FedEx Corporation

Good day, everyone, and welcome to the FedEx Corporation Second Quarter Fiscal Year 2022 Earnings Conference 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. Please go ahead.

Good afternoon, and welcome to FedEx Corporation Second Quarter Earnings Conference Call. The Second Quarter Earnings Release Form 10-Q 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 Raj Subramanian, President and COO, Mike Lenz, Executive Vice President and CFO, and Brie Carreri, Executive VP, Chief Marketing Communications Officer. And now Raj will share his views on the quarter.

Thank you, Mickey, and good afternoon, everyone. Let me begin by extending a heartfelt thank you to our more than 600,000 dedicated team members, especially those on the front lines who are working relentlessly to successfully deliver another robust peak season for our customers. As expected, we're seeing strong levels of volume in our network given unprecedented levels of shopping and shipping this holiday season. FedEx Ground had an outstanding cyber week with 100 million packages picked up during the first official week of peak. Our ability to handle this influx of packages has been years in the making as we've taken deliberate steps to enhance our unparalleled network to support customers large and small. This includes strategically adding more capacity across our network to support our growing customer base. For example, at FedEx Ground, this means adding 14.4 million square feet to our network, the equivalent of 300 football fields since June of this year. In Q2 alone, we brought online 24 major expansion projects, with nine of them starting operations in November, just weeks before peak. While it was important that these facilities were up and running to add to our capacity in time for peak, experience tells us that they will operate with increasing efficiency in the weeks and months ahead. As we shared on the Q1 call, overcoming staffing and retention challenges due to the constrained labor market has been a key focus. We continued to take bold actions in Q2 to hire and invest in our frontline team members and thus increase network efficiency. These actions, including pay premiums, increased paid time off and tuition reimbursement. I'm pleased to share that we have made considerable traction in recruiting frontline positions. Last week, we exceeded 111,000 applications, the highest level in FedEx history. To put this in perspective, we had 52,000 applications the week of May the 8th. This has led to appropriate staffing levels for Peak, including hiring more than 60,000 frontline team members since we last spoke in September. We delivered strong results for the quarter with an 11% increase in adjusted operating income, which exceeded our initial expectations chaired during the Q1 call. Second quarter results include outstanding performance by our team at FedEx Express, where operating income on an asset-adjusted basis exceeded $1 billion for the quarter. The ability we have at Express to flex our cost structure and network in response to changing market conditions positions us for long-term sustained profitability. FedEx Freight also delivered a strong quarter with an operating margin of 14.7%. I'm proud of the team as they continue to focus on revenue quality and profitable growth. We estimate the effect of labor shortages on our Q2 results was approximately $470 million in line with our original expectations. And consistent with the first quarter, ground once again bore the majority of these costs to the tune of $285 million. While ground results were negatively affected by labor challenges in the first half of the year, we are encouraged by hiring momentum as we look to the second half and are focused on retaining recently hired team members after the peak season concludes. We know we have an excellent value proposition for employees, which we are strengthening even further with technology that enables employee-friendly, flexible schedule options, including the ability to pick up extra shifts when convenient, or swap shifts with a colleague, all from the convenience of an app on their phone or computer. All of this to say, We anticipate cost pressures from constrained labor markets to partially subside in the second half of the fiscal year. Now, it's a good time to focus on what is ahead for FedEx. The FedEx business has been built over nearly five decades, and during that time, we have built networks and capabilities that are differentiated from our competitors and nearly impossible to replicate. Our customers and their customers value these networks and capabilities as we enable global supply chains to stay connected. This has never been illustrated more clearly than during the last two years of the global COVID pandemic. Our industry has proven to be absolutely critical in delivering during this pandemic, whether it is business to business or e-commerce. And within this industry, our strategy is unique. our future growth and profitability will be driven by our strategy and we will drive total shareholder value over the immediate mid and long term there is solid momentum in our base business as we continue to lean into the dynamic growth of e-commerce amid a robust pricing environment in addition we have other levers for profitable growth including number one increasing collaboration and efficiency to optimize our networks and business. Number two, driving improved results in Europe and international. And number three, unlocking value by digital innovation. Our expanded collaboration across operating companies will drive cost benefits, lower delivery and line haul costs, and better utilization of existing assets. Said differently, we'll utilize our air and ground networks in a smarter, more calculated manner. FedEx Freight trucks have traveled 4 million miles while operating on behalf of FedEx Ground this year. FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched nearly 50,000 times. We will continue to look comprehensively at all assets in our network, including stations, hubs, and equipment to put the right package in the right network at the best service for our customers. As I highlighted earlier, the focus on collaboration also extends to our customers as we work to make their supply chains smarter. This includes providing integration and common data platform opportunities and planning the best way to leverage our network flexibility for their volume needs. The second lever is continuing to improve our international profitability. Our international business, particularly Europe, remains one of our biggest opportunities. I was in Europe in October and was happy to note the excellent progress there as we built upon the success of station integration which was completed in May 2021. We remain on track for the completion of our air network integration in April 2022 which will complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks. After April 2022, Paris' Charles de Gaulle Airport will serve as the main hub for all European and intercontinental flights. Liège will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth. Brie will share more on what this enhanced value proposition means for our customers. finally we are unlocking value through digital innovation and our accelerated integration of data-driven technologies and enhanced digital capabilities ranging from increased network efficiency to customer experience improvements for example early package visibility enhances visibility of third-party trailers as improving customer collaboration information sharing and package prioritization Model-driven estimated delivery date uses machine learning to provide a more accurate estimated delivery day of packages to customers and recipients. And trailer load scan automation eliminates the need for a manual scan, enabling faster and more efficient loading while significantly reducing package touches. These ongoing investments in network capacity, automation, and technology have helped FedEx build the most flexible and most responsive network in the industry, affording us significant competitive advantages. In closing, the successful execution of our strategies continues to drive high demand for our differentiated services. We remain confident in these strategies for the various reasons outlined. Our unparalleled portfolio of services, powered by the strength and reach of our global network, positions FedEx to deliver superior, sustainable financial returns and drive shareholder value for years to come. With that, let me turn this floor over to Brie.