Fedex Corp (FDX) — Q1 2022 Earnings Call Transcript

Good afternoon, and welcome to FedEx Corporation's first quarter earnings conference call. The first quarter earnings release, Form 10-Q 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 Raj Subramaniam, President and COO; Mike Lenz, Executive VP and CFO; Brie Carere, Executive VP, Chief Marketing and Communications Officer. And now Raj will share his views on the quarter.

Thank you, Mickey, and good afternoon, everybody, and thank you for joining today's call. First and foremost, I would like to extend my sincerest thanks to our global team members who continue to deliver for our customers in an exceptionally challenging operating environment. We are extremely proud and grateful for the manner in which Team FedEx continues to move the world forward. The execution of our strategies continues to drive high demand for our differentiated services despite the disruptive impact of the pandemic on labor availability, industry capacity and global supply chains. As you look at our first quarter results, our performance was highlighted by double-digit increases in yield across all our transportation businesses driven by limited capacity, high demand and our revenue management strategy. The impact of constrained labor markets remains the biggest issue facing our business as with many other companies around the world and was a key driver of our lower than expected results in the first quarter. As Mike will share in more detail momentarily, we estimate that the impact of labor shortages on our quarterly results was approximately $450 million, primarily at FedEx Ground. Labor shortages have had two distinct impacts on our business. The competition for talent, particularly for our frontline workers, has driven wage rates higher and pay premiums higher. While wage rates are higher, the more significant impact is the widespread inefficiencies in our operation from constrained labor markets. To illustrate this, I'd like to share a brief example from FedEx Ground. Our Portland, Oregon hub is running with approximately 65 percent of the staffing needed to handle its normal volume. This staffing shortage has a pronounced impact on the operations, which results in our teams diverting 25 percent of the volume that would normally flow to this hub because it simply cannot be processed efficiently to meet our service standards. And in this case, the volume that’s diverted must be rerouted and processed, which drives inefficiencies in our operations and in turn higher costs. These inefficiencies included adding incremental line haul and delivery routes, meaning more miles driven and a higher use of third-party transportation to enable us to bypass Portland entirely. Now that's merely one example. Across the FedEx Ground network, there are more than 600,000 packages a day being rerouted. We anticipate the cost pressures from network inefficiencies such as the one I just illustrated to persist through peak as we navigate the labor market and impacts of new Covid variants. Overcoming these staffing and retention challenges is our utmost priority as they not only affect our cost structures and operational efficiency, but also have a negative impact on service levels. As such, we're taking bold action across the enterprise to hire and invest in our frontline team members as we prepare for the peak season ahead. These actions include targeted pay premiums, particularly for weekend shifts, increased tuition reimbursement, sponsorship of a national hiring day on September twenty-third as we seek to hire ninety thousand additional positions ahead of peak; detailed volume and demand planning with customers to drive additional sorts to alleviate congestion and expanding network capacity, which I will touch on shortly. Based on these actions, combined with our expectations for improving labor conditions, we do anticipate gradual improvement in our operational efficiency as we turn into the new calendar year. During the first quarter, the team continued to execute on our strategy even amid the challenging operating environment. As e-commerce drives higher demand, we continue to strategically invest in our network to boost daily package volume capacity, increase efficiencies and further enhance the speed and service capabilities of our networks. Our investments continued in Q1 as FedEx Ground expanded its physical footprint with the new state of the art hub in Chino, California, which began operations in August. This fully automated hub includes large package sortation and has the capability to process up to thirty thousand packages per hour and is strategically located to help address ongoing port congestion challenges. FedEx Ground also continues to see year-over-year improvement in last mile efficiency, driven by a 2.4 percent increase in packages delivered per hour compared to Q1 last year thanks to route optimization technology. As we move into Q2, we are meticulously planning for peak season ahead including close collaboration with customers to build solutions to enable them to succeed. We expect to have substantially higher ground capacity this peak season, due to our investments in FedEx Ground’s infrastructure. This includes the addition of more than a dozen new automated facilities and several other sortation equipment expansions in addition to the Chino hub that I already mentioned. Several key technology projects are also slated for completion this fall, including the modernization of multiple sortation, transportation management and safety systems, which will help to increase Ground’s network capacity by one hundred thousand average daily volume, as well as its flexibility and resiliency. This brings a total capacity increase of more than one million average daily volume compared to last peak. Another significant opportunity in our growth strategy is the improvement in the profitability of our International Express operations. We reached a significant agreement with the social partners at our Liege express operations regarding the intended European Air network transformation. This is an important milestone in the completion of the Air Network integration, which remains on track for completion in spring twenty twenty two. That will bring the physical network integration of TNT into FedEx to a close and when combined with the benefits of our previously announced European restructuring provides significant upside in our international profitability moving forward. In summary, we're taking bold actions in the short term to navigate through this highly uncertain environment. We remain committed to long-term shareholder return and we are very confident in our strategy for the following reasons. We have a differentiated portfolio of services to attack the fast-growing e-commerce market. Our business model gives us the framework to be very successful in this regard. In fact, we are working strategically with several retailers to deliver a win-win-win solution - win for the retailer, win for the end consumer, and win for FedEx. For instance, we recently partnered with a large retailer to create a common data platform that drives optimization of our combined assets, and enhancement of visibility and predictability to the end customer. Further, as day-definite residential volumes grow in our network, there's increasing opportunity to collaborate across our operating companies to improve efficiency by better utilizing our assets. Another upside for FedEx is international, hence the completion of our physical integration in Europe provides an inflection point for profitable growth. And finally, we are in the early stages of unlocking value from digital innovation. We are confident that this will play a significant part in the success of FedEx for years to come as we make supply chains work smarter for everyone. Our strategy is sound and positions us well for improved returns as we move through fiscal year twenty-two and beyond. With that, let me turn it over to Brie.

