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Text: Joining us on the call today are members of the media.
During our question-and-answer session callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act.
Joining us on the call today are Raj Subramaniam, President and COO; Mike Lenz, Executive Vice President and CFO; and Brie Carere, Executive VP, Chief Marketing and Communications Officer.
And now, Raj will share his views on the quarter.
As expected, we are seeing strong levels of volume in our network given unprecedented levels of shopping and shipping this holiday season.
FedEx Ground had an outstanding Cyber Week, with 100 million packages picked up during the first official week of peak.
Our ability to handle this influx of packages has been years in the making as we have taken deliberate steps to enhance our unparalleled network to support customers, large and small.
This includes strategically adding more capacity across our network to support our growing customer base.
For example, at FedEx Ground, this means adding 14.4 million square feet to our network, the equivalent of 300 football fields since June of this year.
In Q2 alone, we brought online 24 major expansion projects, with nine of them starting operations in November just weeks before peak.
While it was important that these facilities were up and running to add to a capacity in time for peak, experience tells us that they will operate with increasing efficiency in the weeks and months ahead.
As we shared on the Q1 call, overcoming staffing and retention challenges due to the constrained labor market has been a key focus.
We continued to take bold actions in Q2 to hire and invest in our frontline team members and thus increase network efficiency.
These actions including pay premiums, increased paid time off and tuition reimbursement.
I am pleased to share that we have made considerable traction in recruiting frontline positions.
Last week, we exceeded 111,000 applications, the highest level in FedEx history.
To put this in perspective, we had 52,000 applications the week of May 8.
This has led to appropriate staffing levels of peak, including having more than 60,000 frontline team members since we last spoke in September.
We delivered strong results for the quarter with an 11% increase in adjusted operating income, which exceeded our initial expectations shared during the Q1 call.
Second quarter results include outstanding performance by our team at FedEx Express, where operating income on an as-adjusted basis exceeded $1 billion for the quarter.
The ability we have at Express to flex our cost structure and network in response to changing market conditions positions us for long-term sustained profitability.
FedEx Freight also delivered a strong quarter with an operating margin of 14.7%.
I am proud of the team as they continue to focus on revenue quality and profitable growth.
We estimate the effect of labor shortages on our Q2 results was approximately $470 million, in line with our original expectations.
And consistent with the first quarter, Ground once again, bore the majority of these costs to the tune of $285 million.
While Ground's results were negatively affected by labor challenges in the first half of the year, we are encouraged by hiring momentum as we look to the second half and are focused on retaining recently hired team members after the peak season concludes.
We know we have an excellent value proposition for employees, which we are strengthening even further with technology that enables employee-friendly, flexible schedule options, including the ability to pick up extra shifts when convenient or swap shifts with a colleague all from the convenience of an app on their phone or computer.
All of this to say we anticipate cost pressures from constrained labor markets to partially subside in the second half of the fiscal year.
Now, it's a good time to focus on what is ahead for FedEx.
The FedEx business has been built over nearly five decades.
And during that time, we have built networks and capabilities that are differentiated from our competitors and nearly impossible to replicate.
Our customers and their customers value these networks and capabilities as we enable global supply chains to stay connected.
This has never been illustrated more clearly than during the last two years of the global COVID pandemic.
Our industry has proven to be absolutely critical in delivering during this pandemic, whether it is business-to-business or e-commerce.
And within this industry, our strategy is unique.
Our future growth and profitability will be driven by our strategy and we will drive total shareholder value over the immediate mid and long-term.
There is solid momentum in our base business as we continue to lean into the dynamic growth of e-commerce amid a robust pricing environment.
In addition, we have other levers for profitable growth, including number one, increasing collaboration and efficiency to optimize our networks and businesses; number two, driving improved results in Europe and international; and number three, unlocking value by digital innovation.
Our expanded collaboration across operating companies will drive cost benefits, lower delivery and line-haul cost and better utilization of existing assets.
Said differently, we'll utilize our air and ground networks in a smarter, more calculated manner.
FedEx Freight trucks have traveled four million miles while operating on behalf of FedEx Ground this year.
FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched nearly 50,000 times.
We will continue to look comprehensively at all assets in our network, including stations, hubs and equipment to put the right package in the right network at the best service for our customers.
