Fedex Corp (FDX) — Q4 2021 Earnings Call Transcript

Good afternoon, and welcome to FedEx Corporation’s fourth quarter earnings conference call. The fourth quarter earnings release and stat book are on our website at fedex.com. This call is being streamed from our website where the replay will be available for about one year. Joining us on the call today are members of the media. During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate. I want to remind all listeners that FedEx Corporation desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance, may be considered forward-looking statements within the meaning of the act. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Please refer to the Investor Relations portion of our website at fedex.com for 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 Fred Smith, Chairman and CEO; Raj Subramaniam, President and COO; Mike Lenz, Executive Vice President and CFO; Mark Allen, Executive VP, General Counsel and Secretary; Rob Carter, Executive VP, FedEx Information Services and CIO; Brie Carere, Executive Vice President, Chief Marketing Officer and Communication Officer; Jill Brannon, Executive VP and Chief Sales Officer; Don Colleran, President and CEO of FedEx Express; John Smith, President and CEO of FedEx Ground; Henry Maier, Former President and CEO of FedEx Ground; and Lance Moll, President and CEO of FedEx Freight. And now, Fred Smith will share his views on the quarter and year.

Thank you, Mickey. Fiscal 2021 was truly unprecedented, and we are enormously proud of our 570,000 team members who performed magnificently to keep global healthcare, industrial and at-home supply chains open and, more recently, allowed significant additional commerce to flow. The FedEx team’s role in moving PPE, vaccines and international release shipments has been perhaps this Company’s finest hour. Our financial results speak for themselves. Raj and Mike will have more to say about the numbers, of course. Our pride in the FedEx team and our performance for shareholders is greatly tempered, however, by our continuing grief over the senseless murder at a FedEx Ground facility in Indianapolis of eight FedEx team members. Lingering sorrow among their families, friends and colleagues throughout FedEx can never be erased. Raj will also comment on this tragedy in a moment. The strategies we’ve executed over the last several years were carefully developed and have been executed at a high level with great success overall. As we’ve mentioned previously, the pandemic simply brought many of the market trends, which informed our strategies forward. Brie will be more specific about these trends in a moment. As reported, FedEx revenues for FY 2021 were $84 billion, and we project FY 2022 revenues over $90 billion. We believe FedEx margins will continue to improve this fiscal year. However, as Raj will cover momentarily, the labor market in the U.S. over the last several months has been quite challenging, adversely affecting hiring and leading to significant reengineering of parts of our networks to deal with the lack of these resources. And while the situation has begun to abate, delivering a successful peak season when we anticipate significant year-over-year volume increases will require additional flexibility and creativity on the part of our management, staff and frontline team members while maintaining our Safety Above All culture. To handle future ground volumes, we are significantly increasing capacity to deliver great service and improved financial results. This summer, we are intently focused on improving network and delivery operations prior to the volume surge in the fall. There’s great focus on revenue quality at FedEx. However, our focus solely on yields does not give a complete picture of our profit upside. As Brie will explain, our alliances with retailer partners generate significant amounts of short-haul traffic, much of which is now shipped from stores. Our Innovate Digitally initiatives are gaining steam, particularly Surround and SenseAware. Let me thank Henry Maier for more than 34 years of loyal and dedicated service to FedEx. At the conclusion of this call, I’ll have additional comments about Henry’s remarkable career and countless contributions to FedEx’s growth and success. A further note, the Biden administration has recognized exceptional talent, and our Board member, John Chris Inglis, who was confirmed by the Senate last week, to serve as the National Cyber Director. We benefited from Chris’ cybersecurity and information technology expertise since he joined our Board in 2015, and we wish him well in the hugely important role for which he has been tapped. Now Raj, Brie and Mike will give their remarks, after which we will answer your questions. Raj?

