Q2 2024 FedEx Corp Earnings Call
Good day and welcome to the Fedex fiscal year 2024 second quarter earnings call. All participants are in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key.
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After todays presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on you touched on phone and to withdraw. Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Steven Hughes Director of Investor Relations. Please go ahead Sir.
Steven Hughes: Good afternoon, and welcome to Fedex Corporation's second quarter earnings Conference call.
Steven Hughes: <unk> second quarter earnings release Form 10-Q, and Stat book are on our website at investors Dot Fedex Dot com.
Steven Hughes: This call and the accompanying slides are being streamed from our website.
Steven Hughes: The replay and slides will be available for about one year.
Speaker Change: Joining us on the call today are members of the media.
Speaker Change: During our Q&A session callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
Speaker Change: Certain statements in this conference call such as projections regarding future performance may be considered forward looking statements.
Speaker Change: 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.
Speaker Change: For additional information on these factors please refer to our press releases and filings with the SEC.
Speaker Change: 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.
Speaker Change: Joining us on the call today are Raj Subramaniam, President and CEO.
Speaker Change: Re crary executive Vice President Chief customer Officer, and John Dietrich Executive Vice President and CFO.
Speaker Change: I'll now turn it over to Raj, who will share his views on the quarter.
Raj Subramaniam: Thank you, Steve and good afternoon, everyone.
Raj Subramaniam: Let me begin by thanking the Fedex team for their commitment to delivering yet another strong holiday season.
Speaker Change: I'll speak.
Speaker Change: Fedex has the best service offerings in the industry.
Speaker Change: This includes the most expansive global network and the fastest U S ground service.
Speaker Change: The broadest weekend residential coverage.
Speaker Change: Strong service and speed are also come in with a more aggressive peak transit compared to this time last year with.
Speaker Change: The ground.
Speaker Change: Time in transit in the U S at 1.94 days.
Speaker Change: I'm incredibly proud of the team's ability to sustain superior service levels, while we continue to transform our global network.
Speaker Change: Our second quarter performance reflects clear signs of progress in our transformation.
Speaker Change: What remains a difficult demand environment.
Speaker Change: We are moving with speed and agility to deliver on drive, which is supporting improved profitability and enabling us to maintain our earnings outlook for the year, even as our revenue expectations have moderated further.
Speaker Change: As you can see in our results in slide six our transformation is driving improved profitability.
Speaker Change: At the enterprise level, we delivered a 17% improvement in adjusted operating income.
Speaker Change: Adjusted margin improvement of 110 basis points compared to the prior year.
Speaker Change: Even as the total revenue declined 3%.
Speaker Change: These results reflect benefits from drive.
Speaker Change: Our continued focus on revenue quality and meaningful differentiation across our products and services.
Speaker Change: As we build the worlds smartest logistics network.
Speaker Change: Our focused execution enabled us to retain a majority the high quality volume we won over the summer from UBS and as a result of the yellow shutdown.
Speaker Change: At the segment level.
Speaker Change: Ground continued to deliver outstanding results with adjusting operating income up 57%.
Speaker Change: Adjusted margin expansion of 370 basis points.
Speaker Change: This was driven in part by revenue growth due to higher yielding volume combined with solid operational performance.
Great delivered strong performance as well driving double digit profit improvement and margin expansion of over 270 basis points compared to the prior year.
Speaker Change: Express total revenue declined due to both volume and yield pressures.
Speaker Change: These headwinds more than offset continued benefits will drive and lead to a margin decline compared to the prior year.
Speaker Change: There is more work to do at express, where we are structurally redesigning our network.
Speaker Change: Speed.
And density.
Speaker Change: We continued to make progress with express to unlock the value that exists across this business.
Speaker Change: Turning to slide seven.
Speaker Change: Drive continues to fundamentally change the way we work.
Speaker Change: The impact of drive is clear.
Speaker Change: As our lower cost structure enables improved profitability.
Speaker Change: Just look at the powerful chart on the left hand side of this slide.
If you look across market cycles over the last 15 years, we have now delivered two consecutive quarters of operating income growth against declining revenues.
Speaker Change: When you step back and review our business has performed in an environment with suppressed demand we.
Speaker Change: We are delivering much better profitability today than we have historically.
Speaker Change: In the quarter, we reduced cost by approximately $200 million.
Speaker Change: Our surface network, including our U S Xpress operations.
Speaker Change: This was driven by shifting to a single Daily Korea dispatch.
Speaker Change: Dock productivity initiatives.
Speaker Change: Consolidating underutilized sorts and maximizing the use of rail.
Speaker Change: Across our air network and the international operations, our drive initiatives are helping offset pressures with about $115 million in total cost reductions in Q2.
Speaker Change: Primarily driven by structural flight takedowns.
Speaker Change: And then G&A, we're making significant changes to how we approach procurement and functional excellence.
Speaker Change: In the second quarter.
Speaker Change: We realized over $100 million in savings driven by reducing the use of temporary labor.
Speaker Change: Leveraging the scale of the enterprise to negotiated favorable surface transportation rates.
Speaker Change: Optimizing certain benefit programs and lowering head count.
Speaker Change: Given our progress we are highly confident that we'll deliver on our goal of $1 8 billion in cost reduction benefits from drive this fiscal year.
Speaker Change: Turning to slide eight.
Speaker Change: Despite progress on drive profitability at Fedex Express was pressured by an ongoing volume mix shifts and related yield headwinds.
Speaker Change: Our ability to drive margin improvement in the near term has been constrained by transitory factors, including.
Speaker Change: The year over year decline in the U S. Postal service volume combined with minimum required service obligations associated with our current USPS contract.
Speaker Change: And also the timing of this structural redesign of our air network.
Speaker Change: Historically.
