聯邦快遞 (FDX) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to the FedEx Corporation Fourth Quarter Fiscal Year 2018 Earnings Conference Call.

Today's call is being recorded.

If you have any questions for the conference call, please e-mail them to ir@fedex.com.

Only questions submitted by mail will be discussed on the call today.

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, and welcome to FedEx Corporation's Fourth Quarter Earnings Conference Call.

The fourth quarter earnings release, stat book and earnings presentation slides are on our website at fedex.com.

This call and the accompanying slides are being streamed from our website, where the replay and slides will be available for about 1 year.

Questions are welcome through our e-mail address, which is ir@fedex.com.

When you send your question, please include your full name and contact information.

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 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 the 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 are: Fred Smith, Chairman; Dave Bronczek, President and Chief Operating Officer; Alan Graf, Executive VP and CFO; Mark Allen, Executive VP, General Counsel and Secretary; Rob Carter, Executive VP, FedEx Information Services, and CIO; Don Colleran, Executive VP, Chief Sales Officer, FedEx Corporation; Raj Subramaniam, Executive Vice President, Chief Marketing and Communications Officer, FedEx Corporation; David Cunningham, President and CEO of FedEx Express; Henry Maier, President and CEO of FedEx Ground; and Mike Ducker, President and CEO of FedEx Freight.

And now Fred Smith will share his views on the quarter.

Thank you, Mickey.

Welcome to our call to discuss earnings for the fourth quarter and the full year and our outlook for fiscal 2019 and beyond.

We're very proud of the financial and operational results FedEx delivered in fiscal 2018, and let me congratulate our more than 425,000 team members worldwide for a job very well done indeed.

FedEx Express posted solid revenue growth and is making good progress towards improving operating income by $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017.

The FedEx Ground modernization and optimization are paying off with more efficient handling with the increasing growth of business-to-business and e-commerce shipments.

FedEx Freight margins are increasing due to an improved industrial business environment and a better balance of volume, pricing and capacity.

Our leading-edge technologies now allow customers to conveniently pick up, drop off or ship at approximately 60,000 locations nationwide in the United States.

FY '18 was a year of opportunity and quite frankly, challenges, anticipated and unexpected.

And FedEx emerged more competitive than ever.

We're committed to increasing our margins, earnings, cash flows and returns while investing for long-term profitable success.

We believe our shareowners, team members and customers will reap the benefits of this approach by creating sustainable differentiated advantages.

In all my years at FedEx, I have never been so optimistic and so sure of our strategy and our ability to deliver an exciting future.

Having said that, we do remain concerned, however, about threats that diminish the free flow of goods among countries.

Trade is a 2-way street, and FedEx supports lowering trade barriers for our customers, not raising them.

Finally, let me extend the best wishes of the corporations and -- the corporation, the board and all of our teammates and most importantly, from me personally, to FedEx Freight President and CEO, Mike Ducker, as he retires this summer.

This will be Mike's last call.

Mike has been our partner for more than 43 years, and he always answered the call when asked to lead in each new opportunity.

Whether in Europe, Asia or in the Americas, Mike has been truly the model of our people service philosophy -- People-Service-Profit philosophy, and I must tell you, he is one of the most outstanding leaders and executives that I have ever seen in any field.

So Mike, you're retiring with our best wishes and we're going to miss you, but since you only live right down the road, we'll see you a lot.

So here's to you, Mike.

So with that, let me turn it over to Alan for his comments.

Thank you, Fred, and good afternoon, everyone.

For the quarter, adjusted earnings were $5.91 per share, up 41% year-over-year, driven by tax benefits and improved operating results that are covered in the earnings release.

Our adjusted consolidated operating margin was 11.5%.

All 3 transportation segments achieved the fourth quarter operating margin targets that we provided last quarter.

Turning to the full year, we finished the year with an adjusted EPS of $15.31.

That's up 27% year-over-year.

We invested more in our people to share some of the benefits of the U.S. Tax Cuts and Jobs Act by advancing our annual pay increases for certain U.S. hourly workers to April 1, from the normal October date for 2018.

Our capital expenditures were $5.7 billion or 8.7% of revenues.

We repurchased 4.3 million shares for approximately $1 billion in FY '18.

In FY '18, we contributed $2.5 billion to our tax-qualified U.S. domestic pension plans.

Regarding pensions, I would like to take a few minutes to explain the effect the new pension accounting rules will have on our financial results for FY '19.

Going forward, only the pension service cost will be included in operating expenses.

All the other elements that make up total pension expense will now be classified as other nonoperating expenses, including the year-end mark-to-market adjustment.

For example, in FY '18, our total pension expense, excluding mark-to-market and other pension adjustments, was $224 million, while our service cost was $812 million.

