Q3 2024 FedEx Corporation Earnings Call

Good day and welcome to the Fedex fiscal year, 'twenty 'twenty four third quarter earnings call.

Unknown Attendee: Good day, and welcome to the FedEx Fiscal Year 2024 Third Quarter Earnings Call. All participants are in listen-only mode.

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Please note this event is being recorded.

I would now like to turn the conference over to Jenny Hollander, Vice President of Investor Relations. Please go ahead.

Jenny Hollander: Good afternoon, and welcome to Fedex Corporation's third quarter earnings Conference call for the third quarter earnings release Form 10-Q, and Stat book are on our website at investors Dot Dot com this call and the accompanying slides are being streamed from our website, where the replay and slides will be available.

Jenifer Hollander: Good afternoon, and welcome to FedEx Corporation's third quarter earnings conference call. The third quarter earnings release, Form 10-Q, and stat book are on our website at investors.fedex.com. This call and the accompanying slides are being streamed from our website, where the replay and slides will be available for about one year.

For about one year.

Unknown Attendee: During our Q&A session, callers will be limited to one question to allow us to accommodate all those who would like to participate. Certain statements in this conference call may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

During our Q&A session callers will be limited to one question to allow us to accommodate all those who would like to participate.

Jenny Hollander: Certain statements in this conference call maybe considered forward looking statements as defined in the private Securities Litigation Reform Act of 1995.

Jenny Hollander: Forward looking statements are subject to risks uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward looking statements.

Unknown Attendee: For additional information on these factors, please refer to our press releases and filings with the SEC. Today's presentation also includes certain non-GAAP financial measures. 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 measure. Joining us on the call today are Raj Subramaniam, President and CEO; Brie Carere, Executive Vice President and Chief Customer Officer; and John Dietrich, Executive Vice President and CFO. Now, I will turn the call over to Raj.

Jenny Hollander: For additional information on these factors please refer to our press releases and filings with the SEC.

Jenny Hollander: Today's presentation also includes certain non-GAAP financial measure please refer to the Investor relations portion of our website at <unk> Dot com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.

Jenny Hollander: Joining us on the call today are Raj Subramaniam, President and CEO re Crary executive Vice President and Chief customer Officer, and John <unk> Executive Vice President and CFO now I will turn the call over to Raj.

Rajesh Subramaniam: Thank you, Jenny, and welcome to your first earnings call at FedEx. We are happy to have you on board leading the investor relations team. Before we discuss the quarter, I would like to congratulate Rob Carter on his upcoming retirement, which we announced last week.

Rajesh Subramaniam: Thank you Jenny and welcome to your first earnings call at Fedex, We are happy to have you onboard leading the investor relations team.

Speaker Change: Before we discuss the quarter I would like to congratulate Rob Carter on his upcoming retirement.

Speaker Change: We announced last week.

Rajesh Subramaniam: He has served as CIO for the last 24 years, leading FedEx in modernizing our IT infrastructure. I'm immensely grateful to Rob for his numerous contributions in establishing FedEx as an innovative, data-driven, and people-focused company. We thank him for his dedication and service to FedEx over the years and wish him well in his upcoming retirement.

Speaker Change: Yes served as CIO for the last 24 years, leading Fedex and modernizing our it infrastructure.

Speaker Change: Densely grateful to Rob for his numerous contributions and establishing Fedex as an innovative data driven and people focused company.

Speaker Change: We thank him for his dedication and service to Fedex over the years and wish him well in his upcoming retirement.

Thank you also to the Fedex team for their exceptional work in Q3 by providing superior service for our customers and delivering strong results.

Rajesh Subramaniam: Thank you also to the FedEx team for their exceptional work in Q3 by providing superior service for customers and delivering strong results, all while advancing our transformation initiative. For the third consecutive quarter, we delivered operating income growth and margin expansion in a declining revenue environment. This is a very positive dynamic, and a unique one in our industry. It demonstrates clear progress on our transformation and ability to manage what's within our control through DRY.

Speaker Change: All while advancing our transformation initiatives.

Speaker Change: For the third consecutive quarter, we delivered operating income growth and margin expansion in a declining revenue environment.

Speaker Change: This is a very positive dynamic.

Speaker Change: And the unique one in our industry.

It demonstrates clear progress on our transformation and ability to manage what's within our control to drive.

Strengthening our value proposition, improving the customer experience and increasing profitability.

