Good day, everyone, and welcome to the FedEx Corporation Third Quarter Fiscal Year 2021 Earnings Conference Call. Today's call is call is being recorded. At this time, I would like to turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead.
Call is open. Good afternoon, and welcome to FedEx Corporation's 3rd quarter earnings conference call. The 3rd quarter Form 10Q, earnings release, stat book as well as our economic forecast on our website at fedex.com. Call is being streamed from our website, where the replay will be available for about 1 year. Joining us on the call today are members of the media.
Call is being recorded. 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. Call is open. Certain statements in this conference call, such as projections regarding future performance, may be considered forward looking statements within the meaning
of the act. Call is being recorded.
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 call is by such forward looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Call is now open. Please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of the non GAAP financial measures discussed on the call to the most directly comparable GAAP measures. Joining us on the call today are Fred Smith, Chairman and CEO Raj Shulmanyan, President and COO Mike Lentz, Executive VP and CFO Mark Allen, Executive VP, General Counsel and Secretary Rob Carter, Executive Vice President, FedEx Information Services and CIO Rick Carreri, Executive Vice President, Chief Marketing and Communications Officer Joe Brannen, Executive Vice President and Chief Sales Officer call is Don Cowen, President and CEO of FedEx Express Henry Mayer, President and CEO of FedEx Ground John Smith, President and CEO-elect of FedEx Ground and Lance Small, President and CEO of FedEx Freight.
And now, Fred Smith will share his views on the quarter.
Call is open.
Thank you, Mickey. First, I want to say how immensely proud I am of our FedEx team members. Since our last earnings call, they've completed a historic peak season and using the power of our expanded 7 day a week FedEx Ground operations, Our team handled record breaking volumes throughout the holiday shipping season. They also worked diligently to clear the backlog call is caused by the recent severe winter weather in the U. S, a 50 year event.
They worked night and day We're sincerely grateful to them and to our customers for their understanding as we navigated the effects of these massive winter storms. Our team members are continuing to move the world forward with the delivery of COVID-nineteen vaccines related ingredients and supplies throughout the U. S, Canada and more than 20 other countries around the world. We did a great job on these vaccines during the weather event too. FedEx is prepared to transport now vaccines to more than 2 20 countries and territories for as long as necessary to help eradicate COVID-nineteen.
As part of our responsibility to be good stewards of the planet, earlier this month, we announced our bold strategy call is to achieve carbon neutral operations globally by 2,040. To help reach this goal, we focused our strategy in 3 key areas: Vehicle electrification, which we've been involved in for over a decade, sustainable energy call is being recorded in the second half of twenty nineteen and beyond. In this regard, importantly, our plan includes a pledge to help establish the Yale Center For Natural Carbon Capture. The center will build on the Yale legacy call is now open to the School of the Environment of World Class Research and Education to develop measurable carbon capture solutions findings will be published and shared so that businesses, industries and governments globally can benefit from this work. Call is being recorded.
As reflected in this quarter's results, continued execution of our strategies is producing strong earnings growth and margin improvement across our company. We I'm exceedingly optimistic about the future of FedEx and again very grateful to our team members for their hard work. I'd also like to thank Henry Mayer, President and CEO of FedEx Ground, who was retiring at the end of July after more than 35 years of dedicated service at FedEx. We'll have much more to say about Henry on our next earnings call in June. Let me now ask Raj, Brie and Mike
Q3 was a strong quarter of growth for FedEx. Despite challenging circumstances, the team performed exceptionally well call is through the biggest peak season in our company's history. This included delivering nearly 500,000,000 holiday packages, Transporting the 1st shipment of COVID-nineteen vaccines here in the U. S. And increasing collaboration across operating companies.
Call is open. Our results speak for themselves. In December, we achieved the highest monthly totals in our company's history in both revenue call and operating profit. Results in December were different than previous years. We better maximized our available capacity call is now open.
And as Brie will cover in a moment, better aligned prices to incremental costs. Peak 2020 was unlike any peak experience before and sets call is a new standard for future peak seasons. As Fred mentioned, our operations were impacted by last month's severe winter weather throughout the United States. Mike will expand more on the scope and unique nature of these storms. And I'm sure many of you have seen reports in the last couple of days, which illustrate the impact these storms had on the overall U.
S. Economy, including retail sales call and manufacturing output. We implemented numerous contingencies to mitigate the impact, including adding sorts, line haul and collaborating across our network to assist in the recovery. I'm very proud of the team call is for managing through this very challenging situation. Now speaking of the team, call is now open.
