Q4 2021 FedEx Corp Earnings Call
Good day, everyone and welcome to the Fedex Corporation fourth quarter fiscal year 'twenty 'twenty 1 earnings conference call. Today's call is being recorded at this time I will 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 fourth quarter earnings Conference call.
The fourth quarter earnings release, and Stat book are on our website at Fedex Dot com.
This call is being streamed from our website, where the replay will be available for about 1 year.
Joining us on the call today are members of the media.
During our question and answer session callers will be limited to 1 question in order to allow us to accommodate all those who would like to participate.
I want to remind all listeners that <unk> 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.
For additional information on these factors please refer to our press releases and filings with the SEC.
These refer to the Investor relations portion of our website at Fedex Dot Com for reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.
Joining us on the call today are Fred Smith, Chairman and CEO.
Raj Subramaniam President and COO.
Mike <unk> executive Vice President and CFO.
Mark Allen Executive VP General Counsel and Secretary.
Rob Carter Executive VP, Fedex information services, and CIO Brie, Crary Executive Vice President Chief Marketing Officer, and Communications Officer.
Brandon Executive VP and Chief sales officer.
Don Colleran, President and CEO of Fedex Express, John Smith, President and CEO of Fedex ground, Henry Maier, former President and CEO of Fedex ground and land small president and CEO of Fedex freight.
And now Fred Smith will share his views on the quarter and year.
Thank you Mickey.
Fiscal 'twenty 1 was.
Truly unprecedented and were enormously proud of our 570000 team members who performed.
I've never certainly to keep global healthcare industrial and at home supply chains open and more recently allowed significant additional commerce to flow.
The Fedex teams role in moving P b vaccines and international really shipments.
It has been perhaps this company's finest hour.
Our financial results speak for themselves Raj and Mike will have more to say about the numbers of course.
Our pride in the Fedex team and our performance for shareholders as greatly tempered however by our continuing grief over the 15th April senseless murder at Fedex ground facility in Indianapolis.
8 Fedex team members.
Earnings are among their families friends and colleagues throughout Fedex can never be erased Raj.
Raj will also comment on this tragedy in a moment.
The strategies, we have executed over the last several years, we're carefully developed.
And I've been executed at a high level with great success overall as.
As we mentioned previously the pandemic simply brought many of the market trends, which informed our strategy forward.
Larry will be more specifics about these trends in a moment.
And it reported Fedex revenues for FY, 'twenty, 1 where 84 billion and we project FY 'twenty 2 revenues over 90 billion.
We believe Fedex margins will continue to improve this fiscal year.
However, as Raj will cover momentarily the labor market in the U S over the last several months.
Has been quite challenging adversely affecting hiring and leading to significant reengineering parts of our networks to deal with the lack of these resources.
And while a situation that has begun to abate delivering a successful peak season, when we anticipate significant.
Year over year volume increases will require additional flexibility and creativity on the part of our management staff and frontline team members, while maintaining our safety above all culture.
To handle future ground volumes, we are significantly increasing capacity to deliver both great service and.
And improved financial results.
This summer we are intently focused on improving network and delivery operations prior to the volume surge in the fall.
There's great focus on revenue quality at Fedex.
However, our focus solely on yields does not give a complete picture of our profit upside.
As Brie will explain our alliances with retailer partners generate significant amounts of short haul traffic.
Much of which is now ship from stores.
Our innovate digitally initiatives are gaining steam, particularly surround and sensor wear.
Let me, thank Henry Maier for more than 34 years.
Loyal and dedicated service to Fedex.
And Rps, which we acquired in 1998.
At the conclusion of this call I'll have additional comments about Henry's remarkable career and countless contributions to Fedex as growth and success.
A further note the Biden administration has recognized an exceptional talent and our board member General Crusher English who was confirmed by the Senate last week to serve as the National Cyber director weed.
We benefited from Christmas Cyber security and information technology expertise.
Since he joined our board in 2015, and we wish him well in the hugely important role for which he is been tapped now Raj Brie and Mike will give their remarks, after which we will answer your questions Raj.
Thank you Fred and good afternoon, everyone.
As Fred stated, we continued to moan the tragic loss of 8 team members skilled at Fedex ground facilities in Indianapolis on April 15th.
Let me take a moment to remember each team member we lost that day.
Matthew are Alexander.
Some ARIA Blackwell.
Or G jehol.
Just when their power.
Argued zircon.
Just windows thing currently Smith and.
John why is that.
Our most heartfelt sympathies and condolences remain with the families team members and friends of these individuals.
They will forever be members of the Fedex family.
Now turning to our results fiscal year 'twenty, 1 was a pivotal year for Fedex has to be delivered incredible financial performance, including record revenue and profit in Q4 and for the full fiscal year. This is a no shock measure due to the outstanding work by our global team members that may take.
This opportunity you said, thank you for the Fedex team, especially those on the Frontlines for going above and beyond the call of duty in these difficult times when I look back at fiscal year 'twenty, 1 I'm proud of the role of Fedex played in saving lives, helping small and medium businesses get back on their feet and keeping the globe connected.
The exceptional financial performance was driven by a robust growth strategy and focused execution on 3 key areas E Commerce operational excellence and digital innovation.
You can take a moment to highlight each strategic focus area and the progress made in Q4.
Firstly e-commerce, the acceleration of trends experienced in fiscal year 'twenty, 1 highlight the importance of our ongoing strategic initiatives to win globally. In E. Commerce. This includes Fedex ground 7 day operations investing in technology to optimize last mile deliveries expanding capabilities to better handle.
Large items.
Offering the first Fedex, Brian did through the door service with Fedex freight direct and accelerating the expansion of our retail convenience network.
Ground's full 7 day operations, including weekend residential delivery coverage now reaches 98% of the U S population on Saturdays at 95% on Sundays give us a distinct competitive advantage.
We're working very closely with customers to leverage the full flexibility of weekend operations. So they can meet the demands of E. Commerce every day of the week.
This is evident in the growth we saw in ground Sunday deliveries with 56% more packages, Delaware on Sunday in Q4 than last year.
We are also winning in e-commerce outside the United States by leveraging the strength of our global networks and the expansion of our portfolio Brie will cover additional details in this regard shortly.
