Q1 2020 Earnings Call
Good day, everyone and welcome to the Fedex Corporation first quarter fiscal year 2020 earnings Conference. Today's call is being recorded at this time I would like to turn the conference over to Mickey Foster Vice President of Investor Relations for Fedex Corporation. Please go ahead.
Good afternoon, and welcome to Fedex Corporation's first quarter earnings Conference call.
The first quarter earnings release, and Stat book on our website at Fedex Dot com.
In addition, certain speakers may refer to charts, we posted on the website. This afternoon.
This call is being stream from our web site, where the replay will be available for about one year.
Joining us on the call today are members of the media.
During our Q and a session callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
I want to remind all listeners that Fedex Corporation desires to take advantage of the safe Harbor provisions.
The private Securities Litigation Reform Act certain statements in this conference call such as projections regarding future performance may be considered forward looking statements within the meaning of the act such forward looking statements are subject to risks uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward looking statements.
For additional information on these factors please refer to our press releases and filings with the SEC.
Please refer to the Investor relations portion of our website at Fedex Dot Com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.
Joining us on the call today are Fred Smith Chairman.
Raj Supermini, President and COO.
Alan Graf Executive Vice President and CFO .
Mark down executive VP General Counsel and Secretary.
Recurring our executive VP, Chief marketing and Communications Officer, and Rob Carter Executive Vice President Fedex Information services, and CIO, who is calling in remotely and now Fred Smith will share his views on the quarter.
Thank you make a good afternoon, thanks, everyone for participating in our first quarter Aflac 20 analyst call.
Let me also thank the hundreds of thousands of Fedex teammates around the World, who work every day to keep our purple promise.
I will make every Fedex experience outstanding.
When our strategic management Committee present in the F.Y. 20 business plan to our board of directors last spring.
We identified three significant challenges to increasing earnings this fiscal year.
Consistent with our stated long term goals.
One beginning in the fall of 2018, it'd become clear that Goebel global trade disputes were adversely affecting manufacturing in Europe , and Asia, thereby slowing international shipping demand.
Two our TNT integration was facing as most important phase leading to the integration of European ground operations by the end of F Y 20, and three we plan to add capabilities to enhance our services for the rapidly growing e-commerce market, which we expect to grow in the United States from 50 million to 100 million packages per day by 2026.
These shipments will be destin increasingly to residences and one in four packages will be short distance deliveries.
While the backbone of Fedex is the b to B business.
Our unmatched ground and express line all in short networks carry both b to B and B to C e-commerce with great efficiency.
To lead in E Commerce, we have launched or announced.
Fedex extra hours and express service, which provides nightly pickup with the delivery the next business day.
Insourcing, Fedex Smartpost packages for Fedex ground delivery by peak 2020.
Fedex ground, six and seven day delivery.
Expanding the Fedex ground oversized package network to approximately 100 facilities by Pete 2020.
New return services and thousands of additional pickup and shipping points, including 8000 dollar general onsite locations in less dense areas.
And finally in Fedex freight direct for heavy and hard to handle items requiring delivery over the threshold. The so called H three D market.
Fedex can handle millions of additional shipments generated by these new offerings without adding significant additional sortation capacity.
It should be noted a large amount of ground growth will be short haul zone, one that will be lower yield, but with improved margin due to increasing density and minimal line all costs.
There is a new video on our website that goes into detail about our broad portfolio and I Hope you will watch it.
Our services and capabilities and cost will be industry, leading in the short haul zone one sector.
The Fedex Board of directors endorse making these moves as F.Y. 19 came to a close understanding the short term cost as we believe by the end of this fiscal year F. Y 20, we will have significantly repositioned Fedex for strong future earnings.
The market is changing as volumes are moving out of the us PS.
And we are in sourcing more we have a chart on the IR website that shows these trends.
Over the summer these challenges increase somewhat due to the decision to not renew our largest amazon contracts and deepening trade disputes.
While the Amazon contracts represented only a small proportion of our revenues the nature of our business is such that near term profits will be adversely affected since the last bit of volume has significant flow through to the bottom line.
However, we have closed additional business to replace this traffic, which is being onboarded and we are taking out significant costs, which were unique to amazon's requirements.
Also the global macro economy continues to soften and we are taking steps to reduce capacity.
Specifically, we will retire 20, MD 10, 10 aircraft over the current and next fiscal year.
Which will eliminate that fleet type from.
Our air operations.
We are highly likely to also retired the remaining 10 Athree 10 aircraft. This year, which will also lead to the elimination of that fleet type.
In addition, we are parking the equivalent capacity of seven MD 11 aircraft this fiscal year.
Accordingly, assuming no recession, we will continue the initiatives announced in May.
In June with confident optimism about Fedex as long term future competitive position and industry leadership.
We posted a chart on our website that shows the significant customer correlation among our three core opcos.
Our ability to bundle express ground and freight services is essential to success in our competitive ecosphere.
Fedex office in Fedex Logistics also provide important value added services to our portfolio against the major competitors, we face every day.
Let me now ask breed to amplify our views on the marketplace and the economy and rise to discuss current operations, including our plans for peak season, and Allan will give you more details on our financials.
