Q1 2022 FedEx Corp Earnings Call

Good day, everyone and welcome to the Fedex Corporation first quarter fiscal year 2022 earnings call. Today's call is being recorded 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 first quarter earnings Conference call.

The first quarter earnings release Form 10-Q, 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 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.

Fedex Corporation desires to take advantage of the Safe Harbor provisions of the private Securities Litigation Reform Act.

Certain statements in this conference call such as projections regarding future performance may be considered forward looking statements within the meaning of the act.

Such forward looking statements are subject to risks and <unk>.

Certainties 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 at Fedex Dot com.

For a reconciliation of the non-GAAP financial measure discussed on this call to the most directly comparable GAAP measures.

Joining us on the call today.

Raj Subramaniam President and COO.

Mike Glenn Executive VP and CFO.

Re crary executive VP, Chief marketing and Communications Officer.

And now Raj will share his views on the quarter.

Thank you Mickey and good afternoon, everybody and thank you for joining today's call first.

First and foremost I would like to extend my sincerest. Thanks to our global team members, who continue to deliver for our customers and that exceptionally challenging operating environment. We are extremely proud and grateful for the manner in which team Fedex continues to move the world forward.

The execution of our strategies continues to drive high demand for our differentiated services. Despite the disruptive impact of the pandemic to labor availability industry capacity in global supply chains.

As we look at our first quarter results. Our performance was highlighted by double digit increases in yields across all of our transportation businesses driven by limited capacity high demand and our revenue management strategy.

The impact of constrained labor markets remains the biggest issue facing our business as with many other companies around the world and was a key driver of our lower than expected results in the first quarter as Mike will share in more detail momentarily, we estimate that the impact of labor shortages on our quarterly results.

This was approximately $450 million, primarily at Fedex ground.

I just had two distinct impacts on our business the competition for talent, particularly for our frontline workers have driven wage rates higher and pay premiums higher.

While wage rates are higher the more significant impact is the widespread inefficiencies in our operation from constrained labor markets.

Illustrate this I'd like to share a brief example from Fedex ground.

Our Portland, Oregon hub is running with approximately 65% of the staffing needed to handle its normal volume.

The staffing shortage as a pronounced impact on the operations, which are solid and our teams diverting 25% of the volume that would normally flow to this hub because it's simply cannot be processed efficiently to meet our service standards and in this case the volume that is devoted must be rerouted and process.

<unk> drives inefficiencies in our operations and in turn higher costs.

These inefficiencies included adding incremental line haul and delivery routes, meaning more miles driven and a higher use of third party transportation to enable us to bypass Portland entirely.

Now that's merely one example across the Fedex ground network there are more than 600000 packages a day being rerouted we.

I anticipate the cost pressures from network inefficiencies such as the one I just illustrated to persist through peak as we navigate the labor market and impacts of new Covid waves.

Overcoming the staffing and retention challenges is our utmost priority as they not only affect our cost structure and operational efficiency are also having a negative impact on service levels.

As such we're taking bold action across the enterprise to hire and invest in our frontline team members as they prepare for the peak season ahead.

These actions include targeted pay premiums, particularly for weekend shifts increased tuition reimbursement sponsorship of a national hiring day on September 23rd as we seek to hire 90000 additional positions ahead of peak.

Detailed volume and demand planning with customers to drive additional starts to alleviate congestion and expanding network capacity, which I will touch on shortly.

Based on these actions combined with our expectations for improving labor conditions we.

We do anticipate gradual improvement in our operational efficiency as we turn into the new calendar year.

During the first quarter the team continued to execute on our strategy, even amid the challenging operating environment as E. Commerce drives higher demand, we continued to strategically invest in our network to boost daily package volume capacity increase efficiencies and further enhance the speed and service.

<unk> abilities of our networks, our investments continued in Q1 as Fedex ground expanded its physical footprint with a new state of the art hub in Chino, California, which began operations in August.

This fully automated hub includes large package sortation as the capability to process up to 30000 packages per hour and a strategically located to help address ongoing port congestion challenges.

Fedex ground also continues to see year over year improvement in the last mile efficiency driven by a two 4% increase of packages delivered per hour compared to Q1 last year. Thanks to route optimization technology.

As we move into Q2, we're meticulously planning for peak season ahead, including close collaboration with customers to build solutions to enable them to succeed we expect to have substantially higher ground capacity to speak season due to our investments in Fedex ground infrastructure. This includes the addition of more than a dozen new automated.

Facilities and several other sortation equipment expansions in addition to the Chino hub that I already mentioned.

Several key technology projects are also slated for completion this fall, including the modernization of multiple sortation transportation management and safety systems, which will help to increase ground grounds network capacity by one hundreds of thousands of <unk> as well as its flexibility and resiliency. This brings the total capacity.

The increase of more than 1 million average daily volume compared to last peak.

Another significant opportunity in our growth strategy is the improvement in the profitability of our International Express operations, we reached a significant agreement with the social partners at early age Express operations regarding the intended European Air Network transformation.

This is an important milestone in the completion of the Air network integration, which remains on track for completion in spring 2022.

That will bring the physical network integration of TNT into Fedex to a close and when combined with the benefits of our previously announced European restructuring structuring provides significant upside.

In our international profitability moving forward.

In summary, we are taking bold actions in the short term to navigate through this highly uncertain environment. We remain committed to long term shareholder return and we are very confident in our strategy for the following reasons, we have a differentiated portfolio of services to attack a fast growing e-commerce market our business model.

It gives us the framework to be very successful in this regard in.

In fact, we are working strategically with several retailers to deliver a win win win solution when for the retailer win for the end consumer and wind for Fedex.

