FedEx Q2 FY21
Earnings Call Transcript – December 17, 2020
A.
Mickey Foster
Vice President, Investor Relations, FedEx
Corp.
Good afternoon and welcome to FedEx Corporation’s second quarter
earnings conference call. The second quarter Form 10-Q, earnings release, and
stat book are on our website at FedEx.com. This call is being streamed from our
website where the replay will be available for about one year. 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. 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.com for a reconciliation of the non-GAAP financial
measures discussed on this call to the most directly comparable GAAP measures.
Joining us on the call today are Fred Smith, Chairman and CEO; Raj
Subramaniam, President and COO; Mike Lenz, Executive Vice President and CFO;
Mark Allen, Executive VP, General Counsel and Secretary; Rob Carter, Executive
Vice President, FedEx Information Services and CIO; Brie Carere, Executive Vice
President, Chief Marketing and Communications Officer; Don Colleran, President
and CEO of FedEx Express; Henry Maier, President and CEO of FedEx Ground; and
John Smith, President and CEO of FedEx Freight.
And now, Fred Smith will share his views on the quarter.
Frederick
W. Smith
Chairman, President & CEO, FedEx
Corp.
Thank you,
Mickey. Let me make one administrative comment. Due to the COVID-19 situation,
we have four members of our SMC spatially distanced in the one room and then
five members of the SMC are participating by Zoom with us. So, we may be a
little clunky here handing off for the answers, but that’s the reason.
Let me first
thank our FedEx team, nearly 600,000 strong. These team members have continued
to keep the world moving amid the pandemic, transporting medicines, protective
gear and all the things our customers need for daily life, and all of our B2B
customers need to run their industries. And now our team is acting on months of
rigorous planning to transport COVID-19 vaccines safely and on time. We have no
higher priority as a company.
Time-definite
express transportation of critical shipments is exactly what our air-ground
network was built to do. And we have the experience, unmatched global network
and technology solutions needed to effectively play our role in helping to
eradicate this awful disease. Particularly important has been the recent roll-out
of our new proprietary SenseAware ID system, which provides real-time
visibility of vital shipments like the vaccines.
In addition to
this critical work, we’re in the midst of our peak holiday shipping
season where we expect record-breaking volumes. Our strong revenue and earnings
growth during the second quarter is another reflection of the continued hard
work of our team members and their commitment to our customers. We’re very
confident in our strategies and extremely optimistic for FedEx’s future.
Let me now ask
Brie, Raj and Mike, who I’d like to officially welcome to his first earnings
call as our CFO, to provide their comments, after which we will take your
questions. Brie?
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
Thank you, Fred, and good afternoon, everyone.
With the coronavirus in its third surge in many countries, the near-term
economic outlook remains unclear. In the US, goods spending is above
pre-pandemic levels, powered by gains in e-commerce. We are also seeing growth
beyond the consumer as drivers of business activity are increasingly in place.
Inventory restocking and a strong recovery in
capital goods spending are supporting industrial production. Positive developments
on the vaccine front should strengthen the appetite for investment. However,
the service sector does remain challenged and faces short-term uncertainty
against the latest virus surge. When the health emergency ends and pent-up
services demand is released, we should see a long growth runway.
International growth rebounded in the third
quarter of calendar year 2020 with the goods sector outperforming services.
Global industrial production and merchandise trade volumes are close to a full
pre-COVID recovery. Sentiment among manufacturing firms is solid, while trade
growth is becoming more broadly based around the world. China’s economy has
surpassed pre-COVID levels and is leading a strong recovery in East Asia. In
contrast, however, Europe has been slower to recover and faces short-term
headwinds from virus containment. While uncertainty remains high, vaccine
prospects are increasing confidence in the medium-term outlook.
As I discussed last quarter, the acceleration
of e-commerce has had a profound impact on our industry. This holiday shipping season has certainly proved that. The pandemic has
accelerated the growth of e-commerce volumes. In the first nine months of 2020,
US e-commerce sales grew 33% year-over-year, while traditional retail sales, excluding
auto, gas, and food services, grew a little more than 1% year-over-year.
E-commerce package volumes are expected to more than triple to 111 million
packages per day by 2026, up from 35 million in 2019.
On the last call, you heard me coin this peak
season as the Shipathon, as we prepared for
unprecedented levels of online shopping and shipping this holiday season. We
have worked very closely with our customers to get the shop early, ship early
message out to consumers, and we’ve been incredibly pleased with their
response.
While available capacity across the entire
industry has been severely constrained, we have worked with our customers to
develop innovative solutions to meet their capacity needs this peak. The
proactive steps we took to prepare for the growth of e-commerce, including the
expansion of FedEx Ground’s seven-day-a-week US residential delivery,
investments in automated facilities and our retail convenience network have
certainly paid off.
We expanded Sunday residential delivery to nearly
95% of the US population in September. Since then, we have made more than 50
million Sunday residential deliveries. Our investment in seven-day delivery has
given us a speed advantage for e-commerce that is near impossible to match
without a national Sunday delivery offering.
The convenience of our retail network has led
to record volume growth, with more than 60% increase in average daily volume
from October 15 to November 30. We are very pleased with our Walgreens and
Dollar General alliances and the services they are providing our customers and,
of course, a huge shout out to the FedEx Office team who always does an
incredible job at peak.
We have also set new record highs in returns
volume for the past six consecutive months. With the return season upon us, we
expect these record highs to continue over the next several months. I am
incredibly proud of how we have grown our digital e-commerce portfolio.
FedEx Delivery Manager monthly enrollments have
increased more than 70% year-over-year this fiscal year-to-date. And, of
course, we are thrilled to expand our digital portfolio with the pending ShopRunner acquisition. It is no secret that the success in
e-commerce lies at the intersection of a superb physical network and incredible
digital capabilities. Raj will talk more about this later.
Turning to revenue quality, we have remained
laser-focused throughout this peak on ensuring capacity for customers is at the
right price, enabling us to provide the best possible service for all of our
customers. Our revenue quality strategy requires the right balance of yield
management, surcharges and, of course, product and customer mix.
As discussed last quarter, the implementation
of several peak surcharges has played a critical role in our revenue quality
strategy this peak, helping to offset, of course, the additional expenses
associated with the unprecedented volume and the virus surging. I believe peak
surcharges for the holiday season are the new normal for our industry.