Then we will take your questions Barry.
Thank you Fred good afternoon, everyone I'll open with our economic outlook and dive directly into how are tackling market opportunities and delivering solutions for our customers that Fedex.
Comparing to where we were in June our overall outlook for US economic growth is down 20 basis points currently at 2.3% for real GDP.
Our outlook has changed despite consumer driven growth of 2% in the us in Q2, let's see why 19.
This change is because the industrial sector remained sluggish due to an inventory buildup and increased geopolitical trade tensions as you can see on chart number three on the IR site U.S. manufacturing PMI has been very weak this year.
Given that our industrial production outlook is down 70 basis points from Jam currently has 0.9%.
From a global perspective economic growth has decreased as the developed world outside of the U.S. sees weaker growth in both domestic and external factors weighing on emerging markets.
In Europe ongoing decline in Germany's industrial sector is a drag on growth while uncertainty of Brexit is impacting not just the UK, where no sector has been immune to the negative impact and its major training trading partners as well.
Growth in Italy remains weak with Q2 see why 19 data showing no gain and real GDP.
In reference to chart four in the presentation, you can see eurozone manufacturing PMI has been signaling contraction for most of the year.
In Asia Chinese industrial production growth had a 10 year low in July and exports remain weak Chinese exports. The U.S. have declined every month in 2019 more broadly all manufacturer sorry, excuse me all major exporting economies have been impacted by the slowdown in trade, especially Asian economies with high exposure to China.
I want to highlight that Q2 see why 19 global trade volumes declined year over year, which is the first decline since 22009. This decline coupled with JP Morgan Global PMI manufacturing export orders index falling from 47.5 in August from 49 in May lead us to expect expect global trade volumes will contract. This year on an annual basis for the first time since 2009.
As we have stressed before as zero tariff zero subsidy global trade environment is the most powerful economic growth engine thereafter.
We will continue to push for policies that stimulate rather than depressed global trade.
Now turning our focus to what we can control we remain laser focused on executing strategies across three key areas international ecommerce and small business.
Right now our sights are set on an addressable transportation market totaling $550 billion worldwide.
The majority of this opportunity lies outside of the United States, where Fedex share has significant opportunity for growth International is a clear opportunity for us with tremendous runway ahead.
As we integrate TNT and lower our cost to serve in Europe , we will be ideally positioned to gain share from the competition.
The European team is gaining traction and accelerating the acquisition of parcel customers. Unfortunately, this momentum has been offset by reduction in industry airfreight volumes between Europe , and the United States.
In Europe , we are simplifying our pricing structures and our opening the Val for E. Commerce for the first time ever to further stimulate growth. It is important to note that our European competitors have a larger ecommerce volume base, which insulate stem from economic headwinds impacting commercial business. We are very excited about the ecommerce potential for our European business.
We're also creating new pricing and improving our value proposition between Asia and Europe . This is the largest trade lane in the world prior to the TNT acquisition, we did not have the European buyer base to pull this volume from Asia as European payers make the majority of buying decisions in this lane.
Now shifting my focus to e-commerce .
In reference to chart five on the IR site, our IR site and the you asked more than 90% of incremental domestic parcel volume from 2018 to 2026 is expected to come from E. Commerce period. This is why we are busy building a world class portfolio of solutions to best serve thousands of retailers in this space. We are very proud of the rapid innovation. We have brought ecommerce in the last three years and you can certainly expect more innovation in the months ahead.
On the same chart, you'll see that more than 50% of the U.S. domestic ecommerce market is our addressable growth market with a CAGR of 12%.
As ecommerce market grows so does the market for returns up 35% since 2015 packages dropped off at our retail locations result in a higher pickup density and drive greater operational efficiency, making Fedex, even more competitive and the returns market. We are very excited about our network expansion with dollar General we will have 1800 incremental locations opened by peak. We also expect our will and volume to reach a record high this holiday season.
Innovation and customer value are driving every decision we make when it comes to E. Commerce. We are very excited about making every day AD delivery day with the launch of our seven day service at Fedex ground, we are already faster than the competition by at least one day and 26% of the lanes. This move will further speed up our network and allow us to continue to gain market share.
We are also building powerful relationships with many retailers and leveraging solutions like Fedex extra hours and Fedex ground zone, one which is our local portfolio our local portfolio enables retailers to leverage local inventory and stores in Dcs take orders later in the day and still deliver them. The next day.
We just forged a new strategic delivery partnership with Dick's Sporting goods. The majority of their spend with US is on our ecommerce business by leveraging our portfolio of ground commercial home delivery and express services. They are getting the product to their customers faster, which of course is paramount to them and to their business growth.
Another retailer, we work closely with as Chile.
Excuse me with one of the first home delivery customers that benefited from our six day expansion.
Due to their one to two day shipping commitment and 24 by seven operations. They are ready to take full advantage of our new seven day service.
Retailers and brands large and small have recognized our commercial teams for their partnership and for our ability to help them grow their business and successfully compete in the market.
