FedEx Freight | FedEx Corp. Reports Fourth Quarter and Full-Year Earnings
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Numbers look good, should be a good bonus.
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FedEx Corporation (FDX) CEO Fred Smith on Q4 2018 Results - Earnings Call Transcript
https://seekingalpha.com/article/41...-results-earnings-call-transcript?part=single
https://seekingalpha.com/article/41...-results-earnings-call-transcript?part=single
Finally looked at the earnings call. We'll share, as time allows, some interesting parts.
FRED SMITH:
"... let me extend the best wishes of the corporation, the board, and all of our team mates, and most importantly, for me, personally to FedEx Freight President and CEO, Mike Ducker, as he retires this summer. This will be Mike's last call. Mike has been our partner for more than 43 years, and he always answered the call when asked to lead in each new opportunity. Whether in Europe, Asia, or in the Americas, Mike has been truly the model of our people service profit philosophy, and I must tell you he is one of the most outstanding leaders and executives that I've ever seen in any field. So Mike, you're retiring with our best wishes and we're going to miss you, but since you only live right down the road, we'll see you a lot. So, here’s to you Mike."
Alan Graf
"Regarding pensions, I would like to take a few minutes to explain the effect that new pension accounting rules will have on our financial results for FY19. Going forward, only the pension service cost will be included in operating expenses. All the other elements that make up total pension expense will now be classified as other non-operating expenses, including the year-end mark-to-market adjustment. For example, in FY18 our total pension expense excluding mark-to-market and other pension adjustments was $224 million while our service cost was $812 million. So while there was no impact on net income from these new rules, they will negatively impact our operating margin by about 90 basis points. Of course, prior years will be recast to conform to these new rules, so there will be no year-over-year impact once we have an apples-to-apples comparison starting in the first quarter of FY19.
Since our primary pension plans are fully funded under ERISA, contributions will not be required for the foreseeable future. As a result, most of the service cost expense is really a non-cash item that has a material effect when modeling our cash flows. While no cash contributions are required in our primary U.S. pension plans, we will make voluntary contributions during FY19, but they will be at a much lower level than the $2.5 billion we contributed in FY18. I would also like to comment on the pension derisking transaction that we executed in Q4 to remove approximately 20% of our pension liabilities from the balance sheet through an annuity purchase with MetLife. This $6 billion transaction was the largest single transaction in our history and it represents a win for both our shareholders and our retirees. This event follows a long line of derisking activities, including plan design changes and special lump sum settlements, all design to reduce the volatility of our pension liabilities, and further strengthen our balance sheet."
"Regarding pensions, I would like to take a few minutes to explain the effect that new pension accounting rules will have on our financial results for FY19. Going forward, only the pension service cost will be included in operating expenses. All the other elements that make up total pension expense will now be classified as other non-operating expenses, including the year-end mark-to-market adjustment. For example, in FY18 our total pension expense excluding mark-to-market and other pension adjustments was $224 million while our service cost was $812 million. So while there was no impact on net income from these new rules, they will negatively impact our operating margin by about 90 basis points. Of course, prior years will be recast to conform to these new rules, so there will be no year-over-year impact once we have an apples-to-apples comparison starting in the first quarter of FY19.
Since our primary pension plans are fully funded under ERISA, contributions will not be required for the foreseeable future. As a result, most of the service cost expense is really a non-cash item that has a material effect when modeling our cash flows. While no cash contributions are required in our primary U.S. pension plans, we will make voluntary contributions during FY19, but they will be at a much lower level than the $2.5 billion we contributed in FY18. I would also like to comment on the pension derisking transaction that we executed in Q4 to remove approximately 20% of our pension liabilities from the balance sheet through an annuity purchase with MetLife. This $6 billion transaction was the largest single transaction in our history and it represents a win for both our shareholders and our retirees. This event follows a long line of derisking activities, including plan design changes and special lump sum settlements, all design to reduce the volatility of our pension liabilities, and further strengthen our balance sheet."
