Q2 2023 FedEx Corp Earnings Call

Speaker 2: you

Speaker 3: we're about to begin.

Speaker 4: Good day everyone and welcome to today's FedEx Corporation second quarter fiscal 2023 earnings call. Today's call is being recorded and now at this time I would like to turn the call over to Mickey Foster, Vice President of FedEx Investor Relations. Please go ahead.

Speaker 5: Let me start.

Speaker 6: Good afternoon and welcome to FedEx Corporation's second quarter earnings conference call.

Speaker 7: The second quarter earnings release, Form 10-Q , and stat book on our website at FedEx.com.

Speaker 8: This call and the accompanying slides are being streamed from our website, where the replay and slides will be available for about one year.

Speaker 9: 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.

Speaker 10: 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.

Speaker 11: certain statements in this conference call, such as projections regarding future performance. We can await for tomorrow's strategy.

Speaker 12: We exceeded our Q2 earnings target and cost...

Speaker 13: 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.

Speaker 14: For additional information on these factors,

Speaker 15: Please refer to our press releases and filings with the FCC.

Speaker 16: 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 mostly directly comparable GAAP measures.

Speaker 17: Joining us on the call today are Raj Subramanian, President and CEO , Mike Linds, Executive Vice President and CFO , and Bree Carreri, Executive Vice President and Chief Customer Officer.

Speaker 18: Before we begin, I'd like to take a moment to remember our colleague, Jeff Smith.

Speaker 19: who passed away on November 17th after a courageous battle with brain cancer.

Speaker 20: Jeff's contributions to the investor relations and FedEx team were immeasurable.

Speaker 21: and our hearts remain heavy at his loss.

Speaker 22: He will be greatly missed.

Speaker 23: Separately, I'd like to congratulate Elizabeth Allen on her upcoming retirement at the end of the month after 32 years at FedEx.

Speaker 24: Elizabeth has been instrumental to the investor relations team, and she will be missed by her FedEx colleagues and the investment community alike.

Speaker 25: And now Raj will share his views on the quarter.

Speaker 26: Thank you, Mickey, and good afternoon, everyone.

Speaker 27: Let me begin by thanking our more than 550,000 employees for working diligently to deliver another strong peak season for our customers.

Speaker 28: I am extremely proud of the team's ability to sustain excellent service this season while we continue to transform our global network.

Speaker 29: B-Z to the FedEx team.

Speaker 30: I'm encouraged by our second quarter results and the momentum underway against our Deliver Today, Innovate for Tomorrow strategy.

Speaker 31: We exceeded our Q2 earnings target and cost action goals shared in September .

Speaker 32: even as the environment remains challenged.

At the same time, there is more work to be done.

The declining demand trends we saw at the end of Q1 softened further in the second quarter.

and we are moving faster and with more determination than ever to accelerate our cost actions.

Today, we will provide more detail on those cost actions and our plan to structurally transform our network to be nimbler, leaner and more efficient.

supported by our DRIVE program.

Turning to slide 6 for a snapshot of the quarter.

Volumes declined across all segments, primarily at Express, down low double digits.

As such, revenue was down 3% driven by a decline at FedEx Express which was partially offset by growth at FedEx Freight and FedEx Ground.

Adjusted operating margin and EPS declined.

with

Volume weakness partially offset by higher yield and cost management actions.

All of this said, we knew coming into this quarter that we would continue to be challenged by volume softness and high inflation.

I am exceptionally proud of the team's execution to date.

which enable us to exceed the second quarter earnings and cost targets.

A great example of our meticulous focus on cost actions.

was the results at FedEx Ground.

where despite volume being down 9% in the quarter, we were able to grow both operating income and margin.

And at Phoenix Freight

Due to operating margin, improved 320 basis points due to their continued focus on revenue quality, aligning the cost structure to lower volume levels, and delivering an outstanding customer experience. For more information, visit www.fema.gov

Now, I will provide an update on our aggressive and decisive plan to cut costs in fiscal 23 relative to our June plan.

In Q2, we achieved over $900 million of savings.

exceeding the cost target we shared with you last quarter.

This brings our total year-to-date progress to $1.2 billion.

As we look to the remainder of the fiscal year, we have identified additional savings.

bringing our target for fiscal year 23 to be approximately $3.7 billion in cuts.

Turning to slide 8.

As we execute these cost actions,

We are also laser focused on delivering upon the superior service that has defined FedEx throughout our nearly 50-year history.

As I mentioned, our team is performing exceptionally well this peak season.

with ground time in transit in the US at just two days.

FedEx Ground is delivering holiday shipments faster to more locations than our nearest competitor.

Our ground service is now back to pre-pandemic levels, supported by continued enhancements to our route optimization and package handler scheduling technologies.

Thank you.

Service levels also continue to improve at Express.

