Q1 2023 FedEx Corp Earnings Call
Please standby good.
Day, everyone and welcome to the Fedex Corporation first quarter fiscal year 'twenty 'twenty three earnings conference call. Today's call is being recorded at this time I will turn the call over to Mickey Foster Vice President of Investor Relations for Fedex Corporation. Please go ahead.
Good afternoon, and welcome to Fedex Corporation's first quarter earnings Conference call.
Before we begin we want to recognize our SEC 8-K was filed earlier than planned due to a technical issue.
The first quarter earnings release Form 10-Q, and Stat book are on our website at Fedex Dot com.
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.
We want to remind all listeners that Fedex Corporation desires to take advantage of the safe Harbor provisions of the private Securities Litigation Reform Act.
Certain statements 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.
Raj Subramaniam President and CEO .
Mike Lynch Executive Vice President and CFO .
And Bruce <unk>, Executive Vice President and Chief customer Officer.
And now Raj will share his views on the quarter.
Thank you Mickey and good afternoon, everyone.
I'd like to start today by acknowledging our pre announced first quarter earnings results and updated outlook, we provided last week.
Our network capacity did not align with the demand we experienced as the quarter progressed.
As communicated last week, we have taken swift actions to address what's within our control.
Getting cost out rapidly.
My priority.
And today I will outline why I'm confident in our ability to drive improved performance and profitability through aggressive cost actions.
Before providing more details around these actions let me briefly discuss what happened since we last spoke to you in June .
We saw a decline in our volumes during the first quarter, which accelerated in the final weeks or softening volumes in Asia and the U S were predominantly due to the economy, while the shortfall in Europe was both economic and service related.
Therefore, we had costs in the system for volumes that didn't materialize.
While we immediately took action savings from these cost efforts lagged the volume decline due to the scale of our operations.
As a result, while revenue was up 6% year over year. These dynamics translated to volumes being down year over year at all of our transportation segments.
Volume decline directly impacted our bottom line driving totally total company adjusted operating income down roughly 18% year over year.
Now what matters most is what we're doing about it.
And this brings me to our aggressive and decisive plan to reduce costs I'll speak to you our I'll speak to our actions in two parts first our fiscal year 'twenty three steps to immediately reduce costs and second our Delaware today innovate for tomorrow transformation strategy to.
Only reduce costs and optimize our network.
Starting with fiscal year 'twenty three we are prioritizing cost actions to generate 2.2 to $2 $7 billion of savings of which about $1 billion will be permanent.
Taking each key contributor in turn.
At Fedex Express, we expect to drive one five to $1 $7 billion in savings this fiscal year.
The largest single expected contributor in fiscal 'twenty three will be the changes, we're making to our express air network as we cut global flight hours. This reduction includes 11% of planned specific daily frequencies, 9% of Trans Atlantic Daily frequencies, and 17% of daily frequencies from that.
Between Asia and Europe .
As volumes deteriorated later in the quarter, we began making these structural changes to our network.
The impact of these initial changes to be fully realized in October and the benefit of our continued actions will steadily increase throughout the fiscal year.
We're also evaluating additional reductions to be implemented post peak.
Further, we're taking steps to enhance our ground efficiency, including reducing routes hours vehicle rentals and other on road expenses for.
For example in Europe , we are altering ground network routes to improve productivity, leading to a reduction of approximately 11% of routes in the UK and 12% in Germany.
Now turning to Fedex ground.
We expect savings in ground to be $350 million to $500 million in fiscal 'twenty three.
Approach to cutting costs at ground, primarily centers around rationalizing our operations.
We're consolidating sorts, which will reduce costs, while maintaining service and have canceled several planned ground network capacity projects.
And as mentioned last week, we are also reducing select Sunday operations in or 170 stations.
Mike will provide more details on our capital plan shortly.
The final component of our expected fiscal 'twenty three savings from overhead expenses as we rightsize. Our overall cost structure. These actions include our plans to close nearly 140, Fedex office locations and at least five corporate office facilities. Additionally, Fedex services has stopped.
All non critical projects in total our overhead reduction actions, including Fedex services will contribute $350 million to $500 million.
We realized nearly $300 million in cost savings from these actions in Q1 and expect approximately another $700 million in Q2 with the remainder of the fiscal 'twenty three savings realized during the second half of the year.
The second part of our cost plan is focused on permanent reductions and we have launched drive a program supporting our delivered today innovate, but tomorrow strategy introduced in June <unk>.
Drive is how we execute on that strategy. Our team has already started implementing cost reductions under this program and this will ultimately enable network to auto the long term and to enter an optimization of our network.
Sri Ramakrishna Xiaomi, our newly appointed Chief transformation Officer will facilitate drive and continue reporting directly to me.
In total we expect to take out an additional $4 billion in costs related to drive by fiscal year 2025.
To be clear these are incremental to the fiscal 'twenty three savings I just outlined.
These transformational changes will lay the foundation for network, good auto, which will create an additional 2 billion dollar benefit over the long term.
