FedEx Corporation

Good day everyone and welcome to the FedEx Corporation first quarter fiscal year 2021 earnings conference call. Today's call is being recorded. At this time I'd like to turn things over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead.

Good afternoon and welcome to FedEx Corporation's first quarter earnings conference call. The first quarter form 10Q 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 harper 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 the press release. Please refer to the investor relations portion of our website at FedEx.com for reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us on the call today are Fred Smith, Chairman, Raj Subramanian, President and Chief Operating Officer, Alan Graf, Executive Vice President and CFO, Mark Allen, Executive Vice President, General Counsel and Secretary, Rob Carter, Executive Vice President, FedEx Information Services and CIO, Reed Carrere, Executive Vice President, Chief Marketing and Communications Officer, Don Colleran, President and CEO of FedEx Express, Henry Mayer, President and CEO of FedEx Ground, and John Smith, President and CEO of FedEx Freight. After our Q&A session today, Fred and Alan will have some additional comments. And now Fred Smith will share his views on the quarter.

Thank you,

Mickey. First and foremost, my sincere thanks goes to our team members for their outstanding and ongoing efforts to respond to COVID-19 challenges. At FedEx, keeping the world connected in good times and during periods of great need is who we are and what we do every day. With safety as our first priority, we have worked tirelessly to keep the world's industrial, health care and at-home supply chains flowing during the pandemic. Detailed planning is underway at FedEx to distribute vaccines at scale worldwide once approved. Our earnings growth underscores the importance of our business initiatives and investments over the last several years. In many ways, the world has accelerated to meet our strategies and we remain very confident in the future of FedEx. This will be Alan Graff's last earnings call and we are very, very grateful for his more than 40 years of dedicated service. Alan has been a part of every significant decision and helped navigate tremendous growth, strategic investments, international acquisitions and global and market change. FedEx would not be the globally admired corporation it is today without Alan's leadership. Mike Lentz will assume the role of CFO beginning 22 September and Alan will remain the senior advisor until the end of December. At the end of this call, I will ask Alan to say a few words. I would also like to thank John Edwardson who is retiring from the FedEx Board of Directors for his wise counsel and more than 17 years of service. Our Board of Directors has approved resolutions of appreciation for both Alan and John that provide in greater detail their invaluable contribution to FedEx's success. I will share the highlight of these at the 21 September shareholders meeting and the resolutions themselves will be posted on our investor relations website. Let me now ask Bree, Raj and Alan to provide their comments after which we will take your questions. Bree.

Thank you, Fred. Good afternoon, everyone. The economic outlook remains uncertain due to the continued impact of COVID-19 around the world. Until a vaccine is available globally and the would normally have gone into services has shifted towards goods with goods spending boosted further by demand. Retail sales are growing again year over year and e-commerce is booming at holiday levels and of course more to come on that in a moment. The service sector severely impacted by the pandemic and high unemployment rates continues to weigh on growth. Outside of the US, recovery has taken hold as well as coronavirus related restrictions have been loosened. Manufacturing output is improving off the April low and trade activity is on the mend. Trade global trade volume which declined 10% in the first half of calendar year 2020 have resumed sequential growth. However, given the depth of the downturn, we expect global GDP and trade growth on a year over year basis to remain negative for the remainder of this calendar year. There are two trends that have had substantial impact on our industry and showcase FedEx's credible value proposition. The first key trend is the dramatic reduction of air cargo capacity as a result of the significant loss of commercial airline capacity. Current estimates indicate that freighter capacity now accounts for 66% of total air capacity on the transatlantic lane, 83% on the trans-pacific and 80% on the Europe to Asia lane. This compares to pre-COVID freighter capacity of 33% for transatlantic, 59% for trans-pacific and 50% for Europe to Asia. FedEx Express is incredibly well positioned to benefit from a constrained air capacity market. We've experienced elevated demand enabling both the expansion of existing customer relationships and the development of new customer relationships. Ultimately, we believe this is an opportunity to disintermediate traditional freight forwarders commercial relationships. Internationally, demand was strongest on the Asia trans-pacific lane with lower percentage of PPE shipments month over month. Europe's demand continues to be driven by the growth of e-commerce. The international team has done an excellent job managing demand and mix. As you will note, our premium international priority package volumes were up 31% year over year. We continue to monitor the air freight pricing environment and air freight yields remain strong. We are renegotiating base contracts to better reflect current market conditions and to establish longer term commitments. The second and perhaps more profound trend is the acceleration of e-commerce. Pre-COVID, we projected that the U.S. domestic market would hit 100 million packages per day by calendar year 2026. We now project that the U.S. domestic parcel market will hit this mark by calendar year 2023, pulling volume projections forward by three years from the previous expectations. E-commerce fueled substantially by this pandemic is driving the extraordinary growth. In fact, 96% of the U.S. growth is expected to come from e-commerce. While e-commerce as a percentage of total retail has declined from its apex in April, it remains elevated. E-commerce as a percentage of total retail for Q2 calendar year 2020 is estimated at 21% compared to 15% in Q2 calendar year 2019. We have built a strong portfolio of e-commerce services and digital solutions that offer the value proposition in the market with best in industry yields. In the United States, FedEx is unsurpassed when it comes to our ability to make residential delivery seven days a week year-round to optimize network capacity and enhance the customer experience. Sunday coverage now reaches nearly 95% of the U.S. population. And as I have mentioned on previous calls, Returns reinforces the integral value proposition of FedEx services and e-commerce while increasing commercial business. Returns drive the e-commerce volume into our retail channels. In the first two months of fiscal year 2021, more than 50% of express and ground returns were tendered at retail, increasing from 44% for the same period last year. In August, we completed the Dollar General expansion. FedEx has more than 27,000 staff locations with 92% of the U.S. population now with within five miles of a FedEx pickup or drop-off location. Our vast network and proximity to consumers provides small and medium e-commerce merchants with the buy online pickup and store convenience without the brick and mortar expense. FedEx delivery manager enrollments increased more than 60% in fiscal year 2020. And today, FDM enrollees are interacting with deliveries more than they ever have before. As we look ahead to peak, we believe e-commerce will keep volumes elevated and it will be a record-breaking peak. We are prepared for what we're calling the Shipathon and we are warmed up and we're ready to deliver. As we prepare for a peak like no other, we continue to be very focused on revenue quality while ensuring we are providing our customers with the best service possible during this challenging time. We will be implementing several peak surcharges to ensure that we are covering the increased cost of delivering shipments and those customers who are consuming the largest proportion of capacity in our network are charged accordingly. These peak surcharges will help us manage increased demand while maintaining strong levels of service for our entire base of customers. We are collaborating with our largest e-commerce customers to leverage capacity and to develop creative solutions to smooth out demand spikes during the peak season. We are working diligently to protect our small and medium customers from the impact of most peak surcharges to ensure that their nascent recovery continues to grow post-COVID. The small and medium customer segment with our fastest growing segment with high double-digit revenue growth in the quarter and FedEx continues to champion and support their recovery. Finally, as we prepare for vaccine distribution, we believe the most critical attributes needed to tackle the size and scale of this monumental supply chain initiative are visibility, extensive temperature control and intervention capabilities. That's why we were thrilled to announce the launch of FedEx Sensorware ID yesterday. Sensorware ID is the latest in next generation sensor-based proprietary FedEx technology which provides enhanced package visibility for shipments using a compact sensor that transmits location every two seconds. Sensorware ID will initially be applied to first overnight shipments within the U.S. domestic express network and is eventually planned to include other premium services. We believe this innovation is a critical feature to the anticipated vaccine distribution efforts and the continued movement of life-saving pharmaceuticals and medical supplies. Beyond healthcare, we are confident this innovation will attract customers in other high-value industries such as aerospace. With that, I'll turn it over to Raj for his remarks.