For instance, we recently partnered with a large retailer to create a common data platform that drives optimization of our combined assets and enhancement of visibility and predictability to the end customer.

Further as the day definite residential volumes growing our network does increasing opportunity to collaborate across our operating companies to improve efficiency by better utilizing our assets.

Another upside for Fedex is international and the completion of our physical integration in Europe provides an inflection point for profitable growth and.

And finally, we are in the early stages of unlocking value from digital innovation. We're confident that this will play a significant part in success of Fedex for years to come as we make supply chain work smarter for everyone.

Our strategy is sound and positions us well for improved returns as we move through fiscal year 'twenty two and beyond.

With that let me turn it over to Barry.

Thank you Raj and good afternoon, everyone. Our first quarter commercial results were very strong with 14% revenue growth and double digit yield improvement in our transportation segment.

These results reflect the positive backdrop for growth in the parcel market, including very healthy pricing environment.

For fiscal year 'twenty, two Fedex revenue is forecasted to pass $90 billion. Further we are forecasting that the U S. Peripheral market will grow to 101 million packages a day by calendar year, 2022, which is year over year growth of 12%. These.

These market projections are slightly lower than last quarter as e-commerce percentage as a percentage of retail declined with our shift to in store shopping and buy online pick up in store and spending and services of course increased however, despite this moderate change in e-commerce growth the secular trend of e-commerce growing as a percentage of retail.

We will continue to drive healthy parcel market growth, we are forecasting a 10% annual growth rate of U S domestic market volumes through 2026.

At Fedex in the first quarter total U S domestic package volumes increased year over year by one 5% at.

And express our total U S. Domestic package volume grew 7% year over year total Fedex ground volumes were relatively flat in the quarter. However, I am very proud as we proactively managed our capacity for higher yielding commercial and home delivery services in fact, Fedex ground commercial volumes grew double digits in the quarter.

In the first quarter of fiscal year 'twenty, two Fedex total U S. Domestic residential package volume mix was 57% versus 62% a year ago.

U S <unk> improved year over year in the first quarter of fiscal year 'twenty tail as BW volumes continue to recover with inventory replenishment and manufacturing rebounding as the economy opens.

ADC mix continues to remain higher however than pre pandemic levels.

In Q1, Fedex freight revenue increased 23% driven both by increased volume and higher revenue quality, a huge shout out to the Fedex freight team great job team.

<unk> freight direct continues to gain incredible momentum.

Turning now to our revenue quality strategy.

Continued constrained capacity in both the U S domestic and international markets has led to a very favorable pricing environment.

We are focused on protecting and growing volume in high yielding commercial segments, including commercial ground and small and medium segment.

Have an incremental opportunity to improve large customer yields through contract renewals and providing large customers an ability to procure incremental capacity at current market rates.

As announced yesterday effective January <unk>, 2022, Fedex Express Fedex ground, and Fedex home delivery shipping rates will increase by an average of five 9%.

While Fedex freight rates will increase by an average of five 9% to seven 9%. We also announced other surcharge increases which can be found on Fedex dot com.

These increases will help us continue to balance capacity with demand and mitigate the impact from the increased costs that Raj just outlined.

Turning now to international we are forecasting the air cargo market in more than $80 billion by calendar year 2025.

Fedex, we currently have single digit market share and as such this remains a significant growth opportunity for us to continue to pursue.

We expect air cargo capacity to remain constrained through at least the first half of calendar year 2022, a full recovery is not anticipated until 2024.

Global Air cargo capacity continued to recover in July it is still down 10% compared to pre pandemic levels capacity on the international lanes remains scarce and we have seen European and APAC export demand recover to pre pandemic levels.

Globally, we continue our efforts to optimize our network and customer mix, we managed to a very high percentage of priority service on our international flights with yield per package improvement of 11% for international parcel and yield per pound improvement at 18% for international freight.

Exports from Asia are fueled by the strong demand from BTC and <unk> recovery.

<unk> will further benefit from a shift in demand from ocean freight to air cargo as our customers replenish stock levels in time for the peak sales season.

To provide access to reliable capacity in this constrained environment. We turned six previously AD hoc intercontinental flights into scheduled service in fiscal year fiscal year quarter Q1.

For transplant trip for Trans Pacific and two for the Asia Europe Lane.

We are seeing a strong recovery in Europe, as well with the overall economic recovery back to pre pandemic levels.

Our intra Europe cross border BTB volumes have recovered to pre COVID-19 levels. Our growth has further accelerated by significant beta see parcel volumes.

E Commerce growth will be critical for both our Asian and European businesses in Q1, we expanded Fedex International connect plus from Europe to six new global destination, increasing coverage to 82% of global GDP across a total of 300 Lane and on September 1st we launched <unk> and <unk>.

<unk> across 80 origin destination lanes.

Our business is looking for a cost effective solution with competitive trends at <unk> provides a compelling e-commerce value proposition, we continue to gain new customers through ICP and have a very robust sales pipeline.

In summary, while it continues to be a very dynamic market, we remain incredibly confident in our global growth potential and our world class commercial teams to bring end market, leading yields and with that I'll turn it over to Mike for his remarks.

Thank you Barry and good afternoon, everyone. Our first quarter FY 'twenty two adjusted earnings per share of $41.0, and was negatively impacted by approximately $800 million in year over year headwinds.

Well Raj cover the operational impacts of these challenges I will detail the financial impacts to the quarter.

Now these headwinds the difficult labor markets had the largest effect on our bottom line.

Presenting an estimated $450 million in additional year over year cost the majority of which impacted our Fedex ground business.