In FY 2021 Q2, FedEx had a total US domestic
residential package volume of 67% versus 57% a year ago. With the increase of
residential packages in our networks, we’ve been very focused on effective
yield and product mix. In FY 2021 Q2, we have increased SmartPost yield by more
than 20% year-over-year and overall US domestic residential yields by 10%
year-over-year. We announced yesterday that we would modify several surcharges
post peak, and those will be effective January 18, 2021.
Finally, paramount to our revenue quality strategy
is the growth of our small and medium segment. As such, we continue to protect
the majority of our small and medium customers from the SmartPost peak and
temporary surcharges. We are taking market share in the small and medium
segment, and it is our strongest growing volume segment year-over-year.
We are increasingly digitizing our go-to-market
strategies to improve their customer experience, while continuing to help the
small and medium businesses grow their business despite the challenges
they have faced this past year. As Fred discussed, FedEx is proud to be one of
the two primary carriers of the COVID-19 vaccine in the United States. We will
play a critical role in the distribution of vaccines around the world for
months to come.
Now, let me turn to international. Current
estimates indicate that as of October, the global air cargo market capacity was
down 23% year-over-year due to the significant reduction in passenger aircraft
line. Air cargo demand is expected to recover to pre-COVID levels faster than
passenger capacity for key intercontinental lanes creating an opportunity for
FedEx.
Currently, Asia to US and Asia to Europe
passenger capacity is expected to recover to pre-COVID levels by 2023, and
Europe to US is expected to recover by 2024. Our goal is to profitably take
market share and keep it beyond the capacity shortage internationally. As such,
we are prioritizing business from small and medium customers and reprioritizing
any volume from resellers, ensuring we protect the business that will stay with
FedEx for the long term.
We are balancing near-term profitability, while
strategically growing our customer base internationally. With constrained
capacity, we have adjusted transit times and embargoed our deferred services.
We will continue to lean into international e-commerce, as it remains a
significant international market opportunity. It will also enable improved
flight density to further increase revenue per flight.
E-commerce will, however, drive lighter
international parcels, so yield per pound will become an increasingly important
metric. In Q2 2021, international export air express yield per pound was up
double digits year-over-year globally.
So, in summary, I am incredibly pleased with
our performance during this past quarter. We’ve nimbly navigated the Shipathon, all while planning for key initiatives that will
positively impact our business for many years to come.
And with that, I’ll turn it over to Raj for his
remarks.
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Thank you, Brie, and good afternoon, everybody.
Let me start by echoing Fred’s sentiments in thanking our global team members,
especially those on the front line who are working diligently to keep the world
in motion during this truly unprecedented time.
We are in the midst of an extraordinary peak
season with Shipathon, as we handle record-breaking
volumes and deliver strong service for our customers. While our regular peak
season falls in November and December, our preparations this year were months
in the making. In many ways, we have been operating at peak-like levels since
March, due to surges in e-commerce volume. We planned meticulously throughout
this year, including collaborating with our customers on innovative solutions,
enhancing capacity through new and repurposed facilities, and leveraging the
flexibility of our network to ensure we are well positioned to deliver during
our busiest holiday shipping season to date.
As we handle these record volumes, we’re also
delivering the first wave of COVID-19 vaccine shipments here in the US. In
fact, on December 14, at 5:53 AM Eastern, the FedEx Express courier made the
first US vaccine delivery to Boston Medical Center in Boston, Massachusetts.
Our team stands ready to transport additional vaccine shipments internationally
as they become available. This effort is among the most important work in the
history of our company, and we are honored and proud to be a part of the effort
to help end this pandemic.
And as Fred highlighted, our unparalleled
Express network was built for time-definite shipments such as these vaccines.
The scale of the FedEx network is massive, comprised of 680 aircraft, 200,000
vehicles, and most importantly, our nearly 600,000 dedicated team members
around the world. The power of our networks is such that FedEx can pick up a
shipment in most any one part of the world and deliver to most any other part
of the world in a matter of couple of days.
And the distinction between our networks means
that each will have the dedicated resources they need to deliver quickly and
safely. And it is precisely this power that will be critical in delivering our
very important mission at hand, the mission to distribute COVID-19 vaccines.
Simply put, a global health crisis of this scale requires a network of our
scale to address. This is who we are and what we do.
Now, turning to Q2; we delivered strong results
across the board. Mike will provide details, but I would like to highlight that
we achieved volume, yield and significant profit growth in each of our
transportation segments this quarter. These results were largely driven by many
of the strategic investments and decisions we have put in place over the last
18 months to address the growing e-commerce market.
These include expanding the US Ground
residential delivery to every day of the week; integrating SmartPost package
volume into the Ground network to improve density; investing in technologies
that enable real-time decisions and optimize the critical last mile; building
our networks’ capabilities and expanding services to more efficiently handle an
increase in large items, and accelerating the expansion of our retail
convenience network with Dollar General, Walgreens and of course, our own FedEx
Office locations.
These initiatives increase density, improve
last-mile efficiency, and help us prepare for the peak season. Indeed, Q2 was a
critical quarter for FedEx Ground with the culmination of many of these
foundational initiatives.
Now, turning to FedEx Express, they simply had a banner quarter. This record revenue performance is a direct reflection of the global Express team’s laser focus on executing our profitable growth strategy and operational excellence. The TNT physical integration remains on track, even amid shutdowns during the pandemic. We continue to build a strong portfolio,
leveraging the benefits of further network integration to
pave the way for success in Europe for years to come.
And finally, FedEx Freight had another outstanding quarter
with a double-digit operating margin. The Freight team remains focused on
profitable growth and revenue quality. As I said, the success of Q2 was a
direct result of the strategy we kick-started nearly two years ago, and we are
well-positioned for the future of FedEx.
During our September Shareholders’ meeting, we introduced
our new strategic operating principles, which are: compete collectively,
operate collaboratively, and innovate digitally. The shift in our operating
principles is yet another step in our long-term future-ready strategy.
Let me take a moment to talk about each in turn. Compete
collectively remains our core. Each FedEx operating company offers a unique
value proposition, and they each play a vital role in delivering on customer
expectations. It is when these companies compete collectively, under the
powerful FedEx brand, that we unlock new opportunities for our customers.