We announced that Henry Mayer will retire this summer and named John Smith, former President and CEO of FedEx Freight, his successor. Lance Small, former SVP of Operations at FedEx Freight has been promoted to CEO, and we're pleased to have all these 3 gentlemen on the call today. Call is now turning to FedEx Ground. The outstanding margin improvement for Ground in Q3 highlights the success
call is now available for our
ongoing strategic initiatives and investments to improve efficiency and reduce costs associated with the last mile call is being recorded even amid record residential volume levels. These investments continue to pay off. Let me share 3 examples. Call is number 1, we saw meaningful improvement in last mile efficiency as service providers improved their stops per hour
call
is
call is now open. Our first question comes from the line of John Franzrebrenberg. Please go ahead. Thanks, John. Thank you, John.
Thank you, John. Call is now open. We remain very optimistic for continued profitable growth at Ground. Collaboration between operating companies call continues at an unprecedented rate in Q3. This month marks the 1 year anniversary of the launch of last mile optimization, call, which allows us to flex our networks to increase delivery density for residential, rural and deferred packages.
LMO will expand to 6 more markets effective May 1, increasing to 63 markets in total and covering 2 thirds of the U. S. GDP. Additionally, FedEx Freight has delivered more than 1,750,000 shipments for ground so far this fiscal year. Call is now open.
This time last year, freight had yet to deliver a single ground shipment as increased support for ground kicked off in May of 2020. Finally, turning to FedEx Express. Our global network is moving COVID-nineteen vaccines, ingredients and supplies as we speak. Call is it has been a coordinated orchestration of our physical and digital capabilities. At FedEx Express, we expect elevated pricing for at least the next 12 months.
We know, however, that these prices are not sustainable in the longer call will be recorded and we will flex our networks appropriately as commercial capacity returns into the market. In addition, we will continue to improve our efficiency call is being recorded as planned and in accordance with local market regulations. April will be a big month as we prepare to roll out a set of new service capabilities for our customers, which Brie will provide more detail very shortly here. We'll complete their integration in spring 2022, which will bring the physical network integration to a close. Our Paris hub will be our main express hub in Europe with Liege serving as Indidas in the U.
S. As our 2nd largest European air hub. We remain focused on optimizing the network and strengthening our capabilities to drive upside in Europe for years to come. In closing, FedEx remains committed to delivering long term profitable growth. We have the network, the strategy call is
now open and the right team
in place as we build upon the exceptional results we have seen so far in fiscal year 2021. With that, let me turn it over to Brie.
Thank you, Raj. Good afternoon, everyone. In the United States, we are seeing strong growth and momentum. Call is now open. The U.
S. Domestic parcel market is expected to grow to 101,000,000 packages a day by calendar year 2022, With e commerce contributing 86% of total U. S. Market growth. E commerce as a percentage of U.
S. Retail sales was approximately 21% call is about the diversification and evolution of the e commerce market. Some of our largest retail customers reported e commerce growth rates in the high double and even call is full digits through 2020. As the U. S.
Reopens, we recognize the potential for a short term deceleration in e commerce shopping. However, we are very confident that e commerce as a percentage of retail has a long growth runway. Turning now to peak, It certainly was the shipathon we predicted, a peak upon a peak. We had tremendous growth with almost 500,000,000 packages delivered call is now open to the Q1 fiscal year 2021 earnings conference call. To the global sales and marketing teams, I could not be more proud of your execution call is now open.
And the momentum you have created. FY 2021 parcel volume growth remains strong, supported by a portfolio of e commerce solutions growing at double digits. Of particular note, our FedEx Ground 7 day a week residential delivery service call is one of the fastest growing services in e commerce with 70% volume growth in Q3. Overall, year to date average daily volume growth remains strong for all customer segments. However, our U.
S. Small and medium segment Grew 35% through the end of February. In FY 2021 Q3, FedEx total U. S. Domestic residential package volume mix was 70% versus 62% a year ago.
With the increase of residential packages in our networks, call will focus on improving yield and product mix. In FY 2021 Q3, we increased FedEx ground economy yield by 35% and overall U. S. Domestic residential yields by 15% year over year. Call is now open.
It's important to note FedEx Ground
is formerly FedEx SmartPost. While e commerce is the key driver of the overall growth, in January, our U. S. Enterprise B2B volume was at pre COVID levels. Turning to our U.
S. Revenue quality strategy, we continue to actively pursue yield management, product and customer mix strategies. Our primary focus is ensuring large customer pricing aligns to their volume distribution. We continue to manage capacity at FedEx Ground, prioritizing our highest yielding SAM segment as well as our premium home delivery product.
Call is now open. As we plan for
peak of fiscal year 2022, our peak surcharges will continue to play a critical role. Turning now to international. Global air cargo capacity remains down 20% year over year as of January, and we expect air cargo capacity to remain constrained call is being recorded through the end of calendar year 2021. We expect passenger capacity to recover between 55% 75% of its pre COVID level by the end of calendar year 2021, with a full recovery not anticipated until 2023 or 2024. From a demand perspective, APAC Outbound has recovered to pre COVID, while Europe Outbound is expecting a partial recovery by the end of 2021 call is now open and a full recovery sometime in 2023.
