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FedEx (NYSE:FDX)
Q2 2018 Earnings Conference Call
Dec. 19, 2017 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen. Please stand by. We're about to begin.

Good day, everyone, and welcome to the FedEx Corporation's Second-Quarter Fiscal Year 2018 Earnings Conference Call. Today's call is being recorded. If you have any questions for the conference call, please email them to IR@FedEx.com. Only questions submitted by email will be discussed on the call today.

At this time I will I will turn the call over to Mickey Foster, vice president of investor relations for FedEx Corporation. Please go ahead.

Mickey Foster -- Vice President of Investor Relations

Second-quarter earnings release, 31-page stat book, and our earnings presentation slides are on our website at FedEx.com. This call and the accompanying slides are being streamed from our website, where the replay and slides will be available for about one year. Written questions are welcome via email. Our email address is IR@FedEx.com.

When you send your question, please include your full name and contact information. Preference will be given to inquiries of a long-term strategic nature. I want to remind all listeners that FedEx Corporation desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance, may be considered forward-looking statements within the meaning of the act.

Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Please refer to the Investor Relations portion of our website, FedEx.com, for reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.

Joining us on the call today are Fred Smith, chairman; Dave Bronczek, president and chief operating officer; Alan Graf, executive vice president and CFO; Mark Allen, executive vice president and general counsel and secretary; Rob Carter, executive vice president of FedEx Information Services and CIO; Don Colleran, executive vice president and chief sales officer of FedEx Corporation; Raj Subramaniam, executive vice president and chief marketing and communications officer of FedEx Corporation; David Cunningham, president and CEO of FedEx Express; Henry Maier, president and CEO of FedEx Ground; and Mike Ducker, president and CEO of FedEx Freight.

And now Fred Smith will share his views on the quarter.

Fred Smith -- Chairman

Thank you, Mickey. Good afternoon and welcome to our webcast and conference call to discuss second-quarter earnings. Strategic execution by the FedEx team and the stronger global economy drove improved financial results and we believe we are well-positioned for profitable long-term growth. Alan will provide further insight and our outlook.

FedEx is on track for another record holiday shipping season and we're pleased to say the outstanding service around the world and across our portfolio during the second quarter has continued into December. We plan year-round to meet the intense challenges of the peak season as average daily volumes can more than double with heavy demand for residential e-commerce deliveries. More important, let me thank the more than 400,000 FedEx team members around the world for their outstanding efforts to keep our purple promise, which is, simply stated, "I will make every FedEx experience outstanding." It's become increasingly clear to all of us that trust and reliability matter to customers when they choose who will be delivering packages to their doors. Size, reach, speed, and reliability of our networks and the strength of the FedEx brand have great value around the world.

Raj will have more to say about the peak and macroeconomic trends. We're very proud of the progress the FedEx team has made in recovering from the effects of the cyber attack at TNT. Let me express our appreciation to the thousands of FedEx professionals who worked around the clock and tirelessly to mitigate this unprecedented event. Dave will update you in his discussion of overall global operations.

We expect yield and volume growth at all of our transportation segments will support revenue and earnings growth in the second half of fiscal 2018. Our plans remain on target to improve operating income at the FedEx Express segment by $1.2 billion to $1.5 billion in fiscal 2020 versus fiscal 2017 and our goal remains to increase earnings, margins, cash flows, and returns, and we are confident we can do so.

We're encouraged by the Tax Cuts and Jobs Act, the legislation advancing in Congress at this very moment. This legislation offers pro-growth, pro-business tax reform solutions that will power the economy, increase business investment, expand job opportunities, and enhance incomes and improve US competitiveness. We at FedEx hope all of you have a wonderful holiday season and now let me turn the call over to Alan.

Alan Graf -- Executive Vice President and Chief Financial Officer

Thank you, Fred, and good afternoon, everyone. Our adjusted earnings per share for the quarter was $3.18, up 15% from an adjusted $2.77 last year. This year's and last year's quarterly consolidated earnings were adjusted for TNT integration expenses of $0.33 and $0.18 per diluted share respectively. As reported and adjusted, second-quarter earnings this year reflects the estimated negative impact of the TNT cyber attack of $0.31 cents per diluted share.

Results for the quarter improved primarily due to higher base rates, volume growth, and a favorable net impact from fuel at each of our transportation segments. Second-quarter results also include a tax benefit of approximately $80 million or $0.29 per diluted share from foreign tax credits associated with a dividend paid from our foreign operations. Our effective tax rate was 32% for the quarter and 35.4% for the first half.

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Turning to the segments and starting with Express, adjusted operating income increased 11% to $813 million driven by revenue growth, a positive net impact from fuel, and continued cost efficiencies. Adjusted operating margin improved 20 basis points to 8.7%. The cyber attack at TNT impacted our as-reported and adjusted results by an estimated $100 million for the Express segment primarily from loss of revenues due to decreased shipments in the TNT network. As we noted last quarter, we are accelerating portions of our TNT integration as a result of the cyber attack.

TNT integration expenses for the second quarter were $96 million for Express and are included in the GAAP results. Despite the challenges from the cyber attack, total international average package volume increased 5%. At ground, operating income increased 12% to $521 million and operating margin increased to 10.6%. Operating results improved due to revenue growth partially offset by higher purchase transportation, network expansion, and staffing cost, as well as increased self-insurance reserves.

Ground continues to work on further restraining costs. At Freight, operating income increased 34% to $118 million driven by 7% increase in LTL revenue per shipment. Freight's operating margin improved 120 basis points year over year to 6.7% as revenue quality initiatives continue to benefit results.

