FedEx Corporation (FDX) Q4 2022 Earnings Call Transcript

FedEx Corporation (NYSE: FDX) Q4 2022 earnings call dated Jun. 23, 2022

Corporate Participants:

Mickey Foster — Vice Presiden, Investor Relations

Rajesh Subramaniam — President & Chief Executive Officer

Brie Carere — Executive Vice President, Chief Customer Officer

Mike Lenz — Executive Vice President and Chief Financial Officer

Analysts:

Brandon Oglenski — Barclays — Analyst

Jack Atkins — Stephens — Analyst

Chris Wetherbee — Citi — Analyst

Amit Mehrotra — — Analyst

Tom Wadewitz — UBS — Analyst

Jon Chappell — Evercore ISI — Analyst

Allison Poliniak — Wells Fargo — Analyst

Jordan Alliger — Goldman Sachs — Analyst

Ken Hoexter — Bank of America — Analyst

Brian Ossenbeck — JPMorgan — Analyst

Bascome — — Analyst

Helane Becker — Cowen — Analyst

Scott — — Analyst

David Vernon — Bernstein — Analyst

Scott Schneeberger — Oppenheimer — Analyst

Todd Fowler — KeyBanc Capital Markets — Analyst

Bruce Chan — Stifel — Analyst

Jeff Kaufman — Vertical Research Partners — Analyst

Presentation:

Operator

Good day everyone, and welcome to the FedEx Corporation Fourth Quarter Fiscal Year 2022 Earnings Conference Call. Today’s call is being recorded.

At this time, I’d like to turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead.

Mickey Foster — Vice Presiden, Investor Relations

Good afternoon, and welcome to FedEx Corporation’s fourth quarter earnings conference call. The fourth quarter earnings release and stat book are on our website at fedex.com. This call is being streamed from our website, where the replay will be available for about one year.

Joining us on the call today are members of the media. During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate.

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 at fedex.com for a 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 Raj Subramaniam, President and CEO; Mike Lenz, Executive Vice President and CFO; and Brie Carere, Executive Vice President and Chief Customer Officer.

And now Raj will share his views on the quarter.

Rajesh Subramaniam — President & Chief Executive Officer

Thank you, Mickey, and good afternoon, everyone. I’d like to start by thanking team FedEx for continuing to move the world forward amid unanticipated challenges. This is most recently displayed during Operation Fly Formula, where in response to the critical shortage rippling across the United States, we have moved hundreds of thousands of pounds of baby formula from Europe to the US. And this weekend, our team will move 52 tons of medical relief to Poland for Ukrainian refugees in coordination with Direct Relief International.

Now, turning to our financials, I’m proud to share that in the face of an increasingly challenging global backdrop we finished fiscal ’22 with our highest ever revenue of $93.5 billion and adjusted operating income of $6.9 billion, both up 11% year-over-year. This is a testament to our value proposition and continued execution against our long-term strategy. As I shared on the last call, we have worked through many network inefficiencies caused by labor shortages. Although wage rates remain higher than this time last year, they’re stabilizing. Still, COVID-related conditions slowed global recovery and pressured second half performance.

While Q4 volumes were down year-over-year and all our transportation segments compared to the extra ordinary fiscal year ’21, we successfully implemented strategic actions that drove double-digit yield improvement across the board with Express composite yield per package up 20%, ground up 11% and freight yield per shipment up 28%. We remain focused on revenue quality as one of the key levers to help offset the ongoing macroeconomic pressures and driving improved margins going forward.

Turning to Express, even in the face of higher operating expenses related to inflationary pressures, we delivered improved quarterly operating income and revenue. Our full execution of our new revenue management actions has allowed us to overcome headwinds from COVID lock downs in Asia and geopolitical uncertainty in Europe.

At FedEx Ground, we experienced modest revenue growth driven by higher yields as a result of pricing actions and improved volume mix. Volumes declined year-over-year due to our efforts to constrain economy volume as well as slower customer demand. We will continue to leverage opportunities to maximize utilization of existing facilities through operational adjustments, including multiple preload and relay operations. Ground operating expenses continued to be pressured by higher purchase transportation and wage rates although we see these pressures stabilizing.

We continue to proactively address labor availability head on through multiple levers. As we increase the frontline retention and refine the recently launched package handlers scheduling tool, we will not only ensure we have the right level of staffing for every sort based on volume, we will ensure a workforce that is safe, efficient and highly engaged to stay and grow with the company. Additionally, we are implementing several technology based initiatives that are driving increased productivity in our line haul and dock operations as well as continuing our efforts to optimize the last mile. We’re seeing early benefit from these efforts with productivity of ground dock operations improving 6% in Q4 compared to Q3.

FedEx Freight once again delivered outstanding results with the fourth quarter operating margin of almost 22% driven by a continued focus on revenue quality. A job well done to Lance Moll on his first full fiscal year as Freight CEO and to our Freight and Commercial teams for their solid execution.

As we look ahead to fiscal year ’23, we expect the macroeconomic risks both in the US and globally to continue to put stress on supply chains and trade. Brie will cover this in more detail shortly. Let me though reaffirm confidence in our key strategies. As CEO, my focus is maximizing total shareholder return driven by improved revenue quality, higher margins and a balanced capital allocation strategy, which Mike will provide more color on shortly. Importantly, our foundational long-term investments have set the stage for another strong year driven by focus on lowering our cost to serve. A great example of where we are going to lower our cost to serve is in Europe. The integrated network and consolidation of many flights into our Charles de Gaulle hub allows us to improve operational efficiency and enhances our network. For instance, since April, the number of European airports we service from CDG increased by 71%, the number of flights intra-Europe was reduced by 13%. We are confident that actions like those will drive bottom line improvement in fiscal year ’23.

As we move forward, I’m honored to lead our global team, who enable FedEx to deliver what’s next. And speaking of what’s next, we are looking forward to hosting our investors in Memphis in a few days. Our goal for this two-day event is for attendees to leave with a deep understanding of our strategies, including financial targets and priorities and how we plan to execute.

