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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 our 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.
First and foremost, our thoughts are with those affected by the ongoing violence in Ukraine.
The safety of our team members in Ukraine is our utmost priority, and we are providing them with financial assistance and various resources for support.
We have suspended all services in Ukraine, Russia, and Belarus.
Additionally, we are helping to move relief to Ukraine, and we have provided more than $1.5 million in humanitarian aid.
Execution of our strategies resulted in substantially higher operating income for the quarter as Team FedEx delivered yet another outstanding peak season.
December 2021 was our most profitable December in FedEx history.
Our ability to handle the influx of packages was years in the making as we've taken deliberate steps to enhance our unparalleled network and support of customers large and small.
We have fundamentally changed our performance as we handled increased e-commerce volume during peak and set a new precedent for peak seasons moving forward.
Having said that, we are laser focused on improving our margins.
You'll hear us talk more about this today and then more specifically at our upcoming Investor Day.
Even with the successful execution of peak, the new year brought new challenges, mostly driven by omicron.
This affected our business in two ways: first, we experienced staffing shortages, particularly in our air operations.
In January alone, the absentee rate of our crew due to omicron was over 15%, which caused significant flight disruptions.
domestic and European markets.
Both of those factors resulted in softer-than-expected volume levels, especially in January.
We estimate the effect of omicron-driven volume softness in our Q3 results was approximately $350 million.
While it was significant, it was also temporary, and we have seen volume rebound from January levels.
Even with these challenges, FedEx Express delivered strong adjusted operating income growth of 27% year over year.
Speaking of the Express team, we announced that after nearly 40 years of distinguished service, Don Colleran, president and CEO of FedEx Express, will retire later this year and named Richard Smith, current executive vice president of global support and regional president of Americas at FedEx Express, as a successor.
We'll have much more to say about Don and his countless contributions to the business during our call in June.
FedEx Freight once again delivered strong results with third quarter operating income nearly tripling year over year, driven by a continued focus on revenue quality.
Turning to FedEx Ground.
Operating costs continue to be challenged by the competitive labor environment now primarily manifesting in increased labor rates.
We estimate the total impact of approximately $210 million at ground in the third quarter, which is significantly lower than what we saw in Q1 and Q2 as we have seen substantial improvement in labor availability post peak.
With the stabilization in the labor environment, I'm pleased to share that we have successfully unwound network adjustments that were necessary to provide service but cost inefficiencies.
Staffing levels and the rapid acceleration in labor costs have stabilized and our network is operating at normal levels.
Despite improvement in the labor headwind, volume levels in Q3 were softer than we had previously forecasted, in part due to omicron surge slowing customer demand.
As such, we expect our second half Ground margins will be lower than our previous expectations and not reach double digits.
Over the years, FedEx Ground has built a strong foundation to serve B2B and small and medium customers with an unmatched value proposition.
As a result, we have grown market share in these segments and they remain strong priorities for the future.
And then more than three years ago, we built upon this foundation and embarked on a strategy that positioned FedEx squarely in the center of the fast-growing e-commerce market with a differentiated portfolio and a diversified customer base.
This included a period of strategically investing in our network to meet growing market demand.
Let me note here that this strategy is different than what our primary competitor has pursued.
By building on our current base of business and making those prior investments in our network to facilitate growth, we are in a position to generate improved operating profit and margins.
We saw this potential in our financial results for December prior to the surge of omicron.
And moving forward, our financial performance will be further enhanced by maximizing existing assets, improving capital utilization, and leveraging technologies that facilitate optimization of our existing physical capacity and staffing.
As we prepare to close fiscal year '22, permit me a moment to share what's on the horizon for FedEx as we continue to focus on margin expansion and shareholder return.
In addition to the opportunity to enhance performance at Ground that I just discussed, we have other levers for profitable growth, which include: number one, driving improved results in Europe; number two, increasing collaboration and efficiency to optimize our networks, lower our cost to serve and enhance return on capital; and number three, unlocking new value through digital innovation.
Of course, we'll do this in an environment of strong revenue quality management.
Our international business, particularly Europe, remains a big profit opportunity.
Air network integration remains on track for the end of the month to complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks, both in the air and on the road.
Paris CDG 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.
Our expanded collaboration across operating companies will utilize our air and ground networks in a smarter and more calculated manner.
For example, FedEx Freight trucks have traveled more than 7 million miles while operating on behalf of FedEx Ground this fiscal year.
FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched more than 36,000 times.
We'll continue to comprehensively look at all our assets in our network to put the right package in the right network and the right cost to serve.
Additionally, we are unlocking value through digital innovation, our accelerated integration of data-driven technologies that will drive increased productivity in our linehaul and dock operations, as well as in the last mile.
Enhanced sortation technology will be operational at FedEx Ground in hundreds of facilities fired as we speak.
It will increase upstream efficiencies, enabling managers to do better balance and planned sortation operations, thereby unlocking key capacity.
For example, during Cyber Week, this technology helped keep 1.9 million ground economy packages out of constrained sorts.