In closing we are focused on actions, we can control as we stabilize our near term performance and execute against our long term strategy.
I'd like to sincerely, thank our highly motivated team for the hard work and dedication to deliver upon the purple promise.
Now, let me turn it over to our Chief customer officer breaker Aerie to discuss market trends that underpin our outlook and our commercial strategy in some more detail.
Okay.
Thank you and good afternoon, everyone.
Raj discussed during the first quarter manufacturing global trade and consumer spending decelerated, particularly late in the quarter and certainly more than we anticipated.
As a result, our first quarter volumes were lower than we forecasted.
Our current expectations for 2022 U S GDP growth and U S. Industrial production forecasts have declined by about 100 basis points since June .
Data shows that U S consumer spending has slowed as inflation remains a challenge.
Further consumption is skewed towards services demonstrated by the fact that in June excluding auto the real retail inventory to sales ratio fully recovered towards pre pandemic level.
From October to June the real inventory to sales ratio, excluding automotive increased 14 basis points, which was the fastest gain over an eight month period in the 25 year history of the series.
Also real retail sales, including auto after growing four 6% and 10, 8% in calendar year 'twenty, one and 'twenty two respectively are now down three 1% year over year through July and are pacing to have the worst decline since the great recession.
Turning to our transportation businesses I'd like to spend a moment on the dynamics occurring within Fedex Express and most specifically in Asia and Europe .
Starting with Asia, our results were impacted by macroeconomic weakness our lower demand is consistent with the broader market with ocean and air freight rates under pressure in recent weeks.
A good indicator of how quickly the market changed in Asia is to review the spot rates coming out of Hong Kong and Shanghai.
In June and July spot rates were between 20, and 40% higher year over year, respectively.
In early August these rates fell to single digits and by the end of the month, Shanghai had plummeted to a 10% decline year over year, while Hong Kong rates were flat.
Through June which is the latest data available we have had small market share gain in our Asia region.
In Europe , the economy was weaker than we anticipated and service further pressured our results.
Our network integration was successfully completed in March but it is an incredibly complicated effort to combine two individual networks of this scale.
Throughout the quarter, we continued to refine our standard operating procedures to improve service levels and create momentum across our European Division.
Moving now to Fedex ground.
Revenue growth was driven by higher yield from higher fuel surcharges base rate increases and improved volume mix.
Despite volumes being lower than anticipated, we have held market share in the United States.
Fedex ground has strong service levels best in market Transit times, and an exciting new picture proof of delivery capability. We are ready to deliver for peak, we will remain nimble and leveraging peak surcharges to balance demand and the capacity of our networks as we monitor volume trends.
At Fedex freight momentum continues to build.
The freight team delivered another strong quarter marked by 21% revenue growth. The team continues to drive disciplined execution focus on revenue quality and profitable share growth.
For the company overall, we continue to execute our revenue quality strategy and pursue business that provides attractive yields.
We continue to deliver new pricing capabilities and we've taken recent actions to stay well positioned relative to the market as we approach peak.
We've maintained a brisk pace for repricing contracts for new renewables and continue to negotiate strong increases.
We just announced a six 9% general rate increase this coming January and our response to inflationary pressures on our costs.
We also announced our new remote area surcharge and peak residential pricing in the United States.
In Europe , and Asia, we will launch a new handling surcharge as well this January .
In August we implemented international fuel surcharge table adjustments for Asia, Europe , the Middle East and Africa.
Fuel surcharges are important pricing tool, we rigorously monitor fuel prices to ensure that we are appropriately positioned relative to the market.
We're moving with speed and agility to reposition our business model for today's operating environment. As you heard from Raj, We had a great we have great opportunity to align costs with volume levels. We.
We are committed to doing this while executing against our commercial strategy and delivering for our customers.
Importantly, we are still focused on the longer term opportunity growing in high value segments, driving improved service quality and of course, delivering an outstanding customer experience.
I am really pleased with how our teams have responded in this dynamic environment and we are well positioned to deliver during the upcoming peak season service is strong and we have a fantastic value proposition with that I'll turn it over to our Chief Financial Officer, Mike Glenn.
Thank you Barry.
<unk> revenue was up 6% for the quarter profitability was challenged with operating income down 18% on an adjusted basis and adjusted operating margin down 150 basis points year over year.
At Express adjusted operating income declined 72% due to lower average daily package and freight volume and increased expenses as cost reductions lagged volume declines.
These factors were partially offset by yield management actions, including higher fuel surcharges.
Package yield, including fuel grew 16% year over year.
Turning to ground.
Operating income increased 3%, primarily due to yield improvement and home delivery volume growth.
Yield, including fuel grew 12% year over year.
These factors were partially offset by higher operating expenses driven by increased purchase transportation and other operating expenses.
Great delivered another strong quarter with operating income increasing over 67%.
Is the freight team continues to execute.
This was driven by yield management actions, including higher fuel surcharges.
