FedEx : Q4 FYFY22 Earnings Call Transcript – June 23, 2022

A. Mickey Foster

Vice President, Investor Relations, FedEx Corp.

Good afternoon, and welcome to FedEx Corporation's Fourth Quarter Earnings Conference Call. The fourth quarter earnings release and stat book are on our website at fedex.com. This call is being streamed from our website where the replay will be available for about one year.

Joining us on the call today are members of the media. During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate.

I want to remind all listeners that FedEx Corporation desires to take advantage of the Safe Harbor Provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance, may be considered forward-looking statements within the meaning of the Act. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC.

Please refer to the Investor Relations portion of our website fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.

Joining us on the call today are Raj Subramaniam, President and CEO; Mike Lenz, Executive Vice President and CFO; and Brie Carere, Executive Vice President and Chief Customer Officer. And now, Raj will share his views on the quarter.

Rajesh Subramaniam

President & Chief Operating Officer, FedEx Corp.

Thanking you Mickey and good afternoon everyone. I'd like to start by thanking team FedEx for continuing to move the world forward amid unanticipated challenges. This was most recently displayed during Operation Fly Formula where, in response to the critical shortage rippling across the United States, we have moved hundreds of thousands of pounds of baby formula from Europe to the US. And this weekend, our team will move 52 tons of medical relief to Poland for Ukrainian refugees in coordination with Direct Relief International.

Now, turning to our financials. I'm proud to share that in the face of an increasingly challenging global backdrop, we finished fiscal 2022 with our highest-ever revenue of $93.5 billion and adjusted operating income of $6.9 billion, both up 11% year-over-year. This is a testament to our value proposition and continued execution against our long-term strategy.

As I shared on the last call, we have worked through many network inefficiencies caused by labor shortages. Although wage rates remain higher than this time last year, they are stabilizing. Still, COVID-related conditions slowed global recovery and pressured second-half performance. While Q4 volumes were down year-over-year at all our transportation segments compared to an extraordinary fiscal year 2021, we successfully implemented strategic actions that drove double-digit yield improvement across the board with Express composite yield per package up 20%, Ground up 11% and Freight yield per shipment up 28%. We remain focused on revenue quality as one of the key levers to help offset the ongoing macroeconomic pressures and driving improved margins going forward.

Turning to Express. Even in the face of higher operating expenses related to inflationary pressures, we delivered improved quarterly operating income and revenue. Thoughtful execution of our new revenue management actions has allowed us to overcome headwinds from COVID lockdowns in Asia and geopolitical uncertainty in Europe. At FedEx Ground, we experienced modest revenue growth driven by higher yields as a result of pricing actions and improved volume mix. Volumes declined year-over-year due to efforts to constrain economy volume as well as slower customer demand.

We will continue to leverage opportunities to maximize utilization of existing facilities through operational adjustments including multiple pre-load and relay operations. Ground operating expenses continue to be pressured by higher purchase

transportation and wage rates although we see these pressures stabilizing. We continue to proactively address the labor availability head on through multiple levers. As we increase the frontline retention and refine the recently launched package handler scheduling tool, we'll not only ensure we have the right level of staffing for every sort based on volume, we'll ensure a workforce that is safe, efficient, and highly-engaged to stay and grow with the company.

Additionally, we are implementing several technology-based initiatives that are driving increased productivity in our linehaul and dock operations as well as continuing our efforts to optimize the last mile. We're seeing early benefit from these efforts with productivity of Ground dock operations improving 6% in Q4 compared to Q3.

FedEx Freight once again delivered outstanding results with fourth quarter operating margin of almost 22% driven by a continued focus on revenue quality. A job well done to Lance Moll on his first full fiscal year as Freight CEO and to our Freight and commercial teams for their solid execution.

As you look ahead to fiscal year 2023, we expect the macroeconomic risks both in the US and globally to continue to put stress on supply chains and trade. Brie will cover this in more detail shortly. Let me, though reaffirm confidence in our key strategies. As CEO, my focus is maximizing total shareholder return driven by improved revenue quality, higher margins and a balanced capital allocation strategy, which Mike will provide more color on shortly.

Importantly, our foundational long-term investments have set the stage for another strong year driven by focus on lowering our cost to serve. A great example of where we are going to lower our cost to serve is in Europe. The integrated network and consolidation of many flights into our Charles de Gaulle hub allows us to improve operational efficiency and enhances our network. For instance, since April, the number of European airports we service from CDG increased by 71%, and the number of flights intra-Europe was reduced by 13%. We're confident that actions like this will drive bottom-line improvement in fiscal year 2023.

As we move forward, I'm honored to lead our global team, who enabled FedEx to deliver what's next. And speaking of what's next, we're looking forward to hosting our investors in Memphis in a few days. Our goal for this two-day event is for attendees to leave with a deep understanding of our strategies, including financial targets and priorities and how we plan to execute.

Now, before I turn it over to Brie, I'd like to say a few words about FedEx Express President and CEO Don Colleran, whose 40-year career with FedEx has been nothing short of exceptional. As one of the pioneers of our international business, he helped lay a foundation for the significant growth in that sector of the FedEx portfolio. Since assuming his current role in 2019, he's launched new capabilities for our customers and led our global FedEx Express team through some of the most challenging times, including the COVID pandemic.

As announced in March, Don will move into CEO Executive Advisor role in September of this year in support of Richard Smith's transition to the CEO of FedEx Express and will retire from FedEx in December. Don, we appreciate your service and countless contributions to this company. We wish you nothing but the best in your well-deserved next chapter.

And now, let me turn it over to Brie, who last week was named Chief Customer Officer in a move that aligns several teams under her leadership to give us even greater focus on our commercial strategy and our end-to-end customer experience. So Brie?

Brie Carere

Chief Marketing and Communications Officer & Executive Vice President, FedEx Corp.