In Europe , we have made strong progress with Italy, France, Germany, Spain and the UK showing sustained high levels of service performance.

The service challenges at Paris

Charles de Gaulle Airport have been largely alleviated.

and we are capitalizing on efficiencies in the network to further improve service.

We are taking swift action to address the remaining issues for our intra-Europe service, including the reopening of our Netherlands ground hub in October , which will continue to improve transit and depressurize the rest of the network.

and completing the Novara Italy Roadhub in February of 2023.

Moving to slide nine.

I'll now provide an update on our ongoing structural transformation.

We have spent 50 years building our networks and growing our portfolio.

As a result, we now have the most extensive network of any provider in the industry.

We are now focused on optimizing this network to realize our full value potential.

This includes advancing our global transformation through DRIVE.

our comprehensive program to support long-term profitability and deliver on our fiscal year 25 financial targets.

The drive is how we are executing that strategy and achieving more than $4 billion in annualized structural cost reductions by fiscal year 2025.

I'm confident I have the full commitment of our executive team.

or leading drive with purpose and a sense of urgency.

and of Sriram Krishnasamy, our Chief Transformation Officer, who is facilitating the program.

We have identified 14 specific focus areas, which we call domains.

to target for efficiency improvements.

Each is led by an executive sponsor and is aligned around a strategic vision for the business.

We are measuring success against each domain's FY25 permanent cost savings target.

in addition to using clear operational metrics to track financial and service level progress.

Our focus within Drive is in three main areas.

FedEx Express, FedEx Ground, and shared and allocated overhead expenses.

At Express, the team is transforming the network to be more agile, efficient, and digitally concepts.

An initial priority is to optimize the global air network where we expect to generate approximately $400 million in savings.

This work includes deploying digital assets that allow us to efficiently balance our purple-tile airplanes

and third-party lift as you build the network of the future.

We are also addressing our express pickup and delivery operations globally to improve efficiency.

In February , we will implement a new US Network design that will improve P&D efficiency and result in cost savings of approximately $300 million annually.

In Europe , what do we expect? Over one third of Express' drive savings.

We have spent the last several years bringing the networks together.

With integration behind us, we have shifted to optimization.

We're adjusting our network.

deploying route productivity tools, and investing in digital capabilities for planning and automation.

Additionally, we are right-sizing our intra-Europe air network and improving processes to enhance the end-to-end customer journey.

This will all serve to improve both service and profit of our European business.

Now turning to FedEx ground.

We are focused on every portion of the package lifecycle.

For instance, in linehall operations,

We are applying new tools, technology, and processes to drive increased packages per kilious.

Within ground we have a dock domain.

This team's responsibility is to improve packages for labor hour.

In Q2, that metric increased 3.5% year-over-year and we expect continued improvement as we deploy additional capabilities.

Across both the express and ground focus areas, we are leveraging our operational insights platform.

This provides the foundational data, tools and insights critical not only for delivering drive savings goals.

but also for sustaining those savings and transforming the way we operate.

Finally, shared and allocated overhead expenses are a significant opportunity.

This includes procurement and digitizing and centralizing support functions.

One example of digitizing support functions is our ability to reduce customer service calls by redirecting customers to best-in-class digital applications.

A win for FedEx and a win for our customers.

Within procurement, we are reducing spend through our operate collaboratively model and creating a central function to optimize our enterprise spend.

We are reducing spend through our operate collaboratively model and creating a central function to optimize our enterprise spend.

We are setting up

A cross-opco initiative to consolidate our contract transportation spend to realize value in the second half of fiscal year 23.

In conclusion, there is strong momentum underway as our team focuses on cutting costs immediately.

and structurally transforming our network.

We will continue to provide updates on our Drive progress.

and we plan to host a deep dive call in the first half of Calendar 2023 to provide additional details on our ongoing transformation.

Now, let me turn it over to our Chief Customer Officer, Bri Carrere, to discuss recent market trends and our commercial strategy in more detail.

Thank you and good afternoon. As expected, the operating environment in the second quarter was challenging.

The trends we saw toward the end of the first quarter persisted through November .

As a result, we experienced lower demand for FedEx products and services.

But we acted with urgency to adjust our network while continuing to deliver for our customers.

Revenue at FedEx Express was down 6% year-over-year, primarily due to volume and yield softness in Europe and Asia.

In Europe , we're making steady progress as volume trends improved quarter over quarter.

I am confident in our momentum as we have a robust sales pipeline in Europe .

We are leveraging our faster road network and our unique ability to bundle parcel and freight.

As we anticipated, the softening demand created yield pressure, especially in Asia.

Despite volume softness, I am pleased with the team's ability to manage volume, share, and margin in our Trans-Pacific Lane.

At FedEx Ground, revenue was up 2%. Due to higher yield, driven by fuel surcharges, base rate increases, and improved product mix. It was partially offset by lower volumes.

