FedEx details China comeback in otherwise cloudy earnings outlook

By , Daily Memphian Updated: March 18, 2020 3:33 PM CT | Published: March 17, 2020 3:14 PM CT

Editor’s note: Due to the serious public health implications associated with COVID-19, The Daily Memphian is making our coronavirus coverage accessible to all readers — no subscription needed.

FedEx officials say they don’t know how the coronavirus will affect the next earnings cycle, but they’re confident the Memphis-based company will be at the forefront of relief and recovery efforts.

“FedEx is one of the few companies in the world that has the network and capability to keep commerce and aid moving during this time,” said Raj Subramaniam, president and chief operating officer.

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“We are keenly aware of this fact and the role we play, and we view it as our duty and responsibility to continue supporting our customers and communities in a safe and effective manner,” Subramaniam continued.

Chief marketing and communications officer Brie Carere said, “The coronavirus and the efforts to contain it represent an unprecedented challenge that we are evaluating and addressing daily.

“We are uniquely positioned to lead in both the relief and the recovery effort,” Carere said. “We are on the front lines of the relief effort, prioritizing the handling of medical and humanitarian supplies for our customers and nonprofits, while also supporting our existing customers.”

Their comments came after FedEx on Tuesday, March 17, reported adjusted earnings of $1.41 a share for a December-February quarter that was hurt by coronavirus in China and helped by growing e-commerce in the U.S. and Europe. Adjusted earnings a year ago was $3.03 a share. 

After the virus locked down much of China and its manufacturing base for a couple months, its spread to Europe and the U.S. now poses major uncertainty for FedEx’s results next quarter and beyond.

The company broke with longstanding tradition and declined to issue a forecast of what full-year earnings might be for fiscal 2020, which ends May 31, or the following fiscal year.

But some analysts had already suggested FedEx would be wise to skip the earnings forecast, to avoid setting unrealistic expectations for investors. As of three months ago, the company had reduced annual profit estimates for five consecutive quarters.

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Results came in below a $1.69 a share consensus estimate by Zacks Investment Research but matched a $1.41 a share consensus estimate by FactSet. Revenue beat estimates, coming in at $17.5 billion compared to $17 billion a year ago.

During an earnings call with analysts, FedEx executives reported seeing renewed strength in the Chinese economy at a time when Europe is sagging and e-commerce orders are generating robust business in the U.S.

While acknowledging coronavirus is deadly serious, officials downplayed the chances of the pandemic throwing the country into recession or slowing the e-commerce revolution that FedEx is positioning to serve.

“Obviously, you’re talking about one of our scenarios that’s way down in the realm of likelihood or possibility as of today, but we still have to have it,” executive vice president and chief financial officer Alan B. Graf Jr. told an analyst who asked about recession.

“From my point of view, (as) a company that’s best positioned to continue to keep global supply chains up as we fight this virus and then rebound from it, I think we’re in great shape in that regard. It just depends on how long it lasts and how much demand there is.

“But there’s going to be demand. People are going to be needing medical supplies. People are going to be needing to eat. People who run businesses are going to run businesses, and they’re going to rely on us to help them with their supply chains. I’m confident in that,” Graf said.

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Coronavirus in China was among factors dampening third quarter earnings, along with costs of retooling FedEx Ground as a seven-day-a-week network, loss of Amazon business and other items.

On the positive side of the ledger were volume growth at FedEx Ground, which is absorbing FedEx SmartPost packages from the Post Office, higher yields at FedEx Freight and Cyber Week’s move into December, which was a drag on last quarter’s earnings.

Carere, also executive vice president, estimated China’s manufacturing base is back up to 65%-75% of capacity and growing, with large manufacturers probably 90%-95% back.

Reductions in trans-Pacific passenger flights severely slashed belly capacity for cargo during the worst of the epidemic in China, leaving FedEx in position to pick up business when the factories came back to life.

“Coronavirus impact in February resulted in factories being shut down in Asia and lowered volumes on FedEx network as a result. These numbers are reflected in our third quarter earnings,” Subramaniam said.

“However, while manufacturing has started to come back, belly capacity on passenger airlines continues to be severely constrained. In contrast, FedEx flew 246 flights in and out of China just last week, which is in line with our normal flight schedule,” Subramaniam said.

“For the past couple weeks, our flights have been full, and we have registered record load factors intra-Asia, especially with our hub in Guangzhou,” he said.

Likewise, FedEx would be available to fill a void in cargo capacity that’s being created by cancellation of passenger flights between Europe and the U.S., which normally carry about 60% of trans-Atlantic air cargo. The question is what the air freight demand will be between Europe and the U.S.

“What we do not know now is how this pandemic evolves and what happens to demand,” Subramaniam said.

“For instance, we do not know how Europe demand is going to come through as a lot of their manufacturing has shut down there. There are so many unknowns now. As Alan said, the first two weeks of March were good, but there’s no way for us to predict what the next few weeks hold for us.”

Graf added, “We are really managing this business almost on a day-to-day basis. We might think we know what’s going to happen in the next week, but I have to tell you, every 24 hours something new happens. Europe had been doing well, now it seems that Europe and the UK have shut down a little bit more and the demand is going to be a little bit less than I would have told you three days ago.

“We can’t tell you about Asia. It’s the same thing. Is this a bubble, or is this going to continue?” Graf said.

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On the home front, FedEx Ground revenues grew 11% in the December-February quarter, FedEx Freight had a strong quarter, and the company’s push to connect retailers to online shoppers continues.

“Currently, our FedEx Ground volumes are strong,” Carere said. “Our largest retail customers’ volumes are rising as social distancing efforts are encouraging consumers to shop from home.”

Smith said he expected slower global economic growth and international trade and more talk about replacing business travel with technology fixes because of coronavirus. But he doesn’t see it derailing the growth of e-commerce or FedEx’s move to take advantage of it.

“We leaned into it, painfully,” Smith said. “We said at the beginning of this year this would be a year of challenge and change, and now you have the coronavirus on top of it. ... I think the e-commerce revolution will continue, and we plan to be a big part of that.”

In a quarterly report filed with the Securities and Exchange Commission, FedEx listed coronavirus among risk factors.

It said in part, “An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition,” it said.

The earnings report, covering Dec. 1, 2019 through Feb. 29, 2020, came as FedEx filed a regulatory notice about credit agreements totaling $3.5 billion. A five-year, $2 billion credit agreement dating to last March 22 was amended and restated, and a new $1.5 billion, 364-day credit agreement was reached.

FedEx was part of an Airlines for America request for an aid package from the federal government. The industry group asked Monday for a $50 billion package.

“We’re part of the A4A group that submitted our request via them to government about some liquidity support,” Graf said. “We have a a doomsday scenario where we definitely can cut as much capex (capital spending) out of 2021 as we need to. I don’t think we’re going to hit that. I think our cash flows are going to be strong. I can’t tell you that until we get through the coronavirus, and nobody knows when that’s going to be,” he said.


FedEx coronavirus earnings shipping industry
Wayne Risher

Wayne Risher

Business news reporter, 43-year veteran of print journalism, 35-year resident of Memphis, University of Georgia alumnus and proud father and spouse of University of Memphis graduates.


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