolfe Research. Your line is open.
Hey, Thanks afternoon, guys. So Mike you just had a few questions for you you've been highlighting incentive comp for last few quarters. If we have more of a normal earnings growth year next year is more of a normal incentive comp headwind.
Taking my question then the corporate eliminations line has grown for like a run rate of about $1 billion a year I think there's been a bunch of COVID-19 losses in there is that something that should start to normalize to be less of a loss.
In the future.
Well, Scott one thing that I would mention in the corporate unallocated line is.
We've mentioned previously Fedex.
Ex office results are in there and the related revenue, while Adv is up spectacularly at Fedex office. The print related revenue is significantly related impacted by the pandemic.
So as we start to come through that we would anticipate we will see some improvement there.
On the variable comp.
I guess, what I would say to you and that is we wouldn't anticipate that to be a headwind looking at FY 'twenty two.
Hope that helps.
Thank you.
Okay.
And at this time I will turn it back to management for closing remarks.
Thank you for your participation in Fedex Corporation third quarter earnings Conference call.
Please feel free to call anyone on the Investor Relations team. If you have additional questions about Fedex. Thank you very much.
Yeah.
And that does conclude our call for today. Thank you for your participation you may now disconnect.
Okay.
Yeah.
Okay.
Yeah.
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