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.

Thank you, Raj. Good afternoon, everyone. Several macroeconomic forces, including the tragic conflict in the Ukraine, uncertainty around the pandemic, a tight labor market, supply chain disruptions, high energy prices, and inflationary pressure have dampened the current GDP outlook globally and for the United States. Last week, we lowered our economic outlook. U.S. GDP is now expected to increase 3.4% in calendar year 2022, revised down from 3.7%. and our outlook is 2.3% in calendar year 2023, with consumer spending tilting towards services and B2B growth supported by inventory rebuilding. Global GDP growth is expected to be 3.5% in calendar year 2022, previously 4.1%, and it will be 3.1% in calendar year 2023. Growth will be driven by the release of pent-up demand for services, while investment demand and inventory restocking support global manufacturing and trade. Given the tremendous fluidity of the macroeconomic environment, we will continue to update our outlook. Our teams are ready to adjust plans as required to drive margin improvement despite the dynamic environment in which we operate. With fuel prices increasing around the world, today we announced a fuel surcharge increase effective April 4th for FedEx Express, ground and freight. Additional details can be found on FedEx.com. The change in economic outlook does not change our confidence that e-commerce will continue to drive strong parcel market growth. We believe the e-commerce growth rate in the United States will be in the mid to high single digits for the next three to four years. we will continue to build differentiated value propositions to achieve market-leading pricing in all our customer segments, including e-commerce, our small and medium customers, and our commercial B2B business. We are very pleased with the results of our revenue quality strategy and know we have great opportunity to increase the flow-through to margin expansion. In the third quarter, revenue growth was 10% year-over-year, with double-digit yield improvement for FedEx Express and FedEx Freight, Close behind was FedEx Ground at 9% year-over-year yield improvement. In the United States, our package revenue grew 9% in Q3 on strong yield improvement of 10%. We executed on our peak pricing strategy in the month of December, delivering more than $250 million in peak surcharge revenue. Softness in parcel volumes came predominantly from constraining FedEx Ground economy and the effects of Omicron on both our networks and on our customers. Focus on revenue quality and profitable share growth drove outstanding results for FedEx Freight this quarter. For the quarter, revenue increased 23% year-over-year, driven by a 19% increase in revenue per shipment. Additionally, FedEx Freight Direct continues to gain great momentum as an e-commerce solution for heavy, bulky items with phenomenal growth in Q3 year-over-year. Our international businesses are navigating a dynamic environment. Capacity constraints continue to be a reality. At this point, valet capacity on transatlantic passenger airlines is expected to recover faster than transpacific. Passenger airline capacity is not expected to fully recover to pre-COVID levels until 2024 or even later across our largest global trade lanes. Air's capacity on international lanes and strong demand out of Asia is resulting in a continued favorable pricing environment. With the completion of our integrated air network at the end of this month, we have one European air network and one road network in and out of Europe. Our international portfolio of services contains the best European road network, the broadest U.S. next day coverage, and a combined parcel and freight offering that no one else in the market has. As a result of the integration, we will be able to offer improved transit times, earlier delivery, and later pickup services to more customers in more locations. Seven new countries will now be connected on the next day basis within Europe, while 14 countries will be expanding our noon delivery coverage. In several countries, this will be the first time we have introduced next day service to the rest of Europe. We will leverage the expanded European portfolio to improve international profitability, drive revenue growth, and gain market share. In addition to the improvements in our European value proposition, we have made significant strides to enhance our digital solutions as well. In January, we enhanced our tracking service based on an advanced machine learning and artificial intelligence model developed by FedEx DataWorks. This new experience delivers greater estimated delivery date accuracy, including updates for early or delayed shipments through all tracking channels. This improves both the shipper and the recipient experience, and it will reduce calls to customer service. Additionally, our new modernized FedEx Ship Manager, which is our online shipping application, has now been rolled out in more than 153 countries. In January, we began introducing customers to it in the United States and Canada. FedEx Ship Manager is the primary shipping application for our small and medium customer segment. We believe a market-leading digital portfolio will enable FedEx to continue to take market share in this very profitable segment. In summary, we remain optimistic about Q4 and beyond and will continue to deliver on our market-leading value proposition. And with that, I'll turn it over to Mike for his remarks.