So while there is no impact to net income from these new rules, they will negatively impact our operating margin by about 90 basis points.

Of course, prior years will be re-cast to conform to these new rules, so there will be no year-over-year impact once we have an apples-to-apples comparison starting in the first quarter of FY '19.

Since our primary pension plans are fully funded under ERISA, contributions will not be required for the foreseeable future.

As a result, most of the service cost expense is really a noncash item.

That has a material effect when modeling our cash flows.

While no cash contributions are required in our primary U.S. pension plans, we will make voluntary contributions during FY '19, but they will be at a much lower level than the $2.5 billion we contributed in FY '18.

I would also like to comment on the pension derisking transaction that we executed in Q4 to remove approximately 20% of our pension liabilities from the balance sheet through an annuity purchase with MetLife.

This $6 billion transaction was the largest single transaction in our history, and it represents a win for both our shareholders and our retirees.

This event follows a long line of derisking activities, including plan design changes and special lump sum settlements all designed to reduce the volatility of our pension liabilities and further strengthen our balance sheet.

For FY '19, FedEx is targeting revenue growth of approximately 9%.

We're also targeting the following before year-end mark-to-market retirement plan accounting adjustments and excluding TNT Express integration expenses: an operating margin of approximately 8.5%, remember, that's being reduced by the service cost; and earnings of $17.00 to $17.60 per diluted share.

Initially, we are anticipating an effective tax rate of approximately 25% prior to year-end mark-to-market retirement plan accounting adjustments, which is higher than our FY '18 effective tax rate due to tax benefits from transactions and TCJA impacts that will not reoccur during FY '19.

We expect our FY '19 cash tax rate to be lower than the U.S. statutory rate of 21% due to the favorable capital expensing provision created by the TCJA.

Cash flows will improve as earnings grow.

For FY '19, depreciation and amortization is expected to be approximately $3 billion, but FedEx will generate very strong cash flows.

Capital spending is expected to decline slightly to $5.6 billion or about 8% of projected revenues.

Our TNT integration expenses are projected to be $450 million, and we expect voluntary contributions to our primary pension plans in FY '19 to be significantly lower than FY '18.

Last week, we announced that we are boosting our FY '19 dividend by 30% to $0.65 per share per quarter.

We are confident that we will achieve the operating income improvement at Express of $1.2 billion to $1.5 billion in FY '20 versus FY '17, assuming moderate economic growth and current accounting and tax rules.

And now Raj will provide more color for our forecast and our strengthening position in the marketplace.

Thank you, Alan.

I'll open with our economic update and outlook and then discuss our revenue performance and business conditions in each segment and provide some commentary on broader industry trends and our growth priorities.

The economic outlook remains very favorable.

The U.S. industrial sector has shifted into higher gear, and capital spending is expanding.

Consumers are benefiting from a strong labor market, and tax cuts are supporting incomes.

Overall, overall sentiment remains near multi-year highs.

Globally, the structured 3-speed world is becoming visible again after a couple of years of synchronous global growth.

While the U.S. accelerates, the Eurozone and Japan are slowing and the emerging world continues to post the fastest rates of growth.

On balance, we expect another year of strong global growth as economic momentum runs at a healthy pace.

Sound fundamentals remain in place to underpin sustained growth in global manufacturing and business investment.

The next few slides show details of revenue, volume and yield performance by transportation segment.

It is clear, our pricing strategies that allow us to grow volumes and increase yields across the portfolio show continued success.

For our U.S. domestic express business, revenue and yield increased 4% and 3%, respectively.

Excluding the impact of fuel, yield per package increased 1%.

FedEx Express international export package revenue increased double digits by 10% in Q4, primarily due to yield increase of 10%.

Excluding fuel and exchange rate impact, yields increased 3%.

Ground segment revenue also saw double-digit growth at 12% in Q4, with volume and yield each up 6%, continuing the strong volume growth from Home Delivery and balanced volume and yield growth in commercial.

Excluding fuel, yield per package increased 5%.

At FedEx Freight, revenue per shipment increased 8%, mainly driven by our revenue quality efforts.

Excluding fuel, revenue per shipment was up 6%.

Revenue per shipment growth was driven by stronger weight per shipment and ongoing emphasis on revenue quality improvements.

Let me now discuss some exciting new enhancements to the FedEx portfolio that will help drive our growth in fiscal year '19.

First, we believe that the realignment of FedEx Trade networks that we recently announced is a very positive step for FedEx.

It allows us to leverage the vast array of capabilities, including air and ocean forwarding, supply chain and fulfillment services, CrossBorder capabilities, 3D printing and customized transportation solutions across the full global portfolio of FedEx.

