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FedEx cites TNT acquisition, flexibility in confident earnings forecast

By Updated: September 18, 2018 6:00 PM CT

FedEx leaders stood strong Monday in the face of tariff threats, Amazon delivery plans and lower-than-expected, but robust quarterly profit growth.

Another record holiday season peak is coming, and the company is being strengthened by a TNT Express network, acquired in 2016, that improves reach into Europe, the Middle East and South America.

"We are very optimistic about our prospects for profitable growth and remain confident we will reach our goal to improve FedEx Express operating income by $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017," chairman and chief executive officer Frederick W. Smith said.

Adjusted earnings for the June-August quarter were up about 38 percent, to $3.46 a share, although they missed Wall Street's expectation of $3.82 a share. Earnings a year ago were $2.51 a share.

The company said results benefited from higher volumes, increased yields, fuel costs and a lower statutory income tax rate as a result of the Tax Cuts and Jobs Act.

The biggest reason for the miss? FedEx paid employees more money.


"We are very optimistic about our prospects for profitable growth and remain confident we will reach our goal to improve FedEx Express operating income by $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017."
Frederick W. Smith, chairman and chief executive officer


That's good news for approximately 30,000 FedEx workers in Greater Memphis, out of 425,000 globally.

“As expected, the quarter’s results were affected by our decision to invest in our team members following the passage of the Tax Cuts and Jobs Act,” executive vice president and chief financial officer Alan B. Graf Jr. said.

"Higher variable compensation accruals and accelerated wage increases negatively affected results this quarter by $170 million or 48 cents per diluted share," Graf said.  “All of our transportation segments' operating margins would have been up year over year excluding these impacts.

“We remain committed to increasing earnings, margins, cash flows and returns this year,” Graf added.

Although FedEx missed on earnings, it’s important to note that $17.1 billion in revenues beat expectations, said Trip Miller, managing partner of Gullane Capital Partners.

"It is very difficult to precisely predict earnings per share, however, as the company is still in the midst of integrating a very large acquisition, TNT Express," Miller said. "We instead focus on the growth of their business, both domestically and internationally. They’re a wonderful bellwether for the U.S. economy, if not the global economy, and they continue to show strength across all their business segments.

"We like the fact that they’re reinvesting in their business, but they’re finding ways to cut costs and improve their margins,” Miller said. “FedEx seems to be firing on all cylinders among their different business segments, and their assessment of value and how they’re returning capital to investors seems to confirm that," he said.

The company increased its full-year earnings forecast by 20 cents a share, to a range of $17.20 to $17.80 a share, before year-end retirement plan accounting adjustments and integration expenses from the TNT Express acquisition.

The earnings release came amid new threats by President Trump to slap $200 billion in tariffs on Chinese imports. It also brought the usual questions from analysts about e-commerce giant Amazon's continuing push to build out its own package delivery network.

The business that FedEx carries for Amazon and between the U.S. and China accounts for a very small share of revenues, company officials said Monday. FedEx took in $65.5 billion in the fiscal year ending May 31 and is projected to hit $70 billion this year.

Less than 2 percent of FedEx's revenue comes from China-U.S. traffic, and the latest proposal by President Trump might affect one-fourth of that traffic, said Raj Subramaniam, executive vice president, chief marketing and communications officer.

"Current tariffs impact a small portion (less than 10 percent) of our volume coming out of China," Subramaniam said. "However, the uncertainty surrounding the issue is not helping, and thus has a broader impact on the market. It's very difficult to predict the future course of tariff implementation.

“We're monitoring the situation very carefully and we'll adjust our strategies according to market conditions,” Subramaniam said. “Clearly, we continue to support lower trade barriers for all our customers.”


"Current tariffs impact a small portion (less than 10 percent) of our volume coming out of China. However, the uncertainty surrounding the issue is not helping, and thus has a broader impact on the market. It's very difficult to predict the future course of tariff implementation.
Raj Subramaniam, FedEx executive V.P., chief marketing and communications officer


Asked if customers are shifting supply chains because of tariff concerns, Subramaniam said the company has not seen any significant shifts, but if the situation continues for some time, FedEx expects customers to diversify supply chains, which could change trade patterns.

"The good news here is that FedEx has got a large, unparalleled global network that can flex and adjust and support our customer needs as they make their changes," Subramaniam said. "I want to reemphasize the point that was made earlier by Alan and several others that the scale and flexibility of FedEx will enable us to deliver strong results over the enterprise despite any uncertainty on trades and tariffs."

Smith reiterated the belief that the company is capable of rolling with the punches of a trade war.

Smith called a U.S.-China trade dispute "worrisome to everyone. And the reason it's worrisome is not just because of the individual dispute. It's because history is very, very clear that countries that pursue the most open markets are the ones that prosper the most and whose citizens' incomes increase the most. Mercantilism does not work. There's example after example of it. People that try to manage economies, particularly worldwide economies from a central perspective, cannot do so.

"I think that at the end of the day, history shows that people want to travel and trade," Smith said, and the proliferation of digital devices has well equipped people around the world to pursue those two goals.

"As all of us have said to you today, we're very optimistic about the company and feel that we're flexible enough and deft enough to deal with whatever the marketplace might bring us," Smith said.

On the subject of Amazon, Subramaniam said the retailer is a longstanding customer but smaller than 3 percent of FedEx's total revenue.

"While there is significant media interest in what Amazon is doing to expand their insourced delivery capability, this should not be confused as competition with FedEx," Subramaniam said. "The global infrastructure, the technology, the capability and knowledge that are needed to compete in our business are quite extraordinary and we have built that up over 40-plus years."

One more reason for optimism is the forecast for another lucrative holiday shipping season between now and year's end.

FedEx last week announced it would hire 55,000 workers to help with peak season, and that it would expand FedEx Ground to a six-day-a-week operation permanently. Both moves are tied to growing digital commerce. FedEx Ground, the domestic parcel delivery unit, carries much of the peak season load.

"FedEx anticipates record amounts of volume this year like we had last year," said FedEx president and chief operating officer David J. Bronczek. "The four Mondays in December will all be record volumes for FedEx. So we anticipated that already and have been working on it all year."

Regarding new hires for peak season, Bronczek said, "A majority of these team members will stay on with FedEx after the holiday peak, they'll become permanent employees of FedEx."



Topics

Fedex Corp. Fred Smith Alan B. Graf Jr. Raj Subramaniam Trip Miller
Wayne Risher

Wayne Risher

Business news reporter, 42-year veteran of print journalism, 34-year resident of Memphis, University of Georgia alumnus and proud father and spouse of University of Memphis graduates.


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