Highlights From FDX's Q1 Conference Call: Strong Federal Express Ground Performance, But Lowers FY12 Outlook

FedEx Corp. (NYSE: FDX) reported Q1 EPS of $1.46, 1 cent better than the analyst estimate of $1.45. Revenue for the quarter came in at $10.5 billion versus the consensus estimate of $10.34 billion. Shares are trading down over 9% today.

Highlights From FDX's Q1 Conference Call:

• Sees Q2 EPS $1.40-$1.60, vs. consensus $1.58.
  
• Reduces its FY12 EPS guidance from $6.35-$6.85 to $6.25-$6.75, which compares to the Street estimate of $6.40.
  
• (Chairman/CEO) Revenue and earnings increased significantly in the quarter due to strong Federal Express Ground performance, improved Federal Express Freight performance and the continued success of the company's yield management actions.
  
• While there's been considerable speculation that the economy has or will soon enter a recession, this is not our view at present.
  
• We expect sluggish economic growth will continue, largely to a lack of confidence that U.S. and European policymakers will effectively address current economic challenges.
  
• Accordingly, we have taken actions to manage through a period of lower demand for shipping particularly in international express. We have many options that allow us to flex our operations up or down to balance capacity and demand such as reducing the number of airplanes in service and other related activities when demand slows.
  
• While economic environment is challenging, we remain confident that Federal Express will improve earnings, improve margins and cash flows this fiscal year.
  
• Qtrly Highlights - Federal Express express completed its acquisition of multipack, a Mexican domestic express package delivery company and launched domestic, next business day service in Colombia's major cities.
  
• Federal Express Freight added new markets in Mexico. Federal Express express enhanced service between Asia and Europe and within the Federal Express Express Asia one network.
  
• In India, we broaden the reach of Federal Express-branded domestic services. In two years, we've grown domestic express services from 16 origin cities in 58 destination cities to 116 origin cities and 331 destinations.
  
• Federal Express trade networks, our international ocean and air forwarding company opened three new offices in Munich, Bucharest, Romania and SHANGDU in China.
  
• (CFO) During the first quarter of fiscal '12, Federal Express Corporation earned $1.46 per share, a year-over-year increase of 22%.
  
• Looking at Federal Express Corporation, revenue increased 11% to $10.5 billion versus 9.5 million last year. Operating income increased 17% to 737 million, versus 628 million the previous year, and our operating margin improved to 7% versus 6.6% the previous year.
  
• Our performance was led by Ground. Ground continued its outstanding performance for the segment. Revenue was up-- revenue was 2.3 billion, up 16% versus last year's first quarter.
  
• Operating profit was 407 million, an increase of 42% and operating margin was 17.9%.
  
• Ground package volume was up 5% and yields were up 9%. 6% from base yield improvement and 3% from higher fuel surcharges.
  
• Mark post average daily volume increased 29%, to 1.4 million packages and yield was up 5% all of which is attributed to higher fuel surcharges.
  
• Looking at freight, revenue was 1.33 billion, up 6% year over year, and operating income was 42 million versus the loss of 16 million a year ago.
  
• LTL yield increased 11%. 6% from base yield and 5% from higher fuel surcharges.
  
• LCL volume did decline 7%.
  
• Turning now to Express, revenue for the quarter was 6.6 billion, up 12% from the prior year, but operating income fell 19% to 288 million.
  
• U.S. domestic package yields increased 13%, including 7% of base improvement and 6% due to higher fuel surcharges. IP package yields increased 16%.
  
• Fuel surcharge accounted for 6% and base and exchange rates provided 10% of the year-over-year improvements. However, slower global economic growth, particularly from Asia, resulted in a shift to our lower yielding services and reduce demand in general for IP package and U.S. domestic services. U.S. domestic volume declined 3%."
  
• The decline economic conditions versus what we expected for the first quarter outpaced reductions in variable operating costs such as flat hours and FTEs. Simply stated, we put capacity out anticipating traffic that did not materialize. We have subsequently adjusted our networks to match current demand.
  
