WEBVTT - FedEx Meets Low Expectations

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<v Speaker 1>This is Bloomberg Business Week with Carol Messer and Jason

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<v Speaker 1>Kelly on Bloomberg Radio. Well, fed X is one of

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<v Speaker 1>the names people are watching after the bell beating estimates

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<v Speaker 1>for the third quarter, suspending their outlook. No big surprise there.

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<v Speaker 1>Let's get into with Lee Classgow Bloomberg Intelligence. He joins

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<v Speaker 1>us on the phone. Lee, great to have you with us. First,

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<v Speaker 1>I trust all is well and healthy with you. Yes,

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<v Speaker 1>I'm working, uh in the home office today. There you go,

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<v Speaker 1>me too, Me too. Alright, So tell us tell us

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<v Speaker 1>what you saw from FedEx, because you know, a lot

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<v Speaker 1>of times people are coming out with numbers and investors

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<v Speaker 1>are running for the hills. Not so here. Yeah, let's listen.

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<v Speaker 1>So in the third in their third quarter, I mean

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<v Speaker 1>they had some I gut some good news if you will. Um,

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<v Speaker 1>they'd beat expectations, but I would caveat that and saying

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<v Speaker 1>that expectations have been extremely low for fed X. Uh,

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<v Speaker 1>they've kind of disappointed the streets. For um. If you

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<v Speaker 1>look at the last twelve months, I mean, their stock

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<v Speaker 1>is vastly underperformed the SMP the stocks down about forty

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<v Speaker 1>percent versus the SMPS down around over the last twelve months,

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<v Speaker 1>and that compares with the UPS, which is underperformed the SMP,

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<v Speaker 1>but just by a hundred basis points. So, um, you know,

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<v Speaker 1>fed X has kind of had a couple of quarters

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<v Speaker 1>of where they've disappointed and the kind of the trends

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<v Speaker 1>that we've been seeing to create that disappointment haven't gone away.

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<v Speaker 1>I mean, they're seeing weaker economic demand. UM, they're seeing uh,

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<v Speaker 1>you know, higher costs because they're expanding their ground service

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<v Speaker 1>to six and seven days delivery. We all knew about

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<v Speaker 1>the Amazon business that they lost on the UPS picked up. Um,

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<v Speaker 1>they're they're talking about, you know, a mixed shift to

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<v Speaker 1>to lower yielding UH packages which is B two C

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<v Speaker 1>versus B two B. These are all things we know about.

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<v Speaker 1>These are all things that are going to weigh on

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<v Speaker 1>the company in the coming quarters. UH. And they also,

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<v Speaker 1>you know, it's relatively you know now that the CFO

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<v Speaker 1>is upping aside the team under the current UH president

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<v Speaker 1>CEO Raj it's kind of needs to coll us a

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<v Speaker 1>new management team. You know, everyone there have been in

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<v Speaker 1>their positions for now for less than two years, so

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<v Speaker 1>you know, they really have a lot to prove. UM

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<v Speaker 1>and what what I would say, is that you know,

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<v Speaker 1>on the good news for them in the coming months

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<v Speaker 1>is while you know, COVID nineteen is definitely going to

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<v Speaker 1>be a strain on the global economy and demand, um,

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<v Speaker 1>you know, it does drive the need for expedited freight.

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<v Speaker 1>So you know, if you if you need products, it

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<v Speaker 1>gets to sell and it makes economics sense to do

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<v Speaker 1>it uh in the air or you know one day

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<v Speaker 1>delivery on the ground. You know you're going to use

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<v Speaker 1>the fed X or UPS or another expedited kind of

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<v Speaker 1>kind of methods. So that's interesting, could be good for them.

