Q3 2022 FedEx Corp Earnings Call
Good day, everyone and welcome to the Fedex Corporation third quarter fiscal year 2022 earnings Conference call.
This 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 third quarter earnings Conference call.
The third 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 our safe Harbor provisions of the private Securities Litigation Reform Act certain statements in this conference call such as projections regarding future performance may be considered forward looking statements within the meaning of the act.
Such forward looking statements are subject to risks uncertainties and other factors.
Which could cause actual results to differ materially from those expressed or implied by such forward looking statements for additional information on these factors. Please refer to our press releases and filings with the SEC.
Please refer to the Investor relations portion of our website at Fedex Dot Com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.
Joining us on the call today are Raj Subramaniam, President and COO.
Mike Glenn as executive Vice President and CFO and.
In brief <unk> executive VP, Chief Marketing Communications Officer.
Now Raj will share his views on the quarter.
Yes.
Thank you Mickey and good afternoon everybody.
First and foremost our thoughts are with those affected by the ongoing violence in Ukraine.
50 of our team members in Ukraine, Zara at most priority and we are providing them with financial assistance and various resources for support.
Suspended our services in Ukraine, Russia and Belarus.
Additionally, we are helping to move relief to Ukraine, and we have provided more than $1 $5 million in humanitarian aid.
Turning to Q3.
Execution of our strategies are solid and substantially higher operating income for the quarter as team Fedex delivered yet another outstanding peak season.
December 2021 was our most profitable December in Fedex history.
Our ability to handle the influx of packages was years in the making us we're taking deliberate steps to enhance our unparalleled network in support of customers large and small.
We have fundamentally changed our performance as we handled increased e-commerce volume during peak and set a new precedent for peak seasons moving forward.
Having said that we are laser focused on improvement improving our margins.
You'll hear us talk more about this today and then more specifically at our upcoming Investor day.
Even with the successful execution of peak, the new year brought new challenges, mostly driven by Omi crop.
Affected our business in two ways.
First we experienced staffing shortages, particularly in our air operations in January alone the absentee rate of our crew due to omicron was over 15%, which caused significant flight disruptions.
Our customers experienced omicron, driven staffing shortages, which reduced demand for our services, especially in U S domestic and European markets.
Both of those factors resulted in softer than expected volume levels, especially in January.
We estimate the effective omicron driven volume softness in our Q3 results was approximately $350 million.
While it was significant it was also a temporary and we have seen volume rebound from January levels.
Even with these challenges Fedex Express delivered strong adjusted operating income growth of 27% year over year.
Speaking of the express team, we announced that after nearly 40 years of Distinguished service, Don Colleran, President and CEO of Fedex Express will retire later this year are named Richard Smith current executive Vice President of global support and regional President of Americas at Fedex Express <unk>.
<unk>.
We will have much more to say about Don and his countless contributions to the business during our call in June.
Fedex freight once again delivered strong results with third quarter, our third quarter operating income nearly tripling year over year, driven by our continued focus on revenue quality.
Turning to Fedex ground.
Operating costs continued to be challenged by the competitive labor environment, now, primarily manifesting and increased labor rates, we estimate the total impact of approximately $210 million of ground in the third quarter, which is significantly lower than what we saw in Q1 and Q2 as we have seen substantial improvement in <unk>.
Labor availability post peak.
With the stabilization of the labor environment I am pleased to share that we have successfully unwound network adjustments that were necessary to provide service, but cost inefficiencies staffing levels and the rapid acceleration in labor costs have stabilized and our network is operating at normal levels.
Despite improvement in the labor headwind volume levels in Q3 was softer than we had previously forecasted in part due to omicron surge slowing customer demand.
As such we expect our second half gross margins will be lower than our previous expectations and not reached double digits.
Over the years Fedex ground has built a strong foundation to serve <unk> and small and medium customers with an unmatched value proposition as a result, we have grown market share in these segments and data remains strong priorities for the future.
And then more than three years ago, we built upon this foundation and embarked on a strategy that puts us in Fedex squarely in the center of the fast growing e-commerce market with a differentiated portfolio and a diversified customer base.
This included a period of strategically investing in our network to meet growing market demand.
Let me note here that this strategy is different than what our primary competitor has pursued.
By building on our current base of business and making those higher investments in our network to facilitate growth. We are in a position to generate improved operating profit and margins. We saw this potential and our financial results for December prior to the surge of omicron.
And moving forward, our financial performance will be further enhanced by maximizing existing assets, improving capital utilization and leveraging technologies that facilitate optimization of our existing physical capacity and staffing.
As we prepare to close fiscal year 'twenty two.
Permit me a moment to share what's on the horizon for Fedex as we continued to focus on margin expansion and shareholder return.