Now before I turn it over to Brie, I’d like to say a few words about FedEx Express President and CEO, Don Colleran, whose 40 year career with FedEx has been nothing short of exceptional. As one of the pioneers of our international business, he helped lay a foundation for the significant growth in that sector of the FedEx portfolio. Since assuming his current role in 2019, he has launched new capabilities for our customers and led our global FedEx Express team through some of the most challenging times, including the COVID pandemic. As announced in March, Don will move into the CEO executive advisor role in September of this year in support of Richard Smith’s transition to the CEO of FedEx Express, and will retire from FedEx in December. Don, we appreciate your service and countless contributions to this company. We wish you nothing but the best in your well-deserved next chapter.

And now let me turn it over to Brie, who last week was named Chief Customer Officer in a move that aligns several teams under her leadership to give us even greater focus on our commercial strategy and our end-to-end customer experience. So Brie?

Brie Carere — Executive Vice President, Chief Customer Officer

Thank you, Raj. It’s an honor and a privilege to take on this responsibility to deliver for our customers and drive quality growth for our shareholders. I’d like to reflect on fiscal year ’22, then drill down to fourth quarter ’22 revenues. Finally, I will discuss the outlook for fiscal year 2023.

Fiscal Year 2022 was another year of change for FedEx. The operating environment was quite challenging, requiring flexibility and creativity on the part of our management, staff and frontline team members to ensure we deliver for our customers. I am proud of how our team rose to this challenge. We executed against our commercial strategy and remained intently focused on revenue quality across the business. In the fourth quarter, our consolidated revenue increased 8% year-over-year. Revenue management actions drove our growth, which was partially offset by lower shipment demand.

FedEx Ground and FedEx Express generated year-over-year revenue growth of 4% and 6% respectively, despite lower volume levels. At FedEx Ground yield management actions affecting our FedEx Ground economy service as the primary factor behind volume declines, with FedEx Ground economy volumes down 36%; including past [Phonetic], our commercial and our home delivery volumes declined 1% due to macroeconomic conditions. At FedEx Express COVID locked down, geopolitical uncertainty and slower economic growth contributed to package volume declines of 11%. In some areas, we also selectively reduced volume to ensure we could deliver the service that is expected of FedEx.

FedEx Freight had a banner revenue quality quarter and growing yield at 28%. FedEx Freight market leading value proposition combined with the disciplined execution of our sales team drove these exceptional results. The FedEx Freight team continues to do a phenomenal job of managing revenue quality.

Now, let me take a moment to discuss 2023. We anticipate consumers will keep spending and their spending will continue tilting towards services from goods. We expect more consumers to return to stores. With this backdrop, we do expect pressure on B2C volumes. Through May industrial activity has been solid, but today’s June flash PMI was a sharp decline. Further after a strong build late last year and early this year inventory restocking is slowing. This will dampen freight demand.

Our international businesses continue to navigate a dynamic environment. Global trade growth has slowed from disruptions related to lock downs in China and the conflict in Ukraine limiting the flow of goods and reducing international export volumes. We do anticipate supply chain disruptions throughout the fiscal year. We continue to expect passenger airlines to fully recover to pre-COVID levels, and that that recovery will take some time. Belly capacity on passenger Airlines is expected to remain constrained in fiscal year 2023. Resulting our pricing environment still favorable to FedEx is a little less than before.

The Europe to Asia lane is estimated to recover in Q1 calendar year ’24 and belly capacity on Trans Pacific Airlines is estimated to recover in Q3 calendar year ’24. Commercial capacity between Europe and Asia is not expected to recover until Q1 of calendar year 2025.

Our fiscal ’23 forecast assumes a normalized economic environment. The factors I discussed earlier have been incorporated into our volume forecast. Our volume forecast has low single-digit volume growth. We’ve also prepared plans to manage through slowing economic environment if required. We will take costs and revenue actions to mitigate the impact of further economic softening, incorporating the lessons learned over the last two extraordinary years.

In fiscal ’23, we will execute a very targeted growth strategy. We will prioritize revenue quality and our intent on pursuing business that provides attractive yields on our assets. We expect the pricing environment will remain rational here in the United States and also around the world. We believe that the systemic changes, especially e-commerce, peak surcharges are durable changes for the industry. We are closely monitoring both inflation and fuel prices. And as a reminder, we adjust our fuel surcharge weekly in response to market rate. I am confident we have the tools to get — to continue getting inflation plus pricing.

Strong revenue quality is possible because we will target customers who value FedEx has unique capabilities. Let me talk about four of our favorite capabilities. First, we are the only provider to bundle our parcel and LTL portfolio. Second, FedEx Ground has two very significant advantages over our primary competitor. FedEx Ground is faster to more locations than UPS Ground and FedEx Ground delivers on Sunday, while UPS does not. Third, we continue to evolve our digital portfolio. Express and Ground are the first nationwide carriers to announce we will provide a picture proof of delivery for every US residential delivery that doesn’t require a signature. And fourth, we have a robust intercontinental offering for both B2B and B2B segments. FedEx provides fabulous solutions for the world’s manufacturing, health care, high tech and e-commerce customers.

In closing, this has been an extraordinary year for FedEx. We generated strong growth, executed on our revenue quality strategy and overcame industry wide challenges. Our plan for fiscal ’23 incorporate a dynamic environment and we have the right strategies and the right team in place to deliver profitable growth and margin improvement.

And with that, I’ll turn it over to Mike for his remarks.

Mike Lenz — Executive Vice President and Chief Financial Officer

Thank you, Brie, and good afternoon, everyone. We had a strong fourth quarter with adjusted earnings per share improving 37% year-over-year, revenue increasing 8% and consolidated adjusted operating margin expanding 50 basis points to 9.2%. These results reflect the outcome of the revenue management emphasis Brie described as we aggressively adjust to mitigate continued inflationary cost pressures.