Thank you, Bri, and good afternoon. Let me start by echoing Fred's sentiments about the valiant effort of our team members during this historic time. We are exceptionally proud and grateful of our FedEx team members who work diligently each day to deliver the Purple Promise, especially in the midst of the ongoing global pandemic. Thank you, Team FedEx, for your commitment and dedication during this dynamic time. FedEx has nearly 50 years of experience flexing our networks to stay ahead of what's next. Over the past couple of years, we've launched a number of strategic initiatives to directly address e-commerce opportunities. To recap, this includes expanding U.S. ground residential delivery to every day of the week, integrating SmartPost package volume into the ground network, investing in technologies that enable real-time decisions and optimize virtually all aspects of our operation, building our network's capabilities to more efficiently handle an increase in large items such as furniture, exercise equipment, and TVs, offering the FedEx's first FedEx branded -the-door service, which moves larger, bulkier items into customers' homes and businesses, and accelerating the expansion of a retail convenience network with Dollar General, Walgreens, and our own FedEx office locations. While our strategy did not change, the timing certainly did. The growth that we expected to see over a period of three to five years happened in a period of three to five months. Our strong financial results from the quarter are largely driven by the excellent execution of our aforementioned future-ready strategy coupled with the acceleration of e-commerce trends. You're also happy to note that our B2B volumes across the segments have continued to steadily improve over the summer, with ground B2B average daily volume in August exceeding prior year levels. As we look to Q2, we enter what we expect to be a peak holiday shipping season like no other in our company's history. We're working closely with our customers and building solutions to enable them to succeed. We're also adding more than 70,000 positions in key markets across the United States. New and expanded ground facilities planned prior to peak will provide additional strategic capacity, including six regional sortation facilities, each strategically located to short haul solutions for large retailers, four new automated stations, eight new or expanded large package facilities, and 50 existing facilities are being expanded with additional material handling equipment and automation. Additionally, we are optimizing the use of our existing capacity through seven-day year-round use operations, expanding and adding stocks to dozens of facilities, and repurposing smart ports facilities for ground package sortation. Many elements of the ground transformation are on track for completion this fall, positioning us to improve last-mile efficiency as we serve the rapidly growing residential market. As of this month, our route optimization technology is available to service providers operating out of 95 percent of our facilities, and Sunday residential delivery is available to nearly 95 percent of the U.S. population. Smart ports integration will be completed next month, thus increasing density and driving down our cost to serve as ground residential volume is sorted and delivered in one network this holiday season. Now turning to FedEx Express. Q1 marked a historic start to fiscal year 21 driven by strong revenue trends globally and relentless execution of our ongoing strategic initiatives. With air capacity at a premium, we are positioning our assets towards our most profitable customers to enhance our revenue quality. We continue to pursue actions to further transform and optimize the FedEx Express international business, particularly in Europe, including expansion of our e-commerce capabilities. The rationale for the TNT acquisition remains sound, and the benefits will accelerate as we complete full network integration over the next 18 months. We expect to complete the final phase of international air network interoperability in early calendar 2022. The acquisition of TNT provides us with a strong portfolio that we can build on and compete with in Europe. Having said that, we clearly understand that there's a significant opportunity ahead of us to improve our performance in the region. Our European team is hard at work to execute that mission. Let me also take this opportunity to highlight FedEx Freight for delivering outstanding results this quarter, including record quarterly operating income and the highest operating margin since fiscal year 2006. These results reflect Freight's commitment to profitable growth and quality, a laser focus on safety, and the ability to manage the network to volume levels. Collaboration between operating companies reached historic levels in Q1. Last mile optimization, which allows us to flex our network, reduce cost, increase delivery density for residential and rural packages, has successfully launched in 57 origin markets. FedEx Freight has provided more than 20 million miles of road and intermodal support and delivered more than 750,000 non-conveyable shipments for FedEx grounds so far in fiscal year 21. To put this in perspective, Freight had never delivered a ground package before May of this year. The support in Q1 alone far exceeds the less than million miles that Freight had provided ground throughout fiscal year 19. Our FedEx logistics and FedEx Express operating companies continue to work together to secure air chargers for customers in the U.S. Before I close, I'd like to circle back to Barry's comments about yesterday's launch of Sensorware ID and the value our sensor-based technology brings to the healthcare industry. We recognize that shipping vaccines is complex and critical work. The FedEx network is well positioned to handle these shipments with our temperature control solutions, real-time monitoring, intervention capabilities, and of course our unparalleled network. Today we have more than 90 cold chain facilities across America's Asia, Australia, and Europe and plan to open additional facilities in the coming years. Simply put, FedEx is the transportation and logistics provider with the network, technology, and know-how to distribute vaccines when they're ready. Let me close by making three broad points. Number one, everyone is of course aware of the value our global network provides to the movement of the industrial economy highlighted with such clarity by the healthcare sector in recent times. It is now also abundantly clear the critical role that our industry plays in the growth of e-commerce. Number two, within our industry, the FedEx portfolio is becoming increasingly differentiated. And number three, our foundation is solid and I'm confident that the best years for FedEx are ahead of us. Now before I hand it over, let me also add my sincere thanks and appreciation to Alan for his more than 40 years of service to FedEx and incredibly almost 30 years as CFO. His contributions to FedEx are legendary and on a personal note have certainly benefited from his wisdom and counsel, especially during the past 18 months. So now let me turn it over to Alan D. Graff for his final quarterly earnings remarks as Chief Financial Officer of FedEx Corporation. Alan. Well