In addition to the opportunity to enhance performance and ground that I just discussed we have other levers for profitable growth, which which include number one driving improved results in Europe.
Number two increasing collaboration and efficiency to optimize our networks lower our cost to serve and enhance return on capital.
And number three unlocking new value through digital innovation.
Of course, we will do this in an environment of strong revenue quality management.
Our international business, particularly Europe.
<unk>, a big profit opportunity.
Air Network integration remains on track for the end of the month.
Complete the physical integration of TNT into Fedex Express and enable a full physical interoperability of these networks both in the air and on the road.
Paris CDG airport will serve as the main hub for all European and Intercontinental flights.
<unk> will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus, enabling us to focus on international growth.
Our expanded collaboration across operating companies will utilize our air and ground networks smarter and more calculated manner. For example, Fedex freight trucks have traveled more than 7 million miles will operating on behalf of Fedex ground. This familiar Fedex freight has also provided Fedex ground with intermodal containers.
Which have already been dispatched more than 36000 times will continue to comprehensively look at all our assets and our network to put the right package in the right network and the right cost to serve.
Additionally, we are unlocking value through digital innovation.
Our accelerated integration of data driven technologies that will drive increased productivity in our line haul and dock operations as well as in the last mile.
Enhanced audacious technology will be operational at Fedex ground and hundreds of facilities fibrosis peak, it'll increase upstream efficiencies, enabling managers do better balanced than planned flotation operations, thereby unlocking key capacity.
For example, during cyber week. This technology help keep $1 9 million down economy packages out of constrained sorts.
Also modernizing the planning and staffing of our dock operations as well as the systems training and technology that maximizes productivity on every store.
One such example is our recently rolled out package handlers scheduling technology that will help ensure the right staffing levels for every shorten every facility across the ground network.
So improved dock productivity and when combined with our focus on employee retention it will enable us to significantly reduce the cost of turnover and strategically target recruiting spend when and where necessary.
The last mile. We continue to improve upon the route optimization technology already implemented to enable service providers to make real time decisions that enhance their businesses daily efficiency.
These ongoing investments in automation and technology have helped Fedex build the most flexible and responsive network in the industry and will enable us to improve our margins.
In closing we have the networks the strategy and the right team in place as we deliver financial returns and drive shareholder shareholder value for years to come.
With that let me turn it over to Brie.
Thank you Raj and good afternoon, everyone.
Several macroeconomic forces, including the tragic conflict in Ukraine, and uncertainty around the pandemic a tight labor market supply chain disruption high energy prices inflationary pressure has dampened the current GDP outlook globally and for the United States.
Last week, we lowered our economic outlook.
GDP is now expected to increase three 4% in calendar year 2022 provides down from three 7% and our outlook is two 3% in calendar year 'twenty two 'twenty three with consumer spending tilting towards services and data growth supported by inventory rebuilding.
Global GDP growth is expected to be three 5% in calendar year 2022, previously four 1% and it will be three 1% in calendar year 2023.
<unk> will be driven by the release of pent up demand for services, while investment demand and inventory restocking to support global manufacturing and trade.
Given the tremendous fluidity at the macroeconomic environment, we will continue to update our outlook. Our teams are ready to adjust plans as required to drive margin improvement despite the dynamic environment in which we operate.
The fuel prices increasing around the world today, we announced that fuel surcharge increase effective April 4th for Fedex Express ground and freight.
Additional details can be found on Fedex Dot com.
Change in economic outlook does not change our confidence that E. Commerce will continue to drive strong powerful market growth. We believe the e-commerce growth rate in the United States will be in the mid to high single digits for the next three to four years.
We will continue to build differentiated value propositions to achieve market, leading pricing and all our customer segments, including ecommerce, our small and medium customers and our commercial BW business.
We are very pleased with the result of our revenue quality strategy and now we have great opportunity to increase the flow through to margin expansion in the third quarter revenue growth of 10% year over year with double digit yield improvement for Fedex Express and Fedex freight close behind with Fedex ground at 9% year over year yield improvement.
In the United States, our package revenue grew 9% in Q3 and strong yield improvement of 10%.
We executed on our key pricing strategy in the month of December delivering more than $250 million in peak surcharge revenue.
Softness in parcel volumes came predominantly from constraining Fedex ground economy, and the effects of omicron on both our networks.
On our customers.
Our focus on revenue quality and profitable share growth drove outstanding results for Fedex freight this quarter.
For the quarter revenue increased 23% year over year, driven by a 19% increase in revenue per shipment.
Additionally, Fedex freight direct continues to gain great momentum as an E. Commerce solution are heavy bulky items with phenomenal growth in Q3 year over year.