Brie has already touched on the various ways we’re
unleashing value for our customers, and so I will focus on the two new
principles, operate collaboratively and innovate digitally. Operate
collaboratively is an important and strategic shift for FedEx. While our
networks and the expertise that lies within our operating companies are, and
will remain, independent, we are building a holistic collaborative approach to
compete in the dynamic market. By operating collaboratively, we help ensure
that we have the right package in the right network at the right cost to serve.
We’ve discussed various examples of collaboration in previous earnings calls,
including last-mile optimization and FedEx Freight’s ongoing support of FedEx Ground.
These are just a couple of ways we’re adapting, collaborating and utilizing
different elements of our network to increase efficiency and reduce cost to
serve.
The final principle, innovate digitally, is how we will
deliver the future for our customers, shareholders and team members. The size
and scale of our network and the many millions of packages that traverse it
every day gives us a bird’s eye view of global supply chains and trends. Beyond
our physical infrastructure is the technology that drives our network and
generates a significant amount of data. We’re focused on using this data and
technology to unlock stronger performance, strengthen customer relationships
and drive greater efficiency.
Over the recent weeks and months, we have made significant
strides on our journey to innovate digitally. First, the formation of FedEx DataWorks, a new organization focused on putting our data
into context, and using it to transform the digital
and physical experience of our customers and team members. Second is the
recently announced agreement to acquire ShopRunner.
This platform will accelerate our ability to play a larger role in e-commerce
by connecting brands and merchants to new shoppers, thus improving online
shopping experiences. ShopRunner’s existing customer
brand and merchant base, product capabilities and team of professionals will
drive significant value as we expand our e-commerce portfolio. This recent
digital momentum, combined with our ongoing collaboration with Microsoft and
the launches of SenseAware ID and FedEx Surround, will allow us to harness the
immense data we collect to identify new ways to work even smarter. As Fred
said, we remain very confident in our strategies and the future of FedEx.
With that, let me turn it over to Mike for his inaugural
call as the Chief Financial Officer. Mike?
Michael
C. Lenz
Executive Vice President & CFO, FedEx
Corp.
Thank you, Raj, and good afternoon, everyone.
Before I move into the financials, I’d like to highlight a few points as the
new voice on the call. First, I’d like to recognize the legacy of Alan Graf in
building the world-class team I now lead, and thank him
for his leadership and guidance along the way. The values and standards he
instilled are an exceptional foundation for me to build upon in the years
ahead.
Next, I have appreciated the opportunity to
meet with many of you on the call today over the past few years and hear your
perspectives. I look forward to continuing that important dialogue and sharing
what’s ahead for FedEx. And hopefully, with a post-COVID environment becoming
more visible, the opportunities to connect will expand in the months ahead.
Finally, I must say how inspiring it has been
to see Team FedEx in action from my new vantage point, from the executives on
this call to the frontline team members working tirelessly as we speak to
deliver in this unprecedented environment. It reinforces what we have said before, that the strategies we have in place are
future-ready and make me truly excited for what lies ahead.
Turning to the results. I’m very pleased with
our second quarter performance. Second quarter adjusted operating income increased
121% year-over-year, primarily due to International Priority volume growth of
32%, continued strong demand for US residential delivery, pricing initiatives,
operating margin improvements across all our transportation segments, and a $70
million benefit from the reduction in aviation excise taxes provided by the
CARES Act. These factors were partially offset by higher costs driven by the
package volume surge and expanded service offerings at FedEx Ground, an
approximate $215 million year-over-year increase in variable compensation
expense, and an approximate $50 million in COVID-19-related costs to ensure the
safety of team members and customers.
These COVID-19-related costs that we have
quantified are limited to increased operating expenses related to personal
protective equipment, medical and safety supplies, and additional security and
cleaning services. And they do not include cost of network contingencies,
including additional personnel in place to support our operations through the
COVID pandemic.
For the quarter, all three of our
transportation segments posted strong results. Driven by the strong global
volume growth, Express revenues increased $1.3 billion. Coupled with solid
operational execution, Express generated an adjusted operating margin of 9.1%,
up more than 500 basis points, and a record second quarter adjusted operating
profit of $943 million.
The Ground segment operating margin improved
110 basis points to 7.5% as our strategies to capitalize on the rapid growth of
e-commerce continue to advance. The Freight segment earned a stellar 13%
operating margin, the best second quarter margin in 15 years by focusing on
revenue quality and aligning cost to volumes.
We incurred a pre-tax, non-cash mark-to-market
net loss of $52 million related to amendments to the TNT Express Netherlands Pension
Plan. Benefits will be frozen, and affected employees will begin earning
pension benefits under a separate multi-employer defined contribution plan.
Our effective tax rate was 12.8% for the second
quarter, compared to 2.1% in the prior-year period. This year’s tax rate was
favorably impacted by a tax benefit of $191 million, primarily attributable to
favorable depreciation guidance issued by the IRS during the quarter. That
compares to the prior-year period, which included a tax benefit of $133 million
on substantially lower earnings.
We ended the quarter with $8.3 billion in cash
and equivalents, and with $3.5 billion available under our credit facilities.
Looking forward, we are not providing a forecast of expected earnings per share
for the remainder of fiscal 2021. While current business demand continued to
improve in the second quarter, the current rise in COVID-19 cases globally adds
significant uncertainty to demand forecast as well as operating costs, and clouds our ability to forecast full-year
earnings.
However, based on the current trends in our
business, we anticipate increased demand to result in higher year-over-year
revenue and operating income at FedEx Ground and FedEx Express for the remainder
of fiscal 2021. In addition, yield management and improved productivity is
anticipated to contribute to revenue and operating income growth at FedEx
Freight in FY 2021.
If our current trends continue, we expect
higher variable compensation accruals and increased labor costs to be incurred
during the remainder of fiscal 2021. In addition, we expect a higher effective
income tax rate for the second half of the year versus the first half.
During the third quarter, we also expect to see
headwinds from aircraft maintenance costs and the end of benefits from the
CARES Act. In addition, the third quarter will have one fewer operating weekday
versus last year.
We incurred $48 million of TNT integration
expenses in the second quarter, down from $64 million in the prior-year period.
We expect the aggregate integration program expense to be $1.7 billion through
the completion of the physical network integration of TNT Express into FedEx
Express in early calendar 2022.
As we approach the completion of the physical
network integration in early 2022, we are evaluating opportunities and pursuing
initiatives in addition to the integration to further transform and optimize
the FedEx Express international business, particularly in Europe.