Also ecommerce will continue to create great opportunities for our LTL business, our new Fedex freight direct service moves large bulky items into consumers' homes and into businesses backed by the power of the Fedex brand and the speed and reliability of our nation wide priority network, we are able to reach over 80% of the U.S. population and we have a unique ability to service a large part of this $10 billion market.
And of course, we can't forget about rock. So the Fedex same day bought who has recently been in three test markets, Memphis, Tennessee, Plano, Texas, and Manchester New Hampshire.
New Hampshire rocks I was preparing to change the way on demand e-commerce shipments make it to customers doorsteps.
While these e-commerce investments benefit the broader market I am, particularly excited about how this strategy will support small and medium businesses, who remain our most profitable customers and that's why 19, our small and medium businesses grew more than 8% and there are still a lot of room to grow as there are more than 32 million small businesses in the U.S.
Speaking of being there for small and medium businesses, we will not apply a residential peak surcharge. This holiday season and decision has received outstanding feedback from countless small and medium sized customers. It's a great way to help make our customers. The hero as E. Commerce continues to grow and become a major part of their business.
Now, let me turn the call over to Raj for his remarks.
Thank you Barry and good afternoon, everyone.
As you all aware the global economic and trade environment remains very uncertain.
Despite this uncertainty Fedex remains committed to delivering long term profitable growth.
We are taking decisive actions to address the three topics that Fred covered in his opening number one reducing capacity, especially in our Intercontinental network, an overall reduction of cost in our express business.
Number two completing TNT integration and number three leveraging our infrastructure at Fedex ground, and making targeted investments to allow us to successfully go all in on E Commerce.
Let me talk about each of these in turn first capacity cuts and overall cost reduction at Fedex Express.
We expect the current softness in air cargo demand to continue into calendar year 2020, as such we will take action to reduce our intercontinental flights for peak season to better match supply to demand.
We have already decreased us domestic flight hours, and we will be aggressively looking for additional opportunities.
The express team is intensely focused on overall cost reduction.
This includes deferring non credit critical hiring limiting discretionary spending and implementing structural cost initiatives such as the United States voluntary buyout program.
In addition, we are looking at every opportunity to reduce capital spending benefits from all these changes will be realized in the coming quarters.
Secondly, let me update you on TNT integration.
Overall Im pleased to report that we have picked up the pace of integration and are continuing to improve our value proposition for our customers Cross utilization of combined Fedex Express and TNT networks, which we shared on this call is with a major step toward full integration of the operations in June these capabilities expanded across Europe . The transit times of Fedex intra European economy parcel shipments improved by at least one business day on approximately 40% of the European lanes across the 28 countries in Europe .
We are well on our way to achieving full ground interoperability in our pickup and delivery networks in Europe by the end of May 2020.
Flooring Intercontinental packages into the combined European grown network allows us to improve service, while simultaneously, reducing our cost to serve.
This will help us accelerate growth into Europe from all around the world.
Asia, Europe Lane, which remains the largest intercontinental trade lane is particularly important in this regard.
Given our strong presence in APAC and significantly enhance president in Europe , we expect to gain share in this land in the months and years to come.
Additionally, in Q1, we integrated customs clearance and brokerage services in Europe to provide a more seamless experience for our customers. This milestone ensures we are well prepared for Brexit no matter the outcome.
Clearance integration is also very important for us to enable cross utilization of TNT wrote network for inter continental shipments.
And as mentioned on the previous call sales integration is practically complete and now we are presenting a single face to our customers nearly everywhere around the world.
And thirdly ecommerce.
Fred on Brea have discussed our robust portfolio, let me now address enhancements specifically underway within Fedex ground, which is the backbone of our ecommerce strategy.
Fedex ground continues to transform the package delivery business in response to a growing market demand.
Network investments, including seven due to the central delivery large package capabilities in smartpost integration position us for future growth.
Leveraging the most automated network in the industry will be once again offer seven day residential service to our customers throughout the peak season.
After peak the seven day residential deliberative and become a permanent piece of our service offering.
This will speed up our lanes throughout the week and further extend our competitive advantage in some cases by two days.
We're also well underway in building our grounds large package handling capabilities to accommodate items like Tvs tires and furniture. This includes dedicated large package facilities plus new handling equipment in more than 30 of our existing stations prior to peak.
In terms of Smartpost, the integration of that volume into our network directly addresses one of the biggest challenges the industry density.
From a cost perspective, moving these packages the same service providers already delivering ground commercial and residential packages goes a long way in driving density up and driving the cost per delivery down.
Integrating this volume provide significant growth opportunities with thousands of entrepreneurs, who run pickup in Delaware businesses with Fedex ground.
We've already started transitioning smartpost volume majority of which will move during next calendar year. This should be completed before peak season in 2020.
Investments Fedex ground has made and will continue to make in technology aimed to optimize operations reduce cost and enable real time decision, making based on applied data analytics, we are offering our service providers new technology tools. So they can make decisions about how best to run their business. Each day in terms of staffing needs vacant load plants and optimize routes arming our employees and service providers with the state of the our tools are expected to drive efficiency in Fedex grounds operation as well as the operations of service providers, all the while strengthening the reliability of Fedex ground service.