For FedEx Corp, we are increasing our FY18 forecast due to enhanced revenue quality, style demand trends, and our success in restoring business impacted by this summer's cyber attack. We expect to see improved financial results in the second half. Yield and volume growth at all of our transportation segments are expected to support revenue and earnings growth in the second half prior to any mark-to-market benefit plan adjustments. In addition, we're implementing various cost reductions at Ground for the remainder of FY '18.

We expect ongoing but diminishing financial impacts from the cyber attack in the second half of fiscal '18 in the form of lower revenues. The earnings forecast before year-end mark-to-market pension accounting adjustments and excluding expenses related to TNT express integration and certain first quarter FedEx Trade Network's legal matters is now $12.70 to $13.30 per diluted share for FY18. This forecast assumes moderate economic growth, current US tax laws, and continued recovery from the cyber attack.

Our capital spending forecast for FY18 is still $5.9 billion, although this may increase if the Tax Cut and Jobs Act is enacted. The TNT integration continues, spanning over 200 countries. By the end of FY '20 we plan to have combined pickup and delivery operations at the local level, one global and regional air and ground network, and consolidated operations, customs clearance, sales and back office information technology systems. We now expect the integration expense over four years to be approximately $1.4 billion, including restructuring charges.

Approximately $450 million of that expense is expected in FY18. Our estimate for the integration expenses has increased due to our acceleration of the integration process and additional investments to move TNT information technology, operations, and commercial infrastructure to a FedEx platform.

In addition, we have identified new opportunities to improve our integrated business capabilities for greater profitability in periods beyond FY20. A portion of the incremental integration expenses relate to establishing a new international corporate structure that we may leverage synergies to maximize our international profitability ultimately benefiting our effective tax rate. We remain committed to our target of $1.2 to $1.5 billion in additional operating profit for the FedEx Segment in FY20 versus FY17, which includes TNT synergies as well as base business and other operational improvements across the entire global FedEx Express Network. This target assumes moderate economic growth, current accounting rules and US tax laws, and continued recovery from the cyber attack.

Our effective tax rate forecast is now 33% to 44% before year-end mark-to-market pension accounting adjustments. We have lowered the upper end of the range. None of our forecasts reflect any potential changes from tax reform but turning to tax reform, I know there a lot of questions about possible changes for us as a result of that. So, let me cover as much as I can.

We welcome the possibility of a lower corporate tax rate, a territorial tax system, and 100% expensing of qualifying capital if these provisions are signed into law. Any acceleration for FedEx will primarily be for replacement of equipment and technology. If tax reform is enacted, we expect our uses of cash from tax savings would include optimizing CAPEX to capture the benefits of 100% expensing to further grow the business and create even more upward mobility for our team members, funding our pension plans beyond our current forecast, increasing the dividend as our board may approve, continuing our stock repurchase program at our current modest levels and investing in M&A where it makes sense. As Raj will discuss, US GDP could increase materially next year as a result of the US tax reform.

If this occurs, we would likely increase capital expenditures and hiring to accommodate the additional volumes triggered from this incremental GDP growth. if the Tax Cuts and Job Act is enacted as set forth in the joint conference report, we estimate our earnings per share could increase by $4.40 to $5.50 per diluted share for FY18 before mark-to-market year-end pension accounting adjustments, primarily due to the revaluation of our net deferred tax liabilities. This range also includes an estimated $0.85 to $1 per diluted share due to a lower tax rate on fiscal 2018 earnings for the last five months of fiscal 18. As we've said many times in the past, we would like to see a level playing field for corporate taxes.

This tax reform bill would go a long way, making US-based corporations more competitive globally.

We have delivered great service levels again this peak thanks to our careful forecasting and planning that results from working closely with our customers to manage record-setting seasonal volumes and also thanks to the dedication of hundreds of thousands of team members all over the world that make this happen. Now, I will turn the call over to Raj.

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

Thank you, Alan, and good afternoon, everyone. I'll open with our economic update and outlook and discuss our revenue performance and business conditions in each segment and provide some commentary on broader industry trends and enhancements to the FedEx Portfolio. We see moderate growth in the global economy. Our US forecast is up slightly on solid current momentum.

Consumer confidence is at a 17-year high and solid PMI ratings show the industrial sector is expanding. Passage of US tax reform could add materially to next year's US GDP forecast. Globally, our world GDP forecast for this year and the next reflects the best growth since 2011 with a synchronized global upturn supporting trade volume growth. The next few slides show details of revenue, volume, and yield performance by transportation segment.

Overall, it's clear that our pricing strategies allow us to grow volumes and increase yields across the portfolio and are succeeding in doing so.

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For our US Domestic Express business, revenue and yield increased 6% and 5% respectively. Excluding fuel surcharge, the yield per package increased 3% due to our continued focus on revenue quality. Despite the impact of the cyber attack at TNT, FedEx international export package revenue increased 7% year over year in Q2 and yield increased 4%. Excluding fuel and exchange rate impact, yields declined slightly.

The Ground segment revenues saw double-digit growth of 12% in Q2 with volume and yield up as well, as e-commerce continues to drive growth. Excluding fuel, the yield per package increased 4%. At FedEx Freight, the revenue per LTL shipment increased 7% mainly driven by our revenue quality efforts. Excluding the impact from fuel surcharge revenue, revenue per LTL shipment was up 5%.