As we look into the impact of labor costs on the business I want a brexit impact into two components.

Higher wages and the impact of network inefficiencies.

Of the $450 million, we estimate that $200 million was incurred in higher wage and purchased transportation rates.

This included higher wage rates and pay premiums for team members and higher rates paid for third party transportation services.

In addition to the higher wage rates, we estimate that network inefficiencies of approximately $250 million contributed to the total impact of labor shortages on the business.

These costs include additional line-haul higher usage of third party transportation cost to reposition assets and the network overtime and recruiting incentives all to address staffing shortages.

Beyond the labor impacts our results for the first quarter also included the following headwinds.

An additional $135 million in our healthcare costs due to lower utilization a year ago.

$85 million related to investments in the ground network, which represents the cost of bringing online 16, new automated facilities and expansions at 100 facilities, which are critical to improving service and adding capacity to meet growth for peak and beyond.

And in express and at Express we had an estimated $60 million in incremental air network cost due to the impact of Covid restrictions on our operations, including limitations on layovers supplemental crews to ensure service continuity and immigration restrictions.

In addition, and as a reminder, our prior year results at express included a pre tax benefit of $65 million from a reduction in aviation excise taxes.

That said, our first quarter results did come in lower than our own expectations as difficult labor conditions persisted.

Throughout the quarter.

As a result of that variable compensation was not an expense headwind in the first quarter.

With that overview of the consolidated results, let's turn to the highlights for the segments.

At express results declined due to the higher operating expenses from staffing challenges and Covid related Air network impacts I discussed.

Profitability was also impacted by fewer charter flights compared to the surge last spring during the early months of the pandemic.

While we've covered the impacts to ground results in detail I would like to call your attention to an enhancement in our reporting included in the release and the 10-Q.

As a result of business growth and our unmatched seven day operating network of ground. We are now providing additional product level disclosures for average daily package volume.

Beginning with our first quarter, we are breaking out Adv statistics for Fedex ground commercial home delivery and economy services.

Turning to freight we reported a record operating margin of 17, 3% for the quarter as our continued focus on revenue quality and profitable growth drove average daily shipments up 12% and revenue per shipment increased 11% as <unk> highlighted previously.

Now, let's pivot to capital spending.

During the first quarter, we spent $7.0 billion in capital as we continue to invest in our strategies for profitable growth service excellence and modernizing our digital and it platforms.

Our capital forecast for fiscal 'twenty, two remains at seven $2 billion and less than 8% of anticipated revenue.

It includes the following key elements.

First more than 50% increase in capital spending at ground year over year for capacity expansion and new facilities to capture opportunities from growing E Commerce business.

And second fleet modernization and express with continued investment in 767% and 777 aircraft.

Which not only has a high financial return, but it is an important part of our strategy to reduce our carbon footprint.

In evaluating capital investments our return on invested capital on existing capital in new projects is a critical metric to managing our business and we have a rigorous approval process in place on all new capital projects.

As we look at investments we set the internal rate of return hurdle above our weighted average cost of capital, which varies based on the nature of the project.

For example in investment in replacement capital will have a lower hurdle rate and growth capital.

Capital returns has always been an important metric to managing the business, both historically and in the future.

We ended our quarter with $7 billion in cash and are targeting over 3 billion and adjusted free cash flow for FY, 'twenty, two which puts us on pace to deliver over $12.0 billion and adjusted free cash flow for FY 'twenty, one and 'twenty two combined far exceeding our historical levels.

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We continue to focus on thoughtful capital allocation and strengthening our balance sheet in fiscal 2022.

During the quarter, we repurchased one 9 million shares totaling roughly $550 million and are targeting approximately 1 million additional shares for the balance of the year.

In addition, we plan to make a $500 million voluntary contribution to our pension plan this year.

We are lowering our fiscal 2022 guidance to reflect our first quarter results, which were lower than our expectations.

As we look to the rest of the fiscal year, we expect certain factors to extend longer than we originally forecast in June.

For fiscal 'twenty. Two we are now forecasting earnings per share of $43.0 to $69.0 before the mark to market retirement plan accounting adjustment.

And earnings per share of $94.0 to $21 before the mark to market adjustments.

And excluding estimated TNT integration.

Expenses and costs associated with business realignment activities.

And our effective tax rate projection is approximately 24% again prior to the mark to market retirement plan adjustments.

While our outlook reflects more uncertainty moving forward. It represents adjusted year over year EPS growth ranging from approximately 9% to 15, 5% following our record fiscal 2021.

As you all know, we arent navigating an inherently uncertain macro environment and managing several unknowns.

The pes shape and timing of global economic recovery, given the dynamics of the pandemic, including the spread in response to new and existing Covid variance.

The uneven nature of global government restrictions.

Disruptions to global supply chains and of course recovery and labor availability.

Our forecast assumed continued growth in U S industrial production and global trade a gradual improvement in labor availability.

Current fuel price expectations and existing tax regulations.

With respect to labor, we are assuming that the combination of these actions we are taking that Raj outlined combined with a steady increase in labor availability as we turned into calendar 'twenty two will allow us to add team members, which will drive improvement in our efficiency productivity and cost structure.

While we are not providing specific second quarter EPS guidance I do want to highlight a few key assumptions within our outlook.

So overall for the second quarter, we anticipate a similar level of headwinds in Q2 as we experienced in the first quarter.

As the challenges and impacts to our operations from the labor shortages are expected to persist through the rest of calendar 2021.

Consistent with the first quarter. We also expect headwinds in Q2 to be driven by our expansion at ground higher health care expenses.