Several of these tools have started to be implemented in select markets. Prior to peak immediate benefits will begin to be realized in fiscal year 20 with increased benefit in the years to come.
These investments will allow us to provide the speed and reliability, our customers value, while offering market competitive prices as the low cost last mile provider.
This means we are facing near term headwinds, including additional costs related to our service expansions and smart roll Smartpost volume integration.
But these investments are necessary and will pay off in coming years.
And speaking of last mile or strategically working with a number of retailers to leverage their physical infrastructure with our transportation and logistics infrastructure to provide market leading value proposition for the end consumer interest from retailers remain very high in this regard.
In closing as you approach another busy peak shipping season, we are well prepared to once again deliver exceptional service to our customers. We expect record breaking volumes in multiple Mondays during the peak season ecommerce growth continues which in turn drives strong demand for residential delivery.
Peak season is four days shorter this year and operational intensity remains the same we have been preparing in close collaboration with our customers all year.
The Fedex team of more than 450000 outstanding team members is the best in the business and is ready to deliver the holidays once again for our customers around the world.
In the power of our network, coupled with the hard work and dedication of our global team sets us on a path of long term profitable growth.
Now I'll turn it over to Alan Graf to provide details on our financials Alan.
Thank you, Rob and good afternoon, everyone.
First quarter operating results were impacted by several factors.
Weakening global trade and industrial production have resulted in less than expected demand for our most profitable express package in freight services.
Express yields have also been negatively impacted due to the resulting mix shift lower weight per package and customer trade down to slower lower priced services.
These conditions are especially challenging in Europe .
Where capacity and network reductions are limited due to the current stage of integration as we are operating duplicate road and air networks.
The next ground operating costs were higher due primarily to our expansion of operations to six days per week.
Higher purchase transportation costs attributable to volume growth and expansion to six day operations and higher self insurance expenses.
Each transportation segment had one fewer operating day in the first quarter versus the prior year.
Which is estimated to have lowered earnings by approximately $100 million.
The loss of volume from Amazon had a negative impact to the quarter.
Operating costs, including depreciation also increased with strategic investment programs.
Including the modernization of Fedex Express aircraft in hubs and investment in technology across the enterprise that will further optimize our networks as well as enhance safety and capabilities.
The modernization of our aircraft fleet lowers costs through enhanced reliability reduce maintenance costs and improve fuel efficiency.
Partially offsetting these negative factors were the benefits from an approximate 300 million decrease in variable incentive compensation.
Fedex ground volume growth of 7%.
Increased revenue per shipment at Fedex freight and Fedex ground and cost reductions for business realignment activities, including the U.S. voluntary employee buyout initiated last year.
Looking at.
Looking ahead to the rest of fiscal 2020.
We are now forecasting adjusted earnings per share of $11 to $13 per share.
The new forecast reflects our lower revenue outlook, driven by increasing trade tensions and the corresponding weakening in global economic conditions, especially industrial production that has occurred since our June earnings release.
With the increasing uncertainty of trade negotiations and government policies.
Forecasting customer demand and our corresponding earnings is exceedingly difficult.
Our forecast assume moderate us economic growth.
Current fuel price expectations and no further weakening in international economic conditions.
A further ramping in any trade measures and or adverse changes in international trade policies and relations would likely drive additional weakness in our business.
While our current expectation is to earn slightly above the midpoint of our 11 to $13 range.
We believe the range is appropriate given the current macro and business conditions, we are experiencing.
In addition to the impact of macro uncertainty.
Fedex ground operating expenses are expected to be higher than our previous forecast due to volume mix lower than planned delivery density higher wage rates and ongoing investments to enhance our e-commerce capabilities, including our expansion to seven day operations.
The new forecast also reflects the loss of Fedex ground business from Amazon that began in August .
RF Soi 20 effective tax rate prior to the year end Mark to market retirement plan accounting adjustment.
It is now expected to increase 24% to 26% due to lower than expected earnings in certain non us jurisdictions.
In response to these issues, we're taking additional actions on a number of fronts to better align our costs, including post peak reductions to the global Fedex Express Air Network.
We continue to expect to incur $350 million of TNT integration expenses, and therefore, 20 and 1.7 billion in total through roughly 21.
We continue to expect for 20 capital spending to be approximately $5.9 billion.
While it's early in the process, we anticipate 421 capital spending will be similar to afford 20.
During the first quarter, we issued $2.1 billion of debt.
We used the proceeds to redeem debt maturing this fiscal year as well as to contribute 1 billion to our pension plans.
We do not expect to make additional contributions to our us pension plans this fiscal year.
We also have no material debt maturities prior to fiscal 2022.
In conclusion, we are taking actions to mitigate the effects of macroeconomic uncertainty. However, we are continuing to make strategic investments to improve our capabilities and efficiency.
Which we expect will drive long term growth of earnings margins cash flow and returns.
Now the operator can begin the question and answer session.
Thank you at this time, if you do have a question. Please signals by pressing star one we do ask that you. Please limit yourself to one question again that will be starwood for questions. We'll hear first from Chris Wetherbee with Citi.
Hey, Thanks, good afternoon, thanks for taking the question.