Thank you, Raj. It's an honor and a privilege to take on this responsibility to deliver for our customers, and drive quality growth for our shareholders. I'd like to reflect on fiscal year 2022, then drill down to fourth quarter 2022 revenues. Finally, I will discuss the outlook for fiscal year 2023.

Fiscal year 2022 was another year of change for FedEx. The operating environment was quite challenging, requiring flexibility and creativity on the part of our management, staff and front-line team members to ensure we deliver for our customers. I am proud of how our team rose to this challenge. We executed against our commercial strategy and remained intently focused on revenue quality across the business.

In the fourth quarter, our consolidated revenue increased 8% year-over-year. Revenue management actions drove our growth which was partially offset by lower shipment demand. FedEx Ground and FedEx Express generated year-over-year revenue growth of 4% and 6% respectively despite lower volume levels. At FedEx Ground, yield-management actions affecting our FedEx Ground Economy service was the primary factor behind volume declines, with FedEx Ground Economy volumes down 36%.

In contrast, our Commercial and our Home Delivery volumes declined 1% due to macroeconomic conditions. At FedEx Express, COVID lockdowns, geopolitical uncertainty and slower economic growth contributed to package volume declines of 11%. In some areas, we also selectively reduced volume to ensure we could deliver the service that is expected of FedEx.

FedEx Freight had a banner revenue-quality quarter, growing yield at 28%. FedEx Freight's market-leading value proposition combined with the disciplined execution of our sales team drove these exceptional results. The FedEx Freight team continues to do a phenomenal job at managing revenue quality.

Now, let me take a moment to discuss 2023. We anticipated consumers will keep spending, and their spending will continue tilting towards services from goods. We expect more consumers to return to stores. With this backdrop, we do expect pressure on B2C volumes. Through May, industrial activity has been solid, but today's June flash of PMI was a sharp decline. Further, after a strong build late last year and early this year inventory re-stocking is slowing. This will dampen freight demand.

Our international businesses continue to navigate a dynamic environment. Global trade growth has slowed from disruptions related to lockdowns in China and the conflict in Ukraine, limiting the flow of goods and reducing international export volumes. We do anticipate supply chain disruptions throughout the fiscal year.

We continue to expect passenger airlines to fully recover to pre-COVID levels and that that recovery will take some time. Belly capacity on passenger airlines is expected to remain constrained in fiscal year 2023, resulting in a pricing environment still favorable to FedEx, if a little less than before. The Europe-to-Asia lane is estimated to recover in Q1 calendar year 2024, and belly capacity on trans-Pacific airlines is estimated to recover in Q3 calendar year 2024.

Commercial capacity between Europe and Asia is not expected to recover until Q1 of calendar year 2025.

Our fiscal 2023 forecast assumes a normalized economic environment. The factors I discussed earlier have been incorporated into our volume forecast. Our volume forecast has low-single-digit volume growth. We've also prepared plans to manage through slowing economic environment if required. We will take cost and revenue actions to mitigate impact of further economic softening, incorporating the lessons learned over the last two extraordinary years. In fiscal 2023, we will execute a very targeted growth strategy. We will prioritize revenue quality and are intent on pursuing business that provides attractive yields on our assets.

We expect the pricing environment will remain rational here in the United States and also around the world. We believe that the systemic changes, especially e-commerce peak surcharges, are durable changes for the industry. We are closely monitoring both inflation and fuel prices, and as a reminder, we adjust our fuel surcharge weekly in response to market rates. I am confident we have the tools to continue getting inflation-plus pricing.

Strong revenue quality is possible because we will target customers who value FedEx's unique capabilities. Let me talk about four of our favorite capabilities. First, we're the only provider to bundle our parcel and LTL portfolio. Second, FedEx

Ground has two very significant advantages over our primary competitor. FedEx Ground is faster to more locations than UPS Ground, and FedEx Ground delivers on Sunday while UPS does not.

Third, we continue to evolve our digital portfolio. Express and Ground are the first nationwide carriers to announce we will provide a picture proof of delivery for every US residential delivery that doesn't require a signature. And fourth, we have a robust intercontinental offering for both B2B and B2C segments. FedEx provides fabulous solutions for the world's manufacturing, healthcare, high-tech and e-commerce customers.

In closing, this has been an extraordinary year for FedEx. We generated strong growth, executed on our revenue quality strategy and overcame industry-wide challenges. Our plan for fiscal 2023 incorporate a dynamic environment, and we have the right strategies and the right team in place to deliver profitable growth and margin improvement.

And with that, I'll turn it over to Mike for his remarks.

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Thank you, Brie, and good afternoon, everyone. We had a strong fourth quarter, with adjusted earnings per share improving 37% year-over-year, revenue increasing 8% and consolidated adjusted operating margin expanding 50 basis points to 9.2%. These results reflect the outcome of the revenue management emphasis Brie described as we aggressively adjust to mitigate continued inflationary cost pressures.

Notable fourth quarter year-over-year expense items included higher self-insurance costs, primarily at Ground, as well as a roughly $130-million impact from higher rates for both wages and purchased transportation. Offsetting these headwinds were favorable year-over-year comparisons for variable compensation of approximately $300 million, and last year's

$100-million contribution to Yale University to support our carbon-neutrality goals.

With that overview of consolidated results, I'll turn to the highlights for each of our transportation segments. Ground reported a 4% increase in revenue with operating income down approximately $260 million, resulting in an operating margin of 10%. Self-insurance expense increased approximately $200 million, reflecting a higher loss experience, as well as an adjustment to the reserve for the projected cost of claims. We have multiple initiatives under way to mitigate the cost of risk, including new vehicle safety technology and driver certification standards in our service provider agreements. The strong 11% yield improvement at Ground was not enough to offset that headwind along with higher cost of wages and purchased transportation.

Looking forward, the continued revenue quality emphasis in conjunction with specific productivity and workforce initiatives will drive improved profitability. Stabilization of the labor market will also support further traction in these areas.

