FedEx Corp (FDX) Q1 2025 Earnings Call Transcript Highlights: Strategic Adjustments Amidst ...
Revenue: Declined 1% at Federal Express; declined 2% at FedEx Freight.
Adjusted EPS Outlook: Narrowed to $20 to $21 for FY25.
DRIVE Savings: Achieved $390 million in Q1; expected to build throughout the year.
Operating Profit: Decreased $337 million at Federal Express; decreased $43 million at FedEx Freight.
Capital Expenditures: $767 million in Q1; on track for $5.2 billion in FY25.
Stock Repurchases: Completed $1 billion in Q1; plan for an additional $1 billion in Q2.
International Export Package Volumes: Increased 9% in the quarter.
Yield: Total package yield up 1% year-over-year.
Operating Day Impact: One fewer operating day resulted in a $170 million headwind.
Purchase Transportation Expense: Increased $124 million at Federal Express.
Release Date: September 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
FedEx Corp (NYSE:FDX) achieved $390 million in DRIVE-related savings in Q1, with expectations for these savings to increase sequentially throughout the year.
The company is on track to deliver $4 billion in savings through DRIVE in FY25 compared to the FY23 baseline.
FedEx Corp (NYSE:FDX) has implemented significant new pricing actions, including demand and fuel surcharges, which are expected to benefit future quarters.
The rollout of Network 2.0 and the redesign of the global air network (Tricolor) are well underway, aimed at increasing network flexibility and lowering costs.
FedEx Corp (NYSE:FDX) continues to gain profitable market share in high-value segments such as healthcare and small and medium businesses, despite a challenging demand environment.
Negative Points
FedEx Corp (NYSE:FDX) faced a challenging Q1 demand environment, particularly in the US domestic package market, leading to weaker-than-expected results.
The industrial economy's weakness pressured B2B volumes, especially in the US, impacting overall performance.
There was an increase in demand for lower-yielding services, driven by a shift in customer preference from priority to deferred services, which constrained yield growth.
The company experienced a $124 million increase in purchase transportation expense at Federal Express due to higher international economy volume.
FedEx Corp (NYSE:FDX) had one fewer operating day in the quarter, resulting in an approximately $170 million headwind.
Q & A Highlights
Q: Can you give more color on the negative mix shift and why you think you can push through additional demand surcharges and fuel surcharges? A: Brie Carere, Executive Vice President and Chief Customer Officer: We are confident in our pricing strategy, including the GRI capture rate anticipated in January. Demand surcharges are necessary to improve profitability and ensure outstanding service during peak times. We expect the pressure on international demand surcharges to taper as the year progresses.
Q: Can you provide more details on the lower-than-normal second-quarter EPS seasonality and the confidence in a sharp second-half ramp? A: John Dietrich, Chief Financial Officer: We expect lower-than-normal seasonality in Q2 due to the US Postal Service contract termination and the timing of Cyber Week. However, we anticipate better-than-normal seasonality in the fiscal second half, supported by ramping DRIVE savings and revenue actions.
Q: Why did the $390 million in DRIVE savings fall short of the first-quarter target, and how confident are you in achieving the $2.2 billion target for the fiscal year? A: John Dietrich, Chief Financial Officer: While we were pleased with the $390 million in savings, we expected more based on positive momentum. We are committed to the $2.2 billion target, supported by a robust DRIVE process and a strong pipeline of initiatives.
Q: What is driving the increase in purchase transportation costs, and how do you plan to manage this expense? A: John Dietrich, Chief Financial Officer: The increase in purchase transportation costs is driven by higher freight forwarding revenue, contracted service provider expenses, and additional commercial air linehaul capacity. We are managing these costs through efficiency gains and adjustments in our network.
Q: How are you thinking about capital deployment towards FedEx Freight and the strategic review of this segment? A: John Dietrich, Chief Financial Officer: We are committed to investing in FedEx Freight and improving our ROIC. The strategic review is comprehensive, and we will provide an update by the end of the calendar year.
Q: Can you provide more details on the impact of the Asia export volumes and the Tricolor initiative? A: Brie Carere, Executive Vice President and Chief Customer Officer: We expect continued strength in Asia export volumes, with productive relationships with major shippers. The Tricolor initiative will optimize our international margins and support the growth of deferred volumes.
Q: What are the assumptions for the overall macro environment, and how could a potential port strike impact air freight volumes? A: Rajesh Subramaniam, President and CEO: We are cautiously optimistic about a moderate improvement in the industrial economy in the second half. A port disruption generally favors air freight, and we will monitor the situation closely.
Q: What are the pros and cons of the strategic review for the LTL segment, and are there any strategic options for the Europe business? A: John Dietrich, Chief Financial Officer: The assessment of the LTL segment is comprehensive, and we will communicate the outcome by the end of the calendar year. For Europe, we are focused on capturing profitable share and improving our cost profile, leveraging our expertise from the US surface network.
Q: How should we think about the margin outlook and the impact of the economy service and international business? A: John Dietrich, Chief Financial Officer: We expect adjusted FEC margins to be up for FY25, driven by DRIVE and recent pricing actions. The improvements from Network 2.0, Tricolor, and Europe will be accretive to our profitability.
Q: How do you rate your performance in flexing the network to adjust to intra-quarter challenges? A: John Dietrich, Chief Financial Officer: The team does an excellent job of monitoring demand trends and making necessary adjustments. The winding down of the postal service contract will provide additional flexibility for network optimization.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.