FedEx today reported improved first-quarter results including significant increases in itsexpress and group-wide operating profits, despite a drop in express revenues and continuing “tepid”
global economic growth, and also announced higher US express rates.FedEx Express will increase shipping rates by an average of 3.9% for US domestic, US export andUS import services, effective 6 January 2014, the company said.
Noteworthy trends in the Q1 results included double-digit demand growth for economy expressservices as customers continued to trade down from premium express products, along withdouble-digit revenue and volume increases for FedEx’s Ground services in response to the continuinge-commerce boom.
Group revenue for the first quarter to 31 August increased 2% to US$11.0 billion (€8.2 billion),with operating income up 7% to $795 million and net income also growing 7% to $489 million.Operating margin rose to 7.2%, up from 6.9% in the same period the previous year.
The company said revenue and earnings increases during the quarter had been driven by “solidperformances” at each of the company’s transport segments, although the results included “significant headwinds” from the net year-over-year impact from the timing lag when fuel pricesincrease and indexed fuel surcharges automatically adjust, as well as one fewer operating day.
The group’s FedEx Express segment reported revenue of $6.61 billion, down slightly from lastyear’s $6.63 billion, which it said was due to lower fuel surcharge revenues and the one feweroperating day. However, operating income of $236 million was up 14% from $207 million a year ago,generating an operating margin of 3.6%, up from 3.1% the previous year.
US domestic average daily package volumes increased 1% while US domestic revenue per package wasessentially flat, as higher rates per kilogramme and weight per package were offset by lower fuelsurcharges.
Average daily volumes for FedEx international exports grew 4% during the quarter, as thecompany’s International Economy (IE) product grew 15% while FedEx International Priority (IP)volumes slightly declined. International export revenue per package fell 4%, primarily due to lowerfuel surcharges, lower rates and the demand shift to lower-yielding international services.
Dave Bronczek, president and chief executive officer of FedEx Express, told analystsand journalists today that, during the quarter, the company had further reduced its air capacitycoming out of Asia, reducing flight hours and fuel costs. As part of profit-improvement initiativesannounced last October, he said the business had made great progress in routeing IP and IE volumesinto the most appropriate network and capacity, shifting lower-yielding shipments into the group’sFedEx Trade Networks (FTN) business.
He commented: “I feel very good about where we are with that. We are doing a great job of movingthe lower-yielding IE into the FTN network, and we have not affected service whatsoever.”
He said one of the benefits had been that the company no longer had to put a cap on the level ofIE volumes it accepts, allowing it to take advantage of the growth in demand for this type ofservice.
Despite being constrained by the fuel surcharge timing lag and one fewer operating day, FedExsaid its express operating results improved due to better base US business performance and lowerpension expenses. It said the continued modernisation of the company’s aircraft fleet drovemaintenance costs lower, partially offset by higher related depreciation expenses.
FedEx Ground reported revenue of $2.73 billion, up 11% from last year’s $2.46 billion. Operatingincome of $468 million was up 5% from $445 million a year ago, with operating margin of 17.1%, downfrom 18.1% the previous year.
FedEx Ground average daily volumes grew 11% in the first quarter due to continued growth in bothFedEx Home Delivery and commercial business services. Revenue per package increased 1% due toincreased rates and higher residential surcharge revenue, partially offset by lower fuelsurcharges.
FedEx said average daily volumes of its SmartPost product increased 26%, primarily due to growthin e-commerce. FedEx SmartPost net revenue per package decreased 5% due to increased postage ratesand lower fuel surcharges, partially offset by rate increases.
Operating income increased due to higher volume and revenue per package, partially offset by thenet negative impact of fuel, increased network expansion costs and one fewer operating day.Operating margin decreased due to the net negative impact of fuel.
FedEx Freight reported revenue up 2% to $1.42 billion, with operating income growing 1% to $91million. Operating margin of 6.4% was unchanged from the previous year. Less-than-truckload (LTL)yield increased 1% due to FedEx Freight Economy and FedEx Freight Priority base yield improvements.LTL weight per shipment grew 1% due to heavier FedEx Freight Priority, while LTL average dailyshipments increased 1% due to FedEx Freight Economy. Operating income improved due to higher weightper shipment, yield and average daily shipments, overcoming the impact of one fewer operatingday.
The company said that almost half of the employees who had accepted voluntary buyouts in itsprofitability-improvement programme, primarily within FedEx Express, had now vacated theirpositions, with the remainder expected to do so by the end of this financial year. As a result, itestimated that it would make total estimated savings on an annualised basis of around $600 millionby the end of the financial year, putting it ahead of target in its 1.6 billion profit-improvementprogramme.
However, CFO Alan Graf said that some of the remaining planned savings may have to beaccelerated during the latter part of the restructuring programme, “and may be more on the costside than the revenue side. We are looking at a different revenue outlook for express than we were11 months ago, with more IE and less IP,” he said.
The company also announced that FedEx Express would increase shipping rates by an average of3.9% for US domestic, US export and US import services, effective 6 January 2014, and said FedExGround and SmartPost pricing changes for 2014 would be announced later this year. FedEx Freightimplemented a 4.5% general rate increase on 1 July 2013.
In terms of the wider outlook for the group, FedEx reaffirmed its forecast of full-yearearnings-per-share growth of 7% to 13% from last year’s adjusted results, assuming the currentmarket outlook for fuel prices, US GDP growth of 2.1% and world GDP growth of 2.6%. The companyalso confirmed its capital-spending forecast for fiscal-year 2014 remained $4 billion.
Graf concluded: “We remain confident in our full-year earnings outlook despite tepid globaleconomic growth. FedEx Express continued to execute on its profit improvement initiatives duringour first quarter. We remain focused and are committed to FedEx Express achieving its $1.6 billionoperating profit improvement target by the end of fiscal 2016.”
