The FedEx Fiscal Year 2023 Fourth Quarter Earnings Call has begun, with Mickey Foster, Vice President of Investor Relations, welcoming participants and informing them that the call and accompanying slides are being streamed on the FedEx website. Participants are limited to one question in the question-and-answer session and FedEx Corporation is taking advantage of the safe harbor provisions of the Private Securities Litigation Reform Act. Raj Subramaniam, President and CEO, Mike Lenz, Executive Vice President and CFO, and Brie Carere, Executive Vice President and Chief Customer Officer are also on the call.

Raj Subramaniam acknowledged the upcoming retirement of Mike and his contributions to FedEx before discussing the fourth quarter. Revenue was down 10% due to soft demand, but the rate of volume decline in Ground and Express improved. Yield trends have been pressured in international markets. Despite this, FedEx is on solid footing and committed to executing swiftly on its priorities to support sustained profit improvement.

This paragraph discusses the company's focus on revenue quality and disciplined pricing approach. It also mentions the progress made in terms of cost reduction, operational improvements, and dock modernization efforts. These have led to improved customer experience, such as picture proof of delivery and four hour estimated delivery time window, as well as increased productivity and efficiency. Ground has been a standout, delivering operating income of over $1 billion.

The Ground team expanded margins despite lower volumes in the second-half, increasing cost per package by only 1.9%. At Express, there was a 13% decline in revenue, but the team was able to reduce total flight hours by 12% year-over-year and retire 18 aircraft. They also implemented structural cost savings initiatives, such as a single daily dispatch of couriers and hub productivity measures, and opened two hubs in Europe.

Express and Freight have reduced their operating expenses by $1.1 billion and $330 million, respectively, in the fourth quarter of FY '23. The company is continuing to take cost out of their network, including reducing flight hours and headcount, and is targeting $1.8 billion in cost reduction benefits from DRIVE this fiscal year and $4 billion of permanent cost reductions in FY '25. They have also opened two new road hubs in the Netherlands and Italy to improve their service on the continent.

FedEx is consolidating its operating companies into one unified organization, and part of this process includes transitioning all FedEx Ground operations and personnel in Canada to FedEx Express. This transition is expected to generate an annualized benefit of over $100 million and is the first large scale implementation of Network 2.0. Despite this, the company is taking a prudent approach to its full-year outlook due to the dynamic environment across geographies.

FedEx reported that its fourth quarter operating environment was pressured with year-over-year volume declines and sequential moderation in yields across all transportation segments. FedEx Express reported a 13% year-over-year decline in revenue, due to parcel volume declines in the US and a change in strategy from a large customer. FedEx Ground reported a 2% year-over-year decline in revenue, due to a 6% decline in volume, partially offset by a 5% increase in yield from surcharges and product mix. FedEx plans to reduce capital intensity and focus on highest return opportunities, with aircraft related CapEx expected to decrease after FY '24 and be approximately $1 billion in FY '26. They are also committed to driving operational improvement to further enhance the customer experience.

FedEx Freight experienced an 18% decline in revenue and volumes in the fourth quarter due to a slowdown in the market and high inventory levels. Yield was pressured due to normalized fuel surcharge comparisons, and customer demand rebalanced between priority and economy services. To improve service and outcomes for customers, FedEx is rolling out picture proof of delivery, narrowing their four hour delivery window, and providing enhanced mapping capabilities. They are also focusing on growth in their returns program, introducing their new FedEx Consolidated Returns program available at FedEx office locations.

FedEx recently launched the FedEx Sustainability Insights tool, a cloud-based platform that allows customers to view estimated carbon emissions for both individual tracking numbers and their entire FedEx accounts. The platform also enables customers to transfer their carbon data to their own internal systems via an API, and it is available online for small customers. The team at FedEx has demonstrated strong operational execution by delivering these innovative solutions, and has seen margin expansion due to yield growth and cost controls.