In effect, FTN becomes the force multiplier for our business as our customers benefit from differentiated solutions for their supply chain needs.

E-commerce continues to grow rapidly around the world, and we continue to enhance our global portfolio to offer market-leading capabilities on a global scale.

During the last quarter, we acquired P2P Mailing Limited, which provides unique last-mile delivery options to more than 200 countries and territories.

P2P further expands the capabilities of FedEx within the CrossBorder e-commerce market segment.

We also experienced significant growth in the usage of FedEx Delivery Manager platform, especially in the last year.

Total new Delivery Manager enrollments were up 50% year-over-year during fiscal year '18.

We have been expanding FedEx Delivery Manager internationally and are now in 42 countries, representing 75% of the world GDP.

Additional new countries in the Middle East, Asia and Latin America will be added in fiscal year '19.

E-commerce also brings significantly more returns, and we have expanded our returns technology to enable e-tailers and consumers with unique visibility, flexibility and efficiency around returns management through our FedEx Office locations.

We continue to enhance customers' access to our services with additional FedEx Office locations, including the first 50 new FedEx Office locations inside Walmart stores opening in time for the upcoming peak season.

We anticipate adding a total of 500 FedEx Office locations inside Walmart stores over the next 2 years.

The FedEx Onsite program continues to expand with Walgreens and other retail partners, and we already have almost 11,000 package pickup locations in the U.S. This program is all about convenience and brings FedEx ever closer to consumers.

We, of course, are deep into our preparations for the upcoming peak season, and we will announce more specific plans and expectations with the peak season in upcoming months.

We are proud of the close collaboration with our customers and the detailed forecasting processes that we use.

The final results in peak 2018 were a 99% match to our forecast, which allowed us to very effectively prepare and position people and operational resources and ultimately, deliver outstanding service even on the busiest days of the holiday season.

Let me now turn the call over to Dave Bronczek for his remarks.

Dave?

Okay.

Thank you, Raj, and good afternoon to everyone.

We are proud to report record Q4 adjusted operating income of $2 billion for FedEx Corporation, which is up $255 million year-over-year or 15%.

And as Alan just said, we told you last quarter, we expected operating margins at all 3 transportation operating companies to improve for the fourth quarter and they all did.

At FedEx Express, fourth quarter adjusted operating profit hit a record $1.1 billion, up $129 million year-over-year or 13%.

And their adjusted operating margin was double digits at 11.5%.

FedEx Express segment revenue growth was driven primarily by our international business.

And we had excellent growth in both international and U.S. Freight services, which helped drive better profitability.

As you saw in the release, we are continuing to improve the efficiency and the reliability of the air network with additional orders for new aircraft that will replace older, less-efficient aircraft.

The deliveries of the additional 767s will begin in FY '20, and the deliveries of the additional 777s will begin in FY '21.

The reliability of our air fleet has improved significantly, and we'll continue to improve in this next phase of the fleet modernization program.

Now with respect to the TNT integration, I am happy to say that at the 2-year mark, the integration is accelerating and that significant expansion in our network dramatically improves our global capabilities and our competitive posture.

On June 1, our continued -- we continued the integration of our world-class global sales teams.

Our sales teams will be fully integrated in fiscal year 2019, this year, of course, 1 year ahead of our original schedule.

The technology and operational capabilities to provide us with the ability to flow packages between the legacy TNT and FedEx systems is processing as planned to allow us to flow volumes to the lowest cost or the highest-service FedEx Express network in fiscal year '19.

That's this year.

In June, we launched Economy Express 1-day transit service in 175 lanes in Europe.

These lanes were previously operated on a 2-day transit time commitment.

This is a significant step in demonstrating the power of the TNT European road network and a tangible example of the benefits of our integration for our customers.

Customers will benefit from more speed, more value, more coverage and of course, more choice with all of these changes.

The successful integration of TNT and FedEx Express remains a key driver of the FedEx Express FY '20 operating income improvement target of $1.2 billion to $1.5 billion over FY '17's results.

Now FedEx Ground also achieved record fourth quarter operating profit of $832 million, up $125 million year-over-year or 18%, with double-digit percentage growth in revenue and an operating margin of 17.3%.

We are improving revenue quality through a balanced approach to volume and yield growth.

We reduced our long-term capital plans for FedEx Ground to much better match capacity expansion with pricing and volume growth.

We're optimizing and modernizing in many areas to drive greater profitability.

FedEx Freight's fourth quarter operating profit was also a record profit of $175 million, up $45 million and an amazing 35%.

Freight's operating margin was 9.4%, exceeding all the guidance that we gave you in the last quarter.