Rajesh Subramaniam: We're strengthening our value proposition, improving the customer experience, and increasing profitability. This progress supports our long-term goals for sustainable margin expansion, improvements in ROIC, and value creation for our stockholders. Now, turning to the details.

This progress supports our long term goals.

Speaker Change: Sustainable margin expansion.

Speaker Change: <unk> and Rois.

Speaker Change: And value creation for our stockholders.

Speaker Change: Now turning to the detail.

Speaker Change: Our transformation is driving continued improvement in adjusted operating income margin and earnings per share.

Rajesh Subramaniam: Our transformation is driving continued improvements in adjusted operating income, margins, and earnings per share. At the enterprise level, we delivered a 16% improvement in adjusted operating income and adjusted margin expansion of 90 basis points compared to the prior year, even as revenue declined 2%. Adjusted operating income growth was driven by continued strength at ground and improvement at express.

Speaker Change: At the enterprise level, we delivered a 16% improvement in adjusted operating income and adjusted margin expansion of 90 basis points compared to the prior year.

Even as revenue declined 2%.

Speaker Change: Adjusted operating income growth was driven by continued strength at ground and improvement at express.

Rajesh Subramaniam: At the segment level, I'm particularly pleased with the results at ground, where adjusted operating income increased 14% on 1% revenue growth, and adjusted operating margin improved to over 11% in the quarter. This reflects continued progress controlling expenses and effective yield management, including the ramping benefits from drive. At Freight, the team's continued focus on profitable growth and cost management delivered strong margins and mitigated year-over-year volume challenges. Service levels remain exceptionally high, demonstrating our differentiated execution capabilities. We are also making progress at Express, where adjusted operating income increased enabled by our ability to remove structural costs. Looking ahead, we are reaffirming the midpoint of our fiscal 24-year district EPS range while narrowing the range to $17.25 to $18.25. In fact, we now expect to deliver adjusted earnings above the midpoint of the range we shared last June, despite full-year revenue expectations that have deteriorated significantly over the past nine months. This is clear evidence of our ability to execute. This is clear evidence of our ability to plan.

Speaker Change: At the segment level I'm, particularly pleased with the results of ground ground, where our adjusted operating income increased 14%.

Speaker Change: On 1% revenue growth.

Speaker Change: And adjusted operating margin improved to over 11% in the quarter.

Speaker Change: This reflects continued progress controlling expenses and effective yield management, including the ramping benefits from drive.

Speaker Change: That's great. The team's continued focus on profitable growth and cost management delivered strong margins and mitigated year over year volume challenges.

Speaker Change: Service levels remain exceptionally high demonstrating our differentiated execution capabilities.

Speaker Change: We're also making progress at express where adjusted operating income increase enabled by our ability to remove structural costs.

Speaker Change: Yeah.

Speaker Change: Looking ahead, we are reaffirming the midpoint of our fiscal 'twenty for our district EPS range, while narrowing the range to $17 25.

Speaker Change: To $18 and 25.

Speaker Change: In fact, we now expect to deliver adjusted earnings above the midpoint of the range. We shared last June.

Speaker Change: Hi, Paul.

Speaker Change: Full year revenue expectations that have deteriorated significantly over the past nine months.

Speaker Change: This is clear evidence of our ability to execute.

Rajesh Subramaniam: Turning to the express business, it is my top priority to continue to make the changes necessary to align our air network with an evolving demand environment and unlock the full profit opportunity. While we have made progress at Express this quarter, there are several areas we are aggressively working to address in order to accelerate profit improvement. Service Mix, Network utilization, continued inflation, and other past headwinds. First, with respect to servicemails, we're seeing a clear international market shift toward deferred services. This is tied, in part, to the rapid growth of many of our e-commerce customers, where we are a critical enabler of global trade, offering unique solutions for our customers. Second, weakness in global trade continues to constrain demand for international business, which has remained challenged for longer than expected.

Speaker Change: Turning to the express business.

Speaker Change: It is my top priority to continue to make the changes necessary to align our air network with an evolving demand environment and unlock the full profit opportunities.

Speaker Change: While we have made progress that express this quarter. There are several areas. We are aggressively working to address in order to accelerate profit improvement.

Speaker Change: Service mix.

Speaker Change: Network utilization continued inflation and other cost headwinds.

Speaker Change: First with respect to service mix, we are seeing a clear international market shifts towards deferred service.

Speaker Change: This is tied in part to the rapid growth of many of our e-commerce customers.

We are a critical enabler of global trade offering unique solutions for our customers.

More on how we are addressing this mixed shift shortly.