thank

you

very much Raj and good afternoon everyone. I'm very proud of our first quarter performance. Adjusted operating margin improved 240 basis points year over year to 8.5 percent as FedEx expressed adjusted operating income more than doubled and adjusted margin improved 390 basis points. FedEx ground operating income increased 30 percent despite a significant mix shift to residential delivery and FedEx freight operating income increased 41 percent despite a 9 percent decline in average daily shipments. All totaled, our first quarter adjusted operating income increased 56 percent year over year. Primarily due to international priority volume growth of 31 percent, a surge in demand for U.S. residential delivery, yield improvement at FedEx ground and FedEx freight, a 130 million dollar benefit from an additional operating day, a 65 million benefit from a reduction aviation excise taxes provided by the CARES Act and a better alignment of our expenses especially at FedEx freight. These factors were partially offset by higher costs driven by the package volume surge and expanded service offerings at FedEx ground, increased variable compensation expense and an approximate 100 million dollars in COVID-19 related costs to ensure the safety of team members and customers. Variable compensation expense increased 195 million dollars year over year with approximately half of the increase due to a reversal of long-term incentive plan accruals in the prior year period. Our effective tax rate was 22.5 percent for the first quarter compared to 25.2 percent in the prior year period. This year's tax rate was favorably impacted by changes in our corporate legal entity structure and increased earnings in certain -U.S. jurisdictions. We ended the quarter with seven billion dollars in cash and cash equivalents and with 3.5 billion available under our credit facilities. Last month we issued 970 million dollars of pass-through certificates with a fixed interest rate of less than 2 percent. The certificates are secured by 19 Boeing 767 and 777 aircraft. This transaction provides us additional liquidity flexibility as we move forward and affirms the availability of financing in the cargo aircraft market despite the uncertainties and unprecedented disruption in commercial aviation. Looking forward, we are not providing a forecast of expected earnings per share for fiscal 2021. While business demand improved in the first quarter, continued uncertainties cloud our ability to forecast full-year earnings. However, based on the current trends in our business, we anticipate increased demand to result in higher 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 FY21. If our current trends continue, we expect certain expenses, including higher variable incentive compensation accruals and increased supplies and other costs related to the COVID-19 pandemic, to remain headwinds in fiscal 2021. We incurred $49 million in TNT integration expenses in the first quarter, down from $71 million last year. We expect to incur approximately $175 million of TNT integration expenses this fiscal year. The aggregate TNT integration expense is still expected to be approximately $1.7 billion through the completion of our physical network integration in FY22. Our FY21 capital expenditure forecast has increased slightly to $5.1 billion, driven by additional capacity initiatives to support increased volume levels. The new forecast is $800 million lower than last year's capital spending. I'll conclude by re-emphasizing that we expect to continue to benefit from our strong position in the U.S. and international package and freight markets, yield improvement opportunities, and cost management initiatives. Now the operator can begin the Q&A session.

