Fedex Corp (FDX) — Q3 2021 Earnings Call Transcript

Good afternoon, and welcome to FedEx Corporation's third quarter earnings conference call. The third quarter Form 10-Q, earnings release, stat book as well as our economic forecast are available 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 a reconciliation of the non-GAAP financial measures discussed on the call to the most directly comparable GAAP measures. Joining us on the call today are Fred Smith, Chairman and CEO; Raj Subramaniam, President and COO; Mike Lenz, Executive VP and CFO; Mark Allen, Executive VP, General Counsel and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO; Brie Carere, Executive Vice President, Chief Marketing and Communications Officer; Jill Brannon, Executive Vice President and Chief Sales Officer; Don Colleran, President and CEO of FedEx Express; Henry Maier, President and CEO of FedEx Ground; John Smith, President and CEO-Elect of FedEx Ground, and Lance Moll, President and CEO of FedEx Freight. And now, Fred Smith will share his views on the quarter.

Thank you, Mickey. First, I want to say how immensely proud I am of our FedEx team members. Since our last earnings call, they've completed a historic peak season and using the power of our expanded seven-day-a-week FedEx Ground operations, our team handled record-breaking volumes throughout the holiday shipping season. They also worked diligently to clear the backlog caused by the recent severe winter weather in the U.S., a 50-year event. They worked night and day to move the backlog quickly and as safely as possible. This includes the many team members who typically perform other duties and volunteered their time to help. We're sincerely grateful to them and to our customers for their understanding, as we navigated the effects of these massive winter storms. Our team members are continuing to move the world forward with the delivery of COVID-19 vaccine-related ingredients and supplies throughout the U.S., Canada and more than 20 other countries around the world. We did a great job with these vaccines during the weather event, too. FedEx is prepared to transport vaccines to more than 220 countries and territories for as long as necessary to help eradicate COVID-19. As part of our responsibility to be good stewards of the planet, earlier this month, we announced our bold strategy to achieve carbon-neutral operations globally by 2040. To help reach this goal, we focused our strategy in three key areas: vehicle electrification, which we've been involved in for over a decade; sustainable energy; and carbon sequestration—natural carbon sequestration. In this regard, importantly, our plan includes a pledge to help establish the Yale Center for Natural Carbon Capture. The center will build on the Yale legacy of the school and the environment of world-class research and education to develop measurable carbon capture solutions, with an initial focus on helping to offset greenhouse gas emissions equivalent to current airline emissions. Findings will be published and shared, so that businesses, industries, and governments globally can benefit from this work. As reflected in this quarter's results, continued execution of our strategies is producing strong earnings growth and margin improvement across our company. We expect demand for our unmatched e-commerce and International Express solutions to remain high for the foreseeable future. I'm exceedingly optimistic about the future of FedEx, and again, very grateful to our team members for their hard work. I'd also like to thank Henry Maier, President and CEO of FedEx Ground, who is retiring at the end of July after more than 35 years of dedicated service at FedEx. We'll have much more to say about Henry on our next earnings call in June. Let me now ask Raj, Brie, and Mike to provide their comments, after which we will take your questions.

