FedEx Corporation (FDX) Q2 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a balanced outlook with positive elements, such as new Amazon business and expected peak season growth, outweighing concerns like international export pressures. The Q&A reveals management's confidence in overcoming temporary costs and achieving high-end earnings through strong revenue and cost management. Optimistic guidance, transformation savings, and strategic initiatives, such as Network 2.0 and healthcare market focus, support a positive sentiment. However, the lack of specific guidance details and ongoing headwinds temper expectations, leading to a predicted stock price movement of 2% to 8%.

Key Financial Performance

Revenue Revenue was up 7% year-over-year, driven by yield and volume strength across U.S. domestic package services.

Adjusted Operating Income Grew by 17% year-over-year, supported by targeted transformation-related savings.

FEC Revenue Increased by 8% year-over-year, leading to a 24% growth in adjusted operating income and a 100 basis points expansion in adjusted operating margin.

FedEx Freight Revenue Declined by 2% year-over-year, primarily due to lower average daily shipments, partially offset by higher weight and revenue per shipment.

Adjusted Earnings Per Share (EPS) Increased by 19% year-over-year to $4.82, driven by higher revenue growth from U.S. domestic package services and yield management.

MD-11 Grounding Impact Pressured Q2 adjusted operating income by about $25 million due to operational and financial impacts.

U.S. Domestic Package Yield Increased by over 5% year-over-year, driven by strength across all services.

International Export Package Yield Grew by 3% year-over-year, supported by revenue quality actions, higher weight per shipment, and favorable currency.

FedEx Freight Adjusted Operating Income Declined by $70 million year-over-year, with adjusted operating margin contracting by 3 percentage points due to lower average daily shipments and sales force hiring expenses.

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Operating Highlights

Network 2.0 and Tricolor: FedEx has embedded rigor into its culture through Network 2.0 and Tricolor, leading to structural cost reductions and improved profitability.

AI and Digital Transformation: FedEx is scaling AI adoption across the company, launching a global AI program to enhance innovation and operational efficiency. The company is also exploring digital solutions for logistics intelligence insights.

ServiceNow Collaboration: FedEx announced a strategic collaboration with ServiceNow to integrate logistics intelligence into procurement and supply chain solutions, monetizing proprietary insights.

B2B Growth: Nearly half of FedEx's revenue growth this quarter came from B2B services, with significant wins in healthcare and automotive sectors.

International Market Adjustments: FedEx shifted capacity from Asia-U.S. to Asia-Europe lanes, focusing on high-value B2B shipments with over 75% mix.

MD-11 Fleet Grounding: FedEx grounded its MD-11 fleet due to safety concerns, mitigating operational impacts through network adjustments and trucking more volume domestically.

Cost Reductions: FedEx achieved $1 billion in transformation-related savings, closing over 150 facilities and optimizing 355 facilities under Network 2.0.

FedEx Freight Spin-off: FedEx plans to spin off FedEx Freight as a separate public company by June 1, 2026, with a dedicated leadership team in place.

Vertical Strategies: FedEx has developed vertical strategies for B2B growth, focusing on healthcare, automotive, and data center infrastructure sectors.

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Risk or Challenges

MD-11 Fleet Grounding: The unexpected grounding of the MD-11 fleet caused operational disruptions, requiring rapid adjustments to maintain service levels. This resulted in a $25 million impact on Q2 adjusted operating income and is expected to create further financial headwinds in the second half of the fiscal year.

Global Trade Policy Changes: Shifting global trade patterns and policy changes have created a $1 billion headwind to adjusted operating profit, impacting international export demand and requiring adjustments in network capacity.

Weakness in Industrial Economy: The industrial economy's weakness has led to lower average daily shipments in the FedEx Freight segment, contributing to a $70 million decline in adjusted operating income and ongoing pressure on revenue.