Thank you. At this time, if you do have a question, please signal us by pressing star one. Again, that will be star one for questions. We'll hear first today from Tom Watowitz with EUBS.

Tom Watowitz, UBS Director of International Development and Trade, UBS. Yeah, good afternoon and Alan, congratulations again. You know, great, great career and wow, what a way to, you know, sign off with such a strong quarter. The, let's see, I wanted to ask how you think about the trends in the business in terms of, you know, were there some things that you think fell off in the quarter, would fall off, or do you think the performance, you know, expressed ground from a revenue and margin perspective are likely to continue and you got to forecast earnings kind of, you know, accordingly?

Tom, thanks for your kind comments. I appreciate them. I will say this, knowing that I was going to get a couple of forecast questions. I did work really hard this time to give you two howevers and a reemphasize in my opening remarks. And I would think if you would go back to those, that's about as good as you're going to get from me today. You know, Mike Lenz is probably going to be in the same boat in December as I am today with all these uncertainties. It's just really too difficult to say, but I do, I did say if current trends continue, I thought we'd improve our operating incomes at all three of the major opcos in 2021.

Okay, was there anything that was one-timish kind of in the quarter or not?

Well, fortunately for me, I had planned years in advance to have one extra operating day this quarter when I knew I was leaving. But other than that,

nothing. We'll hear next from Jack Atkinson, Stevens.

Great. Good afternoon. Congratulations on a great quarter. Now, let me echo Tom's congratulations on your retirement. I guess this one's for Raj, but I would appreciate Bree's thoughts as well. You know, the pulling forward of your 2026 domestic growth expectations forward to, you know, by three years to 2023 indicates to me that what you're seeing is more than sustainable. So my question is, you know, when you think about your express, your ground, your freight networks, where do they stand today in terms of capacity utilization? How do you think about balancing the need to remain capital disciplined and upgrading your revenue on one hand versus the desire to grow and participate in such a strong market tailwind on the other hand?

Let me start first and then Bree can add to it. Clearly, we think the same thing. I think the e-commerce market is large and it's growing and the growth has accelerated as pulled forward by three years. And so, you know, that's clear now. The second thing that's clear is the value that FedEx provides to the growth of e-commerce. We work strategically with several retailers around the world and particularly in the U.S. to provide the solution. So we are, you know, when you hear stories about e-commerce growth across the different retailers, you can bet that FedEx is behind those stories. And thirdly, we are going to be very disciplined in how we manage capital and our revenue quality going forward. But, you know, we are most importantly working to provide the best solution possible for our customers, working hand in hand to be creative in solutions for e-commerce and working strategically with them. So, Bree?

Really not much to add. The only thing I will say is Henry and I are lockstep. We're trying to thread that needle of improving quality. But also, again, a reminder, we keep talking about Sunday as a delivery advantage from a customer perspective. It's also an incredible advantage from a capacity perspective. And we are strategically leveraging that, partnering with customers who can pull volume forward into the weekend. And I really don't think that that has been factored in previously. And customers understand this. And it's a huge strategic advantage going into this peak and several peaks in advance.

Bree, there's another one there. Why don't you take it? We just handed it to you there.

Sure. I've also got a question about Walmart's new subscription service, Walmart Plus. So, you know, I can't talk a lot about the relationship. Obviously, it's one we value very much. It's strategic. It's long term. And we're committed to growing with them. We have a very, very healthy partnership there. We're very excited about it. There's also some questions here about same day. I want to highlight as we think about the market growing, the market's essentially going to double in size by 2026. So when I give those numbers, I think that's the other thing that's been lost is that the market's going to double by 2026. Same day from an e-commerce perspective remains a very tiny percentage of the market. So we continue to be focused on the remainder of the market. But we're very excited about our partnership with Walmart.

I should note when you talk about the seven day network, it's not only capacity and the advantages that Raj and Bree mentioned, it also is very cost effective because it spreads the fixed cost across many more units.

Weatherby with Citi.

Thanks. Good afternoon. I guess I wanted to ask about the pricing strategy going forward. So surcharges are coming in and it appears you're having some deep impact on deals, particularly on the ground side. As you think about maybe the next six months or so, how you might actually the pricing opportunity, how much do you think comes to the surcharges? Do they have the risk of being a little bit more temporary and how much can you start to embed in longer term contracts as you move to the next six months?

So I think everybody's aware from a domestic perspective, we put in our surcharges on June 8th. That was the 30 cents and the 40 cents for SmartPost, the 30 cents being for the residential surcharges. We have announced that we've had to increase those surcharges as we head into peak. The oversized portfolio will increase in early October and then we will increase our holiday surcharges from November through to January 17th. So surcharges are certainly an important part of our revenue quality, but I would say that they are one piece of that. We have actively had conversations with our top 25 and now moving to our top 100 customers and we've got a multi-tiered strategy here. As I talked about earlier, we are rewarding customers that can pull volume forward. We are rewarding customers that can integrate their supply chain that are open to longer term contracts. And of course, from a capacity perspective, we are no longer just taking inbound forecasts. We are working with customers and we are having kind of a balanced conversation between base yields, surcharges and capacity management. So it's a multi-tiered strategy. Most importantly, we're planning for the long term. We want strategic relationships. We want to partner with customers that are going to win in the market and we think we're doing a really good job of that. My hat's off to the sales team because they've just done an excellent job with this.