Speaker Change: Second <unk>.

Speaker Change: Weakness in global trade continues to constrained demand in an international business, which has remained challenged for longer than expected.

Rajesh Subramaniam: As such, we're continuing to proactively realign our air network to match capacity to demand. And third, this quarter, Express experienced over $200 million of inflationary pressure on a year-over-year basis. We offset this with benefits from drive as well as responsible headcount management. The dynamics I just outlined create significant opportunities for us to improve our network utilization. Last quarter, we introduced our tricolor strategy.

As such we're continuing to proactively realign our air network to match capacity to demand.

And third this quarter.

Speaker Change: Express experienced over $200 million of inflationary pressure on a year over year basis.

Speaker Change: We offset this with benefits from drive as well as responsible headcount management.

Speaker Change: The dynamics I, just outlined create significant opportunities for us to improve our network utilization.

Speaker Change: Last quarter, we introduced our tricolor strategy.

Rajesh Subramaniam: Ultimately, this network design will enable us to improve the efficiency and asset utilization of the entire FedEx system, putting the right product in the right network, taking advantage of our continental surface networks in Europe and our market-leading FedEx freight LTL network in the United States, and profitably penetrate new market segments at the right cost structure, including the premium air freight market. As we move forward, we are managing the execution of Tricolor with the rigor and discipline of drive, and this will be a key element to our success. Moving to another area of opportunity.

Speaker Change: Ultimately this network design will enable us to.

Speaker Change: Improve the efficiency and asset utilization of the entire Fedex system.

Speaker Change: Put the right product.

Speaker Change: Network, taking advantage of our continental surface networks in Europe.

Speaker Change: And our market, leading Fedex freight LPL network in the United States.

Speaker Change: And profitably penetrate new market segments at the right cost structure, including the premium airfreight market.

Speaker Change: As we move forward, we are managing the execution of Tri color with the rigor and discipline of drive and this will be a key element to our success.

Speaker Change: Moving to another area of opportunity.

Speaker Change: In Europe, we continue to improve our service levels and focus on commercial execution.

Rajesh Subramaniam: In Europe, we continue to improve our service levels and focus on commercial execution. However, the B2B environment remains challenged. And in this context, we are making progress on the drive, on track to generate $600 million of savings in fiscal year 25, and seeking further profit optimization opportunities. As we have mentioned in previous calls, we are also experiencing a continued headwind for the United States Postal Service, which has reduced volumes. Despite this volume and revenue drawdown, our service obligations to the USPS remain fixed.

Speaker Change: However, the <unk> environment remains challenged.

Speaker Change: And in this context, we are making progress on drive on track to generate $600 million of savings in fiscal year, 'twenty, five and seeking further profit optimization opportunities.

Speaker Change: As we have mentioned in previous calls we are also experiencing a continued headwind for the United States Postal service, which has reduced volume.

Speaker Change: Despite this volume and revenue drawdown, our service obligations to the USPS remained mixed.

Speaker Change: At express and across the business drive remains a key enabler of improved profitability both in the near and the long term as we change the way, we work and identify areas for structural cost reduction.

Rajesh Subramaniam: Express and across the business, Drive remains a key enabler of improved profitability both in the near and the long term as we change the way we work and identify areas for structural cost reduction. In Q3, we delivered $550 million of benefits from DRIVE, offsetting the impact of revenue declines and cost pressures. I'm encouraged by the progress across all three categories. This includes $290 million in our surface network, $110 million of savings in air network and international operations, and $150 million of G&A. Given the progress we have made year-to-date, we will deliver on our goal of $1.8 billion in permanent cost reduction benefits from Drive this fiscal year and are highly confident on the additional $2.2 billion in fiscal year 2025. The work we are doing with DRIVE is also helping advance planning for Network 2.0. This quarter, we rolled out our new surface operations leadership structure.

Speaker Change: In Q3, we delivered $550 million of benefits from drive.

Speaker Change: Offsetting the impact of revenue declines and cost structures.

Speaker Change: Im encouraged by the progress across all three categories.

Speaker Change: This includes $290 million and our surplus network.

$110 million of savings in Air network and the international operations.

Speaker Change: And $150 million of G&A.

Given the progress we have made year to date, we will deliver on our goal of $1 8 billion.

Speaker Change: And permanent cost reduction benefits from drive this fiscal year.

Speaker Change: And are highly confident and the additional $2 2 billion in fiscal year 'twenty five.