Our international businesses are navigating a dynamic environment capacity constraints continue to be a reality.
At this point belly capacity on Trans Atlantic passenger airlines is expected to recover faster than trans Pacific.
Passenger airline capacity is not expected to fully recover to pre COVID-19 levels until 2024, or even later across our largest global trade Lane.
Gareth capacity on international lanes, and strong demand out of Asia is resulting in a continued favorable pricing environment.
With the completion of our integrated Air network at the end of this month, we have one European Air Network, and one road network in and out of Europe.
Our international portfolio of services contains the best European Road network. The broadest use next day coverage and a combined parcel and freight offering that no one else in the market have.
As a result of the integration, we will be able to offer improved transit times earlier delivery and later pickup services to more customers in more locations.
Seven new countries will now be connected on the next day basis within Europe.
While 14 countries will be expanding our noon delivery coverage.
In several countries. This will be the first time, we introduced next day service to the rest of Europe.
We will leverage the expanded European portfolio to improve international profitability drive revenue growth and gained market share.
In addition to the improvements in our European value proposition, we have made significant strides to enhance our digital solutions as well.
In January we enhanced our tracking service based on an advanced machine learning and artificial intelligence model developed by Fedex data works.
New experience delivers greater estimated delivery date accuracy, including updates early or delayed shipments through all tracking channels.
This improves both the shipper and the recipient experience and it will reduce calls to customer service.
Additionally, our new modernized Fedex ship manager, which is our online shipping application has now been rolled out in more than a 133 countries in January we began introducing customers to it in the United States and Canada.
Ship manager as the primary shipping application for our small and medium customer segment.
We believe a market leading digital portfolio will enable fedex to continue to take market share in this very profitable segment.
In summary, we remain optimistic about Q4 and beyond and we'll continue to deliver on our market leading value proposition and with that I'll turn it over to Mike for his remarks.
Thank you Bree and good afternoon, everyone.
After a strong start to the third quarter with the most profitable December in company history January was significantly influenced by the rapid spread of the omicron variant and its negative effect on our operations and the macro environment.
The challenge has subsided during February resulting in third quarter adjusted operating income of $1 5 billion up 37% year over year on an adjusted basis.
There are a number of factors influencing our third quarter results for both this year and last year that I will cover.
As Roger explained the effect on our operations I will give further context for the financial implications.
First labor market conditions, although much improved once again had a significant effect on our results and an estimated $350 million year over year, which was primarily experienced at ground.
For the third quarter that was primarily due to higher rates for both purchase transportation and wages.
Labor availability driven network inefficiencies were significantly less of a factor in the third quarter compared to earlier in the year.
The implications from the Omicron variant serves reduced third quarter operating income by an estimated $350 million predominantly at express.
Influenced customer demand and pressured our operations.
<unk> and constrained capacity network disruptions and lower volumes and revenue.
The third quarter had a favorable year over year comparisons for variable compensation of approximately $380 million, including the onetime express hourly bonus last year and significantly less impactful winter weather that it's a $310 million.
With that overview of the consolidated results for the third quarter I will turn to the highlights for each of our transportation segments.
<unk> reported a 10% increase in revenue year over year with operating income down approximately $60 million and an operating margin at seven 3%.
While pressures from constrained labor markets began subsiding the effect was still significant at an absolutely due to the higher purchase transportation and wage rates.
In addition, our volume was.
The softer than expected due to the omicron variant surged slowing customer demand.
A 9% yield improvement, partially offset these headwinds and our teams remain very focused on improving ground performance as Raj outlined earlier.
Express adjusted <unk>, adjusted operating income increased by 27% year over year, driven by higher yields and our net fuel benefit with adjusted operating margin, increasing by 100 basis points to five 8%.
Express results also benefited in the third quarter from $285 million of lower variable compensation as well as much less severe winter weather.
The strong results were partially offset by the headwinds I mentioned earlier with the omicron surge, having the largest effect, especially during January of an estimated $240 million.
Team member absences, primarily among our pilot severely disrupted operations, requiring many flight cancellations and further constraining capacity.
Additionally, during this time the omicron serves reduce customer down in demand in many parts of the world.
Freight had another outstanding quarter, delivering an operating margin of 15% 850 basis points higher year over year.
And revenue for the third quarter increased 23% with operating income up over 180%. Despite the pressures from higher purchase transportation rates and wages.
Operating margin improvement from the second quarter to the third quarter.
This is al.
Profitable share growth.
Tony.
Because the balance sheet, we ended our quarter with $6 1 billion in cash and our targets hitting over 3 billion and adjusted free cash flow for fiscal 2022.
As I emphasized last quarter, our stronger cash flow provides extensive flexibility as we continue to focus on balanced capital allocation.