Speaker Change: Our unmatched global Air Network was primary primarily built on hub and spoke system to support speed and global connectivity.
Speaker Change: With the rapid growth of e-commerce, and as volume mix continues to shift to deferred.
Speaker Change: We recognize the need to reconfigure our network to focus on both speed.
Speaker Change: And density.
Speaker Change: This fundamental network redesign, which we call Tri color design is momentous in our history.
Speaker Change: And includes several key elements.
Speaker Change: First.
Speaker Change: We will deploy what we call our <unk> fleet, which is our Fedex owned assets time or delivering high priority high margin volumes using the existing hub and spoke model.
Speaker Change: This is our purple network, which will be the backbone of our international priority parcel business.
Speaker Change: Second.
Speaker Change: We will read time, a portion of our <unk> daily flights or what we call our Orange network, which will operate off cycle.
Speaker Change: This change will give us time to build density.
Speaker Change: Decongest, our hubs during the freshest nights or.
Speaker Change: And feed into our surplus networks, including our International Road network as well as Fedex ground and Fedex freight in the U S.
Speaker Change: This provides us a differentiated capability to drive profitable.
Speaker Change: Less capital intensive growth in the sizable global deferred parcel and air freight markets.
Speaker Change: And third we will continue to leverage our global partner network.
Speaker Change: <unk> adaptive capacity layer, particularly an imbalance trade lanes.
Speaker Change: This is our white network.
Speaker Change: These changes will improve utilization of our assets increase margins and enhance ROIC.
Speaker Change: The Air Network redesign is a critical piece of our drive execution at express and.
Speaker Change: And we will support the realization of our targeted $4 billion of total drive savings in fiscal year 2025.
Speaker Change: We are approaching this network transformation and a deliberately measured manner to ensure we continue to provide our customers with the best service levels in the industry.
Speaker Change: Simultaneously as you know we are executing network to auto.
Speaker Change: Taken together.
Speaker Change: These efforts will improve our ability to protect profitability and returns through various market environments.
Speaker Change: Big picture.
Speaker Change: We're making clear progress on our transformation and drive is having a real impact.
Speaker Change: Additionally, our team is advancing efforts to combine the strength of our physical transportation network.
Speaker Change: With our digital and data driven solutions.
Speaker Change: We are leveraging our world class engineering skill base to deliver cost effective cutting edge capabilities globally.
Earlier this month, we opened our first advanced capability community, our ACC in Hyderabad, India.
Speaker Change: Which will serve as a hub for our technological and digital innovation.
Speaker Change: I'm truly excited about the opening of the ACC and the vast opportunity to use digital to run our business better.
Speaker Change: Enhanced our customer experience and generate new profitable revenue streams.
Speaker Change: Overall.
Speaker Change: I am confident we have the right strategy and the right team in place to create significant stockholder value.
Speaker Change: And these last few months and weeks our teams dedication to the bumper promise has been tremendous.
Speaker Change: And I would like to express my sincere thanks to our colleagues.
Speaker Change: This performance is Fedex in good position.
Speaker Change: As we enter the final structural peak.
Speaker Change: And deliver the best service offerings in the industry.
Speaker Change: With that.
Speaker Change: Let me turn the call over to Brian.
Thank you Raj and good afternoon, everyone revenue quality and industry, leading service remains a top priority for us in the quarter.
Speaker Change: Our ability to retain the majority of the business. We won from both <unk> and yellow is a testament to the team's hard work and our value proposition, which is the best service offering in the industry and as a result, we are gaining powerful share here in the United States and around the world.
Speaker Change: Looking at the U S market conditions remained soft with Q2 demand lower than we anticipated. The industry has now experienced 10 consecutive quarters of decline in U S. Domestic average daily volume.
Speaker Change: Additionally, international market pressure continued despite this pressure our Europe and EMEA team did a great job of growing parcel volume.
Speaker Change: Let's now look at each segment.
At Fedex ground second quarter revenue was up 3% year over year, driven by higher yield and volume.
Speaker Change: We remain focused on growing our business at the right customer and service next to improve profitability and maintain our position as the price leader in every domestic market segment.
Speaker Change: At Fedex freight new customers that came over as a result of the yellow shutdown are enjoying a better value proposition and we have retained the majority of this volume.
Speaker Change: Freight results showcase our disciplined focus on revenue quality as we gained share amid the industry disruption.
Speaker Change: The market was down and revenue declined 4% as lower shipments offset an increase in yield but on a sequential basis, our revenue decline moderated significantly as volume pressure lessened and revenue per shipment impacted positively.
Speaker Change: Revenue at Fedex Express was down 6% year over year, driven by market contraction and lower fuel and demand surcharges.
Speaker Change: Global freight pounds were down 18% year over year, driven by lower postal service volume as well as the weakness in industrial production.
Despite these headwinds we are encouraged by the progress in areas, we can control.
Speaker Change: For example, the improvement in European service levels enabled profitable share gains.
Speaker Change: With less than one week to Chris Smith, our focus remains on delivering outstanding service. Our networks are running extremely well and we are receiving very positive customer feedback. This peak, we are delivering excellent service, while creating new value for customers and driving customer acquisition.
Speaker Change: This holiday season, we estimate over 365 million packages will be delivered with a picture showing proof of delivery <unk> as we call it.
Great New feature that has helped us win new customers PPO.
Speaker Change: <unk> and other digital tools, such as estimated delivery time window, and Fedex delivery manager provide customers with peace of mind when it comes to holiday shutdowns.
Speaker Change: Overall this year's peak season has been relatively similar to last year and it's in line with our expectations.
Speaker Change: But looking ahead, we are ready to support our customers for post holiday returns a robust return portfolio is well positioned to handle the returns that inevitably follow peak our portfolio includes both a pre labeled and a no label no box solution that creates convenient seamless experience that a retailer and for consumers.