Notable fourth quarter year-over-year expense items included higher shelf insurance costs primarily at Ground as well as a roughly $130 million impact from higher rates for both wages and purchase transportation. Offsetting these headwinds were favorable year-over-year comparisons for variable compensation of approximately $300 million and last year’s $100 million contribution to Yale University to support our carbon neutrality goals.

With that overview of consolidated results, I’ll turn to the highlights for each of our transportation segments. Ground reported a 4% increase in revenue with operating income down approximately $260 million, resulting in an operating margin of 10%. Self insurance expense increased approximately $200 million, reflecting a higher loss experience as well as an adjustment to the reserve for the projected cost of claims. There are multiple initiatives underway to mitigate the cost of risk, including new vehicle safety technology and driver certification standards in our service provider agreements. The strong 11% yield improvement at Ground was not enough to offset that headwind along with higher cost of wages and purchase transportation.

Looking forward, the continued revenue quality emphasis in conjunction with specific productivity and workforce initiatives will drive improved profitability. Stabilization of the labor market will also support further traction in these areas. And Express adjusted operating income increased by nearly 10% year-over-year with operating margin improving by 20 basis points to 8.2%. This improvement was driven by higher yields, including the favorable net impact of fuel and lower variable compensation which more than offset volume declines. In addition, crew cost per flight hour have been further elevated as operating the network has had to accommodate not only COVID protocols, but also to the routing changes to avoid layovers and locations with stricter COVID regulations as well as conflict airspace.

Freight had an incredible finish to the year with revenue for the fourth quarter increasing 23% and operating profit growing 67%. These outstanding results are a testimony to freights continued focus on revenue quality and profitable share growth as we build on our strengths as the leader in the LTL market.

Turning to FY ’23, we are projecting continued momentum with a range of 9% to 19% adjusted earnings per share improvement. We expect margin expansion in all of our transportation segments on an adjusted basis as we execute on key priorities, including enhanced revenue quality beyond inflation, technology driven operational efficiency improvements and increasing utilization of our assets.

As we began fiscal 2023, we are seeing the lower customer demand trends we experienced in the fourth quarter continue into June and expect first quarter volumes will continue to be pressured. In addition, Express continues to experience flight constraints due to crew COVID protocols, as has been highlighted industry wide.

We do expect both Express air network efficiency and year-over-year volume comparisons across all of our transportation segments to strengthen as we go through the fiscal year.

In addition, our outlook includes an approximately $450 million non-cash pension headwind through the lower asset returns realized in fiscal 2022. This is all below the line expense that will be recognized evenly over the year. Our retirement plans operating expense will be relatively flat as lower pension expense will be offset by higher 401(k) expense. And as a reminder, our primary US pension plans were closed to new entrants beginning in 2020 and we introduced a new 401(k) plan with a higher company match in January of 2022. Our projection for the full year effective tax rate is approximately 24% prior to the mark-to-market retirement plan adjustments and costs related to business optimization initiatives.

Turning to capital allocation, our fiscal 2022 adjusted free cash flow of $3.6 billion supported a repurchase of approximately $2.2 billion of our stock and $800 million of dividend payments. In addition, we funded $500 million in voluntary pension contributions and ended the year with a solid $6.9 billion in cash.

As we look to fiscal 2023, we remain focused on driving total shareholder return and thoughtfully allocating capital. First, we will continue to invest in an attractive ROIC initiative. Fiscal 2023 capital expenditures are projected to be roughly the same as the $6.8 billion invested during fiscal ’22, which came in lower than our initial $7.2 billion estimate as supply chain considerations extended timelines. Facility investment at Ground will decline as well aircraft expenditures at Express, offsetting that is increasing investment in vehicle replacement, including rollout of our vehicle electrification initiatives as well as additional automation projects. We project fiscal 2023 capex as a percent of revenue to be under 7% compared to 7.2% for fiscal 2022.

Next, we expect to repurchase an additional $1.5 billion of stock in the first half of fiscal 2023. And of course, as we announced last week, we are raising our dividend by over 50%, which increases our adjusted payout ratio to over 20%. These significant shareholder return advances reflect confidence in our continued execution and ability to adapt to the evolving market. And lastly, I’d add we are projecting $800 million of voluntary pension contributions to the US plans.

So we enter fiscal 2023 with a strong foundation for driving improved profitability and returns. We are mindful of the uncertainty across many fronts, including the pace of global economic activity, inflation, energy prices, additional pandemic developments and further geopolitical risks that are actively adjusting to these changing circumstances.

In closing, we are focused on delivering shareholder value by driving profitable revenue growth, expanding margins, lowering our capital intensity and improving returns to shareholders. And we look forward to sharing additional insights about our plans for this year and beyond at our investor meeting next week here in Memphis.

Now, we’ll be happy to address your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Brandon Oglenski with Barclays.

Brandon Oglenski — Barclays — Analyst

Hey, good afternoon, everyone. And Raj and Brie, congrats on the new roles, obviously. Look guys, I know you want to discuss the future next week and we’ll be in Memphis for sure. But Raj, could you just give us, what are your priorities for FedEx? Obviously, there’s a pretty big change after 51 years under prior leadership and very big shoes to fill after Mr. Smith. And one thing that keeps coming up on this call is revenue quality. So could you just give us a little bit more insight into that perceived change at least that I’m picking up on?

Rajesh Subramaniam — President & Chief Executive Officer

Thank you, Brandon. I will start here and then have Brie talk a little bit more about revenue quality in a minute. But firstly, you’re 100% right, we’re building on a very strong foundation. And we’re very fortunate to have had the opportunity to work so closely with Fred over the years, and we have a strong foundation to build from. My strategy is pretty straightforward. The number one element we talked about is revenue quality and again, we will comment more about that. The second part of the strategy is going to be improve operating margins in each of our operating companies. And we will be extremely disciplined on our capital allocation and drive total shareholder return. So we’ll look forward to sharing more with you next week. But let me turn it over to Brie to talk about revenue quality.