Yield, including the surcharges grew 27%.
This was partially offset by higher salaries and employee benefits as well as lower shipment volumes.
To address the changed environment, we're focused on what's within our control and moving with urgency to take cost out of the network.
Our team is operating with speed to identify cost saving opportunities and accelerate their implementation.
The two two to $2 7 billion in fiscal 'twenty three savings, we are targeting a relative to our initial plans heading into the year.
The majority of this year's savings will come from express.
The demand change has been most pronounced.
We expect about $1 billion of our fiscal 'twenty $3 savings to be permanent in nature.
With slight reduction is the largest component along with corporate and back office costs.
These permanent cost reductions were not part of the deliver today innovate for tomorrow strategy. We shared in June which is about how we structurally optimize our networks.
These these reductions are directly related to flexing in a changed environment with a view to build back differently in the future.
As Raj mentioned, we remain committed to the profit improvement objectives, we shared at our June investors meeting.
We have launched efforts to accelerate initiatives identify incremental opportunities and implement metrics to track progress under the drive program.
The next I'll give more details on the targeted 4 billion savings by fiscal 'twenty five enabled by drive.
About $1 4 billion of the total will come from at Fedex Express operating expenses.
Our largest areas of opportunity we are actively advancing our first restructuring the air network by reducing routes and more efficiently deploying crews aircraft in commercial line haul.
Next optimization of sort surface line haul and on road designed to improve efficiency.
Asset utilization and service.
Next driving efficiencies of Europe , as we've discussed previously and lastly, harmonizing global clearance processes to lower cost.
About $1 1 billion of the total will come from Fedex ground operating expenses by a dock productivity initiatives.
Network and line haul efficiencies.
And reduce liability costs.
And approximately $1 5 billion will come from shared and allocated over expenses overhead expenses led by procurement savings.
Back office automation and infrastructure modernization.
Increased deployment of digital self service.
And further consolidation of shared service functions.
Moving to our capital spending plans, we've reduced our forecast for capital spend for fiscal 2023 to $6 3 billion compared to our prior $6 8 billion forecast.
We're intensely focused on allocating capital to the most attractive ROIC initiatives.
Our liquidity remains a source of strength as we ended the quarter was $6 9 billion in cash.
And based on our cash flows and liquidity, we remain committed to our capital return strategy, including our plan to repurchase $1 5 billion of stock in fiscal 2023.
We expect to purchase $1 billion in the second quarter.
Our capital return strategy reflects our confidence in our business. Despite the headwinds we are currently navigating.
We have significant flexibility to maintain our balanced capital allocation and preserve a resilient balance sheet.
Now turning to second quarter guidance.
While we continue to drive aggressive cost reduction actions, we expect business conditions to remain challenging in the second quarter.
As a result, and consistent with the update we provided last week.
Currently expecting revenue of between 23, and a half to $24 billion in the fiscal second quarter and adjusted earnings per share excluding costs related to business optimization and realignment initiatives of $2 75 or greater in the second quarter.
For the remainder of the year, while we are not providing guidance given current uncertainties. Our plan is based on an expectation that the weak trends. We saw in late Q1, we'll persist across our major geographies.
This is embedded in our guidance for the second quarter and driving our cost takeout initiatives for the fiscal year.
Longer term, we remain committed to our fiscal 2025 targets for operating margin improvement return on invested capital and capital intensity that we shared with you in June .
We're leaning more heavily into cost actions to get to those goals.
The start of the year presented greater than expected challenges, but I can assure you that we are moving with urgency to address these pressures while remaining focused on creating long term value by prioritizing revenue quality <unk>.
Expanding margins and elevating financial returns through profitable growth and reduced capital intensity.
And with that we'll open it up for your questions.
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 to allow your signal to reach our equipment.
To allow time for additional analysts to ask questions. We ask that you. Please limit yourself to one question before re entering the queue again press star one to ask a question and we will take our first question from Tom <unk> with UBS. Please go ahead.
Yes, good afternoon.
Wanted to see if you could.
Maybe give us some more perspective on some of the biggest cost reduction actions and just kind of your level of confidence on the execution.
It seems like I guess parking the planes and taking out capacity is something you've done in prior downturns, but perhaps rationalizing sorting centers.
It seems like a new thing in ground and I guess, the labor markets, maybe it's a little tougher to take labor market. If you think you might need it back. So I just wanted to see if you could give us.
Maybe a bit more detail on your visibility to those cost actions and.
How they come through thank you.
Sure. Tom This is Mike. So you are correct in observing that the biggest.
Order of magnitude of the cost reductions is from flexing down the air network. So that will come into play, particularly as we move through into the second half of the year as the flight slight reductions.
Take our take.
In October and into November .
On the ground you spoke of a facility and sort rationalization what that does for US is as volume fell down below expectations that leads to inefficient line haul because load factors down.
And so thus youre running.
More line haul than you need for the volume you have.
By consolidating sorts and rationalizing facilities. That's just an example of how we can optimize against the lower volume.
