FedEx today reported strong growth in its Q2 operating and net profits thanks to higher volumesand base yields in all three of its transport segments along with benefits from its profit
improvement programmes, lower pension expenses and a slightly positive net impact from fuel.The company has also announced its second acquisition this week, with the takeover of US-basedBongo International, a leader in cross border-enablement technologies and solutions, to expand itsportfolio for the rapidly growing global e-commerce marketplace.
In the September – November 2014 quarter the effects of the profit improvement programmes wereparticularly apparent within FedEx Express, where the division’s operating margin rose by almostone third. However, FedEx Ground saw a slight decline in its operating margins, due in part to adelayed US peak season because of retail stock issues caused by US west-coast port congestion.
Group revenue was up 5% to $11.9 billion, while operating income rose 22% to $1.01 billion, upfrom $827 million last year. The group operating margin rose more than 16% to 8.5%, up from 7.3% ayear ago, while net income grew by 23% to $616 million.
FedEx said the benefits from the company’s profit improvement programmes, lower pension expenseand fuel were partially offset by higher aircraft maintenance expense due to the timing of aircraftmaintenance events.
FedEx Express reported revenue of 2% to $7.02 billion, with operating income rising 36% to $484million. The division’s operating margin rose by more than 32% to 6.9%, up from 5.2% the previousyear.
Revenue increased due to higher US domestic package volumes and international export packagebase revenue, partially offset by lower fuel surcharges and exchange rates. US domestic packagevolumes grew by 7%, including a 10% increase in US ‘overnight box’ volumes. However, US domesticrevenue per package declined 2% due to decreased fuel surcharges and lower average shipmentweight.
FedEx International Economy volume grew 5%, while FedEx International Priority volumeincreased 1%. International export revenue per package was flat, as higher rates were offset byunfavourable currency exchange rates and lower fuel surcharges.
FedEx said the division’s operating results improved primarily due to US domestic andinternational export package revenue growth, cost management related to profit improvementprogrammes, lower pension expense and a slight net benefit from fuel. These improvements werepartially offset by the timing of higher aircraft maintenance expense, the effects of which areexpected to subside beginning in the fourth fiscal quarter.
FedEx Ground reported second-quarter, revenue of $3.06 billion, up 8% from last year’s $2.85billion. Operating income rose 6% to $465 million, although the operating margin dropped to 15.2%,down from 15.4% the previous year.
FedEx Ground average daily volume grew 5% in the second quarter, driven by growth in bothbusiness-to-business and FedEx Home Delivery services. Revenue per package increased 3% due to rateincreases and higher residential surcharges. FedEx SmartPost average daily volume decreased 4% dueto the reduction in volume of a major customer, although revenue per package increased 7% due torate increases and improved customer mix, partially offset by higher postage rates.
Operating income increased due to higher revenue per package and volume, partially offset byhigher network expansion costs, as the company continues to heavily invest in the FedEx Ground andFedEx SmartPost businesses.
Meanwhile, FedEx Freight saw revenue climb 11% to $1.59 billion, with operating income rising35% to $112 million. Operating margin rose around 22% to 7.1%, up from 5.8% the previous year.Less-than-truckload (LTL) average daily shipment volumes increased 8%, including a 10% increase indemand for Priority service. LTL revenue per shipment grew 3% due to higher weight per shipment,higher rates and increased fuel surcharges.
Chairman, president and CEO Fred Smith said that delays associated with west-coast portcongestion and go-slows had disrupted the supply chains of a number of retailers, lowering theamount of peak season traffic for FedEx Ground during November. As a result of the lower thanexpected activity in November, some of the peak season preparations had exceeded demand,contributing to the margin decline at FedEx Ground.
Smith said that he expected retailers in January to reveal that the west-coast port disruptionshad been a much bigger factor than initially thought, leading to high levels of “not in stock”situations. Attempts by retailers to get around the west-coast port situation had meant that sometraffic had been routed through the east coast, requiring different solutions.
While there had been some conversion from sea freight to air freight, Smith said that this hadnot happened on a wholesale basis, partly because retailers had not only became aware of thepotential for significant disruption until late in the cycle, in November. But he said there wouldnot be any large-scale structural shift to air, because the margins for products such as garmentscould not support that.
Instead, disruptions had led to delays of one or two weeks to shipments, which had significantrepercussions for retailers. The company said that some of this activity was expected to take placein December, with some potentially deferred to January.
Commenting on the results overall, Smith said: “FedEx posted strong results and a higheroperating margin in the second quarter, with continued growth in volumes and base yields in each ofour transportation segments.”
The company reaffirmed its fiscal 2015 earnings forecast of $8.50 to $9.00 per diluted share.The outlook assumes continued moderate economic growth and a modest net benefit from fuel, with thecapital spending forecast for fiscal 2015 remaining $4.2 billion.
Meanwhile, FedEx also announced that it has acquired Bongo International, a leader in crossborder enablement technologies and solutions. Bongo International’s capabilities would “complementand expand the FedEx portfolio of offerings important to the rapidly growing global e-commercemarketplace”, it said.
Bongo International’s technology and processes provide a comprehensive and integrated end-to-endsolution that helps retailers and e-tailers grow by reaching international e-commerce consumers,FedEx explained. Bongo International’s capabilities include duty and tax calculations; exportcompliance management; HS classification; currency conversions; international payment optionsinclusive of language translation; shopping cart management and fraud protection.
With a base of over 2,000 retailers across Europe, the UK and U.S., Bongo International iscurrently delivering cross border enablement solutions to more than 200 countries worldwide.
“We anticipate global e-commerce to continue on a double digit growth trajectory,” said T.Michael Glenn, FedEx Corporation Executive Vice President, Market Development and CorporateCommunications. “Bongo International’s end-to-end cross border enablement capabilities will greatlyenhance the FedEx portfolio of global e-commerce solutions and provide customers with unmatchedflexibility to establish and expand their international business and customer base.”
“Our knowledge and experience within the evolving cross border enablement environment, as wellas our customer-centric culture, is a perfect fit with FedEx. We’re excited about joining theFedEx family,” said Craig Turnbull, Bongo International Co-Founder and Chief Executive Officer. “Our collective cross border and transportation solutions will catapult our customers’ globale-commerce business capabilities.”
Bongo International is headquartered in St. Petersburg, Florida, and will operate as asubsidiary of FedEx Trade Networks.