At Express, adjusted operating income increased by nearly 10% year-over-year with operating margin improving by 20 basis points to 8.2%. This improvement was driven by higher yields, including the favorable net impact of fuel and lower variable compensation which more than offset volume declines. In addition, crew cost per flight hour have been further elevated as operating the network has had to accommodate not only COVID protocols, but also to the routing changes to avoid layovers in locations with stricter COVID regulations, as well as conflict air space.

Freight had an incredible finish to the year, with revenue for the fourth quarter increasing 23% and operating profit growing 67%. These outstanding results are a testimony to Freight's continued focus on revenue quality and profitable share growth as we build on our strengths as the leader in the LTL market.

Turning to FY 2023, we are projecting continued momentum with a range of 9% to 19% adjusted earnings per share improvement. We expect margin expansion at all of our transportation segments on an adjusted basis as we execute on key priorities, including enhanced revenue quality beyond inflation, technology-driven operational efficiency improvements

and increasing utilization of our assets. As we get into fiscal 2023, we are seeing the lower customer demand trends we experienced in the fourth quarter continue into June and expect first quarter volumes will continue to be pressured. In addition, Express continues to experience flight constraints due to crew COVID protocols, as has been highlighted industry-wide. We do expect both Express air network efficiency and year-over-year volume comparisons across all of our transportation segments to strengthen as we go through the fiscal year.

In addition, our outlook includes an approximately $450 million non-cash pension headwind due to lower asset returns realized in fiscal 2022. This is all below-the-line expense that will be recognized evenly over the year. Our retirement plan's operating expense will be relatively flat as lower pension expense will be offset by higher 401(k) expense. And as a reminder, our primary US pension plans were closed to new entrants beginning in 2020, and we introduced a new 401(k) plan with a higher company match in January of 2022. Our projection for the full year effective tax rate is approximately 24% prior to the mark-to-market retirement plan adjustments and costs related to business optimization initiatives.

Turning to capital allocation, our fiscal 2022 adjusted free cash flow of $3.6 billion supported the repurchase of approximately $2.2 billion of our stock, and $800 million of dividend payments. In addition, we funded $500 million in voluntary pension contributions and ended the year with a solid $6.9 billion in cash.

As we look to fiscal 2023, we remain focused on driving total shareholder return and thoughtfully allocating capital. First, we will continue to invest in attractive ROIC initiatives. Fiscal 2023 capital expenditures are projected to be roughly the same as the $6.8 billion invested during fiscal 2022 which came in lower than our initial $7.2 billion estimate as supply chain considerations extended timelines. Facility investment at Ground will decline as will aircraft expenditures at Express. Offsetting that is increased investment in vehicle replacement, including rollout of our vehicle electrification initiatives, as well as additional automation projects.

We project fiscal 2023 CapEx as a percent of revenue to be under 7% compared to 7.2% for fiscal 2022. And next, we expect to repurchase an additional $1.5 billion of stock in the first half of fiscal 2023. And of course, as we announced last week, we are raising our dividend by over 50% which increases our adjusted payout ratio to over 20%. These significant shareholder return advances reflect confidence in our continued execution and ability to adapt to the evolving market. And lastly, I'd add we are projecting $800 million of voluntary pension contributions to the US plans.

So, we enter fiscal 2023 with a strong foundation for driving improved profitability and returns. We are mindful of the uncertainty across many fronts, including the pace of global economic activity, inflation, energy prices, additional pandemic developments and further geopolitical risk. We are actively adjusting to these changing circumstances.

In closing, we are focused on delivering shareholder value by driving profitable revenue growth, expanding margins, lowering our capital intensity and improving returns to shareholders. And we look forward to sharing additional insights about our plans for this year and beyond at our investor meeting next week here in Memphis.

Now, we'll be happy to address your questions.

QUESTION AND ANSWER SECTION

Operator: Thank you. [Operator Instructions] And our first question will come from Brandon Oglenski with Barclays.

Brandon Oglenski

Analyst, Barclays Capital, Inc.

Hey. Good afternoon, everyone. And, Raj and Brie, congrats on the new roles, obviously. Look, guys, I know you want to discuss the future next week, and we'll be in Memphis for sure. But, Raj, could you just give us what are your priorities for FedEx. Obviously, there's a pretty big change after 51 years under prior leadership and very big shoes to fill after Mr.

Smith. And one thing that keeps coming up on this call is revenue quality, so could you just give us a little bit more insight into that perceived change at least that I'm picking up on?

Rajesh Subramaniam

President & Chief Operating Officer, FedEx Corp.

And thank you, Brandon. I will start here and then have Brie talk a little bit more about revenue quality in a minute. But firstly, you are 100% right. We're building on a very strong foundation, and we're very fortunate to have had the opportunity to work so closely with Fred over the years. And we have a strong foundation to build from. My strategy is pretty straightforward. The number one element we talked about is revenue quality, and again, Brie will comment more about that. The second part of the strategy is going to be to improve operating margins in each of our operating companies and we'll be extremely disciplined on our capital allocation and drive total shareholder return.

So, we'll look forward to sharing more with you next week, but let me turn it over to Brie to talk about revenue quality.

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

Sure. Thanks, Raj. I think, yeah, we mentioned revenue quality a couple of times. We're operating in a very large market, and it's not a homogenous market. We have spent a lot of investment getting to the place we are today, and we are incredibly proud of that value proposition. And so, we're very focused on customers who value that, and so we're being selective in this market. We're targeting B2B. We're targeting small business. And we're really targeting customers that value the speed and the reliability we provide.

Operator: And our next question will come from Jack Atkins with Stephens.

Jack Atkins

Analyst, Stephens, Inc.

Okay. Great. Thank you for taking my question, I guess, Brie, for you. You noted in your comments that you expected continued above-inflationary pricing. I guess when we look at Ground in particular, it doesn't feel like we've been able to see that, over the last year at least, with margins down 250 basis points or so. Where do you think the disconnect is there? And I guess as you look forward, perhaps is it a function of maybe the benefits from the pricing initiatives are going to be coming in 2023 and we're seeing some lessening of some of these inflationary pressures? Maybe if you could just kind of help us walk through that, that would be helpful. Thank you.