We're also modernizing the planning and staffing of our dock operations, as well as the systems, training, and technology that maximizes productivity on every sort.
One such example is a recently rolled out package handler scheduling technology that will help ensure the right staffing levels for every sort and every facility across the Ground network.
This will improve dock productivity.
And when combined with a focus on employee retention, it will enable us to significantly reduce the cost of turnover and strategically target recruiting spend when and where necessary.
For last mile, we continue to improve upon the route optimization technology already implemented to enable service providers to make real-time decisions that enhance their business' daily efficiency.
These ongoing investments in automation and technology have helped FedEx build the most flexible and responsive network in the industry and will enable us to improve our margins.
In closing, we have the networks, the strategy, and the right team in place as we deliver financial returns and drive shareholder value for years to come.
Several macroeconomic forces, including the tragic conflict in Ukraine, uncertainty around the pandemic, a tight labor market, supply chain disruptions, high energy prices, and inflationary pressure have dampened the current GDP outlook globally and for the United States.
Last week, we lowered our economic outlook.
U.S. GDP is now expected to increase 3.4% in calendar year 2022, revised down from 3.7%, and our outlook is 2.3% in calendar year 2023, with consumer spending tilting toward services and B2B growth supported by inventory rebuilding.
Global GDP growth is expected to be 3.5% in calendar year 2022, previously 4.1% and it will be 3.1% in calendar year 2023.
Growth will be driven by the release of pent-up demand for services while investment demand and inventory restocking support global manufacturing and trade.
Given the tremendous fluidity of the macroeconomic environment, we will continue to update our outlook.
Our teams are ready to adjust plans, as required, to drive margin improvement despite the dynamic environment in which we operate.
With fuel prices increasing around the world, today, we announced a fuel surcharge increase effective April 4 for FedEx Express, Ground, and Freight.
Additional details can be found on fedex.com.
The change in economic outlook does not change our confidence that e-commerce will continue to drive strong parcel market growth.
We believe the e-commerce growth rate in the United States will be in the mid- to high single digits for the next three to four years.
We will continue to build differentiated value propositions to achieve market-leading pricing in all our customer segments, including e-commerce, our small and medium customers and our commercial B2B business.
We are very pleased with the results of our revenue quality strategy and know we have a great opportunity to increase the flow-through to margin expansion.
In the third quarter, revenue growth was 10% year over year, with double-digit yield improvement for FedEx Express and FedEx Freight, close behind with FedEx Ground at 9% year-over-year yield improvement.
In the United States, our package revenue grew 9% in Q3 on strong yield improvement of 10%.
We executed on our peak pricing strategy in the month of December, delivering more than $250 million in peak surcharge revenue.
Softness in parcel volumes came predominantly from constraining FedEx Ground economy and the effects of omicron on both our network and on our customers.
The focus on revenue quality and profitable share growth drove outstanding results for FedEx Freight this quarter.
For the quarter, revenue increased 23% year over year, driven by a 19% increase in revenue per shipment.
Additionally, FedEx Freight Direct continues to gain great momentum as an e-commerce solution for heavy bulky items with phenomenal growth in Q3 year over year.
Our international businesses are navigating a dynamic environment.
Capacity constraints continue to be a reality.
At this point, valet capacity on Trans-Atlantic passenger airlines is expected to recover faster than Trans-Pacific.
Passenger airline capacity is not expected to fully recover to pre-COVID levels until 2024 or even later across our largest global trade lanes.
Scarce capacity on international lanes and strong demand out of Asia is resulting in a continued favorable pricing environment.
With the completion of our integrated air network at the end of this month, we have one European air network and one road network in and out of Europe.
Our international portfolio of services contains the best European road network, the broadest U.S. next-day coverage, and a combined parcel and freight offering that no one else in the market has.
As a result of the integration, we will be able to offer improved transit times, earlier delivery, and later pickup services to more customers and more locations.
Seven new countries will now be connected on a next-day basis within Europe, while 14 countries will be expanding our noon delivery coverage.
In several countries, this will be the first time we have introduced next-day service to the rest of Europe.
We will leverage the expanded European portfolio to improve international profitability, drive revenue growth and gain market share.
In addition to the improvements in our European value proposition, we have made significant strides to enhance our digital solutions as well.
In January, we enhanced our tracking service based on an advanced machine learning and artificial intelligence model developed by FedEx DataWorks.
This new experience delivers greater estimated delivery date accuracy, including updates for early or delayed shipments through all tracking channels.
This improves both the shipper and the recipient experience, and it will reduce calls to customer service.
Additionally, our new modernized FedEx Ship Manager, which is our online shipping application, has now been rolled out in more than 153 countries.
In January, we began introducing customers to it in the United States and Canada.
FedEx Ship Manager is the primary shipping application for our small and medium customer segment.
We believe a market-leading digital portfolio will enable FedEx to continue to take market share in this very profitable segment.
In summary, we remain optimistic about Q4 and beyond, and we'll continue to deliver on our market-leading value proposition.
After a strong start to the third quarter with the most profitable December in company history, January was significantly influenced by the rapid spread of the omicron variant and its negative effect on our operations and the macro environment.