And as I highlighted earlier, the focus on collaboration also extends to our customers as we work to make their supply chains smarter.
This includes providing integration and common data platform opportunities and planning the best way to leverage our network flexibility for their volume needs.
The second lever is continuing to improve our international profitability.
Our international business, particularly Europe, remains one of our biggest opportunities.
I was in Europe in October, and I was happy to note the excellent progress there as we build upon the success of station integration, which was completed in May 2021.
We remain on track for the completion of our air network integration in April 2022, which will complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks.
After April 2022, Paris' Charles de Gaulle Airport will serve as the main hub for all European and intercontinental flights.
Liege will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth.
Brie, will share more on what this enhanced value proposition means for our customers.
Finally, we are unlocking value through digital innovation and our accelerated integration of data-driven technologies and enhanced digital capabilities ranging from increased network efficiency to customer experience improvements.
For example, early package visibility enhances visibility of third-party trailers as improving customer collaboration, information sharing and package prioritization.
Model-driven estimated delivery date uses machine learning to provide a more accurate estimated delivery day of packages to customers and recipients.
And trailer load scan automation eliminates the need for a manual scan enabling faster and more efficient loading while significantly reducing package touches.
These ongoing investments, network capacity, automation and technology, have helped FedEx build the most flexible and most responsive network in the industry, affording us significant competitive advantages.
In closing, the successful execution of our strategies continues to drive high demand for our differentiated services.
We remain confident in these strategies for the various reasons outlined.
Our unparalleled portfolio of services powered by the strength and reach of our global network positions FedEx to deliver superior, sustainable financial returns and drive shareholder value for years to come.
With that, let me turn this floor over to Brie.
Q2 delivered our second consecutive quarter of 14% revenue growth, demonstrating the strong demand for our differentiated portfolio and our ability to drive revenue quality as a result.
Constrained capacity has continued to support a favorable pricing environment.
We are maintaining a brisk pace for repricing contracts, ensuring a high surcharge capture and yield improvements.
We are working with large customers to identify opportunities, to move their volume from our national network to our regional and local networks, freeing up additional capacity for small business customers.
Small businesses relied our market-leading transit times in our seven-day a week network to compete.
They cannot forward deploy inventory at the same scale as large retailers.
Our domestic yield growth was 9.1% with fuel in Q2.
Our general rate increase will take place in January and we expect a strong capture rate.
In January, the Ground Economy peak surcharge will be replaced by the new Ground Economy delivery surcharge at a $1, solidifying the price point for our Economy product.
And as a reminder, FedEx Ground Economy was formerly FedEx SmartPost.
The landscape across the industry remains robust and positions us well for continued profitable growth.
We are forecasting that the U.S. domestic parcel market will reach 134 million pieces a day by calendar year 2026, a remarkable 70% growth from 2020.
E-commerce is expected to drive 90% of the parcel market growth.
We have developed a tremendous portfolio of e-commerce solutions and we are very confident that our competitive value proposition will enable us to continue to take share smartly in the addressable e-commerce market.
As you all know, we have a diversified customer base globally as well as here in the United States.
And as such, we can confidently grow without the risk of a very large and disruptive customer negotiation.
The U.S. domestic B2B market is also expected to grow.
It will grow at a 5% CAGR through 2026.
We are growing our digital capabilities to provide a range of visibility experiences that will give our B2B customers greater clarity, confidence and control over their deliveries, especially in high-value verticals such as healthcare.
Turning now to international.
Our successful commercial and operational execution in response to COVID demonstrates our ability to grow profitably in an uncertain environment.
Demand out of Asia continues to contribute strong revenue and profit performance and our international economy embargo and peak surcharges are contributing to our yield growth there.
Q2 Express international export yield grew 12% and volume grew 7.6%, which is outstanding year-over-year growth.
International export composite yield grew to almost $54 per package, while average daily volume was more than 1.1 million.
I am very proud of the international revenue quality results, especially given that we also had double-digit e-commerce growth internationally, which, of course, puts downward pressure on our package yield.
International Priority Freight had a very strong quarter with 34% year-over-year revenue growth year-to-date.
With new variants of COVID causing uncertainty in the global recovery, we believe that air cargo capacity will remain constrained through calendar year 2022 and a full recovery is not anticipated until at least 2024.
