聯邦快遞 (FDX) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the FedEx Corporation first quarter FY17 earnings conference call.

Today's call is being recorded.

At this time, I will turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation.

Please go ahead.

Good afternoon.

Welcome to FedEx Corporation's first quarter earnings conference call.

first quarter earnings release, statistical book, and earnings presentation slides are on our website, at FedEx.com.

This call is being broadcast from our website.

The replay and presentation slides will be available for about one year.

Written questions are welcome via e-mail or through the webcast console.

As you send your questions, please include your full name and contact information.

The e-mail address is IR@fedex.com.

Preference will be given to inquiries of a long-term strategic nature.

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 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, at 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, Fred Smith, Chairman; Alan Graf; Executive Vice President and CFO; Mike Glenn, President and CEO of FedEx Services; Chris Richards, Executive Vice President, General Counsel and Secretary; Rob Carter, Executive Vice President, FedEx Information Services and CIO, who is joining us on the conference call line; Dave Bronczek, President and CEO of FedEx Express; Henry Maier, President and CEO of FedEx Ground; Mike Ducker, President and CEO of FedEx Freight.

With that, Fred Smith will now share his views on the quarter.

Thank you, Mickey.

Welcome to our discussion of results for the first quarter of FY17.

Managing our operating companies as a portfolio of solutions helped FedEx achieve strong financial and operating results in the quarter, especially given the global economy's continued low growth.

Mike Glenn will offer a more detailed look at economic conditions and FedEx revenue growth later in today's call.

We expect FY17 revenue and earnings to increase, driven by volume growth and improved base yields at all our core transportation companies.

The integration of TNT Express, which includes more than 200 countries, is proceeding smoothly and on schedule.

The level of team members' engagement is outstanding and very much appreciated.

More than 20 teams are working in operations, customer solutions, personnel, IT, finance, legal, security, and other areas to positively transform FedEx and TNT into a seamless worldwide operation.

Alan Graf will provide a more comprehensive update, including our target to exit the end of the four-year integration process in FY20 with annual synergies of $750 million per year.

The integration process continues.

I assure you FedEx will maintain our high levels of customer service across all our operating companies with our commitment to the purple promise, which states simply, I will make every FedEx experience outstanding.

And let me thank hundreds of thousands of FedEx team members in every corner of the globe who do just that every day.

Before I turn the call over to Mike, let me reiterate, we are committed to improving margins, earnings per share, cash flows and returns.

Now Mike and then Alan will provide their insights.

Mike?

Thanks, Fred.

I'll open with an economic update and outlook and then discuss our performance and business conditions in each segment, including revenue, volume and yield, and provide some commentary on broader industry trends and our plans for what is expected to be another record breaking holiday shopping season.

On the economic front, we see moderate growth in the global economy.

Our US GDP growth forecast is 1.6% for calendar 2016, 20 basis points lower than our last forecast in the last quarter, and 2.3% for calendar 2017, led by gains in consumer spending.

Our global GDP growth forecast is 2.2% for calendar 2016, 10 basis points below last quarter, and 2.6% for calendar 2017.

We expect industrial production to decline 0.7% in calendar 2016, 10 basis points lower than last quarter, and increase 2.2% next year.

Now I'll review revenue, volume and yield trends by segment.

US Domestic Express package revenue grew 3% in Q1, driven by growth in both volume and yield.

Excluding the impact of fuel, Domestic Express revenue grew 3.8% year-over-year.

Package volume grew 1% year-over-year in the quarter, driven by strong overnight volume growth.

Yield per package increased 1% year-over-year, despite lower fuel surcharges.

Including the impact of fuel, year-over-year Express Domestic package yield grew 2.5%, primarily due to rate and discount.

FedEx International Express package revenue decreased 1% year-over-year in Q1, but increased 1% if you exclude the impact of fuel.

FedEx International Priority volume decreased 1%, while International Economy volume grew 1%.

International export package yield decreased 1%.

If you exclude the impact of fuel, International Export package yield increased 1.4%, primarily driven by the positive impact of rate and discount changes which outweighed the negative impact of exchange rates.

FedEx Ground revenue increased 12% year-over-year in Q1 and increased 12.6% if you exclude the impact of fuel.

This growth was driven by higher Ground volume and yield.

FedEx Ground average daily volume grew 10% year-over-year in Q1, driven by robust growth in both residential and commercial segments.

FedEx Ground package yield increased 2% year-over-year in Q1.

If you exclude the impact of fuel, FedEx Ground yield per package increased 3% year-over-year, driven by yield improvements in both Ground and Smart Post segments.

FedEx Ground continues to gain revenue market share.

In fact, through the end of calendar year 2015, FedEx Ground has gained revenue market share for 17 consecutive years and we are tracking to continue that trend and make it 18 years through the first half of this calendar year.

FedEx Freight revenue increased 4% in Q1 and 5.4% excluding the impact of fuel.

Average daily shipments increased 8% year-over-year.

The continued strength in shipment volume is driven by our outstanding sales efforts with small and medium customers and reflects the speed, reliability and choice of Priority and Economy service for LTL customers.

We also saw increased demand from larger customers during the quarter.

Revenue per LTL shipment declined 4% in Q1, due to lower fuel surcharge revenue and lower weight per shipment.

Excluding the impact of the fuel surcharge revenue, revenue per shipment was down 1.7%.

I'd now like to spend a few minutes discussing industry dynamics, including pricing changes and the upcoming peak holiday season.

As announced yesterday, we will be raising rates effective January 2, 2017.

FedEx Express rates will increase by an average of 3.9%.

Rates for FedEx Ground and FedEx Freight will increase by an average of 4.9%.

We will also change the dimensional weight divisor for FedEx Express and FedEx Ground from 166 to 139.

Our dimensional weight divisor for US domestic and international packages will now be the same after the change is implemented.

Beginning in February, we will also be updating the FedEx Express and Ground fuel surcharges weekly, as we do with FedEx Freight today.

