FedEx Corporation

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

Good afternoon, and welcome to FedEx Corporation's fourth quarter earnings conference call. The fourth quarter 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 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 Subramanian, President and COO, Mike Lenz, Executive Vice President and CFO, Mark Allen, Executive VP, General Counsel and Secretary, Rob Carter, Executive VP, FedEx Information Services and CIO. Brie Carreri, Executive Vice President, Chief Marketing Officer and Communication Officer. Jill Brannon, Executive VP and Chief Sales Officer. Don Collin, President and CEO of FedEx Express. John Smith, President and CEO of FedEx Ground. Henry Mayer, Former President and CEO of FedEx Ground. And Lance Maul, President and CEO of FedEx Freight. And now, Fred Smith will share his views on the quarter and year. Thank you, Mickey. Fiscal 21 was truly unprecedented, and we're enormously proud of our 570,000 team members who performed magnificently to keep global healthcare, industrial, and at-home supply chains open, and more recently, allowed significant additional commerce to flow. The FedEx team's role in moving PPE, vaccines, and international release shipments has been perhaps this company's finest hour. Our financial results speak for themselves. Raj and Mike will have more to say about the numbers, of course. Our pride in the FedEx team and our performance for shareholders is greatly tempered, however, by our continuing grief over the 15th April senseless murder at a FedEx ground facility in Indianapolis of eight FedEx team members. Lingering sorrow among their families, friends, and colleagues throughout FedEx can never be erased. Raj will also comment on this tragedy in a moment. The strategies we've executed over the last several years were carefully developed and have been executed at a high level with great success overall. As we mentioned previously, the pandemic simply brought many of the market trends which informed our strategies forward. Bree will be more specific about these trends in a moment. As reported, FedEx revenues for FY21 were $84 billion, and we project FY22 revenues over $90 billion. We believe FedEx margins will continue to improve this fiscal year. However, as Raj will cover momentarily, the labor market in the U.S. over the last several months has been quite challenging, adversely affecting hiring and leading to significant reengineering of parts of our networks to deal with the lack of these resources. And while the situation has begun to abate, delivering a successful peak season when we anticipate significant year-over-year volume increases will require additional flexibility and creativity on the part of our management, staff, and frontline team members while maintaining our safety above all culture. To handle future ground volumes, we are significantly increasing capacity to deliver both great service and improve financial results. This summer, we are intently focused on improving network and delivery operations prior to the volume surge in the fall. There's great focus on revenue quality at FedEx However, a focus solely on yields does not give a complete picture of our profit upside. As Bree will explain, our alliances with retailer partners generate significant amounts of short-haul traffic, much of which is now shipped from stores. Our Innovate Digitally initiatives are gaining steam, particularly surround and sensorware. Let me thank Henry Mayer for more than 34 years of loyal and dedicated service to FedEx and RPS, which we acquired in 1998. At the conclusion of this call, I'll have additional comments about Henry's remarkable career and countless contributions to FedEx's growth and success. A further note, the Biden administration has recognized an exceptional talent in our board member, General Chris Inglis, who was confirmed by the Senate last week to serve as the National Cyber Director. We've benefited from Chris's cybersecurity and information technology expertise since he joined our board in 2015, and we wish him well in the hugely important role for which he has been tapped. Now, Raj, Bree, and Mike will give their remarks, after which we'll answer your questions. Raj.