The cost of the ShopRunner
acquisition, which Raj highlighted earlier, will not be material, and will be
funded with existing cash balances. We expect to complete the transaction this
month.
We continue to expect our FY 2021 capital
expenditures will total approximately, $5.1 billion, which is $800 million
lower than last year’s capital spending. While we won’t finalize our FY 2022
capital spending plan until our fourth quarter, we expect that our FY 2022
capital spending will increase versus this year.
In FY 2022, we plan to make additional
investments in our FedEx Ground network driven by the surge in e-commerce
demand. Our CapEx focus remains on strategic investments that will reduce our
cost structure, improve our efficiency, and increase our capacity to profitably
meet market growth demands.
I’ll close by reiterating our excitement and
confidence in our future as we continue to benefit from our strong position in
the US and international package and freight markets, yield improvement
opportunities and cost management initiatives.
And with that, we can turn to the
question-and-answer session.
QUESTION
AND ANSWER SECTION
Operator: Thank you. We’ll go ahead and take our first question from David Ross
with Stifel. Please go ahead.
David
Ross
Analyst,
Stifel
Yeah. Thank you very much. Henry, probably a question for you on the
Ground side, and seeing growth there, and I know that there’s a lot of
investments going on to make sure all the packages get delivered. Right now,
it’s only showing about a 10% incremental margin, and everybody wants to get
back closer to mid-teens.
How should we think about, everything going on at Ground, the investments
weighing on the margin, and then the consolidation of SmartPost into Ground
helping the margin as we move over the next couple of years?
Henry
J. Maier
President
& CEO, FedEx Ground, FedEx Corp.
Thanks, David. Well, as Mike said, margins in the second quarter improved
110 basis points, and operating income improved 61% year-over-year. Given the
very unique environment leading up to peak, our resource ramp-up looked very
different than it had in prior years.
Peak preparation expenses were much higher, and
occurred much earlier than in the past as we anticipated, the potential impacts
of COVID on resource availability, and the timing of customer volume coming
into the network. We are, and have been – or we have
been and continue to be extremely aggressive in the hiring of new package
handlers. In fact, we’re still onboarding record numbers of package handlers as
we speak.
We recognized new challenges for service providers and adding drivers and
vehicles, so we pulled their peak settlement rates forward by a number of weeks
to better enable their businesses, to be ready for peak. All of these things
drove higher-than-normal operating expenses associated with peak preparation
than we normally incur in Q2.
Merits and accruals for variable comp also affected year-over-year comparables. Investments in preparation for this year’s
peak included capacity additions in the shape of 6 new regional sort
facilities, 4 new automated stations, 8 new or expanded large package
facilities, and expanding more than 50 facilities with additional automation
and material handling equipment.
A number of these facilities came online much later this year than it is
acceptable than in years past due to permitting and construction delays due to
COVID-related shutdowns last spring. In fact, if you think about a regional
sort facility, which employs about 500 handlers, the last one came online the
weekend before Thanksgiving, which would have been 4 to 6 weeks later than
would have been acceptable in any other year.
As Brie stated, in the second quarter, we expanded our coverage of
seven-day residential service from 60% to 95% of the US population. This
expansion required the addition of sorts in automated package processing
facilities as well as the additional preloads that formerly didn’t exist on
Sunday in roughly 50 stations.
Finally, assuming no significant change in the business conditions as we
see them today, we expect margin improvement to continue year-over-year in each
of the next two quarters. Thanks for your question.
Operator: And we’ll go ahead and take our next question from Brandon Oglenski with Barclays. Please go ahead.
Brandon
Oglenski
Analyst,
Barclays Capital, Inc.
Hey. Good afternoon, everyone, and thanks for taking my questions. Maybe
this one is for Raj or Brie. Can you guys just dig a little bit deeper into the ShopRunner acquisition because I think
in the prepared comments and also the release tonight, you talked about how you
really want to integrate better with retailers and customers on an end-to-end
basis? So, is this more about the current user base of ShopRunner
or is this offering incentives to the retailers there or is this even more a
play on the technology of the company? Thank you.
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Thank you, Brandon. Let me start, and then I’ll turn it over to Brie.
Firstly, just to put it in perspective here, the technology and the talent are
very critical components of this, and the fact that the technology platform
that connects brands and merchants to consumers is very important. Now, the
important thing also is the combination of those capabilities with FedEx’s
capabilities, our physical and digital infrastructure.
And we have – ShopRunner being an established
e-commerce platform that directly connects online shoppers with brands and
merchants that they love and trust offering member benefits and the seamless
checkout, and you combine that with our – together, our goal is to create a more
open collaborative e-commerce ecosystem that benefits merchants and shoppers.
So, we think it’s a great marriage. We think this is going to be very
successful as we marry in the technology and talent from ShopRunner
along with our capabilities.
I don’t know, Brie, you want to add a couple of points there.
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
Sure. Thanks, Raj. We’re very excited about the ShopRunner
acquisition, and having Sam and his team join us. We
have some interesting product capabilities that I’m not going to be able to
share all the details at this point. But I think the three things from a
go-to-market and a value driver that we see in the very near term as we’re
looking at the ShopRunner acquisition, the first is
that we have the logistics capabilities to create greater certainty with the
existing ShopRunner offering to consumers. We can
work with their brands to make the reality even more efficient on their current
offering.
Second, with their order catalog and their data visibility into these
brands, we can see upstream earlier. This is an incredible advantage from a
logistics optimization. Third, when you think about the post-purchase
experience, and you can take ShopRunner’s order
catalog with our post-purchase visibility into transit, we think that we will
have a best-in-class post-purchase consumer experience. So, those are the first
three things out of the gate, but we’ve got a lot more to come, and we’re
super-excited. Great question.
Operator: And we’ll go ahead and take our next question from Bascome
Majors with Susquehanna. Please go ahead.
Bascome
Majors
Analyst,
Susquehanna
Yes. Thanks for taking my questions. Looking forward, there’s so many
crosscurrents driving really good results in parts of your businesses and
challenges in others right now. I was hoping you could talk about some of the
FedEx verticals, be they by customer or type of business or product that are
really still quite a bit below the pre-COVID baseline. And whether or not
you’re excited about the recovery in that space as we get deeper into next year
and the year beyond? Thank you.