Thank you, Fred, and good afternoon, everybody. Q3 was a strong quarter of growth for FedEx. Despite challenging circumstances, the team performed exceptionally well through the biggest peak season in our company's history. This included delivering nearly 0.5 billion holiday packages, transporting the first shipment of COVID-19 vaccines here in the U.S., and increasing collaboration across operating companies. Our results speak for themselves. In December, we achieved the highest monthly totals in our company's history in both revenue and operating profit. Results in December were different than previous years. We better maximized our available capacity, and as Brie will cover in a moment, better aligned prices to incremental costs. Peak 2020 was unlike any peak experience before and sets a new standard for future peak seasons. As Fred mentioned, our operations were impacted by last month's severe winter weather throughout the United States. Mike will expand more on the scope and unique nature of these storms. And I'm sure many of you have seen reports in the last couple of days, which illustrate the impact these storms had on the overall U.S. economy, including retail sales and manufacturing output. We implemented numerous contingencies to mitigate the impact, including adding sorts, line haul and collaborating across our network to assist in the recovery. I'm very proud of the team for managing through this very challenging situation. Now, speaking of the team, we announced that Henry Maier will retire this summer and named John Smith, former President and CEO of FedEx Freight, his successor. Lance Moll, former SVP of Operations at FedEx Freight, has been promoted to CEO, and we're pleased to have all these three gentlemen on the call today. Now, turning to FedEx Ground. The outstanding margin improvement for Ground in Q3 highlights the success of our ongoing strategic initiatives and investments to improve efficiency and reduce costs associated with the last mile even amid record residential volume levels. These investments continue to pay off. Let me share three examples. Number one, we saw a meaningful improvement in last mile efficiency as service providers improved their stops per hour by 21% year-over-year in Q3. Number two, the average cost per stop decreased by 12% year-over-year. And number three, we maximized our assets, expanding to seven-day operations and integrating Ground economy, or formerly FedEx SmartPost, reduced our fixed cost per package by 4% year-over-year. We remain very optimistic for continued profitable growth at Ground. Collaboration between operating companies continues at an unprecedented rate in Q3. This month marks the one-year anniversary of the launch of last mile optimization, which allows us to flex our networks to increase delivery density for residential, rural and deferred packages. LMO will expand to six more markets effective May the 1st, increasing to 63 markets in total and covering two-thirds of the U.S. GDP. Additionally, FedEx Freight has delivered more than 1.75 million shipments for Ground so far this fiscal year. This time last year, Freight had yet to deliver a single Ground shipment as increased support for Ground kicked off in May of 2020. Finally, turning to FedEx Express. Our global network is moving COVID-19 vaccines, ingredients and supplies as we speak. It has been a coordinated orchestration of our physical and digital capabilities. At FedEx Express, we expect elevated pricing for at least the next 12 months. We know, however, that these prices are not sustainable in the longer-term, and we will flex our networks appropriately as commercial capacity returns into the market. In addition, we will continue to improve our efficiency by executing last mile optimization and transforming our European business. In Europe, momentum continues with the physical integration of the TNT network. We recently announced our Europe restructuring program, and we are progressing with local consultations as planned and in accordance with local market regulations. April will be a big month as we prepare to roll out a set of new service capabilities for our customers, which Brie will provide more detail very shortly here. We'll complete their integration in spring 2022, which will bring the physical network integration to a close. Our Paris Hub will be our main Express hub in Europe with Liege serving as our second-largest European air hub. We remain focused on optimizing the network and strengthening our capabilities to drive upside in Europe for years to come. In closing, FedEx remains committed to delivering long-term profitable growth. We have the network, the strategy and the right team in place as we build upon the exceptional results we have seen so far in fiscal year 2021. With that, let me turn it over to Brie.