We once again delivered strong service levels and best in market transit times.

At FedEx Freight, we delivered solid performance despite the operating environment beginning to moderate.

Pricing discipline across the LTL industry is strong, and we expect the market to remain rational.

Revenue was up 8% as the team remains laser focused on driving improved revenue quality and profitable share growth.

While navigating the current environment, FedEx rate continues to innovate.

We're expanding dimensional capture and piloting dimensional weight-based pricing.

We believe that simplified pricing is the future of the LTL industry and we're leading in this transformation.

I also wanted to provide an update on our Enterprise Pricing Strategy and the initiatives to improve revenue quality.

We remain disciplined. We are focused on growth in the right segments to optimize network profitability.

We announced a 6.9% general rate increase in September , and I remain confident in a continued high capture rate.

We are also continuing to leverage surcharges to align our pricing to cost.

Our recent announcements for demand-based large package and US export fuel surcharge are good proof points.

I'm also very pleased with the team's progress to create new capabilities.

A great example is the partnership between Pricing and Dataworks to build a price anomaly detection engine.

The team has had success detecting overbilling and correcting invoices before they are sent to our customers.

This is a significant customer experience improvement.

We are now adapting these capabilities to identify under-billing opportunities which will increase revenue quality.

As we look toward the back half, service improvement has translated into good momentum for our sales team.

In addition, we have a robust pipeline aligned with our strategy, which includes small and medium and European segment targets.

In Q4, we will be lapping the impact of the beginning of the war in the Ukraine, as well as the air integration disruption we experienced in the region.

As a result, our year-over-year volume comps will improve as we move through the back half of this fiscal year.

However, in Asia, we do expect to face continued yield pressure due to lower demand for priority services.

In the current economic environment, the market is increasingly shifting to deferred services.

We have the deferred portfolio to capture the shift in demand, and our DRIVE program will ensure we have the right cost to serve to profitably manage through this market transition.

In conclusion, we remain prudent in our expectations for volume and yield in the second half of the fiscal year. That being said, our service value proposition relative to our competition will remain strong, and in fact, our relative market position will improve in the back half of the year.

And with that, I'll turn it over to our Chief Financial Officer, Mike Lenz. Thanks, Brie. I'll start on slide 16.

In the second quarter, we delivered improved alignment between variable costs and lower revenue amid a more challenged volume environment that impacted our profitability. Second quarter revenue was approximately $700 million below the lower end of the range we expected coming into the quarter. Approximately $300 million of this variance was due to an increase in the number of people

reducing the lag between incremental volume softness and the savings offsets realized.

This, combined with an additional $200 million in discrete cost actions, led to improved earnings relative to our Q2 outlook.

combined with an additional $200 million in discrete cost actions, led to improved earnings relative to our Q2 outlook. Turning to the transportation segments.

Starting with Express, profitability continues to be pressured. Adjusted operating income declined 65% due to lower volumes as cost reductions lagged accelerating volume declines.

Volume pressures were partially offset by yield management actions.

Package yield grew 8% year over year, primarily driven by higher fuel surcharges and base rates.

partially offset by exchange rate impacts. Yield improvement slowed from Q1 levels across nearly all products and regions.

At ground, operating income increased 24% and operating margins expanded 130 basis points to 7.1%.

supported by yield growth of 13 percent as higher fuel surcharges, product mix, and pricing initiatives drove improvement.

Our cost reduction actions, combined with solid execution by the ground team to adjust near-term variable costs amidst greater volume declines, also supported margin improvement.

These factors were partially offset by increased costs, including higher purchase transportation and other operating expenses.

And at freight, the team continues to drive strong profitability, with operating income increasing 32%. This was driven by yield improvement, including higher fuel surcharges, and higher fuel surcharges.

partially offset by decreased shipments as well as higher wage rates.

During slide 17, I'd like to build on what you heard from Raj on our near-term cost savings, reviewing our progress by category.

As mentioned, we've identified $3.7 billion in discrete cost reductions relative to our plans going into fiscal 23.

which is $1 billion higher than our prior projection.

Express is where we have the most work to do and where the majority of the reductions are focused.

A large portion of those savings is coming from reduced flight frequencies.

Here to date, we've reduced eight international routes and 32 U.S. domestic routes while parking five additional aircraft.

This translates into pulling down U.S. domestic flight hours by 6 percent and international flight hours down 7 percent in the second quarter year over year.

Moving to 18, in addition to the expense actions, we are also lowering our FY23 capital spend forecast by an incremental $400 million to $5.9 billion.

which represents an approximate $900 million reduction from our initial plans for the year.

With the lower demand environment, we're deliberately deferring and slowing the pace of projects as we maintain the emphasis on using our assets more efficiently and reducing our overall capital intensity.

Our liquidity remains a source of strength and we end the quarter with $4.6 billion in cash.