Turning to peak, I wanted to provide some very exciting updates. As Fred mentioned, we're proud of the terrific service we provided even on some of the busiest days in the history of FedEx. We continue to experience many of the trends that have been growing in recent years: increased demand for larger, heavier packages and heavy demand on Mondays. Thanks to the close collaboration with our customers, we're able to plan and engineer our networks and provide excellent service.

I'd like to take this opportunity to thank our more than 400,000 team members around the world who are continuing to work hard to deliver the holidays during the home stretch of the season. Our team members are the best in the business and they're always focused on one thing -- delivering an outstanding experience for our customers.

As e-commerce continues to grow, customers are looking for new options for access to FedEx. This year we've dramatically increased our retail access with approximately 8,200 locations added to the FedEx on-site network with well-known retailers, including Walgreens. Customers can drop off pre-labeled FedEx Express and FedEx Ground shipments or returns. They can also redirect shipments to hold at a FedEx office or a FedEx on-site location for pickup.

We now have a convenience network of over 10,000 locations including Walgreens, Kroger, Albertsons, FedEx Office, and other participating locations. And for those procrastinators, here's a saving grace. Pickup is now available on Christmas Day in the vast majority of more than 7,500 Walgreens locations. Our presence has never been stronger during peak than it is today.

We also encourage customers to use FedEx Delivery Manager options to direct packages to thousands of secure and convenient hold locations. Enrollments have almost doubled year over year and the percentage of residential deliveries being delivered to FedEx delivery manager enrollees have almost doubled as well. We also have a unique strategy for peak pricing this year but we are not applying an additional peak surcharge to all residential packages, only oversized packages or packages that require additional handling. This strategy was different from others in the marketplace but we felt it was important to be mindful of our small and medium customers.

Obviously, peak is not over but we have seen very good traction with our small and medium customers and we'll continue to monitor and measure to inform our pricing decisions for next year's peak season. Once again we are very proud of the results across the portfolio in the second quarter and the outstanding service provided so far this peak season. We believe we are well-positioned for the remaining days leading up to Christmas and look forward to helping the holidays arrive once again for customers around the world.

Let me now turn the call over to Dave for his remarks. Dave.

Dave Bronczek -- President and Chief Operating Officer

OK, thank you, Raj, and good afternoon, everyone. I also want to thank all of our more than 400,000 team members for their dedication year round and especially in these days leading up to Christmas. These team members are working right now. They're on the road, they're in the air and they're probably at your doorstep, delivering the holidays around the world.

We are proud to report improved financial and operational results driven by strength across the FedEx portfolio. This success results from incredible collaboration among sales, marketing, and operations. Operations, of course, is our front line, picking up, sorting, delivering packages all over the globe, but FedEx has some of the smartest minds in the industry in sales and marketing working with our customers every day all year long, constantly innovating our service and marketing our portfolio around the world.

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First, let me start off with FedEx Express. They grew their revenues and profits, as Alan just mentioned, despite the impact of the TNT Express cyber attack. The underlying fundamentals of the business remain very strong, with higher base rates and growth in international package and freight services. Cost efficiencies are also improving.

For example, we continue to see higher aircraft fleet reliability, which increases our productivity. I'm also very happy to say that at TNT we're seeing strong service levels, and operations are back to normal after the June cyber attack. The IT recovery process is complete. We have improved our reliability, we have improved our security, and we're also increasing our investments to expedite portions of the integration process.

While we have been successful in our efforts so far, restoring the full confidence of our customers is our key goal. We expect the impact of the cyber attack on our financial results to diminish in our fiscal second half. Our focus remains on service to our customers, of course, customer is priority, and hardening our IT environments. The successful integration of TNT and FedEx Express remains a key driver of the FedEx Express FY20 operating income improvement target of $1.2 to $1.5 billion over FY17 results, which we're now reaffirming.

Next, FedEx Ground achieved significant growth in revenue and operating income. We're starting to benefit from the cost-cutting measures we are implementing to address evolving business conditions. We are improving revenue quality and reviewing long-term capital plans to balance capacity, expansion, and pricing and volume growth. From a service perspective, we are having the best peak ever at FedEx Ground.

I should add we're having the best peak ever at FedEx Express and FedEx Freight. We are also pleased that Bob Henning has joined the FedEx Ground team in Pittsburgh as the CFO there. Bob's experience in strategic finance coupled with the FedEx Ground team, immense knowledge of ground operations, and the industry trends will be instrumental as we chart our course for the future.

And finally, last but certainly not least, FedEx Freight stands out with tremendous growth in revenue and profitability as we benefit from disciplined pricing strategies and investments to improve safety and efficiency. We expect this to continue and look for this segment to have one of its best years in over a decade. With our global portfolio, we're confident of our ability to achieve our goals, which include increasing our earnings, increasing our margins, cash flows, and returns.

And with that we will answer your submitted questions, and I'll turn it back over to Mickey.

Questions and Answers:

Mickey Foster -- Vice President of Investor Relations

OK, we have some questions [Inaudible].

Fred Smith -- Chairman

OK, Mickey, let me take a few that came right in as they apply directly to a couple of remarks that were made and then we have a list of questions that came in before the meeting that we assigned people to answer. So, Amit Mehrotra of Deutsche Bank, Tom Wadewitz of UBS, and Scott Group of Wolfe, all would like more clarity about Alan's comments about the increase in TNT integration expense.

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So, Alan.

