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.

Thank you, Raj, and good afternoon, everyone. Our first quarter commercial results were very strong, with 14% revenue growth and double-digit yield improvement in our transportation segments. These results reflect the positive backdrop for growth in the parcel market, including a very healthy pricing environment. For fiscal year 22, FedEx revenue was forecasted to pass $90 billion. Further, we are forecasting that the U.S. parcel market will grow to 101 million packages a day by calendar year 2022, which is year-over-year growth of 12%. These market projections are slightly lower than last quarter as e-commerce percentage as a percentage of retail declined. We saw a shift to in-store shopping and buy online, pick up in store, and spending and services, of course, increased. However, despite this moderate change in e-commerce growth, the secular trend of e-commerce growing as a percentage of retail will continue to drive healthy parcel market growth. we are forecasting a 10% annual growth rate of U.S. domestic market volumes through 2026. At FedEx in the first quarter, total U.S. domestic package volumes increased year-over-year by 1.5%. At Express, our total U.S. domestic package volume grew 7% year-over-year. Total FedEx ground volumes were relatively flat in the quarter. However, I'm very proud as we proactively managed our capacity for higher yielding commercial and home delivery services. In fact, FedEx ground commercial volumes grew double digits in the quarter. In the first quarter of fiscal year 22, FedEx total U.S. domestic residential package volume mix was 57% versus 62% a year ago. U.S. B2B mix improved year over year in the first quarter of fiscal year 22 as B2B volumes continue to recover with inventory replenishment and manufacturing rebounding as the economy opens. B2C mix continues to remain higher, however, than pre-pandemic levels. In Q1, FedEx Freight revenue increased 23%, driven both by increased volume and higher revenue quality. A huge shout out to the FedEx Freight team. Great job, team. FedEx Freight Direct continues to gain incredible momentum. Turning now to our revenue quality strategy. The continued constrained capacity in both the U.S. domestic and international markets has led to a very favorable pricing environment. We are focused on protecting and growing volume in high yielding commercial segments, including commercial ground and small and medium segments. We have an incremental opportunity to improve large customer yields through contract renewals and providing large customers an ability to procure incremental capacity at current market rates. As announced yesterday, effective January 3, 2022, FedEx Express, FedEx Ground, and FedEx Home Delivery shipping rates will increase by an average of 5.9%, while FedEx Freight rates will increase by an average of 5.9% to 7.9%. We also announced other surcharge increases, which can be found on FedEx.com. These increases will help us continue to balance capacity with demand and mitigate the impact from the increased costs that Raj just outlined. Turning now to international, we are forecasting the air cargo market to be more than $80 billion by calendar year 2025. At FedEx, we currently have single digit market share, and as such, this remains a significant growth opportunity for us to continue to pursue. We expect air cargo capacity to remain constrained through at least the first half of calendar year 2022. A full recovery is not anticipated until 2024. Global air cargo capacity continued to recover in July. It is still down 10% compared to pre-pandemic levels. Capacity on international lanes remains scarce, and we have seen European and APAC export demand recover to pre-pandemic levels. Globally, we continue our efforts to optimize our network and customer mix. We manage to a very high percentage of priority service on our international flights, with yield per package improvement of 11% for international parcel and yield per pound improvement of 18% for international freight. Exports from Asia are fueled by the strong demand from B2C and B2B recovery. B2B will further benefit from a shift in demand from ocean freight to air cargo as our customers replenish stock levels in time for the peak sales season. To provide access to reliable capacity in this constrained environment, we turned six previously ad hoc intercontinental flights into scheduled service in the fiscal year quarter Q1. Four Trans-Pacific and two for the Asia-Europe lane. We are seeing a strong recovery in Europe as well, with the overall economic recovery back to pre-pandemic levels. Our intra-Europe cross-border B2B volumes have recovered to pre-COVID levels, Our growth is further accelerated by significant B2C parcel volumes. E-commerce growth will be critical for both our Asian and European businesses. In Q1, we expanded FedEx International Connect Plus from Europe to six new global destinations, increasing coverage to 82% of global GDP across a total of 300 lanes. And on September 1st, we launched FICP and EMEA across 80 origin destination lanes. For businesses looking for a cost-effective solution with competitive transit, FICP provides a compelling e-commerce value proposition. We continue to gain new customers through FICP and have a very robust sales pipeline. In summary, while it continues to be a very dynamic market, we remain incredibly confident in our global growth potential and our world-class commercial teams to bring in market-leading yields. And with that, I'll turn it over to Mike for his remarks.

