FedEx to ramp up capital spending

FedEx Corp. will dramatically expand its capital expenditures (CapEx) budget for its 2012 fiscal year as it continues to pursue expansion opportunities in non-U.S. markets, according to the company's executive vice president and CFO.

The one exception will be Europe, where the Memphis-based transport giant will look to grow organically to strengthen its pan-European network, which lags behind rivals UPS Inc. and DHL Express, Alan B. Graf Jr. told investors and analysts late last month at a conference sponsored by JPMorgan Chase.

"Will we continue to make acquisitions? The answer is yes," Graf told the gathering. "We don't have to do any of them, but we think we need to do them to expand our service capabilities" for the company's customers.

The executive said FedEx will take an "aggressive" posture toward capital spending in its 2012 fiscal year, which begins June 1. Without going into specifics, Graf said the company's CapEx budget for the upcoming fiscal year will be "much higher" than the $3.5 billion budgeted for its current fiscal year. Graf said favorable tax treatment of capital investments has motivated the company to ramp up its spending plans.

Graf said it's doubtful FedEx will pursue an acquisition of rival TNT Express, which also has a strong position in Europe. TNT recently separated its mail and express businesses to make the express segment more attractive to potential suitors. However, the Belgium-based concern recently posted lackluster financial results, and Graf said TNT's express business is too richly priced to suit FedEx.

Graf said the company will focus its acquisition efforts in non-U.S. markets, predicting that within 18 months, international traffic will, for the first time, account for more than half the revenues of its FedEx Express air unit. Graf said the company's domestic China operations are expected to turn profitable during its 2012 fiscal year.

In February, the company announced its air unit had closed on the purchase of Indian transport/logistics firm AFL Pvt. Ltd. in a bid to strengthen domestic and international services that touch the fast-growing market. It is also looking to close by the end of June on its purchase of MultiPack, a Mexican domestic express delivery company.

Graf took responsibility for the problems at the company's less-than-truckload (LTL) unit, FedEx Freight, which reported a $110 million operating loss in its fiscal third quarter. "We shot ourselves in the foot," he admitted. "We got too aggressive on yields and tried to make it up in productivity. The reality was that we could not."

Graf said the unit's fortunes have improved, noting that LTL shippers are now willing to pay higher freight rates, and yields have risen as unprofitable customers have been culled from the ranks. In addition, the revamped FedEx Freight service, which was rolled out Jan. 31 over a consolidated shipping network, has resulted in improved efficiencies, Graf said. As a result, the unit is expected to turn a profit in the current quarter, Graf said.

The executive also lauded the performance of its SmartPost operation, where the company injects business-to-consumer packages into the U.S. Postal Service's delivery network for so-called last-mile deliveries from a local post office to a residence. Graf said SmartPost handles, on average, 1.6 million packages a day. While the margins are not as robust as other FedEx products due to the post office's low pricing, the growing volumes have made it a successful endeavor, Graf said.