Speaker Change: The work we are doing with drive is also helping advance planning for network with auto this.

Speaker Change: This quarter, we rolled out our new surface operations leadership structure.

Rajesh Subramaniam: Under this new structure, leaders and their teams will be responsible for all express and ground package operations and facilities in their respective divisions, regions, and districts. This will enhance operational execution and offer greater insights into the package business overall with accountability at all levels. More broadly, we have now implemented Network 2.0 in over 50 locations, With dozens more to follow in calendar 2024, all while maintaining outstanding service.

Speaker Change: Under this new structure leaders and their teams will be responsible for all express and ground package operations and facilities and their respective divisions regions and districts.

Speaker Change: This will enhance operational execution and offer greater insights into the package business overall with accountability at all levels.

Speaker Change: More broadly we have now implemented network through Lotto and over 50 locations with.

Rajesh Subramaniam: With dozens more to follow in calendar 2024, all while maintaining outstanding service. And as a reminder, we will begin the rollout of this service in Canada in April and expect to complete this transition by October of 2024. And as part of our transformation, we are on track to complete the consolidation of FedEx operating companies into one streamlined and simplified organization, creating efficiencies as we build a stronger, more profitable enterprise. In June 2024, FedEx Express, FedEx Ground, and FedEx Services will consolidate into FedEx Corporation. The work we are doing to create a more flexible, efficient, and intelligent network is translating into direct improvements in our customer offering and profitability. When severe weather hits, it can cause a domino effect of delays and reduce service levels across our network.

Speaker Change: With dozens more to follow in calendar 2024.

Speaker Change: All while maintaining outstanding service.

Speaker Change: And as a reminder, we will begin the rollout of Canada in April and expect to complete this transition by October of 2024.

Speaker Change: And as part of our transformation, we are on track to complete the consolidation of Fedex operating companies into one streamlined and simplified organization.

Speaker Change: Operating efficiencies as we build a stronger more profitable enterprise.

Speaker Change: In June 2020 for Fedex Express Fedex ground, and Fedex services will consolidate into federal Express operation.

Speaker Change: The work we are doing to create a more flexible efficient and intelligent network is translating into direct improvements in our customer offering and profitability.

Speaker Change: When severe weather hits and cost a domino effect of delays and reduced service levels across our network.

Speaker Change: While we have always used data analytics to assess the effect of weather events or new weather contingency playbook developed by our planning engineering and data works teams enhances the process by leveraging predictive capabilities to pro actively divert storm.

Rajesh Subramaniam: While we have always used data analytics to assess the effect of weather events, our new weather contingency playbook developed by our planning, engineering, and data works teams enhances the process by leveraging predictive capabilities to proactively divert storm-bound volumes across our network. By combining the power of digital insights and predictive analytics with our physical network, we effectively mitigated the impact of the January winter storm that hit our express hub in Memphis by shifting Memphis-bound express volume to ground or freight at the origin location. Despite this year's event having a longer impact on Memphis operations when compared to the weather event in February 2023, our network recovery was twice as fast. This quarter, we also announced a significant initiative, FDX, a fully integrated data-driven commerce platform that connects the entire customer journey from demand to return. It will provide real-time visibility to help our customers optimize and grow their business, leveraging our analytical capabilities and data from the 15 million packages we deliver every day. I'm excited to have Sriram Krishnasamy serving as Chief Digital and Information Officer effective July 1st.

Speaker Change: Bond volumes across our networks.

By combining the power of digital insights and predictive analytics with our physical network.

Speaker Change: We are effectively mitigated the impact of the January winter storm that fit our express hub in Memphis by shifting Memphis bound express volume to ground, our freight at the origin location location.

Speaker Change: Despite this year's event, having a longer impact of Memphis operations, when compared to the weather event in February 2023.

Speaker Change: Our network Macquarie was twice as fast.

Speaker Change: This quarter, we also announced a significant initiative mdx.

Speaker Change: Fully integrated data driven commerce platform that connects the entire customer journey from demand to returns it.

It will provide real time visibility to help our customers optimize and grow their business leveraging our analytical capabilities and data from the 15 million packages. We deliver every day every day.

Speaker Change: I'm excited to have Sri Ramakrishna Asami, serving as chief digital and information Officer effective July the first.