The second strategic focus area is operational excellence, our competitive advantage in the marketplace is fueled by a relentless focus on operational excellence and customer service.
While the service is a hallmark of Fedex like many businesses, we are facing challenges with labor availability, which have contributed to recent service levels that do not meet our own high expectations of the quality, we expect to Delaware to our customers.
The inability to hire team members, particularly package handlers is driven wage rates higher and creates inefficiencies in our networks as we use over time to cover opened shifts and route volume around known constrains just as a few examples.
As such we're taking bold actions across the business to address service issues and prepare for sustained volume increases, including continued investments in people capacity and technology to optimize our networks.
Fedex ground strategic focus on efficiency continue to reap benefits in Q4 as seen in our ongoing improvements in density. These.
These improvements are driven in part by both B to B and B to see volume growth as well as enhancements and route optimization technology.
<unk> drove up the average number of stops those service providers made per hour by 3.6% versus Q4 of the previous fiscal year.
Along with the revised service provider e-commerce rate structure. These efficiencies contributed to a 3% reduction in cost per stop compared to the same quarter last year.
Further collaboration to improve efficiency continued across our businesses as we expanded our last mile optimization program. In addition, Fedex freight provided approximately 70 million line haul miles and delivered 1.75 million packages for ground in fiscal year 'twenty 1.
Another significant opportunity and further enhancing our operational excellence is the improvement in the profitability of our international operations, which starts in Europe with the completion of the physical integration of TNT.
While the TNT integration has seen its share of setbacks, including a 2017 cyber attack and the delays due to the pandemic we are.
Sutton of the value this combination creates for the Fedex of the future.
The European restructuring announced in January 'twenty 'twenty, 1 is set to deliver 275 million to 350 million in benefits on an annual basis, starting in fiscal 'twenty 'twenty 4.
The cost of the severance benefits under this program, which will be incurred through fiscal 'twenty 'twenty 3 will be in the range from 300 million to $575 million in cash expenditures.
In Q4, we introduced overnight service from Europe, connecting 90% of European businesses to major U S markets. It's an unparalleled next day connectivity that nobody in the marketplace matches.
As you can see we continue to enhance value for our customers while restructuring our European business.
Said simply.
Upside in the profitability of our international business is tremendous.
Finally, our third strategic focus area digital innovation.
We are re imagining our digital capabilities and infrastructure in a manner that will deliver market leading customer experiences that are simple personal and proactive we made great strides in fiscal 'twenty 'twenty, 1 as we continue to drive new value through strategic technologies, including increasing capabilities and products.
Through sensor based technologies, like Fedex sensor, where I D and <unk>.
X surround which provide unmatched visibility and predictive capabilities, most notably seen during the transportation of lifesaving COVID-19 vaccines.
Building off shop run our integration and Adobe Magenta extension to enable a more open e-commerce ecosystem.
And furthering development of our portfolio of services and the autonomous vehicle space as illustrated with ongoing or OXXO testing in this month's announcement of testing with neuro.
In fiscal 'twenty 'twenty, 2 we'll continue to deliver on our strategy around E Commerce operational excellence and digital innovation as we execute on the following key initiatives.
First we expect to substantially increased capacity for this peak by investing in Fedex Ground's infrastructure with the addition of 16, new automated facilities and the implementation of nearly 100 expansion projects at existing operations in key technological enhancements.
Second we will complete the air network integration in early calendar year, 'twenty, 'twenty, 2 which will bring the physical TNT network integration to a close and provides the inflection point for long term profit improvement in Europe.
Next we are exercising existing options to purchase 20 additional 767 apps 10.
<unk> for delivery in fiscal year, 'twenty, 4 and 10 for delivery in fiscal year 'twenty 5 as we continue to modernize our fleet and improve service to our customers.
And we finally continue to identify areas to adapt collaborate and utilize different elements of our global network to increase efficiency and reduce cost to serve.
Our networks and capabilities reflect decades of investment innovation and expertise that are differentiated from our competition, it's incredibly difficult to replicate and provides a significant advantage over others in our industry.
When we net it all back together despite some of the cyclical factors, we remain very confident for fiscal year 'twenty, 2 and beyond that.
The e-commerce market will continue to be a growth engine globally, and if anything has become clearer over the past year is the contribution of our industry provides to the ecommerce value chain.
We remain focused on differentiation building customer solutions and improving revenue quality is critical long term liver so profitable growth in.
In addition, the transformation efforts in Europe, and U S. Domestic was generally generate margin improvement opportunities.
And finally, we're just getting started on unlocking value with digital innovation.
A robust growth strategy position Fedex to deliver superior sustainable financial returns and drive shareholder value for years to come.
With that I will turn it over to Marie.
Thank you Raj and good afternoon, everyone.
In a year of extraordinary challenges and change for our business I continue to be immensely proud of the team's ability to execute our commercial strategy well developing solutions to help our customers grow their businesses.
Before I move into fiscal year 'twenty, 2 I wanted to reflect on our truly exceptional results of 'twenty 1.
Fiscal year 'twenty, 1 parcel volume was very strong across our portfolio of ecommerce solutions.
Average daily volume grew across all our customer segments with U S small and medium leading the way at 32% year over year growth.
E Commerce also drove 28% year over year growth in our returns business through April.
As more consumers shopped online enrolled Fedex delivery manager users grew by 43% year over year.
With this backdrop and the momentum from fiscal 'twenty, 1 our fiscal 'twenty 2 outlook calls for robust growth.
Enterprise growth in fiscal year, 'twenty, 2 will be primarily driven by U S. Domestic ecommerce growth followed by strength in B to B and international and our focus on revenue quality.
In the United States, the flourishing U S. Domestic parcel market will continue to provide opportunity in the coming years. The U S. Domestic parcel market is expected to surpass 107 million packages a day in calendar year 'twenty 2.
With e-commerce contributing 88% of your total U S market growth.
Excluding Amazon volume the U S. Domestic parcel market is expected to be 72 million packages a day in calendar year 'twenty 2.
As we look beyond calendar year 'twenty, 2 we forecast that the U S. Domestic parcel market will reach 172 million packages a day in calendar year 2026.