Thank you, Fred, and good afternoon, everyone. As Fred stated, we continue to mourn the tragic loss of eight team members killed at FedEx ground facilities in Indianapolis on April the 15th. Let me take a moment to remember each team member we lost that day. Matthew R. Alexander, Samaria Blackwell, Amarjeet Johal, Jaswinder Kaur, Amarjeet Sekhon, Jaswinder Singh, Carly Smith, and John Weisert. Our most heartfelt sympathies and condolences remain with the families, team members, and friends of these individuals. They will forever be members of the FedEx family. Now turning to our results. Fiscal year 21 was a pivotal year for FedEx as we delivered incredible financial performance, including record revenue and profit in Q4 and for the full fiscal year. This is a no-shot measure due to the outstanding work by our global team members. Let me take this opportunity to say thank you to the FedEx team, especially those on the front lines who are going above and beyond the call of duty in these difficult times. When I look back at fiscal year 21, I'm proud of the role FedEx played in saving lives, helping small and medium businesses get back on their feet, and keeping the globe connected. The exceptional financial performance was driven by a robust growth strategy and focused execution on three key areas, e-commerce, operational excellence, and digital innovation. Let me take a moment to highlight each strategic focus area and the progress made in Q4. Firstly, e-commerce. The acceleration of trends experienced in fiscal year 21 highlight the importance of our ongoing strategic initiatives to win globally in e-commerce. This includes FedEx ground seven-day operations, investing in technology to optimize last mile deliveries, expanding capabilities to better handle large items, offering the first FedEx-branded through-the-door service with FedEx Freight Direct and accelerating the expansion of our retail convenience network. Grounds' full seven-day operations, including weekend residential delivery coverage that reaches 98% of the U.S. population on Saturdays and 95% on Sundays, give us a distinct competitive advantage. We're working very closely with customers to leverage the full flexibility of weekend operations so they can meet the demands of e-commerce every day of the week. This is evident in the growth we saw in ground Sunday deliveries, with 56% more packages delivered on Sunday in Q4 than last year. We are also winning in e-commerce outside the United States by leveraging the strength of our global networks and the expansion of our portfolio. Bri will cover additional details in this regard shortly. The second strategic focus area is operational excellence. Our competitive advantage in the marketplace is fueled by a relentless focus on operational excellence and customer service. While service is a hallmark of FedEx, like many businesses, we are facing challenges with labor availability, which have contributed to recent service levels that do not meet our own high expectations of the quality we expect to deliver to our customers. The inability to hire team members, particularly package handlers, has driven wage rates higher and creates inefficiency in our networks as we use overtime to cover open shifts and route volume around known constraints, just as a few examples. As such, we're taking bold actions across the business to address service issues and prepare for sustained volume increases, including continued investments in people, capacity, and technology to optimize our networks. FedEx Ground's strategic focus on efficiency continually benefits in Q4, as seen in our ongoing improvements in density. These improvements are driven in part by both B2B and B2C volume growth, as well as enhancements in route optimization technology, which draw up the average number of stops the service providers made per hour by 3.6% versus Q4 of the previous fiscal year. Along with the revised service provider e-commerce rate structure, these efficiencies contributed to a 3% reduction in cost per stop compared to the same quarter last year. Further collaboration to improve efficiency continued across our businesses as we expanded our last mile optimization program. In addition, FedEx Freight provided approximately 70 million line haul miles and delivered 1.75 million packages for ground in fiscal year 21. Another significant opportunity in further enhancing our operational excellence is the improvement in the profitability of our international operations, which starts in Europe with the completion of the physical integration of TNT. While the TNT integration has seen its share of setbacks, including a 2017 cyber attack and the delays due to the pandemic, we are certain of the value this combination creates for the FedEx of the future. The European restructuring announced in January 2021 is set to deliver $275 million to $350 million in benefits on an annual basis starting in fiscal 2024. The cost of the severance benefits under this program, which will be incurred through fiscal 2023, will be in the range from 300 million to 575 million in cash expenditures. In Q4, we introduced overnight service from Europe, connecting 90% of European businesses to major U.S. markets. It's an unparalleled next-day connectivity that nobody in the marketplace matches. As you can see, we continue to enhance value for our customers while restructuring our European business. Said simply, the upside in the profitability of our international business is tremendous. Finally, our third strategic focus area, digital innovation. We are reimagining our digital capabilities and infrastructure in a manner that will deliver market-leading customer experiences that are simple, personal, and proactive. We made great strides in fiscal 2021 as we continue to drive new value through strategic technologies, including increasing capabilities and products through sensor-based technologies like FedEx SensorWare ID and FedEx Surround, which provide unmatched visibility and predictive capabilities, most notably seen during the transportation of life-saving COVID-19 vaccines. Building of shop runner integration and Adobe Magento extension to enable a more open e-commerce ecosystem. And furthering development of our portfolio of services in the autonomous vehicle space as illustrated with ongoing ROXO testing and this month's announcement of testing with Neuro. In fiscal 2022, we'll continue to deliver on our strategy on e-commerce, operational excellence, and digital innovation as we execute on the following key initiatives. First, we expect a substantially increased capacity for this peak by investing in FedEx Grounds infrastructure with the addition of 16 new automated facilities and the implementation of nearly 100 expansion projects and existing operations and key technological enhancements. Second, we will complete the air network integration in early calendar year 2022, which will bring the physical TNT network integration to a close and provides the inflection point for long-term profit improvement in Europe. Next, we are exercising existing options to purchase 20 additional 767Fs, 10 for delivery in fiscal year 24 and 10 for delivery in fiscal year 25 as we continue to modernize our fleet and improve service to our customers. And we finally continue to identify areas to adapt, collaborate, and utilize different elements of our global network to increase efficiency and reduce cost to serve. Our networks and capabilities reflect decades of investment, innovation, and expertise that are differentiated from our competition. It's incredibly difficult to replicate and provides a significant advantage over others in our industry. When we knit it all back together, despite some of the cyclical factors, we remain very confident for fiscal year 22 and beyond. The e-commerce market will continue to be a growth engine globally, and if anything has become clear over the past year, it's the contribution our industry provides to the e-commerce value chain. We remain focused on differentiation, building customer solutions and improving revenue quality as critical long-term levers of profitable growth. In addition, the transformation efforts in Europe and U.S. domestic will generate margin improvement opportunities. And finally, we're just getting started on unlocking value with digital innovation. Our robust growth strategy positions FedEx to deliver superior, sustainable financial returns and drive shareholder value for years to come. With that, I will turn it over to Brie.