Rajesh Subramaniam: His proven track record of driving optimization and innovation for our business through data and insights, combined with his deep knowledge of the network, will be critical to moving FedEx forward as we become a data-driven, digital-first company. As I look across the business and these financial results, there are clear signs of progress on our transformation. Our strategy is generating results, and we are well-placed to maintain our leadership position while delivering improving financial outcomes. Together, we remain focused and committed to our long-term goals, supporting the creation of significant long-term value for our stockholders. With that, let me turn the call over to Brie.

Speaker Change: His proven track record of driving optimization and innovation for our business through data and insights combined with his deep knowledge of the network and that will be critical to moving Fedex forward as we become a data driven digital first company.

Speaker Change: As I look across the business and these financial results there are clear signs of progress on our transformation.

Speaker Change: Our strategy is generating results and we are well placed to maintain our leadership position, while delivering improving financial outcomes.

Speaker Change: Together, we remain focused and committed to our long term goals supporting the creation of significant long term value for our stockholders.

Breathe: With that let me turn the call over to breathe.

Breathe: Thank you Raj and good afternoon, everyone.

Brie Carere: Thank you, Raj, and good afternoon, everyone. First, I want to thank our FedEx team for their strong performance during the peak season. As a result of their hard work and commitment, we once again delivered the best service offering in the industry. We continue to execute on our commercial priorities with a focus on revenue quality while maintaining our industry-leading service. As a result, we took profitable share in the quarter at market rates, and we continue to retain the vast majority of the volume we gained from UPS in the second half of 2023. Our unmatched value proposition has enabled recent high-value wins in the semiconductor, healthcare, and aerospace industries. We will continue to execute our commercial strategy to compete and grow further in the high-margin areas of the market. However, looking now by geography, in the United States, conditions have been weaker than we anticipated.

First I want to thank our Fedex team for strong performance during the peak season.

As a result of their hard work and commitment we once again delivered the best service offering in the industry.

Breathe: We continued to execute on our commercial priorities with a focus on revenue quality, while maintaining our industry leading service.

Breathe: As a result, we took profitable share in the quarter at market rates and we continue to retain the vast majority of the volume we gained from UBS in the second half of 2023.

Breathe: Our unmatched value proposition has enabled recent high value wins in semiconductor healthcare and aerospace industry.

Breathe: We'll continue to execute our commercial strategy to compete and grow further in the high margin areas of the market.

Breathe: Looking now by geography in the United States conditions have been weaker than we anticipated and internationally. We continue to see softness. We however remain very focused on strong commercial execution.

Brie Carere: And internationally, we continue to see softness. We, however, remain very focused on strong commercial executions. Taking a look at third-quarter revenue performance by segment, at FedEx Ground, revenue was up about 1% year over year on a modest yield improvement in flat volumes. Our team remains disciplined on growing with the right customers and mix while offering the best value proposition in the industry. At FedEx Freight, revenue declined 3%.

Breathe: Taking a look at third quarter revenue performance by segment.

Breathe: Fedex ground revenue was up about 1% year over year on a modest yield improvement and flat volumes. Our team remains disciplined on growing with the right customers and Max while offering the best value proposition in the industry.

Breathe: At Fedex freight revenue declined 3%.

Brie Carere: While volume decreased compared to last year, the year-over-year decline moderated on a sequential basis. Revenue was also negatively affected by lower fuel surcharges and a decrease in weight per shipment, although the decline was partially offset by higher base yields. And at FedEx Express, revenue was down 2% year over year, driven by continued volume softness, lower fuel and demand surcharges, and a mixed shift toward deferred and e-commerce products. The actions Raj outlined will allow us to profitably grow this business while continuing to deliver excellent service for our customers. Turning to our monthly volume trends during the quarter, broadly speaking, volumes are stabilizing as we lap weaker demand from a year ago. International exports increased 4% in the quarter, driven by a 29% growth in the international economy, which, of course, is a market reset we expected.

Breathe: While volume decreased compared to last year, the year over year decline moderated on a sequential basis.

Breathe: Revenue was also negatively affected by lower fuel surcharges and a decrease in weight per shipment.

Breathe: The decline was partially offset by higher base yields.

Breathe: And at Fedex Express revenue was down 2% year over year, driven by continued volume softness lower fuel and demand surcharges and a mix shift towards deferred any commerce products.

Breathe: The action Raj outlined will allow us to profitably grow this business, while continuing to deliver excellent service for our customers.

Breathe: Turning to our monthly volume trends during the quarter.

Breathe: Finally speaking volumes are stabilizing as we lap weaker demand from a year ago.

Breathe: International export increased 4% in the quarter driven by a 29% growth in international economy, which of course is a market lease that we expected.