We'll move next to Allison Landry with CreditsList.

Thanks. Good afternoon. So your main competitor signals that XG&A could be a big focus for cost reductions. And maybe if we think broadly about FedEx as a world cost structure, do you also see opportunities to lower XG&A? In other words, what are some of the incremental cost opportunities that you have going forward beyond the T&T integration, smart post integration, et cetera, that we might be able to think about in terms of margin improvement going forward? Thank you.

Allison, I think we've done a really good job with XG&A. Obviously one of the headwinds is a good one. Is if we're able to pay additional incentive compensation to our teammates for the great job that they're doing versus what we've been able to do in the past. I think our XG&A is structured such that we can grow very rapidly with very little addition to our XG&A going forward. We're becoming much more productive. I even have bots in the accounting department. And I'm very excited about where we stand in that regard. We'll continue to work very hard on productivity and density and stops per hour. Our new airplanes provide us greater reliability and lower cost almost any way that you can measure it. And those will continue. So I think that we're rigged for not only great pricing and revenue performance, but also cost performance going forward.

And from Goldman Sachs, we'll move next to Jordan Alger.

Yeah, hi. Congratulations, Alan, on your retirement. My question is on margin seasonality. Realizing this is not a particularly typical year, would you anticipate, though, a sort of typical ebb and flow of ground and express margins as we move through the quarters from here? Or could it be something that alters the normal patterns?

Thanks. I'd say that the history is probably not as good a predictor of this year as it otherwise has been. You're right about normally our summer is weaker and our fourth quarters are stronger. But the acceleration of the traffic that we've been able to handle this quarter was so much bigger than a year ago as to be almost unbelievable. When COVID hit, obviously, we took some hits. So it's going to be spotty. And I'll stand by my two howevers and my reemphasizers as the rest of my forecast.

We'll move on to Duane Fittingworth with Evercore ISI.

Thanks so much for the time. A question for you on Europe. Some of the investors we spoke with were looking for better quantification of what a turn in Europe could be worth. Can you speak to how much TNT is holding back express margins currently? And maybe can you frame the opportunity for profit improvement in Europe?

Let me start and I'll give it to Don Coleran for his comments. Obviously, we're not going to be able to quantify to the level that you like. However, we are clearly that's our biggest opportunity ahead of us. And international markets is to make sure that we perform better in Europe. I think, you know, the integration activities of TNT have gone apace. And we're, you know, we're in a position now to take advantage of the portfolio that we have to do exactly that. Just to remind you, before TNT acquisition, you know, we were heavily good. We had Intercontinental Express and Intra-European but we didn't have a presence in the Intra-European ground or the domestic markets. Now we do. And so this portfolio is going to stand us in good stead. And we believe that's a good opportunity ahead of us and the team is very focused on executing against that plan.

Don? Thanks, Roger. A couple comments, one about Express. I'll quickly get to what our plans for our Europe. First, I want to thank and recognize the amazing Express unit, men and women of that team that put together a fantastic first quarter. Greatly supported wonderfully by our commercial partners in sales, marketing and IT that really made the quarter the historic look that it is. However, at Express, as a coach from New England once said, we have moved on to quarter two. We've got to head down and we're focused on peak season planning as well as hoping that a vaccine is around the corner and we're uniquely positioned as Roger said earlier to handle that with our global network. When you think about Europe though, you need to think about what Roger said earlier. Essentially where we told the street we would be in terms of our transformation and integration by April of 2022, we'll hopefully be fully integrated on the air side. But we have really solid plans for our European theater. We have an excellent team on the ground that's supported by amazing team globally. And as we are in the rest of our units and regions, we're focused on execution. And I just think if you watch the team execute on these plans, they're solid and they have a track record of making things happen and we expect that to be the case in Europe as well.

We'll move on to Scott group with Wolf Research.

Hey, thanks afternoon guys and best of luck in retirement. So I wanted to ask if the demand is still there as we get into peak season, does the ground network have the capacity to maintain 30% volume growth and repeat and then express yields were still down here over the year with all the pricing strategies going on. Do we see opportunities to start seeing express yields increases?

Scott, this is Henry Mayer. We've been operating at peak since March. So the stepping off point for peak this year is frankly not as much as it's been in years past. You know, it's important to point out here some of the things that have already been said. We're operating a seven day network every day of the week year round. We will have smart posts fully integrated into the network by peak which allows us to repurpose 28 former smart post facilities for large and small package operations and ground sortation. And I might add that's pretty cheap capacity to get. We're running much higher yield yielding packages through it than we have in the past. And you know, as Fred pointed out, better asset utilization lowers fixed costs across the whole network. In addition, you know, you saw the announcement on 70,000 new hires for peak. That's on top of a historic number of employees at FedEx ground right now. Our service providers have stepped up and hired tens of thousands of new drivers since all of this began back in March. We're adding six regional sort facilities, four new automated stations. We have about 50 projects underway which include expansions, additional automated sortation capabilities and material handling and then all the other things that we typically do at peak in terms of being able to squeeze additional capacity out of the network for a fairly short period of time. So we're highly confident that we're going to have a great peak this year. It's going to be busy. But nevertheless, I would say that the ground team is ready.