It will be no changes to the fuel surcharge tables.

Details of all changes to rates and surcharges are available at fedex.com/rates2017.

We are deep into planning for what is expected to be another record peak holiday shipping season.

The rapid growth of e-commerce has driven significant shifts in demand over the last several years.

Last year, we experienced 15% growth in peak season volume and delivered more than 325 million packages.

Beyond just the dramatic rise in volume, there's several other shifting industry dynamics.

Holiday promotions and buying patterns have increasingly shifted, which has resulted in heavy demand for package delivery on Mondays during the peak.

The intensity for demand on Monday has accelerated in recent years, as more and more retail locations have started serving as fulfillment centers for e-commerce orders.

We expect each of the four Mondays during the upcoming peak period to be among the busiest in our Company's history.

We have also experienced increased demand for transportation of larger and heavier packages.

As e-commerce grows, there is demand for online ordering and delivery of everything from large screen TVs to mattresses and trampolines.

We've engineered our networks to add sortation and delivery capacity for these larger packages, including entire temporary facilities dedicated to the sortation of oversized packages, which will be critically important this upcoming peak season.

Beyond oversized packages, we will continue to make investments in technology and facilities that allow us to handle this year round growth in demand.

We've added to what is already the industry's most technologically advanced Ground sortation and delivery network with additional automation and new facilities.

In fact, we've added 19 automated stations and four major distribution centers to FedEx Ground since the peak season last year alone.

We've also added more reliable and efficient aircraft to the FedEx Express fleet over the last year.

And while the advanced automation provides us a competitive advantage in sortation and speed, the key to our success during the peak continues to be our people.

Across the FedEx portfolio, we expect to once again add more than 50,000 seasonal positions to help the holidays arrive.

Based upon growth expectations and network expansion, many of these seasonal team members will have an opportunity for full time work at FedEx after the holidays.

These investments in people, facilities, aircraft and technology are all made to enable us to provide outstanding service, even during the busiest days of the year.

As a further commitment to delivering outstanding service and in recognition of Christmas falling on Sunday this year, we've adjusted some service commitments for shipments tendered the week of Christmas.

FedEx Express will be delivering on Saturday, December 24, Christmas Eve, but it is not a service day for FedEx Ground.

FedEx hold at location is also a delivery option for customers on Christmas Eve.

All service adjustments have already been communicated to customers as part of an extensive planning and collaboration effort to meet customer needs and enable outstanding service across the FedEx portfolio throughout peak.

And now I'll turn it over to Alan Graf.

Good afternoon, everyone.

Thank you for your comments, Mike.

Thanks to the FedEx team for delivering strong first quarter results.

For FedEx Corporation, adjusted EPS climbed 20%, to $2.90 per share.

Revenues increased 19%, to $14.7 billion, with the addition of TNT Express.

Consolidated adjusted operating margin was 9.3%.

We continue to increase profits while investing in the business.

First quarter results improved due to higher operating income at Express, where base yields improved and expense growth was constrained, and at Ground, where volume and yield grew.

Offsetting factors included higher network expansion costs at Ground.

These adjusted numbers exclude the integration and restructuring program costs and intangible asset amortization of TNT Express.

Ground volume continued to grow.

Segment operating income increased 14% and margin increased to 14.2%, due to volume and yield growth and lower self-insurance costs.

Headwinds included higher operational costs due to network expansion and higher purchased transportation rates.

Comparison were easier, due to higher self-insurance reserves last year.

We aren't expecting that benefit to continue, and comparisons for the rest of the year are expected to be more difficult.

Ground's business continues to grow nicely, driven in large part by e-commerce.

We believe continued strategic investments will position Ground for long-term profitable growth by increasing capacity and efficiency to better meet the dynamic needs of our customers.

Investments include continued network expansion, integration of commercial and residential networks, including Smart Post, completing transition of our pick-up and delivery service providers to a single operating model to add service capacity and operational flexibility, and incentives for our small business partners to equip their vehicles to improve safety technology.

Freight's operating income increased 2%, primarily due to higher volumes and a favorable comparison as a result of a charge for a facility closure.

These benefits were mostly offset by lower LTL revenue per shipment, which also drove a small decline in operating margin.

Freight continues to face a difficult macro environment and is working hard to manage costs and increase yields.

Express frankly knocked the ball out of the park in Q1.

Adjusted operating income was up 19% and adjusted operating margin grew 140 basis points to 9.7%.

Adding to the bottom line at Express were base yield improvements, volume growth and cost management efforts.

In addition to its day job, Express was busy integrating TNT.

As a result, integration expenses of $22 million are included in the GAAP results for the FedEx Express segment.

FedEx Express continues to manage network capacity to match customer demand, reduce structural cost, modernize its air fleet, and drive continued productivity increases.

Beginning this quarter, we are reporting the operating results for FedEx Express and TNT in different segments.

In our 10-Q, we will provide an overview of the FedEx Express Group, which is comprised of the two segments I just mentioned.

The presentation of TNT in our financial statements, including purchase price allocation, is preliminary and will likely change in future periods, perhaps significantly, given the timing and complexity of the acquisition.

We plan to complete our purchase price allocation no later than the fourth quarter of FY17.

We believe the TNT acquisition, the largest acquisition in FedEx history, transform the world's transportation logistics industry, rapidly accelerating our European and global growth strategy, as 33% of total FedEx Corporation revenue now touches a country outside of the United States.

We have a rich history of success in integrating businesses into FedEx and we are doubling down on our commitment to the TNT integration in terms of our people and financial resources.

TNT's 56,000 team members deliver 1 million packages daily in over 200 countries.

TNT's European road network connects more than 40 countries through 19 road hubs and over 540 depots and will substantially enhance our global footprint by leveraging TNT's lower cost road networks in Europe and in the Middle East and Asia, as well.

