FedEx Corporation

Good day, everyone, and welcome to today's FedEx Corporation second quarter fiscal 2023 earnings call. Today's call is being recorded, and now at this time I would like to turn the call over to Mickey Foster, Vice President of FedEx Investor Relations. Please go ahead.

Good afternoon, and welcome to FedEx Corporation's second quarter earnings conference call. The second quarter earnings release form 10-Q and stat book on our website at FedEx.com. This call and the accompanying slides are being streamed from our website where the replay and slides 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 mostly directly comparable GAAP measures. Joining us on the call today are Raj Subramanian, President and CEO, Mike Lenz, Executive Vice President and CFO, and Bree Carreri, Executive Vice President and Chief Customer Officer. Before we begin, I'd like to take a moment to remember our colleague, Jeff Smith, who passed away on November 17th after a courageous battle with brain cancer. Jeff's contributions to the investor relations and FedEx team were immeasurable, and our hearts remain heavy at his loss. He will be greatly missed. I'd like to congratulate Elizabeth Allen on her upcoming retirement at the end of the month, after 32 years at FedEx. Elizabeth has been instrumental to the investor relations team, and she will be missed by her FedEx colleagues and the investment community alike. And now Raj will share his views on the quarter.

Thank you, Mickey, and good afternoon, everyone. Let me begin by thanking our more than 550,000 employees for working diligently to deliver another strong peak season for our customers. I'm extremely proud of the team's ability to sustain excellent service this season while we continue to transform our global network. BZ to the FedEx team. I'm encouraged by our second quarter results and the momentum underway against our Deliver Today, Innovate for Tomorrow strategy. We exceeded our Q2 earnings target and cost action goals shared in September, even as the environment remained challenged. At the same time, there is more work to be done. The declining demand trends we saw at the end of Q1 softened further in the second quarter, and we are moving faster and with more determination than ever to accelerate our cost actions. Today, we will provide more detail on those cost actions and our plan to structurally transform our network to be nimbler, leaner, and more efficient, supported by our DRIVE program. Turning to slide six for a snapshot of the quarter. Volumes declined across all segments, primarily at Express, down low double digits. As such, Revenue was down 3%, driven by a decline at FedEx Express, which was partially offset by growth at FedEx Freight and FedEx Ground. Adjusted operating margin and EPS declined, with volume weakness partially offset by higher yield and cost management actions. All of this said, we knew coming into this quarter that we would continue to be challenged by volume softness and high inflation. I'm exceptionally proud of the team's execution to date, which enabled us to exceed the second quarter earnings and cost targets. A great example of our meticulous focus on cost actions was the results at FedEx Ground, where despite volume being down 9% in the quarter, we were able to grow both operating income and margin. And at FedEx Freight, due to operating margin improved 320 basis points due to the continued focus on revenue quality, aligning the cost structure to lower volume levels, and delivering an outstanding customer experience. Now, I'll provide an update on our aggressive and decisive plan to cut costs in fiscal 23 relative to our June plan. In Q2, we achieved over $900 million of savings exceeding the cost target we shared with you last quarter. This brings our total year-to-date progress to $1.2 billion. As we look to the remainder of the fiscal year, we have identified additional savings, bringing our target for fiscal year 23 to be approximately $3.7 billion in cuts. Turning to slide eight, as we execute these cost actions, we are also laser-focused on delivering upon the superior service that has defined FedEx throughout our nearly 50-year history. As I mentioned, Our team is performing exceptionally well this peak season, with ground time in transit in the U.S. at just two days. FedEx Ground is delivering holiday shipments faster to more locations than our nearest competitor. Our ground service is now back to pre-pandemic levels, supported by continued enhancements to our route optimization and package handler scheduling technologies. Service levels also continue to improve at Express. In Europe, we have made strong progress with Italy, France, Germany, Spain, and the UK showing sustained high levels of service performance. The service challenges at Paris' Charles de Gaulle Airport have been largely alleviated, and we are capitalizing on efficiencies in the network to further improve service. We're taking swift action to address the remaining issues for our intra-Europe service, including the reopening of our Netherlands ground hub in October, which will continue to improve transit and depressurize the rest of the network, and completing the Novara Italy Road Hub in February of 2023. Moving to slide nine, I'll now provide an update on our ongoing structural transformation. We have spent 50 years building our networks and growing our portfolio. As a result, we now have the most extensive network of any provider in the industry. We are now focused on optimizing this network to realize our full value potential. This includes advancing our global transformation through drive, our comprehensive program to support long-term profitability and deliver on our fiscal year 25 financial targets. The drive is how we are executing that strategy and achieving more than $4 billion in annualized structural cost reductions by fiscal year 2025. I'm confident I have the full commitment of our executive team or leading drive with purpose and a sense of urgency, and of Sriram Krishnasamy, our Chief Transformation Officer, who is facilitating the program. We have identified 14 specific focus areas, which we call domains, to target for efficiency improvements. Each is led by an executive sponsor and is aligned around a strategic vision for the business. We are measuring success against each domain's FY25 permanent cost savings target, in addition to using clear operational metrics to track financial and service level progress. Our focus within DRIVE is in three main areas, FedEx Express, FedEx Ground, and shared and allocated overhead expenses. At Express, The team is transforming the network to be more agile, efficient, and digitally led. An initial priority is to optimize the global air network, where we expect to generate approximately $400 million in savings. This work includes deploying digital assets that allow us to efficiently balance our purple tile airplanes and third-party lift as we build the network of the future. We are also addressing our Express pickup and delivery operations globally to improve efficiency. In February, we will implement a new U.S. network design that will improve P&D efficiency and result in cost savings of approximately $300 million annually. In Europe, where we expect over one-third of Express's drive savings, we have spent the last several years bringing the networks together. With integration behind us, we have shifted to optimization. We are adjusting our network, deploying route productivity tools, and investing in digital capabilities for planning and automation. Additionally, we are right-sizing our intra-Europe air network and improving processes to enhance the end-to-end customer journey. This will all serve to improve both service and profit of our European business. Now turning to FedEx Ground, we are focused on every portion of the package lifecycle. For instance, in line haul operations, we are applying new tools, technology, and processes to drive increased packages per trailer. Within Ground, We have a dock domain. This team's responsibility is to improve packages per labor hour. In Q2, that metric increased 3.5% year over year, and we expect continued improvement as we deploy additional capabilities. Across both the express and ground focus areas, we're leveraging our operational insights platform. This provides the foundational data, tools and insights critical not only for delivering drive savings goals, but also for sustaining those savings and transforming the way we operate. Finally, shared and allocated overhead expenses are a significant opportunity. This includes procurement and digitizing and centralizing support functions. One example of digitizing support functions is our ability to reduce customer service calls by redirecting customers to best-in-class digital applications, a win for FedEx and a win for our customers. Within procurement, we are reducing spend through our operate collaboratively model and creating a central function to optimize our enterprise spend. For example, we are setting up a cross-OPCO initiative to consolidate our contract transportation spend to realize value in the second half of fiscal year 23. In conclusion, there is strong momentum underway as our team focuses on cutting costs immediately and structurally transforming our network. We will continue to provide updates on our drive progress, and we plan to host a drive deep dive call in the first half of calendar 2023 to provide additional details on our ongoing transformation. Now, let me turn it over to our Chief Customer Officer, Bri Carreri, to discuss recent market trends and our commercial strategy in more detail.