Export demand in Europe and APAC has fully recovered to pre-pandemic levels and capacity on international lanes remains scarce.
We anticipate a continued favorable pricing environment and an embargo on our deferred services out of Asia Pacific for the foreseeable future.
We are targeting both B2B and cross-border e-commerce market share internationally.
We have identified the target lanes for B2B growth where we have shared growth opportunity, most notably in and out of and across Europe.
As Raj alluded to, with the launch of our integrated air network in April, we will dramatically enhance our capabilities within and into Europe, creating benefits for customers around the world.
More European customers will have access to next-day and pre-noon delivery times for their intra-European shipments through our expanded portfolio of services.
We will be able to offer customers an option of mid-day or end-of-day service in-bound to Europe, giving our customers around the world more choice and flexibility while giving our global sales team more opportunities to pursue.
These enhancements, along with our intra-Europe road services and industry-leading Europe to U.S. service, position us with a very competitive portfolio.
As we approach the final stages of physical integration this fiscal year, we are increasing the FedEx brand presence on the road in Europe by approximately 30%, including the rebranding of vehicles and facilities.
Additionally, intercontinental e-commerce will contribute approximately half of the growth in the parcel market over the next decade.
FedEx International Connect Plus, which launched across Europe, Asia Pacific and the United States, enables us to compete more effectively in this growing e-commerce market.
In addition to the improvements in our transportation portfolio, we are very focused on our digital solutions across the customer journey.
We have launched our new account opening application in eight countries with very great results.
We are seeing double-digit improvement in account openings and customers opting in for My FedEx Rewards, which, of course, is the only small business loyalty program in the industry.
We have also launched our new FedEx Ship Manager application in more than 100 countries.
This is the primary tool for our small business segment to ship with FedEx.
With the modern, easy-to-use interface, a small business can now create a label and get the package out the door more than a minute faster than they could previously.
We will launch this new FedEx Ship Manager in the United States in 2022.
In summary, we are very confident in our commercial strategies for revenue growth and yield improvement.
Given the historically challenging nature of peak season, along with the continued staffing challenges felt by numerous companies around the world, we are quite pleased with our second quarter consolidated financial results, with adjusted operating income up 11% year-over-year.
While adjusted earnings per share was unchanged year-over-year, this year's effective tax rate was significantly higher as last year's earnings included a $0.71 per share discrete tax benefit from favorable guidance issued by the IRS.
As we anticipated, most of the headwinds we experienced in the first quarter persisted through the second quarter, which dampened our Q2 profitability by an estimated $770 million.
To further unpack our second quarter results, I will highlight several key drivers.
The difficult labor market once again had the largest effect on our bottom line, representing an estimated $470 million in additional year-over-year costs.
As I did last quarter, I'll separate the effect of the labor market into two components; higher rates and network inefficiencies resulting from labor shortages.
Of the $470 million, we estimate $230 million was incurred in higher wage and purchase transportation rates.
This included higher wage rates and paid premiums for team members and higher rates paid for third-party transportation services.
We estimate network inefficiencies resulting from labor shortages, increased costs by approximately $240 million.
These costs include additional line-haul, higher usage of third-party transportation, cost to reposition assets in the network over time and recruiting incentives all to address staffing shortages.
Beyond the labor effects, our results for the second quarter also included the following headwinds; $90 million related to investments in the ground network, as Raj outlined earlier, that are critical to improving service and adding capacity; an estimated $75 million in incremental air network costs at Express due to the continued effect of COVID restrictions on our operations; and lastly, a $70 million effect year-over-year from higher federal excise taxes as the waiver ended on December 31, 2020.
With that overview of the consolidated results, let's turn to the highlights for the segments.
Ground reported $8.3 billion in revenue, a 13% increase year-over-year, with operating margin at 5.8%.
The results at Ground in the second quarter with operating income and margin down are not where we would like them to be and our teams remain very focused on improving performance.
Ground operating income was down approximately $70 million and in addition to the $90 million I mentioned earlier, results were significantly affected by higher wage and purchase transportation rates and network inefficiencies amid the constrained labor market.
Express adjusted operating income increased to over $1 billion and reported an adjusted operating margin of 8.8%, which was driven by higher yields and international priority volume growth, which more than offset the negative effects of continued staffing challenges and COVID-19-related air network inefficiencies.