FedEx now has a strong presence in Europe, transportation options from Express to Economy, Parcel and Freight, helping not only our customers in Europe, but also around the world shipping into Europe.

We have similar and complimentary corporate cultures and a common history of superior service and value to customers.

We had a seamless and very successful first day when we acquired TNT on May 25.

Today is our 119th day of ownership of TNT.

Prior to the close of the transaction, we invested about a year building an integration plan and we are well positioned for success.

Our new senior leadership team is established and all key TNT activities and responsibilities have transitioned to the integrated FedEx senior officer team.

Hundreds of town halls have occurred across the enterprise in operations, sales, marketing and other back office functions.

We have strong talent within the TNT legacy organization and the team members across both organizations are energized about the combination.

We also have strong cultural alignment across the teams, with a focus on our people, service, profit philosophy.

We expect the integration to take four years and significant investments in people, capital and expense.

These are network businesses that require a combination of our pick-up and delivery operations at a local level across stations and depots, our Ground and Air networks, and our extensive operational clearance, sales and back office IT systems.

The IT investments that will be required are significant, given the limited investment in IT at TNT over the last decade.

This is also a key enabler of the integration and its benefits.

We are bringing together the activities of team members across the globe.

These activities and the pace are balanced against continuing to deliver world class customer experience to drive returns for our shareholders.

Prior to acquisition, TNT announced its outlook strategy to double its adjusted operating income and margin percentage by 2018.

That profit improvement program includes various initiatives focused on yield management, operational efficiency, and productivity, as well as customer service.

We are focusing on the initiatives and projects with an outlook to deliver the greatest benefits, balanced with our four-year integration plan.

We are projecting TNT to be dilutive on a GAAP basis in FY17, due to integration expenses, outlook restructuring expenses, and non-cash intangible asset amortization.

On an as adjusted basis, excluding non-cash intangible asset amortization, integration expenses and outlook expenses, we expect TNT to be accretive in FY17, as the TNT outlook restructuring program already started to lower cost.

We have seen almost immediate benefits as we begin the integration.

In the US and Canada, we are transitioning TNT's volume formerly [handed] by third-party carriers into the FedEx portfolio.

In late September, we will begin consolidating depots and will begin transitioning customers in October.

We will complete the US and Canada transition by the end of FY17.

In addition, we have realized procurement and sourcing benefits, transitioned four of TNT's third-party delivery partners into the FedEx Direct Serve operation, or moved to a single third-party provider, and will launch our initial injection of FedEx volume into five select TNT European road network lanes later in September.

We are off to a very solid start.

We see the combination of these two businesses as transformative and expect significant synergies from the integration.

We will drive value from four key areas, optimized pick up and delivery operations, an integrated global express network, improved efficiency of staff functions and processes, and revenue growth.

We plan to optimize pick-up and delivery operations by implementing new technology and processes, optimizing the locations of facilities and stations without impacting service; and benefiting from the new pick-up and delivery efficiencies globally, parcels will utilize a lower cost integrated pick-up and delivery network to achieve greater economies of scale.

We plan to form one global express network by developing integrated solutions to track and route parcels and freight and fully integrating our intercontinental air network.

We will have one global express air network with an optimized line haul and hub strategy that will deliver the best service for our customers and significantly improve our costs.

We plan to improve the efficiency of our staff functions and processes by optimizing our systems and processes, including IT; innovating, transforming and streamlining key support functions, such as Human Resources, Legal, Security, and Finance; achieving meaningful sourcing savings; lowering our effective tax rate over the long term, as synergies will drive additional international profits taxed at lower rates; and greater efficiency will lead to greater cost savings.

We will grow revenue with a best-in-class service portfolio with one sales team, a single online tool for customer inquiries and invoices, revenue management activities that optimize yield, improve market share and increase profitability.

As a result, customers will have access to a broader portfolio of services and will see value proposition improvements.

We remain supremely confident in our initial views of the value of this acquisition and are targeting to exit the end of the four-year integration with annual synergies of $750 million.

Similar to our recently completed and successful profit improvement plan at Express, we do not believe that it is meaningful to give initial year-by-year guidance.

The integration is complex and the timing of integration and restructuring expenses beyond FY17 are not yet crystallized.

However, how we ultimately get to our target will evolve as market conditions and other factors change.

We are highly confident in our target and our goals.

We currently expect the aggregate integration program expense over the four years to be in the range of $700 million to $800 million.

Timing and amounts of these integration-related estimates are subject to change as we implement and adjust our plans, as necessary.

In FY18, TNT will be accretive, excluding integration and restructuring costs.

Turning to our corporate outlook, based on the moderate economic forecast that Mike discussed and the momentum we have, we project adjusted earnings to be $11.85 to $12.35 per diluted share for FY17, which excludes TNT integration, outlook restructuring costs, TNT intangible asset amortization, and year-end mark-to-market pension accounting adjustments.

We are estimating combined TNT integration and outlook restructuring expenses of about $275 million and TNT-related intangible asset amortization about $115 million for FY17.

We still expect our FY17 integration CapEx for TNT to be about $100 million.

Again, the timing and amount of these integration-related estimates are subject to change as our plans are refined.

Meanwhile, Ground and Freight will continue to be focused on achieving their goals independent of the integration at Express.

Our total capital expenditures forecast remains at $5.6 billion in FY17, including TNT.

We anticipate that our cash flow from operations will be sufficient to fund our increased capital expenditures in FY17, which will include spending for network expansion at Ground to support e-commerce growth and the continued aircraft fleet modernization at Express, which continues to lower our costs.

Longer term, we would target CapEx 6% to 8% of revenues.

Our balance sheet remains strong and we are well positioned to continue to increase corporate earnings, dividends, cash flows, returns, and margins.

Now we look forward to answering your strategic questions, and I will turn it back over to Fred.

Thank you very much, Mike and Alan.

I hope that gave the listeners an in-depth understanding of where we are.