Let me take the international yield question. So I think most important to understand is if you look at the yield, half of the impact for both domestic express as well as international express with fuel. When you strip out the fuel impact, there was pressure from a weight per package perspective and the growth of e-commerce led by growth. When we're very excited about this growth, Europe outbound from an e-commerce perspective. That being said, we're doing a really good job partnering with Don and his team on density and the yield per pound is up significantly. So you can't just look at international express yields. Quite frankly, just at the shipment level, you've got to look at yield per pound and overall from a network perspective, total express yield per pound is up 11% year over year. So we feel really good about the overall performance from a yield perspective with those things taking into consideration.

From Wells Fargo, we'll move next to Allison Poliniak.

Hi guys, good evening. So just keeping on ground, nice incremental operating leverage within that business. Raj, you had talked a little bit about, you know, some maybe some obviously some more incremental opportunity out there. But if you look at that business today, you know, would you think longer term, is there anything structural that would hinder you guys getting back to sort of a mid-teen operating margin level in that business?

Um, firstly, the most important thing about our the network that we have provided with the ground is the better value proposition in the marketplace that we provide our customers. And I think that's translating into more business and more profitable business. And the things that we have put in place, not yesterday, but over a period of the last year or two is now, as Fred pointed out, is paying off in many ways. So the target is, of course, to continue to both improve revenue and margins as we go forward. And we believe we have the structure to do just that. I don't know, Henry, if you want to add any more to that.

Allison, let me just say a couple things to add on to Raj's comments. The first quarter of fiscal 21 was FedEx Ground's highest quarterly revenue and operating income quarter in history. In spite of that, those results flow from a number of steps we took several years ago to transform FedEx Ground and position FedEx to prosper in a market increasingly dominated by e-commerce. I've spoken of the integration of the ground and smart post networks. I've spoken of the expansion of 7-day. You can't do any of this without the introduction and use of world-class technology. We're about a week away from having completely rolled out our advanced route optimization software to all the drivers. I should point out to you that this was developed using safe agile methods and was rolled out across our network in the middle of a 100-year pandemic in 13 months. That's pretty damn good, if you ask me. Not only does this enable our service providers to better plan routes, fleet type, number of trucks, types of trucks, volume on trucks on a dynamic daily basis, but it's already improved significantly, final mile efficiency, specifically increasing stops per hour in the network in spite of everything we've already talked about in Q1. The integration of smart post deployment in the network has improved density both on a square mile basis and on a delivery basis, driving the average cost of our stops down. I think where we sit today, our best are ahead of us. We still have a lot of work to do here.

We'll hear next from Brian Osenbeck with JP Morgan.

Hey, good evening. Thanks for taking the question. I want to come back to execution into the holiday peak season. I guess last year was obviously good stuff with Cyber Monday coming in. Well, both planned and you're entering the same period here with a lot more volume, but also a lot more issues and levers to balance it all out, some of which you talked about here or announced recently. So stepping back, how confident are you that it's enough to have a successful peak? And then do you feel like you can make adjustments and recover if needed?

Well, let me start and then what Brian, Henry can add. I think this is going to be a peak like none other, but we believe that we have now the capabilities and the flexibility to do a lot. I think the number one thing that the customer is now looking for is capacity and we're working strategically with them to make sure that we can deliver that. Again, having operations seven days a week helps a lot here too and the technology that we have. So between the flexibility that we have in our infrastructure that we put together with the technology that we have and the customer solutions we put together, we think we're going to manage to the speak quite well. Let me turn to Bri for her comments.

I'll certainly let Henry talk about the physical capacity elements, but from a customer perspective, we're really working hard to set expectations with our e-commerce merchants. I think they are very well aware that this is going to be a peak like no other. The most important thing for our customers' customers is to set appropriate expectations and give them transparency to the appropriate transportation commitments. We're working very hard to do that, to set expectations, to give visibility, and to expose that through all our digital channels and our customers' digital channels. We're working very hard. You also saw that we adjusted our peak surcharge specific to Cyber Week to make sure that customers really pulsed in their volume and that we help out Henry and the team wherever we possibly can. Henry, anything else?

Yeah, I think the only thing I would add here is that even at the operations level, we have conversations almost daily with all of our top customers. Once again, this is not a new event at peak, but this has been ongoing since all of this began back in March. When you're operating a seven-day network, follow me back up and say, we're in a new normal here. There's a new normal for FedEx, but there's also a new normal for all of our customers. When you're operating a seven-day network, we have untapped capacity existing within that network if customers want to take advantage of that untapped capacity. For example, we have ample delivery capacity on Saturday, Sunday, and Monday. We have ample pickup capacity on Friday, Saturday, and Sunday. If everybody wants to ship on Monday, then we're going to have to have conversations with people about how we modify that demand to fit the available capacity we have on one day a week. If customers are flexible, I think we can accommodate most of what people wish to ship this year at

peak. Elaine Becker with Cal1 has our next question.

Thanks very much, Operator Allen. It will be very sad to do these calls without you. I think I've been CFO the whole time. I miss you. To Dawn, thank you for all the work you do on behalf of the Children of St. Jude. That work is very important and very appreciated. On to my question, can you just talk about the vaccine and your distribution capabilities in the sense of the ability to either store or move goods, the vaccines that have to be chilled to minus 80 Celsius. If you've thought about how that gets handled in places like India and Africa and Brazil, in some cases we have very strong networks, how we should think about your ability to participate in that. Thank you very much.