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Well, let me start by saying that we are excited about our performance
across all our segments of the business this quarter. I mean, it’s just
actually – very excited to see the progress we’re making here. If you look at –
obviously, the fastest-growing segment is e-commerce. And as we continue to
improve density and other metrics in our system, the performance is going to
continue to even get better.
But to your point, the industrial production and the business segment is
just recovering, and that there’s upside opportunity here. The inventory, the
sales ratio, it’s an all-time low on for retail, and it is about six-year low
for manufacturing. So, as they come back and the inventory restocking happens over the next few months, that should be an upside to our core
business as well. So, we are excited about the progress we have made in the
e-commerce space, growing very fast in that space. And the investments that we
made is actually filling right into it.
At the same time, on the international segment, we’re seeing that we are
in – clearly, the capacity that we provide today is a premium. We expect that
advantage to continue. And as businesses continue to recover and the B2B
segment comes back, that should be on top of our current trends. So, that’s
what we expect. COVID-19 is choppy in the immediate short term, but the medium
term, we’re optimistic about where these trends are going.
I don’t know, Brie, if you want to add to that?
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
No. I think you covered. I think the only other detail that I would add
is we’re not quite there yet from a recovery from a B2B perspective. We have
seen strong momentum and some early, early signs coming out of Europe. That’s
obviously where it’s most important to us from a business mix perspective. And
my hats off to the European team; they have done some incredible work this year
while their B2B business has not come back. So, that is additive to where we’re
at right now for sure.
Operator: And we’ll go ahead and take our next question from Scott Schneeberger with Oppenheimer. Please go ahead.
Scott
Schneeberger
Analyst,
Oppenheimer & Co. Inc.
Yeah. Thanks so much. And that’s a great segueway
to my question. I recall you citing on last call, last quarter call that you
had B2B growth volume in August. I’m just curious to hear how it has trended
since then, and you said it grew in Europe. Just if you could differentiate
between Europe and the US, some trends you’re seeing what and you expect.
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Okay. I’ll start, and Don and Brie can help me. As we look at the United
States, yeah, the B2Bs started to go into positive directions at the beginning
of Q2, and this strengthened over the quarter as the industrial production has
started to lap the pandemic crisis here, and then coming back on the other
side.
Across the world, China is leading the way in terms of economic recovery
and manufacturing, and Europe is lagging behind. So, in Europe, we’re seeing
growth, but it’s primarily driven by B2C. And the B2B is still in the
recovering stage below where pre-pandemic levels.
So, Don, do you want to comment on the international segments?
Donald
F. Colleran
President
& CEO, FedEx Express, FedEx Corp.
No. Raj, I think that’s helpful, and not a lot to add other than the fact
that certainly the optimism comes around the continued rollout of the vaccines
on a global basis as economies and countries and companies begin to recover and
open back up, that’s when we expect to see our B2B volume recover.
As Brie mentioned, and you expanded on as well, we’re beginning to see
some signs of life in our European business on the B2B side as well. Only a few
data points, but it certainly introduces some optimism on that. The revenue
growth right now is driven by B2C as B2B continues to improve on a sequential
basis, certainly is additive to the European story.
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Okay. Thank you, Don. Brie, anything else?
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
No. I think you’ve covered it.
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Okay. Thank you.
Operator: And we’ll go ahead and take our next question from Amit Mehrotra with
Deutsche Bank. Please go ahead.
Amit
Mehrotra
Analyst,
Deutsche Bank Securities, Inc.
Thanks. Good evening. Mike, you talked about showing year-on-year margin improvement
in the second half on a year-over-year basis. To be fair, the bar is a little
bit low on that. And I was just hoping you could give us a little bit more
color around that. Do you think the year-on-year margin expansion accelerates?
It was great to see it in the fiscal second quarter for the first time in a
long time. But do you think as some of the costs subside that were specific to
the fiscal second quarter, that we might be able to see some acceleration in
that year-on-year margin expansion?
I mean, just the broader question, too, Mike, if you can address, the
problem for the last several years, obviously, has been the growth in Ground
has been fantastic, but the margins have been impacted negatively as a result
of that growth. With the pricing initiatives and the yield that you guys are
showing, which is incredibly impressive, can we say now that the bottom is in
for Ground margins, and subsequent quarters should see gains on the back of
what we’ve been achieving over the last several quarters?
Michael
C. Lenz
Executive Vice President & CFO, FedEx
Corp.
Okay. There was a lot of questions in there, Amit. Let me try and just
say, look, we certainly highlighted that we are incurring incremental costs and
contingencies related to the pandemic, and that continues to create uncertainty
in our near-term forecast. But as Henry outlined, we’re very confident about
the trajectory of the Ground business and the initiatives we have in place.
Just to elaborate a little further, I mentioned that we anticipate
spending more on capital expenditures in our Ground business for next year. The
increase in facilities, which – that’d be both new automated facilities as well
as of expansion of existing ones, that’s not the only lever we have and are working
on to improve Ground margins and profitability.
We also will continue to deploy technology to further enhance that asset
productivity as well as deeper collaboration with our customers to optimize the
when, where and how we receive the shipments.
So, I’m not going to put a point forecast on things, but we’re trying to
paint the picture here for you of all the initiatives and things that are
coming together that are going to drive that going forward.
Operator: And we’ll go ahead and take our next question from Tom Wadewitz with
UBS. Please go ahead.
Thomas
Wadewitz
Analyst,
UBS Securities LLC
Yeah. Good afternoon. I wanted to see your – the Express performance has
been very, very impressive. You’re doing a great job capturing the opportunity,
I think, in a variety of measures.
One in particular, the strength in international airfreight rate, I was
just wondering if you could give some kind of – help us think about the
magnitude of that, and how should we think about that as a potential headwind
in the future. Is that something to be concerned about as you go to back half
of – or as you go into fiscal 2022, that you might have some giveback on that
benefit from really high international airfreight rates?
Frederick
W. Smith
Chairman, President & CEO, FedEx
Corp.
Don, you and Raj, do you want to talk about that or...
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Yeah. Let me kick it off, and then Don can answer. I think the point
about when the capacity supply and demand start to balance is of, course, we
have to look at that. We feel that as demand comes back, the capacity will be
in short haul for quite some time. And our FedEx capacity will be at significant
premium. And as Brie pointed out in her remarks, there’s quite a bit of runway
ahead of us in this regard.
So, let me turn it over to Don for his comments.
Donald
F. Colleran
President
& CEO, FedEx Express, FedEx Corp.