LTL Industry Trends: Consistent weakness in the less-than-truckload (LTL) industry has negatively impacted FedEx Freight's performance, with shipments down 4% and revenue expected to be flat to slightly down for fiscal year 2026.

Variable Incentive Compensation Accruals: Higher accruals for performance-based pay are creating a $600 million year-over-year headwind to adjusted operating income in the second half of the fiscal year.

Air Traffic Constraints: Nationwide air traffic constraints have added operational challenges, requiring adjustments to maintain service reliability.

Supply Chain Adjustments: Adjustments to the Asia-Europe lane and reduced transpacific capacity have been necessary to address global trade shifts, but these changes have pressured profitability.

FedEx Freight Separation Costs: Expenses related to the spin-off of FedEx Freight, including sales force hiring and separation costs, have created a $25 million headwind in Q2 and are expected to continue impacting financials.

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Guidance & Outlook

Adjusted EPS Outlook: FedEx has raised its adjusted EPS outlook for fiscal year 2026 to a range of $17.80 to $19, reflecting strong year-to-date performance and operational execution.

Revenue Growth: FedEx expects consolidated revenue growth of 5% to 6% for fiscal year 2026, driven by sustained U.S. domestic yield and volume growth. The midpoint of the range implies a 7% revenue growth for Federal Express Corporation (FEC).

FedEx Freight Revenue: Revenue for FedEx Freight is expected to be approximately flat to slightly down for fiscal year 2026, with yield growth offsetting a low single-digit percentage decline in shipments.

Capital Expenditures: FedEx targets $4.5 billion in annual capital expenditures for fiscal year 2026, focusing on fleet maintenance, Network 2.0 facility enhancements, and hub modernization.

MD-11 Grounding Impact: The grounding of the MD-11 fleet is expected to create a meaningful headwind in the second half of fiscal year 2026, particularly in Q3, with an estimated $600 million year-over-year impact on adjusted operating income in the second half.

Global Trade Environment: FedEx anticipates a $1 billion headwind to adjusted operating profit from the global trade environment, offset by $1 billion in transformation-related savings.

FedEx Freight Spin-Off: The spin-off of FedEx Freight is on track for June 1, 2026. FedEx Corporation intends to retain up to 19.9% of FedEx Freight's outstanding shares, which will be monetized within a time frame permitted by the IRS.

Q3 and Q4 Adjusted EPS Trends: FedEx expects Q3 adjusted EPS to be sequentially lower than Q2 due to increased peak demand and costs from the MD-11 grounding. Q4 is anticipated to be the strongest adjusted EPS quarter of fiscal year 2026.

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Shareholder Return Plan

Dividend Payout: FedEx increased its dividend payout during the quarter, demonstrating its commitment to returning cash to stockholders.

Stock Repurchase: FedEx opportunistically purchased nearly $300 million worth of stock during the quarter. The company has $1.3 billion remaining under its 2024 stock repurchase authorization and will continue to evaluate repurchasing additional shares during the remainder of FY '26.

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Key Q&A

Q:Can you discuss the dynamics in your domestic U.S. package business, particularly in B2C and B2B, and the potential for yield gains?

A:Brie Carere highlighted the company's focus on profitable market share, incremental margin expansion of 100 basis points at FEC, and strategies like pivoting the sales compensation model to balance B2B and B2C. The company is pleased with rate discipline and surcharge capture, aiming to acquire more B2B market share.

Q:Can you break down the B2B revenue growth in 2Q and its consistency for the rest of the year?

A:Brie Carere clarified that nearly half of the revenue growth in 2Q was from B2B. The growth was driven by new B2B acquisitions, share of wallet gains, and strong small business B2B performance. The company expects this trend to remain consistent throughout the year.

Q:What are the additional costs associated with the service component in management's annual cash incentive and Network 2.0 transformation?

A:Rajesh Subramaniam explained that the service component in the annual incentive compensation is a financial headwind but necessary for maintaining high service quality. Network 2.0 costs are integrated into forecasts, with efficiency typically regained in 3-6 months.