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

Sure. Happy to, Jack. So, I think from a revenue quality perspective, if you look at the fourth quarter, we're actually quite pleased with the revenue quality that we're able to secure at FedEx Ground. I think two other things it is important to note. Within the mix of FedEx Ground, we're also very pleased that we got the right mix. B2B is actually up, and small business mix is up in the fourth quarter, so we're very pleased with that.

I will say what is pressuring, and honestly what will pressure us as we move forward, is weights will come down depending on the economy, so that is putting some pressure. And then of course, zone is also impacting that. But within each cell at FedEx Ground, we're quite confident that we're getting more for each package that we move. We're very pleased with the progress.

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

And, Jack, this is Mike. I want to make sure we emphasize too, it's not singularly driven by revenue quality in terms of how we drive Ground margins further going forward. We won't repeat the labor challenges of last year, obviously, but in terms of the active initiatives we have underway, we'll get further maturation of the productivity initiatives that we started last year. We've got additional ones coming on later this year. And I alluded to, we've got multiple efforts to mitigate the liability cost, and we wouldn't expect the rate of increase that we have experienced the last couple years on that front.

Operator: And our next question comes from Chris Wetherbee with Citi.

Chris Wetherbee

Analyst, Citigroup

Hey. Great. Thanks. Good afternoon. Wanted to ask about the guidance, the EPS guidance. I guess, it sounds like there are some headwinds or at least normalizations in your economic forecast as you think forward, yet from an earnings perspective, obviously, it's a wide range, but the upper end of that range is a nice acceleration in terms of earnings growth from what we've seen. And I know there are some headwinds that you had been facing in fiscal 2022 that presumably turn to tailwinds or at least sort of get mitigated as we go forward. But I kind of wanted to square the sort of body language around the economy being a little bit soft there, what with the optimism about earnings power accelerating from where we are. So, if you could, just help us a little bit with that?

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Well, Chris, this is Mike. I'll give a little context around our thinking around the range, and then Brie can give further backdrop for the economic perspective. But yeah, we certainly are mindful of the conditions and uncertainty in the environment ahead. It's a wider range than we put out there last year, exactly for that consideration. At the same time though, we're confident it's a balanced and achievable outcome that we can navigate amidst the uncertainty that's out there, so we felt that it was appropriate and where we need to get to.

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

I think the only other thing that I will add is we kind of look at our, number one, from a volume forecast perspective, we were conservative and the range in the volume itself. And then as we go through the year, the comps in the back half, especially here from a domestic perspective, they are actually a little bit easier for us, so we've taken both kind of the economy into consideration, the size of the market and obviously, the year-over-year, but right now we feel pretty good about the range we have.

Operator: And our next question will come from Amit Mehrotra.

Amit Mehrotra

Analyst, Deutsche Bank

Hey. Thanks, operator. Hi, everyone. Raj, congrats on the appointment, wish you really all the success in the world. I guess you guys are preparing to provide some mid- to long-term profit targets next week, and it's been a while, so I think that'll be quite welcome. But the question really is, we've seen a lot of uncertainty over the last several quarters. It's an incredibly fast-moving market. Inflation's really high, and that's actually caused you guys to miss even the nearest of profitability targets. And so the question is, as you guys prepare to come out with these multi-year targets, most likely for each of the businesses, where does the confidence come from that you're going to be able to hit those targets? And is there an element of cost or idiosyncratic opportunity related to efficiency where it gives you guys and should give us confidence in being able to hit that, given the experience of last year?

And, Mike, just related to that, if the company is asking investors to gain confidence in multiyear targets, I think it would be helpful to have some goalposts here and now around 2023 around what underpins the 15% EPS growth in 2023 with respect to Ground margins and Express margins. Hopefully, I don't know if you guys are willing to engage with that question, but I think it would be helpful to set that up ahead of giving these multiyear targets. Thank you.

Rajesh Subramaniam

President & Chief Operating Officer, FedEx Corp.

Amit, thank you very much and also appreciate your question. We have - the last year has been quite challenging from many respects as we build out our networks and expanded our e-commerce portfolio and then we had the labor challenges that were quite unexpected. They took $1.4 billion in FY 2022 because of unexpected labor challenges, one -some due to network inefficiencies and some just rates.

So, as we look ahead, the foundation that we have built, the e-commerce portfolio that we have, and we're in the center of an ecosystem for e-commerce for several customers, that we are essentially critical infrastructure for e-commerce. And we are doing a lot of things to make sure that we improve our productivity through technology initiatives that'll launch in this fiscal year 2023. We will continue to focus on, as we talked about revenue quality before, I think the market is there for that and then improve our performance in Europe. And so, I think there are several things that we can do to execute, and we're confident in our ranges we gave you.

Mike?

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Yeah, Amit. Well, first, certainly, look, I highlighted three specific elements for Ground cost improvements and efficiencies that we will be elaborating on further details next week. And as I said, we expect margin improvement at all of our transportation segments, and the most significant one will be at Ground relative to what FY 2022 looking at FY 2023. So appreciate the feedback there and absolutely understand that we need to give specifics and what are the actions that will get us there.

I will take one exception there about the target miss comment you made. Our annual EPS for fiscal 2022 fell within the range of guidance that we gave you a year ago, so while I appreciate there may have been different twists and turns along the way in terms of how we got there, it was indeed within what was a pretty narrow range, given all things considered.

Operator: Our next question will come from Tom Wadewitz with UBS.

