Macro Notes from the FedEx Conference Call

The upshot – blame it on the global macroeconomic slowdown and they are  raising shipping rates.  Stagflation cometh?

FedEx Corp. reported the following consolidated results for the first quarter:

• Revenue of $10.79 billion, up 3% from $10.52 billion the previous year
• Operating income of $742 million, up 1% from $737 million last year
• Operating margin of 6.9%, down from 7.0% the previous year
• Net income of $459 million, down 1% from last year’s $464 million

During the quarter, improved FedEx Freight results and the continued strong performance at FedEx Ground were more than offset by lower demand for priority services at FedEx Express.

FedEx projects earnings to be $1.30 to $1.45 per diluted share in the second quarter and $6.20 to $6.60 per diluted share for fiscal 2013, compared to the company’s previous full year forecast of $6.90 to $7.40 per diluted share.

This guidance assumes the current market outlook for fuel prices and does not include the impact of the cost reduction programs currently under review.

The company reported earnings of $1.57 per diluted share in last year’s second quarter. The capital spending forecast for fiscal 2013 remains $3.9 billion.

Raising shipping rates
FedEx Express will increase shipping rates by a net average of 3.9% for U.S. domestic, U.S. export and U.S. import services effective January 7, 2013.  The full average rate increase of 5.9% will be partially offset by adjusting the fuel price threshold at which the fuel surcharge begins, reducing the fuel surcharge by two percentage points. The FedEx Ground and FedEx SmartPost pricing changes for 2013 will be announced later this year.

Macro money quotes from conference call:

–  In the quarter just ended, while FedEx Ground and FedEx Freight improved their profitability in the first quarter, the slowdown in the global economy and global trade constrained revenue growth at FedEx Express and affected overall earnings

–  On the economic front, we continue to see modest growth in the global economy. Our calendar year ’12 U.S. GDP growth forecast is 2.2% and 1.9% for calendar year ’13, which is 0.5 points lower than our fourth quarter earnings forecast. For industrial production, we expect a growth of 4.2% in calendar year ’12, slightly below last quarter, and 3% in calendar year ’13, 0.5 points lower than our fourth quarter forecast. Our global GDP forecast is 2.3% for calendar ’12 and 2.7% for calendar ’13, 0.3 points lower than our last call.

–  For FedEx Corporation, revenues and operating income increased slightly in the first quarter due to improved profitability at FedEx Freight, the strong performance at FedEx Ground and partially offset by the impact of reduced demand for priority services at FedEx Express. Revenues increased 3% to $10.8 billion primarily due to yield increases, which Mike discussed, and higher volumes at FedEx Ground and FedEx Freight. Our EPS closed at $1.45 per share, which was a little better than we anticipated 2 weeks ago, slightly down year-over-year due to the tough global economy.

– Turning to the outlook and looking ahead, we’re expecting earnings per share of $1.30 to $1.45 for the second quarter and have lowered our guidance for the year to $6.20 to $6.60 per diluted share. This guidance assume weaker economic growth in the economy than we had expected when we first gave you guidance for FY ’13, as Mike described earlier.

–  when we see weakness in the economy, not unlike what happens in the United States, we see a shift from our Premium Services in the Priority network to deferred services to take advantage of lower transit times and lower rates. That’s just one way that customers manage their supply chains in difficult economic conditions, so I think that’s what we’re seeing.

– fundamentally, what’s happening is that exports around the world have contracted, and the policy choices in Europe and the United States and China are having an effect on global trade. Global trade has grown faster than GDP, except for the 2000, 2001 meltdown and 2008 and 2009, for 25 years. And over the last few months, that has not been the case. So that’s what’s really going on, is that exports and trade have gone down at a faster rate than GDP has.

–  as the Fed puts more money out there, people put more money into commodities and drive the price up. So you have products that are getting lower in value per pound, which is the key correlation for goods being moved by air. And so they’re going on the water to an improved container liner system that’s been developed over the last few years. So you’ve got a lot of things that are going on there, and the product launch of Apple’s and Microsoft is not going to provide the type of sustained growth in the international trade that the world has seen historically. So when that turns back around I think is directly related to the economic macro system in Europe, North America and particularly in China.

–   the global trading economy is still the largest single economy in the world. But over the last several months, particularly as we went into this fiscal year, it’s been disappointing, and I think it’s reflective of the low growth in the United States. You’ve got contraction going on in Europe. And because of North America and Europe, China’s export economy, which has been driven by the consumer economies in the United States, North America and Europe, are reflected in the lower trade numbers. So I think until some of these macro issues get resolved,

–  our global forecast is — for calendar year ’12 is 2.3%. In the developed countries, we’re expecting 1.3%; in emerging markets, which is 5.1%. Again, this is slightly lower than we were last quarter. In ’13, we’re looking for 2.7%. Again, developed countries, 1.5%, and emerging markets, 5.7%.  We’ve certainly seen a growth slowdown in the emerging Asia sector in the first half of Q1, but that’s probably run its course, and domestic demand remains robust in the global headwind — into global headwinds.

–  I can tell you this on China. The locomotive that has driven China’s growth is its export industries. And with the situation in Europe and, to a lesser degree, in North America, that is a significant issue for the Chinese economy. Now the consumer consumption in China is not increasing at a significant rate, contrary to everybody’s hopes. While exports from, say, the United States into China have grown, they are dwarfed by the exports from China into the United States. And as the big economies in Europe and the U.S. have grown or contracted — grown at a far lesser rate or, in the case of certain European countries, have contracted, that’s reflected in the numbers in China. And you can’t escape that. I’ve been somewhat amused watching some of the China observers, I think, completely underestimate the effects of the slower exports on the overall China economy.

on a systemic basis, as the price of fuel has gone up inexorably, almost, over the last decade, what you’re seeing are these big trends that I talked about a little earlier. The air cargo market in its traditional definition is not growing. The door-to-door Express portion of it is growing relative to the overall market, and the — a lot of traffic is moving onto the water because moving goods by air is very energy-intensive. So a huge part of these things, of what’s going on, is driven by the price of fuel, and that’s going to change people’s decisions on manufacturing and supply chains. So we’re going to talk about that on October 9 and 10. But you can’t have jet fuel going up to close to $4 a gallon on occasion without it having a big effect on the choices people make in terms of the speed, price trade-off and the decision as to whether to move bulk commodities by air or on the water.

–  we have deferred deliveries of the 777s, because we are not going to escalate the scheduled aircraft in the near term, and we have accelerated the replacement of the MD-10s with 767s, which provide a high ROIC, and they’re 30% more fuel-efficient. And we’re going to continue to do that.

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