As such I'm pleased to share that the accelerated share repurchase program announced last quarter was completed.
During Q3 with $6 1 million shares delivered under the ASR agreement.
Total repurchases during fiscal 'twenty, two our nearly 9 million shares.
Or 3% of the shares outstanding at the beginning of the year.
The decrease in outstanding shares, resulting from the ASR benefited third quarter results by <unk> <unk> per diluted share.
Also during the quarter, we made a $250 million voluntary contribution to our U S pension plan and have funded $500 million year to date.
Now turning to what's ahead.
We are affirming our full year adjusted EPS range at $20 or 50 221.
<unk>.
The operating and business environment uncertainty I mentioned in December did materialize to a greater degree than anticipated during Q3, but we have navigated those challenges and project a solid finish to our fiscal year.
Labor related network and efficiency effects have diminished and the wage rate components should become less of a headwind as we lap the onset of labor rate increases in the fourth quarter.
Lastly, variable compensation expense will be a tailwind as it was in Q3.
Turning to capital spending we have lowered our FY 'twenty two capital spending forecast from $7 2 billion to $7 billion.
Much of the change is driven by extended timelines, resulting from supply chain considerations.
While we are still developing our FY 'twenty three plans our focus remains on lowering our capital intensity, while investing in strategic initiatives to drive returns.
We are highly.
Full year effective tax rate is now.
42% to 23%.
Prior to the Mark to market retirement plan adjustments.
While we.
On certain uncertainty.
The remainder across many fronts, including additional pandemic developments the.
The labor market.
Relation high energy prices and further geopolitical risks under their pension potential effects on the pace and timing of global.
Economic activity.
We continue to monitor these trends.
Memphis.
Mickey and the NFL.
Investor Relations team will soon provides.
We will be happy to address your questions.
Yes.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off July your signal to reach our equipment again that is star one to ask a question. Our first question comes from Amit Mehrotra with.
Deutsche Bank.
Hey.
Thanks, everyone appreciate the questions.
I wanted to add Scott's background margins.
If you can just talk about where you expect ground margins to be in and just longer term question for you.
If I look at ground up.
Since 2013.
Ground revenues are up $17 billion since 2013.
But the profits and ground are up only $400 million, which implies a contribution margin of only two 5%.
So can you just talk about a plan to reverse this long term trend. It seems like for the first time in a while you guys are ready to present, a long term plan to improve the cadence and the ground margins wondering if you could put a little bit more meat around that.
What the levers are going to be to reverse this long term trend and maybe give us some.
Goalposts around that way as it relates to fiscal the next fiscal year, which is coming up pretty soon thank you very much.
Pam.
Firstly.
We.
Financial performance at Fedex ground.
Okay.
No.
So let me start with.
Firstly, the CEO of Fedex ground as John Smith, and he was set the stage for a tremendous performance in Fedex freight before he left and we're seeing the benefit of that is the reason that he is there.
We expect that.
John and his team will drive this performance going forward, but let me also give you just a context of where we are on ground.
We first of all manage Fedex enterprise asset portfolio of different operating companies and we made a specific decision pasty and double down on E. Commerce three years ago. We saw that we were skating to where the puck was going to be seeing where the market was going if you look at the history of Fedex ground from the various.
Beginning starting of the acquisition of Rps, we relaunched home delivery and there are periods of time, we had to invest.
And we were.
We are working with our customers and retailers for them to succeed in E Commerce and it is a strategic relationship but we are building so that period of investment in many ways.
Is behind us that paces.
Is behind US now we are focused on focused on getting revenue quality, making sure. We put the right packaging the right network and making sure that we generate margins.
And growth going forward, we will talk about this in more detail in a new <unk> in June.
Clearly that's what we're focused on right now Mike.
The only thing I would add.
I think there was a.
Question in there about FY 'twenty two.
I'd say certainly for the guidance that we have our consolidated operating margins will increase in Q4, I'm not going to get into specific segment projections, but it is certainly the case.
Sequentially ground margins.
Are typically higher in Q4 than in Q3 than we would have that expectation this year as well.
We will take our next question from Jack Atkins with Stephens.
Hey, great. Thanks for taking my question here. So just another another one on ground I think we've had three quarters in a row, where cost inflation at ground has pretty significantly outstrip your ability to.
Outstrip your your revenue per package and yield growth.
How confident are you that youre in a position to drive cost per package ahead excuse me revenue per package ahead of cost per package as we look forward, especially with rising inflationary pressures that we're seeing across the economy Im sure Youre seeing on your business as well. Thank you.
Thank you Jack.
I think.
We have had two particular issues regarding labor ion Isc's embarked on this journey, obviously that was what we saw in the last year was <unk>.