Speaker Change: Now taking a step back to look at monthly volumes during the quarter.
Speaker Change: Importantly, as I mentioned earlier, we gained share in both the United States and in International markets. This is a clear indication of our winning value proposition in a contracting market.
Speaker Change: Volumes have continued to improve sequentially with crown and international export volume maintaining last quarter's trend of growth on a year over year basis.
Speaker Change: Turning to slide 14 overall, the market is competitive but rational and we are committed to delivering on our revenue quality strategy.
Speaker Change: During the quarter yield trends improved slightly but the dynamics are mixed across the segments.
Speaker Change: At Fedex ground yield increased 1% driven by home delivery and commercial ground offset by ground economy.
Speaker Change: <unk> weight per package and favorable customer segment mix offset a lower fuel surcharge relative to the prior year.
Speaker Change: Fedex freight revenue per shipment increased 1% with base rates strong despite lower fuel surcharges and weights.
Speaker Change: At Fedex Express yield with pressured due to lower fuel and demand surcharges shifts towards e-commerce and the reopening of our international economy service in EMEA also pressure Yelp.
Speaker Change: We continue to focus on our revenue quality strategy earlier. This month, we raised U S Express and ground fuel surcharges by 1% and International Express fuel surcharges by one 5%.
Speaker Change: Looking ahead, we expect a high capture rate from our $5 nine general rate increase we will reset our delivery areas surcharges consistent with our usual practice.
Speaker Change: As we've shared previously we are also resetting our approach to dimensional pricing for international shipments.
Speaker Change: This is moving from a shipment to a par piece dimensional pricing, which is the global market practice.
Speaker Change: We are confident in our strategy and we are balancing both volume and yield growth.
Speaker Change: Moving now to slide 15 Raj.
Speaker Change: Raj mentioned, our focus on digital and efforts to identify new revenue streams I am, particularly excited about our new tracking API that we will launch in early 2024.
Speaker Change: Our tracking API is for both e-commerce shippers and platform, providing them with best in class visibility for their customers, including a pitcher proof of delivery.
Speaker Change: This new <unk> offering is a significant enhancement for our retail customers as well as for those third party e-commerce platforms that rely on our data as an integral part of their value proposition.
Speaker Change: This is just one example of how we're thinking about our digital capabilities to better serve our customers and generate profitable incremental revenue for Fedex.
Speaker Change: In closing I want to thank our entire global team for how they are executing around the world to deliver an absolutely positively outstanding peak season, and with that I'll turn it over to John to discuss the financials.
John Dietrich: Thanks Barry.
John Dietrich: I'll start on slide 17.
Despite a revenue decline.
John Dietrich: The Fedex team delivered improved profitability with strong adjusted operating margin growth.
John Dietrich: Driven by our continued focus on revenue quality and execution of the Companys drive initiatives.
John Dietrich: Taking a closer look at our segment performance in the quarter starting with ground.
John Dietrich: The team continues to deliver strong results.
John Dietrich: Adjusted operating income increased 57% due to yield improvement cost reductions and higher volumes.
John Dietrich: Cost per package declined 2% driven by lower line haul expense and improved first and last mile productivity.
John Dietrich: At freight operating income increased 11% during the quarter driven by higher yield and increased efficiency.
John Dietrich: Actually offset by lower shipments.
John Dietrich: Team continues to focus on improving profitability, while navigating this lower demand environment.
John Dietrich: And at express profitability was pressured as impacts of softening demand on revenue were only partially offset by structural and volume related cost improvements.
John Dietrich: Adjusted operating income at express declined 49% during the quarter on a 6% decline in revenue.
John Dietrich: As Raj mentioned, we have more work to do at express and I am confident that the structural redesign of our networks and other drive initiatives once complete will make us more resilient in future periods of demand weakness.
John Dietrich: Now turning to our fiscal year outlook.
John Dietrich: Based on our performance year to date and our current view of the rest of the year, we are reaffirming our outlook for adjusted EPS in the range of $17 to $18 50.
John Dietrich: At this midpoint of the range, we're now assuming a low single digit percentage decline in revenue.
John Dietrich: This is lower than our previous assumption of flat revenue growth.
John Dietrich: The reaffirmation of our earnings outlook. Despite the weaker demand environment reflects the continued benefits of our transformation.
John Dietrich: We will continue to closely monitor the global demand environment and other key factors, including inventory restocking inflation and e-commerce trends, which informs our view of overall expected performance.
John Dietrich: With regard to our third quarter expectations as we've shared previously we anticipate our typical seasonality, which implies a lighter quarter sequentially for earnings.
John Dietrich: We're also facing a higher comp at ground given our exceptionally strong operating income performance during the third quarter of last year.
John Dietrich: At the enterprise level, we continue to expect year over year adjusted margin expansion in FY 'twenty four.
John Dietrich: At the segment level, we continue to expect adjusted margin improvement in FY 'twenty four at ground.
John Dietrich: We also continue to expect freight margin to remains strong in FY 'twenty, four but lower than FY2023 given volume reductions in yield pressure.
John Dietrich: And we now anticipate a modest year over year adjusted margin contraction at express.
John Dietrich: Turning to slide 19.
Consistent with previous quarters, we're providing a bridge to share how we're thinking about operating profit considerations embedded in our full year outlook.
John Dietrich: For illustrative purposes, we continue to use adjusted operating profit of $6 3 billion.
John Dietrich: Equivalent to the adjusted EPS midpoint of $17 75.
As a reminder, and while our revenue performance will vary based on market trends, we are committed to delivering the $1 8 billion and structural cost savings from our drive initiatives.
John Dietrich: Importantly, while this bridge remains the same as what we showed you in the first quarter. The composition of the second bar showing revenue net of cost increases has changed significantly.