FedEx Freight continues to show improvement in revenue and profitability as our pricing strategies drive revenue growth, while investments in the network dramatically improve safety and lowers our costs.

We are very pleased with the Freight's performance in FY '18.

We look forward to continued success in FY '19.

So in FY '18, we made progress towards our goals of increasing earnings, margins, cash flows and returns while dramatically enhancing customer service.

And we expect to do the same thing in FY '19.

And with that, I'll turn it back over to Mickey Foster.

So now we'll answer the questions that were submitted.

And I'll be the QB here, giving the ball off to various people to answer these questions.

The first one is from Helane Becker and Ken Hoexter of Cowen and BofA Merrill Lynch, respectively.

Could a trade war interrupt global growth or is world trade too entrenched to allow for any disruption?

So I'm going to ask Dave Bronczek to take this on.

If we get a lot of other questions about this, perhaps we'll talk a bit more of it at the end since it was such a topic of conversation on the business shows all day long.

Dave?

Okay.

Thanks, Fred.

And thanks, Ken and Helane.

It's a great question.

We believe global supply chains, especially those of high-value items, are well established and will be very difficult to disrupt.

We are hopeful that amenable solutions, of course, to trade policy issues will be found.

However, our global assets are such a large scale now, it is relatively easy for us to reposition our networks really all around the world should any trade patterns evolve.

So hopefully, I helped answer your question.

So question #2.

This is from The Associated Press.

Are U.S. customers seeking expedited imports of items from China that will fall under the new tariffs on July 6.?

Raj?

So we have not seen any changes in the U.S. customer behavior directly related to these new tariffs.

Now this is not really surprising, especially since the commodities in question make up only a very, very small portion of our U.S.-China revenues.

Ken Hoexter again.

Are tech sales a leading indicator you still watch for Asia-U.

S. exports?

Sort of the same line of questioning there, Raj.

Yes, Ken.

And the answer to that question is, yes, technology sales is clearly one of the key indicators that we monitor and it's very highly correlated to the U.S. -- Asia-U.

S. exports.

Now you have to back out some of the noise, the cell phone product cycle, to get to the underlying trend.

And in recent months, industry investment in technology, capital goods, they have really helped underpin the ongoing growth in Asian exports.

So here's a question from David Vernon of Bernstein and Kevin Sterling of Seaport Global.

How is the tightening truck transportation market impacting demand and cost at each FedEx segment?

Dave Bronczek?

Okay.

Great question, David.

Demand continues to be very strong by the strength of industrial production, as Raj mentioned earlier, and consumer demand.

However, to give you a little bit of color and background to this, I'm going to have the 3 opco presidents, starting maybe with Henry and then Mike, at FedEx Freight, and then David, who has probably the least effect, to give their points of view and their comments on it.

So Henry?

Thanks for the question, David and Kevin.

At FedEx Ground, 100% of our transportation is purchased as it has been for 33 years since the company has contracts with all entities providing transportation services, most importantly our contract service providers.

But you might also be surprised to know, we also have contracts with rail truckload and of course, the United States Postal Service.

These relationships support the company to access virtually unlimited options in the market and drive our industry-leading flexibility to scale our transportation needs as customer demands warrant.

Yes, I'll just add that we're seeing very strong demand for our services in the freight sector.

We remain focused on disciplined growth and margin expansion while providing the best service in the industry.

As a proof point, our fourth quarter results were perfectly balanced, with 8% growth on average daily shipments and an 8% revenue per shipment growth.

And again, while the robust industrial production number is most closely correlated with the LTL market, we really expect a particularly strong high-peak growth during the first half of fiscal year '19.

So that translates into a good growth in shipments.

Good day.

This is Dave Cunningham representing FedEx Express.

We have not experienced any issues with securing third-party trucking lift.

Does FedEx believe that the growth of e-commerce has changed the seasonality of the global air freight market?

If so, how are you adjusting?

This is David Campbell of Thompson Davis.

Raj?

David, yes.

Indeed global e-commerce is increasing.

But you have to remember that the vast majority of the pounds that we carry are business-to-business shipments and as such, seasonality still continues to follow traditional patterns.

I think more importantly, perhaps, is the fact that Dave Bronczek mentioned earlier that the scale of our network, if combined with the capacity that we have deployed on commercial carriers, is so huge now, it makes it relatively easy for us to flex capacity as required by market demand.

How much of the $400 million impact from the cyber attack should we assume comes back in FY '19?

Have you fully recovered all TNT share losses?

I'll ask David Cunningham and perhaps, Don Colleran, to deal with that issue.

David?

Thanks, Fred, and thanks, Scott.