Thank you, Bri, and good afternoon, everyone. After a strong start to the third quarter with the most profitable December in company history, January was significantly influenced by the rapid spread of the Omicron variant and its negative effect on our operations and the macro environment. These challenges subsided during February, resulting in third quarter adjusted operating income of $1.5 billion, up 37% year-over-year on an adjusted basis. There are a number of factors influencing our third quarter results for both this year and last year that I will cover. As Raj explained the effects on our operations, I will give further context for the financial implications. First, labor market conditions, although much improved, once again had a significant effect on our results at an estimated $350 million a year, which was primarily experienced at ground. For the third quarter, that was primarily due to higher rates for both purchase transportation and wages. Labor availability-driven network inefficiencies were significantly less of a factor in the third quarter compared to earlier in the year. The implications from the Omicron variant surge reduced third quarter operating income by an estimated $350 million, predominantly at Express. as it influenced customer demand and pressured our operations, resulting in constrained capacity, network disruptions, and lower volumes in revenue. The third quarter had favorable year-over-year comparisons for variable compensation of approximately $380 million, including the one-time express hourly bonus last year, and significantly less impactful winter weather that debted to $310 million. With that overview of the consolidated results of the third quarter, I'll turn to the highlights for each of our transportation segments. Brown reported a 10% increase in revenue year over year with operating income down approximately $60 million and an operating margin at 7.3%. While pressures from constrained labor markets began subsiding, the effect was still significant at an estimated $210 million year over year, predominantly due to the higher purchase transportation and wage rates. In addition, our volume was softer than expected due to the Omicron variant surge slowing customer demand. A 9% yield improvement partially offset these headwinds, and our teams remain very focused on improving ground performance as Raj outlined earlier. Express adjusted operating income increased by 27% year-over-year, driven by higher yields and a net fuel benefit. with adjusted operating margin increasing by 100 basis points to 5.8%. Express results also benefited in the third quarter from $285 million of lower variable compensation as well as much less severe winter weather. The strong results were partially offset by the headwinds I mentioned earlier with the Omicron surge having the largest effect, especially during January, of an estimated $240 million. Team member absences, primarily among our pilots, severely disrupted operations, requiring many flight cancellations and further constraining capacity. Additionally, during this time, the Omicron surge reduced customer demand in many parts of the world. Freight had another outstanding quarter, delivering an operating margin of 15%, 850 basis points higher year over year, And revenue for the third quarter increased 23%, with operating income up over 180%, despite the pressures from higher purchase transportation rates and wages. And for the first time in Freight's history, they realized sequential operating income and operating margin improvement from the second quarter to the third quarter. This is all thanks to Freight's continued focus on revenue quality and profitable share growth. Turning to the balance sheet, we ended our quarter with $6.1 billion in cash and are targeting over $3 billion in adjusted free cash flow for fiscal 2022. As I emphasized last quarter, our stronger cash flow provides extensive flexibility as we continue to focus on balanced capital allocation. As such, I'm pleased to share the accelerated share repurchase program announced last quarter was completed during Q3 with 6.1 million shares delivered under the ASR agreement. Total repurchases during fiscal 22 are nearly 9 million shares, or 3% of the shares outstanding at the beginning of the year. The decrease in outstanding shares resulting from the ASR benefited third quarter results by $0.06 per diluted share. Also during the quarter, we made a $250 million voluntary contribution to our U.S. pension plan and have funded $500 million year to date. Now turning to what's ahead. We are affirming our full year adjusted EPS range at $20.50 to $21.50. The operating and business environment uncertainty I mentioned in December did materialize to a greater degree than anticipated during Q3, but we have navigated those challenges and project a solid finish to our fiscal year. Labor-related network and efficiency effects have diminished, and the wage rate component should become less of a headwind as we lap the onset of labor rate increases in the fourth quarter. Lastly, variable compensation expense will be a tailwind as it was in Q3. Turning to capital spending, we have lowered our FY22 capital spending forecast from $7.2 billion to $7 billion. Much of the change is driven by extended timelines resulting from supply chain considerations. While we are still developing our FY23 plans, our focus remains on lowering our capital intensity while investing in strategic initiatives to drive returns. We are highly focused on ensuring our capital investments generate returns to drive further growth in earnings and cash flows. Lastly, our projection for the full-year effective tax rate is now 22% to 23% prior to the mark-to-market retirement plan adjustments. While we are confident in our ability to deliver a strong fourth quarter, uncertainty remains across many fronts, including additional pandemic developments, the labor market, inflation, high energy prices, and further geopolitical risks. and the potential effects on the pace and timing of global economic activity. We continue to monitor these trends and adjust accordingly. With that, we are all very much looking forward to sharing additional background at our upcoming investor meeting on June 28th and 29th in Memphis. Nikki and the investor relations team will soon provide specifics on logistics, and now we will be happy to address your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. Our first question comes from Amit Mitrota with Deutsche Bank.