The pricing in that sense, and we had two things.
One was.
Because of lack of labor availability, we have are inefficient and moving some other packages and secondly, just the cost of labor going up we have unwound. The inefficiencies. The network is back to normal, but obviously, we have now in our numbers, we have the year over year growth on labor rates and so we are.
And we have dealt with it head on which is now in our numbers and.
I think it gives us a competitive advantage as we look into the future.
Our revenue quality management is a big area of focus for US our peak in December give.
Give us a flavor of what we can expect in terms of our financial performance going forward and we are confident that we can we are able to manage this going forward.
Mike in fiscal year 'twenty, two that was a natural but it just set the stage for future earnings growth.
Revenue and top and bottom line I don't know where you want it.
When I add anything more on revenue quality.
No. We're obviously, we have done a tremendous job talking about the 9% yield improvement from better brand this past quarter.
As I've mentioned, we have repriced about 50% of our large customer meeting customer contracts. So we still have some opportunity that we have to continue that re pricing.
And so we are clear eyed about the inflationary environment that we're operating in and node and need to stay ahead of that so you can anticipate that as we head into next year's business plan in all of our discussions with customers that you will continue to see a high yield improvement across all segments, because it will be required to stay.
Head of the environment, we're operating in right now.
Jack if I can say one other thing we have a revenue management committee that meets every week and is even more important now because of the inflation inflationary environment and the operations teams and the commercial teams are.
Locked in and we make decisions very very dynamically and very very quickly to deal with this.
And we'll take our next question from Tom <unk> with UBS.
Yes, good afternoon.
I wanted to see if you could offer some thoughts on the consumer.
I think three maybe you had spray Raj you had some comments about risks or Mike, Mike, but have you seen any sign on cause noise, but just the consumer weakening have you seen that recently in the U S.
And how do you think about the importance of consumer and goods goods buying when you look at the ground business. If you have a weaker consumer does that just make it tougher to.
Make that algorithm on ground margin improvement work.
Really just wanted to get your thoughts on consumer and.
Near term and also outlook. Thank you.
Hey, Tom Thank you for that question.
Especially as the inflation has picked up.
And there.
There is obviously consumer spending in February was already down.
It's difficult to forecast in the environment, but I'm going to tell you that.
A big period of growth of E. Commerce is now behind us and we are planning.
From that perspective, we are confident new.
And with the mid.
Mid single digit growth, so mid to high single digit growth.
But he was talking about on E. Commerce that we are able to generate positive.
Returns going forward. So we're not counting on huge consumer spend in our numbers.
Yes, I would agree with that completely as I talked about we already have modified our economic outlook from a market forecast perspective, a couple of things one for this calendar year, we do expect <unk> to be parcel market growth to be actually relatively healthy at 3% normally its in around 2% in our market.
But as here, we still see a lot of inventory replenishment. We also see strong requirements coming in from Asia as I mentioned earlier.
Our backlog there quite frankly, so the <unk> is still going to be healthy for the year from a BDC perspective, we have modified our long term outlook, we're now projecting about eight 3% CAGR.
We had actually projected above 10%. So yes, we think consumer demand will be down it has already.
Quite frankly in our outlook for Q4 and as we look forward.
<unk> for next year, we think we can continue to take market share.
And have some profitable growth despite sort of a softer economic outlook.
We'll take our next question from Jordan <unk> with Goldman Sachs.
Yes, Hi afternoon, just curious you mentioned that think that the.
Staffing and labor related.
And the most recent quarter.
Fourth quarter direction Wise and then St.
Same thing Brad I think you said the <unk> III.
Fiscal fiscal fourth quarter.
Thanks.
Hey, Jordan, it's Mike.
So we went from Mike roughly $4 70 in Q2.
$3 50, this quarter I mean, I would put it in the order of magnitude around 100 million or so.
Based on what we are.
Here today, that's again, principally the wage rate element of it which really began to manifest.
In the May timeframe essentially April.
From a timeframe.
And our next question comes from Chris Wetherbee with Citi.
Hey, great. Thanks, Good afternoon quick clarification and then another question on ground, just making sure I understand Raj I think you said it well.
Wouldn't hit double digits on ground margins for make sure I heard that the average for the back half of the year. So I guess, we will see expansion in the fourth quarter and then.
Maybe taking a step back in terms of the ISP model on the ground side, just kind of curious if this type of inflationary environment.
Pressure to kind of go back and maybe open up contracts and do things differently with that piece of the business is that something that we need to think about beyond this year out into next year and beyond as inflationary pressures keep up.
Thank you.
So the first question in a minute.
And on the enterprise and entrepreneur and a business model with <unk> with a contract goes as so as a win win scenario that provides us the flexibility as the market dynamics change we remain committed to collaborating with those service providers and.