Thank you, Brie, and good afternoon, everyone. Our first quarter FY22 adjusted earnings per share of $4.37 was negatively impacted by approximately $800 million in year-over-year headwinds. And while Raj covered the operational impacts of these challenges, I will detail the financial impacts to the quarter. Of these headwinds, the difficult labor market had the largest effect on our bottom line, representing an estimated $450 million in additional year-over-year costs the majority of which impacted our FedEx ground business. As we look into the impact of labor costs on the business, I want to break this impact into two components, higher wages and the impact of network inefficiencies. Of the $450 million, we estimate that $200 million was incurred in higher wage and purchase transportation rates. This included higher wage rates and pay premiums for team members and higher rates paid for third-party transportation services. In addition to the higher wage rates, we estimate that network inefficiencies of approximately $250 million contributed to the total impact of labor shortages on the business. These costs include additional line haul, higher usage of third-party transportation, cost to reposition assets in the network, overtime, and recruiting incentives, all to address staffing shortages. Beyond the labor impacts, our results for the first quarter also included the following headwinds. An additional $135 million in healthcare costs due to lower utilization a year ago. $85 million related to investments in the ground network, which represents the cost of bringing online 16 new automated facilities and expansions at 100 facilities, which are critical to improving service and adding capacity to meet growth for peak and beyonds. And at Express, we had an estimated 60 million in incremental air network costs due to the impact of COVID restrictions on our operations, including limitations on layovers, supplemental crews to ensure service continuity, and immigration restrictions. In addition, and as a reminder, our prior year results at Express included a pre-tax benefit of 65 million from a reduction in aviation excise taxes. That said, our first quarter results did come in lower than our own expectations as difficult labor conditions persisted throughout the quarter. As a result of that, variable compensation was not an expense headwind in the first quarter. With that overview of the consolidated results, let's turn to the highlights for the segments. At Express, results declined due to the higher operating expenses from staffing challenges and COVID-related air network impacts I discussed. Profitability was also impacted by fewer charter flights compared to the surge last spring during the early months of the pandemic. While we've covered the impacts to ground results in detail, I would like to call to your attention to an enhancement in our reporting included in the release and the 10Q. As a result of business growth and our unmatched seven-day operating network at Ground, we are now providing additional product-level disclosures for average daily package volume. Beginning with our first quarter, we are breaking out ADV statistics for FedEx Ground commercial, home delivery, and economy services. Turning to freight, we reported a record operating margin of 17.3% for the quarter as our continued focus on revenue quality and profitable growth drove average daily shipments up 12% and revenue per shipment increased 11% as Brie highlighted previously. Now let's pivot to capital spending. During the first quarter, we spent $1.6 billion in capital as we continue to invest in our strategies for profitable growth, service excellence, and modernizing our digital and IT platforms. Our capital forecast for fiscal 22 remains at $7.2 billion and less than 8% of anticipated revenue. It includes the following key elements. First, more than 50% increase in capital spending at ground year over year for capacity expansion and new facilities to capture opportunities from growing e-commerce business. And second, fleet modernization at Express with continued investment in 767 and 777 aircraft, which not only has a high financial return, but is an important part of the strategy to reduce our carbon footprint. In evaluating capital investments, our return on invested capital on existing capital and new projects is a critical metric to managing our business. And we have a rigorous approval process in place on all new capital projects. As we look at investments, we set the internal rate of return hurdle above our weighted average cost of capital, which varies based on the nature of the project. For example, an investment in replacement capital would have a lower hurdle rate than growth capital. Capital returns has always been an important metric to managing the business both historically and in the future. We ended our quarter with $7 billion in cash and are targeting over $3 billion in adjusted free cash flow for FY22, which puts us on pace to deliver over $7.5 billion in adjusted free cash flow for FY21 and 22 combined, far exceeding our historical levels. We continue to focus on thoughtful capital allocation and strengthening our balance sheet in fiscal 2022. During the quarter, we repurchased 1.9 million shares, totaling roughly 550 million, and are targeting approximately 1 million additional shares for the balance of the year. In addition, we plan to make a $500 million voluntary contribution to our pension plan this year. we are lowering our fiscal 2022 guidance to reflect our first quarter results, which were lower than our expectations. As we look to the rest of the fiscal year, we expect certain factors to extend longer than we originally forecast in June. So for fiscal 22, we are now forecasting earnings per share of $18.25 to $19.50 before the mark-to-market retirement plan accounting adjustment. and earnings per share of $19.75 to $21 before the mark-to-market adjustments and excluding estimated T&T integration expenses and costs associated with business realignment activities. And our effective tax rate projection is approximately 24%, again, prior to the mark-to-market retirement plan adjustments. While our outlook reflects more uncertainty moving forward, it represents adjusted year-over-year EPS growth ranging from approximately 9% to 15.5% following our record fiscal 2021. As you all know, we are navigating an inherently uncertain macro environment and managing several unknowns. The pace, shape, and timing of global economic recovery given the dynamics of the pandemic including the spread and response to new and existing COVID variants, the uneven nature of global government restrictions, disruptions to global supply chains, and of course recovery in labor availability. Our forecasts assume continued growth in U.S. industrial production and global trade, a gradual improvement in labor availability, current fuel price expectations, and existing tax regulations. With respect to labor, we are assuming that the combination of these actions we are taking that Raj outlined, combined with a steady increase in labor availability as we turn into calendar 22, will allow us to add team members, which will drive improvement in our efficiency, productivity, and cost structure. While we are not providing specific second quarter EPS guidance, I do want to highlight a few key assumptions within our outlook. Overall, for the second quarter, we anticipate a similar level of headwinds in Q2 as we experienced in the first quarter, as the challenges and impacts to our operations from the labor shortages are expected to persist through the rest of calendar 2021. Consistent with the first quarter, we also expect headwinds in Q2 to be driven by our expansion of ground, higher healthcare expenses, COVID-related air network inefficiencies at Express and the benefit in the prior year of reduced aviation excise taxes. That said, while these headwinds will persist in the second quarter, we expect strong performance in the second half of fiscal 22. We remain confident that our long-term strategies will allow us to realize the benefits of growth investments in the future. And next, we'd be happy to address your questions.