Alan Graf -- Executive Vice President and Chief Financial Officer

So, I'll start and I'll turn over to David Cunningham. If the concern is, are we going to get return on the additional investment over the $800 million, the answer is clearly yes and that it will come beyond the FY20 period, as I mentioned in my earlier remarks. You should also know that we're spending a significant amount on our tax structure that is below the line and that will have benefits if the new tax law passes, that will be substantial and that we never quantified for you in the $1.2 to $1.5 billion. So, I'm convinced that we're doing the right thing here.

A lot of this was as a result of the cyber attack. Well, we decided to move much more aggressively on hardening and turning to FedEx platforms and I think Dave Cunningham and Rob Carter can add a little color to that.

David Cunningham -- President and Chief Executive Officer of FedEx Express

Well, Alan, there's not a lot to add in terms of what you just said. I would just add that we are convinced that the additional spending is going to generate results well beyond $1.2 to $1.5 billion in the marketplace.

Rob Carter -- Executive Vice President of FedEx Information Services and Chief Information Officer

The only thing I'll add and just very concisely is on the heels of the cyber attack we've become much more aggressive about improving the security posture, reliability, and speeding up the integration of the technology platforms. We've been successful on all three fronts, Dave mentioned those but we're going very aggressively moving the TNT enterprise to the more stable and reliable FedEx system.

Fred Smith -- Chairman

OK, that was Rob Carter, our CIO, who just spoke there. I'm not sure he said that he was entering there but he obviously knows whereof he speaks. Now we have three questions about tax, cash flows, and CAPEX. Matt Troy at Wells Fargo about CAPEX levels on an absolute dollar basis over the next three years.

Will it decline? Ravi Shanker -- What will the proposed tax resolution do to your free cash flow performance? Will free cash flow go up as much as EPS? And finally from Lee Klaskow of Bloomberg Intelligence -- Will FedEx recognize further foreign tax credits in the remainder of FY18? Yes, it will be similar to the $80 million in 2Q.

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Alan, why don't you answer that last one and then talk about free cash flow?

Alan Graf -- Executive Vice President and Chief Financial Officer

OK. We don't plan to recognize any more foreign tax credits this year. Things can change but I think we've done the planning that we need to at this point. Obviously, Matt's and Ravi's questions are related.

I think that with a 100% expensing, as I've said it in several of the last meetings, if we got that in the new tax law, we would likely increase our CAPEX on an absolute basis. One of the most important things that we're doing in the company is our fleet refleeting at Express, and if there's a possibility to accelerate that, it's the highest return project that we have out there and it's something we would look at. So, Ravi, I'm not sure how you define free cash flow but in my opening comments I did mention that we plan to make additional pension fund contributions and the way I measured that would be a reduction in free cash flow although, since it's optional, some people don't count that. Having said that, it won't go up as much as EPS because of what I said about CAPEX.

So, I hope that gives you the color that you need.

Fred Smith -- Chairman

OK, let's turn to some of the questions that were submitted in advance. Helane Becker would like to know about the two recent feeder aircraft that we ordered, the Cessna C408, the new airplane, and the ATR72-600, large cargo door airplanes. Are they growth or replacement aircraft or both? And Ken Hoexter of Merrill Lynch would like to know how big of a CAPEX program this is. So, David Cunningham.

David Cunningham -- President and Chief Executive Officer of FedEx Express

[Audio gap] replacement capital and a part of our fleet modernization. Our current fleet of ATRs and 208s are 25 to 26 years old and will be approaching 30 years about 2020 when we take the first deliveries. These are twin-engine aircraft with modern glass cockpits and large cargo door, which is different than the others and they're also containerized versus being bulk loaded. And so, we're creating a lot of efficiency but we're also creating the opportunity to handle product-to-markets that we haven't been able to handle in some of the smaller aircraft to this point.

We're very excited about those. The capital is roughly equivalent to one wide-body aircraft per year. And the orders of aircraft that we're talking about are 408s, 50 orders and 50 options, the ATRs are 30 and 20. So, in terms of the ATRs, we're talking about six aircraft per year and 408s we're talking about 12 aircraft per year.

Mickey Foster -- Vice President of Investor Relations

And the next questions are about Ground margins, also from Helane Becker, wanting to know does it make sense to continue investing in long-term ground facilities. Jairam Nathan of Daiwa -- How do you see FedEx capacity to handle e-commerce deliveries giving a stronger than expected growth this year? Should we expect another expansion binge? I'm not sure we've ever binged on expansion. I think they've been pretty well-planned. That's a joke.

And CAPEX, will an increase in growth rate surpass expectations? So, I'm going to Henry to take both of those.

Henry Maier -- President and Chief Executive Officer of FedEx Ground

Yeah, good afternoon. Thanks for the questions. Our investments in capacity and automation over the last several years have enabled our industry-leading service including at the busiest times of the year and we believe reliable service is a key factor in our continued growth. However, we're approaching a transition point where you'll begin to see us dial back network expansion CAPEX as we complete certain critical capacity projects already under way and we can do this while still effectively serving the growing e-commerce market because automation in technology improves efficiency, productivity, and utilization of network capacity.

Fred Smith -- Chairman

So, we have another question on Ground. What are the specific steps and financial benefits you can take to improve ground margins to mid-teens? -- Christian Wetherbee of Citi.

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I'll just say we have all kinds of plans on Ground to improve the margins there and we're confident we can do so but none of these tactics we would be willing to discuss with the general public.

Is there a general range for the cost savings on delivering to drop-off locations versus home delivery? What percent of ground shipments are going to pick up and drop off locations currently? -- Todd Fowler of KeyBanc. Raj will take that.