Thank you, Raj. And thanks for the question. So, let me frame it from a
market perspective. And I appreciate the comments on the Express’s team
performance. Obviously, really proud of what they’ve delivered over the past
couple of quarters.
When we look at the airfreight market, obviously, it’s a derivative of
supply and demand, and conventional wisdom in market forecast would suggest
that we don’t get back to pre-COVID capacity in the marketplace for somewhere
in the range of 18 to 24 months. So, if you believe that to be true and we do,
I think there’s continued reason to be optimistic about the supply and demand
situation as it relates to our business going forward.
As Raj mentioned, as these vaccines continue to roll out around the globe
and economies begin to recover, they’ll recover, I believe, at a faster pace
than the capacity coming back in the market. So, my sense is, again, we don’t
go back to pre-COVID levels in commercial capacity in the marketplace for 18 to
24 months and economies hopefully begin to recover prior to that, it creates an
opportunity from a pricing environment. Brie, I’m not sure if you want to add
to that?
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
I think you’ve covered it, Don.
Operator: We’ll go ahead and take our next question from Jack Atkins with
Stephens. Please go ahead.
Jack
Atkins
Analyst,
Stephens, Inc.
Hey, good evening. Thank you for taking my question. I guess this one’s
for Mike. It’s a question for you on cash flow, if you don’t mind. There’s been
a significant improvement in operating cash flow through the first six months
of this year on a year-over-year basis. Looks like a good portion of that’s
from lower payables. Is that related to the payroll tax accrual holiday related
to CARES Act, first of all? Then I guess more broadly, with an increased focus
on CapEx discipline now, do you anticipate being sustainably free cash flow
positive moving forward, barring something unforeseen from a macro perspective?
Thank you.
Michael
C. Lenz
Executive Vice President & CFO, FedEx
Corp.
Well, Jack, the answer to your first question is two big drivers of that.
We made a $1 billion contribution to our pension plan in the first half of last
year. And then you are correct, the deferral of the payroll taxes under the
CARES Act shows up there at this point. The benefit from that, we’ve deferred
just north of $600 million of payroll taxes under the CARES Act, and those will
pay back in calendar 2021 and 2022. Look, it remains we are fully focused on
improving returns and free cash flow, but I don’t want to get into giving you a
forecast at this stage of the game, but we’re definitely prioritizing that as
well as improving our capital efficiency.
Operator: And we’ll go ahead and take our next question from Jordan Alliger with
Goldman Sachs. Please go ahead.
Jordan
Alliger
Analyst,
Goldman Sachs & Co. LLC
Yeah. Hi. I was wondering if you could put a little longer-term color on
Ground margin thoughts in sort of way the higher amount of residential packages
that is likely to stay in the system from here against some of the things and
opportunities you’re doing around the air-ground optimization, bringing the
postal business in house, et cetera. If you could just – obviously, a good
start on the Ground side, I’m just sort of curious how you think about Ground
out over the next year or two and directionally where that could go?
Henry
J. Maier
President
& CEO, FedEx Ground, FedEx Corp.
Hey, Jordan. This is Henry Maier. As I said, we expect margin improvement
each of the next two quarters year-over-year. I think the important thing here,
as you think about residential, is you’ve got to focus on the transformational
initiatives that have been accomplished and the ones that are yet to come.
We talked about seven-day year-around, 95% of the US population. I’ve
spoken on this call before about the great route optimization technology we
rolled out, we put in the hands of our service providers, the in-sourcing of
SmartPost volume has allowed us to experience a very real return on these
strategic investments. For example, we’ve seen a 22% improvement in stops per
hour Q2 year-over-year.
The average cost per stop has been reduced by 15% year-over-year. And
causing our assets to sweat seven days a week, once again the in-sourcing of
SmartPost has allowed us to reduce our fixed cost per package by 9%
year-over-year in the quarter. And we’ve also seen a material reduction in
miles per stop. These are all of the input cost trends you need to see to win
in e-commerce. So, I would tell you that from where we sit, FedEx Ground today,
we couldn’t be more positive about the future. Do you want to take the LMO
question, Brie?
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
From an LMO perspective, obviously, we’re excited to turn that back on. I
think I covered the percentage of residential that’s already in the network
right now. So, that remains an upside opportunity. We have gained share
consistently over the last 20 years, and we’re very, very optimistic about the
future and opportunities. That’s why I continue to share the growth of
e-commerce in those numbers, 111 million packages in the market by 2026,
there’s some significant room for growth there. So, we’re really excited about
the FedEx Ground outlook.
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Yeah. Can I just add a couple of things here? I mean both Henry and Brie
said it. There are twin areas. One is improved density and efficiency. And
Henry already gave you the evidence of some of those and we expect those trends
going forward. And second, this work on the revenue quality that Brie talked
about. So, those – to look forward, we are optimistic about what Ground can
deliver with these increased volumes that we’re getting. Thank you.
Operator: And we’ll go ahead and take our next question from Scott Group with
Wolfe Research. Please go ahead.
Scott
H. Group
Analyst,
Wolfe Research LLC
Hey, thanks. Afternoon. So, I want to stick on Ground. Do you think the –
is the 7% yield growth sustainable? And maybe since Ground margins aren’t at
double digits yet, do you think there’s opportunity to push that Ground yield
even further? And then just with the pricing, I mean do you – I guess,
directly, do you see the opportunity to get to double-digit margins for a year?
Can you get to low-teens margins for a year in Ground? I guess that’s what
everyone’s trying to figure out.
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
So, we’re going to continue to execute on our revenue quality strategy.
We think that there has been some fundamental shifts
in the market, and you saw the beginning of that this quarter with a 20%
increase in our SmartPost product and the 10% increase from a yield in the residential
business.
We believe surcharges will be a part of our pricing strategy moving
forward for e-commerce. They are a necessary part. We also are going to
continue to work on our product and our customer segment mix. And what do I
mean by that? We are leaning into our Home Delivery product for growth. It is
the best value proposition in the market. No one else can do seven-day. And we
expect to continue to get a premium.
We also expect that that will continue to drive market share from small
and medium customers who cannot move to a local operation, and they really do
value the national speed advantage that we have. So, yes, I continue to expect
strong yield performance for the FedEx Ground portfolio, and we’re confident
that we have started to change some industry trends this year.
Henry
J. Maier
President
& CEO, FedEx Ground, FedEx Corp.