Thank you, Raj. Good afternoon, everyone. In the United States, we are seeing strong growth and momentum. The U.S. domestic parcel market is expected to grow to 101 million packages a day by calendar year 2022, with e-commerce contributing 86% of total U.S. market growth. E-commerce as a percentage of U.S. retail sales was approximately 21% in Q4 of calendar 2020, significantly above the pre-pandemic level. We remain excited about the diversification and evolution of the e-commerce market. Some of our largest retail customers reported e-commerce growth rates in the high double and even triple digits through 2020. As the U.S. reopens, we recognize the potential for a short-term deceleration in e-commerce shopping. However, we are very confident that e-commerce as a percentage of retail has a long growth runway. Turning now to peak. It certainly was the peak upon which we predicted, a peak upon a peak. We had tremendous growth with almost 500 million packages delivered and 19% year-over-year average daily volume growth. To the global sales and marketing teams, I could not be more proud of your execution and the momentum you have created. Fiscal Year 2021 parcel volume growth remains strong, supported by a portfolio of e-commerce solutions growing at double-digits. Of particular note, our FedEx Ground seven-day-a-week residential delivery service is one of the fastest-growing services in e-commerce with 70% volume growth in Q3. Overall, year-to-date average daily volume growth remains strong for all customer segments. However, our U.S. small and medium segment grew 35% through the end of February. In Fiscal Year 2021 Q3, FedEx's total U.S. domestic residential package volume mix was 70% versus 62% a year ago. With the increase of residential packages in our networks, we're focused on improving yield and product mix. In Fiscal Year 2021 Q3, we increased FedEx Ground economy yield by 35% and overall U.S. domestic residential yields by 15% year-over-year. It's important to note, FedEx Ground is formerly FedEx SmartPost. While e-commerce is the key driver of the overall growth, in January, our U.S. enterprise B2B volume was at pre-COVID levels. Turning to our U.S. revenue quality strategy, we continue to actively pursue yield management, product and customer mix strategies. Our primary focus is ensuring large customer pricing aligns to their volume distribution. We continue to manage capacity at FedEx Ground, prioritizing our highest yielding small and medium segment as well as our premium home delivery product. As we plan for the peak of Fiscal Year 2022, our peak surcharges will continue to play a critical role. Turning now to international. Global air cargo capacity remains down 20% year-over-year as of January. We expect air cargo capacity to remain constrained through the end of calendar year 2021. We expect passenger capacity to recover between 55% and 75% of its pre-COVID level by the end of calendar year 2021, with a full recovery not anticipated until 2023 or 2024. From a demand perspective, Asia-Pacific outbound has recovered to pre-COVID, while Europe outbound is expecting a partial recovery by the end of 2021 and a full recovery sometime in 2023. With these projections, demand trends will continue to favor freighters and integrators. We are confident in our ability to maintain elevated yields for at least 12 months. With e-commerce driving significant growth internationally, we will increasingly utilize peak surcharges in our international business. Finally, we are executing commercial strategies to maintain and grow our incremental volume as capacity recovers. Intercontinental performance continues to be very strong. Our total international express yield per pound has again seen impressive double-digit year-over-year improvements in all key markets. Our B2B volumes are recovering to pre-COVID levels in Europe, and are fully recovered in Asia, while our overall growth is fueled by significant B2C volumes. During our fourth quarter, we will dramatically enhance our European portfolio. As stated on previous calls, with the completion of the road integration last May, our European road value proposition already gained significant improvements. Our customers have been accessing the unparalleled TNT European road network. In Q4, we will introduce an enhanced Europe-to-the-U.S. value proposition, providing an industry-leading next-day service to the U.S. in twice the number of origin countries currently offered. In addition, we will be launching our new FedEx International Priority Express service, giving our European customers two premium services within Europe, offering customers a choice between overnight by noon and overnight by the end of the day. We will be rolling out these new service capabilities to our customers over the coming months. We will also launch FedEx International Connect Plus from Europe to the United States, to Asia and within Europe, providing the service across more than 200 lanes. FedEx International Connect Plus, or FICP, has been designed with features of service targeted to reduce the cost to serve while delivering an outstanding customer experience and is specifically targeted to support our e-commerce customers. The new European transportation portfolio is brought to market through a refreshed and modern online shipping application that has already rolled out in Europe and across 143 countries globally. In summary, we have great momentum coming out of Q3. And with that, I'll turn it over to Mike for his comments.