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

Yeah. Todd, thank you for the question. We don't break out operational costs for pickup and delivery or percentage of volume for FedEx on-site or FedEx Office, but if you can imagine, delivering multiple packages to a retail location is far cheaper than delivering a single package to a home but the real key here to the advantage of FedEx on-site is the convenience that we provide for our customers and ultimately providing a win-win-win solution for the shipper, the consumer, and for FedEx. As example, porch piracy is a significant concern that can be allayed by this service.

Now, as I mentioned already, we have more than 10,000 FedEx on-site locations and we are very, very pleased with the usage trends that we have seen so far.

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Thank you.

Fred Smith -- Chairman

So, Alan, got one here from Chris Wetherbee from Citi about the EPS estimate for the TNT cyber attack. Alan.

Alan Graf -- Executive Vice President and Chief Financial Officer

Chris, you asked a question about is $1.20 still a good estimate for the year? We had a $1.10 in the first and second quarters but it dropped significantly from the first quarter to second quarter. So, I'm not sure it's even going to be worthy of us discussing the second half of the year. So, that's the best answer I can give you at this point.

Fred Smith -- Chairman

So, we have a number of questions now on Amazon and e-commerce from Keith Shoemaker of Morningstar -- Given the high cost of the residential deliveries and capacity stress from handling peak demand, is it actually beneficial to have some customers take in house some of the deliveries or is it detrimental effect on delivery density a stronger negative than the demand relief?

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We've talked about this yesterday. We're not 100% sure exactly what the question is but let me give a broad explanation of how we deal with these issues and I think it will answer the question that you have in mind. As I've said on a number of occasions and Dave Bronczek's gone into a lot of detail on this, as Henry Maier and Raj, the secret of our business is to 1) effectively match commercial and residential deliveries so that we don't get too far out of balance and we're achieving our profitability goals. Now, as we just discussed, we put a lot of [INAUDIBLE] expenses to improve and expand our ground network and, as Alan has said over and over again, we anticipate those are going to have substantial long-term returns and improvements to profitability.

And one of the things that I've mentioned over and over again on this call as many times, it seems like some of you are trying to talk about FedEx Ground Inc. or FedEx Express Inc. rather than FedEx Corporation Inc., and by that I mean when we're knocking the ball out of the park in one segment, we then say perhaps we can make some investments someplace else so that we can improve their longer-term profitability. So, we deal with our op-co's as a portfolio of solutions and not all of them are being run by us to maximize returns every quarter or we couldn't make these long-term investments.

So, going back to the question, you've got to have a disciplined approach to the mix of commercial and residential packages. Having said that, we are quite confident that we can handle nationally larger amounts of the e-commerce packages in the future at profitable rates because of the investments we've made. These automated facilities that Henry talked about, we have two major hubs coming online next year and a couple more after that. These are substantial improvements to our ability to handle this type of traffic on a profitable long-term basis.

The other thing that I would mention to you that is often missed in these evaluations are the comments about the e-commerce business. It requires a close collaboration between FedEx and our customers to choreograph these massive industrial systems during these peak seasons. We will begin literally the day after New Year planning for next peak season and we have very close relationships with our major customers and I think the proof of the pudding is in the eating. Dave told you we're having an outstanding peak.

Well, that's because of the investments and the close planning we do with our customers and that's a prerequisite in this business or you will not be successful. And some of the questions seem to miss those two points, and I want to reemphasize that our great service is because of the outstanding planning, long-term planning, and having facilities in place. We've been off a little bit sometimes but not much but, boy, we had it right this year so far, knock on wood. And secondarily, it's managing this mix.

And third, you've got to have a close collaboration with your major customers who have a lot of residential e-commerce. So you know where that traffic is coming from. You can prepare for it and handle it. So, I apologize for the long answer but a lot of these questions kind of miss those key points.

So, then David Vernon asks "If Amazons starts competing for shipping business, how would that impact your go-to-market strategy?"

Obviously, we don't address hypotheticals. I'm sorry, David, but maybe Raj wants to comment about this?

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

All I can add to that is to just say that Amazon is a long-standing customer of FedEx. However, it should be noted that FedEx has no single customer that represents more than 3% of revenue or volume.

Fred Smith -- Chairman

So, Allison Landry wants to know about the addressable market for reverse logistics? Are we capable of handling the growth in returns in online orders and how does FedEx plan to capitalize on this opportunity? Raj.

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

Thank you for your question, Allison. We have estimates that say that roughly 15% of all goods purchased are returned but apparel is running at about 30%. Now, the business of returns continues to grow in scale and complexity, especially for retailers as they are directly impacted by the amount of online consumer spending. Now, from our part, the integration of FedEx supply chain with our existing portfolio is uniquely positioned for success here because we provide the most robust end-to-end solutions in this growing market and we have some very exciting developments under way that will surpass customer expectations, provide new value for both merchants and consumers.

Now, in addition to all this, buying online and returning in store continues to emerge as a core consumer preference. Now, we've talked several times, we have a vast network of FedEx Office and retail alliances like Walgreens that provide an ideal opportunity to offer consumers a convenient drop-off point for their returns.

Fred Smith -- Chairman

So, Allison had a follow-on question. Do we collaborate with traditional brick-and-mortar retailers that have successful online strategies?

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The answer to that question is yes, and big time, and we collaborate with pure e-tailers. We deal very closely with our customers. Don Colleran, do you want to make a comment about that because it's your people that are right in there, the solutions group.