Thank you, Raj, and good afternoon, everyone. Our first quarter commercial results were very strong with fourteen percent revenue growth and double-digit yield improvement in our Transportation segment. These results reflect the positive backdrop for growth in the parcel markets, including a very healthy pricing environment. For fiscal year twenty-two, FedEx revenue was forecasted to pass ninety billion dollars. Further, we are forecasting that the U.S. parcel market will grow to one hundred and one million packages a day by calendar year twenty twenty-two, which is year-over-year growth of twelve percent. These market projections are slightly lower than last quarter as e-commerce percentage as a percentage of retail declined. We saw a shift to in-store shopping and buy online pickup in-store and spending in services, of course, increased. However, despite this moderate change in e-commerce growth, the secular trend of e-commerce growing as a percentage of retail will continue to drive healthy parcel market growth. We are forecasting a ten percent annual growth rate of U.S. domestic market volumes through twenty twenty-six. At FedEx in the first quarter, total U.S. domestic package volumes increased year-over-year by one point five percent. At Express, our total U.S. domestic package volume grew seven percent year-over-year. Total FedEx Ground volumes were relatively flat in the quarter, however, I'm very proud as we proactively manage our capacity for higher yielding commercial and home delivery services. In fact, FedEx Ground commercial volumes grew double digits in the quarter. In the first quarter of fiscal year twenty-two, FedEx total U.S. domestic residential package volume mix was fifty-seven percent versus sixty-two percent a year ago. U.S. B2B mix improved year-over-year in the first quarter of fiscal year twenty-two as B2B volumes continue to recover with inventory replenishment and manufacturing rebounding as the economy opens. B2C mix continues to remain higher, however, than pre-pandemic levels. In Q1 FedEx Freight revenue increased twenty-three percent driven both by increased volume and higher revenue quality, a huge shout-out to the FedEx Freight team, great job, team. FedEx Freight Direct continues to bring incredible momentum. Turning now to our revenue quality strategy. The continued constrained capacity in both the U.S. domestic and international markets has led to a very favorable pricing environment. We are focused on protecting and growing volume in high-yielding commercial segments, including commercial ground and small and medium segments. We have an incremental opportunity to improve large customer yields through contract renewals and providing large customers an ability to procure incremental capacity at current market rates. As announced yesterday, effective January third, twenty twenty-two, FedEx Express, FedEx Ground and FedEx Home Delivery shipping rates will increase by an average of five point nine percent. While FedEx Freight rates will increase by an average of five point nine percent to seven point nine percent. We also announced other surcharge increases which can be found on FedEx.com. These increases will help us continue to balance capacity with demand and mitigate the impact from the increased costs that Raj just outlined. Turning now to International. We are forecasting the air cargo market to be more than eighty billion dollars by calendar year twenty twenty-five. At FedEx, we currently have single-digit market share, and as such, this remains a significant growth opportunity for us to continue to pursue. We expect air cargo capacity to remain constrained through at least the first half of calendar year twenty twenty-two. A full recovery is not anticipated until twenty twenty-four. Global air cargo capacity continued to recover in July. It is still down ten percent compared to pre-pandemic levels. Capacity on international lanes remains scarce, and we have seen European and APAC export demand recover to pre-pandemic levels. Globally, we continue our efforts to optimize our network and customer mix. We managed to a very high percentage of priority service on our international flights, with yield per package improvement of eleven percent for international parcel and yield per pound improvement of eighteen percent for international freight. Exports from Asia are fueled by the strong demand from B2C and B2B recovery. B2B will further benefit from a shift in demand from ocean freight to air cargo as our customers replenish stock levels in time for the peak sales season. To provide access to reliable capacity in this constrained environment, we turned six previously ad hoc intercontinental flights into scheduled service in fiscal year quarter Q1, four trans-Pacific and two for the Asia Europe lane. We are seeing a strong recovery in Europe as well with the overall economic recovery back to pre-pandemic level. Our intra-Europe cross border B2B volumes have recovered to pre-COVID levels. Our growth is further accelerated by significant B2C parcel volumes. In Q1 we expanded FedEx International Connect Plus from Europe to six new global destinations, increasing coverage to eighty-two percent of global GDP across a total of three hundred lanes. And on September first, we launched FICP in EMEA across eighty origin destination lanes. For businesses looking for a cost-effective solution with competitive transit, FICP provides a compelling e-commerce value proposition. We continue to gain new customers through FICP and have a very robust sales pipeline. In summary, while it continues to be a very dynamic market, we remain incredibly confident in our global growth potential and our world-class commercial teams to bring in market-leading yields. And with that, I'll turn it over to Mike for his remarks.