We continue to generate solid cash flows supporting our capital return strategy.

We executed a $1.5 billion accelerated share repurchase transaction, which will be completed by the end of this calendar year.

Our capital return strategy reflects our commitment to reducing capital intensity and creating value for shareholders while continuing to reinvest in FedEx for today and tomorrow.

To provide additional context for the changes in demand during the first half and what we are planning for in our outlook, on slide 19 we've shown first half monthly volume trends for our major product categories.

Volume declines continue to accelerate across major product categories, both in the U.S. and internationally throughout the second quarter.

As we look to the second half of the year, we expect volume declines to begin moderating and expressing ground by the end of the third quarter, with comparisons easing further in the fourth quarter as we lap the onset of softer volumes.

Yield growth will be increasingly pressured as year-over-year fuel surcharge comparisons normalize and customer demand shifts, most prominently in Asia.

This brings me to our outlook on slide 20.

While we continue to aggressively drive cost reduction actions, we expect business conditions to remain challenging in the second half of FY23.

Our current expectation for full year adjusted earnings per share is between $13 and $14.

On a quarterly basis, we expect results to follow our historical seasonal pattern.

with lower innings in the third quarter versus the second quarter and highest in the fourth quarter.

Second quarter adjusted expenses were essentially flat year over year as inflation impacts, particularly fuel, offset our activity reductions on an absolute basis. As we move through the second half, we project year over year expenses to increasingly decline as our cost initiatives accelerate in conjunction with the overall year over year.

with lapping certain inflationary increases. In closing, I'd like to reiterate that the entire team continues to aggressively identify and implement both immediate cost reductions as well as structural cost efficiencies to drive improved performance.

With that, we'll open it up for your questions.

Thank you. If you would like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Thank you. If you would like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 at this time.

And we'll first hear from Tom Watterwitz of UBS. Yeah good afternoon. Wanted to see if you could give a sense of what drives the additional 1 billion in cost takeout and then I don't know if you look at the broader frame. Raj you talked about some of the split but

Can you give like the detail or a bit of breakout from express ground and shared services on the four billion dollar number? Also, thank you.

Hey Tom, this is Mike. So first for the additional billion dollars for FY23 relative to our plans coming into the year, that's mostly at express. It's a combination of a further flight reductions, incremental sort cancels, particularly post peak.

adjustments to our ground operations, primarily in the pickup and delivery space.

And then I guess another piece I'd highlight too was further reductions at our FedEx services, shared services organization where they're doing a great job of

really clamping down on costs relative to what we were contemplating earlier in the year.

As it relates to the $4 billion in DRIVE, we've highlighted $1.4 billion is for Express.

1.1 billion is ground and then one and a half billion is in the shared and allocated expenses.

And keep in mind that as we approach those, those are structural cost reductions that are irrespective of the demand environment assumption that you would make going forward so that we can achieve a path towards the FY 25 objectives that we outlined. Thanks for the question.

Great, thank you.

Great, thank you. Next we'll hear from Helene Becker of Cowan & Company.

Thanks very much, operator. Hi, everybody, and thanks for the time this afternoon. Just one question related to...

The real, the reduction in CapEx Mike, you talk, you're moving, just to clarify, you're moving that to the right and you will still spend that money. You will just not spend it this current fiscal year.

So we certainly have deferred a number of facility projects and initiatives. So that is a component there as well as looking to pause other certain major projects at a phase of completion. So that is a component there as well as looking to pause other certain major projects at a phase of completion.

as we evaluate the chain circumstances. Another piece of it is a change in our aircraft payment schedule as well. So we've uh

push that out further, but the number of deliveries remains unchanged. Just a timing on that sense.

Okay and then can I just ask a follow-up with respect to salaries, wages, and benefits. I sort of thought that there was some decline there that looked kind of okay. Could you just explain that because you also said during your prepare remarks that salaries were actually up.

Well, so, Helene, we will see mitigating in terms of the year-over-year increase in wage rates relative to what we were seeing earlier in the year. And in addition, as we flex down the network, we will see a decrease in wage rates relative

networks, particularly post peak, will have a ramp down in terms of the resources deployed there as we typically do, but certainly

going to move quickly as we come past the successful peak that we're in the middle of right now. So expect further progress in that line going forward as well.

Okay, thanks. Thank you. And next we'll hear from Jordan Alliger of Goldman Sachs.

Yeah, hi. So question on the $13 to $14 range, maybe some more perspective. Obviously, you beat in the second quarter. You're upping the cost saved by a billion dollars. I mean, how do we think about that from a conservative perspective?

is a conservative or maybe some context in your view of the economy. We are assuming a recession in those numbers because it would seem especially with the moderate decline in volume that...

The cost savers are basically…

all the second half operating profits. So I'm just wondering if you've kind of taken a very conservative approach. Thank you.

