A 12% rise in Express profits and slightly better Ground and Freight profits drove higher underlying profits at FedEx in the final quarter of 2014/15, and the group remains optimistic about prospects for the new fiscal year, including the planned acquisition of TNT.
FedEx today announced adjusted operating profits of $1.28 billion for the March – May 2015 quarter, up 5% on the previous year’s $1.22 billion, with the group operating margin rising fractionally to 10.5%. Revenue increased to $12.1 billion from $11.8 billion due to organic growth and acquisition effects, and the adjusted net profit was flat at $753 million.
The reported figures were heavily impacted by a $2.2 billion charge in connection with changes in pension accounting methods, along with a $228 million settlement in legal cases concerning the former FedEx Ground business model. On a reported basis, FedEx made an operating loss of $1.32 billion and a net loss of $895 million.
Key Q4 factors included base yield growth in the express, ground and freight transportation segments, higher ground and U.S. domestic express volume, and benefits from profit improvement programme initiatives. These improvements offset increased employee variable incentive compensation and unfavourable net impacts from fuel and weather, according to the company.
For the year ending May 2015 as a whole, FedEx made an adjusted operating profit of $4.26 billion, up from last year’s $3.59 billion, while the operating margin improved to 9% from 7.9%. Group revenues increased to $47.5 billion from $45.6 billion, while the adjusted net profit increased to $2.57 billion from $2.19 billion.
"Fiscal 2015 was a transformative year for FedEx with outstanding financial results driving expanded long-term value for shareowners,” said Fred Smith, FedEx Corp. chairman, president and chief executive officer. He also stressed on the Q4 conference call that the group’s profit improvement programme remains on schedule “and we are confident we will reach our goal”.
FedEx Express “had a great quarter” with higher profits despite lower revenues, CFO Alan Graf emphasised. Q4 express revenues dropped 4% to $6.7 billion but adjusted operating profit improved by 12% to $598 million due to cost savings, pushing the operating margin up to 8.9% from 7.6% last year. On a reported basis, including $276 million of impairment and related charges for 15 aircraft retirements and related measures, operating profits dropped 40% to $322 million.
Adjusted segment operating results improved due to higher base yield and U.S. domestic volume growth, the benefit from profit improvement programme initiatives and lower international expenses due to currency exchange rates, the company said. These benefits were partially offset by an unfavourable net fuel impact, higher incentive compensation and a negative impact from weather.
The 4% revenue decline resulted from lower fuel surcharges and unfavourable currency exchange rates that more than offset base yield and volume growth. U.S. domestic package volume grew 2%, driven by a 3% increase in overnight box. U.S. domestic revenue per package declined 4%, with lower fuel surcharges offsetting improved base rates.
International export volume was down 1%, as International Economy grew 3% while International Priority declined 2%. International export revenue per package decreased 8%, as lower fuel surcharges and unfavourable currency exchange rates more than offset higher base rates.
For 2014/15 as a whole, FedEx Express revenues grew slightly to $27.24 billion from $27.12 billion the previous year, adjusted operating profits increased to $1.58 billion from $1.43 billion, and the operating margin improved to 5.8% from 5.3%. US package revenues increased 2.6% to $11.67 billion. International export revenues dropped back 1.5% to $8.55 billion as IP revenues declined by 3.1%, while International domestic revenues were 2.8% lower at $1.4 billion. Freight revenues declined fractionally to $4 billion.
Express CEO Dave Bronczek said FedEx continued to reduce capacity by taking out one transpacific flight in April but underlined that 83% of volumes are still transported as IP shipments on own freighters while deferred shipments using third-party capacity are also profitable. Overall, FedEx Express “is better positioned and better shaped” than before the ‘Great Recession’ of 2008, having transformed its US business, adjusted services and modernised operations, he declared.
CFO Graf said FedEx Express expects higher revenues and earnings in the new fiscal year based on higher yields, and will focus both on revenue quality and cost management.
FedEx Ground’s Q4 revenues increased by 19% to $3.57 billion due to the inclusion of GENCO results and higher ground volume and revenue per package. Ground yield increased 2% due to higher dimensional weight charges and increased rates, partially offset by lower fuel surcharges, while average daily volume grew 5% in the quarter, primarily driven by growth in residential deliveries. FedEx SmartPost average daily volume decreased 1% due to the reduction in volume from a major customer but revenue per package increased 7% due to rate increases and improved customer mix, partially offset by higher postage costs.
The division’s operating profits were flat at $603 million, and the operating margin declined to 16.9% due predominantly to the inclusion of GENCO results and increased self-insurance reserves.
FedEx Freight’s Q4 revenues increased by 1% to $1.57 billion, the operating profit improved by 5% to $137 million and the operating margin operating slightly to 8.7%. LTL revenue per shipment improved 2% due to higher rates from ongoing yield initiatives, significantly offset by lower fuel surcharges, while LTL average daily shipments were flat.
Looking ahead, CEO Fred Smith told analysts that the three announced acquisitions (Genco and Bongo last December, and the planned TNT takeover) “may prove as significant” as the earlier acquisitions of Flying Tigers and Caliber Logistics, and “will fill critical gaps in our portfolio of customer solutions”.
Executive Vice President and chief legal officer Christine Richards said FedEx is preparing to make its formal offer for TNT by the end of this month, in line with Dutch stock exchange rules, and confirmed that the company has been in consultations with the European Commission. “We do not believe this transactions faces any competition issues for the Commission,” she commented. CFO Alan Graf added that the company is already working on TNT integration planning which “is going very well”.
Financially, CFO Alan Graf said the company remains confident for the new fiscal year. “Our operating performance significantly improved in fiscal 2015 as we focused on revenue quality and executed on our profit improvement program initiatives. We expect strong earnings growth in fiscal 2016 as we continue to focus on improving performance and successfully executing our profit improvement initiatives.”
FedEx projects adjusted earnings of $10.60 to $11.10 per diluted share before year-end mark-to-market pension accounting adjustments in fiscal year 2016, driven by continued improvement in base pricing and benefits from the profit improvement programme. The outlook assumes continued moderate economic growth and does not include any operating results or costs related to TNT Express.