Brie Carere: Rate shipments declined, but they continued to moderate sequentially. The, As Raj mentioned, postal volumes were a headwind in the quarter. Our current contract with the United States Postal Service expires on September 29th.

Breathe: Freight shipments declined but they continued to moderate sequentially.

Breathe: As Raj mentioned postal volumes were a headwind in the quarter.

Breathe: Our current contract with the United States Postal service expires on September 29, we have made significant progress in negotiations for a new contract and aligns with our ongoing network transformation plan, while providing the USPS with the operational reliability and outstanding service, we have delivered for them for more than two decades.

Brie Carere: We have made significant progress in negotiations for a new contract that aligns with our ongoing network transformation plan while providing the USPS with the operational reliability and outstanding service we have delivered for them for more than two decades. A new multi-year agreement would provide a more efficient network with service to fewer markets. It would allow us to better adjust our overall network to demand. We will, of course, let you know when we have an update. We continue to operate in a competitive but rational market environment. During the quarter, yield trends were similar to what we saw last quarter, with dynamics remaining mixed across the segments. At FedEx Express, yields remained pressured due to a tapering of international export demand surcharges and an increasing mix of lower-yielding e-commerce and deferred products.

Breathe: A new multiyear agreement would provide a more efficient network with service to fewer markets. It would allow us to better adjust our overall network to demand.

Breathe: We of course, we'll let you know when we have an update.

Breathe: We continue to operate in a competitive but rational market environment during the quarter yield trends were similar to what we saw last quarter with dynamics remain remaining mixed across the segments.

Breathe: Fedex Express yields remained pressured due to the tapering of international export demand surcharges, and an increasing mix of lower yielding e-commerce and deferred products.

Brie Carere: Yield was also pressured by increased capacity in the market. At FedEx Ground, yield increased 1% driven by home delivery, partially offset by the ground economy. Higher weight per package and favorable customer segment mix offset a lower fuel surcharge relative to the prior year. And at FedEx Freight, revenue per shipment was down 1%, driven by lower fuel surcharges and lower weight.

Breathe: Yield was also pressured by increased capacity in the market.

Breathe: At Fedex ground yield increased 1% driven by home deliveries, partially offset by ground economy.

Breathe: Higher weight per package and favorable customer segment mix offset a lower fuel surcharge relative to the prior year.

Breathe: And at Fedex freight revenue per shipment was down 1% driven by lower fuel surcharges and lower weights.

Brie Carere: In January, we rolled at a 5.9% GRI, and importantly, we've been able to capture a high percentage of that rate increase. During peak, our holiday peak residential surcharges enabled us to effectively offset higher costs, delivering $120 million in profits. We are very confident we have the right strategy in place balancing both volume and yield growth. We are building our network of the future with digital and data-driven solutions that simplify the customer experience and further strengthen our best-in-class customer offerings. For example, earlier this month, we enhanced our healthcare offering with more powerful capabilities to prioritize critical life-saving healthcare shipments above other volumes within the network. Healthcare customers now have the ability to select monitoring and intervention service options that cover categories such as temperature requirements and vaccines, and they do this at the package level.

And January we rolled out a five 9% Gi and importantly, we've been able to capture a high percentage of that rate increase during.

Breathe: During peak, our holiday peak residential surcharges enabled us to effectively offset higher costs delivering $120 million in profit.

Breathe: We are very confident we have the right strategy in place balancing both volume and yield growth.

Breathe: We are building our network of the future with digital and data driven solutions that simplify the customer experience and further strengthen our best in class customer offerings.

Breathe: For example earlier this month, we enhanced our health care offering with more powerful capabilities to prioritize critical lifesaving healthcare shipments above other volume within the network.

Breathe: Healthcare customers now have the ability to select monitoring and intervention service option they cover categories, such as temperature requirements and vaccine and they do this at the package level.

Brie Carere: Each express shipment now includes specific healthcare identifiers so that if we need to intervene, we are able to do it with more speed and more precision. And, of course, in January, we announced the FDX Commerce Platform. FTX connects the entire customer journey by offering end-to-end e-commerce solutions, making it easier for companies to grow demand, increase conversion, optimize fulfillment, and streamline their returns.

Breathe: Each express shipment now includes specific health care identifier, so that if we need to intervene we're able to do it with more speed and more precision.

Breathe: And of course in January we announced the <unk> Commerce platform.

Breathe: <unk> connects the entire customer journey by offering end to end e-commerce solution, making it easier for companies to grow demand increase conversion optimize fulfillment and streamline their return.