Also highlight that within the capital spending projections, we have deferred a number of planned ground facilities and we actually.
Canceled a few that were literally about to initiate so we're moving quickly on this and.
Fully acting to realize the full potential there. So we have clear plans to.
To get at all of these that I have.
Have a long list and they all add up to a very solid number and the team is focused on execution.
We will take our next question from Brian <unk> with Jpmorgan. Please go ahead.
Yeah, Hi, maybe just a more basic question Ross can you just talk about.
The.
I guess the reason why it is only a fedex issue at least at this point in time, you know why haven't peers called this out they all seem to sound like things are actually working pretty well in their favor at least not nearly as much of a fall off.
You've highlighted so maybe can you just address that and why you waited a week to talk about the cost which were which were all waiting for.
And then just because of the significant downdraft in express.
Can you give us some recent stats in terms of just how quickly it fell in house at September shaping up.
Okay, Let me start and then.
Break and talk about some of the trends Youre seeing.
Listen I can comment on what our competition is seeing or not seeing.
All I can say is the trends that we're seeing in the marketplace and we want to get out ahead of this.
And.
Listen the hole at the end of the day, the macro is going to ebb and flow it's really.
The activities that we do that matters at the end of the day and we wanted to take control of what what we can control and Thats why we are being very aggressive on our cost actions.
<unk>.
<unk> again.
We will let the economic environment, the things that we don't control that.
Jordan do who will just we will focus on the issues that we can control and primarily on the cost side I'll, let bill talk about the revenue trends.
Sure. Thanks Raj.
Brian just to kind of reiterate what we win I know, we had a lot of opening comments, but when we look at kind of the background, we really didnt break things into three categories in Asia Pacific. We absolutely believe that this is a market trend and not a fedex trend as I mentioned, our market share studies, they are a little bit of a lagging.
Indicator, but we do see that through June and our.
Asia Pacific region, we actually gained market share and that's why I shared those spot rates and how quickly the market changed in August and we do believe the entire market is experiencing that in Asia and Europe similar story from an economic perspective, we think that the economy got worse throughout the quarter. We however, as we acknowledge did not.
What have the improvement in service in the quarter that we had expected we actually saw some plateau and service levels. So that was a fedex issue and as Raj mentioned, we're working on it seriously and actually feel good about the momentum there from a service improvement and then here in the United States as I mentioned through June we can see that we've held.
Market share if you actually look from a nuance perspective, I would say that the one nuance within the domestic performance is that from a Fedex ground economy perspective, we have prioritized revenue quality and so we have let some volume go that was very conscious and we have seen that kind of persists throughout the quarter. So overall.
We do think that the entire market is experiencing what we had from a macroeconomic perspective and then for Q2, you've got the revenue range and I would say that September is right in that range.
Okay.
We will take our next question from Brandon of Glinski with Barclays. Please go ahead.
Hey, Raj and team. Thanks for taking my question and definitely appreciate the new cost plans, but maybe we're going about this all the wrong way because there's been plenty of cost improvement plans in the past that this company that just haven't delivered so.
Can I ask a pointed question have you done a proud to review like what does not work in the last 20 years, that's driving lower profitability in your network relative to your competitor is there a certain product or customer or region that just isn't working and I can tell you from the outside looking and TNT seems to have been.
On the mitigated disaster here that just isn't delivering because he is a calling out European losses again, and then from our perspective as well dual express and ground pickup and delivery networks I get it I know that express and ground have different dynamics. However, your asset efficiency is literally half that of your nearest competitor, which is unionized if I might add.
So I.
I guess why not use this downturn to put more concrete plans in place to exit markets or regions that aren't working and the $1 billion in permanent cost out obviously, a step in the right direction, but I guess, how can you address the deficiencies in the network as you see them.
Well, thank you Brandon I think.
We are absolutely fully committed to taking costs good cost levers out we've talked about the three buckets fiscal year 'twenty three.
Two two to $2 $7 billion with.
For cost take out here, we're talking about $4 billion between.
Between 23, and 25 and then in the network toward auto of 2 billion. After that so those are significant numbers. We are confident in these numbers we have.
Identified domains with targets, we have people who are focusing on run the business and people focus and transform the business and we are using cutting edge technology and some of it's already coming on live here and all of this is in motion as we speak as we speak to deliver value.
As quickly as possible so.
We're confident we're committed and this is a this is definitely the focus of the entire team.
As far as the TNT is concern.
Since you asked that question you've got to go back and look at the hit a little bit of history here.
Portfolio gap that we had in Europe , but our.
Competition has been in Europe , since $19 74, and it took.
And it's a very important business and profitable business for them, we had to build a portfolio gap now as the integration gone exactly the way we thought it would.
No because of.
Had the cyber attack, we had COVID-19, we had all kinds of things in the middle but the integration is now complete.
And the.
That part of it is done we had.
Service issues are getting better.