David Cunningham -- President and Chief Executive Officer of FedEx Express

Sure, Fred. I think you did a wonderful job explaining the process. It is a 12-month process where we sit down with approximately our top 25 customers and put together very specific and very surgical plans. We share those with the operating company so there's alignment in terms of where we want to position the resources but it's worked flawlessly this year and the operational excellence that we've experienced at the operating company level is because of the ongoing planning that we do with our top customers as well as broader sort of customers.

So, we feel really good about where we sit this time of the year going into the last week.

Fred Smith -- Chairman

So, we have a couple of other questions here on CAPEX and expensing, and the part that is often missed in the conversation because of the politics involved in this situation, is with if the tax bill works as anticipated, there will be a significant growth in GDP and remember that the Business Roundtable did a survey prior to this tax bill passing and 82% of BRT membership anticipated that if it did pass that it would substantially increase their capital expenditures and 75% anticipated that they would increase employment. Well, they're not making additional CAPEX and increasing employment for any other reason than the market's growing. So, if we increase capital expenditures, as Alan said, it will be because the market is going, we think we can make more money and increase cash flows, and so forth but there's not just any willy nilly interest in increasing CAPEX other than for that, except for one thing and in the case of expensing, you increase the net present value of the returns if it is a replacement piece of capital because you get it in place earlier and you get your money right back. So, to that extent, it would be bringing the money forward and not spending it later.

It's the CAPEX for GDP growth rates induced by the tax rate that is the important part of any increase in CAPEX, and we will identify which is which if we do that.

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There was a question to Rob Carter on some software.

Rob Carter -- Executive Vice President of FedEx Information Services and Chief Information Officer

This is Rob Carter. This is from Amit Mehrotra from Deutsche Bank. Please update us on Smartpost Redirect initiatives, when we will address matching software to be deployed.

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That software is already deployed and is paying big dividends at FedEx Ground where we are taking address matching capabilities and even proximate capabilities and moving Smartpost deliveries into the FedEx Ground network. So, that was deployed this summer at scale and we are experiencing the benefits. We're also planning on making available to our customers in the coming timeframe, probably next year, Smartpost hold-at-location capabilities so you'd also be able to redirect those shipments to any of our convenient more than 10,000 locations in the on-site network.

Fred Smith -- Chairman

OK. So, here's a question from Ben Hartford -- How has FedEx attitude toward migrating closer to the consumer via a formal retail marketplace evolved? What are the merits and drawbacks that evolving marketplace would directly link customers, retail, consumer transactions with your broad distribution network?

--

I think, Ben, what you're asking there, is why don't we put up a marketplace ourselves. Well, we strongly believe that we should not compete with our customers, and our big customers have marketplaces. So, we think the value added that we bring to the table and on match value added is a portfolio of solutions and assets that we can help them fulfill their marketplace requirements. So, that's our policy in that regard.

There's a question about FedEx Express' domestic China deliveries. Has the focus shifted to nearly all import-export – Keith Shoemaker of Morningstar to Dave Cunningham.

David Cunningham -- President and Chief Executive Officer of FedEx Express

Thank you. Our domestic business is growing and an important part of our unique value proposition in China. We're the only foreign company with a wholly owned domestic and international business. The domestic product is closely aligned and integrated with our international import-export business that is doing great.

Our business is more focused. The domestic business is more focused on the B2B market and does not compete in the domestic e-commerce market.

Fred Smith -- Chairman

So, there's a question about cross-border and international e-commerce. Matthew Russell of Goldman Sachs wants to know the secular opportunity here and what if any additional investment FedEx will need to make to best capture the opportunity. Raj.

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

Yea, Matthew, thank you for the question. According to Forrester the cross-border e-commerce represents roughly 11% of the total e-commerce market in 2017 but is growing significantly faster, roughly 1.5 times faster. And so, in that sense cross-border e-commerce maybe come 20% of the market by 2022 with a GMV of roughly $627 billion but, as you can imagine, this market is far more complex than the domestic e-commerce market and there are only a very, very few players like FedEx who can provide adequate capabilities. Firstly, we can leverage our existing world class global transportation network.

And secondly, we launched FedEx Cross-Border as a technology play to make cross-border e-commerce as seamless as possible. We are extremely pleased with the progress we've seen thus far and very, very excited about the potential in the future.

Fred Smith -- Chairman

There's a question about Tesla semi-truck. Mike Ducker, would you read who it came from and answer it?

Mike Ducker -- President and Chief Executive Officer of FedEx Freight

It came from Ravi Shanker and Ravi asks "Are there any thoughts on the Tesla semi-truck? Have you placed any orders yet?"

--

As you know, we already have a lot of electric vehicles operating in all across our networks. We think they've got good potential. They could offer a lot of benefits when they come to market. So, we've certainly evaluated the truck and should we decide to order any of those, we will certainly make that known early.

Fred Smith -- Chairman

Yeah, I think we had people out there at the grand opening. We work with Tesla and looked up the vehicles, very innovative.

--

So, a question from David Campbell of Thompson Davis. Hope you're doing well, David, old friend. You want to know whether the company believes that international air shipment growth will continue to achieve the global rate of GDP over the longer term. And then a related question -- how should investors be thinking about a potential slowdown in the pace of growth in international air freight in 2018 as it pertains to international Express results in 2018 -- Allison Landry of Credit Suisse.

And I think Dave Bronczek wanted to answer this maybe with some color from Raj.