With these projections, demand trends will continue to favor freighters and integrators. Call is to maintain and grow our incremental volume as capacity recovers. Intercontinental performance continues to be very strong. Call is now open. Our total international Express yield per pound has again seen impressive double digit year over year improvements in all key markets.
Call is being recorded. Our B2B volumes are recovering to pre COVID levels in Europe and are fully recovered in Asia, while our overall growth is fueled by significant B2C volumes. During our Q4, we will dramatically enhance our European portfolio. As stated on previous calls, with the completion of the road integration last May, call is being recorded. Our European road value proposition already gained significant improvements.
Our customers have been accessing the unparalleled TNT European road network. In Q4, we will introduce an enhanced Europe to the U. S. Value proposition, providing an industry leading next Express service, giving our European customers 2 premium services within Europe, offering customers choice between overnight by noon call is open and overnight by end of day. We will be rolling out these new service capabilities to our customers over the coming months.
Call is now open. We will also launch FedEx International Connect Plus from Europe to the United States to Asia and within Europe, providing the service across more than 200 lanes. FedEx International Connect Plus or FICP call has been designed with features of service targeted to reduce the cost to serve, while delivering an outstanding customer experience and is specifically targeted to support our e commerce call is being recorded. The new European transportation portfolio is brought to market through a refreshed and modern online shipping application call has already rolled out in Europe and across 143 countries globally. In summary, we have great momentum coming out of Q3.
And with that, I'll turn it over to Mike for his comments.
Thank you, Barry, and good afternoon, everyone. FedEx delivered significantly improved financial results during the quarter as we met the challenges of rising demand and limited capacity during our peak season call and overcame severe winter weather in February. Adjusted operating profit increased 120% adjusted operating margin increased 210 basis points, primarily due to strong volume growth in U. S. Domestic residential package, A 41% increase in FedEx international priority package volume led by Asia and Europe call and solid execution of our revenue management strategies in the face of increasing demand across all our transportation segments.
Call. These gains were partially offset by 4 noteworthy factors. 1st, higher variable incentive compensation expense call is $485,000,000 including $125,000,000 special bonus for global frontline team members at FedEx Express. 2nd, lower revenues and higher costs due to significant weather events that reduced operating income by an estimated 350,000,000 3rd, the estimated impact of having 1 fewer operating weekday, which was approximately 150,000,000 And lastly, consolidated direct COVID-nineteen related costs of approximately $60,000,000 call, which does not capture the many accommodations we continue to make across all our operations for the safety of our employees and to comply with various regulations and guidelines.
Given that significance, I want to
add further context around the adverse weather impact. 1st, we always anticipate and have contingencies for demand and operational impacts during our fiscal Q3, call, which spans the most active winter weather months. The mid to late February events, in particular, call is being seen in over 50 years prior to the founding of FedEx and when coupled with a record time 9 consecutive days below freezing had a significant impact on our operations, as Fred and Raj mentioned. Our Indianapolis and North Texas Express hubs were impacted as well. Demand was deferred as significant portions of the U.
S. Population were impacted by the various weather events.
Of the
$350,000,000 estimated impact, dollars 240,000,000 was at Express, dollars 85,000,000 at ground and $25,000,000 at freight. Despite that, the Express segment reported adjusted operating profit of $514,000,000 with an adjusted operating margin of 4.8 percent, up 260 basis points, driven by significant volume growth in both international export and U. S. Domestic package as well as higher international priority yields. In the quarter, Express absorbed 340,000,000 higher variable incentive compensation expense and was on pace to deliver record 3rd quarter operating profit prior to the February weather.
FedEx Ground had an exceptional peak and 3rd quarter, growing operating margin 270 basis points over the prior year to 8.8%. Operating income of $702,000,000 was the highest third quarter in FedEx Ground's history. Yield grew 11%, call is now open. While volumes were up 25%, resulting in 37% growth in revenues, which more than offset headwinds, call is being recorded, including increased payments to our independent service providers, higher labor rates and higher variable incentive compensation of 70,000,000 As Raj and Brie highlighted, our commercial and operational initiatives are yielding and will continue to yield profitable growth at Ground call is on the e commerce opportunity. Turning to FedEx Freight.
Operating income increased 5 percent despite the impact of increased variable compensation and the weather. Freight continues to post excellent results with their focus on revenue quality, aligning their cost structure with current business levels and improving operational efficiencies. Freight applied to a deferred tax balances and associated with a $300,000,000 voluntary contribution to our qualified U. S. Pension plans.