As you know, we began soliciting questions over the internet several calls ago, and we have a number of them, quite frankly, some we're not going to deal with because they were answered in the in-depth remarks of Mike and Alan.

We'll deal with them on the basis of their strategic interest to the broader listeners on this call.

And what we will do is we'll take two from the internet and then Mickey will queue up two from the live calls.

So the first question is from David Ross, Stifel Nicolaus.

What is the benefit of having the road freight LTL/groupage business in addition to the package business?

I presume this talks about TNT in Europe.

Might it ultimately just be a small package network in Europe?

Well, let me give you sort of a broad answer and then ask Mike and Dave Bronczek to jump in with any details they'd like to add.

First of all, I'm not sure it's known as well as it should be that FedEx Express carries both palletes, or express freight and packages and packets.

And we are the market leader in the United States with our Express freight.

There are three services, overnight, two-day, and then two- to three-day.

And that is a very profitable service and we have different pick-up and delivery vehicles optimized for Express Freight.

And obviously, we have our package delivery vans in the Express network, mostly the sprinter size vans; and those two streams of traffic come together at our airport and hub locations, where the palletes are sorted in one area and the packages in another and then they're joined together for the line haul.

So TNT is very similar in Europe to the way FedEx is organized in the United States that I just mentioned to you.

They have terminals which have pallet sortation facilities in one end, package sortations in the other.

The main difference is they have had vehicles which do both palletes and larger business-to-business package deliveries.

The attraction of TNT was many fold, but I have to tell you that one of the key attractions was their unduplicated express freight network in Europe.

And of course, Europe, there's a high density of population, and their ability to move these palletes very fast throughout Western Europe was a tremendous advantage.

Now we have very extensive Express Freight capabilities in Brazil, Middle East, Southeast Asia and many other places around the world.

So we will definitely continue in the Express Freight and the package business, in the Express segment.

Now let me hasten to add that our Express Freight business is very different than Mike Ducker's FedEx Freight unit.

Average weight per shipment is almost 4X.

The nature of the commodities is quite different.

The pricing is quite different, and so forth.

Similarly, Henry Maier's FedEx Ground is quite different than FedEx Express' parcel operations.

And in Europe, there is a very distinct Ground parcel sector where there are a number of competitors.

But TNT's aggregate pallet and package business, mainly in Europe, but around the world, was a very attractive feature of that company which led us to have an interest in buying them.

And we will be very much continuing to provide International Priority Freight and International Economy Freight and IntraEuropean Freight, and in those other areas and regions I mentioned to you.

Mike?

I'm not sure I can add to that answer.

(laughter)

Well, you prepped me well then.

I'm afraid to answer it anymore.

But this is Dave Bronczek.

I'd just add, as Fred outlined it very well, most of you have been to Memphis in our Memphis hub.

There's a whole freight area that you've seen.

It's around the world the same, Dubai is the same, Hong Kong's the same, Brazil and around the world.

One of the big advantages of TNT -- and Fred's right, that goes unnoticed -- is their ability to handle very profitable freight.

And that's a part of their business that now we're going to put into our global network of parcels and palletes, and it's been very successful for us and it's a nice part of the business that we added with TNT.

It's also part of what we actually viewed when we went to Australia just a month ago.

Fred Smith and I went to visit our colleagues in Australia TNT, and our FedEx Express folks in Australia.

The combination down there could be very, very powerful for us.

We're looking at a way to make that whole marketplace much more successful, much more profitable, and it gives us an opportunity to now leverage one with the other that we didn't have in the past.

So to Fred's point, it's a great part of TNT's new business, which is now part of the FedEx business.

Second question comes from Scott Schneeberger of Oppenheimer.

Could you please compare and contrast the major components FedEx's e-commerce opportunities in the US and Europe now that TNT is a part of your portfolio, and what are some key strategic initiatives you expect to implement to capitalize on growing European e-commerce?

Mike Glenn, why don't you take that and then Dave jump in?

Thanks, Fred.

Well, first of all, let me say that we believe there's significant opportunity for FedEx both in the US from an e-commerce market perspective, as well as in Europe and around the world.

And our objective is to build out a robust portfolio of services in Europe and other countries, just as we have in the US, to include a choice for e-commerce customers in terms of getting their packages delivered in a reliable and efficient manner.

That's going to be a significant focus for us as we integrate TNT.

And we believe the additional density within the European network that TNT will bring to FedEx will allow us to compete on a much more aggressive basis as a result, so --

This is Dave again.

The jewel in the crown always at TNT was the very best ground road network in all of Europe.

It's great service.

They have great people, great cost structure.

So with that now in our portfolio around the world, customers have always asked us for a solution for e-commerce to move across the world, and mainly into Europe.

And now we'll have that opportunity to do that very successfully.

So thank you.

Okay.

Now we're going to take two questions.

Thank you.

FedEx would like to invite questions via e-mail.

To e-mail your question, please use the IR@fedex.com e-mail address and provide your full name and contact information.

(Operator Instructions)

We do have our first question from Chris Wetherbee with Citi.

Thanks and good afternoon.

Wanted to follow-up on some of the longer term opportunities with TNT as part of the business.

When you think about the $750 million in annual synergy target exiting FY20, can you help us with some of the buckets?

Alan, I know you gave us four primary buckets of synergies.

Is there any way we can group those there, any one of those buckets seem to be more representative of growth than others?

Just want to get a sense of how to think about that.

Thank you.

I think what we have done today, Chris, is as far as we're going to go in this quarter.

On the synergy side, we are in the process of validating the strategic business case that we used when we made the acquisition and we've got some work to go along there.

I haven't seen any surprises or disappointments, at this point.

I'm very upbeat about where we are in this process with the team that we put together and with the energy that I'm seeing over there.

We might be able to give you some more by the time we get to Q3 or Q4 that you're looking for in a little bit more detail.

But at present, we've got that target out there and we'll be updating you on how we're progressing towards that as we move forward, but you have to give me a couple more quarters.