You can see in the results that we experienced year-over-year double-digit revenue growth in our international package and Freight services this past quarter.

While higher rates were certainly a major contributor, we're also seeing solid year-over-year growth in freight traffic, a piece of our product portfolio that expanded significantly through the addition of TNT.

Again, the recovery of the business over the past several months has been remarkable, and we certainly owe a major thanks to our sales, customer service and IT professionals who have done an outstanding job of recovering from this attack.

Thank you, David.

I just would like to add a comment to that as well.

We greatly appreciate the loyalty that our customers have shown us as we went through this difficult period.

And as you noted, I'm also glad to mention that we resumed year-over-year growth in the impacted segments of that business.

So here are 3 questions for FedEx Ground we'll give to Henry.

Question one, how much can you grow FedEx Ground volumes without adding more facilities?

Helane Becker of Cowen.

Second, what level of FedEx Ground margins are possible over the long term?

Jairam Nathan of Daiwa.

And David Ross of Stifel, and how much is left to do for full ISP model conversion, from David Ross of Stifel.

Henry, can you remember all of those?

Yes, I think I can, Fred, thanks.

First of all, thanks for the questions.

In terms of adding volume, I would say our investments in automation and technology have led us to have the most automated package sortation network in North America, if not the world.

And that's enabled us to be able to flex our capacity as needed based on market dynamics, and probably the best example of that is how we handle record volumes each year at peak.

Concerning margins, we expect to continue to deliver strong volume and revenue growth, driven by the trends that everybody here today so far has talked about by e-commerce.

We're intently focused on modernizing and optimizing the ground network to drive profitability.

And we continue to look for ways to maximize asset utilization by leveraging existing capacity and automation.

In terms of the ISP model conversion, we expect to be done sometime in late calendar 2019.

We recently announced that we were accelerating that process.

Will the IMO 2020 changes and marine fuel standards impact demand and pricing in the airfreight markets?

David Vernon of Bernstein.

Raj?

David, it's a bit too early to tell at this point.

It's great to see that thanks to IMO 2020, that the marine fuel sulfur will be reduced, which will be positive for the global environment.

While the implementation will probably raise fuel prices, then we'll have to see what kind of material impact this has in the airfreight demand.

It's too early to tell.

But please note that thanks to our growing FedEx Freight network's ocean business, we are very close to any pricing development and in a perfect position to optimize transportation solutions for our customers.

So a couple of questions on Freight.

Why are FedEx Freight annual margins not double digits in such a strong LTL environment?

And any investments restraining current margins?

David Ross of Stifel.

And are you interested in getting into heavy goods last-mile?

Would that be through your LTL or package divisions?

Scott Group of Wolfe Research.

And David Vernon of Bernstein has a similar question.

So let me ask Mike Ducker to answer the -- both of those questions.

All right.

Thanks, David.

First of all, we're pleased with the profit and margin performance during fiscal year '18.

And I would like to give a shout out to our teammates for their great performance.

Our operating income improved by 33% and the margin by 120 basis points.

If you take that on a quarterly basis for Q4, it was 35% and 130 basis points.

Now while we're pleased with that, we're still not satisfied with those results.

Our goal remains sustainable double-digit margins.

But we're not going to compromise our continued investments, which we believe are critical for our future growth and preparedness.

So we continue to invest in technology that will prepare us better for the rapid modernization of supply chains and to ensure we maintain a market-leading position.

The second part of the question for David Vernon at Bernstein, we already deliver a significant volume of goods through both FedEx Ground and FedEx Freight, the last-mile goods.

So as demand grows for those shipments, we believe FedEx is uniquely positioned on reach and flexibility of our networks to provide outstanding service, even for those larger and heavier deliveries.

Specifically for LTL, e-commerce is and will create opportunities for us.

And while we see opportunity in that large growing market, we do have plans to leverage those trends to support margin expansion.

So a question for Raj.

Can you detail the issues at FedEx Supply Chain and the turnaround plans?

Jairam Nathan at Daiwa and Kevin Sterling at Seaport Global.

Raj?

All right, Jairam and Kevin.

Yes, we have covered this issue in our May 29 8-K disclosure, and we are accelerating our efforts to streamline and standardize our operating model and upgrading our technology.

These actions will not only increase our flexibility and service for our customers, at the same time, it also improves profitability through lower operating expenses.

As I mentioned in the opening, we are very excited about the realignment of FedEx Trade Networks, which will act as a force multiplier for our entire business.

Let me just add to that.

I mean, we don't have any systemic problems with FedEx Supply Chain.

We have an excellent group working on there.

The basic issue about the goodwill impairment was simply that we had 2 cell phone repair contracts, one that went to a different business model, a warranty-type model.