As we talked about earlier, we recognize moving vaccines across the global network is very critical work. We believe that we have the network, the technology, the solutions to do just that. We have engaged with several of our customers who are in this vaccine production mode and we're planning appropriately for it. Again, the timing is TBD at this point, but the capabilities that we have around the world, including the physical network, the storage solutions, as well as the sensor ID that we just launched and enhanced visibility platforms and the ability to intervene as needed is unique. I think we are well situated to handle this vaccine. Let me turn it over to Don because a lot of those are going to travel on the Express network.

Thank you, Raj, and thanks for the question. I would like to add a little bit of color to this because we look at this really as a supply chain design opportunity. First of all, for many months, as you can imagine, we're talking with the major manufacturers and customers in the healthcare space along with HHS, CDC and the FDA. This will be clearly a global team effort. What's unique about this opportunity when you think it through is there's a very good chance that the raw ingredients are going to be made in one country, the manufacturing of these vaccines in another country, in another region, and the consumption and the need for this is global. This is why we uniquely position. When you look at the 220 countries that we serve, well over 600 aircraft we have in our network and the ability to integrate that with our air and ground, we're uniquely positioned to support this critical initiative. We're ready for it. We're planning for the mother of all pigs. Within that, we're also looking at the ability to move on a global basis these vaccines when they become ready. We're obviously hopeful like everybody else is that it's sooner rather than later, but when they do come and they came off the manufacturing line, we'll be able to support those manufacturers on a global basis.

Next to David Vernon with Bernstein.

Hey guys, thanks for taking the question. Henry, I wanted to come back to the topics you brought up around kind of working with customers and flexibility. Anecdotally, we've heard from a couple different shipping consultancies that some of the on-time transit reports for the ground network is maybe lagging a little bit. I just wanted to give you a chance to comment on how you feel service levels are trending. And then also, as you think about the next two to three years, given the pull forward and the volume growth you're going to be pushing through the network, does that change your thinking about the size of the capex and go up for the ground segment?

Thanks. Well, David, I've been in this business for 40 years. I've never seen a more difficult operating environment from the one we're in. We're dealing with a 100-year pandemic, absenteeism as a result in certain facilities, wildfires, hurricanes, social unrest, unlike anything I've seen since the 60s. And I lived through the 60s, so I remember it. All of that places some pretty difficult challenges on an operation when you're trying to run a national network that's as highly engineered and as precise as the ones we operate. FedEx ground people have worked tirelessly through all of this, and I have eternal confidence that we'll continue to provide world-class transit service going forward for our customers. On the issue of capex, I would say to you that we have been very diligent in the past about this. I made a comment about smartposts. We've got 28 smartpost facilities we're repurposing for ground. That's pretty cheap capital when you consider the fact that we convert those buildings for ground growth, and they're essentially already included in the network footprint. Notwithstanding any of that, we're going to have to invest in the ground network going forward for growth. As Brie gave you the statistics on e-commerce between now and 2026, we can squeeze more capacity out of this existing network, but we're not going to be able to maintain these growth rates unless we invest in it. And I can assure you that that work is something that is ongoing almost daily at FedEx ground. Thanks.

Ben Hartford with Baird has our next question.

Good evening. Again, Alan, congrats on your career and retirement. Just to follow up on capex and just cash management, as we transition over to Mike's leadership, can you provide a little bit of perspective about how you're thinking about liquidity going forward? We've got a little bit of a different operating environment from an express standpoint. You've got free cash this quarter. You've got plenty of liquidity on hand. How do you think about capex needs over the next few years and uses of incremental free cash flow and cash on hand, debt pay down, et cetera?

Appreciate the question. We are first and foremost going to repair our balance sheet. We borrowed a significant amount of money in anticipation of liquidity needs that, unfortunately, we did not have to have. But I can tell you back in March when we were sitting around the table here, we had no idea what to expect. And so we got prepared the best we could. I think you could see from my comments, we have over $10 billion of liquidity today. Obviously, we expect to have improved free cash flow. And so we'll be repairing the balance sheet first. But we haven't forgotten about return to shareholders. Recall that over a number of years, we bought a significant amount of shares at a price of about $153, which looks pretty good today. Didn't look so good in March. And obviously, we have a frozen dividend right now because of our agreement with our banks. So we'll be looking at all of those. But first and foremost is a

moment. The road travel with Deutsche Bank has our next question.

Thanks for squeezing me in. Appreciate it. Ron, I was just hoping on the ground business, one thing that we've noticed at least is that purchase transportation costs have continued to go up on a per shipment basis, given what you guys are doing on SmartPost redirect. Should there be an expectation or can there be a potential for purchase transportation cost per shipment to be moderated significantly? I think it's important to address it. And then just a higher level, if we're sitting here in August or September of 2021, obviously 30% growth in ground is not sustainable in perpetuity. I understand the secular benefits. But if we're sitting here this time next year, the economy hopefully is pivoted because we have a vaccine towards maybe more downstream goods and services and growth is negative in volume. How is the profitability structure of the business in that environment if you can address that as well? Thank you.