These challenges subsided during February, resulting in third quarter adjusted operating income of $1.5 billion, up 37% year over year on an adjusted basis.
There are a number of factors influencing our third quarter results for both this year and last year that I will cover.
As Raj explained the effects on our operations, I will give further context for the financial implications.
First, labor market conditions, although much improved, once again had a significant effect on our results at an estimated $350 million year over year, which was primarily experienced at Ground.
For the third quarter, that was primarily due to higher rates for both purchase transportation and wages.
Labor availability-driven network inefficiencies were significantly less of a factor in the third quarter compared to earlier in the year.
The implications from the omicron variant surge reduced third quarter operating income by an estimated $350 million, predominantly at Express, as it influenced customer demand and pressured our operations, resulting in constrained capacity, network disruptions and lower volumes and revenue.
The third quarter had favorable year-over-year comparisons for variable compensation of approximately $380 million, including the one-time Express hourly bonus last year and significantly less impactful winter weather that lead it to $310 million.
With that overview of the consolidated results of the third quarter, I'll turn to the highlights for each of our transportation segments.
Ground reported a 10% increase in revenue year over year, with operating income down approximately $60 million and an operating margin at 7.3%.
While pressures from constrained labor markets began subsiding, the effect was still significant at an estimated $210 million year over year, predominantly due to the higher purchase transportation and wage rates.
In addition, our volume was softer than expected due to the omicron variant surge slowing customer demand.
A 9% yield improvement partially offset these headwinds, and our teams remain very focused on improving ground performance, as Raj outlined earlier.
Express adjusted operating income increased by 27% year over year, driven by higher yields and a net fuel benefit, with adjusted operating margin increasing by 100 basis points to 5.8%.
Express results also benefited in the third quarter from $285 million of lower variable compensation, as well as much less severe winter weather.
The strong results were partially offset by the headwinds I mentioned earlier, with the omicron surge having the largest effect, especially during January, of an estimated $240 million.
Team member absences primarily among our pilot severely disrupted operations, requiring many flight cancellations and further constraining capacity.
Additionally, during this time, the omicron surge reduced customer demand in many parts of the world.
Freight had another outstanding quarter, delivering an operating margin of 15%, 850 basis points higher year over year, and revenue for the third quarter increased 23% with operating income up over 180% despite the pressures from higher purchase transportation rates and wages.
And for the first time in Freight's history, they realized sequential operating income and operating margin improvement from the second quarter to the third quarter.
Turning to the balance sheet.
We ended our quarter with $6.1 billion in cash and are targeting over $3 billion in adjusted free cash flow for fiscal 2022.
As I emphasized last quarter, our stronger cash flow provides extensive flexibility as we continue to focus on balanced capital allocation.
As such, I'm pleased to share the accelerated share repurchase program announced last quarter was completed during Q3 with 6.1 million shares delivered under the ASR agreement.
Total repurchases during fiscal '22 are nearly 9 million shares or 3% of the shares outstanding at the beginning of the year.
The decrease in outstanding shares resulting from the ASR benefited third quarter results by $0.06 per diluted share.
Also during the quarter, we made a $250 million, a voluntary contribution to our U.S. pension plan and have funded $500 million year to date.
Now turning to what's ahead.
We are affirming our full year adjusted earnings per share range at $20.50 to $21.50.
The operating and business environment uncertainty I mentioned in December did materialize to a greater degree than anticipated during Q3, but we have navigated those challenges and project a solid finish to our fiscal year.
Labor-related network and efficiency effects have diminished and the wage rate component should become less of a headwind as we lap the onset of labor rate increases in the fourth quarter.
Lastly, variable compensation expense will be a tailwind as it was in Q3.
Turning to capital spending.
We have lowered our FY '22 capital-spending forecast from $7.2 billion to $7 billion.
Much of the change is driven by extended timelines resulting from supply chain considerations.
While we are still developing our FY '23 plans, our focus remains on lowering our capital intensity while investing in strategic initiatives to drive returns.
We are highly focused on ensuring our capital investments generate returns to drive further growth in earnings and cash flows.
Lastly, our projection for the full year effective tax rate is now 22% to 23%, prior to the mark-to-market retirement plan adjustments.
While we are confident in our ability to deliver a strong fourth quarter, uncertainty remains across many fronts, including additional pandemic developments, the labor market, inflation, high energy prices and further geopolitical risk, and the potential effects on the pace and timing of global economic activity.
We continue to monitor these trends and adjust accordingly.
With that, we are all very much looking forward to sharing additional background in our upcoming investor meeting on June 28 and 29 in Memphis.

user
q3 operating income improved due to higher revenue per shipment and a net fuel benefit at all transportation segments.
sees fy earnings per share $20.50 to $21.50 before (year-end mtm retirement plans accounting adjustment, and excluding some costs.
sees fy capital spending of $7.0 billion, compared to prior forecast of $7.2 billion.
qtrly results were partially offset by effects of omicron variant, as well as higher purchased transportation costs and wage rates.
strong quarterly operating income increase was dampened by surge of omicron variant.

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