FedEx today reported an 11% rise in underlying Q4 profits, excluding a $134 millionaircraft-related charge, thanks to record US ground package results and despite cost-conscious
customers switching from premium to slower and cheaper express products.The Memphis-based company also unveiled higher profits for the full year ending May 31, 2012,and promised further improvements in earnings and yields in the 2012-13 fiscal year along withcost-saving restructuring measures for the US domestic express operation.
“FedEx delivered strong earnings results for fiscal 2012 due to the outstanding performance byFedEx Ground, our new value proposition at FedEx Freight and improved yields across alltransportation segments,” stated chairman, president and CEO Fred Smith. “In fiscal 2013, we willcontinue our focus on improving our operating efficiencies and our financial performance across allof our businesses, while simultaneously enhancing our service capabilities. We remain absolutelycommitted to higher earnings, margins, cash flows and returns.”
In the March – May 2012 fourth quarter, FedEx’s group revenues rose 4% to $11 billion. Operatingprofits dropped 4% to $856 million, leaving the operating margin at 7.8%, down from 8.4% last year.Net income dropped slightly to $550 million from $558 million.
However, these figures included a non-cash impairment charge of $134 million for the retirementof 18 A310-200s aircraft as well as six Boeing MD10-10 aircraft. Excluding this charge, operatingresults improved due to higher yields, volumes and margins at FedEx Ground and FedEx Freight.Underlying operating profit rose 11% to $990 million, representing a 9% margin, and underlying netincome was up 14% at $634 million.
For 2011-12 as a whole, FedEx increased revenues by 9% to $42.7 billion. It reported operatingprofits of $3.2 billion, up from $2.4 billion last year, with an operating margin of 7.5% versusthe previous year’s 6.1%.
FedEx Express increased Q4 revenues by 3% to $6.8 billion while its operating profit dropped 34%to $281 million, leaving the margin at 4.1%, down from 6.5% 12 months earlier. Excluding theaircraft charge, its operating profit was down 3% at $415 million. Key trends were lower volumesbut higher yields both internationally and in the USA, and a move from premium to deferred productsthat is expected to continue in the coming year. For 2011-12 as a whole, FedEx Express revenuesgrew by 8% to $26.5 billion and its operating profit improved 3% to $1.26 billion, leaving theprofit margin fractionally lower at 4.8%.
In the USA, Q4 domestic revenue per package grew 6% due to higher rate per pound, the growth ofthe premium FedEx First Overnight service and fuel surcharges, while average daily package volumedeclined 5%.
FedEx international priority (IP) revenue per package grew 3% due to higher package weights andfuel surcharges, while average daily package volume decreased 3% driven by year-over-year declinesfrom Asia. IP freight pounds increased 3%, while revenue per pound decreased 4% due to lower rateper pound. In total, IP package and freight pounds increased 2% and revenue decreased 1%year-over-year. IP revenue growth was affected by a lower-yielding mix of services, consisting ofgrowth in deferred services and declines in premium services.
Mike Glenn, executive vice president of market development, told analysts on a Q4 conferencecall that Asia volumes had dropped largely due to technology customers changing their productlaunch approaches while FedEx Express CEO Dave Bronczek commented that there had been a shift fromair express to ocean freight in Asia along with a move from premium to deferred products.
Europe, however, had continued to out-perform, executives said. “We have seen very good resultsfrom our European business,” Bronczek commented. “Europe is very profitable.” CFO Alan Graf addedthat alongside the French and Polish acquisitions, FedEx had “very aggressive” organic growth inEurope, was gaining customers and was “probably more bullish (about Europe) than others”.
In the coming year, FedEx Express expects higher international revenues but lower US domesticrevenues. A major restructuring of the US express operation to reduce cost levels will be unveiledin October.
CEO Fred Smith stressed to analysts that the domestic US express business could not be seen inisolation but as part of a global express market and also as part of the overall US domesticexpress and parcels market, where FedEx is active through its Express and Ground businesses. Healso highlighted the fast growth of the freight forwarding business, FedEx Trade Networks, butplayed down any need for FedEx to expand the size of the business through acquisitions.
Meanwhile, FedEx Ground improved its profit margin to a record 20% in Q4, up from a high 18.4%last year. The division increased revenues by 9% to $2.48 billion and increased operating profitsby 18% to $494 million. Over the full year, it increased revenues by 13% to $9.6 billion, improvedprofits by 33% to $1.8 billion and pushed the margin up to 18.4% from 15.6%.
FedEx Ground achieved the record Q4 figures due to higher volumes, driven mostly by B2B and homedeliveries, and higher yields. The core Ground product increased volumes by 3% and revenue perpackage by 5%. FedEx SmartPost, which targets lighter e-commerce orders, increased average dailyvolume by 16% and its revenue per package rose 7% due to higher rates.
The US trucking business FedEx Freight increased Q4 revenues by 7% to $1.4 billion and nearlydoubled operating profits to $81 million primarily due to higher yield, volume growth and continuedimprovements in operational efficiencies.
Looking ahead, FedEx projects earnings of $1.45 to $1.60 per diluted share in Q1, 2011-12, and$6.90 to $7.40 per diluted share for fiscal 2013, excluding the effects of the forthcoming costreduction programmes. It forecasts U.S. GDP growth of 2.2% and world GDP growth of 2.6% during thefiscal year.
“We are focused on improving margins in all businesses, although we face certain cost increasesin fiscal 2013,” said CFO Alan Graf. “These headwinds include higher employee-related costs,including higher pension expenses of approximately $150 million due to a historically low discountrate on our May 31, 2012 measurement date, as well as higher depreciation costs. We expect tomitigate these challenges by reducing costs and improving efficiencies, and are continuing toevaluate additional actions to substantially improve FedEx Express margins.”