Well, I'll address the purchase trans question. Purchase transportation is driven by volume. I mean, all of our transportation is purchased at FedEx ground. We don't have company owned equipment. We don't have employee drivers. So as the volume goes up, purchase transportation costs are going to go up. I think that something that may be somewhat obscuring some of the numbers in there is the transition of SmartPost ground because packages that formerly were treated as postage because we paid the post office to deliver them are now part of ground settlement. That work will be done by the end of October with few exceptions. The ground network is highly variable and highly flexible. We can scale up. We can scale down based on the volume. We contract with 5,300 small businesses that employ something north of 130,000 employees. They see the changes in the volume at the micro level much faster than any of us could see it operating out of a corporate headquarter structure. They react almost instantaneously to any changes in volume, both up and down. This is not something that we haven't been through before. I mean, we've been through up cycles and down cycles. Sometimes it takes us a little bit longer to ramp up if we don't see it coming like this particular COVID-19 event. But I'll assure you that we can take the costs out of this network really quick if we have to.

And from Bank of America, we'll go to Ken Hoekster.

Hey, Greg. Good afternoon. Phenomenal quarter, Alan, and congrats on beginning your next phase. And thanks for the comments over the past two decades. Maybe just my question is on maybe for Raj, on the thoughts on margin benefits from express to ground. I know, Henry, you just mentioned kind of the parcel side of it, but you've also talked about moving express packages over the ground. Can you talk how that transition is going on volume or margin side? And then just a clarification, Alan, have you delineated the benefits from the surcharges in terms of dollar size scale?

I'll answer the second one. No, we haven't because it's all part of one giant orchestra and one conductor and all the pieces flow together.

And on the first one, let me just make sure the OSDB to see the residential volume continues to grow. They're definite and allows us the opportunity to optimize between networks. So the residential and rural packages, we were able to from one network to the other as optimized as a service. So we'll see where it goes. As I told you, we have launched it in a few markets and we'll monitor as we go forward here.

And at this time, I'd like to turn things back to Mickey Foster for closing remarks.

Okay. We have some final comments by Fred Smith. So as I said at the beginning, I was going to give the microphone over to Alan to make a couple of remarks. Let me reiterate what I said at the start and several of our colleagues have said here at the table on behalf of the board and the strategic management committee. We thank Alan for 40 plus years of outstanding leadership in this company. He's been a great comrade and brilliant man, not only in business, but his accomplishments and contributions in so many philanthropic endeavors. Chairman of the University of Memphis, Pro Bono, very heavily involved in establishing the FedEx family house, he and Susan, where I could spend half the evening here talking about Alan in that regard. But as I said, this is an earnings call, so I'll make more fulsome remarks at the shareholders meeting next Monday. And let me turn the microphone over to Alan, who will say what he wants to say, and then make his own tile off the meeting. Alan? Well, thanks, Fred.

In the fall of 1991, Fred took a chance on a -year-old treasurer, despite a significant amount of pressure to bring in a proven seasoned CFO. When he told me he wanted me for the job, he said he had a tremendous amount of confidence in me and challenged me to always think long-term and strategically. Among other things, Fred was very clear that I should always communicate what I thought, no matter how against the grain it might be. That was great advice and has been the basis for our partnership ever since. As I finish my last of around 120 earnings calls, I want to give you a few thoughts of mine about where we are and how optimistic I am about the future of FedEx. Believe it or not, I have always looked forward to these calls, no matter if the news was good or bad. I have thoroughly enjoyed preparing for the very excellent and -thought-out strategic questions I expected to be asked. While I often did not get these insightful and penetrating questions, I did enjoy the occasional bantering. I always endeavored to answer questions from a strategic viewpoint, hoping to impart a deep, transparent description to help you see what I see. Over the years, any accomplishments attributed to me truly belong to an unbelievably dedicated and talented team. I am referring not just to an incredible world-class finance organization, but to all of my 500,000 teammates with whom it has been an honor to serve. I am extremely optimistic about the future of FedEx. Over the years, we have invested in building unmatched physical and technological networks that are keeping the world supply chains moving with very high levels of reliability. Although our capital investments have sometimes been questioned, the past quarter provides a strong indication that these are providing increasing returns, and I am certain that that will be the case moving forward. By the end of FY 2019, we made a strategic decision to go all in on e-commerce. We moved away from a large customer to focus on the broader market. We moved to -a-week ground operations, allowing us to handle significant additional volumes using existing capacity. We moved smart post packages into the ground network and repurposed smart post facilities to handle higher-yielding home delivery packages. We added advanced route optimization technology, maximizing route efficiencies and increasing stops per hour. We serve every address in the U.S., and 92 percent of the U.S. population lives within five miles of the FedEx pickup or drop-off location. We are modernizing our air fleet and major hubs to lower cost and handle additional volume. We are transforming our international business, and the benefits of the T&T acquisition are beginning to accelerate. We have the right strategy in place, and our team is executing at a high level. We are a high-energy organization and are always on the offense. And now I am excited to hand the CFO mantle to Mike Lenz. Mike's performance during his tenure at FedEx has been outstanding, and he has the full confidence of Fred, the board of directors, and the Strategic Management Committee. He will be superb, and I look forward to watching him. It has been a great ride, and I will be forever grateful for my time at FedEx. To my teammates, thank you for everything. I will miss you, and I will enjoy your future success. And my wife Susan, my daughters Bridget and Carrie, and our families, your love and support and patience have been my cornerstone. I wish everyone good luck and good health. Thank you, and farewell.

Thank you for your participation in FedEx Corporation's first quarter earnings conference call. Please feel free to call anyone on the Investor Relations team if you have additional questions about FedEx. Thank you very much. Bye.

And again, that does conclude today's conference. Thank you all for joining us.