I guess I wanted to just talk about the reduction in guidance and get a little bit specific if we could if you think about the difference of where you were three months ago versus where you are today.
It kind of equates to almost $900 million right down to the operating profit of the business. This fiscal year. So if you'd give us a little bit more specific sort of buckets breakdown, what maybe the lower revenues based on macro and then maybe what may be caused by higher costs associated with certain restructuring the network to adapt to ecommerce that will be very helpful.
Chris I would say that the vast majority of this 900 is the reduction of our revenue forecast associated with the macroeconomic conditions that we did not expect some of the cost increases that you are seeing did have some impact but the main reason was the macro the biggest impact of course was at express and it was in international with a large degree or that in Europe .
Yes.
Well hear next from Scott Group with Wolfe Research.
Hey, Thanks afternoon, guys. So this is I think the fifth straight quarter of either missing or cutting missing numbers are cutting guidance are you approaching guidance any differently, meaning.
Taking a more conservative approach your eye anything that you think that gives you some confidence or us some confidence that this is the final cut and then I I separately just want to understand Raj you said, we're doing everything we can to reduce capital spending and yet capex is staying unchanged and now flat next year as well. So can you help us understand I know that's two questions but.
When some handholding here I think.
Scott I'll take them both.
The.
The lack of Maryland had our forecast is just the difficulty associated with forecasting in this environment.
I don't think we've been too aggressive based on what we knew at the time.
You've noticed we've widened the range this year and I did mention that our current point estimate is higher than the midpoint of that range. So we have given us given ourselves a little bit more downside I also said that we don't we're not expecting any additional weaknesses in the international macro environment from where we are today, which is a wildcard.
So I just want to point those things now too as far as Capex Trust me up like 21 would be on a lot higher than 5.9 billion, who were not started cutting already.
I think there are two things that are really important to understand.
And number one is.
We have to continue to modernize the fleet the profound impact of the lower costs and higher reliability.
Of the new Twins is just remarkable and we're going to continue to do that.
We're gonna maybe stretch it out a bit.
But not much.
Because the faster we can get those in there the faster we can enjoy those benefits.
Fred mentioned the number of aircraft that were going to take out of service either fully retiring or parking. So we're not adding capacity in our international network and in fact were reducing that and we're reducing our domestic flight hours, but we need to modernize the fleet, it's very important.
Secondarily on the hubs that express where they are underway, we have a lot of things that are committed.
But the improved automation and processing capabilities of those two hubs when we finish our also profound in terms of the productivity and im not a throughput we can handle and we anticipate that we're going to need that.
If we get further deterioration in the macro environment or we see something in the us it looks like a recession will definitely cut further but those are our plans at the moment.
Well hear next from Jack Atkins with Stephens.
Hey, guys. Good afternoon. Thank you for taking my question can you quantify the Biennale benefits from the capacity of cost actions you announced this afternoon and.
I guess from a bigger picture perspective, why why are these capacity adjustments only being made now when it feels like.
We've been facing more challenging trade and industrial production trends since last December what prevented you from taking these actions before today. Thank you.
Let me take a shot at that this is Fred Smith speaking first of all I think it's important to look at the things that we've said over the last few earnings call in the context of about.
What's going on globally.
I mean, I watch the business press everyday and I have to tell you I think there's a lot of whistling past the graveyard about the U.S. consumer and the the United States economy versus what's going on globally.
So.
The serious trade disputes began in the spring of 2018.
And they escalated throughout the summer of 2018.
And most people don't think about the fact that when.
China slows down because of us tariffs or uncertainty or for whatever reason.
As big a victim, if you want to call it that.
The China slowdown is Europe .
Because Jim Germany's a contraction is because they are not selling as much to China, which is.
A huge customer of Europe .
So remember last spring.
There was a tremendous amount of euphoria, when we were going to get a deal China trade deal.
And then at the last minute it broke up and then over the period of the summer there been escalating tariffs on both sides and increasingly.
Lower industrial production and that's why we put those charts up on the IR web site.
So we're reacting inside of Fedex to these same thing so.
As we went into the fiscal year, we were hopeful of a trade deal and some sort of restoration of normalcy.
That has not.
Taking place.
And the us consumer which is.
A remarkable driver of growth in employment and all the things that are spoken about everyday.
Sort of masked the fact that the goods producing sector, which we're in the midst of is much more global in nature than the us consumer which is largely services and and certain consumption.
So that's the reason that we began the year the way we began it and.
Should we have moved faster or known faster or what have you I mean, all I can do is report the numbers as we see them and I would point out to you that last fall. We were the first people that call. This out and I remember very vividly I mean, we are the.
Leading prognosticator of this we have 15 million votes everyday in our system.
And I remember when we made this call on CNBC. They took our heads off that we were quote blaming someone we're just reporting what's going on in.
Reacting to to these macro economic.
Things and as Alan said Thats why it makes it so hard to forecast we think we've taken appropriate steps, we'll do more if we have to but I can't give you any better answer than what I just did.
And from Barclays will move onto Brandon Oglenski.