Brie Carere: The FTX platform will enable us to enhance our long-standing relationship with merchants of all sizes to help them optimize and grow their business. We have opened a private preview for select brands and retailers, and based on their feedback, I am incredibly excited about the official launch later this year. In closing, I'm very proud of our entire global team and how they continue to deliver outstanding service as we navigate a very dynamic market. And with that, I'll turn it over to John to cover our financials in more detail. Thanks, Brie.

Breathe: <unk> platform will enable us to enhance our long standing relationships with merchants of all sizes to help them optimize and grow their business we.

Breathe: We have opened up private preview for select brands and retailer and based on their feedback I am incredibly excited about the official launch later this year.

Breathe: In closing I am very proud of our entire global team and how they continue to deliver outstanding service as we navigate a very dynamic market and with that I'll turn it over to John to cover our financial in more detail.

John: Thanks Barry.

John W. Dietrich: Our third-quarter results reflect ongoing progress on our DRIVE initiatives, as well as our continued focus on service and revenue quality. As a result of these efforts, we delivered operating income growth and margin expansion for the third quarter in a row, despite declining revenue in a challenging market environment. Taking a closer look at our performance in the quarter on a year-over-year basis. We'll be right back, and at the enterprise level, adjusted operating income increased by $192 million, and adjusted operating margin expanded by 90 basis points. At Express, adjusted operating income increased by $134 million, and adjusted operating margin expanded 130 basis points. The benefits of drive initiatives and an additional operating day more than offset lower revenue. At ground, the team delivered another quarter of strong results. Adjusted operating income increased by $120 million, and adjusted operating margin expanded by 140 basis points due to cost reductions and yield improvements. Despite slightly lower volumes and in an inflationary environment, ground cost per package was flat year over year, with lower line haul expenses and improved dock productivity offsetting higher first and last mile costs.

John: Our third quarter results reflect ongoing progress on our drive initiatives as well as our continued focus on service and revenue quality.

As a result of these efforts we delivered operating income growth and margin expansion for the third quarter in a row.

Despite declining revenue in a challenging market environment.

Taking a closer look at our performance in the quarter on a year over year basis and at the enterprise level adjusted operating income increased by $192 million.

John: And adjusted operating margin expanded by 90 basis points.

John: At express adjusted operating income increased by $134 million and adjusted operating margin expanded 130 basis points.

John: The benefits of drive initiatives and an additional operating day more than offset lower revenue.

John: At ground the team delivered another quarter of strong results.

John: Adjusted operating income increased by $120 million and adjusted operating margin expanded by 140 basis points.

John: Due to cost reductions and yield improvement.

John: Despite slightly lower volumes and in an inflationary environment Brown cost per package was flat year over year with lower line haul expenses and improved dock productivity offsetting higher first and last mile costs.

John: And that freight while operating margin remains strong operating income declined by $46 million and operating margin declined by 170 basis points.

John W. Dietrich: And at Freight, while operating margin remains strong, operating income declined by $46 million, and operating margin declined by 170 basis points, driven by lower fuel surcharges, reduced weight per shipment, and lower shipments. These results also reflect the lapping of a $30 million facility gain last year, partially offset by the benefit of an additional operating day during the quarter. Looking at the quarter overall, weather had an immaterial year-over-year effect on profitability.

John: Driven by lower fuel surcharges reduced weight per shipment and lower shipments.

John: These results also reflect the lapping of a $30 million facility gain last year, partially offset by the benefit of an additional operating day during the quarter.

John: Looking at the quarter overall weather had an immaterial year over year effect on profitability.

John: Before turning to the outlook I'd like to spend a few moments updating you on our cost reduction initiatives, including drive and more specifically G&A.

John: As an initial matter and as part of responsible head count management, we have reduced our workforce by nearly 22000 over the last year and expect additional opportunities in the future as we move forward with our transformation.

John W. Dietrich: Before turning to the outlook, I'd like to spend a few moments updating you on our cost reduction initiatives, including DRIVE and, more specifically, G&A. As an initial matter, and as part of responsible headcount management, we have reduced our workforce by nearly 22,000 over the last year and expect additional opportunities in the future as we move forward with our transformations. Within GNA, we continue to make significant changes to how we approach areas like procurement and technology so that we are a more efficient, digitally led organization. In addition, global functional alignment provides savings opportunities. I'm pleased that we have achieved $350 million of G&A savings year-to-date, including $150 million in the third quarter.