And ladies and gentlemen, if you'd like to ask a question, please press the star key followed by the number one on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. Please note that we do ask that you only ask one question, but you may recue after your question has been answered. Again, star one to ask a question. And we'll go first to Scott Group from Wolf Research. Your line is open.

Hey, thanks. So, guys, it strikes me that everybody in transportation right now has a lot of pricing power, and everyone's dealing with tight labor capacity and inflation, but every other transport company is reporting margin improvement and earnings growth. So I guess my question is, why do you think you're seeing a bigger impact than anybody else in transportation? And outside of just adding more capacity and spending more, what sort of meaningful, significant changes do you think you need to make, or are you contemplating making to start realizing more sustainable improvement in margin, earnings, returns, all that? Thank you.

Let me start by saying that we definitely do not see this as an us versus them situation at all. In fact, the Minneapolis Fed noted that firms in every sector reported difficulty in attracting labor and that 68% of the Fortune 100 companies address supply chain and labor descriptions over the past quarter. so the situation is very complex not just the availability of workers workers impacted by safety concerns with coven of course the very real issue of child care and our labor markets and broader economy cannot function properly and if schools and daycares cannot stay open so our approach to our teams and our people first culture combined with the flexible operating model and ground has positioned us to remain competitive in this market and we are highly confident that the actions we're taking to address the short shortage as um as i outlined in my prepared remarks oh let me just also add that you know we are very confident in our strategy i mean where the market is uh growing we have a differentiated value proposition we have a a network um an operating model that makes uh that makes it very that makes it good for us to succeed And, you know, so we are confident in the long-term strategy here. And as Mike said, we expect to see in the new calendar year, the new calendar year, the labor availability continue to recover. Mike?

Yeah, Scott, you know, I would add, I think you can't just characterize all transportation companies in one singular bucket there. And assume that everybody has the same considerations in terms of the nature of the business there. You know, we've tried to explain with great specificity how this operationally impacts us and thus the financial ramifications of that. So look, we fully recognize that the first quarter wasn't what we anticipated. We've taken a number of actions to address that. We will continue to identify further actions, but I will fully say if the circumstances don't change as we identify here, we absolutely would need to revisit the pace of the plans that we have. The strategies are sound, but we would absolutely need to think about the pace of things given the environment that we're operating in. So, you know, I think Bree highlighted the characteristics of what growth is and will continue to be in the business. So that remains the underpinning going forward.

And next we'll go to Brandon Oglenski from Barclays. Your line is open.

Hey, good evening, everyone, and thank you for taking my question. Mike, can I just follow up on that? I think the frustrating part from an investor perspective is you guys have definitely seen pretty substantial growth in the past decade, definitely put the capital behind that. But margins are actually lower now than they were prior peak. Returns have obviously come down. And we do hear lots of bold actions how to sustain forward growth. But I guess I'm going to ask the question just the same way, like what is being done in a bold way to improve returns and profitability across all these networks? And, you know, is there a way to look back and say, hey, we've been investing in the 777 and 7673, and yet express margins aren't showing most traction? How do we review those prior plans to ensure that they deliver in the future? Thank you.