Freight had another outstanding quarter with an operating margin of 14.7% as revenue for Q2 increased 17% year-over-year and operating income increased 33% year-over-year.
Our Q2 results include a net pre-tax non-cash mark-to-market loss of $260 million related to the termination of the TNT Express Netherlands Pension Plan and a curtailment charge related to the U.S. FedEx Freight Pension Plan.
Now, let's pivot to capital spending.
Year-to-date, we spent $3.1 billion in capital as we continue to invest in our strategies for profitable growth, service excellence and modernizing our digital platforms.
Our capital forecast for fiscal 2022 remains at $7.2 billion and less than 8% of anticipated revenue.
We ended our quarter with $6.8 billion in cash and are targeting approximately $3 billion in adjusted free cash flow for FY 2022, which puts us on pace to deliver over $7.5 billion in adjusted free cash flow for FY '21 and '22 combined, far exceeding our historical levels.
These cash flows have provided extensive flexibility as we continue to focus on balanced capital allocation and strengthening our balance sheet.
As a result of this flexibility, I am pleased to announce our Board has approved a new $5 billion share repurchase authorization.
And as part of this program, we expect to enter into a $1.5 billion share repurchase program that will be completed by the end of the fiscal year, which is on top of the $750 million of repurchases in the first half of the year.
This new program highlights the tremendous confidence we have in our business and underscores our commitment to driving value for our shareholders.
During Q2, we also made a $250 million voluntary contribution to our pension plan, which mitigates PBGC fees and further strengthens the funded status of our plan for our employees and we expect to make an additional $250 million contribution in February.
As for our FY2022 guidance, we are raising our full-year adjusted earnings per share range to $20.50 to $21.50 to reflect second quarter results and outlook for the second half of the fiscal year as well as the expected benefit from our ASR transaction.
This improved outlook represents another outstanding financial year with a year-over-year increase in adjusted earnings per share ranging from 13% to 18%, following our strong 2021 results.
While the second quarter exceeded our expectations, uncertainty remains across many fronts, including the labor market.
We are closely monitoring developments related to the federal vaccine mandate, ongoing pandemic developments and inflation as we consider our outlook.
Labor headwinds will persist in Q3, but the labor availability and network inefficiency component will continue to mitigate as we move through the quarter, given our progress to date and plans to address this.
In addition, we do not expect a recurrence of approximately $1 billion in notable second half headwinds from a year ago that included the timing of variable compensation expense, historic severe winter weather, a one-time express frontline bonus and our commitment to the Yale Carbon Capture initiative.
In summary, the successful execution during the second quarter of our strategies amid a very dynamic environment gives us confidence in our updated outlook for the remainder of fiscal 2022 and beyond.
In closing, I do want to take a moment of personal privilege here.
While not on these calls, many of you are familiar with John Merino, our longtime Chief Accounting Officer, who signed our 10-Qs and 10-Ks.
John has been integrally responsible for the quality and integrity of our financial information.
And after 23 years with FedEx, he will retire at the end of this month.
And now before we move to the Q&A, our Chairman and CEO, Fred Smith, has joined us and would like to share a few words.
As promised on the June Analyst Call, I am here to answer any questions specifically for me.
This time of year is challenging, especially for those working tirelessly on our frontlines, but your hard work and dedication to keep our purple promise for our customers is evident by the Q2 results, Raj, Brie and Mike have covered well today.
I'm pleased to announce we will be hosting an Investor Meeting on Tuesday and Wednesday, 28, 29 June 2022 in Memphis.
Mickey will share details after the New Year.
I'll now pass it back to him to begin the Q&A portion of the call.
Now, I'd like to open our question-and-answer session, and please remember, callers are limited to one question, so we can accommodate everyone.

user
new $5 billion share repurchase program authorized, including $1.5 billion accelerated share repurchase program.
sees fy capital spending of $7.2 billion.
continue to forecast improved earnings and margins for our fiscal year.
in quarter challenging labor market affected availability and cost of labor resulting in network inefficiencies, and higher wage rates.
fedex is unable to provide a fiscal 2022 earnings per share or effective tax rate (etr) outlook on a gaap basis.

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