We didn't repair them anymore, they just gave them new phones.

And the second, the customer decided to split the business for strategic reasons.

So we've got a lot of stuff in the pipeline, and Supply Chain will do fine.

On a related area, there's a question from -- about why we moved FedEx Trade Networks out from under FedEx Express.

Raj basically mentioned this, but I thought I would just add some color on this.

Basically, FedEx Trade Networks is now doing things for all of the opcos.

FedEx Trade Networks is the largest customs broker in the United States.

They clear things for FedEx Ground, going across the NAFTA borders.

We're moving more sea freight, and that sea freight is going into the FedEx Freight network.

By putting the other specialty operating companies together, as Raj said, we believe that it will be a force multiplier across our opcos, and we felt it was a better fit there.

Now I have to tell you, we have a sort of a model of that, what we did with FedEx Office, I mean, it has been a fantastic contributor to our operating companies, doing all kinds of value-added services.

And I'm sure that will be the case with the new FedEx Trade Network, with custom critical and supply chain and forward depots and CrossBorder as integral parts of it.

So now we turn to a number of financial questions related to CapEx.

We have one from Ravi Shanker.

Given the new planes and ongoing hub expenses, is it fair to assume that CapEx will increase in FY '20 and beyond from FY '19 levels?

And I'll ask Alan if he will take that.

Thank you, Fred.

We're going to continue to grow our revenues and continue to grow our cash flows.

And as we see opportunities to invest, whether it's expense, capital or acquisitions that are going to increase the long-term value of our company, we're going to do that.

Obviously, we benefited greatly from the TCJA tax rate and 100% expensing for the next 5 years.

That obviously makes CapEx investing less risky.

Although on the case of the aircraft, that was certainly not the driver.

When you're presented with opportunities to make asset acquisitions at a really good price and those that are driving tremendous productivity improvements and operating expense reductions, we need to make those moves.

So our CapEx is going to spike up in FY '20 and FY '21, mostly as a result of Express.

We are significantly reducing our outlook for CapEx at Ground.

We won't build a hub for a long time.

Ground has many innovative and in some ways, revolutionary cost-reduction programs underway right now, all of which involves [sweating] assets, improving productivity and lowering costs.

And the same thing at Freight.

So it will be easily managed.

I won't say that we'll be able to stay at the 8% level, but it will be very easily managed and covered with our cash flows.

And we'll still have excess cash flow.

So in the same vein, David Vernon wants to know, as EBITDA and cash flows go up faster than the rate of CapEx, which is what we've been telling you is going to happen here for a significant period of time, and what's our free cash flow projection for this coming year?

Alan, can we put that out there?

No, we're not going to put that out there because we have a different definition of free cash flow.

But our EBITDA will be very strong, particularly if we consider the service cost of pension.

But this is one of my favorite subjects at FedEx.

The whole concept that you're driving at is capital allocation.

I think we've done a tremendous job of that in the past.

We're balancing it, I think, very effectively with returns to shareholders.

I'll just remind you that since FY '14, we bought back 17.5 million shares for $10 billion at an average price of 147.

And based on where it's trading today, I'd say that's a pretty dang good move.

We just increased our dividend 30% more.

We hope to continue the stock buyback and continue dividends.

We've managed our pension very effectively.

It's now fully funded, over fully funded, from an ERISA standpoint.

So we'll continue to do what we've been doing.

And we'll be balancing our opportunities and our returns to total shareholder returns, and I suspect we will be improving our credit ratios as we go along.

So that basically answers David Vernon's question about what should investors expect FedEx to do with the resulting ramp in free cash flow.

What percentage of your overall domestic package revenue is now B2C?

Are B2C margins improving?

Scott Group, Wolfe Research.

Raj?

Well, we don't provide the specific breakdown of B2C revenue or margins.

But you have to remember that the B2C e-commerce is still relatively a small percentage of our total global revenues.

Now having said that, we all know it's a relatively fast-growing segment, and we are very excited about the capabilities that we have put in place to grow this business profitably.

So there's a question from Ken Hoexter of BofA Merrill.

Can you review the total cost of integration since acquisition?

And what's left after 2019?

Do the benefits outweigh the cost yet?

And then Matthew Reustle of Goldman Sachs asked a similar question.

After the $450 million in TNT integration expenses in 2019, will you still have $150 million of integration expenses in 2020?

Alan?

So we're now a little bit past 2 years of day 1 with TNT, and we've learned a tremendous amount.

Recall, we also suffered a very nasty cyber attack a year ago, almost coming up on the year anniversary.

And so our integration expenses are going to be a little bit higher than we originally thought, but that's not bad at all because we'll be tightening our defenses from a cyber standpoint, and we're going to invest more than that than we had anticipated.