Sure, thanks, Jordan. Well, I would highlight, certainly the environment remains fluid.

We outlined our expectations on the trajectory of volume and yield and considered a range of outcomes within the corridor for both of those and in conjunction with the tech cost takeout you highlighted there we're very confident with the 13 to 14 dollar range.

So while it's true the volume declines, we expect those to moderate as we move through the rest of the year, particularly in Q4.

We're going to have more yield pressure relative to the increases we saw in the first half of the year.

So when you bring all three of those elements together, that's what gets you to the bottom line projection there that we've highlighted.

But I guess I would also say that while the declines moderate on the volume, we're in essence projecting the same demand profile that we're currently experiencing. So hopefully that puts it in.

full context for you. Yeah, thank you so much.

Next, we'll hear from Ken Hextor of Bank of America.

Hey, good afternoon. Um, if we could just take that maybe a step further, it seems like of that, I think Jordan just hit it on the, the. You have a 1.2 billion savings so far. So if you're 3.7 target now, the 2.5, that means all of the 2nd, half. Savings I just want to clarify the 7 dollars, 30 cents or whatever 7 to 8 dollars seems like it's all from cost savings. Right? And so the new found 1,000,000,000 dollars.

Does that mean you were targeting maybe $10 to $11 of earnings before that, given that you, you know, that gets you the back half? And I guess, Mike, if you can kind of specify what of that is then structural versus, you know, adjusting for, you know, takeout given the pace of volumes you're seeing.

you were targeting maybe $10 to $11 of earnings before that, given that you, you know, that gets you the back half. And I guess, Mike, if you can kind of specify what of that is then structural versus, you know, adjusting for, you know, take out given the pace of volumes you're seeing. Okay, Ken.

How I would address that is, as you saw in the second quarter, the revenue environment was below our expectations.

So therefore, we are assuming that going forward into the second half of the year, which motivated

further near-term takeouts of costs relative to what we had planned for FY 23.

So we will project revenues to be down year over year in Q1, but we're also going to see a ramp up in absolute expense reductions as we move through Q3 and even more so into Q4.

So that's the absolute basis when you look at it for year over year.

And so that are these again just to clarify then is that does that mean these are just reactions to the slowing revenues and so it's it's cyclical versus I'm just trying to understand your the you know I think investors want to understand what is structural moves that FedEx is making here versus just reacting to the decelerating revenue environment is there a way to clarify that?

Well, Ken, maybe we talked about a permanent reduction of a billion dollars from FY23.

that recognizes we were operating in very unique circumstances over the last year and a half, two years. And so those takeouts would not return under any range of normalized demand scenarios that you might consider.

And of course, most of that's at express. I mentioned that we parked five additional aircraft during the second quarter.

By the end of the fiscal year, we're projecting to park 11 additional aircraft. So hopefully that gives you a little more context.

for how we're thinking about resizing the network, and most of those will be wide bodies.

Great. Condolences on Jeff. He will be missed and good luck to Elizabeth.

Condolences on Jeff, he will be missed, and good luck to Elizabeth. Thank you, Ken. Really appreciate it.

Next we'll hear from Scott Group of Wolf Research.

Hey, thanks afternoon. Mike, can you just talk about the margin expectations for the segments in the back half? Can ground continue to improve? Can freight continue to improve? Can express get back to margin improvement and then Bre, you were something you're talking about pricing slowing. I wasn't sure if that was a partial comment

order.

Given some of the factors we outlined, including ramping up more of the discrete cost reductions into the

into the fourth quarter. We're fully seeing traction in Europe , plus lapping the challenges from last year with the air network.

integration as well as lapping the volume inflection there.

Express remains where we have the most work to do. I would say at Ground, we're past the rapid growth and labor challenges that the Ground team was executing on over the last two years, and now they are laser focused on driving improved productivity.

and efficiency within a declining volume environment. And so it felt great.

progress in that regard here in the second quarter and expect to see continued going forward in the second half of the year. So hopefully that

gives a little dimensions to the pieces of it. Bree, if you want to take a look.

Sure, fair question Scott. So from a yield perspective, let's talk front half versus back half. When we look at the domestic parcel market, we are still anticipating in the back half that we will have yield growth for both express and ground in the parcel market, although less growth than we did in the first half.

The same holds true for FedEx Freight domestically. Back half, we are still anticipating yield growth in the inflationary environment, although much less than the front half. And then as we go to the international markets, it's the largest change that we will experience in the back half.

yield and margin and our transpacific lane is still a very profitable and healthy lane for us. So it is within the range but that's how we're thinking about yield front half versus back half.

and margin and our transpacific lane is still you know a very profitable and healthy lane for us. So it is within the range but that's how we're thinking about yield front half versus back half.

Next, we'll hear from Brandon Oglensky of Barclays.