Thomas Wadewitz

Analyst, UBS Securities LLC

Yeah. Great. Appreciate it. And also, I know others have said this, but really looking forward to the further detail next week and the kind of, I don't know, new direction or new elements of the strategy. So, looking forward to that. When you look at the fiscal 2023 because that's what we're focused on today, can you give us a sense of just magnitude of some of these big pieces? Is it two-thirds of it is revenue quality that's giving you the growth and cost is smaller and costs can grow over time? Or is this something that cost is a pretty big component of your margin improvement, your earnings growth? Just trying to get a sense of the kind of relative frame of that. And I guess I would also kind of look back to the analysts' meeting 10 years ago where you had the Express improvement program, and you had a lot of improvement, but it took a couple-years to see that. So, I guess just trying to figure out how quickly we see some of the costs and productivity measures come through and how big of a component that is versus price and revenue quality in fiscal 2023.

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Okay. Tom, there's a lot packed into that. Again, much of which in terms of flushing out details in that is something that we can elaborate on and spend a whole lot more time on next week. But as Brie mentioned, the volume growth in the projection here for 2023 is low-single digit, so while there is continued yield opportunity because of the inflationary environment and because of the capabilities and value that our networks provide, we do have meaningful, significant cost and efficiency initiatives underway. I talked about how we're lowering our facility investment at Ground so the emphasis now is on utilizing the capacity that we have, sweating the assets, and driving further efficiencies and productivity there.

Raj mentioned about how we schedule our people in that, to get it optimally targeted and resourced per sort on that, so there's no sort of single magic bullet to point to there, but it's a number of concrete real initiatives across the enterprise that will allow us to achieve the results that we need to get to.

Operator: And our next question will come from Jon Chappell with Evercore ISI.

Jonathan Chappell

Analyst, Evercore Group LLC

Thank you. Good afternoon. Brie, there's been a high-profile entrant in the market, so to speak, who has clearly over-hired, added a lot of capacity and now there's talk of trimming a significant amount of capacity in the next 12 months or so. As you think about the network in general, what's FedEx's opportunity and its risk for maybe some laying off some people, where you've had some labor issues in the past and also spare capacity and what that may do to pricing in the business over the next 12 months?

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

Thanks, Jon. A very fair question. I think a couple of things. Number one, we've absolutely planned conservatively so that we really can focus on those customers that value us. We have over the last couple of years done, I think, a tremendous job negotiating mid- to long-term contracts that I think puts us in a really good place to stabilize the base of our volume.

So to Mike's point, if things do soften from an economy perspective, I think we're in a really good position. And we're going to focus on disciplined revenue quality, disciplined targeted growth, and that will be kind of be our primary focus versus kind of filling the network from an alternative perspective. So I feel pretty good about where we are, despite some of the competitive activity and some of the other headlines we're all reading.

Operator: And our next question will come from Allison Poliniak with Wells Fargo.

Allison Poliniak-Cusic

Analyst, Wells Fargo

Hi. Good evening. Just so first on the labor inefficiency, is there a way to quantify what that headwind was to Ground? I know that you quantified the absolute wage increase. And then in line with that, a lot of productivity initiatives out there. Based on your volume outlook, is there a way to think or quantify what those eventual productivity initiatives will contribute to margin expansion in 2023, particularly in Ground? Just any color there? Thanks.

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Okay. So, Allison, yeah, this is Mike. The Ground network inefficiency aspect of the labor availability for FY 2022, we pegged that at roughly $300 million, so that was certainly most prevalent in the first half of the year. So I think that addresses that. Sorry. The second part of your question?

Allison Poliniak-Cusic

Analyst, Wells Fargo

I mean, on the context of your low-single-digit volume increase, a lot of productivity initiatives. I think you talked about the technology and the software related to the doc, some improvement on that side. Is there a way to better understand what that contribution to that margin expansion would be from some of those initiatives as we look to 2023 here?

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Yeah. So well, Raj highlighted just the first leg of that, roughly 6% improvement just quarter-to-quarter, so that gives you a flavor of the opportunity ahead there. We certainly - I talk about the liability and the cost of risk. That was a significant impact to the margin, and bending that going forward. That's going to definitely provide opportunity there. There was a question earlier about the labor market easing. We are hiring fewer new people. That is supportive too of a more efficient and a more safe operation too, with people that are more experienced. So, again all these elements come to play and we have a lot of good plans behind it that the team will be happy to speak further to next week.

Operator: And moving on to Jordan Alliger with Goldman Sachs.

Jordan Alliger

Analyst, Goldman Sachs & Co. LLC

Yeah. Hi, everyone. So, yields were very strong, as you noted, across the board. Is there any way to at least give some big-picture view how to think about the components of the yield improvement? Would it be fuel surcharge? Core price? Mix? As you've referred to, revenue management? Or other surcharges? Just some picture how to think about these very large improvements. Thanks.

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

Thanks, Jordan. Appreciate the question. So specifically for Q4, fuel was the largest driver of the revenue quality. And we also did a - quite frankly, as I mentioned earlier, I thought the team just did a tremendous job, within our portfolio, of managing to hold on to really our best and most profitable volume. So when you look at kind of the volume decline, we actually moved the right way. But in the Express company domestically, we had lower volumes on deferred than our overnight from a year-over-year perspective.

When you look internationally, the intercontinental, the team did a really good job of stabilizing volume there. And we actually - we decided to let some international domestic volume go, and then the same thing happened within Ground where you'll see the huge difference in Ground Economy decline versus actually we did a really good job of stabilizing the Commercial and the HD of course, our highest-value-proposition product.

So from a revenue quality perspective, while fuel was the largest driver, we also did a great job. We continue to get inflation-plus renewals, and they're really working on making sure from a mix perspective we get the revenue for the most premium part of our portfolio. So I hope that helps to clarify that.

Operator: And our next question will come from Ken Hoexter with Bank of America.

Ken Hoexter

Analyst, BofA Securities, Inc.