Thank you, Fred, and good afternoon, everyone. As Fred stated, we continue to mourn the tragic loss of eight team members killed at FedEx Ground facilities in Indianapolis on April 15th. Let me take a moment to remember each team member we lost that day: Matthew R. Alexander; Samaria Blackwell; Amarjeet Johal; Jasvinder Kaur; Amarjit Sekhon; Jaswinder Singh; Karli Smith; and John Weisert. Our most heartfelt sympathies and condolences remain with the families, team members and friends of these individuals. They will forever be members of the FedEx family. Now turning to our results. Fiscal year 2021 was a pivotal year for FedEx as we delivered incredible financial performance, including record revenue and profit in Q4 and for the full fiscal year. This is no short measure due to the outstanding work by our global team members. Let me take this opportunity to say thank you to the FedEx team, especially those on the front lines, for going above and beyond the call of duty in these difficult times. When I look back at fiscal year 2021, I’m proud of the role FedEx played in saving lives, helping small and medium businesses get back on their feet and keeping the globe connected. The exceptional financial performance was driven by our robust growth strategy and focused execution on three key areas: e-commerce, operational excellence and digital innovation. Let me take a moment to highlight each strategic focus area and the progress made in Q4. Firstly, e-commerce. The acceleration of trends experienced in fiscal year 2021 highlight the importance of our ongoing strategic initiatives to win globally in e-commerce. This includes FedEx Ground's seven-day operations, investing in technology to optimize last-mile deliveries, expanding capabilities to better handle large items, offering the first FedEx branded through-the-door service with FedEx Freight Direct, and accelerating the expansion of our retail convenience network. Ground’s full seven-day operations, including weekend residential delivery coverage that reaches 98% of the U.S. population on Saturdays and 95% on Sundays, give us a distinct competitive advantage. We are working very closely with customers to leverage the full flexibility of weekend operations so they can meet the demands of e-commerce every day of the week. This is evident in the growth we saw in Ground Sunday deliveries with 56% more packages delivered on Sunday in Q4 than last year. We are also winning in e-commerce outside the United States by leveraging the strength of our global networks and the expansion of our portfolio. The second strategic focus area is operational excellence. Our competitive advantage in the marketplace is fueled by a relentless focus on operational excellence and customer service. While service is a hallmark of FedEx, like many businesses, we are facing challenges with labor availability, which have contributed to recent service levels that do not meet our own high expectations of the quality we expect to deliver to our customers. The inability to hire team members, particularly package handlers, has driven wage rates higher and created inefficiency in our networks as we use overtime to cover open shifts and route volume around known constraints. As such, we’re taking bold actions across the business to address service issues and prepare for sustained volume increases, including continued investments in people, capacity and technology to optimize our networks. FedEx Ground’s strategic focus on efficiency continued to reap benefits in Q4, as seen in our ongoing improvements in density. These improvements are driven in part by both, B2B and B2C volume growth as well as enhancements in route optimization technology, which drove up the average number of stops the service providers made per hour by 3.6% versus Q4 of the previous fiscal year. Along with the revised service provider e-commerce rate structure, these efficiencies contributed to a 3% reduction in cost per stop compared to the same quarter last year. Further collaboration to improve efficiency continued across our businesses as we expanded our last-mile optimization program. In addition, FedEx Freight provided approximately 70 million line-haul miles and delivered 1.75 million packages for Ground in fiscal year 2021. Another significant opportunity in further enhancing our operational excellence is the improvement in the profitability of our international operations, which starts in Europe with the completion of the physical integration of TNT. While the TNT integration has seen its share of setbacks, including a 2017 cyber attack and the delays due to the pandemic, we are certain of the value this combination creates for the FedEx of the future. The European restructuring announced in January 2021 is set to deliver $275 million to $350 million in benefits on an annual basis, starting in fiscal 2024. The cost of the severance benefits under this program, which will be incurred through fiscal 2023, will be in the range from $300 million to $575 million in cash expenditures. In Q4, we introduced overnight service from Europe, connecting 90% of European businesses to major U.S. markets. It’s an unparalleled next-day connectivity that nobody in the marketplace matches. As you can see, we continue to enhance value for our customers, while restructuring our European business. Said simply, the upside in the profitability of our international business is tremendous. Finally, our third strategic focus area, digital innovation. We are reimagining our digital capabilities and infrastructure in a manner that will deliver market-leading customer experiences that are simple, personal and proactive. We made great strides in fiscal 2021 as we continue to drive new value through strategic technologies, including increasing capabilities and products through sensor-based technologies like FedEx SenseAware ID and FedEx Surround, which provide unmatched visibility and predictive capabilities, most notably seen during the transportation of life-saving COVID-19 vaccines. Building ShopRunner integration and Adobe Magento extension to enable a more open e-commerce ecosystem, and furthering development of our portfolio of services in the autonomous vehicles space, as illustrated with ongoing Roxo testing in this month’s announcement of testing with Nuro. In Fiscal 2022, we’ll continue to deliver on our strategy in e-commerce, operational excellence and digital innovation, as we execute on the following key initiatives. First, we expect to substantially increase capacity for this peak by investing in FedEx Ground’s infrastructure, with the addition of 16 new automated facilities and the implementation of nearly 100 expansion projects at existing operations and key technological enhancements. Second, we will complete the air network integration in early calendar year 2022, which will bring the physical TNT network integration to a close and provides the inflection point for long-term profit improvement in Europe. Next, we’re exercising existing options to purchase 20 additional 767Fs, 10 for delivery in fiscal year 2024 and 10 for delivery in fiscal year 2025, as we continue to modernize our fleet and improve service to our customers. And we finally continue to identify areas to adapt, collaborate and utilize different elements of our global network to increase efficiency and reduce cost to serve. Our networks and capabilities reflect decades of investment, innovation, and expertise that are differentiated from our competition. It’s incredibly difficult to replicate and provides a significant advantage over others in our industry. When we net it all back together, despite some of the cyclical factors, we remain very confident for fiscal year 2022 and beyond. The e-commerce market will continue to be a growth engine globally. And if anything has become clear over the past year, it’s the contribution our industry provides to the e-commerce value chain. We remain focused on differentiation, building customer solutions, and improving revenue quality as critical long-term levers of profitable growth. In addition, the transformation efforts in Europe and U.S. domestic will generate margin improvement opportunities. And finally, we’re just getting started on unlocking value with digital innovation. Our robust growth strategy positions FedEx to deliver superior, sustainable financial returns and drive shareholder value for years to come. With that, I will turn it over to Brie.