And.
Table that when the lines of communication are open.
So yes, we will work closely hand in hand to make sure that we are successful.
For Fedex and our contract is going forward.
Chris Nothing from what I've said prior where consolidated operating margins will be up in Q4.
And the ground Q4 margins sequentially would be higher than Q3, but.
I'm not going to go past in terms of the specific segment quarterly margin projections.
We will take our next question from Duane starting with <unk> <unk> with Evercore ISI.
Hey, thanks for taking the questions.
I Wonder if you could comment on you gave us the impact to EBIT, but I wonder if you could comment qualitatively on the impact to volume growth from all micron.
And express and ground.
And to what extent, you've seen those volumes and adv's accelerate and pick back up.
Sure happy to Great question, when we look at the volume in Q3, we really have to break it down by month. So from a December perspective, we actually saw softer than anticipated volume for a couple of reasons. The first with Fedex found economy, we have been.
Constraining that products to make sure we get the revenue quality that we require for the network.
One is we are absolutely focused on service and make sure that we had volume in the right places within the network and then third.
Was that we also saw a huge pull forward in early in November both retailers and of course, the carriers were really pushing to get volume moving earlier in the peak season and actually it was quite successful. So overall December was softer than anticipated for those three reasons and when we got into January we obviously saw significant impacting volume.
The express network here in the United States, but also in Europe, and then we did see some impact in January at X crowd, but also we did have the Fedex ground economy constrained in both impact January because as you can imagine the fan economy product is heavily used for returns as well. So that was what was going on in December and January.
<unk> also saw those other impacts in December and January and then we got to February we actually saw a rebound.
So as Raj mentioned in his opening remarks.
We saw quite a bit.
Dramatic recovery from a volume perspective relative to January and so thats sort of where we're at from a volume perspective.
Our next question comes from Scott Group with Wolfe Research.
Hey, Thanks afternoon guys.
So Mike you've got a big range of earnings guidance for the year, one quarter last any thoughts on Directionally, where do you think we should be shaking out.
Well to that range and then I'll ask another on ground margins.
You guys operating give or take at an 8% margin ups's on its way to 12, you guys used to be better.
<unk> is a structural is there is there a reason you can't get.
To those kinds of levels and then any thoughts on this.
<unk> contractor lawsuit. Thank you.
Okay.
Alright, Scott first as Mike.
Talking about the range.
Look certainly it is the case that relative to where we were three months ago.
A little different place and the range as the uncertainty than we had anticipated.
But.
We're quite proud of the fact that our guidance remains where we started the year at and.
If you look if you had told me at that time, we would have the most dramatic labor market shift in generations as well as another phase of the pandemic that resulted in case counts in the U S and Europe higher than any previous waves.
Yes.
Validly would've had a significantly wider range. So we feel that it is a great accomplishment of the team.
To be where we are with this lots of moving pieces and things change along the way within the scope and scale of what this enterprises.
So we're looking forward to a strong finish to the fiscal year.
Let me just say a big kudos to our CFO on setting the range in the beginning of the fiscal year and of all the things that have happened in the Midland We are still the same range. So.
Our survey.
I've already talked to you about the situation and we will continue to work that.
So communication are open.
And he is directly in touch and display.
Team and as far as our upside.
For Fedex ground, yes.
Upside, we know that and we are laser focused on that on that.
John is the right person to lead that team to get there as well. Thank you.
Our next question comes from Allison <unk>.
A linear with wells Fargo.
Hi, good evening.
I just wanted to go see the levers of growth you talked about collaboration and increasing our collaboration to optimize the network understanding. It's early innings. There just any color on the productivity you are seeing some kind of some of those efforts and then maybe the potential checkpoints that youre seeing that might need to be addressed before that could accelerate further.
Just any color thanks.
Yes listen thank you for that question.
Clearly as we the e-commerce market has grown.
And in both our networks.
There is now opportunity to optimize the day definite traffic between the two networks and so we're clearly doing that.
But as you call it in the early in the niche.
We have modeled.
A lot of work to be done and we will share with share that with you. When you are all here in Boston and we will continue to make good strides here now in this context, please don't forget.
Fedex freight is doing in this regard.
Especially working with both ground and express an overtime within international and so we will clearly focus on trying to making sure that we put the right packaging the right network at the right price and.
Again, we'll share more details with you in June.
Okay.
Barclays.
Hey, good afternoon, and thanks for taking the question.
<unk> restaurant management team his last call maybe you can give us some insight into the appointment of Richard at Express what was the process there for electing the next leader and then what do you hope to get out of the leadership change and that large division. Thank you.
Thank you Brandon and of course, we have a very.
Succession planning.