Great. Good afternoon. Raj, Brie, congrats on the positions and really almost the entire team since the start of pandemic. So again, mirror everybody's sentiment about next week and the conference. But it seems like you've had a - coming out of that maybe a week ago a big capital and return focus, the involvement of an activist. You've now talked about lowering CapEx. Maybe talk about what's getting removed from the CapEx or how your thoughts on investment shifts from your prior kind of growth focus and then how we should think about that? Obviously, you've built a huge cash balance now.

And maybe talk about your thoughts on capital allocation and distribution going forward. Thanks.

Rajesh Subramaniam

President & Chief Operating Officer, FedEx Corp.

I mean first of all, just say the conversations with an activist here, but then I'll let Mike talk about the specific question here. We have been working on Investor Day for nearly a year and the strategies and the dividend plans are well in place. And so we had very strong plans and then we long proceeded any conversations that we had with anybody. And then when we had the opportunity to sit down with them, there's clear alignment on where we're headed. So that was, I wanted to make sure that you understood that, that these plans have been well in place for a long time, and a key part of the equation is what Mike's going to talk about now.

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Well, Ken, you're trying to get me to give away everything from next week. But I'll just - I'll say, look, we've highlighted before that we were at a significant phase of re-fleeting the Express air fleet. And as I said, that is going to come down. We can detail more of that going forward. We've built up the Ground network with the capabilities that are industry leading and are going to be able to continue to realize value from that going forward and will further utilize that, so we don't need to invest as much in the hard assets. We'll certainly be investing in technology aspects to more fully utilize it and different

- and creative ways. So it's just a natural evolution from building to having these capabilities and now transitioning.

But I would remind you too that we repurchased roughly 3% of our shares last year. While the dividend increase was certainly very significant, we've long been looking and striving to increase that. In fact, it was the second-largest percentage increase. A few years ago, we actually had a larger percentage increase. So again it's just the natural evolution of where we are in terms of capital allocation and driving improved returns, and I look forward to elaborating further next week.

Operator: And moving on to Brian Ossenbeck with JPMorgan.

Brian P. Ossenbeck

Analyst, JPMorgan Securities LLC

Hi, good evening. Thanks for taking the question. So let me come back to the impact of fuel. And, Brie, you mentioned it didn't sound like there's any demand destruction or trade down. The mix was actually better. So if you could elaborate on that, if you expect that to continue given where fuel prices are and where surcharges are? And then, Mike, can you just talk about how much of an impact fuel was on a net basis? It was mentioned a few times in the press release. And what do you have baked into the guidance next year?

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

Hey, Brian. You're right. In Q4, we didn't see a lot of trade down. There's a couple of reasons for that. Obviously from an intercontinental perspective, capacity is still quite constrained, so if the economy does continue to soften, do I anticipate that there will be more demand for deferred portfolio? I absolutely do, but we are very focused on customers who have a bundle, who have a deferred need and have a need for our premium portfolio. And so as we look at that targeted growth, we will be very thoughtful about not just attracting customers that rely solely on our deferred portfolio. It really is about bundling to make sure that we maximize the value of our networks. I hope that help to clarify.

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Yeah. Brian, look, there's many elements of fuel when you aggregate it, and as Brie has highlighted before, it's a fundamental component of the overall pricing construct, so I'm not going to parse it out in terms of one specific aspect of it. But I would say in terms of the guidance that we have, the fuel price assumption that we have in there is not as high as current fuel prices, so that is a - maybe a little more help for you on that front.

Operator: And our next question will come from Bascome Majors with Susquehanna.

Bascome Majors

Analyst, Susquehanna Financial Group LLLP

Yeah. Thanks for taking my questions. I understand that you're modeling and guiding to the projections that you have out there. I know a lot of investors would love to see the economy coming out with that. But as they discount potentially worse scenarios, can you walk us through how the business, in your mind, would perform in a moderate-to-deeper recession and whether or not there are any nuances we should consider versus that, call it, 40% EPS drawdowns we've seen historically in that type of environment? Thank you.

Rajesh Subramaniam

President & Chief Operating Officer, FedEx Corp.

Let me begin this and then have Mike or Brie jump in and help me here. Firstly, let me just say that, yeah, we have economic projections today out there, and some of those projections may come down, and we're prepared for that. And we are prepared to pull some levers here. We are already moving, making sure that there are significant cost controls, and we're operating in a very constrained environment from that perspective. But we'll adjust networks. We'll just take down flights as required, we'll just match the capacity to demand. And that's the beauty of having a big network is we're able to flex up and down. We have demonstrated that historically as well. And so, yeah, there's a range of outcomes that we're ready to deal with. We're definitely not assuming a prolonged, deep recession. That's not what we're assuming here, but we have some flex for some slowdown in our economy. Mike?

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Yeah, Bascome. I mean, look, just to give you some parameters around how we have adapted and adjusted previously when the trade or macroeconomic backdrop can change on you, in February of 2020, so just before the pandemic, obviously, we were seeing significant shifts in trade policy and demand. And as a result, we had lowered our frequencies across the Trans-Pacific by 20% from the prior year. Well, then fast forward a few months later, the pandemic and that, when we had to completely realign and shift instead of temporarily parking airplanes, we were trying to get more lift back in the air to support commerce, to support the pandemic efforts and that. So certainly, one, we demonstrated historically. And two, I think, as an organization, the ability and the speed at which we were able to adjust amongst all of our networks during the pandemic gives us every confidence and the learning that we can react faster than we may have thought we could in the past, and we're absolutely prepared to do so.

Operator: Thank you. And our next question will come from Helane Becker with Cowen.

Helane Becker

Analyst, Cowen & Co. LLC

Hello. Thanks very much. Hi, everybody. So thanks for the time here. My two questions are this. The passenger airlines, as you know, are hiring every pilot they can possibly get. And I probably asked you this question before, but how are you thinking about hiring and retention so that you can continue to master your network? And the other question is I think there was an announcement earlier this week that you took 150 electric vehicles from Freight trucks. So I think that's out of the 2,500 van order. Can you talk about the CapEx related to that and how you're thinking about sustainability efforts? And if you're going to do it next week, that's fine. I can wait.