Thank you, Raj. Good afternoon, everyone. In a year of extraordinary challenges and change for our business, I continue to be immensely proud of the team’s ability to execute our commercial strategy while developing solutions to help our customers grow their businesses. Before I move into fiscal year 2022, I wanted to reflect on our truly exceptional results of 2021. Fiscal year 2021 parcel volume was very strong across our portfolio of e-commerce solutions. Average daily volume grew across all our customer segments, with U.S. small and medium leading the way with 32% year-over-year growth. E-commerce also drove 28% year-over-year growth in our returns business through April. As more consumers shopped online, enrolled FedEx delivery manager users grew by 43% year-over-year. With this backdrop and the momentum from fiscal 2021, our fiscal 2022 outlook calls for robust growth. Enterprise growth in fiscal year 2022 will be primarily driven by U.S. domestic e-commerce growth, followed by strength in B2B and international and a focus on revenue quality. In the United States, the flourishing U.S. domestic parcel market will continue to provide opportunity in the coming years. The U.S. domestic parcel market is expected to surpass 107 million packages a day in calendar year 2022, with e-commerce contributing 88% of total U.S. market growth. Excluding Amazon volume, the U.S. domestic parcel market is expected to be 72 million packages a day in calendar year 2022. As we look beyond calendar year 2022, we forecast that the U.S. domestic parcel market will reach 172 million packages a day in calendar year 2026. In fiscal year 2021, FedEx's total U.S. domestic residential package volume mix was 67% versus 62% a year ago. As we look beyond this fiscal year, we expect residential volumes to grow significantly faster than commercial volume. However, with retail inventories relative to sales at historic lows, we expect solid B2B volume growth this fiscal year. In fiscal year 2022, we will continue to execute against our revenue quality strategy. In fiscal year 2021 Q4, we increased FedEx Ground economy yields by 28%, and overall, U.S. domestic residential yields by 16% year-over-year. It is important to note when reviewing composite U.S. domestic yields that weights and zones will decrease, putting pressure on yields as we grow in e-commerce. We are managing total network profitability. Short zone e-commerce and our FedEx Ground economy service will enable us to sweat our assets and maximize sortation capacity. Within our pricing strategy, we continue to prioritize capacity for commercial and small and medium customer segments. To support the network amid ongoing capacity constraints, we have increased our peak surcharges as of June 21st, and will monitor and adjust our strategy as capacity and demand warrant. We will continue to confidently renegotiate our large customer segment contracts to increase profitability. This means balancing product, day of week and lane mix at the customer level while ensuring appropriate surcharges and rate increases cover rising labor costs. Most large customer contracts in the U.S. are three years. Almost half of our total large segment volume had pricing agreement implementations in the past 12 months, leaving upside for fiscal year 2022. Now turning to international. Global trade volume has surpassed pre-pandemic levels and is on course for its fastest year of growth in over a decade. Global air cargo capacity remained down 10% year-over-year as of April, mainly due to the reduction in passenger value capacity. We expect air cargo capacity to remain constrained through at least the first half of calendar year 2022. Recovery will be slow, potentially episodic, and a full recovery is not anticipated until 2024. We believe favorable pricing internationally should continue through fiscal year 2022. We will continue to manage demand internationally, using yield management and continuation of peak surcharges, especially on transpacific and transatlantic lanes. We are seeing a very good capture rate on these surcharges. While peak surcharges played a significant role in our international performance in fiscal year 2021, it was not the majority of our revenue growth. In fiscal 2021, we improved parcel and priority mix versus freight and economy, grew our small and medium customer base while penetrating e-commerce. In fact, we grew e-commerce parcel volume by more than $1 billion year-over-year out of Asia and Europe. To a large extent, due to its lightweight nature and limited relative line-haul capacity requirements, we were able to price e-commerce very competitively. I believe this e-commerce volume is quite sticky. That being said, we continue to refine our commercial and network strategies to be prepared for when commercial capacity does come back. Overall demand for exports from Asia has recovered to pre-COVID levels. In fiscal year 2022, our network plans include six intercontinental daily frequencies from Asia to provide more consistent, predictable capacity based on our demand forecast. This will eliminate some of the ad hoc nature of our flights in fiscal year 2021. Intra-European B2B volumes have recovered to pre-COVID levels. While our growth is further accelerated by significant B2C volumes on our intercontinental lanes. With reduced pandemic-related uncertainty and industrial activity on the rise, we expect the overall European economy to be back to pre-pandemic levels in late calendar year 2021. Raj covered our new European value proposition. Customers are very interested in both our new Europe to U.S. overnight service and e-commerce product expansion. On the Europe to U.S. lane, we have strong demand with a healthy mix of small and large businesses. We have deployed incremental capacity to serve this high-yielding segment. Our e-commerce value proposition, anchored by our new FedEx International Connect Plus product, is very compelling. We continue to gain new customers and have a very robust sales pipeline. In summary, we had a stellar fiscal year 2021, and the strategies we have in place will help us to win what’s next in 2022 and well beyond. With that, I’ll turn it over to Mike for his remarks.