Brie Carere — Executive Vice President, Chief Customer Officer

Sure, thanks, Raj. I think, yes, we’ve mentioned revenue quality a couple of times. We’re operating in a very large market and it’s not a homogenous market. We have spent a lot of investment getting to the place we are today. And we are incredibly proud of that value proposition. And so we’re very focused on customers who value that. And so we’re being selective in this market. We’re targeting B2B, we’re targeting small business. And we’re really targeting customers that value the speed and the reliability we provide.

Operator

And our next question will come from Jack Atkins with Stephens.

Jack Atkins — Stephens — Analyst

Okay, great. Thank you for taking my question. I guess Brie for you, you noted in your comments that you expected continued above inflationary pricing. I guess when we look at Ground in particular, it doesn’t feel like we’ve been able to see that over the last year at least with margins down 250 basis points or so, where do you think the disconnect is there? And I guess, as you look forward, perhaps is it a function of maybe the benefits from the pricing initiatives are going to be coming in ’23. And we’re seeing some lessening of some of these inflationary pressures. Maybe if you could just kind of help us walk through that. That’d be helpful. Thank you.

Brie Carere — Executive Vice President, Chief Customer Officer

Sure. Happy to Jack. So I think from a revenue quality perspective, if you look at the fourth quarter, we’re actually quite pleased with the revenue quality that we were able to secure at FedEx Ground. I think two other things that is important to know within the mix of FedEx Ground, we’re also very pleased that we’ve got the right mix. B2B is actually up and small business mix is up in the fourth quarter. So we’re very pleased with that. I will say what is pressuring and honestly, what will pressure us as we move forward, is waits will come down, depending on the economy, so that is putting some pressure and then of course zone also was impacting that. But within each sell at FedEx Ground, we’re quite confident that we are getting more for each package that we move, we’re very pleased with the progress.

Mike Lenz — Executive Vice President and Chief Financial Officer

And Jack, this is Mike. I want to make sure we emphasize too, it’s not singularly driven by revenue quality in terms of how we drive ground margins further going forward. We won’t repeat the labor challenges of last year, obviously. But in terms of the active initiatives we have underway, we’ll get further maturation of the productivity initiatives that we started last year. We’ve got additional ones coming on later this year. And I alluded to, we’ve got multiple efforts to mitigate the liability costs and we wouldn’t expect the rate of increase that we have experienced in the last couple of years on that front.

Operator

And our next question comes from Chris Wetherbee with Citi.

Chris Wetherbee — Citi — Analyst

Hey, great, thanks. Good afternoon. I wanted to ask about the guidance, the EPS guidance, I guess it sounds like there are some headwinds, or at least normalizations in your economic forecast, as you think forward. Yet, from an earnings perspective, obviously, it’s a wide range, but the upper end of that range is a nice acceleration in terms of earnings growth from what we’ve seen. I know there are some headwinds that you’ve been facing in fiscal ’22, that presumably turned to tailwinds or at least sort of get mitigated as we go forward. But I kind of wanted to square the sort of body language around the economy being a little bit softer, but with the optimism about earnings power accelerating from where we are. So can you just help us a little bit with that?

Mike Lenz — Executive Vice President and Chief Financial Officer

Well, Chris, this is Mike. I will give a little context around us by thinking around the range and then Brie can give further backdrop for the economic perspective. But yes, we certainly are mindful of the conditions and uncertainty in the environment ahead. It’s a wider range than we put out there last year exactly for that consideration. At the same time, though, we’re confident that let’s say, it’s balanced and achievable outcome that we can navigate amidst the uncertainty that’s out there. So we felt that it was appropriate and where we need to get to.

Brie Carere — Executive Vice President, Chief Customer Officer

I think the only other thing that I will add as we kind of look at our number one, from a volume forecast perspective, we were conservative and the range in the volume itself. And then as we go through the year, the comps in the back half, especially here from a domestic perspective, they’re actually a little bit easier for us. So we’ve taken both kind of the economy into consideration, the size of the market, and obviously the year-over-year, but right now we feel pretty good about the range we have.

Operator

And our next question comes from Amit Mehrotra.

Amit Mehrotra — — Analyst

Hey, thanks, operator. Hi, everyone. Raj congrats on the appointment. Wish you really all the success in the world. I guess you guys are preparing to provide the mid to long-term profit targets next week. And it’s been a while, so I think that’ll be quite welcome. But the question really is, we’ve seen a lot of uncertainty over the last several quarters, it’s an incredibly fast moving market, inflation is really high. And that’s actually caused you guys to miss even the nearest of profitability targets. And so the question is, as you guys prepare to come out with these multiyear target, most likely through to the businesses, where does the confidence come from that you’re going to be able to hit those targets? And is there an element of cost or idiosyncratic opportunity related to efficiency where gives you guys and should give us confidence in being able to hit that given the experience of last year? And Mike, just related to that, if the company is asking investors to gain confidence in multiyear targets, I think it would be helpful to have some goalposts here and now, around 2023, around what underpins the 15% EPS growth in 2023 with respect to ground margins and express margins, hopefully, I don’t know if you guys are willing to engage with that question. But I think it would be helpful to set that up ahead of giving these multiyear targets. Thank you.

Rajesh Subramaniam — President & Chief Executive Officer

Amit thank you very much and also appreciate your question. We have — the last year has been quite challenging from many respects, as we — as it build out our networks and expanded our ecommerce portfolio. And then we had the labor challenges that were quite unexpected, though they took $1.4 billion in FY ’22, because of unexpected labor challenges, one, some due to network inefficiencies, and some just rate. So as we look ahead, the foundation that we have built, the ecommerce portfolio that we have, and we are in the center of an ecosystem for ecommerce on several customers. Then we are essentially a critical infrastructure for ecommerce. And we are doing a lot of things to make sure that we improve our productivity through technology initiatives that will launch in this fiscal year ’23. We will continue to focus on as we talked about revenue quality before, I think the markets there for that. And then improve our performance in Europe. And so I think there are several things that we can do to execute and we’re confident and the ranges we gave you. Mike?