Scott, my crystal ball doesn’t go out much more than six months. So, I’ll
stand by my statement about the next two quarters. I am highly confident of double-digit
margins. I don’t know whether I want to get into a debate with anybody on this
call about teens, so.
Operator: We’ll go ahead and take our next question from Duane Pfennigwerth
with Evercore ISI. Please go ahead.
Duane
Pfennigwerth
Analyst, Evercore
ISI
Hey, thanks. Maybe a question for Raj on collaboration. Can you offer any
metrics on the degree of collaboration between the segments year-over-year? For
example, how much Express volume ran through Ground this quarter versus the
year ago period?
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Okay. We have moved over more than 10 million packages from Express to
Ground. These are primarily – I mean, these are rural and residential packages
that because of e-commerce and the ability for us to have a day-definite system
and a lower-cost day-definite system, we have moved more than 10 million
packages into the Ground system.
In addition, FedEx Freight has done a lot of work for FedEx Ground as
well. They’ve driven 40 million miles, up 80% year-over-year. There were 1.5
million packages that Freight has delivered, which is hard-to-handle packages,
up more than 435%. There are several such numbers, but the collaboration is
very active. And we are making sure that we put the right package in the right
network and the right cost to serve.
Duane
Pfennigwerth
Analyst,
Evercore ISI
Thanks. What inning would you say we’re in?
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Did you say what inning?
Duane
Pfennigwerth
Analyst,
Evercore ISI
Collaboration, what inning?
Frederick
W. Smith
Chairman, President & CEO, FedEx
Corp.
Raj plays cricket. Raj plays cricket.
Rajesh
Subramaniam
President & Chief Operating Officer,
FedEx Corp.
Yeah. Great. There are innings in cricket, too. But yeah – no, we are
just getting started, if that’s what you mean.
Operator: And we’ll go ahead and take our next question from Allison Landry with
Credit Suisse. Please go ahead.
Allison
M. Landry
Analyst,
Credit Suisse Securities (USA) LLC
Thank you. So, I was wondering if you could give us a little bit more
clarity on the increase in Ground CapEx in fiscal 2022. I mean, I guess just
first, what’s the magnitude of the uptick in spending? And more importantly, I
think you had previously talked about not needing to add incremental major hub
capacity given that the growth over the next several years would likely come at
a shorter length of haul and, therefore, you could push volumes out to the
second tier and satellite facilities and really start to leverage the
investments that you’ve made in the stores. So, is that still the right way to
think about it? What’s sort of the nature of the increase in CapEx? So, just
wanted to understand any sort of additional details to sort of get some
clarification on that. Thank you.
Michael
C. Lenz
Executive Vice President & CFO, FedEx
Corp.
Hey, Allison, it’s Mike. So, I don’t have a specific number to give you
on that as we are, as I said, in the midst of formulating our plans and putting
it together for FY 2022. But unquestionably, the sustainability and
acceleration of the e-commerce business that we have seen that everybody has
highlighted is here to stay. And Brie spoke of this tremendous shift in the mix of residential business with not much advanced notice, yet Ground
has quickly adapted, adjusted, and was able to increase margins.
So, that’s a testament to the execution of the team on all fronts, the
commercial teams, the operational teams. So, that volume is going to keep
coming. So, it’s essential that we do invest in certain assets going forward,
but it’s not going to be the same nature and configuration as you might
historically have considered it. So, I mentioned it’s facilities, it’s
technology, it’s how we work with customers. But I’ll let Henry elaborate a
little bit more on just kind of the nature of the facilities and how that works
so you have a better sense of it.
Henry
J. Maier
President
& CEO, FedEx Ground, FedEx Corp.
Yeah. Thanks, Mike. Allison, I think the way you should think about this
is we’re going to invest much more heavily on the edge of our business, which
is the last mile space. So, if you think about this, our focus is going to be
on much smaller automated satellites and stations, regional sortation
facilities, which, if you’re not aware, sort about 12,000 to 15,000 packages an
hour, they tend to be inbound only so that we can process direct loaded volume
from large retailers.
They are much less costly to build and operate, because what we do is we go in and we modify an existing building. And we are
able to get these up much quicker. In fact, the time to get them up and running
is measured in months instead of years like some of the bigger construction
projects we’ve had. They’re solely designed for the sortation of regional
packages. And I think when you think about regional, you should think about
overnight mainly. And one of the great advantages they have is, is that they
can serve as a relief valve for spillover sortation at peak.
There’s a lot of other levers we can pull here. The ideal situation for
us is to be able to load direct to van, not have to go through a destination
facility. We’re investing heavily in technology tools that will give us the
ability to do that. There is a lot of things we do, particularly this time of
year at peak with mobile docks and annexes. And the ability to waive dispatch
and run dual pre-loads in facilities that allow us to dual-use facilities when
volume is at the level it is now that don’t require us to invest in the
traditional brick-and-mortar.
And all that being said, we’re always going to have brick-and-mortar in
our business, but many of the transformational initiatives I’ve talked about
are intended to give us better real-time information about what’s coming, so we
can make decisions that reduce our input costs. The main area would be
re-handles, so that we can bypass a brick-and-mortar facility all together and
load right to a vehicle that’s going to go deliver those packages in the neighborhood.
So, hope that answers your question.
Michael
C. Lenz
Executive Vice President & CFO, FedEx
Corp.
And, Allison, that’s density yet again. You’ve heard us say it numerous
times, but that is density and how we manage that yet again.
Operator: And we’ll go ahead and take our next question from Brian Ossenbeck with
JPMorgan. Please go ahead.
Brian
P. Ossenbeck
Analyst,
JPMorgan Securities LLC
Yeah. Thanks. Good evening. So, another one for you, Henry, can you just
talk about peak season costs, how they came in versus expectation? Sounds like
you had to make a few adjustments, obviously, with everything that’s happened.
So, do you feel like you’re well suited to handle the rest of peak and the
returns after that? And then maybe you can just give us an update on – I think
last call, you were talking about maybe needing to shift some customers over to
the weekend, possibly incentivizing them to change their behavior a little bit.
I imagine that’s probably not the case anymore, but if
you can give us an update on that, too, I’d appreciate it.
Henry
J. Maier
President
& CEO, FedEx Ground, FedEx Corp.
Okay. I’ll take the first part and then I’ll let Brie take the second.
But let me talk about peak. First of all, we haven’t actually had a conversation
about that.