Thank you, Brie, and good afternoon, everyone. Our first quarter FY’22 adjusted earnings per share of four point three three seven dollars was negatively impacted by approximately eight hundred million dollars in year-over-year headwinds. And while Raj covered the operational impacts of these challenges, I will detail the financial impacts for the quarter. Of these headwinds, the labor cost pressures year over year cost, the majority of which impacted our FedEx Ground business. As we look into the impact of labor costs on the business, I want to break this impact into higher wages and the impact of network inefficiencies. We estimate that approximately two hundred million dollars were related to increased purchased transportation rates. This included higher wage rates and pay premiums for team members and higher rates paid for third-party transportation and services. In addition to the higher wage rates, we estimate that network inefficiencies of approximately two hundred fifty million dollars contributed to the total impact of labor shortages on the business. These costs include additional line haul, higher usage of third-party transportation, cost of repositioned assets in the network over time, and recruiting incentives to address staffing shortages. Beyond the labor impacts, our results for the first quarter also included the following headwinds. An additional one hundred thirty-five million dollars in healthcare costs due to lower utilization a year ago, eighty-five million dollars related to investments in the Ground network, which represents the cost of bringing online sixteen new automated facilities and expansions at a hundred facilities which are critical to improving service and adding capacity to meet growth for peak and beyond. And at Express, an estimated sixty million dollars in incremental air network costs due to the impact of COVID restrictions on our operations, including limitations on layover, supplemental crews to ensure service continuity, and immigration restrictions. In addition, as a reminder, our prior year results at Express included a pre-tax benefit of sixty-five million dollars from a reduction in aviation excise taxes. That said, our first quarter results did come in lower than our own expectations as difficult labor conditions persisted throughout the quarter. As a result of that variable compensation was not a significant expense headwind in the first quarter. With that overview of the consolidated results, let’s turn to the highlights for the segments. At Express, results declined due to the higher operating expenses from staffing challenges and COVID-related air network impacts I discussed. Profitability was also impacted by fewer charter flights compared to the surge last spring during the early months of the pandemic. While we've covered the impacts to Ground results in detail, I would like to call your attention to an enhancement in our reporting included in the release and the 10-Q. As a result of business growth and our unmatched seven-day operating network at Ground, we are now providing additional product level disclosures for average daily package volume. Beginning with our first quarter, we are breaking out ADV statistics for FedEx Ground commercial, home delivery, and economy services. Turning to Freight, we reported a record operating margin of seventeen point three percent for the quarter as our continued focus on revenue quality and profitable growth drove average daily shipments up twelve percent and revenue per shipment increased eleven percent as Brie highlighted previously. Now let's pivot to capital spending. During the first quarter, we spent one point six billion dollars in capital as we continue to invest in our strategies for profitable growth, service excellence, and modernizing our digital and IT platforms. Our capital forecast for fiscal twenty-two remains at seven point two billion dollars and less than eight percent of anticipated revenue and includes following key elements: First, more than fifty percent increase in capital spending at Ground year-over-year for capacity expansion and new facilities to capture opportunities from the growing e-commerce business. And second, fleet modernization at Express with continued investment in seven sixty-seven and seven seventy-seven aircraft which not only has a high financial return but is an important part of the strategy to reduce our carbon footprint. In evaluating capital investments, our return on invested capital on existing capital and new projects is a critical metric to managing our business and we have a rigorous approval process in place for all new capital projects. As we look at investments we set the internal rate of return hurdle above our weighted average cost of capital, which varies based on the nature of the project. For example, an investment in replacement capital would have a lower hurdle rate than growth capital. Capital returns has always been an important metric to managing the business, both historically and in the future. We ended our quarter with seven billion dollars in cash and are targeting over three billion dollars in adjusted free cash flow for FY’22, which puts us on pace to deliver over seven point five billion dollars in adjusted free cash flow for FY’21 and twenty-two combined, far exceeding our historical levels. We continue to focus on thoughtful capital allocation and strengthening our balance sheet in fiscal twenty twenty-two. During the quarter, we repurchased one point nine million shares totaling roughly five hundred fifty million dollars and are targeting approximately one million additional shares for the balance of the year. In addition, we plan to make a five hundred million dollars voluntary contribution to our pension plan this year. We are lowering our fiscal twenty twenty-two guidance to reflect our first quarter results, which were lower than our expectations. As we look to the rest of the fiscal year, we expect certain factors to extend longer than we originally forecast in June. So, for fiscal twenty-two, we are now forecasting earnings per share of eighteen point twenty-five dollars to nineteen fifty before the mark-to-market retirement plan accounting adjustment and earnings per share of nineteen point seventy-five to twenty-one dollars before the mark-to-market adjustments and excluding estimated TNT integration expenses and costs associated with business realignment activities. And our effective tax rate projection is approximately twenty-four percent again prior to the mark-to-market retirement plan adjustments. While our outlook reflects more uncertainty moving forward, it represents adjusted year-over-year EPS growth ranging from approximately nine percent to fifteen point five percent following our record fiscal twenty twenty-one. As you all know, we are navigating an inherently uncertain macro environment and managing several unknowns. The shape and timing of global economic recovery given the dynamics of the pandemic, including the spread and response to new and existing COVID variants, the uneven nature of global government restrictions, disruptions to global supply chains, and, of course, recovery and labor availability. Our forecast assumes continued growth in U.S. industrial production and global trade, a gradual improvement in labor availability, current fuel price expectations, and existing tax regulations. With respect to labor, we are assuming that the combination of these actions we are taking that Raj outlined combined with a steady increase in labor availability as we turn into calendar twenty-two will allow us to add team members, which will drive improvement in our efficiency, productivity, and cost structure. While we are not providing specific second quarter EPS guidance, I do want to highlight a few key assumptions within our outlook. Overall for the second quarter, we anticipate a similar level of headwinds in Q2 as we experienced in the first quarter as the challenges and impacts to our operations from the labor shortages are expected to persist in the rest of calendar twenty twenty-one. Consistent with the first quarter, we also expect headwinds in Q2 to be driven by our expansion of Ground, higher healthcare expenses, COVID-related air network inefficiencies at Express and the benefit in the prior year of reduced aviation excise taxes. That said while these headwinds will persist in the second quarter, we expect strong performance in the second half of fiscal twenty-two. We remain confident that our long-term strategies will allow us to realize the benefits of growth investments in the future and next we'd be happy to address your questions.