Covid related Air network inefficiencies at express and the benefit in the prior year of reduced aviation excise taxes.

That said, while these headwinds will persist in the second quarter, we expect strong performance in the second half of fiscal 'twenty two.

We remain confident that our long term strategies will allow us to realize the benefits of growth investments in the future and next we'd be happy to address your questions.

Okay.

And ladies and gentlemen, if you'd like to ask a question. Please press. The star can you followed by the number one on your telephone keypad. If you are calling from a speaker phone. Please make sure. Your mute function is off to ensure your signal can reach our equipment. Please note that we do ask that you only ask one question, but you may re queue. After your question has been answered again start.

I wanted to ask a question.

And we'll go first to Scott Group from Wolfe Research. Your line is open.

Hey, thanks.

So guys. It strikes me that everybody in transportation right now has a lot of pricing power and and everyone's dealing with tight labor capacity and inflation, but every other transport companies reporting margin.

Improvement in earnings growth. So I guess my question is why do you think you're seeing a bigger impact than anybody else and in transportation and outside of just adding more capacity and spending more what sort of meaningful significant changes do you think you need to make or are you contemplating.

Aching to stay.

Amazing more sustainable improvement in margin, earning.

Earnings returns all that thank you.

Let me start by saying that we definitely do not see the system as worse as them situation at all in fact, the Minneapolis Fed noted that firms in every sector reported difficulty in attracting labor and that 68% of the Fortune 100 company.

[noise] supply address supply chain and labour descriptions over the past quarter. So the situations very complex and not just the availability of workers, where workers impacted by safety concerns with the Covid and of course, the very real issue of childcare and our labor markets and Barbara economy cannot function properly and if schools in daycares cannot stay open so R. A.

Approached our teams and our people first culture combined with the flexible operating model and ground as positioned us to remain competitive in this market and we are highly confident that the actions. We're taking to address is charged shortage as well as I outlined in my prepared remarks, our let me just also add that you know we are very confident in our strategy.

I mean, where the market is growing we have a differentiated value proposition, we have a a network and operating model that makes that makes it very <unk> that makes it good for us to succeed and you know so we are confident in the long term strategy here and so Mike said, we expect to see.

<unk> the calendar year, the new kind of your the liberal available to continue to recover Mike.

Yeah Scott.

I would add I I think you can't just characterize all transportation companies in one singular.

Bucket, there and <unk>.

Assume that everybody has the same considerations in terms of the nature of the business. There Uhm, we've tried to explain with great specificity how.

How this operationally impacts us and that that's the financial ramifications of that.

So look we fully recognize and that the first quarter wasn't what we anticipated we've taken a number of actions to address that we will continue to to identify further actions, but I will fully say if the circumstances don't change as we are.

And if I hear we absolutely would need to revisit the pace of the plans that we have the strategies or <unk>, what we would absolutely need to think about the pace of things given the environment that we're operating in so you know I I think brie highlighted the characteristics of <unk>.

Growth is and will continue to be in the business. So that remains the underpinning going forward.

And an extra <unk>, Brandon Oh can I escape from Barclays. Your line is that okay.

Hey, good evening, everyone and thank you for taking my question My can I just follow up on that I think the frustrating part from an Investor perspective, you guys have definitely seen pretty substantial growth in the past decade definitely put the capital behind that but margins are actually while we're now than they were prior.

Prior peak returns have obviously come down and we do hear lots of bold actions how to sustain full of growth, but I guess I'm going to ask the question just the same way like what is being done in a bold way to improve returns and profitability across all these networks and is there a way to look back and say hey, we've been investing in.

Triple a seven and 767 feet and yet express margins aren't showing much traction how do we review those prior plans to ensure that they deliver in the future. Thank you.

So well Brandon Let me first you mentioned about express investment in the aircraft. There you know if you.

If you rewind roughly a year and a half ago, we were in the midst of talking about parking and reducing capacity a number of R. M. B 11 fleet.

Obviously in the market changed radically here and there was the need for the additional capacity and the opportunity there. So we unpark those.

Should things change going forward that remains a flex lover and it absolutely is the case that having a higher proportion of the newer more efficient aircraft, which the 767 and triple seminar in the fleet will drive improved economics and margins that express so again we're.

<unk> ongoing looking at these different network initiatives and so that that absolutely remains a a longterm winter in terms of the fleet renewal and we will we will continue with that.

What was the second part of your you started off with the another aspect.

<unk> you know make the frustrating thing I didn't care for a lot of your investors is that the growth is very evident, especially in the last few years. It's just that margin to have that in for you. So you know there's always a plan to improve margins that doesn't seem to come through so what are the bold steps that can be taken to improve those outcomes in the future.

Well, maybe you just step back a little bit.

We had record results in 21.

And improve margins.

Our guidance, albeit lower than what we shared with your three months ago.

Is if you look at the operating earnings and packets double digit at the low end, we had some discrete tax items there so.

Indeed, we are focused on driving improved.

Margins cash flows and returns and feel that we're we're projecting another record year on top of a record year.

So again, we are absolutely committed to continuing that trajectory.

And we'll go next to Chris whether it be from city. Your line is open.

Hey, Thanks for taking the question you know I I wanted to ask you about costs might be helpful to kind of run through a number of the items that were impacting the quarter, but.

If I were to sort of exclude those items and look at the cost inflation on the package business. He express and ground package. It still looks like I'm getting about 9% cost inflation on essentially flat volume. So I was wondering maybe if you could help us understand X. Some of the items that you've talked about what's driving the cost inflation at such a high level.