Fred Smith
"A question from Bascom Majors of Susquehanna and Helene Becker [ph] of Cowen. Are customers coming to you to discuss UPS strike contingency plans? How much of UPS volume could you accommodate if there is a strike? Dave Bronczek?"
Dave Bronczek
"Obviously, it's a timely question. However, we never actually comment about our competitor's issues or their business considerations. I do want to say something that is very important for our customers though. We will continue to provide outstanding service, for our customers we have capacity, only then -- and only then, if there is additional capacity, if there is a need, would we consider other alternatives for other customers. We will take care of our customers first like we always do, the way we ramp up for Christmas peaks and so forth, we can handle it and we're going to take care of our customers."
"A question from Bascom Majors of Susquehanna and Helene Becker [ph] of Cowen. Are customers coming to you to discuss UPS strike contingency plans? How much of UPS volume could you accommodate if there is a strike? Dave Bronczek?"
Dave Bronczek
"Obviously, it's a timely question. However, we never actually comment about our competitor's issues or their business considerations. I do want to say something that is very important for our customers though. We will continue to provide outstanding service, for our customers we have capacity, only then -- and only then, if there is additional capacity, if there is a need, would we consider other alternatives for other customers. We will take care of our customers first like we always do, the way we ramp up for Christmas peaks and so forth, we can handle it and we're going to take care of our customers."
Fred Smith
"So from Brain Issenbec [ph] to JP Morgan; what does the next chapter of technology and innovation look like? How close to commercial viability are the recently disclosed tracking sensors, block chain involvement and small drone test flights? So Rob Carter, you want to talk at least about first two of those?"
Rob Carter
"Yes, sure. The impact of innovations in the connected world, whether it's the Internet of Things and sensor-based logistics, mobility, block chain autonomy; all of those things are accelerating across the enterprise. If you look at sensor-based logistics and the announcements and the capabilities that we've shown in our new Bluetooth low energy sensors, that's resulted in a huge number of patent filings and really is a buyable technology in of [ph] itself today. What takes some time to rollout is the infrastructure and wifi networks, enrolling stock and an aircraft in order to martial all those sensors as they operate in the world. And then the backend systems that are needed to handle that volume of data. With regard to block chain, we're quickly seeing block chain capabilities moving towards production, primarily through our involvement in bit of the block chain and transport alliance. With new hundreds of participating companies, FedEx Freight is leading the charge there and are cheering the committee on standards for bidder and we have several applications that are working their way forward.
And then lastly, with regard to drones -- drones are still really specializing in observation and inspection with sophisticated optics and their ability to look at aircraft and airframes. That's a very advanced capability that we're already using today but things like lift and range are limiting their use in transport although we're testing them in some of our larger ramp facilities to deliver parts to mechanics and things of that nature."
"So from Brain Issenbec [ph] to JP Morgan; what does the next chapter of technology and innovation look like? How close to commercial viability are the recently disclosed tracking sensors, block chain involvement and small drone test flights? So Rob Carter, you want to talk at least about first two of those?"
Rob Carter
"Yes, sure. The impact of innovations in the connected world, whether it's the Internet of Things and sensor-based logistics, mobility, block chain autonomy; all of those things are accelerating across the enterprise. If you look at sensor-based logistics and the announcements and the capabilities that we've shown in our new Bluetooth low energy sensors, that's resulted in a huge number of patent filings and really is a buyable technology in of [ph] itself today. What takes some time to rollout is the infrastructure and wifi networks, enrolling stock and an aircraft in order to martial all those sensors as they operate in the world. And then the backend systems that are needed to handle that volume of data. With regard to block chain, we're quickly seeing block chain capabilities moving towards production, primarily through our involvement in bit of the block chain and transport alliance. With new hundreds of participating companies, FedEx Freight is leading the charge there and are cheering the committee on standards for bidder and we have several applications that are working their way forward.