Thank you, Brie, and good afternoon, everyone. FedEx delivered significantly improved financial results during the quarter, as we met the challenges of rising demand and limited capacity during our peak season and overcame severe winter weather in February. Adjusted operating profit increased 120%, and adjusted operating margin increased 210 basis points, primarily due to strong volume growth in U.S. domestic residential packages; a 41% increase in FedEx international priority package volume, led by Asia and Europe; and solid execution of our revenue management strategies in the face of increasing demand across all our transportation segments. These gains were partially offset by four noteworthy factors. First, higher variable incentive compensation expense of $485 million, including a $125 million special bonus for global frontline team members at FedEx Express; second, lower revenues and higher costs due to significant weather events that reduced operating income by an estimated $350 million; third, the estimated impact of having one fewer operating weekday, which was approximately $150 million; and lastly, consolidated direct COVID-19-related costs of approximately $60 million, which does not capture the many accommodations we continue to make across all our operations for the safety of our employees and to comply with various regulations and guidelines. Given its significance, I want to add further context around the adverse weather impact. First, we always anticipate and have contingencies for demand and operational impacts during our fiscal third quarter, which spans the most active winter weather months. The mid to late February events, in particular, impacted many parts of the country but were historic throughout the South Central Corridor of the U.S. The snow amounts in Memphis had not been seen in over 50 years prior to the founding of FedEx, and when coupled with a record time nine consecutive days below freezing, had a significant impact on our operations, as Fred and Raj mentioned. Our Indianapolis and North Texas Express hubs were impacted as well. Demand was deferred as significant portions of the U.S. population were affected by the various weather events. Of the $350 million estimated impact, $240 million was at Express, $85 million at Ground, and $25 million at Freight. Despite that, the Express segment reported adjusted operating profit of $514 million with an adjusted operating margin of 4.8%, up 260 basis points, driven by significant volume growth in both international export and U.S. domestic packages, as well as higher international priority yields. In the quarter, Express absorbed $340 million higher variable incentive compensation expense and was on pace to deliver record third-quarter operating profit prior to the February weather. FedEx Ground had an exceptional peak and third quarter, growing operating margin 270 basis points over the prior year to 8.8%. Operating income of $702 million was the highest third quarter in FedEx Ground's history. Yield grew 11%, while volumes were up 25%, resulting in 37% growth in revenues, which more than offset headwinds, including increased payments to our independent service providers, higher labor rates, and higher variable incentive compensation of $70 million. As Raj and Brie highlighted, our commercial and operational initiatives are yielding and will continue to yield profitable growth at Ground, as we capitalize on the e-commerce opportunity. Turning to FedEx Freight, operating income increased 5% despite the impact of increased variable compensation and the weather. Freight continues to post excellent results with their focus on revenue quality, aligning their cost structure with current business levels, and improving operational efficiencies. Freight also provided critical peak season operational support to both Ground and Express. Our effective tax rate was 15% for the quarter due to tax benefits of $108 million, resulting from a tax rate increase in the Netherlands applied to deferred tax balances and associated with a $300 million voluntary contribution to our qualified U.S. pension plans. Now, turning to what's ahead. While there remains a degree of uncertainty as we begin to see progress in combating the pandemic, we are projecting full year adjusted earnings per share of $17.60 to $18.20, compared to $9.50 adjusted EPS in FY 2020. We expect our effective tax rate prior to the year-end mark-to-market adjustment to be between 21% and 22% for the full year fiscal 2021. We expect higher revenue, operating income, and operating margins on a year-over-year basis at all our transportation segments in the fourth quarter, which does include one additional operating weekday. These forecasts assume continued recovery in U.S. industrial production and global trade, no additional COVID-19-related business restrictions, and current fuel price expectations. With this forecast, we expect higher variable incentive compensation expense in the fourth quarter, as we plan to reward our employees for their achievements this year. The year-over-year increase is expected to be slightly higher than the third quarter, excluding the $125 million special bonus I mentioned previously. Earlier Fred mentioned our sustainability initiatives and we will record our $100 million pledge to Yale University in our fourth-quarter results. For Express in the fourth quarter, there will be no benefit from the reduction in the aviation excise tax and the CARES Act, which expired on December 31. In addition, Express maintenance costs will be higher year-over-year in the fourth quarter as we execute on our flexible air fleet strategy. Just over a year ago, we shared with you plans to temporarily park the equivalent of seven MD-11s. Given the increased demand, we are efficiently adding needed capacity for our customers by investing in maintenance expense to utilize aircraft from temporary storage. As of now, we plan to have no temporarily parked MD-11s prior to next peak season. This illustrates our ability to flex capacity up or down in a financially efficient manner in response to changes in the market. Our capital spending focus remains on strategic investments that will reduce our cost structure, improve our efficiency, and increase our capacity to profitably meet market growth demands. Our Fiscal Year 2021 CapEx forecast is now $5.7 billion due to changes in the timing of aircraft payments, as well as the acceleration of FedEx Ground capacity initiatives. That projects to roughly 6.9% of expected revenue, which is the lowest level in over 10 years. While we have not finalized our Fiscal Year 2022 plans, capital spending will increase, as we invest in capacity and proceed with investments in replacement capital previously deferred. That said, I anticipate CapEx as a percentage of revenue will be 8% or less, which remains less than our historical capital intensity. We’ll provide more specifics in June. Looking at liquidity on the balance sheet, we ended the third quarter with $8.9 billion in cash and cash equivalents, and on Tuesday, renewed our $2 billion five-year credit agreement and $1.5 billion 364-day credit agreement. The key aspect of our capital allocation strategy moving forward will be strengthening our balance sheet and repayment of outstanding debt. Given our strong cash flows and liquidity position, we are evaluating potential transactions to reduce and refinance existing debt. The timing of any transaction will be based on market conditions, and we would incur costs related to these transactions, which may be material. I'll close by reiterating, I have great confidence in our ability to build on the successes we have had this year as we execute our plans to generate sustainable long-term growth in earnings and cash flow. And with that, we can move to the question-and-answer session.