When we're not seeing the volume growth of those individuals segments and maybe do you expect that to sort of change and do you think margin bookstand in both of those segments for the whole year.

Well, let me, let me take a swing at that first so.

As it relates to the cost inflation and taking that category broadly let me just clarify what's what's in our outlook.

The network inefficiencies inherently are contributing to that cost increase that you're talking about we expect those to mitigate and work away.

In our outlook that we're giving you here, we're not assuming any change in terms of the current labor market in terms of wage rates in that so you know just to give you an illustrative example here.

Oh year ago, our package handler as a ground we are paying an hourly rate that is 16% more than previously at our express major sort locations. The hourly rate is north of a 25% increase.

So those are the <unk> that is the reality of the labor market right now and so that's as Brie highlighted we're taking a number of actions to recognize and address that you know maybe if I.

Help.

Talk through as we go through the year here I think maybe part of what your.

Well you're also there so so again like I said.

More efficient operations as we go through a year.

The pricing actions that we announced yesterday combined with our ongoing efforts those largely will impact the second half of the year.

Raj highlighted a number of the adaptations, we're making in our operating plans as well as some of the technology and other initiatives, we're bringing on to execute more efficiently.

And then you know just to just to tie off some aspects here, we will have some tailwinds in the second half you may recall, we had the severe weather situations in the third quarter of last year.

Variable comp will be a tailwind and the second half of the year.

And then there was two other items with the frontline bonus program and then the recognition of our Yale contribution so trying to put all that in context for Ya. There Raj any if I was just going to just going to the cabinet off course by just saying that so you know we expect in the second half that improved margins in all segments of our business.

And an extra lookout you ravish stinker from Morgan Stanley Your line is open.

Thank you well I didn't want her to follow up on on a minute <unk>. The last comic because again some of the items that that point for the second half being maker he bedroom.

Palm.

Dumping all for any home nothing like almost one day may so I'm, just gonna get a sense of.

All you have.

It's possible that can help me.

The first off the reason I'm asking the question because.

Pardon.

Some of them.

Implies.

Robert you broke up some there, but I there was a reference to some of these items being non operational in the second half I I I guess, maybe I'd.

Turn it around the other way and say if we were fully.

Sorry, if I if I can try again, if I if I if I have something else to me I just wanted to get us a little bit more detail into why you think second half is going to be me too it would be better in the first half because some of those items you quantified the yield contribution to being able to compensate Curragh does seem kind of <unk>.

Non operational almost almost one time Asian nature kind of so again do do you really feel like like the top line is going to accelerate the warriors in an accident rate and the reason I'm asking. This question is because you basically cut your your guidance by approximately the magnitude of the first quarter mess, which does not seem to imply that you.

You are expecting the labor cost a students to continue for the rest of the year.

Well, we're not sitting on our hands amidst the circumstances were taking actions to mitigate it so I wouldn't characterize it as just singularly looking at Q1 and.

Changing as a result of the outcome of that so we're we're aggressively managing.

Every aspect there.

I guess I might turn it around the other way and say if you looked at our results in Q1 absent.

The labour availability challenges it would be extraordinary and thus you know where we realize the absolute number matters and so we're taking actions on a number of fronts to.

That will make the second half exactly as we outline I I'll, let bria dress. Your volume question for later as we go through the year.

Yeah, I guess, the only thing to add is you know, we're so pretty bullish on the volume growth in our ability to take sure both domestically and internationally. The Q1 of our fiscal year is the hardest calm here a year from abroad with perspective. So for sure. We had you know get to say earlier I think there was a comment earlier about kind of flat.

Onions, we have to put that in perspective, and yeah. We have record high volumes within the network right now as we look towards peak, we're gonna see growth on you know what was that a tremendous growth at peak last year. So are pretty confident in a volume then again to complement what make sure. It is a reminder, a lot of our increase large air I will happen in January [laughter]. So.

I'll have it in the back half, which is obviously a big driver of back half performance and then a couple of things John got some great technology, that's coming into market as we head into peeking in the back half, it's gonna help us be more productive and karyn redington in the Europe team has some incredible work going on as they finalize the integration of the air at work and we've got some other work one on there to.

I'm proud of European profitability. So we are pretty confident the back half of the year.

And next look out you can <unk> from Bank of America. Your line is open.

Alright, Thanks, <unk> Raj I think there was a comment in the in the release kind of talking about some a deceleration on on some of the e-commerce in with ground volumes down 10% year over year International domestic down 13% you know it is that part of what you're anticipating for for labor to improve or maybe just talk about the top line for you were just mentioning still.

Seeing strength and and a good network at the peak, but yet the numbers indicate and kind of what we're hearing from from the market that we're seeing some nice deceleration that as you had in the print. So maybe just talk about the the the volume side a little more.

Sure I'll I'll start on that I'll turn it over to Britain no absolutely. We are actually seeing very strong volume do add towards breeder said the only reason, we're seeing a flat volume in the in the ground segment, just because of the economy product. We just broke out for you for the first time and you know our even them from a the commercial volumes.

Growing strongly and even our <unk> H D volume on a very you know tough you are we have Congress still growing on top of that and international is growing very strong. So no all over the only only place we're not going there this restructuring or international domestic businesses, but you know our I P business R E busy.

This export businesses is very very strong so no the demand for our services continued to be very strong because of the differentiation that we are providing in the marketplace and we continued to gain market share around the world. So brief.

Yeah, I I think Raj kind of outlined that pretty clear it clearly from a volume perspective, as we get beyond I guess, the one thing I should add that maybe it wasn't clear in in my opening remarks is that we are constraining demand right now you know as Mike and and Raj talked about the labor. We are doing everything we can to strike that right balance of growth with Sir.

