FedEx Corporation

Good day, everyone, and welcome to the FedEx Corporation third quarter fiscal year 2022 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 third quarter earnings conference call. The third quarter earnings release, form 10Q, 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 our 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 a 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 Bri Carreri, Executive VP, Chief Marketing Communications Officer. And now Raj will share his views on the quarter.

Thank you, Mickey, and good afternoon, everybody. First and foremost, our thoughts are with those affected by the ongoing violence in Ukraine. The safety of our team members in Ukraine is our utmost priority, and we are providing them with financial assistance and various resources for support. We have suspended all services in Ukraine, Russia and Belarus. Additionally, we are helping to move relief to Ukraine and we have provided more than $1.5 million in humanitarian aid. Turning to Q3, execution of our strategies resulted in substantially higher operating income for the quarter as Team FedEx delivered yet another outstanding peak season. December 2021 was our most profitable December in FedEx history. Our ability to handle the influx of packages was years in the making as we've taken deliberate steps to enhance our unparalleled network in support of customers, large and small. We have fundamentally changed our performance as we handle increased e-commerce volume during peak and set a new precedent for peak seasons moving forward. Having said that, we are later focused on improving our margins. You'll hear us talk more about this today and then more specifically at our upcoming Investor Day. Even with the successful execution of PEAK, the new year brought new challenges, mostly driven by Omicron. This affected our business in two ways. First, we experienced staffing shortages, particularly in our air operations. In January alone, the absentee rate of our crew due to Omicron was over 15%, which caused significant flight disruptions. Second, our customers experienced Omicron-driven staffing shortages, which reduced demand for our services, especially in U.S. domestic and European markets. Both of those factors resulted in softer than expected volume levels, especially in January. We estimate the effect of Omicron driven volume softness in our Q3 results was approximately $350 million. While it was significant, it was also temporary and we have seen volume rebound from January levels. Even with these challenges, FedEx Express delivered strong adjusted operating income growth of 27% year over year. Speaking of the Express team, we announced that after nearly 40 years of distinguished service, Don Corrin, President and CEO of FedEx Express, will retire later this year and named Richard Smith, current Executive Vice President of Global Support and Regional President of the Americas at FedEx Express as his successor. We'll have much more to say about Don and his countless contributions to the business during our call in June. FedEx Freight once again delivered strong results with third quarter operating income nearly tripling year over year, driven by a continued focus on revenue quality. Turning to FedEx Ground, operating costs continue to be challenged by the competitive labor environment now primarily manifesting in increased labor rates. We estimate the total impact of approximately $210 million at ground in the third quarter, which is significantly lower than what we saw in Q1 and Q2, as we have seen substantial improvement in labor availability post-peak. With the stabilization in the labor environment, I'm pleased to share that we have successfully unwound network adjustments that were necessary to provide service but cost inefficiencies. staffing levels and the rapid acceleration in labor costs have stabilized and our network is operating at normal levels. Despite improvement in the labor headwind, volume levels in Q3 were softer than we had previously forecasted in part due to Omicron surge slowing customer demand. As such, we expect our second half ground margins will be lower than our previous expectations and not reach double digits. Over the years, FedEx Ground has built a strong foundation to serve B2B and small and medium customers with an unmatched value proposition. As a result, we have grown market share in these segments and they remain strong priorities for the future. Then, more than three years ago, we built upon this foundation and embarked on a strategy that positioned FedEx squarely in the center of the fast-growing e-commerce market with a differentiated portfolio and a diversified customer base. This included a period of strategically investing in our network to meet growing market demand. Let me note here that this strategy is different than what our primary competitor has pursued. By building on our current base of business and making those prior investments in our network to facilitate growth, we are in a position to generate improved operating profit and margins. We saw this potential in our financial results for December prior to the surge of Omicron. And moving forward, our financial performance will be further enhanced by maximizing existing assets, improving capital utilization, and leveraging technologies that facilitate optimization of our existing physical capacity and staffing. As we prepare to close fiscal year 22, permit me a moment to share what's on the horizon for FedEx as we continue to focus on margin expansion and shareholder return. In addition to the opportunity to enhance performance at ground that I just discussed, we have other levers for profitable growth, which include number one, driving improved results in Europe. Number two, increasing collaboration and efficiency to optimize our networks, lower our cost to serve and enhance return on capital. And number three, unlocking new value through digital innovation. Of course, we will do this in an environment of strong revenue quality management. Our international business, particularly Europe, remains a big profit opportunity. Air network integration remains on track for the end of the month to complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks, both in the air and on the road. Paris CDG 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 that's enabling us to focus on international growth. Our expanded collaboration across operating companies will utilize our air and ground networks in a smarter and more calculated manner. For example, FedEx Freight trucks have traveled more than 7 million miles while operating on behalf of FedEx Ground this fiscal year. FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched more than 36,000 times. We'll continue to comprehensively look at all our assets in our network to put the right package in the right network and the right cost to serve. Additionally, we are unlocking value through digital innovation and our accelerated integration of data-driven technologies that will drive increased productivity in our line haul and dock operations, as well as in the last mile. Enhanced automation technology will be operational at FedEx ground in hundreds of facilities prior to this peak. It will increase upstream efficiencies, enabling managers to do better balance and plan sortation operations, thereby unlocking key capacity. For example, during Cyber Week, this technology helped keep 1.9 million ground economy packages out of constrained sorts. We're also modernizing the planning and staffing of our dock operations, as well as the systems, training, and technology that maximizes productivity on every sort. One such example is a recently rolled out package handler scheduling technology that will help ensure the right staffing levels for every short and every facility across the ground network. This will improve dock productivity, and when combined with a focus on employee retention, it will enable us to significantly reduce the cost of turnover and strategically target recruiting spend when and where necessary. The last mile, we continue to improve upon the route optimization technology already implemented to enable service providers to make real-time decisions that enhance their businesses' daily efficiency. These ongoing investments in automation and technology have helped FedEx build the most flexible and responsive network in the industry and will enable us to improve our margins. In closing, we have the networks, the strategy, and the right team in place as we deliver financial returns and drive shareholder value for years to come. With that, let me turn it over to Bree.