In fiscal year 'twenty, 1 Fedex total U S domestic residential package volume mix was 67% versus 62% a year ago.
As we look beyond this fiscal year, we expect residential volume volumes to grow significantly faster than commercial volume.
However, with retail inventories relative to sales at historic lows, we expect solid day to be volume growth this fiscal year.
In fiscal year 'twenty, 2 we will continue to execute against our revenue quality strategy.
In fiscal year 'twenty, 1 Q4, we increased Fedex ground economy yields by 28% and overall U S domestic residential yields by 16% year over year.
It is important to note when reviewing composite U S domestic yields that weights in zone will decrease putting pressure on yields as we grow in E. Commerce, we are managing total network profitability.
Short zone E Commerce, and our Fedex ground economy service will enable us to sweat our assets and maximize sortation capacity.
Within our pricing strategy, we continue to prioritize capacity for commercial and small and medium customer segments.
To support the network of net ongoing capacity constraints, we have increased our peak surcharges I as of June 21st and well monitor and adjust our strategy as capacity and demand warrant.
We will continue to confidently renegotiate our large customer segment contracts to increase profitability. This means balancing product day of week and lane Max at the customer level, while ensuring appropriate surcharges in rate increases to cover rising labor costs.
Most large customer contracts in the U S or 3 years.
Almost half of our total large segment volume had pricing agreement implementations in the past 12 months, leaving upside from fiscal year 'twenty 2.
Now turning to international Global trade volume has surpassed pre pandemic levels and is on course for its fastest year of growth in over a decade.
Global Air cargo capacity remain down 10% year over year as of April mainly due to the reduction in passenger belly capacity.
We expect air cargo capacity to remain constrained through at least the first half of calendar year 'twenty 2.
Recovery will be slow potentially episodic and a full recovery is not anticipated until 'twenty 'twenty 4.
We believe a favorable pricing internationally should continue through fiscal year 'twenty 'twenty 2.
We will continue to manage demand internationally using yield management and continuation of peak surcharges, especially on Trans Pacific and Trans Atlantic lanes, we are seeing a very good capture rate on these surcharges.
Well peak surcharges played a significant role in our international performance in fiscal year 'twenty..1 it was not to the majority of our revenue growth in fiscal 'twenty..1 we improved parcel in priority Max versus freight and economy grew our small and medium customer base, while penetrating ecommerce.
In fact, we grew ecommerce parcel volume I'm more than $1 billion year over year out of Asia and Europe.
To a large extent due to its lightweight nature and limited relative line haul capacity requirements, we were able to price E. Commerce very competitively I believe that e-commerce volume as a result is quite sticky.
That being said, we continue to refine our commercial and network strategies to be prepared for when commercial capacity does come back.
Overall demand for exports from Asia have recovered to pre COVID-19 levels in fiscal year 'twenty..2 our network plans include sex Intercontinental daily frequencies from Asia to provide more consistent predictable capacity based on our demand forecasts.
This will eliminate some of the AD hoc nature of our flights in fiscal year 'twenty 1.
Intra European BW volumes have recovered to pre COVID-19 levels, while our growth has further accelerated by significant b to C volumes on our Intercontinental lanes.
With reduced pandemic related uncertainty in industrial activity on the rise we expect the overall European economy to be back to pre pandemic levels in late calendar year 'twenty 1.
Raj covered our new European value proposition customers are very interested in both our new Europe to U S overnight service and e-commerce product expansion on.
On the Europe to U S Lane, we have strong demand.
With a healthy mix of small and small and large businesses.
We have deployed incremental capacity to serve this high yielding segment.
Our e-commerce value proposition anchored by our new Fedex International connect plus product is very compelling we continue to gain new customers and have a very robust sales pipeline.
In summary, we had a stellar fiscal year 'twenty, 1 and the strategies. We have in place will help us to win what's next in 'twenty, 2 and well beyond with that I'll turn it over to Mike for his remarks.
Thank you Barry and good afternoon, everyone.
Our fourth quarter and fiscal 'twenty 'twenty, 1 results reflect the tremendous momentum in our business and reinforce our growth strategy and investments across our network to grow our capabilities improved collaboration and drive efficiency.
Our full year results include over 1 billion in variable incentive compensation expense as we reward our team members for their invaluable contributions.
In the fourth quarter Fedex continued to drive higher profitability with increased margins across the board <unk>.
Consolidated revenue grew 30% year over year in the quarter, while adjusted operating income was up 117%, even with higher costs to support increased demand increased variable compensation expense of $380 million and our previously announced 100 million dollar contribution to Yale University to support our carbon neutrality goals.
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Drilling down into those numbers the rise in U S. Parcel volume was the greatest driver of our revenue growth and through the incredibly hard work and ingenuity of our team members. We took a significant portion of that revenue growth to the bottom line.
Ground revenue grew 27% in the fourth quarter with operating margin, increasing 310 basis points to 13, 6%.
Ground substantially improve margin and earn the most operating profit in their history.
As our international business in E Commerce in the U S continued to grow express revenue grew 32% over Q4 of last year with adjusted operating margin up 340 basis points.
Freight blew out this quarter with 38% revenue growth and their highest quarterly operating margin ever at 16, 1%.
They also topped 1 billion and operating income for the full year for the first time.
With our overall profit growth, we generated a record 4.6 billion and adjusted free cash flow, while balancing continued investment in the business funding, our pension plans by $300 million and strengthening our balance sheet.
During the fourth quarter, we executed a debt refinancing and extinguishment transaction underscoring our focus on reducing our financial leverage.
In the fourth quarter, we reduced our outstanding debt by $2.6 billion or 11% of the total outstanding liability, eliminating all debt maturities through FY 'twenty 5 and 1 in FY 'twenty 7.
This transaction resulted in a $390.593 million charge in Q4, however, it will lower our interest cost over the next 3 years with a positive payback on the transaction.
Yeah, that's why 'twenty 2 we will continue to drive a robust growth strategy capitalizing on global economic recovery and E Commerce.
This focus will flex all levers of our business, including volume growth yield management.
Operational efficiency.
And network optimization.
