5 Things FedEx Management Wants You to Know

By Markets Fool.com

Last week, package delivery giant FedEx (NYSE: FDX) reported record earnings for Q3 of its 2015 fiscal year. While the company's EPS of $2.01 easily beat the average analyst estimate of $1.87, investors still punished the company's shares following the release:

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After the report, FedEx CEO Fred Smith and several of his top lieutenants spent an hour discussing FedEx's quarterly performance and business trends with investors and analysts. Here are 5 key points the management team tried to convey to investors.

Record profit performance

We had another outstanding quarter, as our earnings per share grew 63%, to $2.01. Corporate margin rose 250 basis points year over year, to 8.2%. Revenue grew 4%, to $11.7 billion, from increased volumes and notably higher base yield. -- FedEx CFO Alan Graf

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FedEx's soaring profitability over the past year or so is the product of years of preparation. In 2012, FedEx announced a sweeping cost-cutting program designed to boost the company's efficiency. The restructuring program is scheduled for completion within the next year or so.

FedEx is finally getting a big payoff from its cost cuts in FY15. Full year EPS is expected to soar more than 30%, even as revenue grows at a modest mid-single digit pace. Most analysts currently expect EPS growth to remain above 20% in FY16 as well.

Profit improvement plan on track

Our profit improvement is on track, and it's on target. You can see, in all of our numbers, that the constrained growth of our expenses actually helped drive the 333 basis point [margin] improvement. -- FedEx CEO Fred Smith

Speaking of FedEx's cost-cutting program, the company is maintaining its projection that it will exit the current fiscal year (which ends in May) with a $1.2 billion annual run rate profit improvement in the FedEx Express segment. That represents 75% of the program's $1.6 billion goal.

FedEx has successfully made dramatic cost cuts in the Express division. Photo: The Motley Fool

The management team's optimism about the profit improvement plan appears to be justified. Through the first three quarters of FY15, operating income in the FedEx Express segment is up more than 50% year over year.

Fuel price movements boosted earnings

We had a significant benefit in Q3 from fuel. Given where oil prices are today, I don't expect to have much benefit at all in the fourth quarter, and perhaps a slight headwind there. -- Alan Graf

Favorable fuel price movements had a significant positive impact on FedEx last quarter. FedEx passes the cost of fuel through to customers via fuel surcharges, but these surcharges operate with a two-month lag. This increases FedEx's profit when fuel prices are falling and hurts it when fuel prices are rising.

Fuel prices fell more $0.60 per gallon in the 2 months leading up to the beginning of FedEx's third quarter. As a result, during December and January, FedEx was adding fuel surcharges based on the significantly higher cost of fuel from 2 months earlier. This created an unusually strong earnings tailwind last quarter.

Dimensional weight pricing is working

So for those of you who are environmentally concerned, the dimensional pricing is probably one of the most important environmental initiatives in corporate America, because it incents people not to waste fuel to move air. -- Fred Smith

In January, FedEx began applying "dimensional weight" pricing to all FedEx Ground shipments. This means that prices are based on package volume, not just weight. In effect, this increases the price for shipping lightweight but relatively bulky items. (Previously, FedEx Ground had only used dimensional weight pricing on packages with a volume greater than 3 cubic feet.)

FedEx recently changed its pricing policy for FedEx Ground shipments. Photo: The Motley Fool

While this move is bringing in extra revenue for FedEx, it is also improving efficiency. FedEx is helping customers use more efficient packaging so that they can ship the same amount of stuff in less space.

As Fred Smith noted, this is a huge opportunity to improve both environmental and business efficiency. Space, not weight is almost always the constraining factor on FedEx vans, trucks, and planes. Dimensional weight pricing will help FedEx maximize its use of this space.

Investing in FedEx Ground growth

So Ground's CapEx is substantial. It's needed, to continue to build those beautiful, automated hubs and satellites, to handle the additional traffic that we're expecting. -- Alan Graf

FedEx's primary growth driver since the Great Recession has been the Ground division. From FY08 to FY14, FedEx Express revenue grew just 11%: from $24.4 billion to $27.1 billion. In that same time period, Ground segment revenue exploded 72%, rising from $6.8 billion to $11.6 billion.

Ground segment revenue has continued to grow at a double digit rate in the last few years. Keeping this growth going requires significant investments in new vehicles and sorting facilities. FedEx Ground spent significantly more on CapEx in the first three quarters of FY15 ($794 million) than it did in all of FY13 ($555 million)! However, the investments will be well worth it if they allow FedEx Ground to maintain its steady growth.

The article 5 Things FedEx Management Wants You to Know originally appeared on Fool.com.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.