Q:What are the temporary costs associated with the LTL business spin-off, and how do they impact EBIT?

A:John Dietrich stated that $100 million of the $300 million EBIT decline is due to separation costs, including sales force hiring and IT expenses. The remaining decline is attributed to broader market conditions.

Q:Are the costs related to the MD-11 aircraft grounding separate from spin-off costs, and what is the impact on the third fiscal quarter?

A:John Dietrich confirmed that MD-11 grounding costs are separate from spin-off costs. Incremental costs in the third quarter, especially in December, are significant due to peak season and outsourced lift expenses. Rajesh Subramaniam emphasized safety as the priority.

Q:Can you break down the $600 million headwind in the back half of the year and its impact on Q3 earnings?

A:John Dietrich explained that $160 million is due to LTL business softness, $175 million to MD-11 grounding costs (mostly in Q3), and $265 million to increased variable compensation. Q3 adjusted EPS will be sequentially lower than Q2, with Q4 expected to be the strongest quarter.

Q:How does the company view the impact of refilling the incentive compensation bucket and FEC margin improvement?

A:Rajesh Subramaniam stated that the incentive compensation headwind will not persist into fiscal '27. The company is pleased with the ongoing momentum and transformation efforts, despite incremental headwinds in the next 3-6 months.

Q:What factors could push earnings to the high end of the guidance range?

A:John Dietrich mentioned that stronger revenue and better cost management could push earnings to the high end of the range, but specific factors were not detailed.

Q:How does the company view the potential impact of UPS's relationship with the Postal Service on domestic parcel growth?

A:Brie Carere does not see this as a competitive threat, as the company's focus is on high-value segments like B2B and ground commercial, which are not serviced by the Postal Service.

Q:Can you clarify the $300 million impact on the LTL business and the $152 million in spin-off costs?

A:John Dietrich explained that $200 million of the $300 million impact is due to lower ADV and market pressure, while $100 million is ongoing separation costs. The $152 million spin-off costs are one-time expenses.

Q:What is the company's view on LTL industry consolidation and its impact on shipment numbers?

A:Rajesh Subramaniam noted that consolidation in the truckload business could benefit the LTL sector over time. John Dietrich added that the company is seeing positive inflection in yield, reflecting pricing discipline.

Q:What is the company's perspective on a potential Supreme Court ruling on tariffs and its impact on trade activity?

A:Rajesh Subramaniam stated that it is too early to comment on the impact of a potential ruling. Any increase in international volume would be beneficial, but it is not factored into the current outlook.

Q:Can you provide more color on peak season performance and trends?

A:Brie Carere reported mid-single-digit year-over-year growth in ADV during peak season, with small and medium businesses performing slightly ahead of forecast. The company is focused on maintaining strong service levels and managing large package volumes effectively.

Q:What is the margin profile of Network 2.0 automated facilities, and how will it evolve?

A:John Dietrich stated that tangible financial results from Network 2.0 are expected later in FY '27. Rajesh Subramaniam added that the company is targeting a 30% footprint reduction by FY '27, contributing to $2 billion in cost savings.

Q:What is the company's strategy for health care and SMB markets, and how does it view the data center market?

A:Brie Carere highlighted the company's strong digital portfolio and cold chain capabilities in health care, with a long-term strategy to capture more of the $70 billion market. SMB performance has been strong, and the data center market, though smaller, offers growth opportunities due to its demand for precision.

Q:How should we think about the flow of non-GAAP add-backs and their impact on expenses?

A:John Dietrich explained that the majority of non-GAAP add-backs are tied to freight separation, with smaller portions related to fiscal year calendar changes and ongoing business optimization.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on what could push earnings to the high end of the guidance range, citing multiple variables without elaboration. Additionally, they did not provide a clear timeline or financial impact for the potential Supreme Court ruling on tariffs.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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