Yeah. Hey, thanks. Good afternoon. Maybe I want to start on the Ground side and understand, I guess, first, around Ground pricing, so significant progress has been made so far. But I wanted to get a sense of where do you think you are in the process of repricing this product for the service that you're offering and ultimately, the demand in the market right now? And then maybe as we think about how's that and mix may impact margins as we move forward, say, into fiscal 2022, clearly, we've moved – are very heavily overweight towards B2C, over the course of the last 12 months. But as B2B grows, it maybe even takes a little bit of market share. How should that play through your ground margins?

Thanks for the question, Chris. It's Brie speaking. From a yield strategy perspective, we still believe we have opportunity from a mix perspective. As you saw, this quarter was probably the most dramatic or not probably, was the most dramatic movement we've been able to make from a product perspective. You're going to see that shift throughout this year as capacity – we anticipate capacity throughout this calendar year will be constrained. And as a result, as I mentioned, we've got to prioritize our small and medium growth. You heard 35%. It's the best segment performance we've got from a small perspective. So we're going to prioritize that. It will continue to work our yields up. In addition to that, the FedEx economy product is something that we are very focused on, and it will add dramatic yield upside from here out. Henry?

Hi, Chris. Let me take the margin question. First of all, in Q4, we expect margins to be in the teens. But let me speak to how we see the business beyond that. First, we believe there's considerable operating leverage still to be realized in this business. Strategic initiatives will help ensure the right packages are on the right sort, on the right day for on-time delivery. They also ensure that overnight sorts are reserved for next-day volume, enabling the right balance of sort capacity in the network. These are critical capabilities for a seven-day network operation. We're also implementing dynamic scheduling tools to match sort, staffing, headcount more closely to volumes, thereby improving dock productivity and our dock expense. And we're rolling out capabilities for certain upstream volume in the network to bypass station sortation and transfer directly to delivery vehicles, freeing up valuable station capacity. None of these initiatives require brick-and-mortar. They're possible through industry-leading technology, AI and machine learning and are developed using a safe agile framework and tools. So with all of that, in my view, as we continue to transform the FedEx Ground business, FedEx Ground's best days are still ahead of them.

Thanks for the time.

Great. Good afternoon. Let me switch over to Express. And, I guess, if you exclude the weather impacts, the 4.8% goes up to maybe upper single digits in terms of margin. Maybe you could talk about the – Brie, the return of B2B on the Express side, same thing that you were just talking on Ground. Maybe you were talking about pricing starting to disappear in 12 months. So how do you look at this business? Do you see it transitioning back to double-digit margins, or is there some structural change that keeps that at the single-digit levels?

Hi, Ken, it's Brie. I'll start with the pricing and the yield element and then turn it back over to Don and Mike. From a yield perspective and from a B2B, as we mentioned, as of January, here in the United States, our B2B volume was back to pre-COVID level. The mix within the B2B wasn't what historically we have seen. It was obviously heavy healthcare, heavy retail, heavy tech. We have not seen it fully come back in automotive and industrial. So we think that there's some upside there. When you look at the B2B volume outside of the United States, at a whole holistic level, we're back, but Europe is not. So we see there still opportunity intra-Europe and intercontinental outbound from Europe. The European team has done a phenomenal job of shoring up volume, but it is B2C volume that they've shored up that gap with. So I still think that there is some B2B upside coming out of Europe still. From a yield perspective, we're feeling pretty confident in our yields throughout this calendar year from an International Express as well as a Domestic Express. There is pressure on the yield from a weight perspective because the e-commerce mix will continue to increase outside of the United States at Express. So, overall, we're quite comfortable from a yield growth and opportunity perspective for the next 12 months, and I'll turn it over to Mike?

Yes. Chris, as I said, this is Mike. We certainly, in the fourth quarter, we'll see margin gains at all three of the transportation segments. You can't get to the guidance that we put out there without that falling into place, as well as the other context I gave you. And we're highly confident we can build on the momentum here with the strategies and the plans that have been outlined, but we're not going to be given forward margin expectations. We'll have more to say about our outlook for 2022 in June. Don?

Yes, Mike and Brie, just to add a few things to your comments. One is, I think, Raj had mentioned in his prepared remarks about the strength of the quarter. And it was a strong quarter for us, highlighted by the best December we've had in the company's history, and on track to provide that same level of performance for the quarter until the weather hit. Now this is not a comment about would have, should have, could have, but it really is one to highlight the strong fundamentals that exist in the Express business right now. We're extremely confident of the fundamentals that we'll continue to deliver into the fourth quarter, as evidence of what we've seen. We had $1.9 billion of revenue growth in that quarter. I thank our excellent sales team around the globe and a wonderful job that the Express operating unit did in terms of monetizing and turning that into a strong performance. As it relates to what we're seeing from a yield perspective, I agree, obviously, with Brie's assessment. We're seeing some fundamentals in our international business that are quite clear to us in the short, medium and maybe in the longer-term. When inventory levels remain low, supply is soft and demand is very strong. And we think that demand is going to even increase as the stimulus checks come into the marketplace. So we think, if you look at it in terms of tri-factor, those fundamental economic issues that we have should continue to benefit us, especially in our international business going forward.

Thanks, Don. Mike, Brie, appreciate it.

Thanks. Good afternoon. Sorry, I was on mute. Just digging a little bit more in terms of the Ground revenue per piece and specifically on Q3, Brie or Henry, could you maybe talk about or break out the contribution to the yield equivalent that came from base price versus the peak surcharges and then mix? I guess, what I'm trying to think through is how to best think about the sequential yield change in Q4. Normally, I think it's up about 4%. But obviously, maybe the peak surcharges fall off, you have some incremental surcharges in place. So, just looking for a little bit of context in terms of breaking out the contribution of the different pieces there. Thank you.

