FedEx Earnings Call Nuggets: Cost Savings and Impact on Earnings

FedEx Corporation (NYSE:FDX) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Cost Savings

Tom Wadewitz – JPMorgan: Alan, you had quite a bit helpful commentary following up in the October meeting kind of reviewing some of the drivers on the broader improvement program. If you’re taking this charge in fourth quarter, it would imply that you have significant amount of the headcount that would be out in fiscal ’14. Is that primarily related to the SG&A cost savings; I think $500 million total that you had identified, and how would we think about that is it reasonable to think that you could realize a fair bit of that cost savings given the timing of your buyout program?

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Alan B. Graf, Jr. – EVP and CFO: At the Investors and Lenders Meeting, we had thought that the buyout would be as people departed. We have since done a log of further accounting research and have determined that we will take the charges upon the signing of the execution of the voluntary buyouts, no matter when people depart. So, that’s why we will expect most of the charges to occur in 2013. We are working very hard on our reorganization plans. We think we know within pretty good tolerance range of how many people are going to accept it and where they will be and how we will address that, but until we actually get through February, it’s going to be very difficult for me to quantify how much in fiscal ’14 that we will be able to put through the bottom line as we determine how long we will have to retain people to ensure the smooth transition. It will be significant, but I would look for most of the benefits from the voluntary buyout to be realized in fiscal ’15. And I will say the same thing for the profit improvement program at Express. We’ve already started it there. Dave will talk about it. In fact, I’ll just turn it over to him and let him talk about it as part of this. We have already started that. We have saved a lot of money already and we’re well on our road. I would just say, to sum up, we are very confident about reaching the $1.7 billion profit improvement program by fiscal ’16 and I think as the deeper we get into this, the more confident that we are. Let me have Dave talk a little bit about profit improvement.

David J. Bronczek – President and CEO, FedEx Express: Thanks, Alan. And that’s correct. We’re very optimistic that the five-point plan that we presented is going exceptionally well. SG&A as Alan pointed out, a big part of it is at Express. This quarter I should go back to and I will talk about expense in a minute here. Significantly, it was affected. This quarter our profits and our margins by super storm Sandy was a big part of the $0.11 without Express. Another big part of it significantly was at fuel that Alan pointed out, although it seemed like it would be a positive, it was negative significantly. Pension and then the fourth point that you may not pick up, it’s in our purchase transportation is our new acquisitions, sits in that purchase transportation number. It’s a big negative number. That’s a short term obviously until you get these new acquisitions rolling. So, you had those significant headwinds in our profits, in our margins this quarter. Going forward, we’re very optimistic that those margins and profits improve. But on the expense side even in this quarter, our FTEs were down 1,736 over 2%. Our fuel usage was down, thanks to our great programs we put into air operations. Aircraft maintenance was down, even though our pounds were up. So pounds were up across the world. A lot of them being international economy, which I’ll talk about a little bit later because it’s a new network design we’re putting in for that lower yielding international traffic to be in a much more cost-effective network going forward. That’s part of our five-point plan. So we’re feeling very good about our five-point plan. We actually had a quarter that would have significantly looked better had those four initiatives not hit all at one time. So going forward we’re very optimistic.

Impact on Earnings

Robert Salmon – Deutsche Bank: It’s Rob on for Justin. I guess, Dave, as a follow-up to your comments related to the various cost initiatives at Express, you guys had called out, I think, roughly $350 million at the Investor Day, which you weren’t including in that $1.7 billion of cost initiatives that you are targeting for fiscal ’13. Can you give us a sense how much of that actually showed up in the earnings this quarter? Just given the headwinds from Sandy, earnings were a bit better. So I’m just trying to get a sense of how much of those costs initiatives are now kind of showing up in the bottom line.

David J. Bronczek – President and CEO, FedEx Express: Yeah, that’s a good question because if it wasn’t for Sandy, a lot more would have shown up and we actually did reduce our FTEs in our U.S. transformation number that you’re talking about, the $350 million, would have been significantly better (if you) would have seen it at a lot more dramatic. But it’s in our U.S. domestic transformation program that you are talking about. We are going after those costs in a lot of different areas; attrition, of course, redesigning the network; and even with Sandy, we still had pretty good improvement on our FTEs. Alan?

Alan B. Graf, Jr. – EVP and CFO: Rob, let me just add that we are building momentum, and while I know that a lot of people don’t like my outlook for the third quarter we did keep the year the same, because we expect the momentum to build through Q3 and we will really start to see the impact of this as expressed in the Q4 results for Express and for the corporation and then on into fiscal ’14. So, momentum is there. It does take a while to get everything. Once we made the plans executed. We’ve got, for example, bid packs with the pilots; we’ve got attrition that you have to let happen; we’ve got to continue to go through the reorganization for the G&A that we are doing, but strong momentum building and you’ll see it in Q4.

T. Michael Glenn – EVP, Market Development and Corporate Communications: One last thing on four 767s. Obviously, it’s accretive to more operating profits and margins. It’s a positive MIRR as well, and it’s all part of one of those five pillars that I pointed out in our fleet modernization as well.

A Closer Look: FedEx Earnings Cheat Sheet>>