Thank you, Brie, and good afternoon, everyone. Our fourth quarter and fiscal 2021 results reflect the tremendous momentum in our business and reinforce our growth strategy and investments across our network to grow our capabilities, improve collaboration and drive efficiency. Our full year results include over $1 billion in variable incentive compensation expense as we reward our team members for their invaluable contributions. In the fourth quarter, FedEx continued to drive higher profitability with increased margins across the board. Consolidated revenue grew 30% year-over-year in the quarter, while adjusted operating income was up 117% even with higher cost to support increased demand, increased variable compensation expense of $380 million and our previously announced $100 million contribution to Yale University to support our carbon neutrality goals. Drilling down into those numbers, the rise in U.S. parcel volume was the greatest driver of our revenue growth. And through the incredibly hard work and ingenuity of our team members, we took a significant portion of that revenue growth to the bottom line. Ground revenue grew 27% in the fourth quarter, with operating margin increasing 310 basis points to 13.6%. Ground substantially improved margins and earned the most operating profit in their history. As our international business and e-commerce in the U.S. continued to grow, Express revenue grew 32% over Q4 last year, with adjusted operating margin up 340 basis points. Freight blew out this quarter with 38% revenue growth and their highest quarterly operating margin ever at 16.1%. They also topped $1 billion in operating income for the full year for the first time. With our overall profit growth, we generated a record $4.6 billion in adjusted free cash flow while balancing continued investment in the business, funding our pension plans by $300 million and strengthening our balance sheet. During the fourth quarter, we executed a debt refinancing and extinguishment transaction, underscoring our focus on reducing our financial leverage. In the fourth quarter, we reduced our outstanding debt by $2.6 billion or 11% of the total outstanding liability, eliminating all debt maturities through FY25 and one in FY27. This transaction resulted in a $393 million charge in Q4. However, it will lower our interest cost over the next three years with a positive payback on the transaction. In FY22, we will continue to drive a robust growth strategy, capitalizing on global economic recovery and e-commerce. This focus will flex all levers of our business, including volume growth, yield management, operational efficiency, and network optimization. The FY22 adjusted EPS range we provided corresponds to 13% to 18% year-over-year growth on top of record FY21 earnings. I’d make the following highlights behind that. We expect margins in all our transportation segments on an adjusted basis to exceed FY21 levels, driven by several key areas. We expect e-commerce to continue to drive higher profitability, and we will continue to invest in our FedEx Ground network to improve efficiency and utilization through expanded and new facilities as well as technology enhancements. We also look forward to incremental benefit from the completion of our physical integration of TNT, which will enable us to offer more and better services to our customers internationally. This key milestone will continue to drive momentum and provide a launch point for even better profitability down the road. Integration expenses will be lower in FY22 than in FY21, and total integration spending is expected to be $1.8 billion, slightly higher than our previous estimate due to additional opportunities identified to further optimize legal entity structures and improve back-office automation. We expect continued improvement at FedEx Freight through our ongoing revenue quality and profitable growth strategies. Our outlook includes substantial funding of our incentive compensation programs for our team members. That said, variable compensation expense is not expected to be a headwind for fiscal 2022. While we have clear growth opportunities, the widespread labor shortages impacting many companies and industries across the U.S. is also impacting us through higher wage rates and lower productivity, particularly in the first quarter, and this is reflected in our overall outlook for the year. Earlier, Raj talked about our Innovate Digitally initiatives. The spending related to these important projects is included in our outlook and will largely be recorded in the corporate, eliminations and other section of our P&L. Further, we estimate a higher effective tax rate for fiscal 2022 of approximately 24% prior to the mark-to-market retirement plan accounting adjustments. Finally, I will address our capital allocation, starting with capital expenditures, which is expected to be $7.2 billion in FY 2022. This projects to 8% or less of revenue, which is the target level for the CapEx to revenue component of our FY22 to 2024 long-term incentive plan and remains below our historical capital intensity. Approximately half of our expected capital spending this year will be for growth with the remainder for important projects like replacing our aging FedEx Express aircraft, which not only is expected to have a high financial return, but is an important part of our strategy to reduce our carbon footprint. We’ll also continue to invest in the modernization of our key Express hubs and upgrades to other facilities in all our transportation networks to drive efficiency. We will increase the replacement of vehicles across the enterprise, which we largely deferred in FY21. We will add safer, more energy-efficient equipment. All these projects will yield benefits in the near term and long term. We ended fiscal 2021 with $7.1 billion in cash. And as such, our leadership team is laser-focused on enhanced capital allocation opportunities, including our 15% dividend increase for fiscal 2022, which raised the dividend to $3 per share, as we announced on June 14th. Next, our plan to restart our stock buyback program during the first quarter, which we can do without having to increase leverage and our focus primarily to offset dilutive effects of our equity compensation programs, and our plan to voluntarily contribute $500 million in FY22 to our pension plan, which was funded at 95% on May 31st. In closing, we are adding shareholder value by driving profitable revenue growth, expanding margins, generating strong free cash flow, focusing capital spending into the greatest areas of return, strengthening our balance sheet and improving cash return to shareholders. Based on record fourth quarter results we just covered and the future strategies we have in place, I can say with confidence that we fully expect FedEx to continue delivering sustainable and superior financial returns in the future. Next, we will be happy to address your questions.

Hey. Good afternoon. Thank you for taking the questions. Mike, I wanted to see if you could give some color as it relates to the Ground margins in the guidance. Obviously, some considerable operating leverage here in terms of incrementals year-over-year. You’ve talked about the right store, the right package, the right trucks, but clearly, there is some inflation working its way through the system. So, can we think about double digits on the way to teens, or would you guide us to something a little bit less than that considering what you’re outlining on inflation side, which does seem to be a little bit front-end loaded? So, maybe if you can address that and also about the surcharges that you might be able to install to offset some of those costs. Thank you.

