FedEx FY 3Q16 Earnings Call Notes

FedEx’s (FDX) CEO Fred Smith on Q3 2016 Results

We do things that increase earnings cash flows and returns

“We buy airplanes because they increase earnings, cash flows and returns over a period of time. We add automated ground facilities because they do the same thing. So there is no motivation inside FedEx to do anything other than to achieve those results at the corporate level and sometimes we decide to be aggressive in one segment because we are achieving our corporate goals”

TPP is going to be harder to pass with the leading candidates against it

“I don’t think there is any question about the fact that TPP is going to be harder to pass given that the leading republican and democratic candidates were presenting United States are against it. Free trade and opening markets has been American policy since 1934 when Roosevelt and Hull passed the trade agreement act that overturned the absolutely disastrous Smoot-Hawley Tariffs, those were two republicans that in 1930 put in a lot of tariffs to protect America. So trade contracted by 66% and the Roosevelt Hull action in 1934 turned it around but there is no question that those tariffs created with a big part of the cause of the depression.”

Trade makes everyones standard of living better

the thought that trade is not been a great thing for the world and America is absolutely belied by facts. Now have they been in merchant list, of course they have Japan and China in particular. But to lump in all trade with the trade practices of a couple of trading partners is like putting leaches on you and bleeding the way they used to do during the old days and think you’re going to get better. I mean it’s a self inflicted problem and in the case of Mexico, the NAFTA agreement has added hundreds of billions of dollars which is traded with Mexico, yes we do have a modest trade deficit with Mexico but the benefits of trade are always dispersed, lower iPhones, lower TVs, lower priced T shirts, lower automobile cost, on and on down the line which makes everyone standard of living better whereas the pain is always localized”

The key to the delivery business is route density and revenue per delivery

“the essential thing in the delivery business is route density and revenue per delivery stock. And that is why he said virtually the same thing that we have said that in all likelihood the primary delivers of e-commerce shipments for the foreseeable future will be UPS, The U.S. Postal Service and FedEx because input costs even though you might have a local operator over the thousands, it might talk about are trumped by the delivery density and the revenue per stop characteristics of the big carriers.”

It’s Metcalfe’s law

“And remember, we are not delivering from 50 fulfillment centers or 100 stores or 60 stores, we have the capability to pickup, transport and deliver an item from 95% of the human beings on the planet much less every business on the world within one to two business days, door to door customs cleared. So that’s known as Metcalfe’s law, everybody understands this in the telecommunication business, it’s the number of nodes on the network squared. If you run the hub-and-spoke system, it’s in times and minus one. So whether you’re a big box retailer or you’re an e-tailer that puts their fulfillment centers which is a surrogate for the store delivers the items individually or how you come into the store, the economics are the same. It’s network density and revenue per delivery stop that are the determinant of who is going to deliver these packages in the years to come.”

Doubling up packages leads to greater revenue per delivery stop

“The postal service delivers to a 140, 154 million addresses every day and so like way the e-commerce packages are perfect for the postal service because they can put them in with a mail and deliver on two residents”

This misunderstanding is leading people to misunderstand the future evolution of the markets

“it’s that misunderstanding that the drivers are network density and revenue per delivery stop that have led to a lot of the misunderstanding about the future evolution of the markets.”

Mike Glenn

2015 peak season was historic

“The 2015 peak season was historic by many measures and it was driven by the continued growth of e-commerce. Demand for residential deliveries across the industry surpassed expectations as consumers increased online shopping in record numbers, not only with their higher volumes, but the types of goods purchased online increased.”

E-commerce is now enabled as a full scale retail revolution

“It is very clear that e-commerce is now enabled the full scale of retail revolution. There are several important trends worth noting. First, referring to a specific peak day is quickly becoming a thing of the past. As evidenced this year, there were multiple days where volumes exceeded 25 million packages as consumer buying habits are changing. We view this as a positive as Mother Nature can sometimes play habit with last minute e-commerce shoppers. Smoothing sales throughout peak season is a trend that will benefit retailers and transportation companies alike. We believe online shoppers will have increasing incentives to order earlier in the holiday season”

More and more retailers shipping from store

“Second, more and more retailers are fulfilling e-commerce orders from individual stores or what we call store to home delivery. FedEx is well positioned to service this growing market in the years ahead with our broad portfolio of services including metro delivery and same day services.”

Seeing more non-traditional items purchased online

“Third, we are seeing a significant increase in non-traditional items now being purchased online, mattresses to new swing sets and big screen TVs just to name a few. ”

It would be a daunting task to try to replicate existing delivery networks

“Large retailers have long had their own transportation capabilities, primarily to enable movement and positioning of inventory across their store and fulfillment locations. While recent stories and reports of a new entity competing with the three major carriers in the United States grabs headlines, the reality is it will be a daunting task requiring tens of billions of dollars in capital and years to build sufficient scale and density to replicate existing networks like FedEx.”

Amazon’s strategy is to build distribution closer to the end customer

“I think Amazon’s strategy is clear, the more distribution facilities they put up the more they would like to be close to the end consumer which by definition makes more deliveries on a local basis. Having said that, all of the conversation about new entrants into the local delivery market, I mean there are hundreds and thousands of local delivery companies in every market in the country delivering parcels.”

Dave Bronczek

China not causing any problems because for the most part multinational customers

Yes thanks Fred, and thanks for the question David. Obviously, China is a very important to us, but they are not more important than all the rest of the world. I mean they are a part of the rest of the world for us. There’s a lot of multinational companies that are in China that we do business with in China and exporting out of China. So, I would say that we’re always watching how the economy is in China, but it is not causing us any problem or any concern right now because our customers there are for the most part multinational customers.

Alan Graf

Fuel prices ticking up could work against us

“You never know, fuel prices are ticking up a little bit and so that could possibly work against us on a year-over-year basis, so we’re watching that very carefully.”