And since we’re in the midst of it, let me begin by saying I couldn’t be
prouder of the Ground team. And what they’ve been able to accomplish this year,
just like about everything else in 2020, which has been an extraordinary year,
peak this year has been pretty extraordinary.
All the things that I talked about in terms of investments, resources,
capacity, are all really driving one of the best peak seasons we’ve ever had in
spite of COVID and all the other challenges we’ve had in this business. On
average, FedEx Ground is delivering 25% to 30% of the volume a day early, and
the average package spends about 2.4 days in the network in terms of transit,
which is faster than last year in spite of the volume and the challenges I
outlined.
I think the issues this year on the cost side were timing and a lot of
unknowns. I talked about the building – the facilities came on much later this
year because most governments were shut down for two months. So, we couldn’t
get permitting that really slowed the timeline here. And even though our
property and engineering team did a fabulous job in the race to the finish line
here to get them up and running, facilities came on a lot later this year than
normal.
In terms of the resources, particularly in the case of handlers, I would
just say two things. When you bring on resources at the rate
we’re bringing them on, they’re not very efficient. It takes time for these
people to be taught their job. And there’s this ramp-up of two, three, four
weeks it takes for a handler to learn their job. And once again, I mean, we’ve
got a sizable portion of the handler workforce that is not as productive as
they could be.
I think, I said on the call at the end of Q1 that our facilities are not
designed for social distancing. So, out of an abundance of caution in keeping
safety above all in our business, we’ve got to staff and man these buildings in
such a way that we can keep our people safe while they’re at work. The
unintended outcome of that is, is that we don’t get the desired or engineered
throughput through all these buildings we would in the time pre-COVID. So,
those are the things that are probably most material to the cost side of this.
As I said, also in the earlier question, we pulled peak settlement for
our service providers forward because we knew they were going to have
challenges with the recruitment of drivers. And we recognized early on that
vehicles were in short supply. Once again, automotive manufacturing plants were
shut down for two or three months, and new and used vehicles in the market
right now are almost impossible to find. That meant that rental vehicles had to
be procured much earlier and with commitments that were much longer than
normal. And we made adjustments to settlement in those situations to try to
defray some of the costs for our service providers.
Finally, let me just say one last thing. Our ISPs have done an
unbelievable job this year at peak. I’ve lost track of the number of days we’ve
had peak package delivery days, peak stop days, et cetera, and they have
stepped up every step of the way this year. And I would reinforce again that
the ability and flexibility of those small businesses to make decisions on the
fly based on local conditions and the data we push to them about what their
delivery is going to look like the next day, there’s nothing short of
unprecedented and it is truly a differentiator on our business.
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
And to answer the second half of your question, I think, Jill Brannon and
her sales team have just done an incredible job leveraging our weekend
capacity. The incentive is you use the weekend or you
lose the capacity. And that has worked. Do we have opportunity? Yes, I believe
we have incremental opportunity to further improve the productivity and density
on the weekends. But again, we have created a peak capacity strategy that does
require customers to pulse their volume more equally throughout the week. And
our best largest customers are doing just that with us. They’ve been great
partners, and I think you’ll continue to see us do a good job of that at peak
moving forward.
Operator: And we’ll go ahead and take our next question from Allison Poliniak with Wells Fargo. Please go ahead.
Allison
Poliniak-Cusic
Analyst, Wells
Fargo Securities LLC
Hey. Good morning. So just to follow on that question, just you’re going
back to that and working with your retailers to better balance the peak. I
guess, one, was there a noticeable, I would say, pull forward about some of
those volumes in November that was noticeable to you? And it sounds like the
volumes are – you’re seeing some level of operational balance in December in
terms of the peak. Any incremental color you can give there?
Brie
Carere
Chief Marketing and
Communications Officer & Executive Vice President, FedEx Corp.
Sure. We really were hoping to change shopping behavior, and we really
didn’t see that, to be completely honest. We have seen, as a result, I think
there’s far more awareness from consumers of the unprecedented year we’re
having. What we did see is, the Ground team and the sales team did such a great
job educating the merchant and the customer that we saw a lot better planning.
And as a result, we saw volume, and we are seeing volume earlier in the
Express network. So, it was successful in that we were able to move some of the
higher-value e-commerce into the Express network. And we have been successful
in smoothing day of week within Henry’s network. We were not successful in
getting all consumers to shop before the cyber weekend. So, that remains a
goal, let’s just say.
Operator: And we’ll go ahead and take our next question from David Vernon with
Bernstein. Please go ahead.
David
Vernon
Analyst,
Sanford C. Bernstein & Co. LLC
Hey, good afternoon. Brie, I wanted to follow up on that topic around
sort of collaboration, right? You’re reporting some pretty healthy rate
increases on the B2C side, 20% for SmartPost, 10% for the residential. How is
the discussion going with retailers at this stage? Are they accepting this as
take it or leave it?
Or how are they thinking about your product in the context of pretty
significant rate increases. And as you think about the negotiations with them
going forward, are they being more willing to participate with you on things
like joint process, day of week injection, that kind of stuff that would help
you kind of build a deeper relationship on the customer side?
Brie
Carere
Chief Marketing and Communications
Officer & Executive Vice President, FedEx Corp.
I would say, in general, the conversations have gone very well. The
largest and most successful retailers in the US, they understand how important
FedEx logistics is, quite frankly, to their growth strategy. And so, I think
we’ve had some tremendous success. I do want to be clear on the SmartPost. It
was about trading out as well. That’s a big part of the strategy. So, the
customers that understand the value we bring, they’ve been great partners, and
that’s enabled us to move forward.
And for those who don’t value our speed and our differentiated value
proposition, as you can see in our growth numbers, there were lots of customers
who did value that. So, it’s not a one-size-fits-all, but overall I would say
that the team’s done a great job and that come January, we’ve already had – we
have a full – Jill’s calendar for January is full as she moves into peak
planning for next year, and I think this year has set new precedences
for many years to come.
Operator: And that does conclude today’s question-and-answer session. I’d like to
turn the call back over to Mr. Foster for any additional or closing remarks.
A.
Mickey Foster
Vice President, Investor Relations, FedEx
Corp.
Thank you for your participation in FedEx Corporation’s second quarter
earnings conference call. Feel free to call anyone on the Investor Relations
team if you have additional questions about FedEx. Thank you very much. Bye.