I think on the expense side of what we're looking at, particularly in FY18, is some of the timing of some of these integration moves that we're making and some of the restructurings that we'll be making.

We don't have those firm enough for me to tell you much about FY18, just because of the timing issues.

But again, later on in the year, not in the second quarter, but maybe the third quarter call, we'll be able to, I think, expand on what we've told you today, which I thought was a lot of information that we gave you.

Our next question is from Allison Landry with Credit Suisse.

Thanks.

Good afternoon.

In terms of the TNT, the outlook restructuring costs, it looks like you're expecting it to be about $75 million in FY17.

I was wondering if you could quantify the benefits that you saw during the first quarter and when you think the profit improvement will more than offset the restructuring costs?

Well, as I said, and you can see in the chart in the appendix that we put out there, TNT's earnings in the first quarter were fairly small.

But we expect to see that improve as we go through the year, and it will be accretive on an as adjusted basis.

But we aren't going to start giving different segment outlooks at this point, for sure.

But like I said, I'm very happy with what I've seen.

I'm particularly enthused about the people that I've met across the organization and just how energized they are, how excited they are to be part of a team that can bring the investment needs and the brand to what they do every day.

And we're as confident as ever about the long-term return.

Okay, back to the internet questions that were submitted in advance.

Bascome Majors of Susquehanna.

How has FedEx been impacted by the significant growth in oversized, overweight residential e-commerce shipments that blur the lines between parcel and LTL?

Do you see a significant opportunity to grow residential deliveries in your LTL business?

So how do you avoid margin pressure from this B2B to B2C mix shift freight?

So Mike Glenn, Henry Maier and Mike Ducker, take it away.

As I commented in my industry remarks, we have seen a significant increase in the demand for oversized and heavier residential packages.

I referenced flat screen TVs, mattresses and trampolines, and we expect that trend to continue.

Having said that, we believe the bulk of that volume will be in the Ground network.

We've made several pricing adjustments to make sure that we're compensated accordingly for handling that traffic and we'll continue to reevaluate those.

I also referenced that we've put up dedicated sort facilities.

Henry can comment on that more.

But we would expect the bulk of that traffic to stay in the Ground network for a variety of reasons.

It's possible that we could see some bleed into the LTL network.

That were to happen, obviously we would make any necessary pricing adjustments to prevent margin decline.

This is Henry Maier.

The increase in large packages is clearly being driven by e-commerce.

It also goes without saying that these packages create some operational challenges for us.

For instance, they don't always fit on our standard sortation equipment and they take up more space in line haul and delivery vehicles, in addition to being more difficult to handle.

We recognize customers have few options here, so we've realized that they look to FedEx for solutions.

And in that end, as Mike mentioned, as part of our network expansion strategy, we are now operating temporary non-conveyable annexes.

This year at peak, we will own six of them, which are essentially separate buildings designed to handle just these type packages which don't fit on our standard sortation equipment.

We've strategically located these facilities in parts of the country where our experience and history has shown that shippers reside that ship these type packages, and continue to investigate how we handle these in the future.

We're encouraged, because there's some pretty interesting new technologies with respect to material handling equipment coming out that would be targeted directly at this type of package characteristics.

As time goes on, I think we'll employ more of that in our operations.

Mike Ducker.

I would only add that it is really less than 3% of our overall shipment count that is residential.

It's not a big opportunity, and seeing no big transition as a result of the e-commerce initiative.

Here's a question from Helane Becker of Cowen.

A lot of companies are starting to experiment with UAVs.

Is FedEx experimenting, as well?

If so, how is that going and what do you think the timing would be of using UAVs, both in the air and on the ground?

Also, is it realistic to believe there could be unmanned trucks?

Is FedEx going down this route?

(LOL, pun intended).

So Helane, obviously, we at FedEx are very mindful of these trends.

We have a number of activities underway in robotics, in particular.

In the package handling sector, Henry and FedEx Ground are real leaders in this regard.

In terms of UAVs in particular, we have five separate -- I think it would be not fair to call all of them projects, but work streams or projects in both aviation and automated vehicles.

The difference with us and a lot of other people, we just prefer to keep working those issues and tell you about them when they make a meaningful difference in the company.

But I will say this much.

I think our philosophy, and we know a lot about these technologies, after all, our auto pilots and our 777 airplanes are among the most sophisticated robots in the world.

They can take off, land a plane and taxi to the gate and turn themselves off, if that's what we chose to do so.

But it's very difficult in the foreseeable future to substitute for the well-trained pilot or driver or person.

And we look at the use of automation more as an opportunity to improve the productivity of those types of experts within our system to make their job more comfortable and easy, and above all, to increase safety.

So those five work streams are underway.

You'll hear a lot about them, I'm confident, in the next few years.

But it's important, and our philosophy may be slightly different than a lot of other people that think that right over the horizon, everything is going to be an automated vehicle or some sort of UAV.

We think that is unlikely and that this technology, like most technology, particularly aviation technology, will evolve incrementally over time with a great emphasis on safety first.

So that's our UAV update.

Okay.

Two questions?

First up, we have Tom Wadewitz with UBS.

Yes.

Great.

Thanks for all of the color on the call.

And Alan, in particular, all the financial information around TNT is very helpful.

I wanted to see if you could give us a sense of just to understand, is there a base operating income level that we should be considering for TNT and you're adding $750 million on top of that, or is $750 million really the bucket that you end up with at the end of FY20 in terms of operating income contribution?

And then also, the goodwill amortization, is that going to come in at some point or we should just consider that number, I think you said like $115 million a year, that's just excluded from the way you look at TNT going forward?

So anyways, thanks for the information, just looking for a little more to understand it better.

Thank you.

There will be some base TNT in that number of $750 million.

But you'll be able to see, when we report what they earn at the end of this year, how much of that is actually increase going to be in synergies.

So when we get there, we can give you more detail about that.

As to our purchase price accounting, you'll see in our 10-Q that the purchase price was $4.9 billion.