John Dietrich: We now forecast materially lower revenue, but expect to achieve the same net profit impact of $500 million at the midpoint as.
John Dietrich: As we proactively manage volume related expenses and revenue quality in this difficult demand environment.
John Dietrich: Now moving to slide 20.
John Dietrich: We remain focused on maintaining a strong balance sheet prudent capital allocation improved return on invested capital all while providing increased shareholder returns.
John Dietrich: Our liquidity position remains strong ending the quarter with $6 7 billion in cash.
John Dietrich: Capital expenditures for the quarter were $1 3 billion.
John Dietrich: Bringing year to date Capex of $2 6 billion.
John Dietrich: And we continue to expect to achieve our target of less than six 5% capex to revenue for the year.
John Dietrich: As we've previously stated our capital expenditures will decline as we continue to reduce capital intensity by reducing facility and other capacity investment and continue to plan for lower annual aircraft Capex.
John Dietrich: We still anticipate aircraft related capex to decline to approximately $1 billion.
John Dietrich: In fiscal year 'twenty six.
John Dietrich: Consistent with our capital return priority, we completed another $500 million accelerated share repurchase transaction in the quarter.
John Dietrich: This brings our total share repurchases for the first six months of the fiscal year to $1 billion.
John Dietrich: And $2 5 billion over the last 18 months.
John Dietrich: Looking ahead, we expect to repurchase an additional $1 billion in common stock. This fiscal year, while also paying our dividend in line with our previously stated capital return plan.
Speaker Change: Before we turn to Q&A I just wanted to comment that now that I'm nearly five months into my new role as CFO.
Speaker Change: I'm, even more excited about our strategy relentless focus on execution and.
Speaker Change: And the opportunity ahead to create long term value for all our stakeholders.
Speaker Change: I want to thank all our team members for their continued efforts and focus on our common goals with that let's open it up for questions.
Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two please limit yourself to one question and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Ken <unk> with Bank of America. Please go ahead.
Ken: Great good afternoon.
Ken: So I guess, John Raj, maybe just sticking with express to start margins were down year on year I get volumes were down and you have negative leverage but just to be at one 7%.
Ken: Seeing higher purchase trends higher employee expense.
Speaker Change: What is it really take maybe just walk us through one.
Speaker Change: Why margins are stubbornly so low and then two you are talking about a new plan in terms of the Orange purple and White plan.
Speaker Change: Are we talking about structurally changing expression pulling additional cost out parking more planes pulling employees out what does it take to get this structural margin out of this very slow.
And I guess you are still in the middle of your range. So I get the earnings outlook I'm, just trying to understand just the constraint on express and the ability to get the margins up there overtime.
Speaker Change: Yes. Thank you Ken let me start and John can add as he wishes here. So this has been a particularly difficult year for express several headwinds this year.
Speaker Change: And many of them are transitory, but we're dealing with as we speak so firstly.
Speaker Change: The demand surcharges out of Asia are significantly lower year over year.
Speaker Change: <unk> seen the product mix shift from shift from priority to economy traffic and then our fuel surcharges also had been lower.
Speaker Change: Finally.
Speaker Change: As part of the strategy from USPS, they have shifted more volume from air to ground and so that's been also a headwind for Fedex This year.
Speaker Change: On top of all this we have seen now the market demand weakened primarily because of slowdown of industrial production across the world, which has impacted our international extra.
Speaker Change: Express freight business as well. So this is this is the background, we're dealing with I would say that despite this the team has done a really good job on execution on drive and flexing down variable cost to the tune of $1 5 billion and year over year expense reduction year to date.
Clearly <unk> is an opportunity for us as we look ahead.
Speaker Change: The redesign that I just talked about.
Speaker Change: Is very profound and it would be called Tri color because as recognizing the fact that we now have a significant mixture of.
Speaker Change: Freight traffic as well as deferred traffic to change a portion of the existing flight schedule.
Two different clock, so to speak allowing ability.
Speaker Change: Our ability to drive more ability to fill up the traffic and improve density and again, most importantly, allowing us to feed into not only our international enrolled network, but also into our Fedex ground and Fedex freight network for the first time and so this is a significant change.
Speaker Change: It is one of the biggest changes <unk> seen in decades, I think thats got the opportunity here to improve our asset utilization improve density improving return on invested capital in a significant manner.
Speaker Change: So I just want to also just use this opportunity to say.
Speaker Change: The enterprise level.
Speaker Change: We have improved our operating profit, 17% and 110 basis points in operating margins. Despite a 3% revenue decline, let me turn it over to John to see what he wants to add yes. Thanks Raj.
I Echo everything you said I think the only thing I would add is that our cost structure, Ken anticipated a little higher demand than what we saw so we will be laser focused on bringing out as much of that cost as possible as we go forward.
Speaker Change: The next question will come from Chris Wetherbee with Citigroup. Please go ahead.
Hey, Thanks, Good afternoon, maybe sticking on the back of that answer John I guess as you think about the sequential performance in its fresh from <unk> I don't think we've seen really since maybe fiscal 11, a deterioration in operating profit revenue was up sequentially. So I guess was it just a mix that was moving around or maybe misjudging. What you thought the demand environment was going to look like and then.
Speaker Change: As we think about the back half of the year and express youre facing particularly easier comps both on a revenue and profit basis. So I know margins down for the full year, but you can get margin and profit up in the back half of fiscal year on express.
Speaker Change: So as you pointed out.
Speaker Change: There is a whole host of factors that went into the express performance and as Raj mentioned, we see that there will be continuing opportunities at express.
Speaker Change: The cost in terms of the relationship with the demand will definitely be a primary focus of mine and.
Speaker Change: And as we go forward I know brie and the team really focused on revenue quality.