Well, Brian, I’ll kind of hit the first part and just reiterate a few things we’ve said and maybe try to tie it together in a different way. But, as we’ve said, the pandemic accelerated the dramatic and rapid shift in the growth of e-commerce, and at the same time, as you noted there, put some pressure in areas along the way as well, which is really why the performance at Ground in 2021 has been nothing short of stellar. ADV increased an astounding 23%, driven by e-commerce and we still improved margins. So, Brie highlighted that U.S. domestic parcel growth will continue to be primarily driven by e-commerce, and we’re very confident in our strategy to profitably execute against that. So, we expect margins to improve in 2022 and beyond as we continue to increase density, further improve the facility and on-road productivity, enhance the utilization of our assets. And I kind of emphasize those aspects as Ground is generating exceptional ROIC margins. And so, we remain very confident of the future opportunity, and we’ll continue to innovate and differentiate the capabilities there. There was something about surcharges that you asked as well, maybe you can clarify that.

Yes, right. Earlier this week, we saw your main competitor announce some surcharges for peak season that were instituted earlier than last year, and they’re also a bit higher. So, with the inflation you’re talking about with the capacity in the system, maybe you can address that as well and what you assumed in this guidance here.

Thank you, Brian. This is Brie. From a structural pricing perspective, we believe that peak surcharges have become a new normal, and we need to align our pricing with our costs. I have mentioned in previous calls that we expect e-commerce surcharges during every peak. Currently, we have peak surcharges in the market, and we are continuously assessing any necessary changes based on demand and capacity. We made some adjustments on June 11, and we are still monitoring the situation.

Good afternoon, and thank you for taking my questions. It’s clear that we’re experiencing one of the best trade-up scenarios we've seen from logistics customers, with all of your higher-yielding, higher-priority products performing exceptionally well in this environment. Can you discuss how you maintain that profitability in terms of both mix and pricing when we inevitably revert to a more stable and sustainable demand and priority environment?

Sure, happy to take the question. I think we have to separate it between the domestic market and the international market. Here in the U.S., you heard me quote some just outstanding growth numbers from a parcel perspective. So, we think we actually have quite a sustained growth environment, while demand will outpace capacity in the domestic market. Structurally, as I mentioned, we will continue to use surcharges, not only for peak, but to cover large package and to really just make sure that our pricing, quite frankly, aligns to our cost. We think we have the very best value proposition in the market, full stop. We have the best weekend coverage. And so, as a result, we think the demand that we are planning for will be there for quite some time here domestically. On the international side, it’s a little bit of a different story and far more complex. We do believe, as I mentioned, that commercial capacity will come back. Episodically, it will not be a straight line up than we actually have, we believe, until 2024. The longer it takes for commercial capacity to come back, quite frankly, the longer we have to make sure that this customer base is sticky. I pointed out in my opening remarks that we had $1 billion growth in e-commerce. We priced this e-commerce volume at future price. It is going to be very sticky. It was very competitively priced. So, we don’t believe there’s any risk there in our small business growth, we’ve also had internationally. We also believe that volume is very sticky. So, as commercial capacity comes back, we’ll adjust the network. We’ll bend the cost curve to offset some of the surcharge risk. But overall, we feel quite good about the strategies, and we have some time to implement them.

Thank you very much, operator. Hello, everyone. I appreciate your time. I have two questions. My first question is, considering the labor shortages we are experiencing and the expectation that this trend may continue, is now a good time to shift dramatically towards increased use of robotics and expedite the implementation of automation?

Well, Helane, this is Mike. I’ll just highlight that within that CapEx projection, a good amount of that is to enhance the efficiency of the facilities, which is exactly the aspect you’re hitting on. I’ll give it to Raj to talk more broadly about the broader point you raised.

Well, I think the point that I want to make here is that the labor environment remains challenged right now. And we are doing everything we can possibly do, whether it is from wages, from technology, from routing and all things associated with it to make sure that we can get our service improved. We expect that over the next two, three months, that situation gets better and that we get ready for peak. And, of course, we are considering longer-term opportunities that Mike talked about in terms of technology as well. Thank you.

Thanks. For me one. Can you give us a little bit of color on what the two halves of fiscal 2022 look like, first half versus the second half, given that you probably have a little bit, I’d say, pandemic conditions continuing through the next couple of quarters, but then some of the comps start getting a little bit harder in the back half of the fiscal year?

Yes. Ravi, look, we’re giving our best middle of the fairway estimate of what we think the year looks like. As you highlight, there are any number of moving parts. So, I don’t want to try and parse various elements along the way there. But certainly, the recognition that the first quarter here with the labor challenges and the productivity impacts as well as, keep in mind, we are continuing to still have to make accommodations in the Express air network as well for layover requirements and that. So, there are a number of related aspects there. So, I’ll leave it at that in terms of what’s at play here.

So, Mike, could you provide some details on the overall cost impact, specifically regarding productivity and wage effects due to the inflation in the marketplace and the challenges in hiring sortation labor into the network? Any insights you can share to help us understand the extent of this headwind would be very helpful.

I wish it were possible to simplify this into straightforward categories. However, to expand on what Raj said earlier, when you lack sufficient staffing at the facility, it leads to lower throughput, and you may not achieve the expected trailer density. This results in additional costs for operating the network and transportation. Therefore, it’s not as straightforward as saying we are short by a certain number of people and identifying the impact this has or how much of it is due to wage rates. It’s an ongoing process that requires us to adapt and adjust our approach consistently. That's how we are addressing the situation.

I was just curious you know UPS sold their LTL division to a Canadian company a few months ago. Is that expected to have any impact on your marketing or your share of the market in the LTL business?