Hey, thanks. So, guys, it strikes me that everybody in transportation right now has a lot of pricing power. And everyone's dealing with tight labor capacity and inflation, but every other transport company is reporting margin improvement and earnings growth. So, I guess my question is, why do you think you are seeing a bigger impact than anybody else in transportation and outside of just adding more capacity and spending more, what sort of meaningful significant changes do you think you need to make or are you contemplating making to start realizing more sustainable improvement in margin, earnings, returns, all that? Thank you.

Let me start by saying that we definitely do not see this as an us versus them situation at all. In fact, the Minneapolis Fed noted that firms in every sector reported difficulty in attracting labor and that sixty-eight percent of the Fortune one hundred companies reported supply chain and labor disruptions over the past quarter. So, the situation is very complex, not just the availability of workers, which is impacted by safety concerns with COVID and, of course, the very real issue of childcare, and our labor market and broader economy cannot function properly when schools and daycare cannot stay open. So our approach to our teams and our people-first culture, combined with the flexible operating model in Ground, has positioned us to remain competitive in this market and we are highly confident that the actions we are taking to address the shortage, as I outlined in my prepared remarks. Let me just also add that we are very confident in our strategy. I mean where the market is growing, we have a differentiated value position, we have a network, an operating model that makes it very good for us to succeed. And so we are confident in the long-term strategy here. And as Mike said, we expect to see, in the calendar year, the new calendar year the labor availability will continue to recover, Mike.

Yeah, Scott, just I would add, I think you can't just characterize all transportation companies in one singular bucket there and assume that everybody has the same considerations in terms of the nature of the business. We've kind of explained with great specificity how this operationally impacts us and thus the financial ramifications of that. So, look, we fully recognize that the first quarter wasn't what we anticipated. We've taken a number of actions to address that. We will continue to identify further actions but I will fully say if the circumstances don't change as we identified here, we absolutely would need to revisit the pace of the plans that we have. The strategies are sound, but we would absolutely need to think about the pace of things given the environment that we're operating in. So, I think Brie highlighted the characteristics of what growth is and will continue to be in the business. So that remains the underpinning going forward.

Good evening everyone, and thank you for my question. Mike, I want to follow up on that. From an investor's perspective, it's frustrating because you have seen significant growth over the past decade and have invested capital, yet margins are lower now than during previous peaks. Returns have decreased, and while we hear about bold actions to maintain growth, I need to ask what specific bold measures are being taken to enhance returns and profitability across all networks. Additionally, how can we assess past investments in the 777 and 767 to ensure they yield better results in the future? Thank you.