And I will tell you that as we've done that you can see where we've constrain it it's a fedex economy product, it's at least profitable product. So it's the right place to constrain growth and we have made sure that we are not constraining browse and our highest profitable segment that small and medium and that's a commercial and he saw those strong commercial numbers that I referenced.

Earlier, so I would say number one we're confident in a secular growth opportunity for Fedex too we shall we've been gaining share my last market share report shows that and then where we are having to constrain because of the cat. The labor issues. We are doing so in a very disciplined manner.

And next I'll go to Tom Waterway, it's from you B S. Your line is open.

Yes. Thank you I wanted to go back to Labour I mean, it seems like your guide really in a pretty big way hinges on that assumption of improving labor availability in second half. So I guess just two elements to that you know do you feel like you have much visibility to that improvement.

And in what maybe have you seen that would give you confidence that that's gonna happen.

And then I guess Ah component within that if you go into peak you know it would seem like if you can't staff. The the sorts head of peak and you have to hire I don't know what your number is 50070 thousand people did that could that problem could get you know worse before it gets better so I I guess visibility on your labor and being okay, but.

Peak as well.

Thank you.

Thank you Tom Yeah. The number is 90000 and we are you know went on our way here now you know we have.

The last two weeks, we have seen pockets sofa opportunity and you know you know positive changes that'd be I hadn't seen in the first quarter. So that gives us a little bit of encouragement and this is a systemic issue and Oh. So yes, we're making some assumptions here in terms of labor available to do but it'd be Stafford.

For peak them you know hopefully we know the Q3 will be in good shape. So if you're making you know we're not making dramatic assumptions here in terms of Q3 and Q4.

Assuming that Q3 is gonna be better than Q choose or go to any better than Q1 and the early indication just very early indication is that that is indeed the case. So you know.

I I don't know Michael <unk>.

Add anything to that no just just to reiterate.

When I broke I broke the labour impact into two pieces. The part that we're assuming that does mitigate is raj outlined as the impact from the availability again <unk> the market <unk> wage rate is what it is and we can assume nothing different than that and that is what is baked in to the outlook.

And next Bill got you, Brian Ashton back from J P. Morgan Your line is open.

Alright. Thanks for taking my question just wanted to ask me about the trains in pricing I, just think a soldier right yesterday, you talked about that briefly you've got some new surcharges and place. She was growing up but I think you mentioned <unk>, there's some availability for people the largest sugars to get the passing now at current.

Right. So maybe you can just you still that those.

Those two factors you know when do you feel about getting price and the market to capture and get ahead of some of these some of these costs and then maybe you can clarify the comment on the on the larger shippers.

Generally you know cause a lot of these churches from my Boeing perspective. Thank you.

Got it thanks, Brian Good question can be really clear when we're talking about incremental capacity one of the key elements of our revenue quality strategy, which has a application here in the United States as well as on our Intercontinental as we talked about it you know I talked about the six new flights that we launch.

From in Asia outbound perspective, as we and that was primarily quite frankly in transition from AD hoc to scheduled service to improve a liability, but that allows us to plan and predict and it also allows us to Sal differently as we sold into those flights versus previously a lot of that was kind of ketchup and spot right. We are making sure.

That we are bringing on customers at current rates and we are measuring kind of those current rates. So if a customer had an ex use of our intercontinental left prior to the last 18 months you know we've contractual terms there, but as we increase the capacity we give those customers that incremental business comes on at a higher.

Right. So we're really trying to strike the right balance with our customers give them the predictability that they need an honor existing contracts will terms as well as as we expand capacity give them availability to that capacity at an incremental current market rates are really trying to strike that right balance. So that's what I was referring to uhm it's predominantly.

Atlanta Intercontinental side, but of course, it does have application from a peak perspective as we've brought on new customers. This year and we look at our searching customers. They obviously those pique surcharges helps them get the capacity they need so they they can have a successful peak I hope that helps answer your question.

[noise] and next we'll go to Jordan Alegar from Goldman Sachs. Your line is okay.

Yeah, Hi, just you know in the new ground.

Set your broken out can you hear me talk a little bit about this the three pieces and and would you expect going forward you know roughly similar trend lines with the commercial serve outpacing everything but still positive on the home delivery and as you mentioned the sexual straining capacity to keep limiting the the last piece of the business.

Great question. So for this fiscal year as if we talked about you know inventory levels are at an all time low and all of the economic indicators that we're tracking saying that we're gonna have a very strong commercial year here in the United States as well as in Europe and of course, that's also gonna drive are entered.

Continental business, so for Fedex ground commercial we are expecting a strong growth ear from our home delivery perspective, I do think that you will see you know we won't say moderate growth for home delivery given the lapping of last year's very very strong grow so I think you're gonna see him some good.

Ed home delivery growth and from an economy perspective. This particular corner you saw the 30% year over year decline I do not think you will see that trend continue John and I are working and we've got some really great new technology coming to market, a new feature called sort to do de which is going to allow us to really move.

The economy through the Fedex ground system at a different pace and continue to lower the cost. So I think you'll see us find a better balance of the economy to home deliberate Ah Directionally commercial will grow the fastest followed by home delivery followed by economy as we think about this fiscal year.

And next I'll go to David Journey from Bernstein. Your line is open.

A good afternoon breaches following up on that sort of growth outlook and he put out some numbers out there on 10% market growth I think in residential for the next couple of years is it your expectation that that pricing and the operation will be at a point, where you can kind of participate at an above market growth rate from you know once you get past the spirit of a bar.