<unk> done.
John It wasn't his role.
And for three years and knew that was going to be a finite time period of time and so we were already working on the succession planning very carefully as we have done so with John and Fedex ground with lands in Fedex freight. Similarly, we have a process going on with express.
Divided into three groups.
Mega regions with Americas, Asia and Europe.
Richard has been leading the Americas region. This was responsible for that.
The vaccine distribution.
And also <unk>.
<unk> of our global network in this very interesting time that we've been through so we are very confident that Richard is going to take the organization to the next level of Don has done a fantastic job of.
Creating a unified culture and getting the right <unk> in place we have great bench.
And.
This is going to be terrific. Thank you.
We will take our next question from <unk> majors with Susquehanna.
Yes, good evening.
You took down the midpoint of your multi year restructuring spend in Europe, but didn't change the benefit you expect to get from that can you talk a little bit about what drove that updating your expectations and what the next steps could be in the Europe profit improvement plan as you get ready to the point of discussing that with investors maybe next year. Thanks.
Share of asking this is Mike. So first yes, we did narrow the range of the expected cost of that program as we have moved through the process.
And as you've noted the.
We've talked about.
Charges as we recognize them there the benefits range is unchanged and so we felt it was appropriate as we're further down the process just to simply narrow narrow the range of that so that was that was it.
A lot of things going forward as it relates to TNT beyond that so Roger elaborate a bit on some upcoming events too, yes, So Glasgow and thank you for the question there I think it's.
At the end of this month.
Very important date for us as we complete the physical integration Europe remains a big profit opportunity for us going forward.
Just to put it.
In perspective.
Today.
Fedex operates 350 flights a week, serving 42 airports and TNT operates 600 flights serving 59 airports.
Combining we've been reduced a total flights to 825, but we extend our reach to serve 72 airports, so fuel slides more airports and oh by the way because they have just extended cough time, so the value proposition gets better so that happens right away in April.
The.
The logic behind our acquisition of TNT remains sound.
We have closing a portfolio gap.
Because we do not have a intra European deferred.
Service and now we do with this.
We can also now so Europe in and out on a lower cost structure.
And we also launched priority timed options. So we have noon and end of day serviced and that gives us flexibility as a lot of things going on as we speak.
Michael will talk to you about the back office savings there.
The CDG hub.
100000 pieces per hour I was there two or three months ago and build back there in may again.
There was something to behold.
So there's going to be.
Confident here that.
As such the stage for our improved performance in Europe from here on out. Thank you so much.
Our next question comes from Brian <unk> with JP Morgan.
Brian Your line.
And it is open that we are unable to hear you. Please check.
And the it function.
Well move onto our next question from Helane Becker with Cowen <unk> Company.
Thanks, very much operator, hi, everybody I just have two questions one is.
When you say that you are taking share I think Brent you mentioned that can you just be a little more specific about where that share shift is coming either in verticals or geographically and then my other question is with respect to.
Your facilities can you just talk a little bit about the.
Use of robotics, and automation that lower potentially could lower labor costs.
Thank you.
Yes.
Sure happy to talk about our targeted revenue growth strategy. So if I am.
A market share perspective, our goal here is to take share strategically in the segments that value our network and as we've talked about over the last year or two we've made some pretty significant enhancements in our network and our value proposition some of which I covered earlier share over the last several years consistently and this year we ask.
<unk> seen our small business segment grew faster than our large customer segments, and we're really pleased with that when we compare ourselves to our primary competitor I still have share upside in both <unk> as well as in ecommerce and as I mentioned, we are very disciplined and very focused on our small business.
Acquisition strategy, we're doing some things very differently.
<unk> direct what do I mean, we're not going.
On math through platforms, we are being very selective with our platform partners that we are choosing because we want to have that direct relationship with the small customer we have a fantastic loyalty program that no one else in the market has we are strategically using earn discount to bundle our parcel and our LTE.
Al portfolio, which of course, our primary competitor can no longer do so from a small business perspective, historically, we've taken share this year I've seen small business grow faster than large and im talking predominantly here in the United States. Although I will tell you that both Europe and EMEA are rolling out a very similar playbook, we're very optimistic but optimistic about our share.
<unk> there as well. Additionally, we saw APAC, our EMEA region take share and we're very pleased with that as well they've been very focused and we see strong momentum out of Asia as well as out of Europe, and ecommerce integral Intercontinental E. Commerce. The premium piece of that market is that a share opportunity those that pay for.
The value proposition that from a Europe perspective, we have not been as successful from a share perspective, but we could not be more excited about what Raj just covered this physical integration allows us to unleash just an incredible value proposition. We've got some brand awareness work to do still but I am very optimistic that you're going to see some real momentum.