Well, Brandon, let me first, you mentioned about Express investment in the aircraft there. If you rewind roughly a year and a half ago, we were in the midst of talking about parking and reducing capacity in a number of our MD11 fleet. Obviously, the market changed radically here and there was the need for the additional capacity and the opportunity there, so we unparked those. Should things change going forward, that remains a flex lever and it absolutely is the case that having a higher proportion of the newer, more efficient aircraft with the 767 and 777 in the fleet will drive improved economics and margins at Express. So, again, we're ongoing looking at these different network initiatives and so that absolutely remains a long-term winner in terms of the fleet renewal and we will continue with that. What was the second part of – you started off with another aspect?

Well, you Mike, the frustrating thing I think for a lot of your investors is that the growth is very evident, especially in the last few years, it's just that margins have not improved. So there's always a plan to improve margins that doesn't seem to come through. So what are the bold steps that can be taken to improve those outcomes in the future?

Well, let me just step back a little bit. We had record results in twenty-one and improved margins. Our guidance, albeit lower than what we shared with you three months ago, is if you look at the operating earnings, in fact, it's double-digit at the low end; we had some discrete tax items there. So, indeed, we are focused on driving improved margins, cash flows and returns, and feel that we're projecting another record year on top of a record year. So, again, we are absolutely committed to continuing that trajectory.

Hey, thanks for taking the question. I want to ask about costs, Mike, it’d be helpful to kind of run through a number of the items that were impacting the quarter. But if I were to sort of exclude those items and look at sort of the cost inflation on the package business, the Express and Ground package, it looks like I'm getting about nine percent cost inflation on essentially flat volume. So I was wondering maybe if you could help us understand ex some of the items that you talked about, what's driving the cost inflation at such a high level when we're not seeing the volume growth for those individual segments? And maybe do you expect that to sort of change and do you think margins expand in both of those segments for the full year?

Well, let me take a swing at that first. So as it relates to the cost inflation and taking that category broadly, let me just clarify what's in our outlook. The network inefficiencies inherently are contributing to that cost increase that you're talking about. We expect those to mitigate and work away. In our outlook that we're giving you here, we're not assuming any change in terms of the current labor market in terms of wage rates and that. So just to give you an illustrative example here, a year ago, our package handlers at Ground were paying an hourly rate that is sixteen percent more than previously; at our Express major sort locations, the hourly rate is north of twenty-five percent increase. So that is the reality of the labor market right now. And so as Brie highlighted, we are taking a number of actions to recognize and address that; maybe if I help talk through as we go through the year here, I think maybe part of what you - we are also there. So again, like I said, more efficient operations as we go through the year. The pricing actions that we announced yesterday combined with our ongoing efforts, those largely will impact the second half of the year.

I just going to cap it off by saying we expect, in the second half, to improve margins in all segments of our business.

Thank you. I want to follow up on the last comment because there are several indicators suggesting that the second half will be better than the first half. Could you share how you are confident that the second half will significantly exceed the first half? The reason I am inquiring is that you adjusted your full-year guidance downward, which does not necessarily indicate that you expect to perform poorly.

Well, we're not sitting on our hands amidst the circumstances, we're taking actions to mitigate it. So, I wouldn't characterize it as just singularly looking at Q1 and changing as a result of the outcome of that. So we're aggressively managing every aspect there. I guess, I might turn it around the other way and say, if you looked at our results in Q1 absent the labor availability challenges, it would be extraordinary and thus we realize the absolute number matters and so we're taking actions on a number of fronts that will make the second half exactly as we outlined. I'll let Brie address your volume question for later as we go through the year.

Yes, I want to emphasize that we remain optimistic about volume growth and our potential to gain market share both domestically and internationally. The first quarter of our fiscal year presents the toughest year-over-year comparisons from a growth standpoint. It's important to consider that while there are comments about flat volumes, we are currently experiencing record-high volumes within our network as we prepare for peak season. We anticipate growth compared to the substantial growth we saw at peak last year. We feel confident about the volumes, and to build on what Mike mentioned, it's worth noting that a significant portion of our increase will come in January, contributing greatly to our performance in the latter half of the year. Additionally, John has some exciting technology set to launch as we approach peak season and into the second half. This will enhance our productivity, and Karen Reddington along with the Europe team is doing remarkable work to finalize the integration of the Air Network, along with other initiatives aimed at boosting profitability in Europe. Overall, we are quite confident about the second half of the year.

Hi, thanks. So, Raj, I think there was a comment in the release kind of talking about some of the deceleration on some of the e-commerce with ground volumes down ten percent year-over-year international, domestic down thirteen percent. Is that part of what you're anticipating for labor to improve or maybe just talk about the top line where you were just mentioning still seeing strength and a good network in the peak, but yet these numbers indicate and kind of what we're hearing from the market that we're seeing some of this deceleration as you had in the print, so maybe just talk about the volume side a little more.

Sure. I'll start and then I'll turn it over to Brie. We are actually seeing very strong volume. To add to what Brie just said, the only reason we are seeing flat volume in the ground segment is because of the Economy product we just introduced for you for the first time. Even the commercial volume is growing strongly, and our HD volume is still increasing despite a challenging year-over-year comparison. International is also experiencing robust growth. The only area where we’re not seeing the same growth is in our restructuring efforts for the international and domestic businesses, but our IP business, IE business, and export business are very strong. The demand for our services continues to be robust due to the differentiation we are offering in the marketplace, and we are still gaining market share globally. Now, Brie?