There was about $3 billion of goodwill in that, which we will not be amortizing, and hopefully, we will never amortize it, as we will seek to make sure that we will earn plenty of money to justify the carrying cost of that goodwill.

And the intangible assets, the biggest one is the customer relationship that we're looking at right now.

We've got that on the books for $685 million and a 15-year useful life.

We're going to work that very hard.

We also have technology and trademarks, and you'll see that in the 10-Q, as well.

I reserve the right to change these amortization lives and amounts as we get further through this process.

And as we do that, we'll keep you fully informed.

Our next question comes from Rob Salmon with Deutsche Bank.

And Rob, if you could check your mute function, please.

Hi.

Sorry about that.

Thanks for taking the question.

With regard to the US domestic package market, we've seen both you guys and your primary competitor, Brown, announce some decent increases to the dimensional based pricing.

And obviously, in 2017 you're taking another step here.

I'm curious from a strategic standpoint, what risks do you see with the USPS highlighting the fact that they haven't made any changes there and how you attack that from a competitive standpoint, whether it's through the Postal Regulatory Commission or just service.

I'd be curious to get your thoughts there.

Well, I'm not going to comment on any competitor's pricing actions, but I'll say that our decision was driven by a couple issues.

One is we wanted to rationalize our dimensional weight policy for both domestic and international, which we have now done so.

Both Domestic Express and International shipments will both carry a [dim] divisor of 139.

In addition to that, obviously one of the key issues for us in managing the network is the density per package.

And one of the challenges that we do see with the increase in e-commerce transactions is packaging that is not as efficient as it could be.

And there are a number of benefits to becoming more efficient.

You can use smaller packages, which is one.

Obviously, it's more sustainable from that perspective.

And we encourage customers to take advantage of our state-of-the-art packaging lab to make sure that they maximize the packaging that they have to avoid these charges.

So that's primarily the driver behind our decision, and that was made independent of what any competitor might consider.

I can't comment on that.

Okay.

A couple more questions from the internet.

David Ross.

Why is the Company buying back stock rather than paying down debt and deleveraging?

I think I'll just have Alan answer this.

Thanks for the question over the internet, David.

As you know, we have very strong cash flows inside FedEx Corporation.

I think you heard me today talk about how excited we are about the future and continuing to grow those.

And the fact of the matter is we believe our stock's undervalued.

But we're also investing in the Company's future at the same time.

I think we get criticized a lot about our capital expenditures, but they all carry very solid long-term return on invested capital.

We wouldn't be doing them.

And then lastly, although we've got a lot of debt, I should tell you that the average coupon on that is 3.6%.

So every project that we're doing is going to be earning way more than that on an annual basis.

So our credit metrics are good.

We've committed to improving our credit metrics, but we'll continue to buy back stock, raise dividends and invest in our businesses going forward, because we can and we're going to manage it accordingly.

Okay.

There are a couple of questions in here from Tom Wadewitz of UBS and Allison Landry, essentially about density, improving density levels and the issue of Smart Post deliveries by FedEx Ground and FedEx Smart Post.

So let me just make one comment here and then ask Henry to talk about it.

I have said this over and over again for the last couple of years.

There is a continuing misunderstanding of the issue of route densities, revenue per stop, and the profundity of those metrics on the e-commerce business.

And there is no one, no entity that can provide the type of route density and cost for lightweight residential delivery as the postal services, both in this country and abroad.

Postal service in this country -- correct me if I'm wrong here, Henry -- makes 156 million stops per day.

So they are a mail company that puts parcels in with the mail stream, usually in very small vehicles, 200,000 150 cubic foot Jeeps.

They are out with an RFP for somewhat larger vehicles and so forth.

So the real question about e-commerce is what's the future of mail and what implications does that have on the price of the delivery of packages?

Put a different way, it is mail that subsidizes the delivery of packages, not packaging subsidizing delivery of mail.

And the Postmaster General talks about this in her calls and so forth.

And it has been a very, very good thing for the Postal Service that the big carriers, like FedEx and UPS, that have these enormous upstream systems can feed these lightweight residential packages into the postal business.

They don't have to have that investment, the hubs, the sortations and so forth.

And similarly, Amazon, of course, now has a very substantial direct injection on their own.

But there is no comparable entity to the Postal Service in terms of density.

And even the most rapid projections of e-commerce growth will not be a fraction of the density that the Postal Service has today.

So there are these continuing articles about this, and more and more things are going to affect the density.

My goodness, they would have to be quantumly greater than is the case.

And so that's the real question about e-commerce is what are the price of those deliveries on a go forward basis, which are driven either by density, in the case of the Postal Service, or input cost?

And so Henry, jump in here.

This is the issue and is very poorly understood.

And I've called it everything I can think of, mythology or whatever you might want to say, but most of the commentary on this is not accurate.

Well, I would just add to that, Fred, thanks, that even with the 156 million unique addresses that present an opportunity for a delivery every day, that base is growing by 900,000 addresses a year.

So this is a moving target.

And I would tell you, even with the tremendous growth all of us who participate in e-commerce are seeing, were really only delivered to a small percentage of those addresses every single day.

We just happen to have very complex state-of-the-art software tools that allow us to take a slug of packages, I guess, for lack of a better word, what we're presented with every day by our customers and optimize those packages for the most efficient delivery.

Now what's been going on at FedEx Ground is really an understanding of this phenomenon and what e-commerce is doing with respect to changing our business.

Our Holy Grail here is to improve delivery density and revenue per stop.

And the only way you can do that in our network is with the network integration we've been going through for the last several years, which includes the integration of Ground and home delivery, and now, since last September, we announced we're integrating Smart Post in that, as well.

Over the top of this is the technology needed to manage the most optimal route of distribution of those packages every single day.

Having a single contractor network, which we announced in January, we're moving to a single contract.

And we expect to be essentially 90% done with all of this by 2020.

