Q4 2019 Earnings Call
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 of the private Securities Litigation Reform Act.
Certain statements in this conference call such as projections regarding future performance may be considered forward looking statements within the meaning of the act.
Such forward looking statements are subject to risks uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward looking statements for additional information on these factors. Please refer to our press releases and filings with the SEC.
Please refer to the Investor relations portion of our website at Fedex Dotcom for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly.
To the most directly comparable GAAP measures.
Joining us on the call today are Fred Smith Chairman.
Raj Supermini, President and Chief operating Officer, Alan Graf Executive Vice President and Chief Financial Officer.
Mark Allen Executive Vice President General Counsel and Secretary.
Rob Carter Executive Vice President Fedex information services.
And CIO.
Breed Crary Executive Vice President Chief Marketing Communications Officer.
And now Fred Smith will share his views on the quarter.
Thank you very much Mickey welcome to all joining our quarterly call fiscal 2019 was a year of both challenging change for Fedex.
We faced weakening international revenue growth driven by the slowdown in global trade.
The less favorable service mix of TNT Express business after the not patches cyber attack and continued rapid growth of e-commerce demand.
We're very proud of our team members, who are responding with positive actions and innovative solutions that will make fedex, even stronger and more successful in the future.
Fedex centers fiscal 2020, with a sharp focus on extending our lead as the Premier Global transport and logistics company and on making the necessary investments today to capture the significant market opportunities, we see for the future.
These steps include.
Enhancing fedex ground capabilities speed and efficiency.
Improving Fedex express hub automation, particularly and Memphis and Indianapolis.
Finishing the integration of TNT modernizing our aircraft fleet, and reducing unit cost and create an increasing productivity, especially for e-commerce deliveries.
While these investments are long term in nature and their success cannot on cannot always be measured immediately we are confident they will drive significant earnings growth and improved margins cash flows and returns for our shareholders over the long haul.
Let me emphasize however that based on our current forecasts of us GDP growth for F y 20.
We anticipate Fedex freight will increase earnings and margin over the period.
We believe Fedex ground will increase earnings for the fiscal year with modest if any.
Margin compression from current levels, despite the investments we've announced.
Such as six and seven day per week delivery.
Large package capabilities and in sourcing of Smartpost.
Global trade disputes and low global growth rates create significant uncertainty for the express business.
Leading us to be cautious in projecting AFE wide 20 earnings for this segment.
The integration of TNT is now progressing at a good clip.
And we will see significant benefits by this time in summer 2021.
A major focus of our investment strategy I should note is also improved sustainability and efficiency.
We intend to substantially grow our e-commerce business and are well aware improve profitability in this market requires great efficiency in delivering residential packages and we have sound initiatives to steadily improve our cost to serve this market.
Diseases. For example, we recently announced in sourcing 2 million Smartpost packages and an agreement with dollar general for over 8000 pickup and delivery onsite locations and sparsely populated in rural areas.
Over after July 20, we will announce several additional initiatives in this regard.
Let me also caution observers who follow Fedex in this industry to be very careful extrapolating past assumptions and trends into the future.
For instance, we have noted repeatedly short haul package delivery will become increasingly important as retailers ship e-commerce orders from store or local fulfillment.
Hence average yields have to be match with the operational changes not visible to most to assess to assure.
Potential future profitability.
Also future developments in speeding up e-commerce deliveries in postal reform, which by the way we have supported will likely be discontinuity in the next several years.
Fedex is uniquely positioned for long term success and will continue to deliver a great future for our customers.
Shareowners team members in the communities we serve.
Let me now turn to rise followed by Bree and Alan.
And then.
A brief comment by Mark Allen and then we'll take questions.
Raj.
Thank you Fred and good afternoon.
As mentioned on the last call. Our focus is long term profitable growth that drives increased shareholder value.
Fiscal year 20 is in many ways at transitioning from Fedex as we continued to reinvigorate our business to capitalize on ecommerce growth and execute significant initiatives to reduce our cost to serve.
In the US alone, we expect the parcel market to double in size to more than 100 million packages per day by 2026.
As the market grows so a two hour a bit abilities, and offering and capabilities and offerings. Our global network serves as the invisible backbone for the fast easy and reliable e-commerce experience that consumers demand today, and we continuously build up on our offerings to customers.
One way we are doing so is by strategically working with retailers to enable market leading value propositions.
This includes working with target to leverage their stores as local fulfillment centers through our Fedex extra hours offering.
And giving our customers access to a multitude of Fedex drop off and pick up services such as last weeks announcement with dollar general.
These are just a few examples of the ways, we continue to flex our operations and network to respond to our customers.
Barry will cover these capabilities among others in more detail.
It is clear that we are all in on E. Commerce. This commitment is illustrated by a number of key strategic initiatives well underway in our operating units.
Just last month, we announced a number of innovative solutions for our Fedex ground network.
This includes seven day, a week residential delivery rapidly integrating Fedex smartpost volume into standard ground operations and enhancing network capabilities around large package handling.
These changes directly address some of the key challenges inherent with ecommerce, namely increasing consumer expectations and managing the cost for residential delivery.
Bringing the Smartpost volume into the ground network allows us to improve density and efficiency in the last mile deliveries.