Mike Lenz — Executive Vice President and Chief Financial Officer

Yes, Amit. Well, first, certainly, look, I highlighted three specific elements for ground cost improvements and efficiencies that we will be elaborating on further details next week. And as I said, we expect margin improvement at all of our transportation segments. And the most significant one will be at ground relative to FY ’22, looking at FY ’23. So appreciate the feedback there and absolutely understand that we need to give specifics and what are the actions that will get us there? I will take one exception there about target in this comment you made, our annual EPS for fiscal ’22 fell within the range of guidance that we gave you a year ago. So while I appreciate there may have been different twists and turns along the way, in terms of how we got there, it was indeed within what was a pretty narrow range given all things considered.

Operator

Our next question will come from Tom Wadewitz with UBS.

Tom Wadewitz — UBS — Analyst

Yes, great. Appreciate it. And also, others said have said this but we’re really looking forward to the further detail next week and the kind of new direction or new elements of the strategy. So looking forward to that. When you look at the fiscal ’23, because that’s what we’re focused on today, can you give us a sense of just magnitude of some of these big pieces, is it two thirds of it is revenue quality that’s giving you the growth? And cost is smaller and cost can grow over time? Or is it something that, cost is a pretty big component of your margin improvement, your earnings growth, just trying to get a sense of the kind of relative frame of that. And I guess I would also kind of look back to the analyst meeting 10 years ago, where you had the Express Improvement Program, and you had a lot of improvement, but it took a couple of years to see that. So, I guess just trying to figure out how quickly we see some of the costs and productivity measures come through, and how big of a component that is versus price and revenue quality in fiscal ’23?

Mike Lenz — Executive Vice President and Chief Financial Officer

Okay, Tom, there’s a lot packed into that, again, but much of what’s in terms of fleshing out details, and that is something that we can elaborate on and spend a whole lot more time on next week. But as Brie mentioned, the volume growth in the projection here for ’23 is low single-digit. So while there is continued yield opportunity, because of the inflationary environment, and because of the capabilities and value that our networks provide, we do have meaningful, significant costs and efficiency initiatives underway. I talked about how we’re lowering our facility investment at Ground, the emphasis now is on utilizing the capacity that we have, sweating the assets and driving further efficiencies and productivity there. Raj mentioned to that, how we schedule our people in that to get an optimally targeted and resourced per sort in that. So there’s no sort of single magic bullet to point to there, but it’s a number of concrete, real initiatives across the enterprise that will allow us to achieve the results that we need to get to.

Operator

And our next question will come from Jon Chappell with Evercore ISI.

Jon Chappell — Evercore ISI — Analyst

Thank you. Good afternoon. Brie there is some high profile entrants in the market so to speak, who’s clearly over hired added a lot of capacity and others talk of trimming a significant amount of capacity in the next 12 months or so. As you think about the network in general, what’s FedEx’s opportunity and its risk for maybe, some laying off some people where you’ve had some labor issues in the past, and also spare capacity and what that may do to pricing in the business over the next 12 months?

Brie Carere — Executive Vice President, Chief Customer Officer

Thanks, Jon. Very fair question. I think a couple of things. Number one, we’ve absolutely planned conservatively, so that we really can focus on those customers that value us. We have over the last couple of years done, I think a tremendous job negotiating mid- to long-term contracts that I think puts us in a really good place to stabilize the base of our volume. So to Mike’s point, if things do soften from an economy perspective, I think we’re in a really good position. And we’re going to focus on disciplined revenue quality, disciplined targeted growth. And that will be kind of via our primary focus versus kind of selling the network from an alternative perspective. So I feel pretty good about where we are, despite some of the competitive activity and some of the other headlines while reading.

Operator

And our next question will come from Allison Poliniak with Wells Fargo.

Allison Poliniak — Wells Fargo — Analyst

Hi, good evening. So first on the labor inefficiency, is there a way to quantify what that headwind was to grounding? Have you quantified the absolute wage increase? And then in line with that, a lot of productivity initiatives out there based on your volume outlook, is there a way to think or quantify what those eventual productivity initiatives will contribute to margin expansion in ’23, particularly in ground? Just any color there? Thanks.

Mike Lenz — Executive Vice President and Chief Financial Officer

Okay, so Allison, yes, this is Mike. The ground network inefficiency aspect of the labor availability for FY ’22, we pegged that at roughly $300 million. So that was certainly most prevalent in the first half of the year. So I think that addresses that. For the second part of your question.

Allison Poliniak — Wells Fargo — Analyst

I know the context of your low single-digit volume increase, a lot of productivity initiatives. I think you talked about the technology and the software related to the doc, some improvement on that side. Is there a way to better understand what that contribution to that margin expansion would be from some of those initiatives as we look to ’23 here?

Mike Lenz — Executive Vice President and Chief Financial Officer

Yes. So, Raj highlighted just the first leg of that roughly 6% improvement, just quarter-to-quarter. So that gives you a flavor of the opportunity ahead there. We certainly, I talked about the liability and the cost of risk. That was a significant impact to the margin and bending that going forward. That’s going to definitely provide opportunity there the question earlier about, the labor market easing, even though we are hiring fewer new people that is supportive to have more efficient and a more safe operation to, than people that are more experienced. So again, all these elements come to play and good plans behind it that the team will be happy to speak further to next week.

Operator

And moving on to Jordan Alliger with Goldman Sachs.

Jordan Alliger — Goldman Sachs — Analyst

Yes. Hi, everyone. So yields were very strong as you noted, across the board, is there any way to at least give some big picture view how to think about the components of the yield improvement, whether it be fuel surcharge, core price mix as you’ve referred to revenue management, or other surcharges? Just some picture how to think about these very large improvements. Thanks.