• (Q&A) The question, I'm sure, that's on everyone's mind talk to us about current Asian Hong Kong volumes. I know we're very early in the quarter, but what have you seen already just in the first couple weeks of that volume as it's developing? (A) We developed our long haul in Asia. As you saw the last quarter we were at 6% growth in IP in Q4 to negative 4. So we're actually very comfortable with the performance that we're expecting in Q2 relative to our new network performance this we put in place and I think you'll see improved profits and margins for express coming out of Q2. And the question specifically in Hong Kong, we're actually going to see a pickup in our traffic relative to last year's Q2. We have more high-tech customers that shipped last year in Q1 that are going to be shipping in Q2.
  
• Good morning. I wanted to ask you a bit about the cost side. Alan, you gave us some comments that you reset the network in terms of some of the cost items. But maybe if you could give a little more detail behind that in terms of how-- what express head count might look like year over year with the reset network and what you think express margin might look like year over year given that you do have some volume pressures, but you've done some work on the cost side, and obviously pricing should provide some support. (A) Well, I'll start and then I'll turn it over to Dave to get more specific. We were on track for growth in June when we gave you our first quarter and annual earnings guidance and then in July, we saw sudden deceleration that continued all the way through August. Again, versus tough comps. Particularly I'm talking about international priority. And, you know, that's continuing right now, but we have done a substantial amount of network reduction, which does take us anywhere from a month to six weeks to change our flight schedules and change the amount of hours that we have in the field. And so we believe now that we've caught up with that, and I'm going to let Dave give you more details because his team has done a great job. (A) Thanks, Alan. That's right. We actually have in going back to that earlier question from Donald, our comps in Q2 will be much easier for us to hit, quite frankly, on the revenue side and our expenses are better because we've actually gone back and adjust the line haul, the frequencies, the head count and some of the traffic that we're anticipating coming from some high-tech customers in Q2. So we're positioned quite well for Q2. (A) I want to go back also and talk about ground and freight. We're seeing great productivity. I mean, 17.9% margins of Ground in the first quarter are phenomenal and freight, I mean, its second quarter of profitability. We're starting to see a lot of productivity improvements and more to come on the combination of networks. On the cost side there, we're in terrific shape.
  
• So if I'm hearing you right, it sounds like the express issue was more of a timing issue than it is actual economic weakness? I mean, it sounds like less. In Q1, you had difficult comps because of your customers. Last year, we're bringing in a lot of goods in and restocking and this quarter should be easier because now we're going to see an easier year-over-year comp. But you also called out weakness in Asia we heard that from your main competitor last week at their investor day. What I'm trying to figure out is, you know, how much the environment has actually stepped down versus how much is a timing issue in terms of when your customers are shipping goods, and on top of that, if I could, just how you have such confidence in the visibility into that high-tech chain? (A) It's actually a combination of everything you just said. It is a slowing down in Asia obviously when you look at our Q4 IP performance of plus four on the volume and up on the yields and negative 4 in Q1 so it swung pretty dramatically so it's partly that. It's probably that last year in Q1, if you go back and actually our two-year running rate for Q1 to Q1 is actually up 14%. That just goes to show you how strong last year's Q1 was for IP and driven, obviously, by Asia and specifically China. So you have a very high Q1 last year and to compare it to Q1 this year was tougher. We had a lot of traffic in the high-tech sector in Q1 last year. That's actually shifted to Q2 this year. So Q2's comps, you can understand are more-- they're relatively easier to hit and the expenses are better because we went back and readjusted the line haul so that it actually gives us the confidence in the Q2."

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Flowers Foods (FLO) Misses Q2 EPS by 3c; Offers Guidance
• Analog Devices (ADI) Tops Q3 EPS by 11c, Beats on Revenue; Offers Q4 Guidance
• Alibaba stock dips as Q2 profit misses estimates despite strong AI cloud growth