Dave Bronczek -- President and Chief Operating Officer

Thanks, Fred. Thanks for the question, David. We absolutely believe short term and long term the international air freight shipments will continue to grow and outpace GDP like it always used to be in the past, then it slows down but now it is again. That's great news for FedEx because we're the biggest, most powerful air freight forwarder and global business transportation worldwide.

So, for us, it's actually right in our wheelhouse.

--

In terms of slowing down in 2018, Alan talked about the tax reform bill. We think that adds a lot to air freight and the global economy and I think that's again going to be very beneficial to us.

Fred Smith -- Chairman

Dave, I think you misspoke there. You meant to say the largest air cargo and air express company, not the largest air forwarder.

Dave Bronczek -- President and Chief Operating Officer

Yea, the word just flew out.

Fred Smith -- Chairman

I didn't want to leave any misimpression in the audience. Raj, do you want to add something there?

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

I mean, all I can add to that is that air freight, in particular the air express market, they really serve the high-value high-sector part of the economy and in modern times they've grown faster than regular GDP and we expect that trend to continue over the long term.

Fred Smith -- Chairman

They've also grown faster than the general air cargo markets over a long period of time as well, I might add.

--

So, new technology. From Ravi Shanker -- "Are you doing any work around the integration of Blockchain and the customer operations? What impact do you think it will have in the logistics and how can that be an opportunity or threat to FedEx?" Rob Carter, our CIO, do you want to answer that?

Rob Carter -- Executive Vice President of FedEx Information Services and Chief Information Officer

Ravi, we definitely believe that Blockchain represents a significant opportunity in the custodial control and chain of control for supply chain shipments. We are charter members in the Blockchain and Transportation Alliance as well in the Blockchain Research Institute and we believe that going forward, the overall provenance of goods as they move around the world and the enhancement that Blockchain offers to global settlement systems and payment systems offer a significant opportunity for us. So, I think the answer is yes.

Fred Smith -- Chairman

So, there's another question here about our view on electric and autonomous trucks and specifically of about our subcontractor model. Would it slow down adoption of such technologies?

--

The answer to that is no, in general, but Rob just gave an important speech that sort of represents the company's position on this and we thought it'd be a good idea if he just repeated what he said out in Silicon Valley, Rob.

Rob Carter -- Executive Vice President of FedEx Information Services and Chief Information Officer

Well, first off, the general innovation of footprint that we have always has us looking at modern and innovation-oriented developments in the marketplace and certainly autonomous vehicles were among them as well as electrification. The reality is that autonomous vehicles are already among us and we believe that the most important things that will happen in the near term is using technologies like adaptive cruise control, lane departure, automatic braking, all of which compositely make for autonomy, offer much-improved safety for drivers, and a much improved quality of life for the men and women that are on the road for FedEx out there. So, clearly, these technologies won't stop. There are many opportunities in the future but right now we're using a lot of autonomy to make our teams safer and to give them a better quality of life on the road and we're using a lot of different technologies to make sure that our sustainability efforts continue to improve the environment, and I recommend to you our sustainability report on FedEx.com.

Fred Smith -- Chairman

Scott Schneeberger of Oppenheimer has a couple of questions. One about freight -- How do you anticipate balancing volume and yield at FedEx Freight going forward if current demand environment persists? Mike Ducker.

Mike Ducker -- President and Chief Executive Officer of FedEx Freight

Yes, sir. First, let me thank FedEx Freight team for a great quarter and a great peak season too and thank you for the question, Scott. As we've all read, the current environment is strong. We have very solid business processes in place to balance volume and yield.

The improved revenue quality really is the primary driver of the results in Q2 including a 34% higher operating margin. It's a team game between operations, sales, pricing, solutions, marketing. We work closely together to not only ensure we're giving the best market-leading service but that we get compensated fairly for it using data-driven decision-making tools in which we've invested in the past. So, we believe we have great processes in place.

We expect that our continued focus on revenue quality will drive operating income and margin improvement through the rest of '18.

Fred Smith -- Chairman

We've got a couple of questions here for Henry Maier. One Tom Wadewitz -- Is FedEx still tapping the brakes on the pace of B2C volume growth in ground? How much did B2C ground volumes grow in 2Q and how much did B2B ground volumes grow? Henry.

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

This is Raj. I would just say that we haven't broken out the volume trends between B2C and B2B and we're not going to start in this call. All I would say is that we grew our Ground business double digits in the second quarter with healthy volume and yield increase and we'll continue to monitor customer to customer and make sure we make the right decision that balances volume yield and profitability.

Fred Smith -- Chairman

So, this one is for Henry. Could you please discuss strategic initiatives to accelerate growth in FedEx supply chain and discuss what type of growth you anticipate for this business longer term? -- Scott Schneeberger of Oppenheimer.

Henry Maier -- President and Chief Executive Officer of FedEx Ground

Thanks for the question, Scott. We think there are great opportunities for growth across several segments in supply chain. For example, we launched FedEx fulfillment in February to help small and medium-sized retailers, e-tailers and brands. FedEx Fulfillment has many capabilities -- warehousing, fulfillment, inventory, and transportation management and reverse logistics.

So, e-tailers and retailers can focus on business itself instead of supply chain. We also see an opportunity to further leverage our reverse logistics expertise to enhance the overall returns process. Ecommerce continues to drive a high return rate, and consumer preferences to return online purchases to physical locations can be satisfied by leveraging FedEx Office and other retail access points.

Fred Smith -- Chairman

There is a question from David Ross of Stifel. With international growing again, do you anticipate any flight additions in calendar '18? I know Dave Bronczek wanted to make a comment and will pass it on to Dave.