Thanks, everyone. Appreciate the question. I wanted to ask about ground margins. If you can just talk about, you know, where you expect ground margins to be in fiscal 22. And, Henry, this is maybe a longer-term question for you. I mean, if I look at the ground numbers since 2013, you know, ground revenues are up $17 billion since 2013, but the profits in ground are up only, you know, $400 million, which implies a contribution margin of only 2.5%. So can you just talk about a plan to reverse this long-term trend? It seems like for the first time in a while, you guys are ready to present a long-term plan to improve the cadence and the ground margins. I wonder if you could a little bit more meet around that, you know, what the levers are going to be to reverse this long-term trend and maybe give us some goalposts around that way as it relates to, you know, the next fiscal year, which is coming up pretty soon. Thank you very much.

Thank you for the question. Let me address it broadly and then Mike can talk about specifics on this. Firstly, we are laser focused on improving our financial performance at FedEx Ground. Let me start with firstly the CEO of FedEx Ground is John Smith and he was at the stage. for tremendous performance at FedEx Freight before he left, and we're seeing the benefit of that as the reason that he's there. So, you know, we expect that John and his team will drive this performance going forward. But let me also give you just a context of where we are on ground. You know, we first of all manage FedEx Enterprise as a portfolio of different operating companies, and we made a specific decision to invest in capacity and double down on e-commerce three years ago. We saw we were skating to where the puck was going to be and seeing where the market was going. If you look at the history of FedEx Ground, From the very beginning, starting of the acquisition of RPS, when we launched home delivery, and now we doubled down on e-commerce, there were periods of time we had to invest. And we were working with our customers and retailers for them to succeed in e-commerce, and it's a strategic relationship that we're building. So that period of investment in many ways is behind us. That pace is behind us now. We are focused on getting revenue quality, making sure we put the right package in the right network, and making sure that we generate margins and growth going forward. We'll talk about this in more detail when you see all in June, but clearly that's what we're focused on right now. Mike?

The only thing I would add, I think there was a question in there about FY22. I would say certainly for the guidance that we have, our consolidated operating margins will increase in Q4. I'm not going to get into specific segment projections, but it is certainly the case that sequentially ground margins increase. are typically higher in Q4 than in Q3, and we would have that expectation this year as well.

We'll take our next question from Jack Atkins with Stevens.