In the fourth quarter, the company recorded a $70 million impairment charge due to retiring 18 aircraft and 34 engines, as well as a $47 million goodwill and asset impairment charge related to the ShopRunner acquisition and a $46 million unplanned tax expense from revaluating foreign tax assets. Volume declines continued in the quarter, but Ground in U.S. Domestic Express package volume trends improved into May. For the first quarter of FY '24, volume declines are expected to continue to moderate at Express and Ground, while Freight will continue to experience pressure. The company is focused on maintaining their commercial position, prioritizing revenue quality, and driving profitability improvement through their DRIVE initiatives.

FedEx is preparing for a range of potential outcomes with their adjusted earnings per share outlook for fiscal 2024 ranging from $16.50 to $18.50. If macroeconomic conditions remain consistent with what is currently being experienced, they anticipate flattish revenue and earnings per share towards the low-end of the range. However, if there is an improving demand environment in the back half of the year, they expect revenue to be up low-single-digit percentage and earnings per share closer to the high-end of the range. They also anticipate higher interest income on their cash balances, but a $230 million net non-cash pension headwind with a $330 million headwind below the line.

FedEx projects a 25% tax rate prior to retirement plan adjustment, and a total pre-tax spend of $2 billion through FY '25. For FY '24, they are expecting adjusted EPS of $17.50, and a modest demand recovery with limited coverage of base cost inflationary pressures. They are also expecting $800 million of international export yield pressure, and a $500 million increase in variable compensation. These pressures are offset by $1.8 billion in cost savings from their DRIVE transformation, leading to an estimated FY '24 adjusted operating profit of $6.2 billion. They ended the year with $6.8 billion in cash, and capital expenditures were 6.8% of revenue.

In FY '23, CapEx was slightly higher than expected due to easing supply chain constraints and the delivery of equipment and other projects. The company projects $5.7 billion in CapEx for FY '24 and is committed to reducing capital intensity. They have repurchased $1.5 billion in stock and paid $1.2 billion in dividends, and plan to repurchase an additional $2 billion and raise the dividend by 10%. They are making progress on their transformation and remain focused on delivering shareholder value. They are also planning for $800 million of voluntary pension contributions to their U.S. plans.

Raj Subramaniam discusses the unique approach to deploying optimization in Canada, which concentrates the population in a few key geographies and splits the volume between Express and Ground. This approach is different than the market-by-market approach taken in the US and will begin in April 2024 and complete by September 2024. Mike Lenz then explains that the EPS range is $16.50 to $18.50 and that the acceleration of revenue and costs is more likely to occur in the second half of the fiscal year.

In the midpoint scenario, there is a positive contribution to revenue beyond inflation, but with muted demand growth and moderating volume declines. The yield increases seen in the previous year will not continue into this year. The DRIVE savings will be greater than the nonrecurring headwind.

Brie Carere answered a question from Brian Ossenbeck about any plans of financial structure trade-down in an uncertain environment and whether any customers were making trades within the portfolio. Carere stated that there was no material benefit from the UPS labor negotiations in Q4 and that the primary competitor had a strong value proposition. She also mentioned that the biggest shift was seen in the Asia-Pacific team's sales pipeline due to the reopening of the IE product.

Mike Lenz and Raj Subramaniam discussed the potential for the company to pull forward DRIVE savings from FY 25 to FY 24 if customer demand deteriorates. Raj outlined a simple formula in which revenue growth is at the low-end of the range at 1%, in the middle at 2%, and at the higher-end of the range at 3%. He also mentioned that there is operational leverage available if needed. Brie was then asked to comment on the $800 million of International Export yield pressure that the company will be seeing this year and whether it will return to pre-COVID levels.

Raj Subramaniam explains that FedEx has already transitioned 20 markets to the One FedEx operation, a hybrid model that works differently in states with overlapping contractors and employee drivers. He also mentioned that they have learned a lot from this process in terms of technology, facilities, and people.