Hi, Allison. From a pricing strategy perspective, obviously, the vast majority of our volume is on highly complex contractual agreements. And so, it's quite difficult to streamline and break that out for you right now. But what I will tell you is from a Q3 perspective, you saw really us very much focused on our FedEx Ground economy product. We know the spread between the FedEx Ground economy and our FedEx Ground home delivery product, that yield spread, historically, has been too wide. So, we are very focused on prioritizing capacity at the higher-yielding home delivery product. And so you're going to see two things happen. You're going to see us give more capacity to home delivery at the higher yield and you're going to see us increase the yield throughout this calendar year, both through peak surcharges as well as through General Rate Increases strategies, and quite frankly, just contractual discussions. So, that's really our focus, is closing that gap, prioritizing capacity for home delivery and making sure we've got capacity for our small and medium customers.

Okay. And just any color on what sort of the peak surcharge impact was in Q3 from a dollar perspective or a percentage perspective?

We're not going to give that out at this time, Allison.

Great. Good afternoon and thanks for taking my questions. Mike, I have a question for you. When considering the fourth quarter implied guidance, historically there tends to be a substantial increase in earnings from the third quarter to the fourth quarter. When adjusting for factors like weather and a lower tax rate, your implied guidance suggests around a 17% increase in earnings from the third to the fourth quarter, while typically it ranges from 50% to 60%. I'm curious if you could explain the reasons behind this discrepancy. Is it due to the broader economy? Is there some uncertainty involved? Or is it just general conservatism? Could you help us understand the implied fourth quarter guidance and why it's not reflecting a more typical seasonal increase? Thank you.

Jack, I'm not going to get into de-comping all of the puts and takes that come into seasonality. I guess I would refer back to when I mentioned an effective tax rate for the year of 21% to 22%, that implies a higher tax rate in Q4 than our typical. You can rule a thumb for a full year. The statutory federal rate is 21%, 3% or 4% for state and other, so 25% on a normalized basis. But as we've mentioned on the call, we have had about $300 million of discrete events through year-to-date in Q1 to Q3. So, I think when you kind of normalize for that and look at our underlying operating performance there, it is a very strong Q4 and I'll leave it at that. I talked about some of the other elements that will play into Q4 earlier, so I won't rehash those. But I think when you are able to piece it all together, it will be a very solid operating Q4.

Yeah. Hi, afternoon. Question, when you think beyond the fiscal fourth quarter of this year and into the next fiscal year, you start getting to some difference in tougher volume comps, especially in the Ground. Is your expectation, though, that with e-commerce continuing even at a decelerating pace that you could still grow the overall volume levels year-over-year? Thanks.

I guess the short answer is, yes. We're anticipating that the market growth, 90% of the market growth is going to come through e-commerce. We've got a long-term outlook at more than 10% compound annual growth rate from an e-commerce perspective. So the short answer is, yes. And Mike, I'm sure would like to add something.

We presented a lot of numbers, but as Brie noted, we increased our residential mix from 62% to 70%, and FedEx Ground's margins improved by 270 basis points. This indicates our strategy for continuing to grow in the e-commerce sector.

And, of course, we will be giving an FY 2022 earnings forecast in June. That has been something that's not been available during the pandemic from a lot of companies. But with the forecast that Mike just gave you for the fourth quarter, you can anticipate a full year FY 2022 range at our June call.

Hey, good afternoon and thanks for taking my question. Mike, can you talk to the outlook if you think CapEx is going to be below 8% of revenue and look forward on these projects, because I think you mentioned accelerating some of the Ground investments there?

Brandon, you were a bit hard to hear, but I believe you were asking about one of the CapEx references. As we mentioned, volume grew by 25% at Ground. During December, while assessing the future opportunities, we identified this as a chance for growth. Also, if you refer to our maintenance CapEx statistics, you'll see that we postponed a significant portion regarding our facilities and vehicles this year. Therefore, some of that will carry over going forward. We will provide you with more detailed information on this in June.

Yeah, Mike, I guess I was asking, like, in the longer-term context, what are the type of return on these projects?

I think the question is about returns. You broke up again. I will say with very absolute confidence that all of these investments we're making will generate a solid return on investment just as the investments we've made in the last few years are showing results today.

Thanks, operator. Hi, everyone. Henry, I'd like to ask you about Ground margins, if that's alright. The main question we've been discussing is the long-term outlook for Ground margins, especially considering the ongoing shift to B2C and the density challenges that come with it. You've made significant advancements in pricing and operations. Could you provide an update on what you believe the sustainable margins for the Ground business will be on an annual basis? Also, when do you anticipate reaching that goal? In connection with that, you mentioned $350 million related to weather. Could you clarify how much of that impacts the Ground business? Thank you.