It is significant that we are engineering and enhancing the ground network in such a way that it will be more cost effective to deliver millions of residential packages a day directly by Fedex ground.
In fact, we expect Fedex ground to become the low cost last mile provider in the industry.
The recent ground announcements should be particularly exciting to online consumers, who purchase large items like furniture, Tvs and kayaks with the click of a button.
We expect to have unlocked package operation in nearly 40 ground facilities prior to our peak season.
The vast majority of these are existing facilities and this approach minimizes capex and enables us to focus on placing large package handling in the most strategic locations such as near ports and railroads.
Not one element of this transformation would be possible without the investments that Fedex ground has has been making and continues to make in technology advancements in loading sorting and scanning technologies will provide near real time data to help optimize operations and maximizing the use of rail improving delivery density and increasing the efficiency of handling all packages no matter the size.
These types of technological enhancement and state of the art tools are true Differentiators and are being implemented all across the Fedex operations not just Fedex ground.
Fedex freight for example is in the midst of modernizing and industry. That's that has been historically paper based.
Technology advancements like advanced forklift computers electronics shipping labels and advanced driver assist systems and love for team members to work smarter safer and more efficiently.
This evolution of automation sets us up for continued long term success.
At Fedex Express we are implementing initiatives focused on lowering our cost to serve in the U.S.
This includes Rightsizing the network as we prepare for future growth.
To accommodate this growth we have launched multiyear hub modernization efforts at two of our largest express hubs Memphis and indeed.
These investments will enable express to handle more volume more efficiently.
Internationally, the global trade picture is less than ideal, but we are confident in our long term position.
We are rapidly moving forward with the integration of TNT as expected we began to fly 20 with a global sales force that is 98% integrated positioning us with a single phase to our customers in nearly every market worldwide.
We have recently completed on schedule the rollout of our capabilities to inject legacy Fedex Express intra European shipments into the TNT European Road network.
We expect to be substantially complete with the operational integration by the end of fiscal year 20.
This will allow interoperability between the TNT and legacy Express networks and in turn result in faster service for customers at a lower cost.
Beyond fiscal year 20, our work will continue with key initiatives, including customer migration and network integration and product rationalization.
The various areas ive touched on today position Fedex to be future ready.
We are focused on the long term and I'm humbled by the ongoing commitment dedication and innovation by our more than 450000 team members around the world.
Now I will turn it over to breed to provide more details on our macro view revenue quality and additional growth initiatives free.
Thank you Ron good afternoon, everyone.
Ill open with our economic update and outlook and provide some commentary on broader industry trends and our growth priorities.
Overall, U.S. economic growth is holding up well with real GDP growing 3.1% in the first quarter of calendar year 19.
However, the industrial sector has suffered from the inventory buildup and increased trade tensions through may manufacturing output with 1.5% off its December peak.
For calendar year 19, we expect global economic growth to moderate as the developed world see slower growth and both domestic and external factors weigh on emerging markets.
We expect services to continue to underpin global GDP growth.
Global trade has slowed as trade frictions have exhibited a negative impact on sentiment and of course the manufacturing sector.
As the Chinese economy has continued to decelerate. This has also impacted other Asian markets export performance.
China's exports, which grew almost 10% in 2018 have fairly grown SCR and that heightened trade tensions with the United States.
Outlook for the European economies to remain slow due to a number of sector and country specific factors such as disruption from the auto manufacturing sector.
Social tension policy uncertainty as well as uncertainty related to Brexit.
In Germany, and Italy, which are two important markets for us manufacturing output, which turned negative in November has continued to decline with April manufacturing output down, 3.5% and 1.9% year over year in Germany, and Italy, respectively.
As we have stressed before tariffs are counterproductive to efforts that encourage business growth and expanded global trade.
Thankfully however, we have a large and flexible global network that allows us to adjust and meet our customers needs when trade issues present challenges in certain markets.
As I mentioned on the last call. We remain laser focused on three key areas International E Commerce and small business.
Despite macroeconomic headwinds that I just covered our international commercial team is poised for growth.
Sales integration as Raj has mentioned is essentially complete our European network is more reliable and faster than it has ever been we have simplified our pricing structure and open now for ecommerce within Europe .
We have also created new pricing programs for our Asian team to sell into Europe as well as from Europe into Asia. This is the largest trade lane in the world.
E Commerce continues to be a driving force of total us domestic market growth. We are building our portfolio networking capacity to best serve thousands of retailers in this space.
And we continue to differentiate for example, with the launch of the Fedex Seven day service and 2020, Fedex ground will deliver seven days a week year round for 80% of Us GDP.
This is truly a transformational knew that build upon the largest global commerce transportation network in the world to further serve the growing E. Commerce market, we are already faster than the competition by at least one day and 25% of the lanes. This new will further speed up our network and allow us to continue to gain market share.
But the growth of ecommerce and consumer demand for flexible safe and convenient delivery options that Exxon provide unmatched matched access and create cost saving opportunities for customers.
The recently announced alliance with dollar General will provide access to Fedex services and places that customers have told us are very convenient in their daily lives.
The alliance will provide more than 8000 additional locations for customers to haul packages for pickup and drop off pre labeled packages, including of course pre labeled returns.
Further it will bring Fedex closer to the consumer than we have ever been before within five miles of over 90% of the United States population.
