Release Date: December 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- FedEx Corp (FDX, Financial) announced a strategic separation of FedEx Freight, creating two industry-leading public companies, which is expected to unlock significant value for shareholders.
- FedEx Freight has maintained its leading market share position and increased operating profit nearly 25% on average per year over the last five years.
- The company achieved drive savings of $540 million in Q2 and remains on track to deliver $2.2 billion in incremental savings in FY25.
- FedEx Corp (FDX) reported strong international growth, with international export package volumes increasing by 9% in the quarter.
- The company completed an additional $1 billion in share repurchases in Q2, bringing the year-to-date total to $2 billion, demonstrating a commitment to returning capital to shareholders.
Negative Points
- FedEx Corp (FDX) revised its FY25 adjusted diluted EPS outlook to $19 to $20, down from the prior range of $20 to $21, due to continued weakness in the industrial economy.
- The company experienced a 1% decline in consolidated revenue, driven by a weak industrial economy and challenging demand environment.
- FedEx Freight's operating profit was down $179 million, with lower average daily shipments and fuel surcharges due to the soft industrial backdrop.
- The expiration of the US Postal Service contract negatively affected two months of the quarter, resulting in additional operating profit headwinds.
- The pricing environment remains competitive, with yields expected to remain pressured due to economic conditions and a mix change towards lower-margin services.
Q & A Highlights
Q: Can you break down the moving pieces of the dollar cut in guidance and how it plays out over the fiscal year?
A: Our prior guidance factored in drive savings and pricing actions, but expected volumes and revenue didn't materialize. The updated EPS range of $19 to $20 reflects revised revenue expectations. Q3 will benefit from ramping drive savings and improved top-line flow-through due to Cyber Week timing, but the USPS headwind will offset these benefits. Q4 is traditionally our strongest earnings quarter, and we expect this to hold despite having one fewer operating day.
Q: Can you provide more color on peak season performance and its impact on volumes and pricing?
A: December volumes are running ahead of forecast, and peak surcharge capture will be up year over year. However, we do not expect December's performance to carry through the back half of the year. We anticipate improvement in domestic volumes, particularly in Ground, and expect Q2 to be the trough for FedEx Freight revenue.
Q: How do you see the separation of FedEx Freight playing out, and what are the risks of customer attrition?
A: The separation aims to increase shareholder value for both FedEx and FedEx Freight. We have a separation management office in place to ensure a smooth transition. We are adding 300 salespeople to address customer concerns and will maintain commercial, operational, and technological cooperation between the two companies to minimize disruption.
Q: Can you provide an update on the Network 2.0 rollout and its progression?
A: We have optimized 200 stations so far, including 130 in Canada, and will complete the rest of the Canada integration early in 2025. We are seeing a 10% P&D cost reduction where Network 2.0 is fully rolled out. By the end of FY25, we expect to have approximately 250 stations integrated.
Q: How will capital allocation change post-separation, and what are the target leverage levels for each business?
A: We are not anticipating changes in capital allocation and will continue to focus on optimizing our existing business and returning significant free cash flow to stockholders. The specifics of capital allocation post-separation will be reviewed over the coming months, and we will keep you updated on progress.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