Raj Subramaniam of FedEx discussed the hybrid model they are using in some markets, which involves both couriers and contractors. He then discussed the success of FedEx Ground in the last quarter and gave credit to John and Richard's teams. He also mentioned that they are taking macroeconomic factors into account when setting their guidance for fiscal 2024.

In September, the industrial economy was slowing down due to inflation, interest rates, and global trade, as well as an e-commerce reset from the pandemic. These three factors have had a detrimental effect on volume for the industry. Looking ahead, the industrial production, GDP, and trade will be closely watched, as well as the inventory stocking and inventory to sales ratio. The company is determined to come out of this stronger than they went in and are pleased with the progress of DRIVE. Ground has made progress, and Express has made great progress amidst the headwinds.

Mike Lenz stated that Express and Ground margins will improve in 2024, while Freight will experience some margin pressure. The largest margin pressure for Freight will be in the first quarter, but this will improve as the year progresses. Express will see a greater degree of improvement beyond the first quarter. Ken Hoexter asked if Express could reach mid-single-digits and if Ground could reach double-digits, and for thoughts on Europe and TNT integration within Express.

In response to a question from Scott Group about the earnings and revenue sensitivity, Mike Lenz provided information about the aircraft CapEx for the next few years. Raj Subramaniam then clarified that the one, two, three formula for earnings and revenue would become non-linear as revenue accelerates. In response to a question from Conor Cunningham about the revenue assumption for 2024, Raj Subramaniam discussed the potential impact of export yield pressure.

Brie Carere discusses the assumption of 2% revenue growth for the year and notes that in the U.S. domestic market, volumes will start to build back throughout the year. She also mentions that FedEx Freight will lag slightly due to the impact leg, and that international business will build back some volume throughout the year. She finishes by noting that they are planning for flattish to low-single revenue growth based on the current economy.

Raj Subramaniam discussed the consumer strength in the United States and the growth of e-commerce, which is currently at 7-8%, with the company's percentage closer to 2-3%. He also mentioned the reopening of Asia and the green shoots in Europe, which the team is working hard to capitalize on. Finally, he answered Helane Becker's question about the cost increase associated with the new pilot contract, which has already been accrued for.

Mike Lenz discussed the company's plans to reduce flying in the Trans-Pacific and Trans-Atlantic regions due to supply-demand constraints, and how this will lead to the retirement of additional aircraft. He also stated that margins on a consolidated basis are expected to improve in 2023.

Mike was asked how to think about the potential decline in priority mail revenue due to the changes implemented by DeJoy, and Brie responded that they have accounted for this headwind in their fiscal range and are committed to meeting their service obligations in the contract with the United States Postal Service. Joseph then asked Mike how to think about the potential increase in purchased transportation costs if the macroeconomic situation improves and there is a need to source third-party capacity.

Mike Lenz discussed how Ground was able to expand their margins and reduce costs through optimizing their network and reducing external linehaul expenses. Bruce Chan asked about the LTL side of the business, and Lenz mentioned that the team reacted quickly to the declining volume environment earlier in the year and they will continue to look to optimize their facilities. He also noted that the smaller facilities that weren't the most efficient could be accommodated within the larger facilities for a more efficient contribution when demand recovers.

Mike Lenz, CFO for the last three years, announced that freight margins will be down in the first quarter of the year and that Express will see the smallest year-over-year margin change in the first quarter. Raj Subramaniam then spoke about the external criteria used to find a new CEO, emphasizing the need for someone with deep financial expertise and strong operational capabilities. Mike Lenz concluded the session by expressing his gratitude for the opportunity to serve as CFO for the past three years.

Mike expresses his gratitude to the FedEx team for their dedication throughout the changes they faced, and specifically thanks Fred and Raj for their vision and leadership. He also thanks his wife and sons for their support and expresses his confidence in the future of FedEx. Raj Subramaniam then thanks the team for their hard work and dedication and expresses his confidence in their ability to continue to execute.

This summary was generated with AI and may contain some inaccuracies.