Once the dollar general rollout is complete the number of retail locations, providing staffed Fedex shipping will grow to over 27000, we are incredibly excited that the access to Fedex service continues to improve especially for ecommerce recipients and more rural less populated areas of the United States.
This is a tremendous achievement not just increasing access, but also in creating cost saving opportunities for our customers and for Fedex.
For instance by choosing to ship packages directly to convenient Fedex retail locations merchants can reduce cost of residential delivery surcharges.
Delivery to our retail location eliminate weather related damage or port staffed helping to reduce customer service and replacement cost for retailers.
And for returns drop off at our retail locations result in higher pickup density and drive greater operational efficiency, making Fedex, even more competitive in the returns market.
We have a great returns growth opportunity that our competitive retail network now opens up for us.
Across all our priorities, we continue to be very focused on revenue management, while we see a rational pricing market E. Commerce will continue to put pressure on yields with lighter packages moving shorter distances.
It is important to note that contrary to the erroneous and misinformed reporting in the Wall Street Journal on June 23rd Fedex has made no recent pricing changes.
No pricing changes to our strategy and we have certainly made no changes related to any one customer.
In fact at express we have experienced strong growth from small and medium customers using our Fedex Express today product following a strategic pricing change we made last year and we anticipate the growth of this successful product to continue UNEV why 20.
We are confident that our strategies will allow us to grow global volumes and revenues profitably.
Now, let me turn the call over to Alan for his remarks Alan.
Thank you Bruce and good afternoon, everyone.
Fedex Express fourth quarter operating income declined as weakness in global trade and industrial production drove a decline in our international priority revenue.
Year over year comparisons were also impacted by an $85 million gain on the sale of a non core business of TNT Express last year.
To mitigate the weakness we have undertaken several immediate cost containment actions, including.
Significant reductions variable incentive compensation.
Limiting hiring and discretionary spending.
And completing our us voluntary employee buyout program.
Approximately 1500, Fedex employees have left or will be voluntarily, leaving the company via the U.S. employee buyout program by the end of therefore 20, approximately 85% of those employees departed on May 31 2019.
We incurred costs of $316 million during the fourth quarter associated with our business realignment activities.
These costs related primarily to severance for employees, who accepted voluntary buyouts.
Business realignment activities, including the voluntary employee buyout.
Are expected to benefit for 20 by approximately $240 million.
By eliminating open positions, we expect to achieve our savings goal using less severance than we originally forecasted.
TNT integration expenses were $84 million for the fourth quarter and $388 million per employee 19.
As you heard from Raj, we're continuing to make good progress with our integration activities.
At Fedex ground, we continue to see strong ecommerce volume growth in the fourth quarter.
However, Fedex ground income and margins were negatively impact.
By increased purchased transportation rates and the January launch of year round six day per week operations.
Fedex freight closed the year with another strong quarter, despite weakening industrial production.
Revenue per shipment increased 4% operating income increased 15% and operating margin improved to 9.9%.
Below the line, our noncash mark to market retirement plan accounting adjustment of a net $3.9 billion loss was driven by a substantially lower discount rate, which contributed $1.8 billion to the loss.
Changes in actuarial assumptions, which significantly increased the liability.
And lower than expected asset returns.
And for 19 capital expenditures totaled $5.5 billion.
For fiscal 2020, we are targeting a mid single digit percentage decrease in adjusted earnings per share.
Our performance is being negatively affected by continued weakness in global trade and industrial production.
As well as a near term impact of certain strategic decisions, we have made to sustain our leading position in a changing marketplace.
At Fedex Express, we expect earnings to be down and therefore 20 due to weakness in international priority revenue and ongoing shifts to lower lower yielding services.
Our strategic decision to not renew the Fedex Express us domestic contract with Amazon will also be a near term headwind, which we expect to reverse to a positive in F. Y 21, as we replace the lost volume and optimize the network.
Additionally, we do not expect a significant benefit from the fuel surcharge table changes in foreign 19 to repeat in for 20.
Fedex Express will continue to implement actions to reduce cost to serve improving efficiencies and adjusted the global network to match anticipated demand.
While we expect to make significant progress on TNT integration activities, and therefore 20 integration work will continue and therefore 21.
We expect to incur approximately $350 million integration expenses, and therefore, 20 and $1.7 billion in total through 421.
At Fedex ground, we expect volume and revenue growth remained very strong enough for 20.
However, operating margins will face headwinds from higher operating costs associated with expanding fedexs grounds delivery schedule.
Improving our capabilities for large packages and other investments to significantly improve efficiency and safety as Raj mentioned.
At Fedex freight we expect continued improved performance as remain focused on improving revenue quality, while implementing technology solutions that will drive efficiency and further differentiate us in the LTL market.
RF Soi 20 effective tax rate prior to year end Mark to market retirement plan accounting adjustments is expected to increase to 23% to 25% and will likely vary from quarter to quarter.
In addition, our tax rate is very sensitive to international income, which may cause the rate to vary from that range.
As slide 20 capital spending is expected to be $5.9 billion.
These expenditures will include Fedex Express investments in aircraft and hub modernization.
Fedex ground investments that increase our efficiency in handling large packages and investments in technology across the enterprise.
That will further optimize our networks and improve our competitiveness.