Yes, I think Raj kind of outlined it pretty clearly from a volume perspective as we get beyond. I guess the one thing I should add that maybe it wasn't clear in my opening remarks is that we are constraining demand right now. As Mike and Raj talked about the labor, we are doing everything we can to strike that right balance of growth with service. And I will tell you that as we've done that, you can see where we've constrained it. It's the FedEx Economy product; it's the least profitable product, so it's the right place to constrain growth. And we have made sure that we are not constraining growth in our highest profitable segments, small and medium, and within the commercial sector, and you saw those strong commercial numbers that I referenced earlier. So, I would say, number one, we're confident in the secular growth opportunity for FedEx; two, we feel we've been gaining share, my last market share report shows that, and then we are having to constrain because of the labor issues, we are doing so in a very disciplined manner.

Thank you. I wanted to discuss labor. Your guidance seems to rely significantly on the expectation of improved labor availability in the second half. Do you have any visibility into that improvement, and what have you observed that gives you confidence it's going to happen? Also, regarding peak season, if you are unable to adequately staff ahead of it, the need to hire a large number of people could exacerbate the situation before it improves. Can you provide insight into your labor situation and ensure stability during peak season as well? Thank you.

Thank you, Tom. Yes, the number is ninety thousand, and we are making good progress. Over the last two weeks, we have identified some areas of opportunity and positive developments that we did not observe in the first quarter, which is somewhat encouraging. This is a systemic issue, and we are making some assumptions regarding labor availability. However, if we prepare adequately for peak demand, we anticipate being in a strong position for Q3. We are not making overly optimistic projections for Q3 and Q4, but we expect Q3 to outperform Q2 and Q1, and early signs suggest that this is likely true. Mike, do you want to add anything?

No, just to reiterate, I broke the labor impact into two pieces. The part that we're assuming that does mitigate as Raj outlined is the impact from the availability. Again, the market wage rate is what it is, and we can assume nothing different than that, and that is what is baked in to the outlook.

Hi, thanks for taking the question. Just wanted to ask Brie about the trends in pricing. Obviously, we saw the GRI issue that you talked about briefly. We’ve got some new surcharges in place; fuel is going up. But I think you mentioned in your prepared remarks, there's some availability for people, the largest shippers to get capacity now at current rates. So, maybe you can just explain those two factors, what do you feel about getting price in the market to capture? You are ahead on some of these costs, and then maybe if you can clarify the comments on the larger shippers and generally talk about the surges from a volume perspective? Thank you.

Thank you for the question, Brian. To clarify, when we discuss incremental capacity, it is a crucial part of our revenue quality strategy that applies both in the United States and internationally. We recently launched six new flights from Asia which were transitioned from ad hoc service to a scheduled format to enhance reliability. This shift enables us to plan better and predict demand more accurately. It also changes how we market these flights. Previously, sales were often catch-up based on spot rates, but now we are ensuring that we are bringing in customers at current rates and actively measuring those rates. For customers who utilized our intercontinental services over the past eighteen months, we have established contractual agreements. As we expand capacity, we can offer these customers additional business at a higher rate. Our goal is to maintain a balance by providing them with the predictability they need while honoring existing contracts, and simultaneously making new capacity available at current market rates. This mainly pertains to our international operations but also applies during peak times. As we onboard new customers this year, the peak surcharges assist them in securing the capacity necessary for a successful peak season. I hope that addresses your question.

Yeah, Hi. Just on the new ground buckets that you’ve broken out, can you maybe talk a little bit about the three pieces and would you expect going forward roughly similar trend lines with the commercial sort of outpacing everything, but still positive on the home delivery, and as you mentioned, constraining capacity to keep limiting the last piece of the business?

Great question. So, for this fiscal year, as we talked about, inventory levels are at an all-time low, and all of the economic indicators that we're tracking suggest that we're going to have a very strong commercial year here in the United States as well as in Europe. And of course, that's also going to drive our intercontinental business. So, for FedEx Ground commercial, we are expecting a strong growth here from a home delivery perspective. I do think that you will see, you know we will see moderate growth for home delivery, given the lapping of last year's very, very strong growth. So, I think you're going to see some good home delivery growth, and from an economy perspective this particular quarter you saw the thirty percent year-over-year decline. I do not think you will see that trend continue. John and I are working, and we've got some really great new technology coming to market, a new feature called ‘sort to due day,’ which is going to allow us to really move economy through the FedEx Ground system at a different pace and continue to lower the cost. So, I think you'll see us find a better balance of the economy to home delivery, but directionally commercial will grow the fastest followed by home delivery followed by economy as we think about this fiscal year.