You lay over our ability, beginning earlier this year, to be able to statically match packages that are destined to the same residential delivery address every single day, and next summer, the ability to do that virtually, plus some additional engineering around deliveries on certain streets and neighborhoods when there's another residential package involved.

And what we end up with here is a much more efficient, much more flexible, a network that has much lower costs, much better capital asset utilization going forward with the growth of e-commerce than the one we have today.

Okay.

We'll take two questions from the call.

Our next question comes from Jack Atkins with Stephens.

Good evening.

Thank you for the time.

Just going back, Alan, to your comments on the synergies for a moment.

Are the synergies, just to be clear, are the synergies in addition to the expectations for margin improvement from the outlook program that TNT was already undertaking?

And then also, could you quantify the EPS accretion from TNT that is embedded in the adjusted FY17 guidance?

Thank you.

I'm not going to go there on number two.

That would be, again, trying to break us down by segments and EPS delivery.

As to number one, we bought TNT for a reason.

We didn't own them last fiscal year, except for a couple of days.

So when we get out to 2020, what I'm saying is we'll be $750 million of synergies better off than we would have been without them.

So you'll be able to very easily measure that and follow that along.

And as I said, we'll talk about this more after we've completed our validation of our strategic business case and met with our Board of Directors about where we stand on that, which is going to take us a little bit of time to get to, because we're also right in the middle of the throes of actually integrating, as I mentioned to you in my opening remarks.

So just have a little patience.

But the whole point was to tell you this thing is a home run, it's going to be a home run, and we are going to have that done by four years from now and we will continue to update you along the way.

It's going to be a great ride.

Our next question comes from Brandon Oglenski from Barclays.

Good evening, everyone, and thanks for letting me get on here for a question.

I'll just second that we definitely appreciate the TNT disclosure.

I think your investors will, too.

And we'll also be shipping plenty of trampolines this fourth quarter.

Henry, on your Ground margins, it looks like you actually got a little bit of improvement year-on-year.

I know there's some issues with casualties last year.

But nonetheless, as we look forward, I think a lot of folks had been worried that the network integration costs of expanding at such a rapid pace, growing the top line so rapidly, would weigh heavier on the margin.

So can you talk to the market dynamics?

Has volume gotten better?

Is demand better than forecast, pricing better, or should we be thinking maybe those headwinds still loom in the near term?

Well, let me let Mike comment on the market here.

Well, let me say that customers still have had demand for our Ground service for the simple fact that it's extremely reliable and we are faster than any other ground network out there by a significant percentage.

So our sales team continues to have great success selling our Ground service.

Let me say that from a volume growth and yield management perspective, we're always looking for the right balance there to maximize the profitability.

So we work very closely with Henry and his team to make sure that we're making pricing decisions that are going to contribute to long-term profitability.

And that's going on on a weekly basis.

So we've got good collaboration there.

But we continue to see strong demand for Ground because of the value proposition that it provides.

This is Alan.

I'm going to give you a little bit of color on where Henry is right at the moment.

We have invested and are investing significantly this fiscal year in Ground to get to the next level where we need to get.

And it's a big capital step, I will tell you.

So it's $2 billion of this year, maybe the same even next year.

And that course has a cumulative effect.

You aren't, when you turn on these new facilities, they aren't full day one.

You have to work them through the systems and they have a little bit of a drag.

That drag is fine, to me, because I know what the long-term results are going to be.

I know the growth that Ground is going to have.

And originally, we did get a little surprised by how quickly these non-conveyables and oversized things grew.

We're going to lean right into that.

We're going to be the best in the business at getting those delivered.

We're going to get them priced right.

They got to be handled a little bit differently.

So that also has a start-up cost associated with it.

So I gave you guidance for the full company for the year.

Henry's comparisons are going to be a little bit more difficult because of all this investment that we're making.

But the state of the business is as good as it's always been and I can't wait until we turn the corner from this period of heavy capital investment.

Okay.

Two questions now?

Well, here is one for you, Henry, and Mike, whichever one wants to take it.

Can you discuss and quantify the synergies thus far with GENCO in your portfolio, as well as some strategic initiatives for this business over the coming year or two?

Well, we bought GENCO because of their expertise in fulfillment, traditional 3PL services and returns.

That expertise allows us to compete for business that we wouldn't have been allowed to compete for before.

And on top of that, we get to secure the transportation business.

I would say strategically right now, we continue to look and explore products that enhance e-commerce fulfillment and add to the returns portfolio they currently have.

And I would also add here that we expect the integration of GENCO to be essentially complete by the end of FY17.

Okay.

Here is one from -- well, Matthew Troy sent one from Wells Fargo Securities about the dimensional pricing calculation.

I think Mike has answered that as to what drove it and why we did it.

It's to standardize it across the enterprise, and basically the realities of the increased cost in handling it.

William Flynn just sent one in.

When you think about the acquisitions you made over the past 30 years, which ones do you view as transformational?

I guess if you stack ranked them, the three that would be in top tier categories would be Flying Tigers, which put us into an unprecedented position in the growing Asian market; certainly Caliber/RPS, which is now FedEx Ground; and TNT would be right up there.

And it's going to be, as Alan said, a very, very significant earnings engine for us.

And what's a little bit different about Tigers and Caliber and RPS, those gave us presences in adjacencies, in adjacent markets.

Tigers in the intercontinental business.

We were much smaller as FedEx, and so we had to go out there and develop the business.

And Alan will remember this with keen detail, like I do.

We bought it at the optimally worst time.

The Gulf War started and air cargo basically stopped, which was an interesting set of circumstances, but it put us in an unprecedented position.

That's why we're the market leader in air cargo and air express.

Caliber RPS, of course, put us in the Ground segment, which we had not been in before.

And through a lot of work by a lot of people, Mike Glenn, in particular, heading up some of these transitions we made, of course, it's a fabulous business now.

And TNT, as Alan has told you there, we're going to get the synergies just from putting the companies together and then we're going to build additional profitability on top of that.