All of these targets 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.
As I mentioned earlier, a substantial decline in disc count rates changes in actuarial assumptions and lower than expected asset returns and negatively impacted our apply 19 mark to market adjustment.
With that our U.S qualified pension plan funded status declined to approximately 90%.
While we are not required to make a pension contribution up or 20.
We are expecting to contribute $1 billion.
Also we have funded large increases in our dividend and significant share repurchases over the last several years.
Our stock buyback level is expected to be significantly lower enough or 20, and our dividend remains at 65 cents per quarter.
In conclusion management is focused on improving our near term performance, while also positioning Fedex for long term success.
While we are adjusting cost to mitigate macro uncertainties and address the growth of e-commerce .
We will continue to invest in areas that expand our capabilities and improve our long term efficiencies. We're confident these investments will drive long term earnings growth.
And improve margins cash flows and returns.
Now, let me turn the call back over to Fred to introduce a topic Mark Allen is going to discuss.
Thank you Alan first before I do that let me take a point of personal privilege and mentioned something in the Wall Street Journal article yesterday, which I'm uniquely qualified to speak to and.
It's the statement that I started the express unit four decades ago to ferry shipments like legal documents and medical supplies.
Over long distances.
The fact of the matter are that when Fedex began operations. It was specifically prohibited for private carriers to move documents of any type.
That was only permitted a number of years.
Later, when they were a relaxation of the private expressed statutes in order to facilitate the fast movements of legal and financial documents and rather than medical supplies. The company was.
Basically put together to pickup transport and deliver first overnight for many address and you asked to any other address in the unit in United States.
Technology packages, which was the the basic market that we were serving.
Of course, we then added a two day express we expanded internationally added pallets and of course from today, we pickup and transport millions of items in the express business on a far larger scale at a far far lower price.
The biggest issue on a go forward basis and the article goes on to say that the express unit was built for E. Commerce. The reality is is perfectly built for e-commerce with the exception that we have to address.
As we've said on several.
Of the remark share, including mine that we have to be very efficient and delivering to residential making residential deliveries, which are an increasing.
Part of the traffic moving through both the the ground any express network.
So with that clarification, let me turn now to the subject of the lawsuit do we we filed yesterday.
Theres been a considerable amount of.
Misreporting on this as well.
Number one as that.
That is related to the wild way.
Issue, where we Miss routed and then apologize for two.
Packages and return to the shipper erroneously a third.
The Y way packages were only peripherally involved in this.
Lawsuit that we filed and in fact, it goes back many many years.
Which is in the lawsuit itself and it concerns not contraband, which many people have confused.
The lawsuit is as concerning.
It concerns import and export controls as administered by the department of Commerce.
So we work very hard with all kinds of law enforcement agency as does the postal service in EWP, yes.
To keep certain types of items out of our networks illegal drugs.
On unlicensed firearms you could go down the list you can go and look at the prohibited items on our website. The postal service is not about prohibited items and Contra man. It is about regulations that the.
Department of Commerce administers which prohibit.
Entities, meaning companies or individuals from exporting or importing.
And that is quite different and in many cases, they're either prohibited.
Completely or they are restricted to various destinations or to various commodities or certain content.
In turn that requires.
A common carrier like Fedex when one of these entities is put on the list.
To in essence, certify and in fact get a certificate from the shipper that basically will switch in the package.
Or in the in the shipment.
And.
That's the issue that we are that we are dealing with here I know that.
That Secretary Ross, who I've known for four decades, and respect and like a lot on pain by the fact that today, we issued a statement that disagrees with our position in the litigation but.
As we told the department of Commerce yesterday, we certainly understand their job then.
Their implementation of the of the trade policy of the administration. This lawsuit doesn't speak to that at all it speaks to the issues at our general counsel.
We will now tell you about and after his remarks, we won't have any further.
Comments on this is we will let the process pay it play out in the courts. So Mark Allen, our general counsel will make a statement.
The action that we filed yesterday in the Federal District Court in DC.
Requested the government be permanently and joined from enforcing the export administration regulations.
Against Fedex in circumstances, where we have no actual knowledge that the contents of the shipment are subject to the EEI ours.
To be is takes a position that a common carrier like Fedex can be held liable for shipments that do not comply with the export administration regulations.
Without requiring any evidence that the carrier had any actual knowledge of an apparent violation.
We believe very strongly that the imposition of this sort of strict liability is a clear violation of our constitutional due process rights under the fifth amendment.
We cannot know the contents of the 15 million packages, we handled daily.
And whether those contents comply with the complex EA ours.
By requiring us to police the contents of packages moving through our global network. The government is placing an unreasonable burden on a common carrier.
We have reached out to commerce to let them know of our commitment to compliance.
However.
We hope to reach an agreement on a common sense way forward.
That would be creating a safe harbor.
That essentially means if we have no knowledge of an apparent violation the VI us will not come after us.
I will take your questions and I think we undoubtedly have some teed up.
Thank you, ladies and gentlemen to ask a question today. Please press star one on your telephone keypad, if you're on a speaker phone. Please make sure that your mute function is turned off to allow you to signal to reach our equipment Thats star one for questions.
And our first question today will come from Allison Landry with credit Suisse.
Thanks, Good afternoon.