Okay, great. Thanks for taking my question here. So just another one on ground. I think we've had three quarters in a row where cost inflation at ground has pretty significantly outstripped your ability to – has outstripped your revenue per package and yield growth. How confident are you that you're in a position to drive revenue per package ahead of cost per package as we look forward, especially with rising inflationary pressures that we're seeing across the economy, and I'm sure you're seeing it in your business as well? Thank you.

Thank you, Jack. I think we have had two particular issues regarding labor. And as we embark on this journey, obviously that was what we saw in the last year was surprising in that sense. And we had two things. One was because of lack of labor availability, we were inefficient in moving some of the packages. And secondly, just the cost of labor going up. We have unwound the inefficiencies. The network is back to normal. But obviously, we have now in our numbers, we have the year-over-year growth on labor rates. And so we have dealt with it head on. It's now in our numbers. And I think it gives us a competitive advantage as we look in the future. Revenue quality management is a big area of focus for us. Our peak in December gave us a flavor of what, you know, we can expect in terms of our financial performance going forward. And, you know, we are confident that we can, you know, we are able to manage this going forward. We had a spike in fiscal year 22 that was unnatural, but it's just, we got to set the stage for future earnings growth, both revenue and top and bottom line.

i don't know do you want to add anything more on revenue quality no we're obviously we have done a tremendous job we talked about the nine percent yield improvement from bedex ground this past quarter um as i've mentioned we have repriced about 50 of our large customer meeting customer contracts so we still have um some opportunity that we have to continue that repricing um and so we are clear-eyed about the inflationary environment that we are operating in and know that we need to stay ahead of it So you can anticipate that as we head into next year's business plan and all of our discussions with customers that you will continue to see a high-yield improvement across all segments because it will be required to stay ahead of the environment we're operating in right now.

Jack, if I can say one other thing, we have a revenue management committee that meets every week. It's even more important now because of the inflationary environment and the operations teams and the commercial teams are locked in and we make decisions very, very dynamically and very, very quickly to deal with this.

And we'll take our next question from Tom Wadowitz with UBS.

Yeah, good afternoon. I wanted to see if you could offer some thoughts on the consumer. You know, I think, Brie, maybe you had some comments about, you know, risks or might, but have you seen any signs that the consumer is, you know, I know Omicron caused noise, but just the consumer weakening, have you seen that recently in the U.S.? And how do you think about the importance of, you know, consumer and goods buying in When you look at the ground business, if you have a weaker consumer, does that just make it tougher to, you know, make that algorithm on ground margin improvement work? So really, you know, really just wanted to get your thoughts on consumer and, you know, near term and also outlook. Thank you.

Hey, Tom, thank you for that question. Especially as the inflation has picked up and there's obviously consumer spending in February is already down. It's difficult to forecast in this environment, but I'm going to tell you that the big period of growth of e-commerce is now behind us and we are planning in that perspective. We are confident even with the mid-single-digit growth to high single-digit growth that Bri was talking about on e-commerce that we are able to generate positive returns going forward. So we are not counting on huge consumer spend in our numbers. Bri?

I would agree with that completely. As we talked about, we already have modified our economic outlook from a market forecast perspective. A couple of things. One, for this calendar year, we do expect B2B parcel market growth to be actually relatively healthy at 3%. Normally, it's been around 2% in our market, and that's for this year. We still see a lot of inventory. Replenishment, we also see strong requirements coming in from Asia, as I mentioned earlier. There's still just a backlog there, quite frankly. So the B2B is still going to be healthy for the year. From a B2C perspective, we have modified our long-term outlook. We're now projecting about 8.3% CAGR in an e-commerce market. That's to calendar year 2026. So historically, over the last couple of years, we had actually projected above 10%. So yes, we think consumer demand will be down. It is already, quite frankly, in our outlook for Q4. And as we look forward for next year, we think we can continue to take market share and have some profitable growth, despite sort of a softer economic outlook.

We'll take our next question from Jordan Alliger with Goldman Sachs.