Well, David, first, this is Mike. Let me just say, our commitment and value of our Freight business, given the results that I just spoke to, is absolute. So, I’ll let Brie address what we think how the market evolves going forward.

Well, honestly, this doesn’t impact our Freight strategy. We are the market share leader because we have the best value proposition. We have had just a stellar year with the Freight team. They have done a tremendous job managing despite the tumultuous year we have. And while they did that, they introduced a new product that is growing rapidly. In addition to growing our share with small customers, we intend to grow our share with FedEx Freight Direct product and grow our residential share. So, we are tremendously excited about our FedEx Freight division, and we’re going to just stay the course.

On the labor topic, and also this does tie into Freight as well, Mike, you mentioned that it looks like it’s largely affecting first quarter. You mentioned you adjusted the guidance for the first quarter. I’m curious on your confidence of I think much of the country is hopeful that this labor dynamic ends at the end of the summer. But just curious how conservative you were or maybe a little bit more color about how you’re considering it and if you hope to get whole by, say, end of first quarter? And then, the follow-up question, but thematically the same is, in Freight, you had some customer suspension, and it looks like that’s largely alleviated, but could you put a little bit more color on what occurred and your comfort that that’s back in a good situation?

Sure, I'll respond to the first part and then hand it over to Lance, our CEO of Freight, for the second part. What we’re experiencing isn’t unusual. As we noted, it primarily affects the first quarter. The overall expectation is that conditions will improve as we transition into the fall and the markets stabilize. We are addressing this daily, and there’s nothing particularly unique about it beyond the common expectation that by September or October, we should see a larger workforce. Lance?

Thanks, Mike. Well, since Freight hardly ever gets any questions, I want to take this opportunity to add to Brie’s comments and recognize our team for an exceptional year. They successfully battled through what has been the most challenging year I have ever seen in my almost 30 years in this business, and I grew up in it. So, I want to recognize all of the points they put on the Board. Now, I’m sure you all have read the multiple articles written over the last several months about the tightening in the trucking industry, and it starts with the truckload sector. They are five times the size of the LTL divisions. And when they get full, the spillover comes into LTL. We use the large LTL carrier and get the majority of it. And so, when you have it combined with what the broad actions our competitors have taken to embargo entire sections of the country without any notice, impacting all customers, we decided to take an implemented temporary targeted volume control to drive and minimize the network disruptions and balance capacity to avoid the backlogs across the entire country. So with record growth has come some tough but necessary decisions to protect our employees, reduce our backlogs and staff to our business volume. This continues to be the driving force behind our business decisions. Now, in hindsight, I would not have wanted to make a decision back in the quarter like this, and we’re taking measures to avoid it going forward. I hope that provided the transparency.

Brie, you mentioned a very optimistic outlook on the tightness in the domestic market. It seems likely that this tightness will persist. How should we consider our pricing strategy? You've experienced significant momentum in pricing, with a 14% increase in revenue per piece in ground services. What are your thoughts on the pricing dynamics for the next few years? Should we anticipate continued above-average pricing gains in both Express and Ground services? Can we also view this as a crucial factor for margin expansion that we can expect to persist as we assess the domestic package businesses?

Absolutely. As we examine 2022 and 2023, we believe you will see a year-over-year price increase that exceeds our historical average. This past year, we adjusted prices for about 45% of our large customer segment, primarily in the latter half of the year. Therefore, we will benefit from these new renegotiations in the latter part of this fiscal year and in the early part of 2022. Additionally, we still need to adjust prices for the remaining large customers. Importantly, as Fred mentioned, it's not solely about top-line revenue; it’s crucial that our pricing reflects our costs. We are intensely focused and disciplined in ensuring that customers with large packages have appropriate surcharges and structures, ensuring those with the highest peak factors cover the additional labor costs during peak times. While I am optimistic about the top line, it is vital to align our pricing strategy with our costs, and we believe this will drive significant momentum both next year and the following year.

I would like to follow up on that point. Given the tightness in the market, it appears that you and your main competitor are the primary drivers of capacity. If you can manage that capacity over the next few years, it should help create a strong pricing environment, likely exceeding cost inflation in the years to come. What could prevent us from taking advantage of the opportunity to restore domestic margins to previous levels? Is there another obstacle we should consider, or is it primarily about aligning capacity with the solid volume growth you've mentioned while ensuring a favorable pricing environment for the future?

Yes. Chris, let me just highlight one aspect when we talk about capacity, too. The CapEx growth at Ground is focused on smaller units than kind of going back the historical legacy large hubs. We have one opening, but it’s targeted to efficiently and effectively execute on a lot of this growing shorter zone demand. And so, that’s why when we talk about having the right targeted investments to align the cost with where demand is going, that’s how we’re thinking about it. And then, of course, there has to be a match on the pricing side, which as Brie has covered, I think, pretty comprehensively. So again, it’s an integrated planning process and assessment here. Look, the finance team is part of the discussions and assessments that go on in that as well. So, it’s very integrated with operations, finance, sales, pricing, and marketing. So, the team really has a collective focus.

Maybe a longer-term question for either Raj or Mike. But, in the past, we found a very high correlation between return on invested capital and a stock to valuation multiple within the transportation sector. At its Analyst Day earlier this month, UPS laid out a plan to get its return on invested capital up to 26% to 29% versus about 20% today. Your LTM return on invested capital is between 7% and 8%. So, Mike, what do you think is a realistic target for ROIC for FedEx would you look out over the next three years?