So you mentioned 2020 is a transition year for earnings and considering that the bump in Capex clearly, it's going to be difficult for you guys to generate cash. This year. So I guess do you expect any positive cash flow.
And could you help us think through the the the longer term cash generation of the business as you as you think about 2021 and 2022. Thank you.
Allison This is Alan yes, I do expect improved free cash flow.
Good morning.
And.
As far as it management transitional year.
We I think exploring it about as well as we could.
As I look forward past that I can't predict what's going to trade tariff China.
Gtwenty Im Brexit so if you'll just set that aside.
If that turns out well are decent you know we've got a lot of good guys in and 21, we'll have a seven day.
Ground operation running full speed will benefit from a full TNT interoperability well below or a U.S. Fedex Express rural and residential costs will have unbelievable in improvement in ground productivity and growth.
And we'll have continued freight growth and improve productivity. So I think once we get through 2000, and we are going to be in fantastic shape with the global macro hanging over as to our 5.9 billion.
The company wanting to spend upwards of seven.
We worked very hard to push up projects that I think will have good strategic returns, but a lot of really good things didn't make the cut we have a lot of opportunities here, particularly on the cost side and we're going to attack them aggressively.
Our next question will come from Chris Wetherbee with Citi.
Hey, Thanks, good afternoon.
Yeah. It looks based on the guidance that you're calling for express to be down from a profit perspective, maybe double digits wanted to get a sense. If you could maybe break out some of the cross currents from trade and the macro and sort of what that impact might be on the core business and try to separate that out from some of the things you are doing strategically with delivery as well as some of the the late night pickups and maybe some of the strategic decisions you made around the customers of any way you can kind of parse out some of the details in sort of that that that guided weakness and express would be helpful.
Yes, Alan again.
What we're looking at right now as I, just talked about in our fourth quarter or the express where we had international priority revenue was actually down.
That's hard to that's hard to recover from in a very short period of time.
Again, I don't know whats going to play out here on trade and tariff. So there could be some upside for that but at the moment I'm not I'm not seeing that.
You know our load factors coming out of Asia really aren't bad, but the yields aren't aren't that good.
And could be better so I think the biggest the biggest issue is the macro.
On the as far as the what's going on with express and the U.S. is doing fine.
I mean, we had a great growth rate in our deferred traffic, which we went after intentionally.
And we're going to get our cost structure and shape to to improve the profitability of express for that as well so.
Really it's the macro that's the biggest hang over for what we're looking at for roughly 20.
And next we'll go to Jack Atkins with Stephens.
Hey, good afternoon. Thank you for the time could you provide some more details.
Around the the steps that you're taking to you in your words in your words rightsize.
Your operations to better handle ecommerce do you foresee perhaps further changes in the business model.
In an effort to gain these efficiencies such as more closely integrating your ground and express operations. Thank you.
I don't recall, who said right size did you Raj as optimal optimized oh optimize well.
As this is Matt there.
I said in my remarks.
That we had made a number of announcements I don't think anybody on this phone call new a month ago that Fedex was going to announce seven day a week service.
8000 dollar general locations in sourcing 2 million.
Smartpost packages.
Building, a number of large package annexes to exploit that business and ground and then all the other things that Raj and brief mention to you.
So please recall in my remarks, I basically said stay tuned there will be telling you some other things during this.
Fiscal year, so we understand the issues.
Involved in e-commerce and residential delivery.
And Raj made the point, specifically, we will be the low cost producer in the in in the E Commerce space for residential deliveries were quite confident of that from many perspectives, but.
We're not prepared to tell you. Some of these other moves anymore than we were prepared to tell you a month ago about the things that I just listed off but there will be other things that we will announce during F. Y 20 in this regard you can count on it.
Our next question will come from Scott Group with Wolfe Research.
Hey, Thanks afternoon. So Alan is there any way you can help us think about maybe the quarterly cadence of earnings just now obviously, we've got some weak trends right now, but then really tough incentive comp comps in the second half of the or any help there and then.
Maybe just spread just following up on that just big picture are you are there reasons why we.
Could potentially consolidate.
Ground and express networks from a delivery standpoint, and then any update you can give us on the international buyout potential.
Oh three.
Scott.
So look as the cadence.
The tax rate is going to be really spotty I mean, we've got some a lot of assumptions that we have to prove and get through.
We're still looking at you know all these pages of interpretations and rigs that are coming out it's left and right. We're dealing with B. We're doing with guilty you probably heard us from everybody that you follow international it's extremely complex. So tax rate is going to be a factor in our quarter to quarter numbers don't be surprised by that.
Secondarily again I just can't tell you what's going to happen.
From the global economic standpoint, so that piece of it.
You know the cadence is going to be the cadence, it's little bit out of our control, we'll manage to it but we.
We don't want to do anything stupid and then.
You know not have the capacity that we need in the right place. So we're watching that extremely carefully.
You asked a ground, they're going to have a great year I mean, they they really are mean, they're gonna grow.
They're going to grow fast and if we're going to hold margins or get close to hold margins on this growth.
With all the expansion and all the investment that they're doing and improving productivity, they're going to be really ready to roll and 21, they're gonna have there have a great consistent year. So that's about all I can but all I can tell you. The other thing is is that you know people forget that.