Dave Bronczek -- President and Chief Operating Officer

I would just say that any additions we would make are so minuscule in our big global network that it wouldn't be really worth talking about and we add capacity to meet demand all year long and as the volumes grow, we keep matching the volume. So, our network is so big and so global now that it wouldn't show up on the radar.

David Cunningham -- President and Chief Executive Officer of FedEx Express

Well, and just maybe to highlight the scale of what Dave is talking about, we operate 1600 departures utilizing 660 aircrafts every single day and we scale up and we scale down to meet demand. So, as Dave said, it will be relatively modest.

Fred Smith -- Chairman

So, where has hiring employees been the most challenging and has it impeded operations materially and increased cost this year? -- Brian Ossenbeck of JP Morgan. I think Dave wanted to mention something and then we will hand it off to Henry Maier.

Dave Bronczek -- President and Chief Operating Officer

Yea, thanks, Fred, and thanks for the question, Brian. It's a great question. We talk about it all the time. We had no problems hiring anybody anywhere in the United States or around the world and, quite frankly, it's because people love working for FedEx.

We actually started a program called Friends and Family. So, our employees, when their sons and daughters come back from college, we hire them and it's been fantastic for us and it continues to be a great program not just for family members but also friends.

Henry Maier -- President and Chief Executive Officer of FedEx Ground

Yea, let me add, Dave. This is Henry Maier, FedEx Ground. Our investments in automated facilities coupled with geographically targeted peak wage rates have allowed FedEx Ground to maintain fully staffed facilities across the entire network this peak. We've had no issues anywhere.

Fred Smith -- Chairman

So, David Bronczek, this question you're uniquely qualified to answer about the postal service from Brian Ossenbeck of JP Morgan. Does a recent order on market-dominant products and proposed supplemental pricing authority beyond the CPI cap have any impact on FedEx?

Dave Bronczek -- President and Chief Operating Officer

The very short answer is we do not believe so. I should add, however, that the USPS is a very good partner of FedEx and has been for many, many years, over a decade now. So, we keep working in the partnership and improving the service along the way.

Fred Smith -- Chairman

Is there further scope to expand non-conveyable on oversized product pricing beyond current levels? What percentage of ground freight volumes are in this category? Same questioner. Raj.

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

Yeah, Brian, the non-conveyable and oversized packages are roughly 10% to 11% of the volume we handle in the FedEx Ground network and we've added sortation and delivery capability to handle these larger heavier packages. As you can imagine, there are only very few players in the marketplace who have the capability to handle such traffic. So, we'll continue to monitor trends and adjust pricing as needed so that ultimately we can provide an outstanding service for our customers.

Fred Smith -- Chairman

And, Raj, if you can just go into this question from David Ross. Now that Smartpost is going down in January, when will Freight finally make the switch to dimensional pricing away from the outdated, irrelevant NMFC pricing? -- David Ross of Stifel. If you could take that and then to Mike and, Mike, when you get the microphone, Ken Hoexter wants to know about any movements or thoughts on 33-foot [INAUDIBLE].

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

David, of course we agree with you. That dimensional density-based pricing offers a much more simplified alternative to the class-based system, which is frankly outdated. We have this capability for customers if they want to choose it today and it benefits the whole industry to move to a simplified pricing structure based on shipment size.

Fred Smith -- Chairman

Mike.

Mike Ducker -- President and Chief Executive Officer of FedEx Freight

Yes, sir. Ken, thanks for the question. As you know, FedEx is a member, in fact, a charter member of the Americans for Modern Transportation Coalition. We have in that coalition a really diverse group of shippers, retailers, and customers including UPS, Amazon, the National Retail Federation, the US Chamber of Commerce among others, and we continue to advocate for these because we believe that they're safer, more efficient, you get an 18% load improvement out of it, it puts fewer trucks on an already taxed infrastructure and we've driven more than 1 million miles on these on the road, so we know that they're safer.

It takes out 204 million gallons of fuel a year, 4.4 billion pounds of CO2 emissions. Why wouldn't this be good is our position. So, we continue to focus on it and hopefully that tax reform moving across the goal line and the infrastructure package next it will be strongly considered, we will certainly be promoting it in that legislation.

Fred Smith -- Chairman

Last question is from Ken Hoexter from Bank of America/Merrill Lynch. It's basically about our customer sales strategy. David Bronczek and Don Colleran will both cut my throat if I answered this question, Ken. So, I'll just say we have the greatest sales force of any] industrial company in the world and lots of potential new business.

--

With that I'll turn it back over to Mickey.

Mickey Foster -- Vice President of Investor Relations

Thank you for your participation in FedEx Corporation's second-quarter earnings release conference call. Feel free to call anyone on the Investor Relations team if you have any additional questions about FedEx. Thank you.

Operator

And this concludes today's conference call. Thank you so much for your participation. You may now disconnect.

Duration: 64 minutes

Call Participants:

Mickey Foster -- Vice President of Investor Relations

Fred Smith -- Chairman

Alan Graf -- Executive Vice President and Chief Financial Officer

Raj Subramaniam -- Executive Vice President and Chief Marketing and Communications Officer 

Dave Bronczek -- President and Chief Operating Officer

David Cunningham -- President and Chief Executive Officer of FedEx Express

Rob Carter -- Executive Vice President of FedEx Information Services and Chief Information Officer

Henry Maier -- President and Chief Executive Officer of FedEx Ground

Mike Ducker -- President and Chief Executive Officer of FedEx Freight

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