Now turning to what's ahead. While there remains a degree of uncertainty as we begin to see progress in combating the pandemic, call is now open. We are projecting full year adjusted earnings per share of $17.60 to $18.20 call, compared to $9.50 adjusted EPS in FY 'twenty. We expect our effective tax rate prior to the year end mark to market adjustment to be between 21% 22% for the full year fiscal 'twenty one. We expect higher revenue, operating income and operating margins on a year over year basis call is at all our transportation segments in the 4th quarter, which does include one additional operating weekday.
These forecasts assume continued recovery in U. S. Industrial production and global trade, no additional COVID-nineteen related business restrictions and current fuel price expectations. With this forecast, we expect higher variable incentive compensation expense in the 4th quarter as we plan to reward our employees for their achievements this year. Call is to Yale University in our 4th quarter results.
For Express in the 4th quarter, there will be no benefit express maintenance costs will be higher year over year in Q4 as we execute on our flexible air fleet strategy. Just over a year ago, we shared with you plans to temporarily park the equivalent of 7 MD-11s. Call is to utilize aircraft from temporary storage. As of now, we plan to have no temporarily parked MB-11s prior to next peak seasons. This illustrates our ability to flex capacity up or down in a financially efficient manner in response to changes in the market.
Call is now $5,700,000,000 due to changes in the timing of aircraft payments call as well as the acceleration of FedEx Ground capacity initiatives. That projects to roughly 6.9% capital spending will increase as we invest in capacity and proceed with investments in replacement capital previously deferred. That said, I anticipate CapEx as a percentage of revenue will be 8% or less, which remains less than our historical capital intensity. We will provide more specifics in June. Looking at liquidity and the balance sheet, we ended the 3rd quarter with $8,900,000,000 in cash and cash equivalents and on Tuesday renewed our $2,000,000,000 5 year credit agreement call is now open and 1,500,000,000,364 Day Credit Agreement.
The key aspect of our capital allocation strategy moving forward will be strengthening our balance sheet call and repayment of outstanding debt. Given our strong cash flows and liquidity position, we are evaluating potential transactions to reduce call will be recorded and refinance existing debt. The timing of any transaction will be based on market conditions, and we would incur costs related to these transactions, which may be material. I'll close by reiterating I have great confidence in our ability to build on the successes we have had this year call as we execute our plans to generate sustainable long term growth in earnings and cash flow. Call
is now open. Thank And first, we'll go to Chris Wetherbee from Citi. Your line is open.
Hey, thanks. Good afternoon. Maybe I want
to start on the ground side and understand, I guess, first around ground pricing, so significant progress has been made so far, but I want to get a sense of where you think you are in the process of re pricing this product up for the service that you're offering and ultimately the demand in the market right now? And then maybe as we think about how that and mix may impact margins as we move forward, say, into fiscal 'twenty two, Clearly, we've moved very heavily overweight towards B2C over the course of the last 12 months. But as B2B grows and maybe even takes a little bit of market share,
call. Thanks for the question, Chris. It's Bree speaking. From a yield strategy perspective, we still believe we have opportunity from a mix perspective, as you saw this quarter was probably the most dramatic or not probably was the most dramatic movement we've been able to make from a product perspective. You're going to see that shift throughout this year as capacity we anticipate capacity throughout this calendar year will be constrained.
And as a result, as I mentioned, we've got It will continue to work our yields up. In addition to that, the FedEx Economy product is something that we are very focused on and it will add dramatic yield Henry?
Hi, Chris. Let me take the margin question. First of all, in Q4, we expect margins to be in the teens. But let me speak to how we see the business beyond that. 1st, we believe there's considerable operating leverage still to be realized in this business.
Strategic initiatives will help ensure the right packages around the right sort call is on the right day for on time delivery. They also ensure that overnight sorts are reserved for next day volume, enabling the right balance of sort capacity in the network. These are critical capabilities for a 7 day network operation. We're also implementing dynamic scheduling tools to match sort staffing headcount more closely to volumes, thereby improving dock productivity And our dock expense. And we're rolling out capabilities for certain upstream volume in the network to bypass station sortation and transfer directly to delivery vehicles, freeing up valuable station capacity.
None of these initiatives require brick and mortar. They're possible through industry leading technology, AI and machine learning and are developed using a safe agile framework call
is being recorded and tools.
So with all of that, in my view, as we continue to transform the FedEx Ground business, FedEx Ground's best days are still ahead of her.
All right. Thanks for the time.
And next we'll go to Ken Hoexter from Bank of America. Your line is open.
Great. Good afternoon. Let me switch over to Express, and I guess if you exclude the weather impacts, the 4.8 goes up
to maybe upper single digits in terms of margin. Call. Maybe you
could talk about the return of B2B on the Express side, same thing that you were just talking on Ground. Maybe you
were talking about pricing starting to year in 12 months. So how do
you look at this business?
Do you see it transitioning back
to double digit margins? Or is there some structural change that keeps call is at the single digit levels.