Speaker Change: And we're confident we're going to be able to manage that outcome and look forward to keeping you posted as we go forward.
Speaker Change: Yes.
The next question will come from Helane Becker with TD Cowen. Please go ahead.
Helane Becker: Thanks, very much operator, hi, everybody I appreciate the time.
Helane Becker: One of the things that you talked about more on the last call. Then you did on this although for you didn't mention that.
Shift in personal service business.
Helane Becker: To ground from the air and I know the contract is up in.
Helane Becker: At the end of the current government fiscal year.
So how are you thinking about incorporating the rest of the business into the network.
Versus renewing the contract or maybe it doesn't make sense to run.
Helane Becker: The contract going forward.
Speaker Change: Good afternoon, Great question, so from a USPS perspective, and yes. This was a significant headwind this quarter as it was last quarter.
Speaker Change: And negotiations perspective, we are having very collaborative negotiations with the post office, but I think we've also been very clear that it will take quite a significant change in contractual terms and agreement to renew that contract. We continue to value. The partnership were both at the.
Speaker Change: Table and of course, we are honoring our service commitments and with the current volume levels that is a headwind to this fiscal year. So we're still negotiating as soon as we have a renewed contract or a decision we'll let all of you know.
I'm optimistic one way or the other we will improve the profit situation at express regardless of our relationship with the post office.
Speaker Change: The next question will come from Scott Group with Wolfe Research. Please go ahead.
Scott Group: Hey, Thanks, So if I look ground yields were up about 1% in the quarter ground volumes in November now flat.
Scott Group: Going forward is is this still an environment, where ground margin should be improving year over year I guess the comps are harder so less improvement, but you think you still see improvement in the back half of the year and grab margin improvement and then John you talked about just seasonality.
Speaker Change: Lower in Q3, maybe just some directional color on how much lower and then what that means for Q4 and all of them. Thank you.
Speaker Change: Sure Scott. Thank you, yes looking at ground.
Speaker Change: We're really excited about the results, we're seeing at ground and through drive in all of our other initiatives. We're focused on maintaining those those margins I think we have tremendous flexibility to continue to leverage the surface modes, including rail and Raj touched on some of those other things and.
In talking with the team. We also have some additional opportunities to leverage our <unk> network as well so.
Speaker Change: We certainly are looking favorably on an on the ground margins going forward with respect to Q3, and while I'm not going to give quarterly guidance historically it has been.
Speaker Change: Our lowest profitable quarter, and we expect seasonal trends to continue but at a lighter.
Speaker Change: Third quarter and more moderate margin improvement in Q3.
Speaker Change: The next question will come from Brandon <unk> with Barclays. Please go ahead.
Brandon: Hey, good afternoon, everyone and thanks for taking my question.
Speaker Change: So raj or John maybe can you guys comment on your non fuel expenses at express because I have to see them at about $8 9 billion now for the last three quarters and I think what has gotten investors really excited around drive is the idea that structural cost reductions are coming. So can you talk about that $1 8 billion that you want to achieve this year.
How much you've already seen at express and is there more to come sequentially on that cost structure and for that Tri color. Our fleet initiatives that you talked about Raj is that a signal that you're just reallocating capacity or should we be thinking thats, a structural reduction in air capacity going forward.
So let me let me start on the latter question on that John had the farmer.
Speaker Change: We will size the overall capacity towards the demand looks like and we're very we are very important and that in fact, a checking account a lot of flight hours in the last 12 months. Accordingly, so so the one part of it is <unk>.
Speaker Change: So some of the capacity to demand, but within that capacity now there is a fundamental restructuring that allows us to really improve our service on our core IP business improved density across all of our networks and then essentially bring bring to a lower cost point.
Speaker Change: In access of our ground networks that are that are really unparalleled. So that's the idea.
Speaker Change: With tricolor, So let me turn it over to John fulfill the other part sure. Thanks Raj. So the majority of our adjusted operating expense declined in the first half was the result of lower volume related expenses as we continue to align our costs across the enterprise with reduced volumes.
John: In addition, as you pointed out we're making strong progress on our drive and we are on track to achieve the $1 8 billion and structural savings in fiscal year 'twenty four that we talked about it's fairly evenly spread throughout the year with a slightly more heavily weighted in the second half as some of these initiatives take hold in Q2.
John: Two.
Raj touched on some of the.
John: Points in his presentation of structural cost reductions included approximately $115 million in the air and international permanent savings category $200 million in surface savings and over $100 million in G&A. So.
John: We're on track for that one eight as well.
Speaker Change: The next question will come from Jack Atkins with Stephens. Please go ahead.
Jack Atkins: Okay, great. Thank you for taking my question I just wanted to go back to the Air network redesign commentary for a moment just to be clear was that contemplated.
Jack Atkins: Within your initial.
Jack Atkins: Drive program, and then I guess.
Speaker Change: The cost associated with that in the second quarter and if so could you break that out and then finally as you sort of think about when youre going to start seeing a benefit from this network redesign is that something we could see show up in the second half of this fiscal year or is that more of an FY 'twenty five event. Thank you.
Speaker Change: Thanks, Jack it's John So yeah tricolor was factored into our outlook, it's something we've been looking at for quite a while it's very well developed we're looking forward to implementation.
John: And it is factored into our full year outlook from a.
John: Cost standpoint, we're leveraging as Raj said the assets that we have there may be some incidental facilities costs that we incur but.
John: Nothing that I would describe in the material category.
Speaker Change: The next question will come from Tom <unk> with UBS. Please go ahead.
Tom: Yes, good afternoon wanted to see if you could offer some.
Tom: Little bit of help on that what the yields look like ex fuel so perhaps ground.