Hey, good afternoon. Brie, just following up on that sort of growth outlook, you put out some numbers out there around ten percent market growth, I think in residential for the next couple of years. Is your expectation that that pricing and the operation will be at a point where you can kind of participate at an above-market growth rate from – once you get past the period of volatility or do you intend to kind of grow the ground business maybe a little bit lower than the overall market as some other competitors add capacity at the lower end of the service spectrum?

That's my favourite question, yes. Our intent, we have the best value proposition in the market. We have the best seven-day transit and coverage in the market. We feel really good about our value proposition. As I mentioned earlier, we are actually right now controlling demand because we're trying to balance service in the current labor environment. So that is absolutely our intent. The market is growing. We've got a great value proposition. I can't think of a better time to lean into growth here in the United States.

Hi, great. Thanks, and good evening. Mike, I understand kind of the thoughts around not being too specific about quarterly guidance, but I do think from a street perspective, kind of the volatility from quarter to quarter can be an issue. So, I just want to make sure, are you seeing that in the second quarter you're expecting a similar eight hundred million dollars magnitude of year-over-year headwinds? And then secondly, when we think sequentially the second quarter, operating income is flat or down a little bit from the first quarter. Is that going to be a similar cadence this year? Are there some other things that we should think about just as we move into the second quarter from a seasonal standpoint? Thanks.

Sure, Todd. Yes, that's a fair characterization when I said the headwinds would be similar to the eight hundred million. Look, the pandemic and many other factors impacting our market, including the supply chain disruptions, I think you have to kind of take pause in terms of assuming typical seasonality across the board. Yes, there is a degree of that that you will see, but I would say we can't just rely upon that because the dynamics are much more fluid than they were, and that’s why we're trying to outline that as best we can, but we're navigating those changes along the way, but we're very confident with what we shared with you.

I just wanted to follow-up on that last question. So, I just want to understand, so you’re obviously entering peak season, higher B2C mix, margin pressure, density pressure. So, you typically see a pretty notable step down in ground margins fiscal Q1 to Q2. Is that the same cadence? I mean because Q1 is obviously pretty low to begin with, just trying to get understanding of that, and just as a high level, do you think ground margins can be up year over year this year? Thanks.

So Amit, I'm just going to stick with it. We're not giving a margin forecast. What we outlined was that we expect operating profit to be up in all the transportation segments. So, I'm not going to get into giving a specific margin forecast by quarter. And again, the seasonality is we don't think it's value-added to kind of get into trying to parse that at a level of precision given the dynamics of the market right now.

Thanks very much, operator. Hi, everybody and thank you for the time. So, we've been actually doing a lot of work as you know in the China area, and you guys have about thirty thousand people employed there. I think it's getting increasingly more difficult to work there. So, can you just talk about how you're thinking longer term about being in that market versus moving more capacity offshore to places like where you have regional sorts like Japan or back to the Philippines? Thank you.

Thank you Helane for that question. We actually have twelve thousand employees in China. As you know, we have been in business in China since nineteen eighty-four, and we have been serving our customers there in this extremely important market. We value our business in China, and we are committed to continuing to improve our value proposition there. Our growth in the market is very strong, and our operations in our hub in Guangzhou are just going smoothly. We also just opened up new air operations from Beijing. So, China remains a very important market for us, and we are very committed to it.

Okay, great. Thank you for taking my question. I guess just to go back to the capex and return discussion for all, and Mike thank you so much for the additional sort of comments around returns and free cash flow. But I guess when you think about sort of the longer-term targets for the business, you guys have always sort of talked about this double-digit consolidated operating margin. We haven't really come close to it since fiscal year sixteen. You raised the capex as a percentage of revenue targets in the proxy several weeks ago. Can you talk about why it makes sense to raise your long-term capital spending plans when the business still isn't achieving the long-term targets you've set for it from a margin perspective? Just help us square those two things. I think that's a vested issue that a lot of people are having trouble justifying.

Right. Well, Jack, first, let me just say, you brought up about ROIC, and I'll expand a little bit about the remarks I made earlier there. We're obviously referencing our WACC when we compare our ROIC, which we put in the seven percent to nine percent range, which I think is consistent with what we see in many of your analyses. But when it comes to the ROIC itself, there are a number of different approaches and methods that practitioners use, so this tends to be variability in the absolute as well as the comparative measurements, but that said we're revisiting the various aspects of that so that we can maybe expand the context around our discussion of the topic. But I will say, regardless of how you calculate it, our ROIC does remain above our WACC. Since you asked about the LTI plan, look, I am not going to speak on behalf of the Board, but I will give you some context around partly about what I mentioned two, three months ago. So, again, we had record earnings in fiscal twenty-one amidst the unprecedented global pandemic and delivering life-saving vaccines around the world. And we’ve talked about the radical changes in supply chains, customer expectations, and all that, so we did indeed accelerate purposefully some investment opportunities for capacity expansion and of course the replacement of the aircraft I mentioned before. So, as I did specifically say on the June call, the FY twenty-two to twenty-four LTI plan was eight percent to account for these opportunities, and that target is below our historical capital intensity. Fiscal twenty-one was seven percent, but that was the lowest in ten years. So, again, there's absolutely a focus on returns, and I think that we will continue to address your considerations there, and I would also highlight because there was the question earlier about Ground and investment there. We're making returns there. We talked a lot about how we're utilizing our assets differently, more efficiently, investing in smaller units of capacity. We got the one single hub, but there are no other hubs on the drawing board. If ground can generate a higher ROIC at different margin levels than it did probably eight, nine years ago. So, again, that absolutely factors into how we look at these things.