Hi, Ken. It's Brie. I'll start with the pricing and the yield call will be answered. Thank you, Dawn.
Thank you, Dawn.
Thank you, Dawn. Thank you, Dawn. Thank you, Dawn. Good morning, everyone.
Call is open.
Here in the United States, our B2B volume was back to pre COVID level. The mix within the B2B wasn't what historically we have call is
being recorded.
It was obviously heavy healthcare, heavy retail, heavy tech. We have not seen it fully come back in automotive and industrial. So we think that there's some upside there. Call is open. When you look at the B2B volume outside of the United States, at a whole holistic level, we're back, but Europe is not.
So we see there still opportunity intra Europe and intercontinental outbound from Europe. The European team has done a phenomenal job of shoring up volume, But it is B2C volume that they've shored up that gap with. So I still think that there is some B2B upside coming out of Europe still. From a yield effective, we're feeling pretty confident in our yields throughout this calendar year from an international express as well as a domestic express. There is pressure on the yield from a weight perspective because the e commerce mix will continue to increase outside of the United States at Express.
So Overall, we're quite comfortable from a yield growth and opportunity perspective for the next 12 months. And I'll turn it over to Mike.
Yes. Chris, as I said, this
is Mike, we certainly in the Q4, we'll see margin gains
call is at
all three of the transportation segments. You can't get to the guidance that we put out there without that falling into place as well as the other context I gave you. Call is open. And we're highly confident we can build on the momentum here with the strategies and the plans that have been outlined, but we're not going to be given forward margin expectations will have more to say about our outlook for 2022 in June. Don?
Yes, Mike and Brie just added a few things to your comments. One is, I think Raj had mentioned in his prepared remarks call is about the strength of the quarter. And it was a strong quarter for us, highlighted by the best December we've had in the company's history And on track to provide that same level of performance for the quarter until the weather hit. Now this is not a comment about would have, should call is the fundamentals that we'll continue to deliver into the Q4 is evidence of what we've seen. We had $1,900,000,000 call is of revenue growth in that quarter.
I thank our excellent sales team around the globe and the wonderful job that the Express operating unit In terms of monetizing and turning that into a strong performance. As it relates to what we're seeing from a yield perspective, I agree, obviously, with Breeze assessment. We're seeing some fundamentals in our international business That are quite clear to us in the short, medium and maybe in the longer term. When inventory levels remain low, Supply is soft and demand is very strong and we think that demand is going to even increase As the stimulus checks come into the marketplace. So we think if you look at it in terms of a trifecta, those fundamental economic issues that we have
And next we'll go to Allison Landry from Credit Suisse. Your line is open.
Thanks. Good afternoon. Sorry, I was on mute. Just digging a little bit more to the revenue per piece and specifically on Q3, Brie or Henry, could you maybe talk about or break out contribution to these notes of the yield improvement that came from base price versus the peak surcharges and then mix. Call.
I guess what I'm trying to think through is how to best think about the sequential yield change in Q4. Normally, I think it's up about 4%, but obviously, maybe the peak surcharges fall off. You have some incremental surcharges in place. So just looking for a little bit of context in terms of breaking out the contribution of the different pieces there. Thank you.
Hi, Allison. From a pricing strategy perspective, obviously, the vast majority of our volume is on highly ground economy and our FedEx ground home delivery product that yield spread historically has been too wide. So we are very focused call is on prioritizing capacity at the higher yielding home delivery product. And so you're going to see 2 things happen. You're going to see us give more capacity to home delivery at the higher yield call.
And you're going to see us increase the yield throughout this calendar year, both through peak surcharges as well as Prioritizing capacity for home delivery and making sure we've got capacity for our small and medium customers.
Okay. And just any color on what sort of the peak surcharge impact was in Q3 from a dollar perspective or a percentage perspective?
We're not going to give that out at this time, Allison.
Okay. Thank you, guys.
And next we'll go to Jack Atkins from Stephens. Your line is open.
Great. Good afternoon and thanks for taking my questions. So Mike, guess maybe this one's for you. When I think about the 4th quarter implied guidance, historically you see a fairly Your guidance if Biden guidance is for maybe a 17% increase in earnings from Q3 to Q4, typically it's 50% to 60%. Call.
So I'm just curious if maybe you can walk us through some of the puts and takes there. Is it a factor of just the broader economy, is it uncertainty there, just some conservatism in general? Just can you help us think
Jack, I'm not going to get into de comping all of the puts and takes that come into seasonality. I guess I would refer back to When I mentioned an effective tax rate for the year of 21% to 22%, that implies a higher tax rate in Q4 than our typically, you can rule of thumb for a full year, the statutory federal rate is 21%, 3 or 4 for state and other, so 25 on a kind of normalized basis. But As we've mentioned on the call, we have had about $300,000,000 of discrete events through year to date in Q1 to Q3. So, I think when you kind of normalize for that and look at our underlying operating performance there, it is a very strong Q4, and I'll leave it at that. I talked about some of the other Elements that will play into Q4 earlier, so I won't rehash those.