Good afternoon, everyone. Thanks for taking my question, So Fred I guess coming off of that I mean, clearly you guys have a culture of forward innovation and growth at Fedex, but I guess on the flip side is there any like real ingrained process at the company and says Hey, we need to challenge every day, what isn't working because maybe even outside of these cyclical pressures I mean, if you look at your LTL business, we can benchmark to other carriers that do better obviously express margins are at quite a low point right now and you look at logistics are like Fedex office, which we don't think have contributed a lot in the past. So I guess what can you tell investors is the process for looking at things that maybe didn't pan out quite as well as you thought.
Well I think you're a great person to ask that Brandon because your your so called deep dive. So let's talk about LTL I don't think we have John Smith here to here today first of all their other carriers or do better than Fedex would the exclusion of.
Perhaps a little small carriers, one short I'm not familiar with I believe the better way to put that is there's one LTL carriers that does better than we do.
And that's the old Dominion and were great admires of old Dominion.
Good old Dominion operates a network that has I believe somewhere in the 200 and some odd stations versus our 360, they don't deliver.
Everyday to every part of the United States and they've been very brilliant and finding a niche that's for lack of a better term near key element in that.
Zone between LTL, and TL and their average weight per shipment and a much more dense and that work is about 300 5400 pounds higher so their margins are outstanding and they have terrific again, obviously, we benchmark them carefully as our other competitors, which gets to your point do we ever think about doing things differently and the answer to that question as we think about doing things differently constantly.
Secondly in the express business.
There is.
A belief, including you Brandon.
That somehow our.
Express operation in the United States is not profitable our express operation in United States very profitable.
And we have some of the best industrial engineers and operating risk operations research people in the country.
So there is been this constant mantra for 10 years.
That Oh, we ought to put express and ground together well my goodness, we've gained market share in ground for 19 out of 20 years.
And Brie and Raj just told you we think it's going to continue on our competitive advantage is going to improve.
So were very convinced that the way that we are operating is the preferred way and yes, we look at it.
Added every day.
The third thing that gives people.
Fired up and I guess Wolf.
Scott Group just mentioned at about Capex is hey, we were proliferate.
We are profligate in terms of Capex reality is about 60 cents out of every dollar we're spending on capex are to modernize the express hubs.
To put it in this new technology, we can't get people in Indianapolis and Memphis.
To work, they're not they're not out there plus it improves the productivity.
So the failure to do it would would be very dire and as Alan said, and we've said over and over again every time, we bring on a 767 and to a much lesser degree that triple seven goes we're not by many other item it's accretive to earnings the reliability goes up so could we stop buying 760 sevens and Triple Sevens, Yes, well why don't we stop buying them because we put a chart.
On the earnings the IR web site today.
That showed the synergy between the three major opcos.
So 80% of our customers by all three of the services. So if you took fed action tried to.
Subjected lets say two I think it was BCG that came up to that that that diagram. You know you have dogs in cash flows in one thing or another.
If you.
Did not.
Improve the express company unless your costs get out of control you couldn't win in the ground sector and vice versa.
So we are very convinced.
And we put up a chart that specifically addressed your comments about this fedex will unquestionably be the low cost producer and the domestic express business because of the fleet modernization.
And that includes any new entrants into the business, yes, we have far far higher pilot costs and AOMT cost perhaps than the third party providers, we think thats a good thing, but our total productivity and our cost per ton mile are down 2% over the task past 10 years in this year's dollars I'm not talking about inflated dollars I'm talking about.
$2019 or 2% less than $2009 nine.
Dollars so the fleet modernization.
Yes, we could stop it and yes, we could stop that capex, but the competitive positioning against our major competitors and the last thing I'm going to say is.
We basically compete in an ACO sphere, that's got five entities in it.
Theres EWP, yes.
Theres DHL, there's a U.S postal service and now increasingly there is Amazon that's who we wake up every day trying to think about how we compete against and give the best services to our sales force.
So it reminds me of my days in the service, where you run Ali's.
Fake maneuvers one thing another it's a lot different when you got competition on the other side. So we try to beat these folks.
Yes, and in particular has a very strong retail presence and both U P S and DHL have significant forewarning presences.
So we decided that we would basically cover those.
Portfolio gaps with more focused capabilities and Thats why we operate differently, we care eight retail freight on our purple tails and interline. It we don't have a huge forwarding operation and we have a retail network that is smaller than Youd store franchise network, but utilizes partners as breed talk to you about Walgreens and.
Dollar more recently dollar general and some others.
So the reason I'm going on about this I'm not quite sure how those mantra got started that were hard headed or we're not willing to look will look in anything but what we can do is to change the reality of the math, we can't make the competition go away I wish they would just leave the field. They are very good operators and the third thing is that we.
Have to deal with as the macroeconomic environment and by the way, there's no company and no person that has been more vocal in our opposition to the trade policies that we are pursuing now to be fair I think it's not just the U.S. I think China is also pursuing bad trade policy, so you're taking.
A a system.
Over the last 70 years of strong more people out of poverty, none in the entire previous history of the world and essentially.
Putting it and putting it all at risk. So these numbers on these macro economic production indicators, we didnt make those up thats whats going on so I apologize for the length of the response, but it's too this continuing.