Yeah, hi, afternoon. Just curious, you mentioned, I think, that the staffing and labor-related costs for the company was $350 million in the most recent quarter. How does that look in the fiscal fourth quarter, direction-wise, and then same thing, Grant, I think you said it's Q10 as a 350. How do you think that fits as we get through fiscal fourth quarter? Thanks.

Hey, Jordan, it's Mike. Look, so we went from like roughly 470 in Q2, 350 this quarter. I mean, I would put it at an order of magnitude around 100 million or so, you know, based on what we are seeing here today that's uh again principally the wage rate element of it which really began to manifest uh in the may time frame essentially uh or april may time frame and our next question comes from chris weatherby with the city

Hey, great. Thanks. Good afternoon. Quick clarification, then another question on ground. Just making sure I understand, Raj, I think you said you wouldn't hit double digits on ground margins. Before I make sure, I heard that that's the average for the back half of the year. So I guess we won't see expansion in the fourth quarter. And then maybe taking a step back in terms of the ISP model on the ground side, just kind of curious, in this type of inflationary environment, do you see pressure to kind of go back and maybe open up contracts and do things differently with that piece of the business? Is that something that we need to think about beyond this year out into next year and beyond if inflationary pressures keep up? Or is it the kind of thing that would just sort of be normal course as we move forward? Thank you.

Thank you, Chris. I'll let Mike answer the first question in a minute. But on the entrepreneurial business model with our contractors, it's a win-win scenario. It provides us the flexibility. As the market dynamics change, we remain committed to collaborating with those service providers and enable that win-win lines of communication are open. So, yes, we will work closely hand in hand to make sure that we are successful for FedEx and our contractors going forward.

Chris, nothing from what I said prior where consolidated operating margins will be up in Q4 and the ground Q4 margin sequentially would be higher than Q3, but not going to go past in terms of the specific segment quarterly margin projections.

We'll take our next question from Duane Fenningworth with Evercore ISI.

Hey, thanks for taking the question. I wonder if you could comment on you gave us the impact to EBIT, but I wonder if you could comment qualitatively on the impact to volume growth from Omicron in express and ground and to what extent you've seen those volumes and ADVs accelerate and pick back up.

Sure, happy to. Great question. When we look at the volume in Q3, we really have to break it down by month. So from a December perspective, we actually saw softer than anticipated volume for a couple of reasons. The first was FedEx ground economy. We have been constraining that product to make sure we get the revenue quality that we require for the network. The second was we were absolutely focused on service and make sure that we had volume in the right places within the network. And then third was that we also saw a huge pull forward in early in November. Both retailers and of course the carriers were really pushing to get volume moving earlier in the peak season and actually it was quite successful. So overall December was softer than anticipated for those three reasons. Then when we got into January, we obviously saw significant impact in volume in the express network here in the United States, but also in Europe. And then we did see some impact in January at FedEx Ground, but also we did have the FedEx Ground economy constrained growth impact January, because as you can imagine, the ground economy product is heavily used for returns as well. That was what was going on in December. In January, you saw Omicron, but you also saw those other impacts in December and January. And then we got to February, we actually saw a rebound. So as Raj mentioned in his opening remarks, we actually saw quite a dramatic recovery from a volume perspective relative to January. And so that's sort of where we're at from a volume perspective.

Our next question comes from Scott Group with Wolf Research.

Hey, thanks. Afternoon, guys. So, Mike, you've got a big range of earnings guidance for the year, one quarter left. Any thoughts on direction where you think we should be shaking out relative to that range? And then I'll ask another on ground margins. You guys operating, you know, give or take it an 8% margin. UPS is on its way to 12. You guys used to be better. Is this structural? Is there a reason you can't get to those kinds of levels? And then any thoughts on this ground contractor lawsuit? Thank you.