But the results will be a much more productive and a much more flexible IT network.

Additionally, we have found additional productivity enhancers as we go through the integration that are going to really increase our return substantially.

I have to say, FY '19, when we're going to step up to about $450 million worth of integration, that is a very big year.

We have great plans in place.

We're off to a good start.

And it's -- this is a key year for us in terms of integration.

After '19, we'll have somewhere around $250 million to $300 million left in FY '20, but that will be around the edges.

I think the meat on the chicken is going to be the current fiscal year that we're in.

Chris Wetherbee of Citi asked, do you expect new aircraft orders to add to total company capacity?

Or will total airlifts stay flat as old planes are retired?

Dave Bronczek, David Cunningham.

Yes.

And let me start off by saying, the great thing about these airplanes is we can just completely replace old planes like the MD-11s, take them out of international and bring them back to the United States, and move the MD-10s out.

We can totally do that, and we've done mostly that.

We've added very few incremental planes along the years here.

On the other hand, if we continue to see strong growth like we're seeing now, we could use them to add capacity.

So we can hold and just replace or we can grow and add the capacity that we currently have.

So with that, David Cunningham?

I think Dave covered it well.

The only thing I would add is that we continue to modernize our global network, resulting in improved reliability, reduced emissions and greater operational flexibility.

So Matthew Reustle of Goldman Sachs asked, can you still achieve 10% corporate operating margins long-term with the pension accounting changes?

The answer to that question is yes, and our goal is to have operating margins at the corporate level and at the opco level in the teens.

Here's one from outside of last-mile delivery, which I take is the term that's being applied to the heavy and hard-to-handle, Raj, is that right?

No, I think it's technology...

Oh, technology.

Okay.

Are you seeing any increase in competition?

Can technology disrupt your mode?

Or are hard assets the barrier to entry?

Matthew Reustle, Goldman Sachs.

Raj?

Matthew, well, FedEx has built arguably the most extensive global delivery network probably in the history of transportation.

And when you combine that with our technology and human assets, it's hard to conceive of a scenario where technology alone could be a disruptor.

I mean, there's definitely a trend in popular press to get carried away by the conversations around technology being the answer to every question.

But the real, real answer is how we combine technology with physical and human assets that provide the value propositions that our customers are seeking.

If you haven't already done so, I would highly encourage you to watch our short video on the subject at fedex.com/dream.

So Raj, while we've got you on the skewer here, Scott Group wants to know, and Kevin Sterling, when do you think the post office will meaningfully raise rates?

Is this a risk for you?

Well, Kevin, I don't think we can speculate on what USPS might or might not do.

However, we do believe that the cost of last-mile delivery will continue to increase in the years to come, which will be an opportunity for FedEx.

So a question from Bascome Majors of Susquehanna and Helane Becker of Cowen.

Are customers coming to you to discuss UPS strike contingency plans?

How much of UPS volume could you accommodate if there is a strike?

Dave Bronczek?

Yes.

Obviously, it's a timely question.

However, we never actually comment about our competitors' issues or their business considerations.

I do want to say something that's very important for our customers though.

We will continue to provide outstanding service for our customers.

We have the capacity.

Only then, and only then, if there's additional capacity, if there is a need, would we consider other alternatives for other customers.

We will take care of our customers first like we always do, the way we ramp up for Christmas peaks and so forth.

We can handle it, and we're going to take care of our customers.

So we've got a question from Scott Schneeberger of Oppenheimer for David Cunningham.

Could you please cover economic trends you're witnessing in Europe and how they're impacting your business?

Well, as we talked earlier, we've seen a good growth in productivity in our results in the fourth quarter, and we continue to expect to see the same.

Could you please discuss FedEx progress in gaining share with small- and medium-size customers?

Also from Scott.

So Raj, would you or Don Colleran take that on?

Well, Scott, thank you for that question.

We do not break out the segment performance, but what I can tell you is that we're making tremendous progress in the small and medium segment and fiscal year '18 was particularly a very good year.

It's a banner year, in fact.

We have a fantastic value proposition around the world and are only strengthened by the acquisition of TNT and which allows our commercial team, which I believe is second to none, to win more business every single day.

As you can hopefully tell, we are very pleased with the results so far, and we expect to accelerate our progress in this segment in the years to come.

Raj, how about FedEx Fulfillment service?

From Brian Ossenbeck, how about an update on that?

Well, Brian, FedEx Fulfillment now has 2 major fulfillment centers, as you know, operational in the United States.

And that business continues to grow as we sign new customers, especially small- and medium-size e-commerce companies who are really looking to scale their business.