So, Brandon, let me first, you mentioned about express investment in the aircraft there. If you rewind roughly a year and a half ago, we were in the midst of talking about parking and reducing capacity in a number of our MD-11 fleet. Obviously, the market changed radically here, and there was the need for the additional capacity and the opportunity there, so we un-parked those. should things change going forward that remains a flex lever and it absolutely is the case that having a higher proportion of the newer more efficient aircraft which the 767 and 777 are in the fleet will drive improved economics and margins at express so Again, we're ongoing looking at these different network initiatives, and so that absolutely remains a long-term winner in terms of the fleet renewal, and we will continue with that. What was the second part? You started off with another aspect.

Well, you know, Mike, the first thing I think here for a lot of your investors is that the growth is very evident, especially in the last few years. It's just that margins have not improved. So there's always a plan to improve margins, but it doesn't seem to come through. So what are the bold steps that can be taken to improve those outcomes in the future?

Well, let me just step back a little bit. We had record results in 21 and improved margins. Our guidance, albeit lower than what we shared with you three months ago, is if you look at the operating earnings in packets double digit at the low end, we had some discrete tax items there. So indeed, we are focused on driving improved margins, cash flows and returns and feel that we're projecting another record year on top of a record year. So again, we are absolutely committed to continuing that trajectory.

And we'll go next to Chris Weatherby from Citi. Your line is open.

Hey, thanks for taking the question. I want to ask about cost. It might be helpful to kind of run through a number of the items that were impacting the quarter. But if I were to sort of exclude those items and look at sort of the cost inflation on the package business, the express and ground package, it still looks like I'm getting about 9% cost inflation there. on essentially flat volumes. So I was wondering maybe if you could help us understand X sum of the items that you've talked about, what's driving the cost inflation at such a high level when we're not seeing the volume growth in those individual segments? And maybe do you expect that to sort of change? And do you think margins expand in both of those segments for the full year?

Let me take a swing at that first. As it relates to the cost inflation and taking that category broadly, let me just clarify what's in our outlook. The network inefficiencies inherently are contributing to that cost increase that you're talking about. We expect those to mitigate and work away. In our outlook that we're giving you here, we're not assuming inflation. any change in terms of the current labor market, in terms of wage rates and that. So, you know, just to give you an illustrative example here, a year ago, our package handlers at ground, we are paying an hourly rate that is 16% more than previously. At our express major sort locations, the hourly rate is north of a 25% increase. So, That is the reality of the labor market right now. And so thus, as Bree highlighted, we are taking a number of actions to recognize and address that. Maybe if I help talk through as we go through the year here, I think maybe part of what you're also there. So again, like I said, more efficient operations as we go through the year. The pricing actions that we announced yesterday, combined with our ongoing efforts, those largely will impact the second half of the year. Raj highlighted a number of the adaptations we're making in our operating plans, as well as some of the technology and other initiatives we're bringing on to execute more efficiently. And then just to tie off some aspects here, we will have some tailwinds in the second You may recall we had the severe weather situation in the third quarter of last year. Variable comp will be a tailwind in the second half of the year. And then there was two other items with the frontline bonus program and then the recognition of our Yale contribution. So trying to put all that in context for you there. Raj, anything?

I was just going to cap it off, Chris, by just saying that we expect in the second half that improved margins in all segments of our business.

And next we'll go to Ravi Shankar from Morgan Stanley. Your line is open.

Thank you. I just wanted to follow up on basically the last comment because, again, some of the items that point to the second half being materially better than the yield contribution variable form, I mean, those don't seem operational. Those are like almost one-time X. So I'm just trying to get a sense of How do you have such confidence in second half being significantly better in the first half? And the reason I'm asking the question is because you've actually cut your full-year guidance by approximately the magnitude of the first quarter mix, which doesn't necessarily imply that you expect to be able to offer the NCAA.

Robbie, you broke up some there, but there was a reference to some of these items being non-operational in the second half. I guess maybe I'd turn it around another way and say if we were fully...

Sorry, if I can try again, if my supplementing was weak. I just wanted to get a little bit more detail into why you think second half is going to be materially better than the first half, because some of the items you quantified, the yield contribution, the variable comp, etc., Those seem kind of non-operational, almost one-time-ish in nature. So, again, do you really feel like the top line is going to accelerate, the volume is going to accelerate? And the reason I'm asking this question is because you basically cut your full year guidance by approximately the magnitude of the first quarter miss, which does not seem to imply that you are expecting these labor cost issues to continue for the rest of the year.

well we're not sitting on our hands amidst these circumstances we're taking actions to mitigate it so i wouldn't characterize it as just singularly looking at q1 and changing as a result of the outcome of that so we're aggressively managing every aspect there i guess i might turn it around the other way and say if you looked at our results in q1 absent the labor availability challenges, it would be extraordinary. And thus, we realize the absolute number matters. And so we're taking actions on a number of fronts that will make the second half exactly as we outlined. I'll let Bree address your volume question for later as we go through the year.