Amit, this is Mike. As I said in my remarks, $85 million of the weather was Ground. Again, we've given you fourth-quarter guidance. We'll have more to say about future outlook in – for FY 2022 in June. But we're very confident of our ability to build on the momentum of generating increased returns and profitability at Ground.

Can I ask it another way then since it's the same question? And the spread between pricing costs in Ground was in excess of 300 basis points per package. As B2C recovers, is there any reason why the spread between price and cost per package should moderate over the next four to five, six quarters?

Well, I think the last two quarters we've given you some guidance on what we've seen unit costs do as we move through the pandemic and we move through the shift in the mix of our business. Obviously, we're going to lap some of those results, but we've had significant reductions in our unit costs as we've gone through the last year as a result of many of the strategic initiatives we've outlined here, and were in, frankly, in Raj's comments. We continue to see considerable operating leverage in the business, and we would expect margins to improve over time.

Yes, good afternoon. Let's see. I wanted to – I think one of the questions that seems to come up is concern about potential to have some of that strength in international rates that's beneficial for Express, that eventually, some of that profitability is going to go back as past device-based comes back. And presumably, that's out very quickly and that you retain a portion of it. I wanted to see if you could give us a sense of the potential offset from your cost initiatives. Those numbers, if you look at a couple of years, are they potentially in the same magnitude? And I'm thinking in particular of integration of some of the B2C shipments for Express and Ground, but that's helpful on the cost side and potentially TNT and maybe you have other things in mind. Thank you.

So, Tom, this is Raj. I'll address it overall. Obviously, it's not possible to provide the figures for each individual item that you mentioned. However, I can speak broadly to the situation. The capacity and commercial passenger carriers are not expected to recover in the next 12 months, possibly longer, and we anticipate the premium to persist during that time. Even if there is a recovery, we have the ability to adapt our networks. We have shown that we can increase capacity when needed and will also be able to reduce it as necessary, utilizing our partner networks to handle deferred traffic. Additionally, there are many efforts underway to enhance margins in FedEx Express. Our transformation in Europe and the expansion of last-mile optimization are notable examples of this positive activity. Therefore, we are very confident about the future of our Express services globally. Don, would you like to add anything further?

I think you made a great point, Raj. We have a strategy for improving margins in both our domestic and international businesses. As I mentioned earlier, we are confident that the supply and demand dynamics are favorable for us. Capacity is currently low, and we expect it to stay that way until global travel resumes significantly. We don't anticipate that happening in the next 12 to 18 months due to various quarantine restrictions worldwide. I want to highlight our last-mile optimization plans and their positive impact on our margins, which you didn't mention. Our Chairman emphasizes that density is crucial for our success, and as we enhance the density in our networks, it greatly benefits our margins. We are approaching the one-year anniversary of our last-mile optimization initiative, collaborating closely with Henry and his team, and we are seeing a substantial increase in volume through the Ground network with consistent growth week-over-week and month-over-month. We have many opportunities to leverage our business through the European transformation and domestic improvements. We are actively pursuing multiple strategies to continue our margin improvement and expansion.

Let me add something to that. The last-mile optimization initiative benefits in two ways. First, it removes lower-yielding residential, deferred, and rural packages from the Express network, allowing it to focus on high-priority business-to-business deliveries, especially those needing ancillary services like SenseAware ID, which is included on every vaccine box we deliver. The execution of this has been nearly flawless, with very few issues despite delivering millions of vaccines. Consequently, Express can operate more efficiently in business-to-consumer deliveries while less dense areas can be served more cost-effectively. This is a two-way benefit; as we handle more residential packages that aren't time-sensitive or that require immediate delivery, it enhances Ground's density, cost efficiency, and asset utilization. During the last call, we experienced 13 questions regarding Ground margins. While we may not see that number again, we’ve already received about half a dozen inquiries this time. It’s challenging for us to convey the significant positive impact of the technology we’re implementing, which we don't frequently advertise. Rob and his team are doing exceptional work, contributing to our confidence in achieving future goals. While you're looking for quarterly forecasts, some of the productivity improvements Raj mentioned are remarkable, and it's crucial to view the bigger picture of these developments. Lastly, we have strategies in place to enhance Express margins with and without significant passenger capacity in the market. It's not an either/or situation. Concerns frequently arise during these calls about e-commerce returning to pre-pandemic levels and the belief that margins won't improve and Express won't perform well because passenger numbers will rise again. These concerns are misguided. I felt it was necessary to address this, as it seems the conversation is straying in the wrong direction regarding both issues.

I would like to add one more thought. The scale of these programs appears to be significant and quite positive. My question was aimed at understanding when you might provide us with more insight into the scale. However, what you're doing really makes sense and seems to play a major role in the outcomes. Thank you for sharing your insights on this.