Tony or do you intend to kind of grow the ground business, maybe a little bit lower than the overall market as some other competitors amphipathic at the lower end of the side of the spectrum.

That's my favorite question, yet, yes, I her intent we have the best value proposition in the market. We have the best seven day, [laughter] transit and coverage and the market. We we feel really good about our value proposition as I mentioned earlier, we are actually right now controlling.

Demand because we're trying to balance service and the current labor environment. So that is absolutely our intent the market is growing we've got you know a great value proposition I can't think of a better time to lean N at too gross I'm here in the United States.

Yeah, we'll take our next question from <unk> from Keybanc capital markets. Your line is open.

Great. Thanks, and good evening, you know, Mike I understand you know kind of the thoughts around that being too specific about quarterly guidance, but I I do think from a street perspective, you know kind of the volatility from quarter to quarter can be an issue. So I just Wanna make sure are you, saying that in the second quarter, you're expecting a similar 800 million dollar magnitude of your over your head.

<unk> and then secondly, and when we think sequentially. The second quarter operating income is flat or down a little bit from the first quarter is that going to be a similar cadence this year or there's some other things that we should think about just as we move into the second quarter from a seasonal standpoint. Thanks.

Oh sure Todd Yeah, no. That's a fair characterization when you when I said, the the headwinds would be similar that the 800 million.

Look you know the pandemic and many other factors impacting our market, including the supply chain disruptions I think you have to kind of take pause in terms of assuming typical seasonality across the board. Yes. There is a there's a degree of.

Of that that that that that you will see but I I would say you can't.

You can't just rely upon that because the dynamics are are much more fluid than they were in and that's why we're trying to outline that as as best we can but we're.

We're navigating those those changes along the way, but we're very confident in what we what we shared with Ya.

And next I'll go to I met in a road trip from Deutsche Bank. Your line is that okay.

Hey, I just wanted to follow up on on that last question. So just to understand so you know you're obviously entering peak season hired me to see mix margin pressure density pressure. She used typically see a pretty notable step down and ground margins fiscal one to two Q is that is that the same cadence I mean, because one accused.

Obviously pretty low to begin with I'm, just trying to get an understanding of that and just as a high level do you think ground margins can be up year over year. This year.

So I admit I'm, just gonna stick with it where we're not giving a more margin forecast what we what we outline was that we expect operating profit to be up in all the transportation segments.

So I'm not gonna get into giving a specific margin forecast by quarter and again the seasonality is we.

We don't.

We hope we don't think it's value added to kind of get into trying to parse that at a level of precision given the dynamics of of the market right now.

And next she'll go to Helane Becker from Kelly Your line is opening.

Oh, thanks, very much have greater hi, everybody and thank you for the time, so we and actually doing a lot of work as you know in the China area and you guys have about 30000 people employed there I think it's getting increasingly more difficult to work. There. So can you just talk about how you're thinking longer term.

About being in that market first is moving more capacity off shore to places like where you have regional sorts like Japan or back to the Philippines. Thank you.

Thank you Helane for that question, we actually have 12000 employees in China. We have you know as you know we've been in business in China. Since 1984, and we have you know serving our customers. There. This is extremely important market, we value your business and <unk>.

Kinda and we are committed to continuing to improve alrighty proposition. There are a golden market is very strong and our operations and Oh in and in or have been Guangzhou is so is is is going smoothly and we also just opened up new your air operations from Beijing. So.

<unk> <unk>.

So China remains a very important market for us and we were very committed to it.

And next will go to Jack Atkins is from Stevenage Your line is open.

Okay, great. Thank you for taking my question I guess just to go back to the Capex and and returned discussion for him and Mike. Thank you. So much for the additional sort of comment.

Around returns and and and free cash flow, but I I guess, what we think about sort of a longer term targets for the business you guys have always sort of talked about this double digit consolidated operating margin.

We haven't really come close to it since fiscal year 16.

You raised the Capex as a percentage of revenue targets in the proxy several weeks ago. You know can you talk about why it makes sense to to raise your long-term capital spending plans when the business still isn't achieving the long term targets you've set for it.

From a margin perspective, just help a square those two things I think that's a that's an issue that a lot of people are having trouble justifying.

Alright, well.

First you know look let me just say yeah cause you you brought up about our Oh I see just in that will expand a little bit about on the the remarks I made earlier there.

<unk>, obviously referencing to our whack when we compare a R O I C, which we put in the 7% to 9% range, which I think is consistent with what we see and and many of your analysis.

But when it comes to the R. O I see itself there was a number of different approaches and methods that practitioners you. So yeah.

No there's tends to be variability in the absolute as well as the comparative measurements, but that said you know we're we're revisiting the various aspects of that so that we can maybe expand the context.

Around our our discussion of the topic, but I will say regardless of how you calculate it are are Oh I see does remain above are wack.

So.

Yeah. So you ask about the the.

<unk> L.

L T I plan.

Look I'm I.

Not going to speak on behalf of the board, but I will give you some context around partly about what I mentioned two three months ago. So again we.

We had record earnings and physical 21 amidst at unprecedented global pandemic in and delivering.

Lifesaving vaccines around the World and then we've talked about the radical changes in supply chains customer expectations and all of that so we did indeed accelerate purposely some investment opportunities for capacity expansion and of course, the replacement of the aircraft I mentioned before so as I did specifically.

Say on the June call. The F Y 22 to 24 L. T. I plan was set at 8% to account for these opportunities.

And that that target.

It is below our historical capital intensity physical 21 was 7%, but that was the lowest in 10 years. So.

Again, there's absolutely to focus on returns and you know I I think that the what we will continue to.