All right, Scott. First is Mike. Talking about the range. Look, certainly it is the case that relative to where we were three months ago, a little different place in the range as the uncertainties manifested in a greater magnitude than we had anticipated. But I think we're quite proud of the fact that our guidance remains where we started the year at. Look, if you had told me at that time we would have had the most dramatic labor market shift in generations, as well as another phase of the pandemic that resulted in case counts in the U.S. and Europe higher than any previous waves, we undoubtedly would have had a significantly wider range. So we feel that it is a great accomplishment of the team. to be where we are with this. Lots of moving pieces and things change along the way within the scope and scale of what this enterprise is. And so we're looking forward to a strong finish to the fiscal year.

Well, let me just say big kudos to our CFO on setting the range from the beginning of the fiscal year and all the things that have happened in the middle, and we're still the same range. So, I mean, that's terrific. I've already talked to you about our dealings with our contractors. It's a win-win situation, and we'll continue to work that. The lines of communication are open. I've spoken to John several times and he's directly in touch and his team. And as far as our upside for FedEx Ground, yes, we have upside. We know that and we are laser focused on that. And again, John's the right person to lead that team to get there as well. Thank you.

Our next question comes from Allison Poliniak with Wells Fargo.

Hi, good evening. I just want to go to the levers of growth. You talked about collaboration, increasing that collaboration to optimize the network, understanding its early innings there. Just any color on the productivity you're seeing from some of those efforts, and then maybe as well as the potential choke points that you're seeing that might need to be addressed before that could accelerate further. Just any color, thanks.

Yeah, listen, thank you for that question. Clearly, as the e-commerce market has grown, and in both our networks, there's now opportunity to optimize the day-definite traffic between the two networks. And so we're clearly doing that, but we are, as you call it, in the early innings. um we have you know there's a lot of work to be done and we'll share with share that with you when when you're all here in person in in june but the opportunity also is quite big and we're already moving in this direction and we will continue to make strides here now in this context please don't forget uh what fedex freight is doing in this regard you know and especially uh working with both ground and express and over time uh with international and so we will clearly focus on trying to making sure that we put the right package in the right network at the right price and uh and again we'll share more details with you in june our next question comes from brandon oglenski with barclays hey good afternoon and thanks for taking the question um raj since the rest of the management team is not called maybe you can give us some insight

into the appointment of Richard at Express, you know, what was the process there for electing the next leader? And then what do you hope to get out of the leadership change in that large division? Thank you.

Thank you, Brandon. Of course, we have a set succession planning process. Don was in this role for three years. I knew that was going to be a finite period of time, and so we were already working on the succession planning very carefully. Actually, we've done so with John in FedEx Ground, with Lance in FedEx Freight. similarly we have a process going on with express uh we divided into three groups uh three mega regions uh with america's asia and europe and uh you know richard is leading america's region is was responsible for uh the the vaccine distribution uh and also in the planning of our global network in this very interesting time that we've been through so we are very confident that richard is going to take the organization to the next level don has done a fantastic job of creating a unified culture and getting the right players in place. We have a great bench and, you know, this is going to be terrific. Thank you.

We'll take our next question from Bascom Majors with Susquehanna.

Yeah, good evening. You took down the midpoint of your multi-year restructuring spin in Europe, but didn't change the benefit you expect to get from that. Can you talk a little bit about what drove that update in your expectations and what the next steps could be in the Europe Profit Improvement Plan as you get ready to the point of discussing that with investors, you know, maybe next year? Thanks.

Sure, Baskin. This is Mike. So, first, yes, we did narrow the range of the expected cost of that program as we have move through the process. And as you've noted, we've talked about the charges as we've recognized them there. The benefits range is unchanged. And so we felt it was appropriate as we were further down the process just to simply narrow the range of that. So that was it. A lot of things going forward as it relates to TNT beyond that. So I'll have Raj elaborate a bit on some upcoming events too.