Hey, I guess that rules out asking seven more Ground questions. Just a couple for me, how much of that $350 million is cost versus volume pushed out into this quarter?

Well, I will tell you most of the $350 million was revenue-related. We did have incremental costs at Express for, of course, beyond normal expectations for de-icing and snow removal, additional labor costs. And then I think a couple of you have noted that we had a significant event with one of our facilities in the Netherlands there as well with the roof collapse, so that is a cost that was in the number as well. But principally, it is revenue from that. And I'll let Brie talk about the overall evolution of where we are now.

Yes, I guess the best way to think about March is the fundamentals are back. So, we're very confident. If we take February out, our fundamentals look a lot like they did in January, B2B is strong, SMB is back, Ground is in good shape. So, it was February revenue, but we feel very confident about the fundamentals in March.

Yes. Thanks, and it gives me an opportunity to brag on the team a little bit. So I guess, if there is any surprise me and it shouldn't have is how amazing the team is it that provided this exemplary service. Richard Smith and his organization have done Yeoman's work to make sure that these vaccines move through our network. As Fred said, an extremely high level of efficiency, a handful if that shipments that did not need service. I think what's important to note though, when we talk about the vaccines is really not the raw in absolute numbers that move in our network. In the grand scheme of things, when you look at almost 20 million packages a day moving through our network, this represents a very small portion of that. But what is important to note is a profound impact that these shipments have when they get to destination. And it really just validates our purpose, and it's one we take very, very seriously. The amount of lives that we potentially save, the amount of people we put back to work, the amount of small businesses that reopen, the borders that can reopen back to normal levels. That's really the story on that vaccines and that's what we're most proud about. So I couldn't be more proud of the team in the way that brought these vaccines to market globally. So thanks for asking that question.

Yes, let me also chime in on that. This is one of the most important pieces of work we have done. To accomplish this, we need a network that allows for global transactions within a few days. Only a few companies can achieve that, and we excel in this area. Additionally, there's the technology aspect, specifically the SenseAware ID that was launched last year, which was perfectly timed for the vaccines and provided unprecedented visibility. We also launched FedEx Surround last year, offering AI and machine learning capabilities to predict future events. When combined, we deliver the best service possible, resulting in extremely low failure rates. We are very proud of this work and remain committed to playing our part in ending this pandemic.

Hi. Thanks for taking the question. Just wanted to circle back on the new service capabilities that you talked about within international. Is there a way to help us understand or quantify sort of the market hole you're expecting to sell, what drove the development of those products? And any thought on sort of mix? I'm assuming it would be a sort of a better mix business for you longer-term. Any thoughts there?

In the fourth quarter, we are focused on three service expansions. First, we have established the fastest intra-European ground network following the integration of the TNT ground network. This will enhance our growth in both B2B and B2C segments as we aim to capture more market share within Europe. Second, we currently offer the best value proposition for shipping from Europe to the United States, and we plan to double our efforts in this area. This will significantly improve our position against competitors like UPS and DHL as we add nine origin countries, allowing us to grow our B2B and B2C shares beyond major European markets. Third, regarding FICP, the same growth opportunity for e-commerce is evident globally, with more than 85% of our parcel growth potential in this sector. We recognize that we currently lag behind DHL and UPS in this market, presenting significant growth potential. Our FICP offerings differ from our core B2B products in key ways, including enhanced clearance capabilities tailored for lower-value shipments, which lowers costs for customers. We are also automating our clearance processes to further reduce service costs, modifying our last-mile delivery attempt policies, and introducing retail access points across Europe to improve service delivery. Across all three segments, we anticipate substantial market share growth, particularly in our overnight service to the U.S., which is primarily B2B, while FICP presents a fast-growing opportunity in e-commerce. I hope this provides some clarity.

Hey, thanks, afternoon, guys. So Mike, I just had a few questions for you. You've been highlighting incentive comp the last few quarters. If we have more of a normal earnings growth year next year, is more of a normal incentive comp headwind, is that – that's my question. Then the corporate elimination volume has grown to like a run rate of about $1 billion a year. I think there's been a bunch of COVID losses in there. Is that something that should start to normalize to be less of a loss in the future?

Well, Scott, one thing that I would mention in the corporate unallocated line, as we've mentioned previously, FedEx office results are in there and the print-related revenue, while average daily volume is up spectacularly at FedEx office, the print-related revenue is significantly impacted by the pandemic. So as we start to come through that, we would anticipate we'll see some improvement there. On the variable comp, I guess, what I would say to you in that is we wouldn't anticipate that to be a headwind looking at FY 2022. I hope that helps.

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