And we have in our portfolio to sell in Europe that is unmatched in sales is getting on the front foot. So this is this is the starting point of view would call and Thats. Why we are confident that the improvements that Europe is going to deliver for us over the next two or three years.
And again on the issue of network to auto.
Very easy to say, yes put it together and look at the numbers, yes, that's great, but the complexity of from technology perspective from facilities perspective, other issues is far greater and most importantly, we have $4 billion of in network efficiencies, we can get that will relatively.
Literally easier than that and Oh by the way we're building technology.
Enable us to get to network Dorado. So we think it's the right sequence.
We will take our next question from Jordan <unk> with Goldman Sachs. Please go ahead.
Yes, hi.
Question for you.
In light of what could you have done differently in the quarter I guess the magnitude of the express drop off was so sharp and I get that volume decelerated, but I'm just curious like how to catch it so off guard had a protect against that in the future.
I would have thought that was the contractual customers you've had you might have had more of that.
A heads up that this deceleration was coming so maybe you could talk to that thank you.
Let me, let me talk about the.
Ill talk about the timing and then maybe Barry if you want to add about about yourself on the customers, but the volume did drop off quite suddenly towards the end of the quarter. As you know we have a complex.
<unk> system form it was multiple multiple constituencies around that and it's there is a time lag between the actions we can take.
Reducing the line haul network and that's all it is so as I said in October you'll see the full benefit of those takedowns in terms of customer trends I don't know Barry if you want add anything more yeah. What I will say is that from a customer perspective, our customers are incredibly sticky and what we experienced especially in August both in <unk>.
Asia and here in the United States is two things is there demand actually wasn't there and our customers missed their own forecast. So I think from a customer relationship perspective, we are working with them curiously to help them manage their the difficulties they are experiencing in their own business, but from a customer stickiness perspective. This is absolutely a.
<unk> of demand within their own business, not a not a share loss implication.
Yes, Jordan this is Mike.
Also our very intently focused on.
Identifying these variable costs in shortening the time span of which we can realize the reduction there. So again theres a theres a span in continuum across different.
Lines of business and nature of costs, but we are intently focused on shortening that horizon.
We will take our next question from Helane Becker with Cowen. Please go ahead.
Thanks, very much operator, hi team so.
Just kind of wondering if you can be more specific on.
Slate that you are reducing and parking aircraft to get to this one six ish billion dollar number.
Like how should we think about.
The trade lanes that are going to be impacted and maybe the number of aircrafts that are going to be on the ground and or do you change your Boeing delivery schedule.
The trade lanes first and then we'll go to aircraft I think.
We have.
Taken down 11% of plan specific daily frequencies, 9% of Trans Atlantic Daily frequencies, and 17% of daily frequencies in the lane between Asia, and Europe , and we will continue to look at it and we'll see what needs to be needs to happen both speak depending upon how the volume of those hold Mike, Yes, Helane in taking that down.
Maintaining connectivity and service in the network, but theres lower volumes. So we need less lift so as a result, we identified the need to be the opportunity to park aircraft just as we have demonstrated in the past the equivalent of about eight narrow bodies is what we will be idling temporarily and so.
As you can appreciate that that defers maintenance spending that we otherwise would have had and of course you save the operating cost of of not flying. So we'll continue to take that approach for how conditions unfold.
We will take our next question from Chris Wetherbee with Citi. Please go ahead.
Hey, Thanks, Good afternoon, I guess I wanted to understand.
The process of the cost outs, particularly this year. So I think you guys mentioned that $300 million of cost savings in the fiscal first quarter. Another 700 million is realize are expected to be realized in the second quarter. So that's about 40% or so of the full year yet the results are running at a level that is about <unk>.
Half of what we expected just a week or so ago. So.
Is this the kind of run rate, we should expect as we move into the back half of the year, where that extra one two to $1 7 billion of costs coming in or is there improvement I guess im just struggling, particularly with the second quarter with a $700 million of cost savings relative to <unk>.
EBIT for the total company, which may be in the neighborhood of $1 billion or a little bit north of that.
Okay. Chris This is Mike let me.
Let me take that in two parts first you asked about the second quarter and that so as we emphasize we saw the downturn in the demand in the latter part of Q1.
And as we expect those trends to persist through all of Q2.
We've accelerated or we will realize more of the cost savings in Q2 as you highlight we also have three full months of that step change in demand that occurred late in Q1, so that certainly pressures.
Q2 margins as we go through the year the savings build and we expect then that.
The pressures relative to Q2 will mitigate as we go through it will be less as we go through the year.
We will take our next question from Ken <unk> with Bank of America. Please go ahead.
Hey, great. Good afternoon, just before I get a question I just wanted to understand why you chose to launch your Q&A with CNBC versus hosting a conference call just want to understand the philosophy of what we can expect of the message going forward and how you plan on distributing it obviously you had technical issues today, but just to try to understand why you chose.
Is that route and getting a message out but my question is.
How do you solve the faster and ground contractor issue. It seems like you talked about purchase transportation cost scaling.
