FedEx Corp. has reported solid earnings growth in the second quarter of its fiscal 2016 financial year, driven by improved base yields and e-commerce growth.
Adjusted operating profits for the July-September 2015 quarter, totalled $1.20 billion compared to $1.02 billion a year earlier with the group's operating margin rising to 9.6% from 8.6%.
Revenue increased to $12.5 billion from $11.9 billion and the adjusted net profit increased to $729 million against $622 million.
Operating results rose year-over-year primarily due to higher base rates and the continued positive impacts from profit improvement initiatives. These benefits were partially offset by lower-than-anticipated volume at FedEx Freight and the modest negative net impact of fuel.
"FedEx Corp. posted solid earnings despite continued weakness in industrial production and global trade, and we are making impressive progress toward our goals to increase margins, earnings per share, cash flows, and returns on invested capital,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer said in a statement.
“A record number of holiday shipments – fuelled by the steady rise of e-commerce – are flowing through the FedEx global networks, and we greatly appreciate the dedication of our 340,000 team members around the world who are delivering outstanding service to our customers,” he added.
Speaking yesterday at a conference call on the Q2 results, Smith revealed that on Monday (15 December) FedEx had picked up over 26 million packages globally.
Executive Vice President, Market Development and Corporate Communications, Mike Glenn, confirmed that the "record-breaking demand during the peak season" was being largely driven by the rapid growth in by e-commerce.
"Our busiest days in peak have exceeded our forecast with more than double our average daily volume. And it should be noted that our busiest days this year are approximately double what they were just about eight years ago," he said.
Smith remarked that it was no secret that e-commerce was changing the dynamics of the transportation industry and driving remarkable growth.
"We have strategic plans to ensure that we will continue to benefit in the years ahead from this growth. For example, we're integrating Ground and SmartPost facilities and line-haul systems to realise incremental operating expense savings in the future."
Returning to the second quarter results, the FedEx Express segment reported revenue of $6.59 billion, down 6% from last year. But operating income was up 26% to $622 million while operating margin increased from 7.0% to 9.4%.
Revenue decreased due to lower fuel surcharges and unfavourable currency exchange rates which more than offset base yield growth.
Operating results improved due to higher base pricing and the benefits from profit improvement program initiatives. Fuel and currency exchange rate changes had a minimal combined net impact on the quarter, as the favourable net impact of currency exchange rate changes was partially offset by the slightly negative net impact of fuel.
Despite contraction of US exports and the higher US dollar and low world GDP and trade growth, the overall market for international door-to-door express continues to increase, also driven by e-commerce, Smith underlined.
"We will exceed the profit improvement programme at FedEx Express this fiscal year and the aircraft fleet modernisation programme is paying off in a big way," he said. "Express' margins are going up and they are going to continue to go up. Express is in a sweet spot."
This was echoed by Express CEO Dave Bronczek, who remarked: "If you remember, our Express profit improvement plan was driven mostly by structural cost initiatives and not as much on the revenue. That being said the revenue has been better. We've had better yield management. But again we've had terrific performance in our fleet. The fleet is flying at 99% plus reliability and the fuel savings have been great and of course reliability is all around the world.
“And then there's our productivity: we've right-sized our US operations….throughout the United States and really, on the global basis, the traffic that we're moving on the International Economy is growing and is very profitable for us now us because we have it in the right network,” Bronczek added.
"So, we are very optimistic about profit improvement going forward. It just continues to grow and increase. We hit a 9-year high in our margins at Express and those will continue to grow as will our profits."
As for other segments of the business, FedEx Ground reported revenue of $4.05 billion, up 32% while operating income rose 13% to $526 million. Revenue increased due to the inclusion of GENCO results, higher ground volume and base rates, and the recording of FedEx SmartPost revenues on a gross basis versus the previous net treatment. FedEx Ground average daily volume grew 9% in the second quarter, primarily driven by growth in e-commerce.
FedEx Freight reported second quarter revenue of $1.55 billion, down 2% from last year with operating income down 10% to $101 million. The revenue decline was due to lower fuel surcharges which more than offset base rate and volume growth.
Commenting on the Q2 results and outlook, FedEx's executive vice president and chief financial officer Alan B. Graf, Jr., said: “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.”