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<v Speaker 1>The snap Act can be very good for them. And

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<v Speaker 1>if you know, they get T and T integration right,

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<v Speaker 1>which is the big M and A that they did

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<v Speaker 1>a couple of years ago, which has kind of been

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<v Speaker 1>hamstrung by a cyber attack that hit that business unit. Um,

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<v Speaker 1>you know, they're finally you know, getting some synergies that

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<v Speaker 1>would stay in that business. Uh. You know, in the

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<v Speaker 1>next twelve months, hopefully that will improve. Uh. And then

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<v Speaker 1>you know, we are seeing or hearing that you know

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<v Speaker 1>that the Chinese economy is getting back to quote unquote

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<v Speaker 1>a more normal uh production level. Obviously they're not a yet,

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<v Speaker 1>but you know, anecdotally that's around seventy five. So you know,

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<v Speaker 1>as that all as the stuff comes off the assembly line,

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<v Speaker 1>it's got to get to the shelves because if anyone's

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<v Speaker 1>been to a grocery store or a costco lately, you know,

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<v Speaker 1>those shelves are pretty barren, especially when it comes to

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<v Speaker 1>the toilet paper and hand sanitizer. All right, So a

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<v Speaker 1>few questions. They got thirty three billion worth of debt

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<v Speaker 1>and I'm assuming some of that is because of that acquisition.

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<v Speaker 1>I mean, is that manageable? Is this something that we

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<v Speaker 1>have to worry about that this is gonna be another

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<v Speaker 1>company that's a tap a credit line or do something

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<v Speaker 1>like do we have to be nervous about that debt

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<v Speaker 1>load for FedEx? No, because they do have some flexibility

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<v Speaker 1>and their tap x UM. You know, they can delay

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<v Speaker 1>the delivery of planes if they wanted to. Uh, they

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<v Speaker 1>can slow down some of the money that they've been

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<v Speaker 1>spending in redesigning and upgrading um their networks to increase

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<v Speaker 1>the amount of automation that takes place. So they do

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<v Speaker 1>have some flexibility. Uh. And at the end of the day,

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<v Speaker 1>they're still profitable, they're still cash so positive. Um, you know,

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<v Speaker 1>the world would have to be really bad, uh for

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<v Speaker 1>FedEx to have a liquidity issue at least from our standpoint. Um,

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<v Speaker 1>but you know, we've seen two black slawns in the

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<v Speaker 1>last two months, so who knows? All right, So what

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<v Speaker 1>do you worry about hearing when they hop on the

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<v Speaker 1>call with you guys Laterly, I'm really really curious about,

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<v Speaker 1>you know, how they um kind of quantify the financial

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<v Speaker 1>impact and COVID nineteen. You know, they're they're saying they're

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<v Speaker 1>not giving guidance anymore. And to be frank, that's a

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<v Speaker 1>good thing because they really gave some poor giants over

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<v Speaker 1>the last two years. They were adjusting it up or down.

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<v Speaker 1>So it's kind of a good thing that they're kind

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<v Speaker 1>of stepping away from that. But like just to get

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<v Speaker 1>them because I mean, their margins were just not good.

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<v Speaker 1>I mean their margins were two percent from a consolidated standpoint,

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<v Speaker 1>that's down over three hundred basis points. And you saw

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<v Speaker 1>that across the board. Their express business was down significantly.

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<v Speaker 1>The margins were only one point five percent, uh, and

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<v Speaker 1>then their ground margins, you know, we're almost down by

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<v Speaker 1>U they were down to about six point one percent

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<v Speaker 1>the one and when we're talking about margins. The one

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<v Speaker 1>group part of their business was set X Freight, which

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<v Speaker 1>is there left in truckload business. You know, a lot

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<v Speaker 1>of people don't realize that though they're the biggest lesson

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<v Speaker 1>truckload provider, and those margins went up on spaces point

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<v Speaker 1>from the quarter. Alright, Lee, we really appreciate your instant

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<v Speaker 1>a context leak Classgow follows FedEx for Bloomberg Intelligence, joining

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<v Speaker 1>us on the phone from home.