You mentioned in your statements you've pulled some networks.
Some have turned their routes and it seems like it seems like Theres really deep concern is there opportunity to use this kind of I don't know, whether the cost savings or something to change the structure there to to resolve some of these issues that the contractors seem to have thanks.
Hey, Ken This is Mike first as it relates to your.
Question about the pre release, so we felt that was appropriate for the circumstances.
Consistent with market practices, and quite frankly allowed us to use more time today to be talking about how we're going to address it and our future plans.
As far as the perceived issues.
On the ground side, let me just assure you first of all that the service levels at Fedex ground are now reached.
Pre pandemic levels, and we are very well positioned for peak.
6000 contractors and we have 96% of them have signed the peak incentive program and to put that in perspective. This is running ahead of where we were last last last last year. So all of those a lot of those were in the media. They are all much more of.
A perception issue than a reality and we are well positioned for peak and we have the support from both from a formula team.
We will take our next question from Amit Mehrotra with Deutsche Bank. Please go ahead.
Thanks, Hi, everyone, Mike I, just wanted to ask about the cost out initiatives this year.
And if it's a gross or net number.
Because obviously the company has a.
<unk> 90 billion dollar cost structure.
If it's not net of $2 two to $2 7 billion. It may sound like a lot, but did you have 3% inflation on that number and wipes out the entirety of the of the cost savings. So I wanted to know how you think about that if that's a fair or unfair way of characterizing it and then just very simply our express profits going up from here in the fiscal <unk>.
Quarter or are they going down from here.
If you can just answer that as well thank you.
So firstly as.
<unk>.
As we've said the two two to two seven is relative to our cost plans that we had coming into the year.
Now as you rightfully observed.
We have.
Everybody else in the world is experiencing unprecedented levels.
Of inflation, and so that absolutely impacts our base costs.
The best way I can characterize it for you is on a on an absolute cost basis the.
The first quarter, the largest of the absolute year over year increase.
As we move through the year that will mitigate as the cost initiatives.
Traction here and that will.
We'll offset.
The cost inflation down the road.
I'm sorry, what was the second question.
Well if you just give me a chance to follow up on that and then the second question was if express profits are going up from where we were in the fiscal first quarter. The one seven margin or even just absolute profits or theyre going up or are they going down in the second quarter and the way you characterize the answer just now it just seems like.
There is still no.
If inflation offsets the gross cost takeout.
Then basically all of the revenue decline prospectively drops to the bottom line and so I just wanted to understand how you. If you agree with that or how you think about that.
But no it wouldn't drop to the bottom line because of the actions we're taking.
Reducing costs to adjust to a lower demand environment.
While that doesn't leave us.
That's the expectations that we highlighted that we outlined in June .
It's certainly the case that were significantly mitigating that as we go through the year.
As it relates to express <unk>.
I would.
<unk> highlighted earlier.
The demand downturn, particularly at Asia Pacific and Europe .
Occurred late in Q1 so.
So Q2 will be.
We will see margin pressure again at express not dissimilar to what we experienced in Q1, but the structural initiatives really gain hold.
At express as we move through Q2, so as you think about the the overall cost outs.
Express has more as we move through the year because of the timing of of the big elements there.
We will take our next question from Jack Atkins with Stephens. Please go ahead.
Okay. Thank you for taking my question, So I guess, where I was going back to a comment you made earlier about the team.
Do you feel like you've got the right senior team in place to lead Fedex into the future. There is a clear lack of outside talent on the senior Executive Committee.
Your largest competitor has really benefited from bringing in some outside talent over the last five or so years do you think it would make sense for Fedex to do that as you look forward to really put into best practices and help drive improved profitability and returns it seems like thats sort of a missing element to the story here.
Jack I think I'm very very confident in the team that we have is a lot of experience here.
We have several new players in place. The team is very very excited obviously, we will look at external talent, we already bought an external talent.
Several areas of this company. So they are not worse does that at all is that we have is very very good team Jack and.
I am very confident that we can deliver.
We will take our next question from Jon Chapell with Evercore ISI. Please go ahead.
Thank you.
Afternoon.
I wanted to ask you about the service challenges that you referenced just wanted to make sure that strictly in Europe .
We're now six months past the tonality of the integration of TNT are you confident that those service issues are behind you and then the final thing as you think about cost cutting across all the regions is there a risk that cost cutting could exacerbate some of the service issues going forward.
Great question, and let me answer the second part first answer is absolutely not.
One of the things we talk about a lot is quality driven management and core service actually cost more and our teams are completely aligned that we are going to reduce cost.
And continue to improve service and I cannot emphasize that enough that these things will move hand in hand, and we are very confident in our service at ground as we head here into the peak season for E Commerce, and we're talking about service in Europe as Raj mentioned the margin integration of the airline.
Was successful.
We successfully integrated the airline it was very complicated and we did suffer some service challenges in March as we stood in front of you in June we absolutely had improvement from that March point. We did expect continued improvement in July and August and what we experienced in Europe was up.