Hey, good evening, everyone, and I second Ken's thoughts on Jeff and Elizabeth. Guys, can you just help us understand, I mean, if you're going to achieve $3.7 billion this year, isn't that very similar to the 2025 drive target?

I think that might be the confusion that a lot of folks aren't fully understanding here. And Mike, we heard you that a billion are permanent this year, but can you talk to maybe the other 2.7 billion that might come back, but then you're going to shed an incremental 3 billion between now and then. Thank you.

So Brandon, let me first thanks for the kind comments regarding Jeff and Elizabeth. We will certainly miss both of them.

Let me get a little more context about the $3.7 billion reduction. I appreciate that's reference to our plans coming into 23.

The purpose of that was to illustrate the scope and magnitude of the cost initiatives that we have undertaken to address the changed circumstances from where we started the year.

So, highlighted, we have a billion dollars of the permanent reductions in a demand environment as we are today. Much of the flight takedowns that we have made at Express, you wouldn't see those coming back. That's what we said.

You know, there will always be, anticipate that there will be cyclical ups and downs, but as we come out of the current circumstances, when it comes back, it would come back in a different way and we would...

be using less of our own purple tail lift and more of partner lift in order to flow traffic in the most efficient manner possible.

You know, again, the 4 billion of drive, think about that in the context of

a greater emphasis on cost reduction rather than the degree of modest revenue growth we were assuming back in June when we outlined the goals for FY 25. So that's what the focus is there to.

that structural cost reduction across a range of demand scenarios that you could envision.

across a range of demand scenarios that you could envision.

Next, we'll hear from Allison Poliniak of Wells Fargo. Hi, good evening. Just want to follow up on the last comment. Just to clarify, the fiscal 25 target, certainly the balance of revenue and cost.

based on sort of the macro deceleration, that algorithm clearly changed in terms of how you reach those targets through fiscal 25, just given some of the structural cost actions and challenging growth right now.

You hit it absolutely, Allison. We are, that's why we have ramped up the degree and intensity around the structural cost reductions. We made great progress to date in identifying those and are looking to use the insights.

as we've made progress on those to identify even more. And if the environment changes, then we will react as you saw we did in the second quarter here to adjust even further on the near term as well.

Next we'll hear from David Vernon of Bernstein.

Hey, good afternoon guys and thank you for taking the time. So Raj, I was wondering if you could maybe kind of bring this stuff up a level, right? If we're talking about $13 to $14 in adjusted earnings in this fiscal year, is that a base from which you can start to build in fiscal 24 and 25? Or are we still got a little bit of risk in terms of chasing the ball down the hill from an economy?

or are we just kind of doing the same sort of mix of stuff a little bit better?

So, David, thanks for the question. And so, I'll just say that I'm just delighted to see how fast we're performing in terms of taking our structural costs down. So I'm just going to comment on the DRIVE program here because that's what gets us going to this point in the system.

we have made and the level of engagement of the entire executive team. We have, as I showed in the slide earlier, 14 domains, each with an executive sponsor, KPIs are identified, we have about 1200 people involved. And this is not a one-on-one exercise, you know, this all the way from initial idea to an executable plan with KPIs, this is like a conveyor belt.

So we can control what the external environment is. We are focused on things we can control. And the base that we have in 23, we will use that to come out of this external environment situation much, much better than we went in. And the DRIVE program is a significant component of that.

And we will talk to you more about that in our deep dive update to you in the first half of calendar 23. We are constantly looking at the portfolio to see what opportunities there exist. And when there's something to talk to you about that, we will definitely communicate. Thank you, David.

Next we'll hear from Stephanie Moore of Jefferies.

Next we'll hear from Stephanie Moore of Jefferies. Good afternoon.

Thanks for taking our questions. I guess I wanted to take maybe a higher level macro question here. You mentioned continued yield softness in Asia. I was surprised, I guess, to hear that the China reopening wasn't mentioned at all, the potential tailwind. So I'm kind of curious. I feel it might be right to ask your question because that is not the thing we're talking about.

what your guys' thoughts are in terms of what's continuing to drive that age of something if China's potentially coming back online as an economy and then maybe noticing that you know, we haven't talked about broader economic outlooks and you guys stop giving the monthly economic updates Maybe if you had any any thoughts on just general US economic conditions here looking over the next 12 months.

is slowing around the world and with Europe being the hardest hit and that there is an e-commerce reset and both those things happened exactly like we said were going to happen. The good news was we reacted, we moved much faster to adjust to these circumstances and we are absolutely focused on what we can control. And again I'm very very proud of the progress we have made.

early for us to make any further comments on this at this time.

Brittany, anything to add here? No, I think that's exactly right. No, we have the team poised and ready to benefit from any potential, but right now the demand signals have been pretty consistent with the last couple of weeks. And so that's how we're planning for the back half.

