Rosa: It was a good quarter, but the second-half guide raised real questions

Frank (Host) 00:00.230

i want to get your take on this because a lot of notes came out should you believe the number should you believe the guide is one headline a lot of people saying i'm not really quite sure what we saw in this quarter how did you take this quarter it's also very important to note

Frank (Host) 00:11.430

this quarter kind of is in the middle of the holiday peak so we're kind of getting the look at the first half of the holiday peak obviously the current quarter is going to show the rest of it

Ari Rosa (Senior Analyst-Equity Research) 00:21.310

so absolutely it was a good quarter right that that that's kind of unequivocal the real question from our perspective is what is the second half guide look like right and so they they they beat they raised the guidance as you mentioned frank but if if you do the math on that

Ari Rosa (Senior Analyst-Equity Research) 00:37.510

really the entirety of the raise was a result of this fiscal second quarter beat and so they effectively lowered the second half guide and what they pointed to were three things right so they said this issue with the MD eleven planes you may remember UPS had obviously that

Ari Rosa (Senior Analyst-Equity Research) 00:52.950

tragic incident where where they had a crash in louisville that resulted in fedex also going and grounding their planes there's going to be a cost associated with that they also said higher incentive compensation because their network is is running quite well and so they're

Ari Rosa (Senior Analyst-Equity Research) 01:06.230

they're passing some of that on to to their employees so those are the kinds of things that are kind of weighing on weighing on the the second half earnings here and then just broader industrial weakness which is impacting their freight segment in particular which has more of

Ari Rosa (Senior Analyst-Equity Research) 01:19.790

that industrial exposure so the net effect you know i can understand why the stock market is a little bit confused on kind of which direction to take this you have to remember this in the context of a stock that's moved up thirty percent or almost thirty percent since october so

Ari Rosa (Senior Analyst-Equity Research) 01:34.110

overall good quarter but still a lot to prove all right

Frank (Host) 01:37.390

so generally though you're pretty bullish on the company your price target is three twenty seven the street average is two eighty seven so you're considerably more bullish than the average of your peers i want to get back to one of those numbers you were talking i want to

Frank (Host) 01:47.390

correct myself yesterday i was talking about the margin when it came to the freight business and i was looking at the gap in the non gap it kind of combined there the it declined year over year by three hundred basis points if you look at non gap you're looking at this

Frank (Host) 01:58.750

sequential decline when it came to freight margins and obviously margins are kind of a proxy for efficiency and how you're running that network on the freight are you looking at the gap or the non gap and how big of a deal is it is that decline in margins when we know they're

Frank (Host) 02:10.070

spinning off and they're hiring a sales team and they're doing a lot of other things related to that spin off

Ari Rosa (Senior Analyst-Equity Research) 02:15.150

yeah that's exactly right so so we look at both we look at both the gap and the non gap we try to make sure that you know they're they're not hiding anything in one one number versus the other but you you're exactly right that the the level of pressure on margins was greater

Ari Rosa (Senior Analyst-Equity Research) 02:28.230

than what we expected and so what is what are the implications of that or what does that mean you know really that's a function of they're preparing for this freight spin-off which is planned for june twenty twenty six and associated with that there are a lot of costs right so

Ari Rosa (Senior Analyst-Equity Research) 02:42.350

as you mentioned they're hiring a sales force they're taking all of it expenses in order to allow that business to stand on its own those things are expensive right and it's and it's clearly weighing on margins and then you couple that with the reality that we have still a

Ari Rosa (Senior Analyst-Equity Research) 02:56.790

pretty weak demand environment from a from a freight perspective especially for those heavy like oversized goods the kinds of things that typically move in in an LTL network versus a partial network all right

Frank (Host) 03:07.630

also took a hundred and fifty million dollar charge so you're saying it's a thing but it's not the big thing i think what the big thing seems to be is the domestic strength you're looking right now at the US ground home delivery volumes up eight percent pricing up five percent

Frank (Host) 03:19.430

that's pretty impressive in this environment where we're before wringing our hands about the consumer and now during the first half of the holiday peak seeing numbers like that right

Ari Rosa (Senior Analyst-Equity Research) 03:28.110

yeah so that's absolutely an area where fedex is doing a great job on their express side which is really their parcel business you can see their winning business because it's clear that you know the economy is not growing eight percent so when they're when they're you know

Ari Rosa (Senior Analyst-Equity Research) 03:39.510

showing revenue that's up eight percent that's really a function of they're doing a good job on pricing they're good doing a good job on revenue mix and they're doing a good job on business wins and so that momentum needs to continue what i think this this quarter really proved

Ari Rosa (Senior Analyst-Equity Research) 03:52.990

out was that express has a lot of momentum going not only with the revenue mix but also on the cost and remember for years this has been a project at fedex of improving margins driving efficiencies what they call network two point zero which is really integrating their express

Ari Rosa (Senior Analyst-Equity Research) 04:07.630

and their ground networks and this quarter i think was a good proof point that they're making progress there so you referenced our our price target which is a bit above some of my peers and a lot of that is is confidence that they can continue to to build momentum in that regard

Ari Rosa (Senior Analyst-Equity Research) 04:21.950

and there's no doubt that there's a lot of low hanging fruit in that in that arena and you can just look at UPS as an example right so UPS has higher margins than fedex especially on the international side and that's where i think a lot of that opportunity is going to come from

Ari Rosa (Senior Analyst-Equity Research) 04:35.590

going forward

Frank (Host) 04:36.190

alright we got to go but very quickly you're bringing up UPS you're bringing up some of the transport companies we also saw CH robinson at all time high yesterday big trucking and freight brokerage is this report is this a read on the broader transports do you expect the

Frank (Host) 04:47.870

transports to continue to rally and show strength going into the new year