But I think when you are Able to piece it all together, it would be a very solid operating Q4.
Okay. Thank you.
And next we'll go to Jordan Alliger from Goldman Sachs. Your line is open.
Yes, hi, afternoon. A question, when you think beyond the fiscal 4 of this year and into the next fiscal year, you start getting to some definitely some tougher volume comps, Specialty and Brown. Is your expectation though that with e commerce growth continuing even at a decelerating pace that you could still
I guess the short answer is yes. We're anticipating that the market growth, 90% of the market growth is going to come through e commerce. We've got a long term outlook at more than 10% CAGR from an e commerce perspective. So the short answer is yes. And Mike, I'm sure, would like to add something.
Yes, Jordan, I just threw a lot of numbers at you, but as Brie mentioned, we went from 62% to 70% residential mix and FedEx Ground's margins were up 270 basis points. So I think that speaks to how we plan to execute on the continued growth of e commerce.
And of course, we will be giving an FY 2022 earnings forecast in June. That has been something that's not been available during the pandemic from a lot of companies. But With the forecast that Mike just gave you for the Q4, you can anticipate a full year FY 2022 range at our June call.
Brandon Oglenski from Barclays. Your line is open.
Hey, good afternoon and thanks for taking my question. Mike, can you talk to
Thank you both for
on these projects, because I think you mentioned accelerating some of the ground investments.
Brandon, you broke up a little bit, but if I understand asking about the CapEx references. So, as we said, volume grew 25% at ground. And so, As we came through December, evaluating and looking at what's ahead and the opportunity there, we see that as opportunity. Also, If you look at our when you get the chance to look at the stat book in terms of the maintenance CapEx, you can see that our Facilities and vehicles, we deferred a lot of that this year. So there will be some amount of those going forward as well.
So We'll be we'll certainly give you more specifics on that when it
comes to June. Yes, Mike, I guess I was asking like in
the longer term context, what are the type
I think the question is about returns. You broke up again. I will say with very absolute confidence that all of these investments we're making will generate
Thank you.
And next we'll go to Amit Mehrotra from Deutsche Bank. Your line is open.
Thanks, operator. Hi, everybody. Henry, I was hoping I could ask you about gram margins, if that's okay. I think the key question and discussion point we've all had is the long term outlook for ground margins given the secular shift in B2C and the density challenges Obviously, come with that. I mean, you guys have made incredible progress on pricing and operations.
I'm just wondering You gave a little bit of it last quarter, but hoping you could update us on what you think the sustainable margins for the ground business are on an annual basis and when you think you can get there. And just related to that, you guys called out $350,000,000 of weather. I was hoping you could talk about what the attribution to ground business was from that number. Thank you.
Amit, this is Mike. As I said in my remarks, dollars 85,000,000 Of the weather was ground. Again, we've said We've given you 4th quarter guidance. We'll have more to say about future outlook for FY 'twenty two in June, But we're very confident of our ability to build on the momentum of generating increased returns and profitability at Ground.
Can I ask it another way then since it's the same question? And the spread between pricing costs and ground was In excess of 300 basis points per package, as B2C recovers, is there any reason why the spread Between price and cost per package should moderate over the next 4 to 5, 6 quarters.
I think the last two quarters we've given you some guidance on what we've seen unit costs do as we move through the pandemic and we move through the shift In the mix of our business, obviously, we're going to lap some of those results, but we've had significant Reductions in our unit costs as we've gone through the last year as a result of many of the strategic initiatives we've outlined here call is open. And we're in frankly in Raj's comments. We continue to see considerable operating leverage in the business and we would expect margins to
And next we'll go to Tom Wadewitz with UBS. Your line is open.
Yes. Good afternoon. Let's see. I wanted to I think one of the questions that seems to come up is concern about potential to have That strength in international rates that's beneficial for Express, that eventually some of that profitability is going to go back as past revised based on that. And presumably that's not very quickly and that you retain a portion of it.
I wanted to see if you could give us a sense of the potential offset from your cost initiatives. Are those numbers, if you look at a couple of years, are they in the same magnitude. And I'm thinking in particular of integration of some of the B2C shipments for expressed in ground that that's helpful on the cost side and potentially C and T and maybe you have other things in mind. Call. Thank you.
So Tom, this is Raj. I'll address it overall. Obviously, it's Not possible to give out the numbers by the individual items that you just talked about. However, we let me address it broadly by first saying The capacity and the commercial carrier passenger carriers, we don't expect it to come back in the next 12 months, maybe more, And we expect the premium to remain for that period of time. Even if it does come back, we have the opportunity to flex it, flex tower networks, we can and that is we have demonstrated the capability to flex up and we will be able to flex it down as needed and to become our Thirdly, there's a lot of activity that's going on to continue to improve margins in FedEx Express.