Drumbeat that somehow we're not willing to look at something and you take selective things like what your LTL operation in as good as quote all the others is not as good as mine and it's not as good as the other ones in terms of margins for the reasons that I gave you.
So it's important to look at this thing with those context in mind.
Next question.
We'll hear now from Allison Landry with credit Suisse.
Thanks, Good afternoon.
And so you guys talked a lot about the short term cost inflation at ground and driving down the cost of.
Delivery longer term and I think you've done a pretty good job of explaining that to the market, but it sounds like you're also seeing some unexpected cost creep higher wage rate.
While our delivery density so forth. So I guess could you help us understand some kind of timeline for when we should expect to see some of the operating leverage and inflection in margins at the ground segment is its fiscal 21, the right way to think about it or do we need to look further out than that thank you.
I like our ground margins unlike there for time.
And I think we told you early on in the intro Allison that.
As at least a gross the zone, one where we think we are going to grow really rapidly, we're talking about lower yields and higher margins. So.
I am grounds performing admirably they issue a ground is there's just not the commercial traffic we plan to have which has significantly higher density than home delivery does home deliveries growing like crazy in the commercial business is not because of industrial production and all the other things. We said so that's a fairly simple explanation. We're adjusting the model. According to do that I think grounds in great shape, I think it's doing fantastic and I don't see anybody making better margins than us.
Let me, let me make one comment here, Brian and then.
Raj and or Henry Maier, the CEO of Fedex ground.
Is sitting here so he can speak to this to Allison.
First thing and people need to understand the things we announced this spring in the summer we just didn't dream up in the last few months, we've been working on these for almost four years.
And during that period of time, we have invested enormous amount.
Of money in IP, which had been dragged through the PML to make sure that I can make a statement and let me make it again, because I think it may have gone over some people's heads.
We will in the short zone market these own one market the ship from store or ship from local.
DC.
Fedex will be the low cost high service producer you can put the traffic again.
Very very late at night or in the morning, and at lower cost than anybody and I mean antibody.
All of the five.
Competitors that I mentioned, a moment ago. So all of these moves that we announced were triggered by a series of developments and.
You know the strategy has been in production for a long time, so we're very confident.
About where this market is going to briefly describe to you and we're very confident in grounds position, but as Allen just mentioned the b to B ground business is being adversely affected for the same reason that the international Pmires going down the trade effects in the goods production side of the house is much greater than it is in the services business.
And that's being reflected across all our businesses.
Freight.
Ground commercial and particularly international Henry Raj.
Well, let me just let me just add on to that by just saying that there is a strong divergence between the strong consumer sector and the weak factorys second around the world and us as being no exception that industrial production and you asked is expected to be flat to negative in the second half of Cdnineteen. That's the issue and once we get the commercial traffic. That's the issue grown is doing very very well and we are definitely investing for the future and we are going to have the market leading value proposition.
Best service at low cost, let me turn it over to Henry for his comments.
Alan Nelson, let me just add.
Cost headwinds at ground are largely six and seven day, because there is a minimum number of people and.
Just to staff a building in order to operate it.
Prior to the the volume and revenue coming on.
The wage rate issue is a number of things first is year over year driver rates, which are reflective of the intense composition a competition for truck drivers in certain geographic markets.
Both in PND and line haul.
However, what we see going forward as we transition out of the current model into the independent service provider model, which will be completely stood up on October 12.
His annual if not multi year negotiations with those businesses about the rate.
About their settlement rates.
Finally.
You know we've talked about the robust labor environment out there are there are geographic markets, where it's highly competitive to get package handlers into the building and while our automated network benefits us greatly in that regard for a job.
Employees, where we're competing for the same on skilled labor in a market we have to be cost competitive and that's just a function of the strength of the economy and the markets we operate in.
And from Goldman Sachs move to Jordan Allosure.
Yeah, Hi, guys, just sort of big picture standpoint can you remind a little bit.
What your long term.
Earnings are profit growth targets would be sort of once we get past this noise and perhaps assess the ability of things to bounce back assuming the economy is okay and assuming you implement the the cost initiatives in the capacity issues that you do.
Yes, do you anticipate as we look into fiscal 21, and 22 that sort of growth can can exceed sort of that long term EPS growth target. Thanks.
It depends on your outlook for the economy.
Sure.
I mean, we said we're going to be really well positioned by the end of 21, Yes. We were late in over budget on the TNT integration, but will there will be there.
And I don't know what the economic environment in Europe will be at that point, but we will be able to.
Significantly reduce our costs and improve.
Prove our service for all the reasons. We've told you about that's one to the some of the things that we've talked about a ground like the loss of the Amazon.
Getting ready for six and seven day, a lot of that stuff will be.
Behind us.
And we'll be ready to move forward, so human a decent economic environment, we ought to be able to easily hit our 10% to 15% earnings EPS growth going forward, but I can't tell you that thats going to be the case because I can't.
Julia what exactly the economy is going to look like right now so if I'm a little gun shy yeah, probably.
Moving onto David Ross with Stifel.
Yes, good afternoon.
Maybe a question for Mark with Assembly Bill five out in California, I know that Cynthia Strada case, you'd been refining the independent contractor model and now are moving towards an all I ASP model is there anything in that proposed bill that could.