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Look, Helane, first, on the electric vehicles, that is when I spoke earlier about increasing our investment in vehicles across the board. The principal element of that is continuing with the pickup and delivery electrification at Express, so that is absolutely a key plan going forward. And look, we're fully committed to reaching the goals by 2040, and that means we've got to get going now on that replacement.

I'll let Raj address the pilot consideration, but thanks for the question.

Rajesh Subramaniam

President & Chief Operating Officer, FedEx Corp.

Yeah. Thank you, Helane. And yeah, the pilot situation, I'll make two points. Firstly, I want to say thank you to our pilots who have done a tremendous job during this timeframe and a big part of the value that they've provided here. And secondly, because of the work environment that we have in FedEx, there's no dearth of people who wanted to get into the FedEx pool, so we're not seeing that as an issue for FedEx.

Operator: Thank you. And our next question will come from Scott Group with Wolfe Research.

Scott Group

Analyst, Wolfe Research, LLC

Hey. Thanks. Afternoon. Mike, you talked about Ground seeing the biggest margin improvement this year, fiscal 2023. I'm wondering do you think we see that margin inflection in Q1 or if it's more later in the year. And then just maybe bigger picture for Raj. I think there's a lot of hope or expectation for next week that we're going to hear about big strategic changes and focus at FedEx and cost reductions and things like that. And understandably, we're not hearing about that today. But do you think - would you agree that we should be seeing and hearing about big strategic changes next week?

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Well, Scott, first, this is Mike. Look, for Ground to have the largest margin improvement of all the segments within the guidance we have here, yes, it is the case that we have to see margin improvement certainly in Q1.

Rajesh Subramaniam

President & Chief Operating Officer, FedEx Corp.

And, Scott, yeah, you're definitely not going to get me to give away the story for next week today. But I'll just tell you this much that historically Express focused on time-definite services, Ground focused on day-definite services, and it is fantastic that we actually gained a lot of share in the US domestic market over the last 20 years. And what has changed in the last 3 years or 4 years is the emergence of e-commerce in the residential delivery and the emergence of day-definite networks, day-definite packages in both networks that gives us the opportunity to optimize across. And we launched, operate collaboratively, a few - year or so ago now, and we'll talk more about that next week.

Operator: And our next question will come from David Vernon with Bernstein.

David Vernon

Analyst, Bernstein

Hey. Good afternoon guys, and thanks for taking the question. Raj, I know you don't want to detail too many of the plans for next year, and this isn't about that, but I want to think it would be helpful, I think, if you could talk us through kind of the operational situation at Ground. How, outside of just labor cost pressure, was there any impact on service levels over the those staffing challenges? And where are we on service kind of today from maybe where we would have been? And the service levels in Ground, these metrics are all opaque public data on this stuff, and we continue to hear from contractors and some shippers that service levels maybe not exactly where they want to be, trucks are taking too much time to be out of the buildings, that kind of thing. It'd be great if you could just talk to us a little bit about and where we are in recovery on the productivity side.

Rajesh Subramaniam

President & Chief Operating Officer, FedEx Corp.

David, you were breaking up a little bit, but let me answer the question that I thought I heard. I think firstly, yes, a year ago at this time, we saw significant challenges on the labor front that the labor availability started to go away from us, and volume was very strong. And that resulted in inefficiencies to the network and also service challenges. By peak, we had unwound most of the network inefficiencies, and we have heavily focused on improving our service, and this is the conversation we have every week. And I'm glad to say that, week-over-week, month-over-month, that we have improved our service to a point now where I would say we're back to a normal situation. We will not over relent here. This is going to be a purple promise, and service differentiation is a key for our success going forward. And so we will get the service back to market leading, and that's our goal.

Operator: And our next question will come from Scott Schneeberger with Oppenheimer.

Scott Schneeberger

Analyst, Oppenheimer

Thanks very much for the question and looking forward to seeing everyone next week. I would like to focus my question on the smallest but certainly most impressive segment this quarter being Freight. Mike and maybe Lance if he's on, just what do you view for the industrial economy here, where we are in LTL cycle and kind of a cadence of what we should expect over the course of fiscal 2023 for this segment as the margin expansion has been nothing short of an impressive 500 basis points-plus quarter-over-quarter and year-over-year? So just how should we think about modeling that going into the year? Thanks.

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Well, Scott, as I said, we expect margin improvement in all of our transportation segments. Look, the Freight LTL business has certainly evolved from where it was a number of years ago. You have a much greater discipline in terms of when the environment changes, in terms of pricing discipline when demand is strong. There is not the degree of capacity adds

which then is excess capacity when you go through a little more of a cyclical change. So we're very confident in the discipline within both the industry overall as well as the approach we're taking to it in terms of continuing to drive great margins from a outstanding year upward from there.

Operator: And moving on to Todd Fowler with KeyBanc Capital Markets.

Todd Fowler

Analyst, KeyBanc Capital Markets, Inc.

Great. Thanks and good evening. So, Brie, I just wanted to make sure I understand the volume expectations. I guess number one, the low single digits is, is that across both Express and Ground? And then number two, it sounds like the shape is slower in the first half with an easier comps in the back half. I want to make sure I got those pieces right. And then if you can help us understand on the Ground Economy side, how much volume is still left to call in that business and the thought around calling that versus the ability to move price up on that business? Thanks.

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

Okay. I'm going to try to get it all, but please feel free to...

Todd Fowler

Analyst, KeyBanc Capital Markets, Inc.

Right.

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

...ask again if I didn't miss the whole question or questions there. Okay. So I think the first question was when we're looking at the volume between Express and Ground and we're saying low single digits, the low single digit is the total volume from a Ground market perspective. We still believe in the secular growth of e-commerce. We have been looking at the e-commerce as a percentage of retail. It's still - last number I looked at, was just above 21%. Pre-COVID, you were like 16%, 17%. So we still believe that Ground has the largest growth opportunity, and that is reflected in our range for this year. We're got Ground growing faster than Express. I don't think that would be a surprise to anybody on this call, and then as I mentioned, in the back half, the comps, especially for Ground, do get better.