Next, we'll hear from

Next we'll hear from Jack Atkins of Stevens.

Okay, great. Thank you for taking my questions.

So I guess Raj this one's for you, and I'd love Mike's thoughts as well But I would be curious to kind of get your take on Structurally, what's changing as you look out over the next several years with how the company's allocating capital I get

that there's a greater emphasis on capital efficiency overall. And I think everyone appreciates the fact that you guys are monitoring the CapEx issue very carefully. But as you think about your decisions to invest for both organic and inorganic opportunities, there have been some challenging sort of...

investments over the past decade. How is the sort of the framework around how you're thinking about capital allocation changing, if at all, as you look forward, Raj?

Okay, thank you Jack. The drive is the way we work and every project that we now go through has got to go through a significant hurdle to make sure those plans are approved and that they know obviously that has to make sense from a financial perspective and from a ROIC perspective.

Jack, look, the

the high rate of growth, particularly at ground over the past few years, that's in the rearview mirror. And so we will not be

spending as much on facility expansion going forward. The major replacement initiatives we have in front of us over the next couple of years, which ramped down beyond FY 25, our fleet

Modernization, we have no firm orders beyond FY 25 for new aircraft. And the modernization of our Memphis hub, which is, as Richard likes to call it, the heartbeat of the express network.

That will be completed in a few years as well, and that will yield efficiencies over the long term.

So those are major.

elements within the capital allocation that we have a clear line of sight of those coming down. And hence, you know, as we outlined, we fully expect to be at the six and a half percent in 25 and lower beyond that. And hence, we were committed to improving our payout ratio and up the dividend.

Hey, thanks. Good evening. Raj, I wanted to get your take on what you think about the domestic economy. It seems like the step down in volume activity in the second quarter seemed to be more driven by domestic across the segment. So kind of curious if we're seeing some of the softness that you'd originally flagged in late summer and into the fall and internationals cascading here into the US. Are there some of the softness that you've seen in the fall and internationals?

maybe some specific customer actions or revenue quality actions that you're taking here in the US? Well, let me just talk about the macro environment. I think the main macro issue in the United States is really the e-commerce reset. If you were to just follow along here, prior to the pandemic, you had a lot of people who were in the US, and they were in the US, and they were in the US.

e-commerce represented about 16% of retail. During the pandemic, it peaked at about 22%. And ever since it's been kind of going down, we are probably about 18 or 19% right now. It's still higher than 16, but not quite as high as 22. So that's the part of the reset that's going on in the US domestic package business.

Of course, we have also taken certain revenue quality actions on some of the segments of the traffic, specifically FedEx ground economy. And that's the only other part that would be unique to FedEx. But other than that, I would say the biggest macro here is e-commerce reset.

I'm at Miratra from Deutsche Bank has our next question.

Thanks. Hey, everyone. Thanks for taking my question.

So Mike, I just wanted to ask maybe a couple quick ones. So I wanted to understand the drag in Express coming from the European ground business, so basically the legacy TNT business because I understand there's cyclicality in the air network and you're always going to want to work your way to the right guy who can do this reliance on http

you're bringing flight hours down, which is great, but I'm just trying to understand, you know, what the legacy TNT business, what the overall impact that has had or will have on kind of the express proper profile. I don't know what that means that you can give us.

an idea of what that business is making or losing or the contribution of that business to the overall express profit, but I think that would be helpful. And then the followup I wanted to ask was on the freight business. And I don't ask a lot of questions about the freight business but it's a big piece of the profit pools today. I don't know if Lance is on, but what I noticed is...

The yields in the freight business were down sequentially, which is something we typically haven't seen quarter on quarter. And of course, this is in the context of, you know, FedEx being part of kind of that pricing war 12 years ago in the LTL business. Is this an indication that FedEx is lowering price to get more volumes in freight? Can you talk about the pricing discipline in the freight business, both with respect to FedEx and also at the industries you see it as well?

Sure, Amit, thanks. I will address Europe first and then I'll let Bri address your question about the LTL business. Okay, great.

Look, the opportunity in Europe is a significant driver of the upside potential for Express.

We've highlighted the challenges that we had.

earlier in the calendar year. We have worked past those. The team has momentum there. The leadership team is very focused on...

winning business, driving more efficiency and productivity both in the air and in the ground network and fully confident that we will see significant contributor to improvement and express profitability going forward with some initial

traction on that coming in Q4 in terms of seeing year over year improvement.

So that is absolutely an opportunity.

for Express and we certainly are confident of getting there. It's taken longer than we would have anticipated and we've had some,

events develop along the way, but we're past those and we're looking forward. Brie? Thanks, Mike. Fair question from a FedEx freight perspective. When we looked at Q2, the one thing that we did see that was slightly different from Q1 is weights actually were slightly down in Q2.

