FedEx Corporation (FDX) Earnings Call Transcript & Summary

John Thornton, City's industrial specialist. I get to play the substitute transportation analyst for the moment, very little fun. With me, I have the joys on stage of the management from FedEx, both CEO, Raj; Chief Digital Information Officer, Vishal; and Jennifer from IR, who I believe you had a few minutes -- a few comments to kick us off with.

It'll be less in a few minutes. John, we're delighted to be here. I promise the lawyers, I would read a quick disclaimer. Certain statements may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act and are subject to factors that could cause actual results to differ materially from those expressed or implied. For additional information, please refer to our press releases and filings with the SEC. .

Okay. I mean, for the purpose of the conversation here, I think a lot of it is going to focus on the tech stack you guys are working through. But to get the near-term comment out of the way. You noted your -- on your 4Q earnings call that you expect EPS growth to accelerate to 20% year-on-year for the remaining 7 months of calendar year '26. How is that tracking so far at year-end? And any comments you'd like to add to that?

Well, thank you very much, and thank you for having us here today. We are pleased with the underlying momentum in our business. As far as we're concerned, we think about our trajectory towards the CY '29 targets that we have set aside. We have modest revenue growth, but double-digit earnings growth because of our transformation and most importantly, generating $6 billion of free cash flow by CY 29. So those are the targets that we are absolutely laser-focused on and I'm pleased to say that we are well on our way towards that. .

So being here at the tech conference, we'll spend some time there. FedEx is most often thought of as an asset-heavy transportation company I think people generally understand that there's a lot of complexity involved in global logistics. But give us a context of how technology plays a role in your operations or simply put, why is it appropriate for FedEx to be at a tech conference?

Yes. Well, that's a terrific question. I think from a point of view of what FedEx, we have built over the last 53 years an unparalleled network that connects every part of the globe to every other part. That's a true definition of a network. And that's a large moat that FedEx has got. And it's impossible. It's very, very difficult to replicate the network that we have built over the years and we move the high-value commerce of the day. We connect roughly 3 million active shippers to about 225 million consumers around the world, and we moved $2 trillion worth of commerce, every single year. This is the high-value supply chains that we are moving. And what's important about that is also the fact that we generate 2 petabytes of data every single day in our system. And we realize that the value of this data is very important and most importantly, the insights that we generate from that. So we started this process back in 2020, we have been on this journey for more than 6 years. Of course, along comes the revolution in AI along the way. And the important thing to fuel AI is data. And so we have now taken on a whole another level from marrying our physical capabilities that every single day generates this incredible insights about global supply chain and then evolve our vision to make supply chain smarter for everyone. Think about this prior to the pandemic, the word supply chain were not as exciting, but pandemic really changed that. Today, it's a boardroom conversation. And there's a significant inefficiency in global supply chain, there's $1.9 trillion worth of inefficiency in global supply chains. And because of the data, the insights and technology now that we have, we think we can make a difference in orchestrating global supply chains and the physical network that we have every single day powers this technology story.

You mentioned the cash before. So let's maybe circle back to that. FedEx has taken a tremendous amount of cost out of the network in recent years with the $4 billion of savings from the Drive initiative and an additional $2 billion related to the Network 2.0. For those who are not familiar, could you discuss these initiatives and give some metrics on the efficiency gains that have been realized and what role did technology play in achieving these savings?

Yes. Back in 2022, we embarked on a very significant structural cost reduction program. And ever since then in the last 4 years, we have taken billions and billions of dollars out of our cost structure. And the team has done a really remarkable job of doing executing against that. But that's not the exciting part. The exciting part was the beginning of the transformation journey that we went on. I know a lot of you have not followed FedEx before. But before this time, we were operating 2 relatively independent networks in the United States, an express network and a ground-based network. We have decided back in 2022 to put these together as 1 of the biggest industrial transformations in recent history, not in our industry, just look in general, even though it's happening within 1 company, and we are extremely pleased with the way that it's going so far. As we have said in the last earnings call that we were about 42% of the way down then, by the end of this year, we'll be 62% done, and we are on track to get it complete by next year. But the important thing is the question you asked is what's the role of technology. I think this is a very critical point because without the journey that we began on our technology and creating that digital twin of our network, we couldn't have done this -- and so whether it's our cost savings that we have structurally taken out of our network or the execution of our transformation program of which network 2.0 is the integration of our networks is a big part we couldn't have done it with our technology. And I think that's a very critical component of it. In fact, that's going to enable us to then provide new value-added services on top of what we have built so far.

And maybe to continue on this path. As rolled out at a tremendous pace. How do you think about the opportunities for FedEx to incorporate AI into the -- to drive efficiency gains and what has been done so far? And should we think about it as distinct in the early innings with meaningful opportunity still to come? And would these opportunities be distinct initiatives from Drive and Network 2.0.

Let me begin the answer to that question, and I'll bring Vishal into this conversation. Again, my point here is that the fuel for AI is really data and the fact that you need to have your data engineered and organized is really critical. And we began that journey back in 2020. So we had a head start in this era then comes AI revolution. We think about AI in terms of, one, obviously, an opportunity to improve our efficiency and our productivity. That's a given. But that's not all of it. It's like that's, in fact, only 1 piece of the equation. We think that AI can help us differentiate our services and offerings to our customers. In fact, it's already happening and that generates growth for FedEx. And then thirdly, it allows us to create new value streams on top of -- because of the information and insights that we have and I'm going to turn it over to Vishal because he's driving a lot of those as we move forward here.