Brie Carere — Executive Vice President, Chief Customer Officer

Thanks, Jordan, appreciate the question. So specifically for Q4, fuel was the largest driver of the revenue quality. We also did, quite frankly, as I mentioned earlier, I thought the team just did a tremendous job within our portfolio of managing to hold on to the really our best and most profitable volume. So when you look at kind of the volume decline, we actually moved the right way within the Express Company domestically, we had lower volumes on deferred than our overnight from a year-over-year perspective. When you look internationally, the intercontinental, the team did a really good job of stabilizing volumes there. And actually, we decided to let some international domestic volume go. And then the same thing happened within ground, we will see the huge difference in ground economy decline versus actually we did a really good job of stabilizing the commercial on the HD, of course, our highest value proposition products. So from a revenue quality perspective, while fuel was the largest driver, we also did a great job. We continue to get inflation plus renewals, and they’re really working on making sure from a mix perspective, we get the revenue for the most premium part of our portfolio. So I hope that helps clarify that.

Operator

And our next question will come from Ken Hoexter with Bank of America.

Ken Hoexter — Bank of America — Analyst

Great. Good afternoon, Raj, Brie, congrats on the positions and really almost the entire team since the start of pandemic. So again, mirror everybody’s sentiment about next week and the conference. But it seems like you’ve had a coming out of that maybe a week ago, a big capital and return focus, the involvement of an activist, you’ve now talked about lowering capex. Maybe talk about what’s getting removed from the capex or how your thoughts on investment shifts from your prior kind of growth focus and how we should think about that, obviously, you’ve built a huge cash balance now and maybe talk about your thoughts on capital allocation and distribution going forward. Thanks.

Rajesh Subramaniam — President & Chief Executive Officer

First of all, just say, the conversations with the activists here, but then I’ll let Mike talk about the specific question here. We have been working on Investor Day for nearly a year and the strategies and the dividend plans are well in place. And so we know we had very strong plans, and then, long preceded any conversations that we had with anybody. And then when we had the opportunity to sit down with them is this clear alignment on where we were headed. So that was I wanted to make sure that you understood that, that this plans have been well in place for a long time. And a key part of the equation is what Mike’s been talking about now.

Mike Lenz — Executive Vice President and Chief Financial Officer

Okay. And you’re trying to get me to give away everything from next week. But I’ll just — I’ll say, look, we’ve highlighted before that we were at a significant phase of leading the Express air fleet. And as I said, that is going to come down, we can detail more of that going forward. We’ve built up the ground network, but the capabilities that are industry leading, and are going to be able to continue to realize value from that going forward and will further utilize that so we don’t need to invest as much in the hard assets. We will certainly be investing in technology aspects to more fully utilize it and different — and creative ways. So it’s just a natural evolution from building to having these capabilities. And now transitioning, but I would remind you, too, we repurchased roughly 3% of our shares last year, while the dividend increase was certainly very significant. We’ve long been looking and striving to increase that in fact, it was the second largest percentage increase. So a few years ago, we actually had a larger percentage increase. So, again, it’s just a natural evolution of where we are in terms of capital allocation and driving improved returns. And I look forward to elaborating further next week.

Operator

And moving on to Brian Ossenbeck with JPMorgan.

Brian Ossenbeck — JPMorgan — Analyst

Hi. Good evening. Thanks for taking the question. So I want to comes back to the impact of fuel, and Brie mentioned, it didn’t sound like there’s any demand destruction or trade down, it was actually better. So you can elaborate on that and expect that to continue, given where fuel prices are, where surcharges are? And then, Mike, can you just talk about how much of an impact fuel was on a net basis, as mentioned a few times in the press release, and what do you have baked into the guidance next year?

Brie Carere — Executive Vice President, Chief Customer Officer

Hey, Brian, you’re right. In Q4, we didn’t see a lot of trade down as a couple of reasons for that, obviously, from an intercontinental perspective, capacity is still quite constrained. So, if the economy does continue to soften, do I anticipate that there will be more demand for deferred portfolio? I absolutely do. But we are very focused on customers who have a bundle, who have a deferred need and have a need for our premium portfolio. And so as we look at that targeted growth, we will be very thoughtful about not just attracting customers that rely solely on our deferred portfolio, it really is about battling to make sure that we maximize the value of our networks. Hope that helps clarify.

Mike Lenz — Executive Vice President and Chief Financial Officer

Yes, Brian, look, there’s many elements of fuel as a — when you aggregate it, and as Brie has highlighted before, it’s a fundamental component of the overall pricing construct. So I’m not going to parse it out in terms of one specific aspect of it. But I would say in terms of the guidance that we have, the fuel [Technical Issues]

Bascome — — Analyst

Yes. Thanks for taking my questions. I understand that you’re modeling and guiding to the projections that you have out there and a lot of investors would love to see the economy come out with that. But as they discount, potentially worse scenarios, can you walk us through how the business in your mind would perform in a moderate to deeper recession? And whether or not there are any nuances we should consider versus that followed 40% EPS drawdowns we’ve seen historically in that type of environment. Thank you.

Rajesh Subramaniam — President & Chief Executive Officer

Let me begin this and have Mike or Brie jump in and help me here. Firstly, let me just say that, yes, we have economic projections today out there, and some of those predictions may come down. And we are prepared for that. And we are prepared to pull some levers here, we already moving making sure that significant cost controls and we are operating in a very constrained environment from that perspective, but we will adjust networks. We will just take down flights as required, we will just match the capacities — the demand. And that’s the beauty of having a big network is we’re able to flex up and down. We have demonstrated that historically as well. And so [Technical Issues] flex for some slowdown on our economy. Mike?