Address your your considerations there and I would also highlight because there was a question earlier about ground and investment there making returns there.

Talked a lot about how we're utilizing our assets differently more efficiently investing in smaller units of capacity, we had the one single hub, but there's no no other hubs on the drawing board, you'll grounded can generate a higher R. O I C at different milk margin.

Levels and it did you know call at eight nine years ago. So again, that's that's absolutely factors into how we how we look at these things.

And extra will go to Alison Planning Act from Wells Fargo. Your line is open [laughter].

Hi, Good evening, three I think he had mentioned a listing of that sure internationally and you know it was.

Certainly unique environment limited capacity can maybe talk to you how you're focused on expanding share things you're doing that but more importantly, what you're doing to try to retain some of that sugar catching today, you know once capacity eases at this point.

Yeah, Great question. So a couple of things number one when we think about our international business, our largest growth opportunity is Europe. So when we think about what are we doing to to gain sure well first and foremost we're gonna complete the physical integration.

Which is obviously critical about when I think about Europe, there's three lines of business. There's the entry Europe, we bought T. N T. At has a very comprehensive and very unique value proposition because it's got the parcel and the freight network entering Europe to grow our Crossborder business and we're very pleased with the momentum there from an international perspective.

<unk> late last fiscal year, we expanded our inter continental value proposition between Europe, and the United States. We now have 90% of businesses and he's 17 have access with the fastest overnight service enter the United States. So we have the leading intercontinental value proposition from you.

<unk> U S. It's a great bundle to sell to be to be our commercial customers saw the entry Europe as well as the Intercontinental and then thirdly, when I think about Europe. It's we are absolutely Underpenetrated and e-commerce, both within Europe, as well as from Europe to the United States and we as I talked about have launched the F. I C product, which is really a.

Very competitive product. It's a quick transit times that has very different features of service for the last mile. So it allows us to lower our costs to serve because the features on the last mile delivery Uhm look a lot more like the ground domestic network. So that's our primary focus from my ear up perspective, I will say, we are also underpenetrated between Asia and Europe and we.

Goddamn, great momentum and that lane similar matrix, we have sped up our service into Europe from Asia. In addition to that we are launching the F. I C. P product between those countries, obviously Asia into Europe, as a very large e-commerce market and again, we're underpenetrated, they're really pleased with them.

Mentum F. R. F. I C. P product. So I hope that helps clarify I also wanted to go back I just looked at my notes commercial and home delivery here in the United States as we think about the rest of the fiscal year are gonna be neck and neck from a growth perspective, so as I talked about commercial growing faster than home delivery, they're gonna be pretty darn close as we look at the volume brought this year.

And next I'll go to Bascom majors from Susquehanna. Your line is open.

[noise] yeah. Good afternoon, when I look at the L. T L freight business. It seems to be performing you know much better relative Tuesday, surely expectations compared to parcel yeah. That's still a manual labor intensive business that requires a lot of drivers line, all freight handling and and bodies.

To do that can can you characterize why do you think that you haven't had these labour driven struggles in that part of your business that seemed to be plaguing, the parcel businesses, particularly domestically and in any best practices or or lessons you can learn and apply elsewhere. Thank you.

Ah Baskin visit this is Mike So first I'll I'll I'll, let Raj address more broadly, but just to clarify within that.

450, a number of the Labour impact there there is an impact there for freight in terms of the same considerations that we talked about there. So I don't want to have the takeaway or imply that the the freight team isn't isn't dealing with similar considerations there, but I'll also highlight as I as I mentioned to.

Scott early on there that you know different networks and in different transportation businesses can have different characteristics than that so so raj Wanna talk about the great things of freight well we are extremely proud of the Fedex right team and you know, but they also bleeding with exactly the same set of challenges and but he.

<unk> you know we have the team has done a fantastic job of managing through Oh revenue quality and operational efficiency. Despite this challenging circumstances Indy nodes. So obviously, they're very very key part of our portfolio, having said that you know it would 20 million packages underground network per day on the ground you must domestic parcel network is a very.

Different so very different set of challenges them dealing with a much smaller instead of shipments I'd go through the the freight system. So look on your point about sharing best practices and making sure that we do the right thing across our operating companies that goes on every single day and you know we were the opera collaboratively is a big one.

Right Fedex now and we are definitely doing doing that so you know again I'm very very proud of what the freight team has done here.

[noise] and next I'll go to Duane, sending where it's from Evercore ISI. Your line is open.

Hey, Thanks, So just on the 200 million wage pressure in the 250 million and inefficiencies at that triggered [noise].

Just just a dive a little deeper there was this a turnover issue or an investment for growth issue are are people, leaving at a faster rate or are you struggling to staff to grow.

And if it's the latter given the environment why why Greg.

So I think if I understand the question I mean, it it is a staffing.

Availability issue on the <unk> on the 250 million piece of it for the 200 million it's the right.

So so just to reiterate that and like I said, we've fully expect and are beginning to see some improvement in the availability, but should not should plans not proceed as we as we fully expect and like I said earlier, we would would need to obviously <unk>.

Reassess the pace of implementing the initiatives there, but the the opportunity remains nonetheless, we just need to be mindful of the overall environment, Yeah, and I would just add one line to that is that if if that were to happen. The obviously much broader implications that's way beyond Fedex.

And now I'd like to turn it back to make any faster for closing remarks.

Thank you for your participation in.

And the Fedex corporations first quarter earnings conference call feel free to call anyone on the Investor Relations team. If you have additional questions about Fedex. Thank you very much bye.

And that does conclude our call for today. Thank you for your participation you may now disconnect.

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