And then lastly, with regard to drones -- drones are still really specializing in observation and inspection with sophisticated optics and their ability to look at aircraft and airframes. That's a very advanced capability that we're already using today but things like lift and range are limiting their use in transport although we're testing them in some of our larger ramp facilities to deliver parts to mechanics and things of that nature."
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Fred Smith
"Couple of questions on freight. Why our FedEx Freight annual margins not double-digits in such a strong LTL environment? And any investments restraining current margins? David Ross of Stifel. And are you interested in getting into heavy goods last mile? Would that be through your LTL or packaged division? Scott Group of Wolfe Research and David Vernon [ph] of Bernstein has a similar question. So let me ask Mike Ducker to answer most of those questions."
Mike Ducker
"First of all, we're pleased with the profit and margin performance during fiscal year '18 and I would like to give a shout out to our team mates for their great performance. Our operating income improved by 33% and the margin by 120 basis points. If you take that on a quarterly basis, for Q4 it was 35% and 130 basis points. Now while we're pleased with that, we're still not satisfied with those results. Our goal remains sustainable double-digit margins but we're not going to compromise our continued investments which we believe are critical for our future growth and preparedness. So we continue to invest in technology that will prepare us better for the rapid modernization of supply chains and to ensure we maintain a market leading position.
Second part of the question for David Vernon [ph] at Bernstein, we already delivered significant volume of goods through both FedEx Ground and FedEx Freight, the last mile goods. So as demand grows for those shipments, we believe FedEx is uniquely positioned on reach and flexibility of our networks to provide outstanding service, even for those larger and heavier deliveries. Specifically for LTL, e-commerce is and will create opportunities for us and while we see opportunity in that large growing market, we do have plans to leverage those trends to support margin expansion."
"Couple of questions on freight. Why our FedEx Freight annual margins not double-digits in such a strong LTL environment? And any investments restraining current margins? David Ross of Stifel. And are you interested in getting into heavy goods last mile? Would that be through your LTL or packaged division? Scott Group of Wolfe Research and David Vernon [ph] of Bernstein has a similar question. So let me ask Mike Ducker to answer most of those questions."
Mike Ducker
"First of all, we're pleased with the profit and margin performance during fiscal year '18 and I would like to give a shout out to our team mates for their great performance. Our operating income improved by 33% and the margin by 120 basis points. If you take that on a quarterly basis, for Q4 it was 35% and 130 basis points. Now while we're pleased with that, we're still not satisfied with those results. Our goal remains sustainable double-digit margins but we're not going to compromise our continued investments which we believe are critical for our future growth and preparedness. So we continue to invest in technology that will prepare us better for the rapid modernization of supply chains and to ensure we maintain a market leading position.
Second part of the question for David Vernon [ph] at Bernstein, we already delivered significant volume of goods through both FedEx Ground and FedEx Freight, the last mile goods. So as demand grows for those shipments, we believe FedEx is uniquely positioned on reach and flexibility of our networks to provide outstanding service, even for those larger and heavier deliveries. Specifically for LTL, e-commerce is and will create opportunities for us and while we see opportunity in that large growing market, we do have plans to leverage those trends to support margin expansion."
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Fred Smith
"So here is a question from David Vernon of Bernstein and Kevin Sterling of Seaport Global. How is the tightening truck transportation market impacting demand and cost at each FedEx segment?"
Dave Bronczek
"Demand continues to be very strong by the strength of industrial production, as Raj mentioned earlier in consumer demand. However, to give you a little bit of color and background to this, I'm going to have the three opco presidents, starting maybe with Henry and then Mike at FedEx Freight, and then David who has probably the least effect to give their points of view and their comments on it. Henry?"
Henry Maier
"At FedEx Ground, 100% of our transportation is purchased as it has been for 33 years since the company has contracts with all entities providing transportation services, most importantly our contract service providers, but you might also be surprised to know, we also have contracts with rail, truckload, and of course the United States Postal Service. These relationships support the Company to access virtually unlimited options in the market and drive our industry-leading flexibility to scale our transportation needs as customer demands warrant."