Yeah, I guess the only thing to add is, you know, we're still pretty bullish on the volume growth and our ability to take share both domestically and internationally. The Q1 of our fiscal year is the hardest comp year over year from a growth perspective. So for sure we had, you know, To say earlier, I think there was a comment earlier about kind of flat volumes. We have to put that in perspective. And we have record high volumes within the network right now. As we look towards peak, we're going to see growth on what was a tremendous growth at peak last year. So we're pretty confident in the volumes. And again, to complement what Mike shared as a reminder, a lot of our increased volumes Well, our GRI will happen in January, so we'll have it in the back half, which is obviously a big driver of back half performance. And then a couple of things. John's got some great technology that's coming into market as we head into peak and in the back half. It's going to help us be more productive. And Karen Reddington and the Europe team has some incredible work going on as they finalize the integration of the air network. And we've got some other work going on there to improve European profitability. So we are pretty confident in the back half of the year.

And next, we'll go to Ken Hexter from Bank of America. Your line is open.

Hey, thanks. So, Raj, I think there was a comment in the release kind of talking about some deceleration on some of the e-commerce and with ground volumes down 10% year-over-year, international, domestic down 13%. You know, is that part of what you're anticipating for labor to improve? Or maybe just talk about the top line for you. You were just mentioning still seeing strength and a good network at the peak, but yet these numbers indicate and kind of what we're hearing from the market that we're seeing from this deceleration as you had in the print. So maybe just talk about the volume side a little more.

Sure, I'll start and I'll turn it over to Brita. No, absolutely. We are actually seeing very strong volume to add to what Brita said. The only reason we're seeing a flat volume in the ground segment is because of the economy product, which just broke out for you for the first time. The commercial volume is growing strongly, and even our HD volume on a very tough year-over-year comp is still growing on top of that. And international is growing very strong. So, no, the only place we're not going is restructuring our international domestic businesses. But, you know, our IP business, our e-business, export businesses is very, very strong. So, no, the demand for our services continue to be very strong because of the differentiation that we are providing in the marketplace. And we continue to gain market share around the world. So, Brie.

yeah i think raj kind of outlined it pretty clear clearly from a volume perspective as we get beyond um i guess the one thing i should add that maybe wasn't clear in my opening remarks is that we are constraining demand right now you know as mike and raj talked about the labor we are doing everything we can to strike that right balance of growth with service um and i will tell you that as we've done that you can see where we've constrained it it's the fedex economy product it's the least profitable product so it's the right place to constrain growth And we have made sure that we are not constraining growth in our highest profitable segments, that small and medium, and that's our commercial. And you saw those strong commercial numbers that I referenced earlier. So I would say, number one, we're confident in the secular growth opportunity for FedEx. Two, we feel we've been gaining share. My last market share report shows that. And then where we are having to constrain because of the labor issues, we are doing so in a very disciplined manner.

And next we'll go to Tom Wadowitz from UBS. Your line is open.

Yes, thank you. I wanted to go back to labor. I mean, it seems like your guide really, in a pretty big way, hinges on that assumption of improving labor availability in second half. So I guess just two elements to that. Do you feel like you have much visibility to that improvement and what may be Have you seen that would give you confidence that that's going to happen? And then I guess a component within that, if you go into peak, you know, it would seem like if you can't staff the swords ahead of peak and you have to hire, I don't know, your number is 50,000, 70,000 people, that that problem could get, you know, worse before it gets better. So I guess visibility on your labor and being okay during peak as well. Thank you.

Thank you, Tom. Yeah, the number is 90,000 and we are, you know, well on our way here. Now, you know, we have. the last two weeks uh we have seen pockets of uh opportunity and you know um positive changes that we hadn't seen in the first quarter so that gives us a little bit of encouragement and this is a systemic issue and uh so yes we're making some assumptions here in terms of a labor availability but if we staff up for peak then you know hopefully we know the q3 will be in good shape so We're not making dramatic assumptions here in terms of Q3 and Q4, but we're assuming that Q3 is going to be better than Q2, is going to be better than Q1. And the early indication, just very early indication, is that that's indeed the case. So I don't know, Mike, or want to add anything to that.

No, just to reiterate, I broke the labor impact into two pieces. The part that we're assuming that does mitigate, as Raj outlined, is the impact from the availability. Again, the market wage rate is what it is, and we can assume nothing different than that. And that is what is baked into the outlook.