We continue to enhance our offering to include additional marketplace integrations, better inventory management, analytics and so on.

And customers are responding very well to the service as FedEx Fulfillment gives them more flexibility to focus on what they do best, while FedEx can focus on the supply chain needs.

Brian also asked, and you might as well take this, Raj, what's needed to facilitate a higher utilization rate of your retail and onsite network for customer pickups and returns versus a residential stop?

Raj?

Well, as I mentioned to you earlier, we are thrilled to have almost 11,000 convenient locations in the U.S. for customers to pick up their packages today.

The 3 factors that drive it, first, obviously, is convenience.

And we are right there.

Locations are open later in the evening.

700 of them are open, in fact, 24 hours.

The second issue is around porch piracy.

A recent survey showed that 75% of online shoppers were concerned about porch piracy, and 45% have a package either stolen or know someone that has had their package stolen.

So that's -- those are 2 very important factors.

The third one, probably over the medium- to long-term, is that, as I mentioned to you, the cost of last-mile continues to increase.

These locations will not only become a convenient location but also become an economic value for our customers.

We have a couple of questions here about ground efficiency in the MetLife program.

They've been asked and answered.

Otherwise, a question about the recent rally in oil prices.

Could it push some shippers to lower service levels with fewer guarantees?

Raj, you want to take that?

Well -- yes.

Well, Brian, I don't think so.

I don't think that's going to be the effect.

But again, having said that, we have a full portfolio of offerings, including FedEx Trade Networks, that allow us to optimize our offerings to our customer needs.

So from Brian Ossenbeck of JPMorgan.

What does the next chapter of technology and innovation look like?

How close to commercial viability are the recently disclosed tracking sensors, blockchain involvement and small drone test flights?

So Rob Carter, you want to talk at least about the first 2 of those?

Yes, sure.

Well, the impact of innovations in the connected world, whether it's the Internet of Things and sensor-based logistics, mobility, blockchain, autonomy, all of those things are accelerating across the enterprise.

If you look at sensor-based logistics and the announcements and the capabilities that we have shown in our new Bluetooth low-energy sensors, that's resulted in a huge number of patent filings and really is a viable technology in and of itself today.

What takes some time to roll out though is the infrastructure in WiFi networks and rolling stock and in aircraft in order to marshal all those sensors as they operate in the world and in the back-end systems that are needed to handle that volume of data.

With regard to blockchain, we're quickly seeing blockchain capabilities moving towards production, primarily through our involvement in BiTA, the Blockchain in Transport Alliance, with now hundreds of participating companies.

FedEx Freight is leading the charge there and are chairing the committee on standards for BiTA, and we have several applications that are working their way forward.

And then lastly, with regard to drones, drones are still really specializing in observation and inspection, with sophisticated optics and their ability to look at aircraft and airframes.

That's a very advanced capability that we're already using today.

But things like lift and range are limiting their use in transport, although we're testing them in some of our larger ramp facilities to deliver parts to mechanics and things of that nature.

So Alan just mentioned that integration costs will be higher than initially expected.

You're saying higher than the $1.4 billion guidance from last year.

How much?

Scott Group of Wolfe Research.

Alan?

I'd say right now, based on what we're seeing, it's more like $1.5 billion, $100 million more.

If we find additional opportunities, we'll keep you posted on that.

But those are opportunistic as opposed to it's costing us more than we thought.

I think that's all the questions that we have.

There's one here from Ravi Shanker about Tesla semis.

I think we'll defer that.

We haven't gotten them yet.

We -- we're looking forward to testing them.

We test a lot of different things from a lot of different vendors.

But Mickey, that completes all of the questions, so I'll turn it over to you.

Thank you.

In closing, we continue to evolve our earnings call format to enhance your long-term strategic understanding of FedEx Corporation and to make the most effective use of our time with analysts and investors.

Beginning with the first quarter earnings call in September, we plan to streamline the process and improve the focus on our integrated strategies and consolidated financial results.

Remarks by the management team will be brief so we can concentrate on answering as many of your strategic questions as possible.

To address those questions on an enterprise basis, the company call participants will be: Fred Smith, Dave Bronczek, Alan Graf, Mark Allen, Rob Carter and Raj Subramaniam.

We will also file our 10-Q and post recurring supplemental information simultaneously with our earnings release to offer investors more context and details around the financial and operating results rather than addressing those on the call.

And also to address as many topics of interest as possible, we will consolidate similar questions.

We are confident these changes will optimize the time with our investors.

Thank you for participation in the FedEx Corporation Fourth Quarter Earnings Conference Call.

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

Thank you very much.

Once again, that does conclude our conference for today.

Thank you for your participation.