From a revenue quality perspective, however, we have to remember, number one, that we are seeing all of the public carriers behave very rationally and the market is very disciplined. Number two, within that market, FedEx Freight has the premium value proposition. We have two types of service, so we have a great opportunity.

that is very profitable for FedEx for allow customers to move from our priority to our economy service. And we've got two great growth opportunities within FedEx, right? We've got FedEx Freight Direct, which we're still seeing high demand for, and we've got a very profitable service into Canada that we're very focused on. So we are going to continue to be disciplined. We absolutely know the history.

There's one for you and then one for Bree. Raj, you've given a good overview with regard to DRIVE. I'm just curious, when in the first half we may expect this update call and what type of information we'll receive there. There are these 14 domains you're targeting. Maybe you could speak to the top three or five there. I'd be curious to hear what you think.

Well, thank you, Scott. On the drive part of the equation, we have, again, as I said, we are very excited about the progress we're making here. Some of the, you know, there are 14 domains under Express. We have the air network domain. This is about fundamentally restructuring our Express.

especially to move the poor traffic. And then, you know, also looking at the domestic US network to see what efficiencies we can get there using technology. The other one is Europe , is part of the domain here and is clearly a big area for focus for us.

We have $1.1 billion of this FedEx ground. There are very interesting opportunities there, whether it is through line hall or dock productivity, things like that. And then of course, back office shared services is $1.5 billion with this procurement.

and improving our efficiency across the board. So I don't want to take the time here to go through all the details, but we'll set up a time. We haven't decided on the exact date yet, but at that meeting, we will give you more detail. We'll talk to you about specific KPIs that we will try going forward and give you a full flavor of what this program is all about.

As I sit here right now, we've had just stellar service in the field and I couldn't be more proud of the team. So as we kind of turn the chapter on this calendar year to next calendar year, domestically, we have the very best value proposition. We're faster than our primary competition. We have this great new feature, which is getting great.

response in the field for picture proof of delivery. We have Sunday service. We have brand new digital capabilities called estimated date of delivery, which gives our e-commerce retailers greater accuracy on their delivery times and we're getting really great feedback. And as you all know, our primary competitor has to manage

lines of business that we sell. In the domestics, we are optimizing from a domestic perspective, we are there for the profitability of international and we have opportunity to optimize those networks and put some volume in the domestic networks and service is excellent in the domestic networks in Europe and I'm really pleased with Karen and the team there.

From an intercontinental perspective, we have a product called FedEx International Connect Plus, and it has done really well for us. And the team has continued to get the right business from Europe into the United States. And then from an inter-European perspective, that has been where we're challenged.

But I'll tell you the brand has done a lot of hard work for us. Customers want to do business with FedEx and quarter over quarter we've seen service improvement and with that we have seen our pipeline and the confidence grow and I believe that you will continue to see quarter over quarter improvement out of our European division. So yes I'm looking forward to January and I think we have the best sales team in the.

domestic price perspective and how you're going to balance that with utilization and the declining volume environment. Maybe you can talk a little bit about competition and if you think there's room to see more of that creep in here as more packages go, they're a lighter weight and shorter distance in the e-commerce growth you continue to see. And then separately, you mentioned the Teamsters negotiation.

would really like to hear more about how you're approaching that, both in the near term to make sure that you're able to protect your own service and longer term if that presents any opportunities to game share.

Yeah, so from a pricing perspective, right now we do anticipate a high capture on our GRI here in the United States and around the world. Our GRI was 6.9 in the US and it's about that around the world, a little bit higher in some places a little bit lower with the inflationary environment.

Most customers understand the need for a high GRI. That being said, I really have got the team focused on two things. One, as I mentioned a moment ago, is differentiation. We command a higher yield when we have a better service and a differentiation, and the marketing team is very, very focused on executing that so we can...

and price really closely. And we're continuing to build some new features out this year, which will also help us get a lift from a revenue quality perspective. We want to be really, really balanced. We also acknowledge that some of our customers are going to have to choose our deferred portfolio and we're working really hard to get the cost and the margins right in that product.

As far as how we're going to handle the negotiations, you know, we're going to do it professionally and with grace. We want to bring customers on that want to do business with us for the long term. And so of course, you know, for our target segment, small business, healthcare, B2B, we want them to be prepared. We want to protect first and foremost.

This concludes the Q&A portion of today's call. I will now turn the call back over to Raj Subramaniam for closing comments.

Well, thank you very much. I'll just say in closing that our team is moving with urgency to accelerate our ongoing transformation.

We have made strong progress to date and will build on this momentum as we move into the back half of the year.

We all know there's a significant opportunity ahead, and I'm very confident in our team's ability to execute. Thank you all for your time today. Thank you for your interest in FedEx, and happy holidays everyone.

That does conclude today's call. Thank you all for your participation. You may now disconnect. Goodbye.