Mike Lenz — Executive Vice President and Chief Financial Officer

Yes, Bascome, just to give you some parameters around how we have adapted and adjusted, previously when the trade or macro economic backdrop, and can change on you. In February of 2020, just before the pandemic, obviously, we were seeing significant shifts in trade policy and demand. And as a result, we had lowered our frequencies across the Trans Pacific by 20%, from the prior year. Well, then, fast forward a few months later, the pandemic and that when we had to completely realign and shift instead of temporarily parking airplanes. We were trying to get more lift back in the air to support commerce, to support the pandemic efforts on that. So, certainly, one we’ve demonstrated historically and two, I think as an organization, the ability and the speed at which we were able to adjust amongst all of our networks during the pandemic, gives us every confidence and the learning that we can react faster than we may have thought we could in the past. And we are absolutely prepared to do so.

Operator

Thank you. And our next question will come from Helane Becker with Cowen.

Helane Becker — Cowen — Analyst

Thanks very much. Hi, everybody. So thanks for the time here. My two questions are this. The passenger airline says are hiring every pilot they can possibly get. And I probably asked you this question before, but how are you thinking about hiring and retention so that you can continue to master your network? And the other question is, I think there was an announcement earlier this week that you took 150 Electric Vehicle from BrightDrop. So I think that’s out of the 2,500 van order. Can you talk about the capex related to that and how you’re thinking about sustainability efforts? And if you’re going to do it next week? That’s fine. I can wait.

Mike Lenz — Executive Vice President and Chief Financial Officer

Helane, first on the electric vehicles. That is why I spoke earlier about increasing our investment in vehicles across the board. The principal element of that is our continuing with the pickup and delivery electrification at Express. So that is absolutely a key plan going forward. And look, we’re fully committed to reaching the goals by 2040. And that means we got to get going now on that replacement. I’ll let Raj address the pilot consideration but thanks for the question.

Rajesh Subramaniam — President & Chief Executive Officer

Yes, thank you, Helane. And yes, the pilot situation, just wanted to make two points. Firstly, I want to say thank you to our pilots who have done a tremendous job during this timeframe, and a big part of the value that they provide here. And secondly because of the work environment that we have in FedEx, there’s no dearth of people have wanted to want to get into the FedEx portal. So that we’re not seeing that as an issue for FedEx.

Scott — — Analyst

[Technical Issues] Hey, thanks, afternoon. Mike, you talked about ground seeing the biggest margin improvement this year fiscal ’23. I’m wondering, do you think [Technical Issues] or if it’s more later in the year. And then just maybe bigger picture for Raj. I think there’s a lot of hope or expectation for next week that we’re going to hear about big strategic changes and focus at FedEx and cost reductions and things like that. Understanding we’re not hearing about that today, but do you think — would you agree that we should be seeing and hearing about big strategic changes next week?

Mike Lenz — Executive Vice President and Chief Financial Officer

Scott, first, this is Mike. Just to clarify, look, for Ground to have the largest margin improvement of all the segments within the guidance we have here? Yes, it is the case that we have to see margin improvement, certainly in Q1.

Rajesh Subramaniam — President & Chief Executive Officer

And Scott, yes, you’re definitely not going to get me to give away the story for next week today, but I’ll [Technical Issues] focus on time definite services, ground focused on day definite services, and it’s fantastic that we actually gained a lot of share in the US [Technical Issues] three or four years is the emergence of e-commerce and residential delivery. And the emergence of day definite networks [Technical Issues] and both networks that gives us the opportunity to optimize across and we launched operate collaboratively a few years ago now, and we’ll talk more about that next week.

Operator

And our next question will come from David Vernon with Bernstein.

David Vernon — Bernstein — Analyst

Hey, good afternoon, guys and thanks for taking the question. Raj, I know you don’t want to tell too many of the plans for next year. And this isn’t about that. But I want to think it would be helpful I think if you could talk us through kind of the operational situation. Outside of just labor cost pressure, was there an impact on service levels over the [Technical Issues] because of those staffing challenges. And where are we on service kind of today for maybe where we would have been and could expect out of the service levels in ground. These metrics are all opaque and divided public data on this stuff that we continue to hear from contractors and some shippers that service level [Technical Issues] that kind of thing. It would be great if you could just talk a little bit about [Technical Issues] and where we are in recovery on the activity side.

Rajesh Subramaniam — President & Chief Executive Officer

David, you’re breaking up a little bit, but let me answer the question that I thought I heard. I think, firstly, yes, year ago, we saw significant challenges on the labor front, that the labor availability started to go away from us. And the volume was very strong. And that resulted in inefficiencies in the network, and also service challenges. [Technical Issues] every week. And I’m glad to say that week-over-week, month-over-month that we’ve improved our service to the point now where I would say, back to a normal [Technical Issues] here. This is going to be purple promise and service differentiation is a key for our success going forward. And so we will get the service back to market leading and that’s our goal.

Operator

And our next question comes from Scott Schneeberger with Oppenheimer.

Scott Schneeberger — Oppenheimer — Analyst

Thanks very much for the question. And I’m looking forward to seeing everyone next week. I would like to focus my question on the smallest but certainly most impressive segment, this quarter of being freight. Mike and maybe Lance, if he’s on. What do you view for the industrial economy here, where we are in the LTL cycle and kind of a cadence of what we should expect over the course of fiscal ’23 for this segment as [Technical Issues] how should we think about modeling that going into the year? Thanks.

Mike Lenz — Executive Vice President and Chief Financial Officer

Well, Scott, as I said, we expect margin improvement in all of our transportation segments. Look the freight LTL business has certainly evolved from where it was a number of years ago, you have a much greater discipline in terms of when [Technical Issues] demand is strong, there is not the degree of capacity adds which then is excess [Technical Issues] very confident the discipline within both the industry overall, as well as the approach we’re taking to it in terms of continuing to drive great margins from [Technical Issues] from there.

Operator

And moving on to Todd Fowler with KeyBanc Capital Markets.

