FedEx (NYSE:FDX) exited its 2017 fiscal year with strong earnings momentum, posting 14% growth in adjusted earnings per share for the full year. However, the package delivery giant stumbled out of the gate to begin fiscal 2018 due to a damaging ransomware attack that hit its TNT Express subsidiary in late June.
A significant proportion of the FedEx earnings call last week was devoted to discussing how the company has reacted to the cyberattack. Management also spent some time highlighting positive trends in the rest of FedEx's business. Here are five points that FedEx executives emphasized during the call.
TNT Express is getting back to normal
Leveraging every other available resource, we have restored the TNT systems to a near-normal state, with virtually all critical systems up and available. We are now focused on the restoration of certain key customer-specific solutions and systems.
-- CIO Rob Carter
The late June ransomware attack disrupted TNT Express' operations for weeks. However, by the end of July, most critical systems were functioning again. In fact, for the month of August, service levels improved relative to the same period in 2016.
At the time of the earnings call, FedEx was down to fixing a small number of customer-specific tools. It expects all of that work to be complete by the end of this week.
Working hard to regain customers
From a customer perspective, our teams are executing a detailed, thorough, and customer-focused plan targeting at restoring customer volumes to our expected levels. This plan includes leveraging our senior officer team on sales calls to instill confidence with customers so that we can fully meet their expectations.
-- President and COO Dave Bronczek
Not surprisingly, many TNT Express customers were extremely frustrated by the fallout from the cyberattack, which caused huge delays and made it impossible to track shipments. In some cases, this caused longtime customers to consider taking their future business elsewhere. As a result, TNT Express shipment volumes still haven't recovered to precrisis levels.
FedEx is now working hard to regain the trust of those customers. As part of this effort, senior executives are joining some sales calls in order to reassure frustrated customers that preventing a repeat of this situation is management's top priority.
Retooling integration plans after the cyberattack
Recovery of the cyber-attack required us to pursue solutions to stabilize the business and leverage FedEx Express' capabilities. These actions highlighted additional and expanded opportunities for accelerating our integration plans.
While the ransomware attack on TNT Express was obviously a costly problem for FedEx, it also highlighted some opportunities for speeding up the merger integration process. For example, the company reacted to the cyberattack by shifting more volume from TNT Express into the FedEx delivery network. Based on this experience, FedEx believes that it can move up the timetable for integrating the two express delivery networks.
IT is another area where FedEx now plans to dramatically accelerate its integration plans. The company hopes to retire dozens of legacy TNT Express applications in the near future. FedEx always intended to migrate TNT Express to its own (superior) IT system over time, but it now aims to speed up that transition.
Trade growth is finally picking up
Internationally, recovery in capital spending is supporting higher global GDP growth and driving the best trade volume growth since 2011.
-- Chief Marketing and Communications Officer Raj Subramaniam
While the scale of the damage from last quarter's ransomware attack was certainly discouraging, FedEx also had some good news to share on its earnings call. Most notably, global trade has finally started to pick up, following several years of disappointing growth.
Indeed, FedEx expects global GDP growth to accelerate to 2.9% in 2017 compared to 2.3% last year. Meanwhile, trade grew at about 1.4 times the rate of GDP growth in the first half of 2017, whereas it had been rising at roughly the same rate as GDP during the previous few years. Rising tech sector shipments have been a key driver of this rebound in trade. Faster trade growth obviously creates huge growth opportunities for FedEx's express delivery business.
FedEx Ground continues to focus on delivery density
As Raj mentioned, one of the exciting things we are working on is significantly expanding the number of FedEx retail locations, so that customers can conveniently access our services.
-- CFO Alan Graf
For more than a decade, the ground delivery business has been FedEx's most important growth driver. However, in recent years, this segment has suffered margin pressure due to the growth of e-commerce and the high cost of making residential deliveries. FedEx continues to work on tools to improve efficiency in the ground business by increasing delivery density.
For example, back in January, FedEx formed a partnership with Walgreens Boots Alliance (NASDAQ:WBA) to offer drop-off and pickup services across the massive Walgreens retail store network. By the end of October, customers will be able to drop off pre-labeled shipments and have packages sent to any of nearly 8,000 Walgreens stores in the U.S.
This program will help Walgreens Boots Alliance by driving more traffic to its stores. But it could have even greater benefits for FedEx, by shifting volume away from high-cost residential pickups and deliveries and toward a smaller number of centralized pickup and drop-off points.