Jack, I won’t be setting any specific targets or guidance beyond what we have discussed today, but I want to emphasize that we are very confident that the investments we are making will yield a strong return on invested capital. I also mentioned that we expect to see margin growth across all business segments. That’s our focus to maintain the trajectory we want to see. So, I think that sums it up.

Brie, could you provide some insight into the recontracting process for enterprise customers? You mentioned that these contracts come up every three years. Is the company able to adjust pricing mid-term with a 60 or 90-day notice, or is this only possible at the end of the contract period? Additionally, Henry, could you clarify the current B2B and B2C mix? I’m interested in understanding how B2B compares to its status before COVID, as this will help us gauge the potential benefits as B2B continues to recover. Thank you.

From an enterprise contract standpoint, each agreement has its unique aspects. We have initiated some contracts outside of the regular cycle when customers have sought to accommodate increased demand. Thus, when they wish to alter our historical arrangements, we engage in those discussions. It's essential for us to grow our pricing and yield while ensuring that our customers are happy and satisfied. We aim to maintain that balance. Some customers required adjustments in their portfolios to meet their business needs due to significant growth, particularly in retail and healthcare. Consequently, we do reopen accounts and hold discussions regularly. I am pleased that our team has shown remarkable agility. Regarding the second part of your question about B2B and B2C, from a domestic viewpoint, we will enhance Express operations. We will focus on commercial and premium services, and we are optimistic about our last-mile optimization strategy, which will help incorporate more residential business into the Ground network. Notably, in May of this year, we recorded our highest commercial volume in the domestic network since September 2019, indicating strong confidence in our commercial business in the U.S. However, as mentioned, 90% of market growth will come from e-commerce, so we will continue to expand B2C volume within the Ground network. We are committed to driving that growth and increasing yield, with the goal of improving margins as Mike indicated. We are very excited to embrace the e-commerce growth for FedEx Ground.

This is Mike. I should add one thing for those of you that are asking about the sequencing or trajectory through the year. As a reminder, I mentioned that we accrued $380 million of variable compensation expense in Q4. And so, if you add up the prior Qs, and that gets you to around $1 billion for the year. So Q1, we were not accruing as much as last year understandably amidst the uncertainty. So just kind of keep that in mind as you think about modeling through.

So, in the outlook, you talked a lot about Ground, but what about Express? So, if we normalize for the $100 million donation, the rebound of FedEx Europe with the TNT integration, the aircraft efficiency, what’s the time frame to get back to double-digit Express, maybe detail the progress at TNT as well? And then, just an update within that, the blending of Express into the Ground network, both on the package and facility side?

Well, there’s been a number of milestones on the TNT. We had the road network. We completed that milestone, and that helped facilitate the enhanced commercial proposition that was highlighted. And again, the air network is another key enhancement, and that comes toward the end of this fiscal year. So, there’s value coming this year, more to come. And then, as we highlighted with the business realignment, that hits full stride into 2024. So, it’s a multiple year of significant opportunity and increases there.

Ken, I want to emphasize how excited we are about our position with TNT. The integration of our physical operations this fiscal year and into next calendar year marks a crucial turning point, as I mentioned earlier. Additionally, we are continuously enhancing our value proposition. The overnight service from various European markets to the U.S. is unparalleled. We are making excellent strides, and we anticipate seeing margin expansion starting in fiscal 2022 and continuing into FY23.

So Raj, you talked about lower cost per stop at Ground. So, is there a way to parse out how much of that was driven by the increased B2B mix versus increased density and e-com residential volume related to last-mile optimization, improved asset utilization from the seven-day operations? And then, if you could just maybe address how we might be able to gauge the improvement in cost per stop in fiscal 2022. Thank you.

I’m going to have John answer that question.

Allison, thanks for the question. If you go back when we talk about the LMO, FY20, we only delivered 1.2 million packages of LMO. Through fiscal year 2021, we delivered 21.6 million packages of LMO. Now, that’s one factor that’s improving our optimization. The next, if you’ll remember, we integrated SmartPost, which is now our economy product, and plus the surging residential growth since the pandemic, all these factors have helped us improve our residential density. Now, one of the things to remember, we’re seeing package matching where we have commercial, residential, economy or LMO packages where they’re destined to the same address or nearby address for another Ground package, and we fully continue to expect this to continue to increase. We’re also confident that our weekend residential delivery coverage, which already mentioned, reaching 98% of the U.S. population on Saturdays and 95% on Sundays truly gives us a distinct competitive advantage.

One of the issues that we’ve heard on the manufacturing side is really the supply chain constraints and sort of the impact that maybe those increased volumes have had. Is this something that’s been, I guess, one, noticeable to you? And is it starting to abate, or is this still sort of a level of volume that you would continue to expect, particularly on the Express side, as we move through the rest of the balance of the year here?

The supply chain constraints are certainly significant. It's also important to consider the inventory to sales ratio, which is at an all-time low. We anticipate that as the supply chain begins to stabilize, we will still have opportunities for growth, particularly on the Express side of the business due to the very low inventory sales ratio, which generates a lot of express traffic. I hope that addresses your question. If anything is unclear, please feel free to ask again.

