FedEx notes volume increases, higher rates in earnings call

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Shrugging off any potential disruption due to trade war, FedEx Corp. executives were upbeat about the outlook for 2019 for both the general economy and FedEx’s operating units during its fiscal 2018 fourth-quarter and year-end earnings call on Tuesday.

“We remain concerned about the threats to free trade,” Fred Smith, chairman & CEO, said in his opening statements. “Trade is a two-way street and FedEx supports lowering trade barriers for all our customers.”

David Bronczek, president & COO, added that he was confident that even if a trade war develops, FedEx’s business model and flexibility would allow it to adjust accordingly.

Smith noted that industrial strength continues to drive higher fright margins as FedEx Corp. (NYSE: FDX) benefited from higher base rates and volume increases across its networks in posting fourth-quarter revenue of $17.3 billion and net income of $1.13 billion, up from $1.02 billion a year ago. For full-year fiscal 2018 (June 1, 2017 to May 31, 2018), FedEx posted net income of $4.57 billion on revenues of $65.5 billion, up from $3.0 billion and $60.3 billion in 2017.

According to Thomson Reuters, analysts were expecting fourth-quarter revenue of $17.25 billion compared with $15.78 billion a year ago. The company reported adjusted EPS of $4.15 a share, versus $3.75 in last year’s fourth quarter. Adjusted earnings were $1.60 billion, or $5.91 per share, up 41% year-over-year, said Alan Graf Jr., CFO. Full-year adjusted EPS was $15.31, up 27%.

Graf added that fiscal year 2019 should return adjusted earnings of between $17.00 and $17.60 per share. It’s effective tax rate will rise slightly over 2018 to about 25% because of one-time adjustments available in 2018.

In its earnings, FedEx said that due to new pension accounting rules that will be in effect for fiscal 2019, it could not provide an accurate operating margin forecast for 2019. The rule changes will not affect net income or earnings per share, it said. For 2019, FedEx expects revenue growth of 9% and an operating margin of about 7.9% and capital spending of $5.6 billion.

“Our fiscal 2019 results will benefit from our continued focus on revenue quality as well as from synergy realization as we make progress in combining TNT Express with FedEx Express,” said Graf. “We expect improved earnings, cash flows and returns this fiscal year and remain committed to improving operating income at the FedEx Express segment by $1.2 to $1.5 billion in fiscal 2020 versus fiscal 2017.”

FedEx stock closed down $5.26 yesterday at $258.39. The earnings were announced after the markets closed.

The company said that higher salaries for hourly employees offset some of the benefits from higher rates and volumes, but it also benefited from $2.1 billion tax benefits, including a $1.6 billion benefit from the Tax Cuts and Jobs Act (TCJA), which has three primary components: ̶

 A provisional benefit of $1.15 billion ($4.22 per diluted share) from the remeasurement of the company’s net U.S. deferred tax liability for lower tax rates; ̶ A benefit of approximately $200 million ($0.75 per diluted share) from an incremental pension contribution made in the third quarter and deductible against the company’s prior year taxes at 35%; and ̶ A benefit of approximately $265 million ($0.97 per diluted share) attributable to the phase-in of the reduced tax rate applied to the company’s earnings.

  • A net benefit of $255 million ($0.94 per diluted share) from corporate structuring transactions as part of the ongoing integration of FedEx Express and TNT Express; and
  • A benefit of $225 million ($0.83 per diluted share) from foreign tax credits associated with distributions to the U.S. from the company’s offshore operations.

Capital spending for fiscal 2018 was $5.7 billion, about 8.7% of revenues. That will drop to about 8% of revenue in 2019, the company said.

Rajesh Subramaniam, executive vice president, chief marketing and communications officer, said the company is expecting U.S. GDP to finish 2018 at 2.9% and dip slightly to 2.7% in 2019. Globally, it will also dip, but only from 3.2% to 3.1%.

As noted throughout its earnings results, FedEx was able to benefit from growth in industrial production, which it expects to rise 3.8% this year. Consumer spending will increase 2.7%, Subramaniam said. The CMCO also noted that the company’s U.S. domestic package business increased 4% and international package volume grew 10%.

Among its operating segments, FedEx Express posted revenues for fiscal 2018 of $9.6 billion and an operating margin of 10.3%. Operating income was up 11% year-over-year to $990 million. The results included a 9% increase due to higher yields and favorable net impact of fuel and currency exchanges, the company said.

FedEx Ground said higher daily package volume of 6% and higher base rates leading to a 12% increase in revenue and 18% increase in operating income. Fiscal 2018 income was $832 million on revenue of $4.80 billion. The company did not that higher purchased transportation costs offset the revenue growth and ongoing cost management efforts. It also increased staffing in the division.

Within FedEx Freight, a 35% climb in operating income from $130 million to $175 million was the result of an 8% increase in both daily shipping and revenue per shipment. Revenue for the unit was $1.86 billion, up 16% from $1.60 billion.