Mike Ducker
"Yes. I'll just add that we're seeing very strong demand for our services in the freight sector. We remain focused on disciplined growth and margin expansion while providing the best service in the industry. As a proof point, our fourth quarter results were perfectly balanced with 8% growth on average daily shipments and an 8% revenue per shipment growth. And again, while the robust industrial production number is most closely correlated with the LTL market, we really expect a particularly strong IP [ph] growth during the first half of fiscal year '19. So that translates into a good growth in shipments."
David Cunningham
"Good day. This is Dave Cunningham representing FedEx Express. We have not experienced any issues with securing a third-party tuckinging load."
"So here is a question from David Vernon of Bernstein and Kevin Sterling of Seaport Global. How is the tightening truck transportation market impacting demand and cost at each FedEx segment?"
Dave Bronczek
"Demand continues to be very strong by the strength of industrial production, as Raj mentioned earlier in consumer demand. However, to give you a little bit of color and background to this, I'm going to have the three opco presidents, starting maybe with Henry and then Mike at FedEx Freight, and then David who has probably the least effect to give their points of view and their comments on it. Henry?"
Henry Maier
"At FedEx Ground, 100% of our transportation is purchased as it has been for 33 years since the company has contracts with all entities providing transportation services, most importantly our contract service providers, but you might also be surprised to know, we also have contracts with rail, truckload, and of course the United States Postal Service. These relationships support the Company to access virtually unlimited options in the market and drive our industry-leading flexibility to scale our transportation needs as customer demands warrant."
Mike Ducker
"Yes. I'll just add that we're seeing very strong demand for our services in the freight sector. We remain focused on disciplined growth and margin expansion while providing the best service in the industry. As a proof point, our fourth quarter results were perfectly balanced with 8% growth on average daily shipments and an 8% revenue per shipment growth. And again, while the robust industrial production number is most closely correlated with the LTL market, we really expect a particularly strong IP [ph] growth during the first half of fiscal year '19. So that translates into a good growth in shipments."
David Cunningham
"Good day. This is Dave Cunningham representing FedEx Express. We have not experienced any issues with securing a third-party tuckinging load."
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Fred Smith
"...Here is one from outside of last mile delivery which I'd taken is the term that's being applied to the heavy and hard to handle. Raj, is that right? I think technology, okay. Are you seeing any increase in competition -- can technology disrupt your mode or are hard assets the barrier to entry? Matthew Russell [ph], Goldman Sachs. Raj?"
Raj Subramaniam
"FedEx has built arguably the most extensive global delivery network, probably in the history of transportation. And when you combine that with our technology and human assets, it's hard to conceive of a scenario where technology alone could be a disruptor. I mean, there is a definitely a trend in popular press to get carried away by the conversations around technology being the answer to every question. But the real, real answer is how we combine technology with physical and human assets that provides the value propositions that our customers are seeking. If we haven't already done so, I would highly encourage you to watch our short video on the subject at fedex.com/dream."
https://thejourney.van.fedex.com/
"...Here is one from outside of last mile delivery which I'd taken is the term that's being applied to the heavy and hard to handle. Raj, is that right? I think technology, okay. Are you seeing any increase in competition -- can technology disrupt your mode or are hard assets the barrier to entry? Matthew Russell [ph], Goldman Sachs. Raj?"
Raj Subramaniam
"FedEx has built arguably the most extensive global delivery network, probably in the history of transportation. And when you combine that with our technology and human assets, it's hard to conceive of a scenario where technology alone could be a disruptor. I mean, there is a definitely a trend in popular press to get carried away by the conversations around technology being the answer to every question. But the real, real answer is how we combine technology with physical and human assets that provides the value propositions that our customers are seeking. If we haven't already done so, I would highly encourage you to watch our short video on the subject at fedex.com/dream."
https://thejourney.van.fedex.com/