There's a reason that express has a two day service it's called distance.
You know when we need an airplane, we need an airplane or the customer really decides.
Which network makes the delivery I think we have explained this over and over and over again on the margin, yes, there's always opportunities but.
For the most part.
We've got a flight when we have to flat, but the customer can make that decision.
I meant no Truphone Deutsche Bank has our next question.
Oh.
Hi, Thanks for taking my question Alan you made the comment I think in response to Allison's question.
The free cash flow would be better in fiscal 20 wondering if you could just help put a finer point on that based on the macro assumptions that the company has made and related to that you know the billion dollar pension contribution the voluntary pension contribution I would imagine that that would be funded with new debt given the offsetting cash savings from the PBGC insurance premiums and then just related to that if you can discuss the incremental costs in fiscal 2000 associated with the seven day delivery. Thanks, so much.
Well, there will be some incremental costs associated with some of the luxury of course, we've been encouraged them, we will continue to incur them but.
That now that we've gone to six.
Seven day lupus.
Not nearly as significant so low though those won't be.
Material, but they probably will likely be a headwind, but I have to say.
What I'm hearing from my team is that the customers are lining up to get the seven day, It's a Sunday service and we're going to do it.
Uh huh.
Very efficiently and I think we'll be able to start it now.
Robert.
In a very good way so.
Again, I'm excited about what's happening in that regard.
Our next question will come from David Ross with Stifel.
Yes, good afternoon, I'm just back on the TNT integration expenses. The total cost of 1.7 billion is about double what it initially was can you remind us what that additional expenses for and is there a difference between.
Network integration, which you said is going to be completed in the next year and network improvement or upgrades and need to be made to the TNT system.
Hey, David.
Well and again.
Not double.
I will tell you a couple of things one is that we originally gave you a 400 million dollar number about not betcha well, that's an old number that's never been updated but it continues to be a problem.
For us in terms of integration as we have to basically rebuild the system.
That TNT had and then integrate it with the network that we've got on the purple side and its cost us a lot more money and slowed it down and that's made it more complex.
The good news on that side is that we the interoperability will be done by the end of fiscal here and that's when we can start really harvesting the benefits of that little cost Road network.
Inflow to express packages through it seamlessly without all kinds of double handling and and.
You know double packaging and everything else I mean, what Raj add to this.
Yeah, I'll, just say that the there's been tremendous momentum in the lot literally the last few months on the TNT integration. A we are Oh, you know we have the vision of interoperability Banda fiscal year 20, a wood and ultimately one network for air and one that for ground. Its a lot of value to be had here or what I want to say here is that we are not waiting to create value for the customers because the customer value is being created as we speak we are speeding up lanes and our service levels are very good and the you know where the demand is strong. So you know I think we made a lot of progress and with the significant value in this investment as you know it will come to bear a fiscal 21 on onwards.
Yeah.
And next we'll go to David Vernon with Bernstein.
A question for you Fred or Raj on the portfolio, obviously, the expansion into the virtual kind of retail footprint with the partnerships with dollar general things like that is there a point, where you maybe look at the portfolio and say why do we still have the services business do you need that retail footprint do you ever do you ever get to a point, where you kind of rethink the composition of that that part of the business.
I guess, you're asking about the Fedex office I think.
But thats, a very important role as part of our retail network.
So you know.
Especially as we move forward on E Commerce some of the premium value added services are on hold at location plus or Tron services and you know there are several things that we are.
Process to the Fedex office, those unique and differentiated and the value is going to get even better as the E. Commerce E Commerce trends Inc. increase I don't agree if you want to add anything more to that yeah. The only thing that I will add is obviously, we're very excited about the expansion of our on site retail partnerships with Walgreens and went dollar general the Fedex office retail locations bring in some of our most profitable small and medium business because the experience they get when they are shipping internationally when they were shipping and they want the peace of mind a proper packaging.
That is absolutely just a stellar experience and those employees just deliver a great experience. So we're very committed to that that element of the portfolio and don't forget. These Fedex office locations. The size of this look you have this.
The next offices are really substantial and it was a very is an excellent.
Places on the call E Commerce, and as Barry pointed out the most profitable packages for the Fedex system come through the Fedex Office network.
And we're expanding inside Walmart stores, which is becoming a great partnership in brea, thanks for mentioning profitability I loved it.
Our next question will come from Brandon Oglenski with Barclays.
Hey, good afternoon, everyone and thanks for taking my questions.
Mr. Smith I really submit this question humbly as an analyst has never run a business but.
I guess at what point do we question the scale of the express network, because we've seen decade after decade of well returns low margins.
In peak economic activity you guys can put in a pretty good return, but still never really crossing that threshold of covering the cost of capital.
And on the call today. It just seems like the strategy is the same put more capital and optimize but not right sized so I guess why not a more radical look at the business I think someone suggests it look at integrating portions of express or ground or maybe even going more aggressively just on the overall footprint of the business can you talk to that please.
Can you ask me the same question the last analyst call.
Somebody else asked me up.
[laughter].
Ask me a similar question.
Well look at.
The only way I can respond to that is.
Obviously, the plans and the programs we put in place.
Were designed to create superior returns.
We didnt just decide to do it for the Hell out of it.
And it reminds me a little bit about.
You know that old adage of Mike Tyson at that.