From an Economy perspective, FedEx Ground Economy, let me be specific there, I think you're going to see Q1 volumes look similar to Q4, and then we'll start to build back from there. Like I said, we really do need the Economy product. It allows us to sweat our assets, and it is a need in the market, especially if things soften. And I want to make sure that my opening remarks didn't confuse anybody. We're very clear eyed about the economy in which we're operating. When we said normalized economic environment, I meant we're not planning right now in our current forecast for a recession, to Raj's point.

So, I do anticipate that if the market softens, the Economy product will have to play a larger role. But like I said earlier, we really have to get the bundle. And the vast majority of customers who have a Home Delivery need and a Ground Commercial need, do have either our returns line that needs to use the Economy product, they have a different SKU that has lower value, so that bundle is really important to us, and we have to make sure that that product is there to defend.

And so I think long answer, but you'll see us build back some Economy volume later in this year, I believe.

Operator: And our next question will come from Bruce Chan with Stifel.

Bruce Chan

Analyst, Stifel

Thanks, operator. Afternoon, everyone, and thanks for squeezing me in here. Just want to come back to the revenue quality discussion. Brie, you talked about growing share in SMB, and I think B2B is part of that. Can you give us a sense of what commercial initiatives you're putting in place to make that share growth happen there? And then maybe also, where do you stand right now in terms of SMB share? Where is that coming from? And where do you think it can go?

Thank you.

Brie Carere

Chief Customer Officer & Executive Vice President, FedEx Corp.

Yeah. Great question. So from a B2B perspective, we've got a lot going on to improve our market share. And again, we're running a massive business, so I'll try to be specific without going kind of through every country in the world. From a B2B, I guess one of the primary things that we're working on and you're going to hear a lot about next week is our visibility tools. As you're talking about managing very complex supply chains, and you can imagine the amount of change that our customers have gone through over the last two years, visibility is critical.

And then honestly, proactive visibility and having the tools to help customers reroute around a weather disruption, reroute around a port congestion, so we are really excited about our FedEx Surround platform that we've talked a lot about. This helps our largest customers and in particular, our B2B customers really navigate and manage their supply chain. We're adding new capabilities on to this tool to allow us to intervene for our health care customer so that, if there is a service disruption, we can intervene and re-ice or put something in a cooler. So I would say thematically for B2B, really giving customers the data, the tools, the insights and then quite frankly having the intervention capabilities that FedEx Express does to do something about it because that is really most important.

From a small business perspective, I'm just really enthusiastic. No one can touch our value proposition. Small bundle or small customers need simplicity, and they tell us that over and over again. If you're a small customer, you're running just about every function in your business, and so if you've got a one-stop shop like FedEx with an LTL provider with national coverage, it works really well. We've got the industry's leading loyalty program, and I think the pricing team has done a really good job using earned discount and some of our tools to really reward small businesses for that bundle. We'll talk about it a little bit more next week, but like I said, I think we're pretty happy with our small business. And as I mentioned, in Q4, our small business mix did improve.

And I guess, sorry, one other thing. When we're talking small business, not all small business is created equal. There are a large amount of very price-sensitive lightweight small businesses. That is not who we're targeting. So we're being very disciplined, and on the portion of small business that we really are interested in, we're very confident in the momentum we've got.

Operator: And our final question will come from Jeff Kauffman with Vertical Research Partners.

Jeffrey Kauffman

Analyst, Vertical Research Partners LLC

Thank you very much for squeezing me in, and a real exciting time. Congratulations to everyone. Looking forward to Memphis next week. Mike, I just wanted to get some clarification here. Two parts here. Number one, the drop in CapEx projection from $7.2 billion to $6.8 billion, I think you implied that was more of a timing issue because of supply chain challenges. So should we assume that that $400 million comes back as we head toward fiscal 2024? And then secondly, I want to follow up on Helane's BrightDrop question. We've actually had a chance to see the vehicle at an expo, and the intel we got was it's not costing much more than a Mercedes Sprinter, but the TCO is dramatically lower between the

maintenance and the fuel savings, and a positive benefit is these trucks come in in terms of P&L to the fleet. Could you address both those issues, please?

Michael C. Lenz

Executive Vice President & CFO, FedEx Corp.

Yeah. Sure. No. Thanks, Jeff. So well, yeah, let me clarify on the CapEx. So indeed it was the case that $400 million lower came in this year because of, for instance, we simply couldn't get some of the replacement vehicles in the time frames anticipated, given supply chain delays with the manufacturers there. Certain facility projects just didn't move at the pace as anticipated. So all that said, the $6.8 million for the current fiscal year considers that those will finish out and plus the other spending I outlined there. So I guess you could say if it had been $6.2 million last year, would have been $6.4 million this year, or $7.2 million last year, it would've been lower this year. But again, at the end of the day, $6.8 million last year and $6.8 million this year.

And then, look, on the BrightDrop electric vehicles, it is indeed the case that - and we look at this from a very focused financial and economic perspective too in terms of our acquisition of this fleet, obviously it's a key underpinning of our carbon initiatives, but you're right, it does have much lower maintenance costs going forward, a lot fewer moving parts, so on and so forth. So again, the total cost of ownership over the long run, we definitely believe that can exceed the combustion vehicle. So again thanks for the question.

Operator: And that does conclude the question-and-answer session. I'll now turn the conference back over to Mickey Foster.

A. Mickey Foster

Vice President, Investor Relations, FedEx Corp.

Thank you for your participation in FedEx Corporation's Fourth Quarter Earnings Conference Call. Please feel free to call anyone on the Investor Relations team, if you have additional questions about FedEx. Thank you very much. Bye.