FedEx’s Revenue Jumps on Rate Hikes, Higher Base Yields

TNT Express contributed $1.9 billion of revenue during Q2 FY17

f1Giant delivery company FedEx Corp. (NYSE: FDX) announced its Q2 FY17 financial results on December 20th, 2016.

The Memphis, Tennessee-based Company is the world’s third-largest delivery company after United Parcel Service Inc. (NYSE: UPS) and Deutsche Post AG. FedEx provides transportation, e-commerce, and business services in the U.S. and international markets through four main segments. The FedEx Express segment provides shipping services for delivering packages and freight, and ocean and air freight forwarding services. Its FedEx Ground segment provides ground package delivery services.

The company’s FedEx Freight segment offers less-than-truckload freight services, as well as freight shipping services. As of May 31st, 2015, this segment operated approximately 65,000 vehicles and trailers from a network of approximately 370 service centers. The FedEx Services segment provides sales, marketing, information technology, communications, customer service, and other back-office services. Read more about FedEx’s financial details below.f2

Q2 FY17 financial highlights

During Q2 FY17, FedEx’s revenue jumped 19% Y-o-Y to $14.9 billion, of which the newly absorbed TNT Express contributed $1.9 billion. The results reflect the higher base yields at FedEx Express and FedEx Ground, volume growth at FedEx Ground, and ongoing cost efficiencies at FedEx Express. These gains were partially offset by integration and restructuring costs and intangible asset amortization at TNT Express, and network expansion costs at FedEx Ground.

However, FedEx’s GAAP operating margin fell 1.3% from the year-ago same quarter to 7.8%. The average operating margin for transport and logistics companies in the third quarter in 2016 was 9.83%, according to CSIMarket. On the other hand, operating income rose to $1.17 billion from $1.14 billion mainly due to the inclusion of TNT Express, higher base rates, and ongoing cost efficiencies at FedEx Express. These factors were partially offset by TNT Express integration and restructuring program costs and intangible asset amortization, and lower operating income at FedEx Ground and FedEx Freight.

In all, FedEx’s Q2 FY17 net income rose to $700 million, or $2.59 per diluted share, from $691 million, or $2.44 per diluted share, in the year-ago corresponding period. A gain of $0.15 per share stemmed from a one-off divestment and the adoption of a new accounting standard. Adjusted diluted EPS came in higher at $2.80f3 versus $2.58 in Q2 FY16.

Segmental highlights

FedEx Express Segment: During Q2 FY17, FedEx Express accounted for 45% of the company’s revenue and remains the Company’s most profitable segment with an adjusted operating margin of 9.7%. This segment’s revenue grew 2.3% to $6.74 billion due to increased base rates and higher package volume. US domestic revenue per package increased 3% and US freight revenue per pound increased 6%, both due to higher base rates.

International export revenue per package increased 1% as higher base rates were partially offset by unfavorable currency exchange rates and lower fuel surcharges. International export average daily volume grew 2%, driven by growth in both FedEx International Priority® and FedEx International Economy®.

Operating income grew 2% to $636 million due to increased base rates and ongoing cost efficiencies. As-reported results include $18 million of TNT Express integration expenses. Fuel and currency exchange rates had a minimal impact on the quarter’s results.

f4TNT Express Segment: During Q2 FY17, this segment’s revenue amounted to $1.9 billion, and include $10 million of intangible asset amortization expense and $10 million of integration and outlook restructuring program costs. Operating income was at $70 million, while operating margin was at 3.7%.

FedEx Ground Segment: During Q2 FY17, this segment’s revenue jumped 9% to $4.42 billion from $4.05 billion in the year-ago comparable period, due to higher volume and revenue per package. FedEx Ground average daily volume grew 5% in the reporting quarter, driven by e-commerce and commercial package growth. FedEx Ground yield grew 4% due to higher base yields. Operating income fell 12% to $465 million decreased due to higher rent, depreciation and staffing as a result of network expansion, and increased purchased transportation rates. Operating margin during the reporting quarter fell to 10.5% from 13% in the year-ago same period.

FedEx Freight Segment: During Q2 FY17, this segment’s revenue rose 3% to $1.6 billion from $1.55 billion in the year-ago same period due to less-than-truckload (LTL) average daily shipment growth of 3% more than offset the impact of lower fuel surcharges and weight per shipment. On the other hand, operating income fell 13% to $88 million due to the impact from lower average weight per shipment and higher information technology expenses. Operating margin declined to 5.5% from 6.5% in the year ago corresponding period.

Other highlights

Reorganization of top brass: FedEx announced that T. Michael Glenn, executive vice president, market development and corporate communications, will retire effective December 31st, 2016. Robert B. Carter, currently Chief Information Officer and Co-CEO of FedEx Services with Glenn, will become the CEO of FedEx Services effective January 01st, 2017, and will oversee the administration of common information technology, sales, solutions, marketing and corporate communications for our operating companies.

In addition, David J. Bronczek, CEO of FedEx Express, will become President and Chief Operating Officer of FedEx Corp. from January 01st, 2018. Beginning January 01st, 2017, Bronczek will become the Chairman of the Revenue Management Committee, replacing Glenn.

In addition, Rajesh Subramaniam, executive vice president of marketing and corporate communications, and Donald Colleran, executive vice president of sales, both at FedEx Services, will become members of the Strategic Management Committee effective January 01st, 2017.

f52017 rate increases: Effective January 02nd, 2017, FedEx Express will hike shipping rates by an average of 3.9%, while FedEx Ground, FedEx Home Delivery and FedEx Freight will rise shipping rates by an average of 4.9%. The FedEx Express and FedEx Ground U.S. domestic dimensional weight divisor will also change from 166 to 139. Effective February 06th, 2017, FedEx Express and FedEx Ground fuel surcharges will be adjusted on a weekly basis compared to the current monthly adjustment.

Guidance for FY17

For FY17, adjusted diluted EPS is projected to be in the range of $10.85 to $11.35 before year-end mark-to-market pension accounting adjustments. This forecast includes TNT Express results and assumes moderate economic growth. Excluding TNT Express related integration and Outlook restructuring program costs and TNT Express intangible asset amortization, FedEx forecasts FY17 diluted EPS of $11.85 to $12.35. The capital spending forecast for FY17, which includes TNT Express, remains at $5.6 billion. FedEx expects TNT Express to start making a positive contribution to FedEx’s financial results by FY18.

FedEx anticipates a record holiday shipping season with 10% more volume than it shipped the previous year, thanks to the rapid growth of ecommerce.

Stock Performance

f6FedEx’s stock stood at $190.89, slipping 0.64%, at the close on Thursday, December 22nd, 2016, having vacillated between an intraday high of $192.46 and a low of $190.78 during the session. The stock’s trading volume was at 2,028,745 for the day. The Company’s market cap was at $51.10 billion as of Thursday’s close.

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