Challenge the current high ASP model or how are you guys viewing that right now.
Hey, David It's Henry Maier I've been designated the company Paralegal for this call.
Let me, let me give the.
Let me give a let me give you the people listening in a little bit of background on Assembly Bill five.
I'm back on not on April Thirtyth 2018, the California Supreme Court issued a ruling in the <unk> and the dynamics case.
Which held it an a b C test should be used to determine whether workers and employ or an independent contractor.
Assembly Bill five is just an attempt by the legislature takata five the dynamics decision of the Supreme Court.
For those who aren't aware of them. There are a number of states that have a b C test. The prong says an individual must be free of control and direction.
The B. prong is service has to be performed outside the usual course of business of the employer.
And the sea prong is the individual is customarily engage in an independently established trade occupation profession or business.
This is intended to address.
Individuals who are classified as independent contractors, we believe it's largely directed at the ride sharing and food delivery business in California, and because Fedex ground only.
Contracts with businesses that are.
Incorporated in good standing and the.
And the states in which they operate.
We therefore have no individuals who are classified as independent contractors.
All service provider employees under contract to Fedex ground are subject to tax withholdings and are eligible for workman's comp unemployment insurance and overtime.
And all of our service providers are contractually obligated to treat their workers as employees are registered as I said and in good standing with the states and agreed to compliance audits by the company.
So therefore, we think that.
Any risks that.
Would accrue to Fedex ground would be minimal to nonexistent way. The bill is currently structured.
Helane Becker with Cowen and company has our next question.
Oh, Thanks, operator, hi, everybody. Thank you very much for the time, Brent I think you talked about demand from China being down between you know China in the U.S. and 10 in Europe , but did you speak at all to goods going from China to third to third countries and then how those volumes are doing for example.
China, Vietnam, and then Vietnam to the U.S. or Taiwan, or you know places elsewhere.
In Asia. So maybe you could talk about you know trends you're seeing in goods moving that way if at all.
Sure Great question, obviously right now from an outlook perspective, we are seeing some pressure on all intercontinental and even within the Asia. You know all of inch intra Asia really as connected from a supply chain perspective, so even if it isn't direct to China. We are seeing a lot of pressure intra Asia. What I think is most important to note as we both Raj and I mentioned is we are underpenetrated from a market share of restrike perspective between Asia, and Europe and your Europe to Asia. We now have unleashed an incredible buyer base in Europe , which we never had access to before and we have traditionally been very underpenetrated in this lane and Joe and I are locked arm in arm to go and grow up grow share. Despite the macroeconomic headwinds. So I think that's really what's most important and that's what's newsworthy for us as we think about growth moving forward.
And from Oppenheimer, we'll move to Scott Schneeberger.
Oh, Thanks, good afternoon, Doug.
In international priority in international economy in the environment, and perhaps provide a perspective on the influence of fuel prices in the trade down dynamic if and how that may factor into this this updated guidance. Thanks.
It's got a fuel prices have.
Very little to do with US at this point and I think it's there's a macroeconomic environment and primarily the you know the industrial sector of the global economy, that's driving that change.
Yeah.
Well move next to Bernstein Research has David Vernon.
Hi, everyone. Thank you for taking our question asking on behalf of David Vernon, How should we think about the greater than 20% increase in corporate center loss and is there any outlook there.
Yeah.
Well they are.
We have moved Fedex office out to its own now.
As you noticed and well Fedex office itself for reporting purposes.
Reports a loss.
You can view that as a channel costs. If you like it's it's vital channel and we've talked about this over and over and over again, our most profitable packages.
Come through Fedex Office Fedex Office has got many many places where you can pick up drop off great relationship going with in store at Walmart. So I wouldn't be too concerned about that we have work to do on our logistics side of the house, we are working very hard on that.
And I expect those will improve over time, but really at the end of the day the real again, the real issue I want to make sure I got this clear to everybody.
All the things we've talked about our issue is international at express.
And from Deutsche Bank will move to Ahmed remember Altra.
Thanks, Thanks for squeezing me in here.
Just wanted to ask if you think 2020 will represent a trough in ground margins that you can build on in 2021, given the I guess the smart Smartpost integration and then can you just update us on the integration of TNT businesses in the UK, France, and Germany, where are those countries given their size and when do you expect the integration to be complete for for those regions. Thank you.
Hi, guys too.
I will I think we've answered them, both but I'll try to establish this again.
We will be complete with both countries at the end of May 2020.
Again.
As you well pointed out in your note, we were little bit light little bit over budget on that thank you for that.
And.
As far as Fedex ground margins again, we will have a lot of these things behind us it will depend on our mix in the economic environment about how fast we can move margins up but we do expect our zone, one traffic to grow rapidly and although at lower yield it will be at higher margins.
And with that at this time I'd like to turn things back to you all for any additional or closing remarks.
Thank you for your participation in the Fedex Corporation first quarter earnings Conference call.
Feel free to call anyone on the Investor Relations team. If you have additional questions about Fedex. Thank you very much bye.
Again that will conclude today's conference. Thank you all for joining us.