Hi good evening. Brie, I think you had mentioned low-single digit share internationally, certainly unique environment, limited capacity. Can you maybe talk to how you are focused on expanding share, things you're doing there, but more importantly what are you doing to try to retain some of that share you're capturing today, you know once capacity eases at this point?

Great question. So, a couple of things; number one, when we think about our international business, our largest growth opportunity is Europe. So, when we think about what are we doing to gain share, well first and foremost, we're going to complete the physical integration which is obviously critical, but when I think about Europe there's three lines of business. There's the intra-Europe. We bought TNT and it has a very comprehensive and very unique value proposition, because it's got the parcel and the freight network intra-Europe to grow our cross-border business and we're very pleased with the momentum there. From an international perspective, late last fiscal year, we expanded our intercontinental value proposition between Europe and the United States. We now have ninety percent of businesses in EU 17, have access with the fastest overnight services to the United States. So, we have the leading intercontinental value proposition from Europe to the US. It's a great bundle to sell B2B or commercial customers, selling the intra-Europe as well as the intercontinental. And then thirdly, when I think about Europe, we are absolutely underpenetrated in e-commerce both within Europe as well as from Europe to the United States. And we, as I talked about, have launched the FIC product, which is really a very competitive product. It's got quick transit times and it has very different features of service for the last mile, so it allows us to lower our costs to serve because the features on the last mile delivery are a lot more like the ground domestic network. So that's our primary focus from a European perspective. I will say we are also underpenetrated between Asia and Europe, and we've got great momentum in that lane, similar metrics. We have sped up our service into Europe from Asia. In addition to that, we are launching the FICP product between those countries; obviously, Asia into Europe is a very large e-commerce market. And again, we're underpenetrated there, really pleased with the momentum of our FICP product. So, I hope that helps clarify. I also wanted to go back. I just looked at my notes, commercial and home delivery here in the United States, as we think about the rest of the fiscal year are going to be neck and neck from a growth perspective. So, as I talked about commercial growing faster than home delivery, we are going to be pretty darn close as we look at the volume growth this year.

Good afternoon. When I look at the LTL freight business, it seems to be performing much better relative to at least early expectations compared to parcel. Yes, that's still a manual labor-intensive business that requires a lot of drivers, line haul, freight handling, and bodies to do that. Can you characterize why you think that you haven't had these labor-driven struggles in that part of your business that seem to be plaguing the parcel businesses, particularly domestically? Any best practices or lessons you can learn and apply elsewhere? Thank you.

Bascome, this is Mike. So, I'll let Raj address more broadly, but just to clarify within that four fifty number of labor impact, there is an impact there for freight in terms of the same considerations that we talked about there. So, I don't want to have the takeaway or imply that the freight team isn't dealing with similar considerations there. But, I'll also highlight, as I mentioned to Scott early on that different networks and different transportation businesses can have different characteristics in that. So, Raj, do you want to talk about the great things at freight?

We are extremely proud of the FedEx freight team, who are facing the same set of challenges. The team has done an excellent job managing our revenue quality and operational efficiency despite these difficulties, and we recognize that this is a crucial part of our portfolio. However, managing twenty million packages daily in the ground U.S. domestic parcel network involves challenges that are very different from dealing with a smaller number of shipments in the freight system. Your suggestion about sharing best practices and ensuring we take the right approach across our operating companies is something we focus on every day. Collaborative operation is a key principle at FedEx, and we are definitely implementing that. Overall, I am very proud of what the freight team has achieved.

Hey, thanks. So, just on the two hundred million wage pressure in the two fifty million in inefficiencies that triggered, but just to dive a little deeper there, was this a turnover issue or an investment for growth issue? Are people leaving at a faster rate or are you struggling to staff to grow? And if it's the latter, given the environment, why grow?

So, I think if I understand the question, it is a staffing availability issue on the two fifty million piece of it. For the two hundred million, it's the rate. So, just to reiterate that, and like I said, we fully expect and are beginning to see some improvement in the availability but should not – should plan to not proceed as we fully expect. And like I said earlier, we would need to obviously reassess the pace of implementing the initiatives there, but the opportunity remains nonetheless. We just need to be mindful of the overall environment.

Yes, and I would just add one line to that is, if that were to happen, then there’s obviously much broader implications that way beyond FedEx.

Thank you for your participation in the FedEx Corporation's First 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. Bye.