FedEx Corporation

Good day, everyone, and welcome to the FedEx Corporation first quarter fiscal year 2022 earnings call. Today's call is being recorded. At this time, I would like to 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 first quarter earnings conference call. The first quarter earnings release form 10-Q and stat book or 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 Raj Subramanian, President and COO, Mike Lenz, Executive VP and CFO, Rick Harari, Executive VP, Chief Marketing and Communications Officer. And now Raj will share his views on the quarter.

Thank you, Mickey, and good afternoon, everybody. And thank you for joining today's call. First and foremost, I would like to extend my sincerest thanks to our global team members who continue to deliver for our customers in an exceptionally challenging operating environment. We are extremely proud and grateful for the manner in which Team FedEx continues to move the world forward. The execution of our strategies continues to drive high demand for our differentiated services, despite the disruptive impact of the pandemic, labor availability, industry capacity, and global supply chains. As we look at our first quarter results, our performance was highlighted by double-digit increases in yields across all our transportation businesses driven by limited capacity, high demand, and our revenue management strategy. The impact of constrained labor markets remains the biggest issue facing our business, as with many other companies around the world, and was a key driver of our lower-than-expected results in the first quarter. As Mike will share in more detail momentarily, we estimate that the impact of labor shortages on our quarterly results was approximately $450 million, primarily at FedEx Ground. Labor shortages have had two distinct impacts on our business. The competition for talent, particularly for our frontline workers, have driven wage rates higher and pay premiums higher. While wage rates are higher, the more significant impact is the widespread inefficiencies in our operation from constrained labor markets. To illustrate this, I'd like to share a brief example from FedEx Ground. Our Portland, Oregon hub is running with approximately 65% of the staffing needed to handle its normal volume. This staffing shortage has a pronounced impact on the operations, which results in our teams diverting 25% of the volume that would normally flow to this hub because it simply cannot be processed efficiently to meet our service standards. And in this case, the volume that is diverted must be rerouted and processed, which drives inefficiencies in our operations and, in turn, higher costs. These inefficiencies included adding incremental line haul and delivery routes, meaning more miles driven, and a higher use of third-party transportation to enable us to bypass Portland entirely. Now, that's merely one example. Across the FedEx ground network, there are more than 600,000 packages a day being rerouted. We anticipate the cost pressures from network inefficiency, such as the one I just illustrated, to persist through peak as we navigate the labor market and impacts of new COVID waves. Overcoming these staffing and retention challenges is our utmost priority as they not only affect our cost structures and operational efficiency, but are also having a negative impact on service levels. As such, we're taking bold action across the enterprise to hire and invest in our frontline team members as we prepare for the peak season ahead. These actions include targeted pay premiums, particularly for weekend shifts, increased tuition reimbursement, sponsorship of a national hiring day on September 23rd as we seek to hire 90,000 additional positions ahead of peak, detailed volume and demand planning with customers to drive additional sorts to alleviate congestion and expanding network capacity, which I will touch on shortly. Based on these actions, combined with our expectations for improving labor conditions, we do anticipate gradual improvement in our operational efficiency as we turn into the new calendar year. During the first quarter, the team continued to execute on our strategy, even amid the challenging operating environment. As e-commerce drives higher demand, we continue to strategically invest in our network to boost daily package volume capacity, increase efficiencies, and further enhance the speed and service capabilities of our networks. Our investments continued in Q1 as FedEx Ground expanded its physical footprint with a new state-of-the-art hub in Chino, California, which began operations in August. This fully automated hub includes large package sortation, has the capability to process up to 30,000 packages per hour, and is strategically located to help address ongoing port congestion challenges. FedEx Ground also continues to see year-over-year improvement in last-mile efficiency driven by a 2.4% increase of packages delivered per hour compared to Q1 last year, thanks to route optimization technology. As we move into Q2, we are meticulously planning for peak season ahead, including close collaboration with customers to build solutions to enable them to succeed. We expect to have substantially higher ground capacity this peak season due to our investments in FedEx Grounds infrastructure. This includes the addition of more than a dozen new automated facilities and several other sortation equipment expansions in addition to the Chino Hub that I already mentioned. Several key technology projects are also slated for completion this fall, including the modernization of multiple sortation, transportation management, and safety systems, which will help to increase ground's network capacity by hundreds of thousands of ADV, as well as its flexibility and resiliency. This brings a total capacity increase of more than 1 million average daily volume compared to last peak. Another significant opportunity in our growth strategy is the improvement in the profitability of our international express operations. We reached a significant agreement with the social partners at our Liège Express operations regarding the intended European air network transformation. This is an important milestone in the completion of the air network integration, which remains on track for completion in spring 2022. That will bring the physical network integration of TNT into FedEx to a close, and when combined with the benefits of our previously announced European restructuring, provides significant upside in our international profitability moving forward. In summary, we're taking bold actions in the short term to navigate through this highly uncertain environment. We remain committed to long-term shareholder return, and we are very confident in our strategy for the following reasons. We have a differentiated portfolio of services to attack the fast-growing e-commerce market. Our business model gives us the framework to be very successful in this regard. In fact, we are working strategically with several retailers to deliver a win-win-win solution. Win for the retailer, win for the end consumer, and win for FedEx. For instance, we recently partnered with a large retailer to create a common data platform that drives optimization of our combined assets, an enhancement of visibility and predictability to the end customer. Further, as the day-definite residential volumes grow in our network, there's increasing opportunity to collaborate across our operating companies to improve efficiency by better utilizing our assets. Another upside for FedEx is international, as the completion of our physical integration in Europe provides an inflection point for profitable growth. And finally, we are in the early stages of unlocking value from digital innovation. We are confident that this will play a significant part in the success of FedEx for years to come, as we make supply chains work smarter for everyone. Our strategy is sound and positions us well for improved returns as we move through fiscal year 22 and beyond. With that, let me turn it over to Bree.