And next we'll go to Brian Ostenbeck from J.P. Morgan. Your line is open.

All right, thanks for taking the question. Just wanted to ask Bray about the trends in pricing. Obviously, we saw the GRI yesterday. You talked about that briefly. You've got some new surcharges in place, fuels going up. But I think you mentioned in the prior remarks there's some availability for people, the larger shippers, to get capacity now at current rates. So maybe you can just distill that, those two factors. What do you feel about getting price in the market to capture and get ahead of some of these costs? And then maybe you can clarify the comments on the larger shippers who generally cause a lot of these surges from a volume perspective. Thank you.

Got it. Thanks, Brian. Good question. To be really clear, when we're talking about incremental capacity, one of the key elements of our revenue quality strategy, which has application here in the United States as well as in our intercontinental, as we talked about it, I talked about the six new flights that we launched from an Asia outbound perspective. And that was primarily, quite frankly, a transition from ad hoc to scheduled flight. service to improve reliability. But that allows us to plan and predict, and it also allows us to sell differently. As we sold into those flights versus previously, a lot of that was kind of catch up and spot rate. We are making sure that we are bringing on customers at current rates. And we are measuring kind of those current rates. So if a customer had X use of our intercontinental lift prior to the last 18 months, you know, we've contractual terms there. But as we increase the capacity we give those customers, that incremental business comes on at a higher rate. So, we're really trying to strike the right balance with our customers, give them the predictability that they need and honor our existing contractual terms, as well as, as we expand capacity, give them availability to that capacity at an incremental current market rate. So, really trying to strike that right balance. That's what I was referring to. It's predominantly on the intercontinental side, but of course it does have application from a peak perspective. As we've brought on new customers this year and we look at our surging customers, they obviously, those peak surcharges help them get the capacity they need so they can have a successful peak. I hope that helps answer your question.

And next we'll go to Jordan Allagher from Goldman Sachs. Your line is open.

Yeah, hi. Just on the new ground buckets that you've broken out, can you maybe talk a little bit about the three pieces and what you expect going forward? You know, roughly similar trend lines with the commercial sort of outpacing everything, but still positive on the home delivery. And as you mentioned, the constraining capacity to keep limiting the last piece of the business.

Great question. So for this fiscal year as we talked about you know inventory levels are at an all-time low and all of the economic indicators that we're tracking saying that we're going to have a very strong commercial year here in the United States as well as in Europe and of course that's also going to drive our intercontinental business. For FedEx ground commercial, we are expecting a strong growth here. From a home delivery perspective, I do think that you will see, you know, we will say moderate growth for home delivery given the lapping of last year's very, very strong growth. So I think you're going to see some good home delivery growth. And from an economy perspective, this particular quarter you saw the 30 year over year decline i do not think you will see that trend continue john and i are working and we've got some really great new technology coming to market um a new feature called sort to due date which is going to allow us to really move economy through the fedex ground system at a different pace and continue to lower the cost. So I think you'll see us find a better balance of the economy to home delivery. But directionally, commercial will grow the fastest, followed by home delivery, followed by economy as we think about this fiscal year.

And next we'll go to David Vernon from Bernstein. Your line is open.

Hey, good afternoon. Bree, just following up on that sort of growth outlook, I mean, you put out some numbers out there on 10% market growth, I think, in residential for the next couple of years. Is it your expectation that pricing and the operation will be at a point where you can kind of participate at an above-market growth rate from, you know, once we get past this period of volatility? Or do you intend to kind of grow the ground business maybe a little bit lower than the overall market as some other competitors have to pass you at the lower end of the service spectrum?

That's my favorite question yet. Yes, our intent, we have the best value proposition in the market. We have the best seven-day transit and coverage in the market. We feel really good about our value proposition. As I mentioned earlier, we are actually right now controlling demand because we're trying to balance service in the current labor environment. So that is absolutely our intent. The market is growing. We've got a great value proposition. I can't think of a better time to lean in to growth here in the United States.

And we'll take our next question from Todd Fowler from KeyBank Capital Markets. Your line is open.

Great. Thanks and good evening. Mike, I understand the thoughts around not being too specific about quarterly guidance, but I do think from a street perspective, the volatility from quarter to quarter can be an issue. I just want to make sure, are you saying that in the second quarter you're expecting a similar $800 million magnitude of year-over-year headwinds? And then secondly, we think sequentially the second quarter operating income has flattered down a little bit from the first quarter. Is that going to be a similar cadence this year? Are there some other things that we should think about just as we move into the second quarter from a seasonal standpoint? Thanks.