The FY 'twenty 2 adjusted EPS range, we provided corresponds to 13% to 18% year over year growth on top of a record FY 'twenty 1 earnings.
I'd make the following highlights behind that.
We expect margins in all of our transportation segments on an adjusted basis to exceed FY 'twenty, 1 levels driven by several key areas.
We expect e-commerce to continue to drive higher profitability and we will continue to invest in our Fedex ground network to improve efficiency and utilization through expanded in new facilities as well as technology in hospice.
We also look forward to incremental benefit from the completion of our physical integration of TNT, which will enable us to offer more and better services to our customers internationally.
This key milestone will continue to drive momentum and provide a launch point for even better profitability down the road.
Integration expenses will be lower in F. 'twenty 2 than in FY 'twenty, 1 and total integration expense is expected to be $1.8 billion slightly higher than our previous estimate due to additional opportunities identified to further optimize legal entity structures and improve back office automation.
Yeah.
We expect continued improvement in Fedex freight through our ongoing revenue quality and profitable growth strategies.
Our outlook includes substantial funding of our incentive compensation programs for our team members that said variable compensation expense is not expected to be a headwind for fiscal 'twenty 2.
Well, we have clear growth opportunities the widespread labor shortages impacting many companies and industries across the U S is also impacting us through a higher wage rates and lower productivity, particularly in the first quarter and this is reflected in our overall outlook for the year.
Earlier Raj talked about our innovate digitally initiatives.
The spending related to these important projects is included in our outlook and will largely be recorded in the corporate eliminations and other section of our P&L.
Further we estimate a higher effective tax rate for fiscal 'twenty 2 of approximately 24% prior to the mark to market retirement plan accounting adjustments.
Finally, I'll address I will address our capital allocation, starting with capital expenditures, which is expected to be $7.2 billion in FY 'twenty 2.
This project, 2.8% or less of revenue, which is the target level for the capex to revenue component of our FY 'twenty 2 to 'twenty 4 long term incentive plan and remains below our historical capital intensity.
Approximately half of our expected capital spending this year will be for growth with the remainder for important projects like replacement of our aging Fedex Express aircraft.
Which not only is expected to have a high financial return, but is an important part of our strategy to reduce our carbon footprint.
We've also continued to invest in the modernization of our key express hubs and upgrades to other facilities in all of our transfer net patient networks to drive efficiency.
We will increase replacement of vehicles across the enterprise, which we largely differed in FY 'twenty 1.
We will add safer more energy efficient equipment.
All of these projects will yield benefits in the near term and long term.
We ended fiscal 'twenty 'twenty, 1 was $7.1 billion in cash and as such our leadership team is laser focused on enhanced capital allocation opportunities, including our 15% dividend increase for fiscal 'twenty, 2 which raised the dividend to $3 per share as we announced on June 14th.
Next our plan to restart our stock buyback program during the first quarter, which we can do without having to increase leverage and our focus primarily to offset the dilutive effects of our equity compensation programs.
And our volume are planned to voluntarily contribute $500 million in FY 'twenty 2 to our pension plan, which was funded at 95% on May 31.
In closing, we are adding shareholder value by driving profitable revenue growth expanding margins generating strong free cash flow.
Focusing capital spending into the greatest areas of return.
Strengthening our balance sheet and improving cash returned to shareholders.
Based on our record fourth quarter results, we just covered and the future ready strategies. We have in place I can say with confidence that we fully expect Fedex to continue delivering sustainable and superior financial returns in the future.
Next we will be happy to address your questions.
Yeah.
And if you would like to ask a question. Please press star followed by the number 1 on your telephone keypad, if you're calling from a speaker phone. Please make sure. Your mute function is often show your signal can reach our equipment.
Again star 1 to ask a question.
And first we'll go to Brian <unk> from J P. Morgan Your line is open.
Hey, good afternoon. Thank you for taking the question.
Wanted to see if you could give some color as it relates to the ground margins in the guidance. Obviously, some considerable operating leverage here in terms of incrementals year over year, you've talked about.
So are the right package at the right truck, but clearly there's some inflation working its way through the system. So it can we think about double digits on the way to teens or would you guide us to something a little bit less than that considering what you're outlining on inflation side, which does seem to be a little bit front end loaded so.
So maybe if you can address that and also about the surcharges that you might be able to install to offset some of those costs. Thank you.
Oh, well, Brian I'll I'll kind of hit the first part and just reiterate a few things, we've said and maybe try to.
Hi, it together in a different way, but you know.
As we said you know the pandemic accelerated the dramatic and rapid shift in the growth of E Commerce and at the same time as you noted there.
Put some pressure in areas along the way as well, which is which is really why the performance at ground in 'twenty..1 has been nothing short of stellar.
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Driven by our e-commerce, and we still improve margins.
So Barry highlighted that U S. Domestic parcel growth will continue to be the primary primarily driven by E. Commerce said, we're very confident in our strategy to profitably execute against that.
So we expect margins to improve in 'twenty, 2 and beyond.
As we continue to increase density.
Further improve the facility and on road productivity.
Enhance the utilization of our assets and I kind of emphasize those aspects as ground is generating exceptional ROIC.
ROIC margins and so we remain very confident of the future opportunity and we'll continue to innovate and.
[noise] differentiate the capabilities there.
There was something about surcharges.
Did you ask as well maybe you can clarify that.
Earlier. This week, we saw your main competitor announce some surcharges for peak season that were.
<unk> instituted earlier than last year, and they're also a bit higher so with the inflation you're talking about with the capacity in the system.
Maybe you can address that as well and what you assumed in this guidance here.
Thanks, Brian it's pretty speaking from a structural pricing perspective, we believe that peak surcharges are kind of the new normal and that we have to align our pricing to our cost I think I've covered that in previous calls that we do anticipate every peak that there will be e-commerce surcharges.
As we right now we already have peak surcharges in market and we continue to evaluate them changes that we need to make based on demand and capacity. We implemented some changes on June 11th and we continue to monitor the environment.
And next we'll go to Baskin majors from Susquehanna. Your line is open.
Yeah, good afternoon, and thanks for taking my questions.