So it's going to be a great thing.

And I think Dave Bronczek and Alan have all said this, but let me just add to it, just wonderful people.

We have just been so thrilled with the folks that we've gotten.

Many, many of the TNT people are now in high executive positions in FedEx, and I think it's going to be a great thing.

Next, we'll take two more questions.

Paul?

Next up we have [Kevin] Hoexter with Bank of America Merrill Lynch.

Great.

Good afternoon.

Thanks for taking the question.

You talked a lot about the integration of TNT, but maybe talk about are the expenses at this stage larger than what you thought they would be, given the couple months under your belt?

I want to understand what, as you talk about the expenses?

And then also, you had talked before about the tax potential.

Is that something that will roll in over time, Alan, or is that something we could see in stair step function?

Thanks.

I've been really pleased with how well our spending has followed what we had designed in the integration plan.

We knew that IT was going to be a big one.

And that's the long pole in the tent.

But we've got really good people working on this.

And you've heard what we're already starting to integrate.

That's a little bit ahead of what I thought we would be able to do.

So when I say 700 and 800, that's kind of what we thought about all along.

And as I said, there will be some restructuring charges along the way.

When we bought Flying Tiger, when we bought Ground, there wasn't the "integration" so much to say as there is in this one.

So this is a little bit different for us.

But we're well ahead of the game.

So I'm very comfortable with how that's going.

And just stay tuned and bear with us and we'll keep you updated and apprised.

But it's going to be a home run.

This is Dave.

To follow-up on that, I've been in Europe a lot of times now in meeting with the whole team over there now, the TNT people that have joined FedEx.

And I have to say, and Fred said it and Alan said it, the people are fantastic.

Service is second to none on the Ground, as they are the best in Europe, coupled with the best air express system in Europe.

We have this opportunity to make this, not only what Alan said, a home run, think is a grand slam.

This has gone exception well, because their people and our people have matched culturally.

At the end of the day, that's the main thing.

Back to the second one, Ken, on tax.

You tell me, are we going to get tax reform or not?

The US is shooting itself in the foot by continuing to not do territorial and have the highest tax rate in the world.

What I'm saying is based on today's laws, we're going to earn a whole lot more in lower tax places than we do today, and over time, that's going to drive our rate down.

We also are in the process of restructuring our tax structure.

And I think we're going to be much more efficient in terms of paying taxes where we actually earn the money than we've been able to do as a US certificated air carrier over the years.

So both of those should work in our favor.

And neither one of those benefits are in the $750 million.

The $750 million is above the line.

Our next question comes from Ravi Shanker with Morgan Stanley.

Thanks.

Good afternoon, everyone.

So not to beat a horse here, but when you consider the outlook costs and the integration costs, can you tell us how much of that is going to be expense versus cash, and also can you give us an update on the Hanjin situation and if you're seeing any benefits or any exiled freight as a result of that?

Thanks.

The only thing that's not cash, Ravi, are the amortization of the intangible assets.

Everything else is cash.

And I've given you all those numbers in my presentation and they will all be restated in the 10-Q.

And I've only given FY17, at this point.

The total $700 million to $800 million is integration costs by itself and does not include any intangible assets.

So that might help you a bit.

I'll let somebody else handle Hanjin.

Yes, this is Dave.

We haven't, there's no effects for us really at the moment whatsoever, on your last question, Ravi, on Hanjin.

So we'll just take questions now from the live call.

Our next question comes from David Vernon with Bernstein.

Hello.

Good afternoon, guys, and thanks for taking the question.

Mike, could you maybe help us dimension how much the [dim] weight change would affect, what percentage of the business would be affected by that and what kind of earnings impact you think that might have in the near term?

Just trying to get a sense for what portion of volume that [dim] weight charge could apply to.

Well, I appreciate the question.

But with all pricing decisions, we don't forecast the economic impact and the profit impact of that or the percentage of volume that it's going to impact.

Obviously, as I noted before, we would love to see customers access our world class packaging lab to continue to provide more efficient packaging, and we hope they do so.

And so it's hard to determine what percentage of packages it will affect, because we hope behavior changes.

But we don't forecast the bottom line impact to these changes.

This is Alan.

We actually do internally, but we don't externally.

(laughter) And so let me just say, it's a good thing.

Our next question comes from Scott Schneeberger with Oppenheimer.

Thanks very much.

Could you discuss what you've seen with regard to pricing and the capacity environment in the international markets, at least with regard to demand to International Priority and International Economy, as that trend's look pretty good right now for you?

Thanks.

Well, as you've seen in our numbers, it's actually very good for us right now.

The International Priority box is up 3%.

The International Economy is up, as well.

So in many of the segments that we are really leading the world, the volume is there and it's growing.

On top of that, the yields are increasing.

So I would say, and Mike might want to add to this, on the international front, we're right in the mainstream where the main business is growing and it's very good for us.

And I would just add that we've got a rational pricing environment, so we feel pretty good about where we're situated.

Okay.

We'll take one more question.

Our final question comes from Helane Becker with Cowen and Company.

Thanks very much, Operator.

Hi, everybody.

Thanks for the time.

And Fred, thank you for your earlier in-depth answer.

Just one question, Alan, and I'm sorry it's short-term in nature.

But in terms of the guidance that you gave us, the $0.10 raise, was it due to TNT or due to the increase because of improvement in the base business?

Thanks.

Well, it's from my All-Star Dave Bronczek and his team.

They're knocking it out of the park, and you see what their margin in the first quarter is.

He's been having a heck of a year, and so that was the reason for it.

That does conclude our question-and-answer session.

I'll turn the call back over to our speakers for closing comments.

Thank you for your participation in the FedEx Corporation first quarter earnings release conference call.

Feel free to call anyone on the Investor Relations team if you have any additional questions on FedEx.

Thank you very much.

Bye.

Once again, that does conclude today's call.

We appreciate your participation.