Thank you for the question there. I think the end of this month is a very important date for us as we complete the physical integration. Europe remains a big profit opportunity for us going forward. Just to put it in perspective, today FedEx operates 350 flights a week serving 42 airports and TNT operates 600 flights serving 59 airports. And by combining, we're going to reduce the total flight to 825, but we extend our reach to serve 72 airports. So fewer flights, more airports, and oh, by the way, because there are jets, extended craft time, so the value proposition gets better. So that happens right away in April. The logic behind our acquisition of TNT remains sound. We are closing a portfolio gap because we did not have an intra-European deferred service, and now we do. With this, we can also now serve Europe in and out on a lower cost structure. And we also launch priority timed options. We have noon and end of day service and it gives us flexibility. So a lot of things going on as we, you know, Mike already talked to you about the back office savings there. The CDG hub, you know, 72,000 pieces per hour. I was there two, three months ago and built back there in May again. uh there'll be something to behold and uh you know so it's going to be you know we are confident here that this now sets the stage for our improved performance in europe from here on out thank you so much our next question comes from brian osenbeck with jp morgan brian your line is open and we are unable to hear you please check your mute function

We'll move on to our next question from Helene Becker with Cowen & Company.

Thanks very much, Operator. Hi, everybody. I just have two questions. One is when you say that you're taking share, I think, Bree, you mentioned that. Can you just be a little more specific about where that share shift is coming, either in verticals or geographically? And then my other question is with respect to your facilities, can you just talk a little bit about the use of robotics and automation that potentially could lower labor costs? Thank you.

Sure. Happy to talk about our targeted revenue growth strategy. So from a market share perspective, our goal here is to take share strategically in the segments that value our network. And as we've talked about over the last year or two, we've made some pretty significant enhancements in our network and our value proposition, some of which I covered earlier. From a small business perspective, We have taken share over the last several years consistently. And this year, we actually have seen our small business segment grow faster than our large customer segment. We're really pleased with that. When we compare ourselves to our primary competitor, I still have share upside in both B2B as well as in e-commerce. And as I mentioned, we are very disciplined and very focused on our small business acquisition strategy. We're doing some things very differently. We're acquiring them direct. What do I mean? en masse through platforms. We're being very selective with the platform partners that we are choosing because we want to have that direct relationship with the small customer. no one else in the market has. We are strategically using earned discount to bundle our parcel and our LTL portfolio, which of course our primary competitor can no longer do. So from a small business perspective, historically we've taken share. This year I've seen small business grow faster than large. And I'm talking predominantly here in the United States, although I will tell you that both Europe and EMEA are rolling out a very similar playbook. We're very optimistic about our share opportunity there as well. Additionally, we saw APAC or our EMEA region take share and we're very pleased with that as well. They've been very focused and we see strong momentum out of Asia as well as out of Europe and e-commerce, intercontinental e-commerce. The premium piece of that market is a share opportunity, those that pay for the value proposition there. From a Europe perspective, we have not been as successful from a share perspective, but we could not be more excited about what Raj just covered. This physical integration allows us to unleash just an incredible value proposition. We've got some brand awareness work to do still, but I'm very optimistic that you're going to see some real momentum in Europe next year. So I hope that answers your question, but happy to answer any other details you need.

Let me take this opportunity to give a shout out to our commercial teams because they've done a really remarkable job of growing share and managing revenue quality, and we'll continue to do that. On the robotics front, it's a very important question, Helene. And I think, especially in the last year or so, the field of robotics itself has actually changed because AI and ML come into the picture. There's significant developments in the robotics field. So we think it's a huge opportunity for us. And again, we already, if you look at some of the facilities that we have in ground, a lot of facilities are now automated, but we can move further here. We are obviously working on several processes inside the hubs. and to involve robotics, and also working with partners on autonomous vehicles. We have FedEx Roxo for same-day delivery on demand, and we have partners like Nuro, and also over the road. So a lot of effort in this direction because it's very strategic and could have big implications in the years to come. So again, thanks for the question.