It's pretty clear that we're in 1 of the best trade ups scenarios, we've seen from logistics customers with all of your higher yielding higher priority products doing exceptionally well in this environment can you talk a little bit about more about how you protect that profitability from both mix and pricing when whenever the.
Oh, you know partial mean reversion to a more stable and sustainable demand in priority environment comes.
Sure happy to take the question I think we have to separate it between the domestic market and the international market here in the U S. You heard me quote some just outstanding growth numbers from a personal perspective. So we think we actually have quite a a sustained growth environment, while demand will outpace capacity in the day.
Mastec market structurally as I mentioned, we will continue to use surcharge as not only for peak, but to cover a large package and to really just make sure that our pricing them quite frankly aligns to our costs. We think we have the very best value proposition in the market full stop we have the best weekend coverage and so as a result, we think the demand that we are.
We're planning for it will be there for quite some time here domestically and on the international side, it's a little bit of a different story and far more complex. We do believe as I mentioned that commercial capacity will come back episodically. It will not be a straight line up and we actually have we believe until 'twenty 'twenty 4 the longer it takes for commercial capacity to come back I quite frankly, the longer we have to.
Make sure that this customer base is sticky I pointed out in my opening remarks that we had a $1 billion growth in E. Commerce, we priced this e-commerce volume at future price. It is going to be very sticky. It was very competitively priced. So we don't believe there's any risk there in our small business growth. We've also had internationally we all.
So believe that volume is very sticky so as commercial capacity comes back we'll adjust the network will bend the cost curve to offset some of the surcharge risk, but overall, we feel quite good about strategies and we have from time to implement them.
Yeah.
And next we'll go to Helane Becker from Cowen Your line is open.
Thanks, very much operator, hi, everybody. Thank you for the time and so I have 2 questions. My first question is.
Given the labor shortages that we're seeing in the expectation that it's likely to continue is this a good time to pivot aggressively into more use of more robotics and accelerate the implementation of them you know.
Automation and so on.
Well Helane. This is Mike I'll, just I'll just highlight that are within that capex projection a good amount of that is to enhance the efficiency of the facilities, which is what exactly are aspect you're hitting on all I'll give it to Raj to talk more broadly about the.
The broader point you raise.
Well I think the point that I want to make here is that the labor environment remains challenged right now and and we're doing everything we can possibly do a whether it is from rages from Russo from technology from or from from routing and all the things associated with it to make sure that we can.
Get a get a service improved we expect that over the next 2.3 months that situation gets better and as we get ready for peak and of course, we will consider considering longer term opportunities that Mike talked about in terms of technology as well. Thank you.
And next we'll go to Ravi Shanker from Morgan Stanley. Your line is open.
Thanks, So definitely 1 can you give us a little bit of color on what are the 2 halves of fiscal 'twenty..2 look like first half or the second half given that you probably have a little bit bug in a.
Pandemic conditions continuing through the next couple of quarters, but then some of the clubs started getting a little bit harder in the back half of this figure.
Yeah, Ravi Yeah look where.
What we're giving our best.
The middle of the Fairway estimate what we think the year looks like as you highlight there's any number of moving parts. So I don't want to try and Oh pars various elements along the way there but are certainly the the recognition that.
The first quarter here with the <unk>.
Labor challenges in the productivity impacts as well as you know keep in mind, we are continuing to still have to make accommodations are in the express air network as well for a layover requirements in that so there's a number of.
Related aspects there so.
I'll leave it at that in terms of what's at play here.
Yeah.
And next we'll go to David Vernon from Bernstein. Your line is open.
Hey, good afternoon, everyone.
Maybe just to follow up a little bit on that is there a way to dimension it whether in margin terms or in an overall sort of like cost impact.
With the productivity and the wage impact from.
From the from the inflation that you're seeing in the marketplace and the difficulty in getting sortation that kind of labor into the network I'm just trying to anything you can give us that would help us to further kind of dimension, how big of a headwind that would be would be extremely helpful.
Well I wish we could break it down into these simple buckets, but when are you know to amplify what.
Oh, what Raj mentioned earlier when you don't have.
The people as many people as you would optimally staff the facility with.
Then of course your throughput is lower and then maybe you're not getting the you know the density within trailers and that that you might otherwise expect so then you're you're getting incremental cost there.
In terms of running the network the line haul in that so it is not as simple as saying, okay, where.
Where X had short and that are that's impacting us this way and in a.
Wage rate as it is y percent of it it's.
It is a it's a iterative ongoing exercise we have to adapt adjust and configure around that so.
So that's that's how we're managing it.
Yeah.
And next we'll go to David Campbell from Thompson Davis <unk> Company. Your line is open.
Yeah. Thanks for taking my question I was just curious.
Hey, you know you pay out or sold or <unk> division.
Canadian company.
Does it go.
Is that expected to have any impact on your marketing or your.
Yeah sure sure the market.
In the L T M.
Okay.
Well David first this is Mike let me just say a R K.
Our commitment and value of our freight business given the results that I just spoke to is.
The absolute so I'll I'll, let brie address what we think how the market evolves going forward.
Wow, well honestly this doesn't impact our freight strategy. We are the market share leader because we have the best value proposition. We have had just a stellar year for the freight team. They have done a tremendous job managing despite the tumultuous year, we have and while they did that they introduced a new product that is growing rapidly and in addition to.
Growing our share with small customer we intend to grow our share with the cross the threshold Fedex freight direct product and grow our residential share. So we are tremendously excited about our Fedex freight division and we're going to just stay the course.
Yeah.
And next we'll go to Scott Schneeberger from Oppenheimer. Your line is open.
Thanks very much on on the.
On the labor topic in and also the steel Italian afraid as well.
Mike you mentioned that it looks like it's largely affecting first quarter. You mentioned you adjusted the guidance for the first quarter I'm curious on your confidence of Ah I think you know much of the country is hopeful that this this this labor dynamic ends at the end of the summer, but just curious how conservative you were or maybe a little bit more color.
How you are considering it and if you hope you get whole bye Bye say end of first quarter and then the follow up question, but thematic. We the same is in freight you had some some some customer suspensions and it looks like that's largely alleviated, but could you put a little bit more color on what occurred and.