The Express part of it, like is it starting to normalize somewhat where you’re seeing that sort of fall off here? And obviously, inventory to sales ratio might not be as sort of next day just in time based on some of the issues we’ve had over the past few months. Just wanted to know if that was noticeable and sort of the volumes you were seeing at this point?

The intensity of demand has remained strong, driven by several factors you and Raj mentioned. On the inventory side, we're seeing historically low levels for both finished products and raw materials like chips. The demand continues to be robust, both domestically and internationally. Additionally, the light supply, both in air and ocean transport, contributes to our optimism, indicating no short-term changes in our outlook. In fact, I’m noticing an increase in this trend within our international business.

Brie, I want to go back to the pricing discussion for a moment, but maybe more specific to Europe. It seems like a meaningful commercial opportunity for you over there, but some of your competitors are also looking at expanding in that region as well. So, my question is, are you seeing any signs of a land grab or any competitive pricing pressure develop on that front or are you seeing the same sort of structural differentials between demand and capacity you’re seeing here in the U.S.?

Great question. From a European perspective, we see ourselves as the underdog but have experienced significant momentum, highlighted by $1 billion growth in e-commerce between Europe and Asia. In terms of our European business, we've strengthened our already strong coverage across Europe and into the United States, making our sales team excited about our value proposition. This gives us potential for growth in both B2B and B2C market share in the U.S. From an intra-European standpoint, our primary focus remains on B2B, while we're just starting to develop B2C, and we see growth opportunities there along with improving yields in Europe. Additionally, we are targeting the Asia to Europe route, where we have previously been underrepresented, but our Asia team has been effectively gaining market share from DHL over the last four quarters. We are optimistic about this pricing environment and the strong momentum we are witnessing.

And Bruce, if I can just add. In some ways, the European markets are the late bloomers, up post COVID-19, but we now expect them to be back to pre-pandemic levels this calendar year versus what we thought will go to be next one. So, there’s going to be the demand, especially B2B coming back sooner. And again, I think we are in a very good position for that.

On the Ground facility investments, as you tilt to smaller facilities, which I think you talked about being driven by ship from store where the demand is headed. Can you talk about utilization of your existing assets? What does churn look like in those? How often do you exit a facility? And is there any geographic focus to your Ground investments?

Thanks, Duane. It’s John. First of all, we’ve already talked about this, but let me re-mention the brick-and-mortar that we’re adding. We’re adding a very large hub in Chino, California, and we’ll end up with 16 regional sortation facilities this year as well as four new automated stations. Already been mentioned that we’re expanding over 100 of our existing facilities. But that’s not just how we’re attacking our capacity. We’re also expanding our operational solutions that maximize how and when we’re using these existing buildings, for instance, like when we run multiple preloads in an existing building. Also, technology is a huge play for us here. It’s going to provide the solutions that are critical to enable these solutions to work. And in addition, we’re refining tools that use real-time data to help us streamline multiple aspects of our operation all the way from staffing through package routing to trailer as well as mode optimization. And we’re also collaborating with our customers on solutions that will leverage the full flexibility of our seven-day operations and benefit from our expanded regional and local solutions for e-commerce shippers that will allow them to reach their customers, both quickly and cost-effectively.

And Duane, if I can answer the strategic point here. I’ve long talked about how we work strategically with some of the retail customers as they see the online growth. And again, that’s exactly what we’re doing. And when you see stories of retailers showing tremendous online growth, you can bet there is a FedEx story right behind that.

Curious, given the investments you’re making in Ground and the automation facilities and preparing for a strong peak, can you give some sense against, obviously, what’s difficult year-over-year comparisons, what sort of big picture volume outlook you might be looking at in terms of growth perspective? Is it a mid-single-digit type of number, better? Just curious. Thanks.

Well, we’re expecting a pretty robust peak. I think last year, we called it Shipathon. I think we’re looking forward to another Shipathon, quite frankly. So especially in the Ground network, we are absolutely expecting a robust peak in volume growth. I think Fred mentioned in his opening remarks, the goal is over $90 billion for the year. And I’m looking across the table at Jill, my commercial partner, and we’re pretty confident in that number.

Thank you very much for participating on this analyst call. As I said, I’d like to take a moment to personally thank Henry Maier for his dedicated service to this organization. Henry’s various roles were pivotal at key points from the time we bought RPS until today. I think, even Henry and I would be amazed looking back in time if we thought FedEx Ground was going to be the enormous entity it is today with substantial growth prospects and an awful lot of that, Henry is due to your leadership and insight, your remarkable professional in an area which is very arcane and very poorly understood, and many, many quarters, because of the topology of networks and how they actually operate. I’ve had a lot of fun, and just on a personal basis with our repartee, and I’m going to continue that with you as we talked about the other day. So, all of us wish you and Diane great success in retirement. And on behalf of all of us, well done, and we are deeply grateful to you. So, let me end with one administrative announcement. In reviewing the format of these calls, we’ve made the decision going forward, Raj, Mike, and Brie will handle these quarterly calls. I’ll be available on the midyear December call and year-end call next June to answer any questions. The rest of our SMC, we’re going to give this time back to them in order to run the railroad because the size and scope of this operation needs every minute that they can devote to their day job rather than to these reports, which will be very adequately handled, as we just demonstrated by Raj and Brie and Mike. So, back to you, Mickey.

Thank you for your participation in FedEx Corporation’s fourth quarter earnings conference call. Feel free to call anyone on the Investor Relations team if you have additional questions about FedEx. Thank you very much.