Thank you, Raj. And as Raj outlined, when we look at AI, we're absolutely in the early innings of what we think the potential exists not just for us within FedEx, but broadly for logistics at large. There's a couple of great examples in where we are already deriving value from initiatives that are inside the organization. As an example, our most valuable asset within FedEx is our plates. And we've cut down the research on aircraft maintenance from 30 minutes to 3 minutes. That's about a 90% efficiency by applying the right AI capabilities to that operation. Our ability to differentiate by reducing our predictable delivery time from 4 hours to 2 hours is another example of how we're leveraging AI to run the more precision network that puts any parcel in any location in the world within 2 hours of its estimated arrival time. Again, 50% better than where we were a couple of months ago, which was 4 hours. Another example of that is we're using Eurovision to look at nonstandard packages inside our network and reclaim surcharge revenue, which we otherwise would have leaked and we are already seeing benefits of over tens of millions of dollars annually as a result of that. So when we are looking at AI within FedEx, we are extremely clear. One, there is no shortcuts. And we are playing the long game. We are playing the long game by establishing a foundation from where any technology capabilities that are advancing in the world at a rapid pace, we have the responsible foundation to introduce them responsibly and structurally inside our organization. Second, we are looking at this as an absolute opportunity to disrupt the industry because we do believe a disruption is coming, expectations from customers is going to evolve and what the customers are also seeking is much beyond the efficiency in just the transportation element of supply chains, but we'll get to that in a second as well.

I'll just add 1 point here. I think our infrastructure of 700 planes, 200,000 trucks and 5,000 facilities. We are a system of inventory in motion. And every second actually matters. And because of technology, we are able to change these efficiencies in minutes and seconds and each of them have -- drive a significant change. For example, in the Memphis hub, if you come and see it, and I invite all of you to come and see it. We have improved our flight arrival time by 8 minutes, and you think 8 minutes. 8 minutes is a lifetime for FedEx. And so there's a lot of things on an inventory at a motion system that we have where technology plays a huge role. .

Maybe circling back on the customer point that you brought up, in what ways are you embedding AI to provide more visibility into your customer supply chains and offering new value-added services? Can you unpack how you are creating new markets for supply chain orchestration?

Sure. And let's focus on the point on visibility. And you can look at visibility from 2 elements. You can look at visibility in terms of when a parcel enters our network and when it leaves our network. So there is visibility in that one, we have mastered to a science. But then when you look at supply chains, you've got to look at visibility broader than that. And where we are finding increasingly our customers that are interacting with us is visibility in the entire breadth of their supply chain from source to plan, to make, to supplier visibility, inbound supply chains, outline supply chains. And Raj mentioned the $1.9 trillion of value that's leaking in supply chains. That $1.9 billion or trillion of value is not leaking in the transport or the move part of supply chains. It's leaking across the entire segment. So 1 of the areas that's an increasing focus for us is high-value B2B verticals. So think automotive, think, health care, aerospace, data center is high tech. And our customers in this space are seeking visibility across all of this. So 1 example of that is when you look at our health care vertical, we are taking our inventory visibility and supplier insights capabilities and helping a medical device manufacturer, connect to the hospital system and connecting suppliers and inventory insights between both. So when a hospital system requires a certain product in a certain area, we can cash those demand signals earlier and automatically route those insights into the medical device manufacturer, which then doesn't have to react after the fact or has to move inventory when it does not need to move inventory or can rebalance its inventory stock. We also then have a senseware capability, which is a physical proprietary technology capability that we implemented that sits on top of any high-value package. So think of any high-value package having its own digital concierge that travels along every part of that packages journey through our network. What's the weather of conditions surrounding that package, what's the temperature of that package? How often -- how long has that package sit in a certain kind of temperature situation. By having that kind of visibility and predictability, we can actually intervene and get that package rerouted so that it can still stay within its standard operating conditions. We also have surround capabilities, Surround capability is 1 which gives extreme visibility to where the package is at any given point in time. which, when blended with the physical sense were capability marries the 2 that allows our customers to have a higher degree of precision and confidence in that their high-value package. One is always secure. Second is always in the conditions that they would want it to be so that it can operate normally and as expected when it arrives. And it's always going to be arriving on time or at least have visibility into when it's arriving ahead of time so that they can do any intervention that may be required. One evidence of the value our customers associated with these is 40% of our health care customers today use 1 of these 2 capabilities. And we are increasingly finding customers asking us to go broader into more capabilities across our insights and signals or supplier visibility in Insight's platforms.

Yes. So permit me to repeat what I said earlier to connect the dots here. I said, AI, firstly, obviously, we are using AI to different -- to improve our operating efficiency and network efficiency. That's a given. Then I said the next layer was the differentiation to drive new business. That's the example that Vishal just talked about. This has allowed us now to become the leader in the health care transportation segment. because of the digital tools and technology and use of AI and predictability to really improve their supply chains and hence, our business goes with it. So that's the driver of growth, the second layer, and we'll talk about the third layer next. .