Tom: Domestic express what did those revenue per piece numbers looked like ex fuel and then some thoughts on what the pricing environment is doing I mean, I think there's certainly been some kind of evidence out there that ups's competing to get business back and you're competing as well and so I'm just wondering if.
Tom: You are seeing some of that and Thats a point of pressure as well just in terms of getting a bit less price than you had expected.
Hi, Tom Thank you for the question it's great.
Speaker Change: I think the most important thing is that the market is quite rational.
Speaker Change: Yes, the yield have reset sense dean at the height of the pandemic, but I think everybody in this room fully anticipated that as.
Speaker Change: As we mentioned.
We continue to get a higher yield per package per segment in the U S domestic market and our primary competitor and we're very proud of that we've been able to maintain that yield leadership and take market share. So yes, its a competitive market, but it's overall very rationale and we feel really good about the team's performance.
Speaker Change: From an overall demand our performance in the quarter were actually quite pleased where yield was in totality.
<unk> talked about we do have some pressures from a mix perspective, but that was more of an express story, we feel really good about ground and actually when you double click and we look at the the market share. We gained we actually took more share in the <unk> segment. So from a mix perspective that is helping.
Speaker Change: Okay.
Speaker Change: The next question will come from David Vernon with Bernstein. Please go ahead.
David Vernon: Hey, good afternoon, So Raj I wanted to.
David Vernon: And I'll come back to the struggles at the express segment here, obviously, Bob at around between sort of 2% and 4% on the margin side.
If you think about this in a three year view.
David Vernon: Obviously, we have a lot of plans that are in place to pull cost out and we've got a lot of initiatives.
To work on this.
David Vernon: At what point do you say like we haven't gotten to where we want to go and we need to think about something else deeper or more structural around the business I'm just trying to like it.
David Vernon: Dress, some investor concerns that I've certainly have been hearing about.
David Vernon: Is the margin profile here fixable and if it's not then what are what's going to happen next.
David Vernon: So.
David Vernon: We're very confident in the future potential borrower Express I think if you look at the.
David Vernon: I mean, you got to take a step back and look at the vagaries of the global supply chain over the last few years and we are.
David Vernon: The pandemic was one of those biggest supply chain bullwhip effect, we have seen in the last 30 or 40 years and we are in the aftermath of that we have seen now multiple quarters of.
David Vernon: The market being down so here, we are in a situation, where we are growing faster than the market and yet the overall demand environment is weak for our sector.
No.
David Vernon: <unk>.
David Vernon: The structural changes that we're putting in the express network are real and they are actually designed to improve our profitability and return on invested capital I am very confident.
The margins in Xpress will return and the structural cost take out that's continuing to take place it will serve us very well and especially as the demand profile of returns is going to be it's going to do is going to be very good opportunity for products in the future.
Speaker Change: The next question will come from Conor Cunningham with <unk> research.
Conor Cunningham: Hi, everyone. Thank you just quickly does the does the pilot contract or a lack of final contract limit. What you can do and just in terms of pulling out express costs and then on network to now I think in the past you've talked about hi, Eric you're testing that in certain markets. Just curious on how those markets performed relative to expectations. Thank you.
Speaker Change: So I'll touch on the pilot piece, if I understood your question.
Look most of what we're doing here is to increase the utilization of our assets and leverage the purple network. So the pilot contract.
Speaker Change: Allows for flex up and flex down, but where we are now is looking to take full advantage of the assets that we have.
Speaker Change: So.
Speaker Change: We will work within the.
Speaker Change: Agreement constraints.
Speaker Change: But we have a fair amount of flexibility to execute on tri color and our other initiatives here I'm, sorry, I'm not sure I caught the full part of the second part of your question.
Speaker Change: On network to Dato if that's if that's your question.
Speaker Change: This fits in quite well there is no constraints, we're talking about on the pilot side on network <unk> in fact, it's complementary for my perspective.
Speaker Change: The next question will come from Allison <unk> with Wells Fargo. Please go ahead.
Allison: Looking at personal today, just how much of that volume ethylene at PREPA.
Allison: Tayo today that could go on white as an example, and if theres any context, you can provide in terms of the relative cost savings there.
Speaker Change: Hey, Allison we didn't hear the first part of your questions.
Speaker Change: Questions could you please repeat it.
Allison: So just trying to understand.
Allison: In terms of the volume impact from Thai color, how much that's going on say a purple tail today that could eventually go on way inside of what the cost impact would be to Fedex by doing that.
Speaker Change: So and just to answer that question I think one of the things that <unk> has that.
Speaker Change: A lot of the growth that's happening in the international space as is happening in the deferred space, they're afraid space and also e-commerce, so whether as a future market evolves. This is the right design for us.
Speaker Change: To be able to to serve each part of the market with the right network in place now how much where is going to fit and that's yet to be determined as the market evolves, but again, what we are designing for is the right network for the right kind of traffic. So we have an opportunity to be able to grow profitably.
Speaker Change: In the international space.
Speaker Change: The next question will come from Amit Malhotra with Deutsche Bank. Please go ahead.
Amit Malhotra: Thanks, Operator, hi, everybody.
Amit Malhotra: I guess I just wanted to come back to I think Chris Wetherbee question.
Amit Malhotra: And talk about I mean, typically John we see express profits go down I don't know about 50% sequentially from Q3, Q, obviously <unk> is not where we wanted it to be but.
Amit Malhotra: Any sense of.
Amit Malhotra: Seasonality normal seasonality or is it that type of magnitude relative to where we are in the second quarter and then just related to that I'm, having a little bit of a hard time or maybe a lot of a hard time understanding sequentially revenue was up an express packages were up composite yield was up drive savings were up but then.
Profits were down so maybe you can dumb it down for me, but I really don't understand why profits would be down sequentially. When all of those pieces of mix and revenue are up sequentially. Thank you.