Auto in that service improvement and I want to be really specific when we get into Europe . The international domestic market. So when we talk about like our UK market or we talk about the France market that domestic service is actually really really strong and then when we get across Europe on the deferred service offerings. It's strong we have Q.
Elevate the service within our overnight business in Europe , and that is our number one focus from a service perspective, and yes, I am confident that Karen and her team will continue to improve there.
But I just wanted to kind of give you that background on kind of where we're at and what we're looking at moving forward and absolutely our entire team knows reduce cost and improve service.
We will take our next question from Ravi Shanker with Morgan Stanley . Please go ahead.
Alright, thanks, everyone.
Regarding the.
The <unk>, how do you reconcile pushing through your biggest rate increase in history.
Time, when your volumes are falling double digits, I mean isn't that going to exacerbate the volume decline.
Fair question I think there is inflation last year, we had a five nine.
The increase in post and by the way, we have just an incredible insight into our pricing discipline in the market and the commercial tools. The team have are just best in class. So last year, we did a $5 nine it was incredibly sticky we had continued cost increases throughout the year and so we felt that the six nine was.
For this year's.
We will monitor.
Post implementation stickiness and of course, we're constantly looking to balance the yield and the volume and make sure that we get the right volume levels from a utilization perspective, but given the inflationary backdrop, yes. We thought this was the rate increase for the year.
Yes.
We will take our next question from Ari Rosa with Credit Suisse. Please go ahead.
Great. Thanks.
So Raj if I look at Fedex freight is now producing almost four times the operating income of express.
And just could you talk maybe about how you think about the sustainability of the performance on the freight side, particularly as we head into a potential downturn and then to what extent if we see some of the strength at freight starting to wane is it possible that that starts to eat into some of the gains that you might see from cost savings.
At the other units.
Yes, Thank you already for that question.
First of all let me just say.
Fedex freight team has done and continues to do a phenomenal job of both managing the revenue quality and our operating efficiency to generate fantastic results and they also form a great piece of our portfolio and will also provide synergies on the cost side.
<unk>.
The point that you made is important because but when there is a significant change.
We went through the last downturn that we.
Very much focus on revenue quality and efficiency and even through the downturn actually the margins expanded.
So we are very disciplined in this area.
And we are executing the plan, we will have to watch how the market conditions change your volumes are actually easy as you can see have declined and yet the margins have gone up and the team has done a fantastic job I expect them to do that going forward.
We will take our next question from Bruce Chan with Stifel. Please go ahead.
Yes, thanks operator.
Raj just wanted to go back to some of your earlier comments, maybe just ask it bluntly.
When you think about the Miss how much of the shortfall was volume related and how much was from those ERP and the service issues and maybe just a follow up you can give us some color on what exactly you mean by service issues I may have missed it but it's not really clear to me what that means.
I guess customer attrition and if so can that come back. Thank you.
So the.
The short answer is the vast majority of our volume mess was macroeconomic.
We talked about kind of when you think about the mess. It really was predominantly at express with Asia being the largest issue. We believe that was entirely macroeconomic and then when we get into your up there was a split between service and the macroeconomic decline I will tell you two things from a service perspective, when we say service issues specifically, what we're talking about is on the <unk>.
Crest portfolio within within Europe across the European network is that we are not hitting that time definite mark at the level that we expect a fedex and so we need to kind of increase that service commitment there what I will tell you is that the sales team and our customer base absolutely want Fedex.
Hating in this market and we have had strong indications that customers are looking for us.
Our portfolio in Europe , we have great relationships with large.
Large globals here in the United States and they want us as part of their portfolio in Europe , So I'm very optimistic about the future in Europe .
We will take our next question from Bascom majors with Susquehanna. Please go ahead.
Okay.
Raj you managed through a lot of change.
Since 2016, just commissioned the TNT acquisition, the cyber attack to trade more downtime.
Pandemic change in leadership from our founder and whatever we're going to call. The cyclical reversal. When we look back on this in a few years here, but as you step back and reflect are there any management states that Fedex did make and if so what can you learn from those mistakes to set your customers and your shareholders up for success over the next three to five.
Years. Thank you.
Well, Matthew I think thats.
Excellent question.
I mean, just think about this for a second and you see 2016 was.
We're primarily in the <unk> space and when you look ahead of the market. We saw 90% of the growth for the next five years is going to be e-commerce, driven and a 10% <unk> well. If you look back now and look at that timeframe, we see almost not 90%, but more than 100% of the growth came from E. Commerce. So we actually.
Expanded our ecommerce portfolio in a big way and expanded our own operations.
We're very proud of the work we did in <unk>.
This portfolio of services in this timeframe you also did them on some of the most important work in the history of the company, especially with expressed by delivering vaccines in health care around the world and especially in the time of the great pandemic were operating and network like ours around the world was extraordinarily complex with changing circumstances I'm extremely proud of.