Transformation in Europe was one of the expansion of last mile optimizations and other and various other activities. So we feel very confident About our future of our Express around the world. I don't know, Don, if you want to
add anything more to that. I think
you hit it, Raj. But think you touched upon it. I did my earlier comments about why we're confident over the medium term that the supply and demand curve works in our favor. Capacity is light and we think it will continue to remain that way, until people start traveling again on an intercontinental basis. We don't think that happens for the next 12 to 18 months because of the various levels of quarantine restrictions that are in All parts of the globe.
We're working one of the things that I would want to highlight that you didn't talk to is our last mile optimization plans and the impact that that has On our margin, I think our Chairman says, density is our destiny. And as we can continue to improved density in either of our networks, it's very much margin accretive. We're celebrating the 1 year anniversary coming up on last mile optimization working very closely with Henry and his team, and we're driving a significant amount of volume Through the Brown Network and that those numbers are accelerating on a sequential week over week, month over month basis. So there's a lot of levers that we can pull In our business, the European transformation, the domestic transformation, but we have multiple playbook is in play as we speak to continue with our margin improvement and expansion.
Let me add something to that.
Call is open. The LMO
initiative benefits in 2 ways. 1, it takes lower yielding residential packages and deferred packages and rural packages out of the Express network, Allowing the Express system to concentrate on the high priority B2B and the verticals, particularly those that Require ancillary services like SenseAware ID, which is on every single box of vaccines that we're now delivering, I mean, it's almost been flawless, the execution of that. You can count on your hand the number of issues with the number of vaccines we've delivered in the millions. And so Express is able to be more Express And the B2C and the less dense areas more cost effectively served. So it's not just one side, call is on both sides, which is what Don mentioned about the density, because as we give more residential packages that are not expressed in nature, time, definite or something that somebody needs in a residence that press has to deliver that helps ground's density, its cost, its asset utilization.
And I think one of the things that I listen to these calls,
The last call, we
had 13 questions on ground margins. I don't know, we're not going to have 13 this time, but we probably got half a dozen so far. We're wouldn't that be close? So one of the things that's hard for us to communicate to this group that Henry has mentioned is the fantastic effect of this technology that we've been rolling out. We don't Advertise it all the time, but Rob and his team and some of the fantastic work we have going on in other ways, That's why the confidence level is so high that we can achieve these things in the future.
So what you all want us to
do is to give it
to you in a quarterly forecast and so forth, but some of the numbers that Raj laid out there for you, I mean, they're stunning And the productivity improvements. So I think it's important to look a bit at the bigger picture of some of these things. And finally, I'll say we have a plan to improve Express margins with a lot of passenger capacity in the marketplace And a plan to improve it without a lot of passenger thing in the market. It's not an either or situation. And so those are the 2 The recurring questions that come up in these calls are the e commerce are going to go back because everybody the pandemic is over And your margins aren't going to get better and you're not going to do well in Express because the passengers coming Those are inherent in most of the questions these last two calls.
Both of those are wrong. So I felt I had to step in finally. I've tried not to Answer any questions, but you're going down the wrong rabbit hole on both of those areas.
I think if I can just I think it's just like the magnitude seems like they're pretty big programs and pretty favorable. So I think my question was just trying to understand If you're going to give us a sense of the magnitude at some point. But they may I mean, what you're doing makes a ton of sense and seems to be a good factor in the results. So anyway, thanks for all the perspective on it.
And next we'll go to Dwayne Finigwerth from Evercore ISI. Your line is open.
Hey, I guess that rules out asking 7 more ground questions. Just a couple For me, how much of that $350,000,000 is cost versus volume pushed out into this quarter?
Well, I will tell you most of the $350,000,000 was revenue related. We did have incremental costs at Express for, of course, beyond normal expectations for deicing and snow removal, Additional labor costs and then I think a couple of you have noted that we had a significant event with 1 of our facilities in the Netherlands there as well with the roof collapse. So that is a cost that was in the number as well. But principally, It is revenue from that, and I'll let Breen talk about the overall evolution of where we are now.
Yes. I guess the best way to think about March is the fundamentals are back. So we're very confident. If we take February
confident about the fundamentals in March.
Thank you. And then just a quick high level on vaccine distribution. I wonder if you could talk about any segment is being utilized and thanks for taking the questions.
Yes, thanks. And it gives me an opportunity to brag on the team a little bit. So I guess if there's Anything that surprised me and it shouldn't have is how amazing the team is that provided this exemplary service. Richard Smith and his organization extremely high level of efficiency, a handful if that shipments that did not meet service. I think what's important to note though when we talk about the vaccines It's really not the raw and absolute numbers that move in our network.