And in your comfort that that's back and are in a good situation. Thank you.
Okay got it all right.
Trying to take a swing at the first part and then I'll give it to Lance our CEO afraid for the for the second part.
I mean look it's it's not a unique phenomenon that were experiencing yeah. It's it's the all the aspects we highlighted it.
It's in the you know obviously it impacts the first quarter. The most in the general expectations that everyone has is that this will mitigate as we moved into the fall and in the markets return to more normalized conditions. So.
Look where we're at it every day, but there's no.
No unique.
Our consideration there beyond just a you see a lot of people, suggesting that come September October we'll be back we'll have a more expanded work force.
Lance.
Yeah, Thanks, Mike Yeah, well since our freight hardly ever gets any questions I want to take this opportunity to add to brief comments and recognize our team for an exceptional year.
They successfully battled through what has been the most challenging year I've ever seen in my almost 30 years in this business and and I grew up in it so I want to recognize all of the points they put on the board.
Now I'm sure you all have read the multiple articles written over the last several months about the tightening in the trucking industry and and it starts with the truckload sector. They are 5 times the size of the L. T L divisions.
Divisions, and when they get fooled a spillover it comes into L. T. L. We as the largest LTE all care you get the majority of it.
And so when you have it combined with what the.
The broad actions our competitors have taken to embargo entire sections of the country.
Without any notice impacting all customers, we decided to take an implemented temporary targeted volume control design minimize the network disruptions and balance capacity to avoid the back backlogs across the entire country.
So with with record growth you know has come from tough, but necessary decisions to protect our employees reduce our backlogs.
And staff, you know to our our business volume.
To be the driving force behind our business decisions now in hindsight I would not have wanted to make a decision back in the corner like this and we're taking measures to avoid it going forward.
I hope that provided the transparency.
And next we'll go to Tom weighted which from UBS. Your line is open.
Yeah good afternoon.
You commented you provide some comments on a pretty optimistic view on tightness in the domestic market and I think the center that tightness is going to continue.
Do we think about the approach to pricing I mean, I know you've had tremendous momentum in pricing I think was at 14% rise in revenue per piece and ground. How do you think about that.
Pricing dynamic. The next couple of years would we expect continued you know kind of stronger than normal pricing gains and express and ground.
Is it fair to view that as a pretty important driver of our margin.
Margin expansion that you would expect to continue as.
As we look at the domestic package businesses.
Yeah, absolutely you know as we look at 'twenty, 2 and 'twenty 3 we absolutely think that youre going to see a greater than our historical average from a year over year price increase as I mentioned this past year. When we look at our domestic volume, we've repriced about 45% of our large customer segment and quite frankly.
We actually did most of that in the back half of this year. So we're going to have some lapping you're going to get benefits of those renegotiations in the back half of this fiscal year, we're gonna get them in the front half of 'twenty..2 in addition, we still have to reprice you know the rest of the large customer segment and really importantly, as Fred mentioned, it's not just about the topline.
Yield, it's about really making sure that our price matches, our cost and you know we're getting very very focused on that very disciplined making sure that customers that have large package without the rate surcharges. The REIT structure. There that was that had the highest peaking factor really pay for the incremental labor at peak and so it's not just about the top line, which I am.
I want to be clear I'm optimistic about but it's really about aligning our price strategy with our cost and we do think that that is going to have tremendous momentum next year and quite frankly, the year after as well.
And next we'll go to Chris Wetherbee from Citi. Your line is open.
Yeah, Hey, Thanks, maybe I could just follow up on that point. So you know with the tightness in the market and maybe you can correct me if I'm wrong. It seems that that you and your major competitor.
The biggest influences on capacity and the argument you could sort of meter that capacity out over the course of the next couple of years. It should certainly should support sort of a relatively robust pricing environment, certainly above cost inflation that you'd go out in the out years. So I guess, what would sort of take away from that potential opportunity to bring those.
Domestic margins back up from maybe where we had seen in a couple of years ago was there. Some other impediment that we're thinking about or just really just a dynamic of what we're trying to match capacity with volume growth you outlined that that is fairly robust and it's a very very good pricing environment for the foreseeable future.
Good day.
Yeah, Chris Let me just.
I'll highlight 1 aspect when we talk about capacity too.
You know that the Capex growth at ground is focused on smaller units. Then you know kind of going back to the historical legacy large hubs. We have 1 we have 1 opening but it's in and it's it's it's targeted to efficiently and effective.
Execute on.
A lot of this growing shorter zone demand and so that's why when we talk about.
Having the right targeted investments to to you align the cost with the where demand is going that that's how we're thinking about it and then of course that has to be match on the pricing side, which you know is brie is key.
I think.
Pretty comprehensively. So you know again, it's a it's an integrated planning.
The process and assessment here Oh look the.
The finance team is is part of the discussions and assessments that go on in that as well. So it's a it's a very integrated with operations.
Finance sales pricing and marketing so the team really has a collective focus.
Yeah.
And next we'll go to Jack Atkins from Stephens. Your line is open.
Okay, great. Thank you maybe a longer term question.
But you know in the past we found a very high correlation between return on invested capital.
Valuation multiple within the transportation sector.
Analyst day earlier this month, you laid out a plan.
To get a return on invested capital.
6% to 29% versus about 20% today.
Your LTM return on invested capital is between 7%, 8%. So Mike what do you think is a realistic target for ROIC for Fedex.
When you look out over the next 3 years.
No Jack I'm, not I'm not going to go put out of a any any sort of targets or guidance beyond.
What we've what we've gone with today, but I will reiterate that the investments that we're making we're highly confident will generate a high return on invested capital and you know as I alluded to the fact that we continue to expect to see margins grow at all all the business segment. So.
That's what we have to do to to continue to get that to where where we wanted to keep seeing it the trajectory. So.
I think that's a that's where we'll leave that 1.
And next we'll go to Annette now Merit Roquette from Deutsche Bank. Your line is open.
Hi, guys, sorry about that that goes on mute. Thanks for taking my question I just wanted to see if you could talk about the the re contracting process for enterprise customers and I know you mentioned they come up every 3 years does the company have an ability to kind of change pricing intra period with 60 or 90 days.