Amit Malhotra: So I'll start with.
Amit Malhotra: The discussion on Q3 are not going to be giving Q3 guidance, but as I said I think it's reasonable to expect that typical seasonality will apply I will say.
Amit Malhotra: For for Q3 in particular due to that.
Amit Malhotra: Fedex ground is very strong performance in last year's third quarter.
Amit Malhotra: With ground operating margin inflicting positive by 240 basis points versus the prior year, we will have a more difficult comparison.
Amit Malhotra: But I think it's fair to say seasonality will will play a role now with regard to the express.
Amit Malhotra: Margins in the profit.
Amit Malhotra: We're going to continue to be laser focused on that as I said, our cost structure did not anticipate the higher demand.
Amit Malhotra: Cannot underestimate the impacts of all the things that Raj and Brie talked about.
Amit Malhotra: If you look to the year over year decline in the U S Postal service volume.
Amit Malhotra: And bind with some of the minimum service requirements that are required that really has a drag on your cost and.
Amit Malhotra: What I will say to us, we're really well positioned when volumes return in light of all the initiatives, we're taking right now.
Amit Malhotra: Yeah.
Speaker Change: The next question will come from Jon Chappell with Evercore ISI. Please go ahead.
Jon Chappell: Thank you good afternoon, John just keeping with that you mentioned a few times now that the costs were kind of above and beyond what you would expect what you would normally have for this type of demand environment. In your latest laser focused on it are those costs that I would imagine a variable that you would look to pull out pretty quickly over the course of the next couple of months, especially with the seasonal slowdown.
Jon Chappell: And express or do you have to kind of manage keeping some of those costs on as noted for when volumes come back just trying to think again about the pace of the of the margin improvement potential as express can it happen very quickly or do you kind of have to keep a little bit more cost on just in case the demand comes back sooner than expected.
Speaker Change: Great. Thank you that's really a great question and I think.
Speaker Change: The answer is yes to all of that right and what I would throw in as well as maintaining our high standards of service that Brie talked about we're factoring in all of those factors the ability to take on additional volumes when it returns.
Speaker Change: Coupled with maintaining the highest quality service that brie talked about but also with a sense of urgency.
Speaker Change: Two to be focused on that which we can take out as quickly as possible without prejudicing those two very important factors.
Speaker Change: The next question will come from Bosco majors with Susquehanna. Please go ahead.
Bosco Majors: Thanks for taking our questions. It sounds like the deferred day network Underutilization there with your core customer has been a bigger problem then.
Bosco Majors: Realized to the bottom line of express can you talk a little bit about if we get to a point, where you do end up walking away or significantly downsizing that customer into next year.
What are your options for consolidating that network either with.
Bosco Majors: Some of your ground opportunities or are the night network are there options for the day network going away sizeable and in addition by subtraction trend.
Bosco Majors: Trend into next year and the year beyond thank you.
Speaker Change: Yes, it's a fair question one of the things that we have been pretty candid about is that we are planning actively for both scenarios that we are working and completely good faith to maintain this relationship and improve the profitability and deliver the service that USPS would like and we think quite frankly that Fedex is uniquely positioned to deliver.
Speaker Change: Liver and parallel through our drive initiative, we already are working our plan if that is not the case. So that we can continue to grow express margin and deliver on our drive commitments as we have previously stated.
The next question will come from Brian often back with Jpmorgan. Please go ahead.
Brian: Thanks, Good afternoon, So as mentioned a few times that fuel was a headwind.
Brian: For yields as surcharges were coming down.
Brian: Maybe some context around that and does that have the timing effect does it have any negative impact on operating income and sort of what do you think for the rest of this year.
Brian: But maybe you can talk a little bit about <unk>.
Brian: Great with the auction that went on a couple of weeks ago. There's another one going on right now you've closed a few facilities do you still think that market stays disciplined now that some of the capacity has has changed stance. Thank you.
Yes, great question and I will start with the second one first.
Brian: We're seeing yes, a very disciplined freight market and I will say I think we are leading.
Brian: <unk> rate if you will.
Look at the volume that we talk.
Brian: This summer, we really like what we got.
Brian: We actually were quite surprised that we found some really high yielding customers and those customers have been very vocal about our great service at Fedex freight is delivering and so market is rationale we are delivering a great service lands and the team have just done an outstanding job and so.
Brian: We're continuing to be very optimistic about the margin profile in the future of Fedex freight.
I have to admit I forgot the first half of the question Taylor. Thank you. So yes steel was.
Brian: A headwind obviously at the top line and the bottom line in the quarter moving forward, we do anticipate that fuel overall will be a headwind for the year.
The next question will come from Jordan <unk> with Goldman Sachs. Please go ahead.
Yes, Hi, a question more on the macro.
Jordan: Is it your expectation that theres not been any macro improvement for the balance of this fiscal year or maybe even for all of calendar 2024, I mean, it has been a lot of Destocking online sales warranty bad and somewhat soft consumer spending might be pretty good next year. So just curious your thoughts or color.
Jordan: On the macro expectations that you've thought through in terms of your numbers. Thanks.
Speaker Change: Yes, Thank you Jordan I think.
Speaker Change: On the macro we have been pretty consistent over the last few quarters about two or three things one is that the industrial production around the world continues to be weak and again, that's reflected in our express freight numbers and even in our domestic express numbers, even though we are growing faster than the market.
Speaker Change: These are headwinds.
Speaker Change: <unk> for the industry volume.
Speaker Change: Consumer spending I think the mix between goods and services I think now thats nearly back.
Speaker Change: To the pre pandemic levels as far as inventory is concerned we believe that the inventory destocking phases over but.
Speaker Change: The restocking phase has yet to begin and owners so.
Speaker Change: For the rest of the fiscal year, we are assuming we're not assuming any kind of.