Sure, Todd. Yeah, no, that's a fair characterization when I said that the headwinds would be similar to the $800 million. Look, the pandemic and many other factors impacting our market, including the supply chain disruptions, I think you have to kind of take pause in terms of assuming typical seasonality across the board. Yes, there is a degree of that you will see, but I would say you can't just rely upon that because the dynamics are much more fluid than they were, and that's why we're trying to outline that as best we can, but we're navigating those changes along the way, but we're very confident in what we shared with you.

And next we'll go to Amit Mehrotra from Deutsche Bank. Your line is open.

Hey, I just wanted to follow up on that last question. So just to understand, so, you know, you're obviously entering peak season, higher B2C mix, margin pressure, density pressure. So you typically see a pretty notable step down in ground margins, fiscal 1 to 2Q. Is that Is that the same cadence? I mean, because 1Q is obviously pretty low to begin with. I'm just trying to get an understanding of that. And just as a high level, do you think ground margins can be up year over year this year? Thanks.

So, Amit, I'm just going to stick with it. We're not giving a margin forecast. What we outlined was that we expect operating profit to be up in all the transportation segments. I'm not going to get into giving a specific margin forecast by quarter. And again, the seasonality is, you know, we don't think it's value added to kind of get into trying to parse that at a level of precision given the dynamics of the market right now.

And next we'll go to Helene Becker from Cowan. Your line is open.

Thanks very much operator. Hi everybody and thank you for the time. So we've been actually doing a lot of work as you know, in the China area and you guys have about 30,000 people employed there. I think it's getting increasingly more difficult to work there. So can you just talk about how you're thinking longer term? about being in that market versus moving more capacity offshore to places like where you have regional sorts like Japan or back to the Philippines. Thank you.

Thank you, Helene, for that question. We actually have 12,000 employees in China. As you know, we have been in business in China since 1984, and we have been serving our customers there in this extremely important market. we value value our business in china and we are committed to continuing to improve our value proposition there our growth market is very strong and um our operations you know in in um uh in our hub in guangzhou is uh is is going smoothly and we also just opened up new newer air operations from beijing so uh you know so China remains a very important market for us, and we are very committed to it.

And next, we'll go to Jack Atkins from Stevens. Your line is open.

Okay, great. Thank you for taking my question. I guess just to go back to the CapEx and return discussion for a moment, Mike, thank you so much for the additional sort of comments around returns and free cash flow. But I guess when we think about sort of the longer-term targets for the business, you guys have always sort of talked about this double-digit consolidated operating margin. We haven't really come close to it since fiscal year 16. You raised the CapEx as a percentage of revenue targets in the proxy several weeks ago. Can you talk about why it makes sense to raise your long-term capital spending plans when the business still isn't achieving the long-term targets you've set for it from a margin perspective? Just help us square those two things. I think that's an issue that a lot of people are having trouble justifying.

All right. Well, Jack, first, you know, look, let me just say, because you brought up about ROIC, and I'll expand a little bit on the remarks I made earlier there. We're obviously referencing to our WACC when we compare our ROIC, which we put in the 7% to 9% range, which I think is consistent with what we see in many of your analysis. But when it comes to the ROIC itself, there are a number of different approaches and methods that practitioners use. you know, there tends to be variability in the absolute as well as the comparative measurements. But that said, you know, we're revisiting the various aspects of that so that we can maybe expand the context around our discussion of the topic. But I will say, regardless of how you calculate it, our ROIC does remain above our WAC. So, you know, so you ask about the LTI plan, Look, I'm not going to speak on behalf of the board, but I will give you some context around partly about what I mentioned too three months ago. So again, we had record earnings in fiscal 21 amidst an unprecedented global pandemic and and delivering the lifesaving vaccines around the world. And we've talked about the radical changes in supply chains, customer expectations and all that. So we did indeed accelerate purposefully some investment opportunities for capacity expansion and of course the replacement of the aircraft I mentioned before. So as I did specifically say on the June call, the FY22 to 24 LTI plan was set at 8% to account for these opportunities. And that target is below our historical capital intensity. Fiscal 21 was 7%, but that was the lowest in 10 years. So again, there's absolutely a focus on returns. And I think that we will continue to address your considerations there. And I would also highlight, because there was a question earlier about ground and investment there and we're making returns there, We talked a lot about how we're utilizing our assets differently, more efficiently, investing in smaller units of capacity. We've had the one single hub, but there's no other hubs on the drawing board. The ground can generate a higher ROIC at different margin levels than it did, you know, call it eight, nine years ago. So, again, that absolutely factors into how we look at these things.

And next we'll go to Allison Poliniak from Wells Fargo. Your line is open.