Todd Fowler — KeyBanc Capital Markets — Analyst

Great. Thanks and good evening. So Brie, I just wanted to make sure I understand the volume expectations, I guess, number one, the low single-digits is that across both Express and Ground. And then number two, it sounds like [Technical Issues] And then, if you can help us understand on the ground economy side, how much volume is still left to call on that business and the thought around calling that [Technical Issues]

Brie Carere — Executive Vice President, Chief Customer Officer

[Techincal Issues] feel free to ask again, if I didn’t [Technical Issues] question there. Okay, so I think the first question was when we were looking at the volume between express and ground and we’re saying low single-digits, the low single-digit is the total volume. From a ground market perspective, we still believe in the secular growth of e-commerce, we have been looking at the e-commerce as a percentage of retail, it’s still last number I looked at was just about 21%, pre-COVID, you were like 16% [Technical Issues] growing faster than Express. I don’t think that would be a surprise to anybody on this call.

And then as I mentioned in the back half the comps especially for Ground do get better. From an economy perspective, FedEx Ground economy, let me be specific there. I think you’re going to see Q1 volumes look similar to Q4 and then we’ll start [Technical Issues] it allows us to sweat our assets. And it is a need in [Technical Issues]. And I want to make sure that my opening remarks didn’t confuse anybody. We’re very clear eyed about the economy in which we’re operating when we said normalized economic environment [Technical Issues] forecast for a recession to Raj’s point.

[Technical Issues] market softens, the economy products will have to play a larger role. But like I said earlier, we really have to get the bundle. And there’s the vast majority of customers who have a [Technical Issues] needs to use the economy product, they have a different SKU that has lower value. So that bundle is really important to us. And we have to make sure that that product is there to defend. And so I think long answer, but you’ll see us build back some economy volume later in this year, I believe.

Operator

And our next question will come from Bruce Chan with Stifel.

Bruce Chan — Stifel — Analyst

Thanks, operator. [Technical Issues] B2B is part of that. Can you give us a sense of what commercial initiatives you’re putting in place to make that share growth happen there? And then maybe also, where do you stand right now in terms of SMB share? [Technical Issues]

Brie Carere — Executive Vice President, Chief Customer Officer

Yes, great question. So from a B2B perspective, we’ve got a lot going on to improve our market share. And again, we’re running a massive business. So I’ll try to be [Technical Issues] every country in the world from a B2B, I guess one of the primary things that we’re working on, and you’re going to hear a lot about next week is our visibility tool. As you’re talking about, managing very complex supply chains and you can imagine the amount of [Technical Issues] gone through over the last two years, visibility is critical. And then honestly, proactive [Technical Issues] weather disruption, reroute around a port congestion. So [Technical Issues] we’ve talked a lot about, this helps our largest customers, and in particular B2B customers really navigate and manage their supply chain. We are adding new capabilities onto this tool to allow us to intervene for our healthcare customers [Technical Issues] disruption, we can intervene and re-ice or put something in a cooler.

So I would say symatically for B2B, really giving customers the data, the tools, the insights, and then quite frankly, having the intervention capabilities that FedEx Express does to do something about it, because that is really most important. [Technical Issues] proposition small bundle or small customers need simplicity. And they tell us that over and over again, if you’re a small customer, you’re running just about every function in your business. And so if you’ve got a one stop shop, like FedEx [Technical Issues] it works really well. We’ve got the [Technical Issues] loyalty program. And I think the pricing team has done a really good job [Technical Issues] tools to really reward small businesses [Technical Issues].

We’ll talk about a little bit more next week. But like I said, I think we’re pretty happy with our small business. And as I mentioned, in Q4, our small business mix did improve. [Technical Issues] when we’re talking small business, [Technical Issues] is created equal. There are a large amount of very price sensitive, lightweight small businesses. That is not who we’re targeting. So we’re being very disciplined and on the portion of small business that we really are interested in. We’re very confident in the momentum we’ve got.

Operator

And our final question will come from Jeff Kaufman with Vertical Research Partners.

Jeff Kaufman — Vertical Research Partners — Analyst

Thank you very much for squeezing me in and really exciting time. Congratulations to everyone looking forward to Memphis next week. Mike, I just wanted to get some clarification here. Two parts here, number one, the drop in capex projection from $7.2 billion to $6.8 billion. I think you implied that was more of a timing issue because of supply chain challenges. So should we assume that that $400 million comes back as we head toward fiscal ’24? And then, secondly, I want to follow up on Helane’s BrightDrop question. We’ve actually had a chance to see the vehicle at Expo and the intel we got was it’s not costing much more than a Mercedes Sprinter. But the TCO is dramatically lower between the maintenance and the fuel savings and a positive benefit as these trucks come in in terms of P&L to the fleet. Could you address both those issues please?

Mike Lenz — Executive Vice President and Chief Financial Officer

Yes, sure. No, thanks, Jeff. So yes, let me clarify on the capex. So, indeed, it was the case that $400 million lower came in this year, because of for instance, we simply couldn’t get some of the replacement vehicles in the timeframes anticipated given supply chain delays with the manufacturers there. Certain facility projects just didn’t move at the pace as anticipated. So all that said, the $6.8 billion for the current fiscal year considers that those will finish out and plus the other spending I outlined there. So I guess you could say if it had been $6.2 billion last year would have been $6.4 billion this year, but or $7.2 bilion last year, it would have been lower this year. But again, at the end of the day, $6.8 billion last year and $6.8 billion this year.

[Technical Issues] indeed the case that and we look at this from a very focused financial and economic perspective too in terms of our acquisition of this fleet. Obviously, it’s a key underpinning of our carbon initiatives. But you’re right, it does have much lower maintenance costs going forward and lot fewer moving parts, so on, so forth. So again, the total cost of ownership over the long run, we definitely believe that can exceed the combustion vehicle. So again, thanks for the question.

Operator

And that does conclude the question-and-answer session. I’ll now turn the conference back over to Mickey Foster.

Mickey Foster — Vice Presiden, Investor Relations

Thank you for your participation in FedEx Corporation’s fourth quarter earnings conference call. Please feel free to call anyone on the investor relations team, if you have additional questions about FedEx. Thank you very much. Bye.

Operator

[Operator Closing Remarks]