In the grand scheme of things, when you look at almost 20,000,000 package a day moving to our network. This represents a very small portion of that. But what is important to note is a profound impact that these shipments have when they get to destination. And it really just validates our purpose and it's one we take very, very seriously. Call is The amount of lives that we potentially save, the amount of people we put back to work, the amount of small businesses that reopen, the borders that can reopen back to normal levels, That's really the story in that vaccines and that's what we're most proud about.
So I guess the surprise that you really shouldn't have been call is the amazing work that our team has done to galvanize and de energize around this purpose. And they take that purpose very personally, get up every morning thinking about the mission that we have to get these vaccines to market, so we can get them in folks' arms. So, I couldn't be more proud of the team and the way they brought these vaccines to market globally. So thanks for asking that question.
Yes, let me also jump in on that. I couldn't wait to this is one of the most important work that we have done and to do the work, To be honest, you need a network and by that I mean you'll be
able to pick it up in any one part of
the world and deposit in any other part
of the world in a couple
of days. That requires a network And only a couple of people can actually do a couple of companies can actually do that and we do that very well. But you also tied to it, The technology component, the Sensible ID that Fred talked about, as we rolled that out last year, I mean, it was perfectly timed for the vaccines to provide unprecedented visibility. And we also launched FedEx Surround last year, which provides with AI and ML predictive capability of what is going to happen. You put it all together, we have the best service possible and as the Chairman pointed out, extremely low level of failures.
So again, we are very proud of this work and continue to do our part in And ending this pandemic.
And next we'll go to Allison Poliniak from Wells Fargo. Your line is open.
Hi. Thanks for taking the question. Just wanted to circle back on the new service capabilities that you talked about within international. Is there a way to help us understand or quantify sort of the market hole you're expecting to sell? What drove development of those products?
And any thought on sort of mix? I'm assuming it would be sort of a better mix business for you longer term. Any thoughts there?
Call? Sure. So I think when you think about what we're going what we have going on in the 4th quarter, we really actually have 3 kind of expansions from a service perspective. We will have actually, we do have the fastest intra European ground network, as we completed the TNT ground network integration. That will provide growth both from a B2B perspective as well as a B2C perspective.
So we are absolutely looking to take share into Europe and we See that with the fastest network in Europe, we're confident we can do that. When you think about the intercontinental, we actually today have the leading value proposition from Europe to the United States and we're going to double that. So we are going to have a dramatic advantage over both UPS and DHL, we're adding 9 origin countries. So it's going to allow us to really expand both our B2B share as well as our B2C share Outside of the major markets in Europe. And then 3rd, as we're talking about FICP, the same story outside of the United is playing out everywhere in the world with more than 85% of our parcel growth opportunity coming in e commerce.
And we did not have an international product that really had the right features of service for serving this massive growth opportunity and we are under penetrated. Full closure, we are behind both DHL and UPS in this market today. So we see their only upside. When you think about FICP, its features or service are different from our core B2B products in a couple of ways. Number 1, we've changed the clearance capabilities, so we now have low value clearance capabilities or what we call Type 86, call is being recorded, which makes it a lower cost entry for the customer.
We are automating our clearance capabilities, which reduces the cost to serve. Call is open. We are changing the terms and conditions on the number of attempts that we will make at the last mile. And of course, we're rolling out retail access points in Europe as well, so that we can provide that access directly to retail, again lowering the cost to serve. So call is In all three of these segments, we believe we've got market share upside, but probably most specifically on the overnight service to the United call is a B2B play on FICP.
It's a rapidly growing opportunity for e commerce. I hope that helps clarify.
That's great. Thank you.
And next we'll go to Scott Group from Wolfe Research. Your line is open.
Hey, thanks. Good afternoon, guys. So Mike, I just had a few questions for you. You've been highlighting incentive comp the last few quarters. If we have more of a normal earnings growth year, next year is more of a normal incentive comp headwind, That's my question.
The corporate elimination line has grown to like a run rate of about $1,000,000,000 a year. I think there's been a bunch of COVID losses in there, is that something that should start to normalize to be less of a loss in the future?
Well, Scott, one thing that
I would mention in the corporate unallocated line, as We've mentioned previously FedEx Office results are in there and the print related revenue, while ADV is up spectacularly call is open. At FedEx Office, the print related revenue is significantly related impacted by the pandemic. So as we start to come through that, We would anticipate we'll see some improvement there. On the variable comp, I guess what I would say to you in that is we wouldn't anticipate that to be a headwind looking at FY 'twenty two.
Call is open. And at this time, I'll turn
it back to management for
closing remarks. Thank you for your participation and FedEx Corporation Third Quarter Earnings Conference Call. Please feel free to call anyone on the Investor Relations team if you have additional questions about FedEx. Thank
And that does conclude our call for today. Thank you for your participation. You may now disconnect.