You know everybody got a plan until they get hit in it in the mouth. So one of the things that always amuses me about watching a lot of things that are that are written about fed action.
So forth.
The competition has a vote.
And the economy has a vote.
So clearly we have been very disappointed over the last few years with.
The assumptions that we made on the growth in international trade, particularly with the Trump administration, the United States policy since 1934.
With Roosevelt and Secretary of State Cordell Hall was to expand international trade.
And now we have a huge dispute where the United States is.
Basically become protectionist defined as I'll make everything on need in my own borders I don't need to import.
Things and quite frankly don't particularly need to export them. Despite the fact that.
95% of the World population is outside the United States. So we have become a protectionist.
Country.
We don't agree with the Chinese position on trade, either and been very vocal about that which is mercantile's list.
You know I would like to sell to you, but I wont I will buy from you on a on a reciprocal basis.
So your question.
Implies that.
You know we.
Have sat around and you said quote for decades.
We don't look at the business as a single segment, we've said that over and over again, you all deconstructed into some.
Some degree are sort of.
Added in that today by making an exception, saying, we expected freight and ground to have earnings increases and and.
And margin increases in freight and.
Hopefully.
Any compression in ground due to the expansion would be very small.
So clearly as we go forward and things change if if we don't presume any kind of international growth, we wouldn't change our approach to the to the business. We don't have any sacred cows here.
But you also have to remember in the express business.
As Alan said, our domestic express business is doing fine.
It's not the issue is the international business, that's having a problem for the reasons that Bree.
And now I am saying to you.
The good news is.
That.
If.
Trapping in yields materialize.
The conversion rate to profitability is probably in the neighborhood of 60%.
Because it's a network where the incremental volume goes to the bottom line faster than than any of our other.
Activities.
In the case of of TNT.
I have to say I've been amazed not just with the people that follow Fedex in this industry.
With the.
Amazing this interest in the not PEGI.
Attack it was the largest single attack.
By state sponsored entity in the history of the World.
It has put the Ukraine on its knees.
The only reason that it was less of a factor to us and it was was because of the fantastic work.
Of our IP team that won and Remediated. It had it not been that TNT had been.
A subsidiary of Fedex The company would have been bankruptcy would have just gone out of.
Out of business so.
You know clearly we should have sat and waited knowing not PEGI was coming we could have picked up the pieces. It would have been a lot easier on us. So I think I'm going to ask Rob Carter, our CIO to just give you.
A bit of color, which has given me the other day about the not patchy.
Account to my knowledge the only in depth article that's ever been written by the I think it was in Wired magazine and when you read that.
It's like.
Oh My God. This is one of the most.
Under reported stories in history, so to get to your point.
Of course, we want to make money in these networks and wheel engineer and modify them to the extent that we need to but you've got to remember those two things.
The anticipation of continued embrace of free trade, which was our assumption on building a lot of this stuff and then not assuming the not petchem things are the two exotic and those factors. We've been we've been dealing with so Rob you want to comment on this well. This attack was weapons grade attack by Russia on Ukraine that utilize cyber tools that were built by the end of say in the U.S. government group called Shadow brokers stole those tools and they were turned back on the Ukraine.
And the devastation Ukraine, just haven't properly been reported.
All the airports were down all the trains were down hospital systems were lost.
The monitoring systems and turn noble that monitor what is the most infamous nuclear plant in the world were lost.
If you looked at pictures that are on the Internet of the cab Airport every single screen.
Showing the red screen of death every point of sale terminal in the big grocery stores showing the same thing.
Every ATM machine down in the country. This was an amazing attack and.
Were we are thankful that our teams were certainly able to stop it at the borders of TNT. It Didnt impact the Fedex enterprise.
But the devastation in the TNT technologies state was considerable to say the least the good news for today is that the state is running significantly better than it ever has with high degrees of reliability that are positively impacting service levels for TNT in the integrated networks that are being put in place now, but fred's right. This this was a devastating attack for a nation state that couldn't defend itself and businesses like ours and many others were impacted.
As well.
Brandon This now and I just.
Since the question is an important one I just feel like I need to weigh in as CFO .
Which is just the question you asked we talk about all the time.
It's about the board level, we've talked about our assume sees.
Let me just add too thanks.
In the fourth quarter, a year ago, we were almost there I mean, we had expressed running on all cylinders and that was without TNT provided anything but a drag.
So I know we can do it I know we will do it.
Im disappointed that we haven't done it but I believe strongly that when we get the interoperability up.
And we get any kind of global trade environment Thats reasonable.
That we will be successful with our international.
At express.
Our next question will come from Helane Becker with Cowen.
Thanks, very much operator, I appreciate the time I heard what happened to the Gong show hub in this whole China U.S. trade situation if anything.
[noise].
Well you know, there's a tremendous trade dispute going on between China, and the United States as as reported almost hourly on the the business TV stations.
But we've been.
A good corporate citizen in China for decades.
And we are completely dedicated to compliance in China.
And.
We have expressed that to them and reinforced it so they audit us and long Joe and many other locations and probably they have been.
An increase in and audits as a result of this to some degree but.
We've cooperated fully with the China State Postal Bureau, and their investigation.
Of the two mis routed packages and the erroneously returned package.
Again, we apologize to the customers.
