FedEx reports solid fiscal first quarter earnings results

FedEx reported solid fiscal first quarter earnings results late yesterday.

Quarterly revenue at $14.7 billion was up 16.3 percent, operating income at $1.26 billion was up 9.5 percent at $1.26 billion, and net income at $715 million was up 3.2 percent. Earnings per share were up 16.6 percent at $2.90, topping Wall Street expectations of $2.78. 

"Managing our operating companies as a portfolio of solutions helped FedEx achieve strong financial and operating results in the quarter, especially given the global economy's continued low growth,” said Frederick W. Smith, FedEx Corp. chairman, president, and CEO, on the company’s earnings call yesterday. “We expect FY '17 revenue and earnings to increase driven by volume growth and improved base yields at all our core transportation companies. The integration of TNT Express, which includes more than 200 countries, is proceeding smoothly and on schedule. The level of team members' engagement is outstanding and very much appreciated. More than 20 teams are working in operations, customer solutions, personnel, IT, finance, legal, security, and other areas to positively transform FedEx, TNT into a seamless worldwide operation.”

Individual unit quarterly performances: FedEx Express quarterly revenue was up 1.1 percent at $6.66 billion, with an operating margin of 9.4 percent, up from last year’s 8.3 percent and an operating income of $624 million for a 12.7 percent annual increase. U.S. domestic package volume was up 1 percent, due to overnight box and envelope volume growth, with FedEx International Priority volume off 1 percent. FedEx added that operating results gains were driven by higher base rates and ongoing cost efficiencies with $22 million of expenses related to the TNT Express integration. The TNT Express segment has $1.80 billion in revenue.

FedEx Ground revenue was up 12 percent at $4.29 billion, and operating income was up 14 percent at $610 billion. Gains were paced by higher revenue and volume per package, with a 10 percent hike in average daily volume led by e-commerce and commercial package growth, with yield up 2 percent due to higher base yields that were partially offset by lower fuel surcharges.

FedEx Freight revenue was up 4 percent at $1.66 billion, with operating income up 2 percent at $135 million. Average daily shipments were up 8 percent offset lower fuel surcharges and shipment weight, said FedEx.

T. Michael Glenn, FedEx executive vice president, Market Development and Corporate Communications, said on the call that FedEx is deep into planning for what is expected to be another record peak holiday shipping season, explaining that the rapid growth of e-commerce has driven significant shifts in demand over the last several years, as evidenced last year, when it 15 percent growth in peak season volume and delivering more than 325 million packages.

“Beyond just the dramatic rise in volume, there are several other shifting industry dynamics,” he said. “Holiday promotions and buying patterns have increasingly shifted which has resulted in heavy demand for package delivery on Mondays during the peak. The intensity for demand on Monday has accelerated in recent years, as more and more retail locations have started serving as fulfillment centers for e-commerce orders. We expect each of the four Mondays during the upcoming peak period to be among the busiest in our company's history.”

And he also noted that FedEx has experienced increased demand for transportation of larger and heavier packages, due to e-commerce growth upping demand for online ordering and delivery of everything from large screen TVs to mattresses and trampolines, which Glenn said drove FedEx to engineer its network’s sortation and delivery capacity for these larger packages, including entire temporary facilities dedicated to the sortation of oversized packages, which he said will be critically important this upcoming peak season.

What’s more, Glenn said FedEx has added 19 automated stations in four major distribution centers for FedEx Ground since the 2015 peak season.

TNT integration: With TNT Express formally a part of the FedEx portfolio, Alan Graf, FedEx EVP and CFO, said on the call that FedEx has a rich history of success in integrating businesses into FedEx and is doubling down on its commitment to the TNT integration in terms of its people and financial resources.

“We had a seamless and very successful first day when we acquired TNT on May 25. Today is our 119th day of ownership of TNT,” he said. “Prior to close of the transaction, we invested about a year building an integration plan and we are well positioned for success. Our new senior leadership team is established and all key TNT activities and responsibilities have transitioned to the integrated FedEx senior officer teams. We expect the integration to take four years and significant investments in people, capital and expense. These are network businesses and require a combination of our pickup and delivery operations at a local level for our stations and depots, our ground and air networks and our extensive operational clearance, sales and in back-office IT systems.”

Graf also explained that FedEx has realized procurement and sourcing benefits, transitioned four of TNT's third-party delivery partners into the FedEx direct serve operation or moved to a single third-party provider and will launch our initial injection of FedEx volume into five select TNT European road network lanes later in September.

“We see the combination of these two businesses as transformative and expect significant synergies from the integration,” he said. “We will drive value from four key areas; optimized pickup and delivery operations, an integrated global express network, improved efficiency of staff functions and processes, and revenue growth. We remain supremely confident in our initial views of the value of this acquisition and are targeting to exit the end of the four-year integration with annual synergies of $750 million.”

FedEx has a very successful track record in acquiring companies and then quickly and profitably integrating the business into the brand, according to Jerry Hempstead, principal of Hempstead Consulting.

“I can think back to several incredibly well orchestrated acquisitions by FedEx, including Flying Tigers, RPS (which also put FedEx in the LTL business) Kinkos (now FedEx Office) and Parcel Direct), which is now FedEx's fastest growing product Smartpost),” he said. “FedEx now has teams from every discipline within the business carefully integrating the legacy FedEx international traffic with that of TNT. The marriage should quickly result in improved yields on their global portfolio. A third of their business has no domestic component, which will also improve their corporate tax rate. Between their improved yields based on the prior rate and rule changes and the new increases coming FedEx is in great shape moving forward. 

Pricing changes: Earlier this week, FedEx announced several rate increases for 2017, which notably included changing the FedEx Express and FedEx Ground U.S. domestic dimensional weight advisor from 166 to 139. The dimensional weight advisor is applied by multiplying the length of a package by its height and width and dividing it by 139 to calculate the dimensional weight.

As for what led to the change in the dimensional weight advisor, Glenn said that FedEx wanted to rationalize its dimensional weight policy for both domestic and international shipments.

“[O]ne of the key issues for us in managing the network is the density per package,” he said. “And one of the challenges that we do see with the increase in e-commerce transactions is packaging that is not as efficient as it could be and there are a number of benefits to becoming more efficient and you can use smaller packages which is one, obviously it’s more sustainable from that perspective.”