Notice or is this just really at the end of the contract period, and then separately Henry can you just share I don't know if sorry, if I missed it but just the b to b and B to C mix, where b to B is today relative to where it was pre COVID-19 just to give us some runway on some of the density benefits, you'll get better b to B continues to recover.
Hi, Amit its brie so from a an enterprise contract perspective, you know each contract is very nuanced. We have opened some contracts out of cycle. You know when the customer has looked for increased demand and so of course, when they want to do something different from what has kind of been our historical average with them of course, we're going to have those conversations.
I think it's really important yes, we want to grow our price, yes, we want to grow our Yale, but we also want to have really happy satisfied customers and so we're trying to strike that right balance and so some customers. Yes. They didn't eat require changes in their portfolio of change in next to meet their business needs because many of them saw explosive growth, especially in our retail segment and of course in our <unk>.
<unk> care so of course as as required we do reopen accounts and have those conversation every Thursday morning, as Mike mentioned, Mike and Joe and I got together and we review what's necessary to run the business. So you know I'm very pleased that the team has been incredibly agile I think the second half of the question was about B to B and B to C. So I think the.
The the answer from a domestic perspective is we are going to continue to make express more express we're going to lean into commercial we're going to lean into premium and health care, we're very optimistic about our last mile optimization strategy, which will allow us to continue to put some residential business into the ground network when we and I think the other thing that I.
I can share is that if you look in may of this past year. It was our highest absolute commercial volume in the domestic networks. Since September 2019. So we're very confident about the return of our commercial business here in the United States. However, as I mentioned, 90% of the market growth will be e-commerce.
And so there will be no settling of the that'd be to see volume within the ground network, we're going to continue to drive that growth, we're going to lean into it grow yield and as Mike mentioned, our goal is to grow the margin. While we do that so very very quite frankly excited to lean into the ecommerce growth for Fedex ground.
Well this is Mike I should add 1 thing for those of you that are.
Asking about the <unk>.
Sequencing or trajectory through the through the year just as a reminder, you know I mentioned that we accrued 380 million of variable compensation expense in Q4.
And you know so if you add up the prior Qs and that are that gets you to a billion or so for that for the year. So you know Q1.
We were not accruing as much last year understandably amidst the uncertainties. So just you know kind of keep that in mind as you think about modeling through.
Okay.
And next we'll go to Ken Hester from Bank of America. Your line is open.
Hey, great good afternoon.
In the in the outlook you talked a lot about ground, but what about express so if we normalize for the $100 million donation.
Rebound that Fedex Europe with the TNT integration the aircraft efficiency, what's the timeframe to get back to double digit express maybe maybe detail the progress at TNT as well and then just an update within that the blending of express into the ground network both on the packaging facility side.
Yeah.
Well Oh are you know, there's there's been a number of milestones on the a T. N T. You know we had the.
The road network, we completed that milestone and that helped facilitate the are they enhance our commercial proposition that AR that was highlighted in again the air network.
As another key enhancement and that comes towards the end of this fiscal year. So there's.
There's a value coming in this year are more to come and then as we highlighted with the the business realignment that that hit full stride in the 'twenty 4 so it's a.
It's a multiple year of significant opportunity it increases there.
Yes, Ken let me just add that so we're very excited about where we sit with TNT.
The combination of the physical integration. This year this fiscal year and next calendar year is an inflection point like I talked about and at the same time. We are also improving continuing to improve our value proposition. The 1 I just talked to you about overnight service from several markets and in a in Europe to U S is unmatched.
So we continue to make great progress and are you know, we really think that we should lead to margin expansion beginning in fiscal 'twenty, 2 and building into FY 'twenty 3.
And next well go to Allison Landry from Credit Suisse. Your line is open.
Thanks, Good afternoon, Raj you talked about lower cost per stop at ground.
So.
It's only a parse out how much of that was driven by increased b to B Max persons increased density and an E com residential volume related to last mile optimization and improved asset utilization.
Nation from from the 7 day operations and then if you could just maybe address.
You know, how how we might be able to gauge the improvement in cost per stop in fiscal 'twenty 2 thank you.
That was and I'm gonna have John answer that question.
Allison Thanks for the question. If you go back when we talk about L. M O.
FY 'twenty, we only delivered 1.2 million packages Labelle M O.
Through fiscal year 'twenty, 1 we delivered 21.6 million packages availing Moe.
1 factor that's improving our optimization. The next if you'll remember we integrated smart post which is now our economy product and.
And plus the surging of residential growth since the pandemic and all of these factors has helped us improve our residential density.
Now 1 of the things to remember, we're seeing package matching where we have commercial residential economy or L. M O packages, where they're destined to the same address or nearby address where another ground package and we fully continue expect this to continue to increase.
And we're also confident that our weekend residential delivery coverage, which has already mentioned, reaching 98% of the U S population on Saturdays and 95% on Sundays truly gives us a distinct competitive advantage.
Okay.
Yeah.
And next we'll go to Allison Pontiac from of Wells Fargo. Your line is open.
Hi, good evening.
What are the issues that we've heard of the manufacturing side is really the supply.
No supply chain constraints and sort of the impact that maybe those increased volumes have had.
Is this something that's been I guess, 1 noticeable to you and is it starting to abate or is it still sort of a level of volume that you would compete expense expect particularly on the express side as we move through the rest of the balance of the year here.
The supply chain constraints are of course real the other thing to keep in mind here is the inventory to sales ratio are at an all time low and so we do fully expect that as the you know, especially as the supply chain starts to get organized here and the we still have.
We needed to grow because especially on the express side of the business as the inventory sales ratio still remains very very low and that that drives a lot of extra traffic.
I hope that answers the question if not just ask again what was not clear.
I mean that the express part of it like is it starting to normalize somewhat where youre seeing that sort of fall off here and you know obviously in the inventory to sales ratio might not be as sort of next day just in time based on some of the issues. We've had over the past few months just I didn't know if that was if that was noticeable in sort of the volume you were seeing at this point.
Don't want to take that sure.
The intensity of the demand is not.
Inventory side not all your is it finished product, but its raw materials are you chips and other things that are going in into finished products remain at historically low levels. The demand also hasn't abated and and so does the demand cycle that we're seeing both domestically and into.