You are up next year, so I hope that answers your question, but happy to answer any other details you need let.
Let me.
I don't think there is opportunity to give a shout out to our commercial teams are because we've done really remarkable job of.
Growing share and managing revenue quality and we'll continue to do that on the robotics front is very important question and I think especially in the last year or so the field of robotics itself has actually.
Change to it because they knew.
Yes.
With AI and ml come into the picture.
There is a significant development in the robotics field. So we think that's a huge opportunity for us and again.
We already if you look at some of the facilities that we have in ground a lot of us in the semi automated but.
On.
Several processes inside the hubs.
And.
While robotics.
I'm also working with partners.
On autonomous vehicles, we have Fedex walk so.
For same day delivery on demand and we have.
Like new Ro.
And also over the road so a lot of effort in this direction, because it's very strategic and.
Could have big implications in the years to come so again, thanks for the question, Yes, Helane This is Mike.
A question it will be the case to amplify the point Raj a day that youre seeing tremendous amount of capital coming into the robotics space as a result of the labor.
Labor market constraints that have been experienced worldwide. So.
That's really an opportunity.
Certainly when the when you are here to visit here in a few months you will get the opportunity to see within our facilities.
How that really works because that is where the bulk of the.
Labor is deployed as the loading and unloading of the trailers there, particularly in the the ground facilities given the investments we've made in automating all the sortation in that so.
Very very relevant point to raise.
Our next question comes from Jeff Kauffman with vertical research partners.
Thank you very much and nice to get back to the question on the.
The improvement that you were seeing in March throughout the network.
Yeah, obviously, the global supply demand equation has changed a lot with the recent events in eastern Europe. So I think earlier you were giving us a few more of the <unk> impact on domestic express could you talk a little bit about what's going on globally as you move from February.
Into March I know Omicron impacted Europe, you mentioned and now we've got a new version of Covid in Asia.
Is the step up look like on the international side and how have the events.
Eastern Europe affected global capacity.
Well, let me start and I'm sure Bruce will clean me up here.
Firstly, it's kind of almost funny that.
On the Corona is almost a thing in memory. When those are averaging just a couple of months ago, but is now behind us in that sense.
And the other bigger things now.
To deal with B the conflict in Europe was really strong.
<unk> plus grown war like that in many many years.
And but the impact on the economy is something that we have to see I think it starts with the guests I'm not going to project that forward.
Sure.
So we will have to be very flexible and nimble in dealing with that situation. They are watching the China situation quicker fully our operations are close to normal as we speak.
The demand is still very strong.
But again this is a very dynamic situation and we have.
More than 10% of our employees and our close loop system today working.
I mean, I've, just amazing job by the team and keeping our operations building so.
This is something we're very fluid in nature and we've got to watch as we go along I don't know brief anymore.
Not a whole lot more to add as I've mentioned.
And as a result, right now we have not seen an impact.
Eight the high inflationary environment as we talked about some of the risks we see from a consensus is pretty high.
Because of the current commercial capacity constraint, but also as I mentioned because inventory levels.
Our style so low so right now demand looks good coming out of Asia, we're keeping an eye on the United States as well as in Europe.
But to take share in that time.
Hey, good but as Raj talked about.
You can change and we will adapt.
As required to do so.
Next question comes from Scott <unk>.
<unk> with Oppenheimer.
Thanks very much.
Just a clarification kind of on the on that last question.
It's got some of the Russian conflict some indirect.
Collateral issues could you. Please just.
Give us a bit of a size of.
How much how much business in Russia, and Eastern Europe represents to you and then just switching gears.
Could you talk about sustainability of freight margins.
Obviously been very strong for a long time now and look I get it continues to have momentum.
We continue to expect.
In the mid teens or is that something that you would expect to change as we move through the rest of the calendar year.
Thank you Scott I think if I if I got the first question right I think the.
Specifically talking about the three markets.
Ukraine, Russia, and Belarus, the profit impact.
That is not material.
So.
So if.
Another question on that happy to take it on the Fedex freight I'm, just delighted with where the progress has been made there were made as it's been.
In the making so to speak we're focused heavily on our revenue quality management and operational efficiency also again, let me make this point Fedex freight is doing a remarkable job in stepping up and helping other operating companies as needed.
I think this is.
Winning formula and that's we expect that to continue.
And that does conclude today's question and answer session. At this time I will turn the conference back to Mickey Foster for any additional or closing remarks.
Thank you for your participation.
Fedex corporations third quarter earnings conference call.
Please feel free to call anyone on the Investor Relations team. If you have any additional questions about Fedex. Thank you very much.
And that does conclude today's conference. We thank you for your participation you may now disconnect.
Okay.
Okay.
Okay.
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