Yeah, and this is Mike. It's unquestionably the case to amplify the point raj may that you're seeing tremendous amount of capital coming into the uh the robotics space as a result of the labor market constraints that have been experienced worldwide so uh that's really an opportunity and uh certainly when uh when you are here to visit here in uh in a few months you'll get the opportunity to see within our facilities how that really works because that is where the bulk of the labor is deployed is the loading and unloading of the trailers there, particularly in the ground facilities, given the investments we've made in automating all the sortation and that. So very relevant point to raise.

Our next question comes from Jeff Kaufman with Vertical Research Partners.

Thank you very much. And I'd like to get back to the question on the improvement that you were seeing in March throughout the network. Obviously, the global supply-demand equations changed a lot with the recent events in Eastern Europe. So I think earlier you were giving us a view more of the Omicron impact on Domestic Express. Could you talk a little bit about what's going on globally now? As you move from February into March, I know Omicron impacted Europe, you mentioned, and now we've got a new version of COVID in Asia. What does the step up look like on the international side, and how have the events in Eastern Europe affected global capacity?

Well, let me start and I'm sure Bri will clean me up here. Firstly, it's kind of almost funny that Omicron is almost a thing in memory, even though it was ravaging just a couple of months ago, but it's now behind us in that sense. And we have other bigger things now to deal with. The conflict in Europe is really tragic. First ground war like that in many, many years. But the impact on the economy is something that we have to see. I think it starts with the cost of fuel. As the fuel cost goes up around the world, inflation goes up. And then because of that, the potential economic slowdown. How long this lasts is anybody's guess. I'm not going to project that forward. So we will have to be very flexible and nimble in dealing with that situation. We're watching the China situation carefully. Our operations are close to normal, as we speak, and the demand is still very strong. But again, this is a very dynamic situation, and we have... You know, more than 10% of our employees in a closed-loop system today working, you know, I mean, just an amazing job by our team in keeping our operations going. So this is something that is very fluid in nature, and we've got to watch as we go along. I don't know if we've got anything more.

No, not a whole lot more to add. As I've mentioned, global commercial capacity is still constrained. And as a result, right now, we have not seen an impact despite the high inflationary environment, as we talked about some of the risks we see from a consumer perspective. Out of Asia, demand seems pretty high because of the current commercial capacity constraint, but also, as I mentioned, because inventory levels are still so low. So right now, demand looks good coming out of Asia. We're keeping an eye on the United States as well as in Europe. Right now, from a Europe perspective, we believe we still have some opportunities, as I talked about, to take share, and that's our intent. So right now we're feeling pretty good, but as Raj talked about, things can change and we will adapt as required to do so.

Next question comes from Scott Schneeberger with Oppenheimer.

Thanks very much. Just a clarification kind of on that last question. You discussed some of the Russian conflict, some indirect collateral issues. Could you please just... Give us a bit of a size of how much business Russia and Eastern Europe represents to you. And then just switching gears, could you talk about sustainability of freight margins? Obviously, it's been very strong for a long time now and looks like it continues to have momentum. Should we continue to expect in the mid-teens, or is that something that you would expect to change as we move through the rest of the calendar year? Thanks.

Thank you, Scott. I think if I got the first question right, I think if you're specifically talking about the three markets, Ukraine, Russia, and Belarus, the profit impact for that is non-material. So if you have another question, I'm happy to take it. On the FedEx freight, I'm just delighted with the progress that we have made there. It's been years in the making, so to speak. We are focused heavily on revenue quality management and operational efficiency. Also, again, let me make this point, FedEx Freight is doing a remarkable job in stepping up and helping other operating companies as needed. I think this is a winning formula, and we expect that to continue.

And that does conclude today's question and answer session. At this time, I will turn the conference back to Mickey Foster for any additional or closing remarks.

Thank you for your participation in FedEx Corporation's third quarter earnings conference call. Please feel free to call anyone on the investor relations team if you have any additional questions about FedEx. Thank you very much. Bye.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.