Improvement in these trends, obviously, if that changes that will be a positive.
Speaker Change: And we are definitely and we've said this over and over again over the last few quarters Youre focused on the things that we can control and Thats why we are so focused on the execution of drive and again.
Speaker Change: I am just reiterate that I am so proud of the team for delivering.
Speaker Change: Meaningful bottom line improvement despite the despite the challenges on the top line.
Speaker Change: Yeah.
Speaker Change: The next question will come from Scott Schneeberger with Oppenheimer. Please go ahead.
Scott Schneeberger: Thanks, very much for taking the question.
Scott Schneeberger: It's probably for you could you address.
Scott Schneeberger: As you took a good amount of share over the summer.
From from EPS in that situation what are you seeing competitively out there now that we're in peak season.
Speaker Change: As far as it was asked a little earlier on on pricing, but how are you holding up as far as maintaining.
Speaker Change: Your customers if you could address this on large and.
Speaker Change: Small and mid size and end to go for question as well going into the next year.
Speaker Change: And how you're thinking a holdup there thanks.
Speaker Change: Okay, Scott, Let me, let me try to unpack that I think first of all from a peak perspective, our peak volumes are very much in line with what we anticipated for the months of December and from a structural pricing perspective and peak as you know peak surcharges are a significant contribution to the month of December.
Speaker Change: We are very pleased they continue to be.
Scott: Something that we are enforcing and customers really understand that they are there to cover the incremental cost from our largest seeking customers. So from a peak perspective, we feel really good as I mentioned there is no question I get asked more around here is there are we holding onto all of the share that we took from UBS and the answer I can give you is continental.
Scott: Yes, we gave you last quarter, the 400000 average daily packages.
Scott: Slightly conservative number we are tracking all accounts that one we won specifically because of their concerns on the labor negotiation. The vast majority of those had an early termination clause and to my knowledge. We have not lost a single one of those accounts now of course, we do trade accounts with UBS.
And we have accounted for the trades between the two of us over the last quarter and we're still up more than 400.
Scott: Average daily packages in the United States. In addition, we looked at their Q3 numbers we've gained share.
Scott: So I think it's important to note we gained some share here in the United States, but globally, we outperformed the market. So it's a confident yes, and we have the better value proposition I believe we have the better commercial team I'm confident we'll hold on.
Speaker Change: The next question will come from Stephanie Moore with Jefferies. Please go ahead.
Stephanie Moore: Hi, Thank you I appreciate the question.
Stephanie Moore: Touching on the prior one talking about the demand environment.
Stephanie Moore: First time, I am kind of curious what youre seeing on the international side of Europe.
Stephanie Moore: Of your business and you have to spare parts of tighter air cargo markets from kind of the lower cost E. Commerce exports out of Asia. If that's had any impact as of late on your business and then more of a broader view, what's your view on when you think the sign and finally turned the corner here just based on what Youre seeing today.
Speaker Change: Sure Great question.
Speaker Change: Think as Raj mentioned.
Of course, we're tracking all of the same economic indicators that all of you are tracking and when you look at some of those indicators you do start to see some optimism.
Speaker Change: What we're doing is we're planning conservatively right now we believe that we will see Fedex sequential improvement throughout the back half, but the overall market demand, we will not change within our fiscal year.
When we've seen the momentum I talked about a couple of places where we've got momentum specifically on parcel that the vast majority of that is two things its e-commerce and its market share gains when we look at the the largest indicator of industrial production and what we're seeing we're not seeing a lot of restocking in our numbers.
Speaker Change: It doesn't mean that it won't come but we're not seeing it yet you know one of the greatest indicators of that is actually if you look at our freight business outside of the United States weights are not where they need to be.
Speaker Change: Shipment volume was decent but it's really the way that we're looking at in weight per shipment is still down dramatically as you can see in the numbers. So are planning conservatively, we're focused very much on what we can control and of course, we'll keep you updated as things move on.
Speaker Change: The next question will come from Bruce Chan with Stifel. Please go ahead.
Great. Thanks for the time.
Bruce Chan: Maybe you want to get a follow up on network to point out.
Speaker Change: Yes, if you could give us an update on where you are with the market network integration I imagine it was a little bit slower during peak season, but what's been completed at this point and what markets are next and then maybe just a follow up for John here in terms of the model where should we think about.
Speaker Change: Where the impact of those changes occur with regard to the outflows.
Speaker Change: Okay, Bruce let me take the first part and I'll turn it over to John.
Speaker Change:
John: So we have.
John: On track to our network to an auto for an implementation as we have told you by fiscal year 2007, we have announced and are implemented optimization changes in Alaska, Hawaii, Canada as well as several locations in the lower 48, and we have learned a lot in this process.
In January.
John: <unk> the next wave of rollout once we get past the busy peak season. So overall, we're on track we're learning a lot in this process here. We're building the right technology solutions in the facilities required to move forward and I'm quite pleased with the progress.
Speaker Change: And Raj what I would just add to that is that our expectations and as a result of all that planning is factored into our guidance.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Mr. Ross Superman M for any closing remarks. Please go ahead Sir.
Okay.
Yeah.
Ross Superman: So thank you very much and in closing we are showing clear progress on our transformation delivering an unprecedented two consecutive quarters of operating income growth and margin expansion, even with lower revenue at.
Ross Superman: At the same time, we are providing our customers with outstanding service and speed through the peak and beyond Im very confident in our path ahead that should become a more flexible efficient and intelligent company. Let me take this opportunity to once again. Thank the Fedex team members, who are delivering just a simply outstanding peak.
Ross Superman: It was the best fixes make on Roomba and sometime to come and we will also take this opportunity to wish everyone. On this call and all of our Fedex team members are very very happy holiday season. Thank you very much.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].