I never left our possessions we offered to.
Make make things right, but that has nothing to do with China or why it has everything to do with the purple promise, we would have done that for.
For any customer so our guangjo hub is a is a huge part of the the economy of the Pearl River.
Basin and.
So we we hope there's not going to be any further deterioration in USA, China trade relations, let me say again.
Just because it's important for this audience to know about this.
Yes.
This request that we made of the DC Circuit Court on these export regulations, which really led us to to do that at the end of the day wasn't washed away at all it was on last Friday, there were five new entities.
Added with these extraordinarily.
Opaque.
Requirements.
And.
Contrary, where this year in the media it we don't have to to be complicit in this it's strict liability if you make a mistake if the department of Commerce Biya House.
Which stands for business in industrial.
Bureau of industry and security they are empowered under their regulations not we think based on congressional hall, but on their own regulation to find us or any other common carrier if what what's been represented in that shipment, even though we have a certificate, saying that it complies $250000 per package.
So I don't think Thats, what they intended and as Mark said, hopefully we are going to going to deal with them, but but that is separate and distinct from the wawa way situation.
Which was three packages out of a 15 million package per day. So it's very difficult. These days to keep this in perspective, but we've tried to do so and then we've got a great team and in China carrying redington, our president and.
And Eddie Chan.
Who runs China for Us and our government affairs people. So hopefully we don't have any issues there are certain any money operational issues to speak of.
Our next question will come from Bascome majors with Susquehanna.
Yes, Thanks for taking my question here.
Alan I was curious if you could tell us how much incentive comp helped the.
The results in 2019 on an absolute basis I know it was $350 million through the first three quarters of the year and how much what a target level be for that to fully come back and how much or how close to that target are you budgeting in the fiscal 2020 outlook. Thanks.
Hey, Bascome.
We're going to have an 8-K in July .
I don't think that's a too much of a strategic question.
I see that.
We.
Our forecasting for EFT Slide 20 is in the guidance I gave you.
And why don't we just leave it at that and follow up with IR later.
Our next question will come from Ken Hoexter with Bank of America Merrill Lynch.
Great Hey, good afternoon, you noted the profit growth at ground incorporated the startup for Sunday delivery and would still be up given the move of retailers for more next day delivery from Walmart target Amazon do you see a larger shift going from express Im sorry from ground to express packages and how does that change your dynamic and cost structure.
So this is Raj let me.
The reason, we have now a full portfolio of services on transportation and other ecommerce services to cater to all the needs of.
Of retailers and Etailers as we go forward here. So your question.
For them when Walmart talks overnight Walmart, where we are the service provider for that and we we have lot of overnight volume volume for that if you need extra hours for target well, we provide that if you need a local zone. One ground delivery, we have that serves us well. So my point here is that we have now a full portfolio of e-commerce delivery services, along with technology and returns.
And more to come as such as the chairman talked about that it is the most robust in the marketplace. So you know so it is a is a it's really the putting together the whole picture that I'm trying to you know that we're trying to do here, Hey, Ken Alan what grounds working on and doing a great job of is lowering their cost structure dramatically, we wouldn't be taking all the smartpost packages into our own network. If it wasn't the fact that we can do it for a lower cost than the postage.
The postage is going to keep going up we're driving our costs down. So that's a that's a important phenomenon for you to understand secondarily again the customer decides.
Time and distance is how we decide which network it goes into ground swell in its asset to double turning it's doing all kinds of things, but it can't make a really late in the evening.
Uh huh.
Pickup for next day delivery or two day delivery of any kind of distance and that's when it goes to express so.
As Raj was explaining to you we've got networks to provide whatever the customer wants and that's the important thing, but I I don't want the day to go by without people understanding ground is significantly lowering its unit cost and doing it very rapidly.
And next we'll go to Tom Wadewitz from yes.
Yeah. Good evening. Thank you for the question sticking on that topic or I guess said <unk>, perhaps you could offer more color on you know what some of the actions artist significantly lower the cost structure in ground I guess Mike.
Intuition is that are you know in transportation the density drives cost and it seems like in the you know the all in on E. Commerce, you're doing a number of things that will help grow the business, but could drive some dilution in your density just you know more BDC packages. So I. So I was just wondering if you could help us understand the offsets to some of the margin pressure and perhaps a little more on what you're saying Alan in terms are really significantly lowering the cost structure in ground.
Yeah.
I got it I got this one.
Of course, its density and its fastest ground is growing as fast as a package that are coming to and the fact that we're sweating the assets more and what the technology and engineering expertise that we have which is world class. We can handle a whole lot more traffic and a lot lower unit cost and that's a great place to be Oh by the way as I want to iterate rounds faster on 25% Elaine's net.
Sometimes we get compared to over over the peak season about how well, we do versus the competition, everybody forgets, where they're holding this to our own standards not what all the competition does that makes us one two or three days faster during peak season. So I think we're in great place and that's how we're doing it.
And that does conclude our question and answer session today, I would like to turn it back over to Mickey Foster for closing remarks.
Thank you for your participation in the Fedex Corporation's fourth quarter earnings Conference call.
Please feel free to call anyone on the Investor Relations team. If you have additional questions about Fedex. Thank you.
That does conclude our conference for today. Thank you for your participation.