Hi, good evening. Bree, I think you had mentioned low single-digit share internationally. You know, it's certainly a unique environment, limited capacity. Can you maybe talk to how you're focused on expanding share, things you're doing there, but more importantly, what you're doing to try to retain some of that share you're capturing today, you know, once capacity eases at this point?

Yeah, great question. So a couple of things. Number one, when we think about our international business, our largest growth opportunity is Europe. So when we think about what are we doing to gain share, well, first and foremost, we're going to complete the physical integration, which is obviously critical. But when I think about Europe, there's three lines of business. There's the inter-Europe. We bought TNT. It has a very comprehensive and very unique value proposition because it's got the parcel and the freight. network into Europe to grow our cross-border business, and we're very pleased with the momentum there. From an international perspective, late last fiscal year, we expanded our intercontinental value proposition between Europe and the United States. We now have 90% of businesses in EU17 have access with the fastest overnight service into the So we have the leading intercontinental value proposition from Europe to the U.S. It's a great bundle to sell to B2B or commercial customers, sell to intra-Europe as well as the intercontinental. And then thirdly, when I think about Europe, we are absolutely under-penetrated in e-commerce both within Europe as well as from Europe to the United States. And we, as I talked about, have launched the FIC product, which is really a very competitive product. It's got quick transit times, but has very different features of service for the last mile. So it allows us to lower our cost to serve because the features on the last mile delivery look a lot more like the ground domestic network. So that's our primary focus from a Europe perspective. I will say we are also under-penetrated between Asia and Europe, and we've got great momentum in that lane. Similar metrics, we have sped up our service into Europe from Asia. In addition to that, we are launching the FICP product between those countries. Obviously, Asia into Europe is a very large e-commerce market. And again, we're under-penetrated there, really pleased with the momentum of our FICP product. So I hope that helps clarify. I also wanted to go back. I just looked at my notes. Commercial and home delivery here in the United States, as we think about the rest of the fiscal year, are going to be neck and neck from a growth perspective. So as I talked about commercial growing faster than home delivery, they're going to be pretty darn close as we look at the volume growth this year.

And next, we'll go to Baskin Majors from Susquehanna. Your line is open.

Yeah, good afternoon. When I look at the LTL freight business, it seems to be performing, you know, much better relative to at least your early expectations compared to parcel, yet that's still a manual, labor-intensive business that requires a lot of drivers, line, all freight handling and bodies to do that. Can you characterize why you think that you haven't had these labor-driven struggles in that part of your business that seem to be plaguing the parcel businesses particularly domestically and any best practices or or lessons you can learn and apply elsewhere thank you uh baskin this is mike uh so far i'll i'll let raj address more broadly but just to clarify within that 450 uh

a number of labor impact. There is an impact there for freight in terms of the same considerations that we talked about there. So I don't want to have the takeaway or imply that the freight team isn't dealing with similar considerations there. But I'll also highlight, as I mentioned to Scott early on there, that different networks and different transportation businesses can have different characteristics in that. So, Raj, you want to talk about the great things at Freight?

well we are extremely proud of the fedex freight team and you know but they're also leading with exactly the same set of challenges and uh but you know you know we have uh the team has done a fantastic job of managing through uh our revenue quality and operational efficiency despite these challenging circumstances and you know it's obviously a very very key part of our portfolio uh having said that you know with 20 million packages on the ground network per day or the us domestic parcel network is a very different set of challenges than dealing with a much smaller set of shipments that go through the freight system. So, look, your point about sharing best practices and making sure that we do the right thing across our operating companies, that goes on every single day. And, you know, the operating collaboratively is a big mantra at FedEx now, and we are definitely doing that. So, you know, again, I'm very, very proud of what the freight team has done here.

And next we'll go to Dwayne Fenningworth from Evercore ISI. Your line is open.

Hey, thanks. So just on the $200 million wage pressure and the $250 million in inefficiencies that that triggered, just to dive a little deeper there, was this a turnover issue or an investment for growth issue? Are people leaving at a faster rate or are you struggling to staff to grow and And if it's the latter, given the environment, why grow?

So I think if I understand the question, it is a staffing availability issue on the $250 million piece of it. For the $200 million, it's the rate. So just to reiterate that. And like I said, we've fully expect and are beginning to see some improvement in the availability, but should plans not proceed as we fully expect. And like I said earlier, we would need to obviously reassess the pace of implementing the initiatives there, but the opportunity remains nonetheless. We just need to be mindful of the overall environment.

Yeah, and I would just add one line to that is that if that were to happen, there's obviously much broader implications that's way beyond FedEx.

And now I'd like to turn it back to Mickey Foster for closing remarks.

Thank you for your participation in the FedEx Corporation's first 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.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.