Nationally continues to be extremely strong and then the combination of the supply being light both from the air in the Ocean and has trickled down and trickle up effect certainly is.
Doctors.
Have us remaining optimistic that there's no short term change in and what we're seeing is a matter of fact, I'm seeing an intensification of that in our international business.
And our next question comes from Bruce Chan from Stifel. Your line is open.
Great. Thank you operator, and good evening team, it's a nice to be back in the mix here.
I want to go back to the pricing discussion from them it, but maybe more specific to Europe.
You know it seems like a meaningful commercial opportunity for you over there, but you know some of your competitors are also looking at expanding in that region as well so.
My question is are you seeing any signs of a land grab or any competitive pricing pressure develop on that front or are you seeing the same sort of structural differentials between demand and capacity as you're seeing here in the U S.
Great question and no from a European perspective, you know what kind of the underdog, we actually see and and have had tremendous momentum as I mentioned I'm. The 1 billion growth from an e-commerce perspective between Europe, and Asia and that's Intercontinental. So when we look at the Europe business Roger's mentioned number 1 we now have we already had but we even strengthen that further we have deep.
Best coverage across Europe, and the United States from a commercial perspective, and the sales team is really excited about that value proposition. So we have upside potential in both the b to b and the B S. C market share in the United States from Europe from an intra Europe perspective, we are predominantly focused on b to B. We're just.
Getting going on beta C, but we see upward potential there and we actually also are seeing improving yields and the entry European theater. So from an entry Europe perspective, we're feeling optimistic and then from an Asia to Europe, that's our our third focus area for the European team. We have historically been under shared in that lane, we have has seen a tremendous.
Relationship between our Asia and our European teams actually are our Asia team has taken share from DHL. The last 4 quarters. So we're pretty I'm pretty pleased with them and we see a great pricing environment and we see some really strong momentum and Bruce if I can just add you know some some ways the European markets or the late bloomers of post Covid.
19, but we now expect them to be back to pre pandemic levels. This calendar year versus what we thought we were going be next 1 so there's going to be the demand, especially be to be coming back sooner and again I think we're in very good position for that.
And next we have Duane Sinn Edwards from Evercore ISI. Your line is open.
Hey, Thanks, Thanks for squeezing me in here.
On the on the ground facility investments as you tilt to smaller facilities, which I think you talked about being driven by ship from store.
Where the demand is headed.
Can you talk about utilization of your existing assets, what does churn look like in those and how often do you exit a facility in and is there any geographic focus to your ground and investments.
Yeah.
Thanks, Duane is John first of all we've already talked about this but let me re imagined the brick and mortar that we're adding.
We are adding a very large hub in Chino, California.
And we will end up with 16 regional sortation facilities this year.
As well as for new automated stations already been mentioned that we're expanding over 100 of our existing facilities, but that's not just what we're how we're attacking our capacity.
We're also expanding our operational solutions that maximize how and when we're using these existing buildings for answers like when we run multiple preload in an existing building.
Also technology is a huge play for US here is going to provide the solutions that are critical to enable these solutions to work.
And in addition, we're refining tools that you use real time data to help a streamlined multiple aspects of our operations all the way from staffing through package routing to trailer as well as mode optimization.
And we're also collaborating with collaborating with our customers on solutions that will leverage the full flexibility of our 7 day operations and benefit from our expanded regional and local solutions through our ecommerce shippers.
That will allow them to reach their customers both quickly as well as cost effectively.
And Duane if I can answer the strategic point here.
Talks about how we work strategically with some of the retail customers as they see their online growth and again, that's exactly what we're doing in this when you see stories of retailers showing tremendous online growth you can bet, there's a fedex story right behind that.
And our next question comes from Jordan Alegar with Goldman Sachs. Your line is open.
Hi, Matt.
Given the investments Youre, making in.
Round in the automation facilities and prepare for a strong peak.
Is there can you give some sense against you know obviously, what's difficult year over year comparisons what sort of big picture volume outlook might be looking at in terms of growth perspective is it a mid single digit type of number a better just curious thanks.
Well, what we're expecting a pretty robust peak I think last year, we called it and ship. It on I think we're looking forward to another shipper on quite frankly, so, especially in the ground network. We are absolutely expecting a robust peak in volume growth I think Fred mentioned in his opening remarks, you know the goal is over $90 billion for the year and I'm looking across the table.
Joe My commercial partner and we're pretty confident in that number.
Yeah.
And I'll turn it back to you for closing remarks.
Yeah.
Thank you very much for participating on.
This analyst call as I said I'd like to take a moment to.
Personally think Henry Maier for his dedicated.
Good service to this organization Henry's various roles were pivotal a key point.
From the time, we bought Rps and tool today I think.
Even Henry.
And I would be amazed looking back in time, if we thought Fedex ground was gonna be the enormous entity. It is today.
With substantial growth prospects and an awful lot of that Henry is due to your leadership and insights.
You're a remarkable professional and.
In an area, which is very arcane and very poorly understood and.
And many many quarters because of the topology of networks and how they actually are actually operate.
Hum.
I've got a lot of fun and just on a.
Personal basis, with our repartee and I'm going to continue that with you as we are.
As we talked about the.
The other day, so all of US wish you and Diane a great success in retirement.
On behalf of all of those well done and.
We are deeply grateful to you.
[noise], So let me end with a.
1 administrative Ah announcement.
In reviewing the format of these calls.
We've made the decision going forward.
Right, Mike and Brie will handle these quarterly calls.
I will be available on the mid year December call and.
Year end call next June to answer any questions. The rest of our S. M. C. We're gonna give this time back to them in order to run the railroad because the size and scope of this operation needs every minute that they can devote to their day job rather than to.
These reports, which will be very.
Adequately handle as we just demonstrated by Raj.
And and Brie and Mike So back to you Mickey.
Thank you for your participation in Fedex Corporation's fourth quarter earnings conference call feel.
Feel free to call anyone on the Investor Relations team. If you have additional questions about Fedex. Thank you very much.
Okay.
And that does conclude our call for today. Thank you for your participation you may now disconnect.
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