The team, we're having executed that so this is the time frame you're talking about so what we did not anticipate to be perfectly honest with you was the tremendous inflation of costs that hit us squarely last year and that was what really got us.
And even with that.
We had a.
Tremendous results in fiscal year 'twenty, two from from our EPS perspective, and but we absorbed a lot of costs from the inflation side of the house and then of course.
Now they've been dealing with this situation we had to build capacity and now we have more capacity than we need so could we have time that a little better I don't know how you're going to calculate it is like you know you can build half of building anyway. So it's just it is now we are in a position to.
Laid out.
Investor meeting, we are focusing on the things we can control.
Our focus is now on improvement of margins improvement of ROIC and improve our capital intensive that's what we're going to do this.
Again.
The economic upturn or downturn forget about that for a second let's focus on the things we can control and Thats why this tremendous cost focus and the structural costs that we're talking about that's going to get us to these targets.
We will take our next question from Todd Fowler with Keybanc capital markets. Please go ahead.
Alright, great. Thanks, and good evening I, just want to make sure I understand the underlying macro assumptions Mike is it that the trends that you saw in August that that's kind of the run rate now going into the second quarter.
Do you expect some further deceleration from where we were in August and then is there a risk that there is contagion.
Where we see weakness in Asia, and then that comes into the U S or just kind of how are you thinking about the geographic piece of it.
And then lastly, we typically see price follow volume and so is there a risk on the yield front. It is volume so that price follows after that thanks.
Okay, Todd so yes, the basic underlying planning assumption that we are using as the demand levels that we experienced in late August will continue through the rest of the year and so that we're taking actions accordingly to react to that so that's the.
That's the operating assumption now I don't have a crystal ball about contagion in that but rest assured we are going to be continuing to focus on the things we can control and if we need to make further adjustments and reductions in the cost structure, we will move quickly and decisively.
We will take our next question from Jeff Kauffman with vertical research partners. Please go ahead.
Thank you very much.
And thank you for the guidance on the cost savings as well.
Just wanted to ask because I noticed that the other corporate and overhead part of operating income was about $100 million higher than year ago.
It costs money to parked planes and I don't know if youre furloughing pilots are you, reducing those hours it costs money to.
Reduce routes or consolidate sorts of shutdown offices.
Do you guys have any estimate for where those costs are going to be how much theyre going to be where they are running through the regular P&L during the quarter or was that the 100 million in incremental costs that I saw going through.
Kind of corporate office and other.
Hi, Jeff, Yes, let me just specifically address the $100 million you can.
Put it into two pieces, we had a specific customer.
That reserve that we booked for $80 million at Fedex logistics.
And so while we are pursuing legal action it was the appropriate.
Reserve to take at this point in time.
And then while we separate it out in terms of our adjusted earnings is also $24 million of our business realignment within that corporate other lines. So maybe that gives a little more context.
For what's there.
I guess just to clarify as far as any other.
No no.
Charge is there anything that was specific to the items.
Youre asking about and there is also no furlough of the pilots that's not even a thing.
We will take our next question from David Vernon with Bernstein. Please go ahead.
Hey, good afternoon. So I appreciate the added color on the cost saves, but reductions from baseline.
Difficult to book as profitability, Yes, 10 weeks ago, we were looking at a low $20 EPS number go into something in the low Thirty's is there any do you think that those.
Targets for earnings power of actually shifted as a result of what's happening in the market right now or are we just pushing those out and as does the $4 billion of extra cost saves just kind of gets you back to that 10% margin level.
I think David.
The way to frame. It is that we fully recognize that the external environment has changed more than we expected.
So we're focused on delivering the margin improvement lowering the capital intensity that we highlighted but it's absolutely the case.
That a greater emphasis will be put on the cost reductions and so that's what we're highlighting here today and we have the specific initiatives and plans in place to go after that and realize that as the as supportive of the goals that we outlined.
We will take our next question from Jairam Nathan with Daiwa. Please go ahead.
Hi, Thanks for taking my question so.
So I just wanted to clarify are there any should we account for any cash restructuring expenses or anything of that Scott.
Sure.
These cost savings.
So to clarify for the.
Cost savings that we've identified for FY 'twenty three no there is nothing.
Associated with that now previously as we talked about.
Broader business optimization initiatives over a number of years.
We scope that that could be potentially in the $2 billion range, but that is over a longer time horizon, but the near term cost initiatives. There is no.
There is no special charge for that.
Okay.
That concludes today's question and answer session. At this time I will turn the conference back to Raj Subramaniam for any additional or closing remarks.
Well, thank you very much and in closing let me just say this goes without saying it was a challenging quarter. This.
This is a real critical moment in time for Fedex to execute and I'm very confident that we will.
The actions, we're taking are key components on the path to achieve our long term targets and make Fedex stronger for a better tomorrow. Thank you for your time today and thank you for your interest in Fedex.
This concludes today's call. Thank you for your participation you may now disconnect.
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