John: Within G&A, we continue to make significant changes to how we approach areas like procurement and technology.

John: So that we are a more efficient digitally led organization.

John: In addition, global functional alignment provides savings opportunities.

John: I am pleased that we have achieved $350 million of G&A savings year to date, including $150 million in the third quarter.

Taking a closer look at sourcing and procurement, we've continued to evolve the sourcing and procurement function from a segregated and regional structure to a centralized global organization that will manage most third party spend across the entire enterprise.

John: With new leaders in place.

John: We're developing new category strategies and have already identified about 20 discrete categories.

John: We will manage centrally in cooperation with functional leaders.

John: By implementing these new strategies at the enterprise level, we will have tighter spend oversight.

John W. Dietrich: Taking a closer look at sourcing and procurement, we've continued to evolve the sourcing and procurement function from a segregated and regional structure to a centralized global organization that will manage most third-party spend across the entire enterprise, with new leaders in place. We're developing new category strategies and have already identified about 20 discrete categories that we'll manage centrally in cooperation with functional leaders. By implementing these new strategies at the enterprise level, we'll have tighter spend oversight, we'll better leverage our scale and buying power, and we'll generate significant cost savings. Overall, I'm very pleased with our enterprise-wide drive progress this quarter, and we will deliver $1.8 billion in savings for the full fiscal year. Now turning to our fiscal year outlook, and as Raj shared earlier, based on our performance year to date and our current view of the rest of the year, we are reaffirming the midpoint of our adjusted EPS range while narrowing our outlook from the prior range of $17 to $18.50 to $17.25 to $18.25. At the midpoint of the narrowed range, we continue to assume a low single-digit percentage decline in revenue for the full year.

John: We will better leverage our scale and buying power and generate significant cost savings.

Overall, I'm very pleased with our enterprise wide drive progress this quarter, and we will deliver $1 $8 billion in savings for the full fiscal year.

John: Now turning to our fiscal year outlook and as Rob shared earlier based on our performance year to date and our current view of the rest of the year. We are reaffirming the midpoint of our adjusted EPS range, while narrowing our outlook from the prior range of $17 $18 50.

John: The $17 25 to $18 25.

John: At the midpoint of the narrowed range, we continue to assume a low single digit percentage decline in revenue for the full year.

John: As always we'll closely monitor the global demand environment, and other key factors, including inventory restocking global trade inflation, and ecommerce trends, which informs our view of overall expected revenue.

John: With regard to our fourth quarter expectations as implied by our outlook range, we expect year over year profit improvement. Despite lapping the onset of certain structural benefits executed in last year's fourth quarter at express and ground.

John: Looking on a sequential basis.

John: Leap day in the third quarter affects our typical seasonality.

John: At the segment level were maintaining our full year expectations for a modest year over year adjusted margin contraction at express.

John: Adjusted margin improvement at ground and.

John W. Dietrich: As always, we'll closely monitor the global demand environment and other key factors, including inventory restocking, global trade, inflation, and e-commerce trends, which informs our view of overall expected revenues. With regard to our fourth quarter expectations, as implied by our outlook range, we expect year-over-year profit improvement despite lapping the onset of certain structural benefits executed in last year's fourth quarter at Express and Grounds. Looking on a sequential basis, the leap day in the third quarter affects our typical seasonality.

John: And strong, but lower year over year margin at freight.

John: At Express we're looking at every aspect of the business, including taking a fresh look at additional opportunities to improve our European business.

And we're confident in our ability to unlock more value at express and across all our businesses as we continue to seek optimization opportunities.

Our bridge shows the operating profit elements embedded in our full year outlook.

John: For illustrative purposes, we continue to use adjusted operating profit of $6 3 billion.

John: The equivalent to $17 75.

Adjusted EPS.

John: As the midpoint of our narrowed outlook range.

John: To walk the bridge to $6 3 billion adjusted operating profit. We're now assuming that revenue net of cost increases is up $200 million.

John W. Dietrich: At the segment level, we're maintaining our full year expectations for a modest year-over-year adjusted margin contraction at Express, Adjusted Margin Improvement at Ground, and a Strong but Lower Year-over-Year Margin at Freight. At Express, we're looking at every aspect of the business, including taking a fresh look at additional opportunities to improve our European business, and we're confident in our ability to unlock more value at Express and across all our businesses as we continue to seek optimization opportunities. Our bridge shows the operating profit elements embedded in our full-year outlook. For illustrative purposes, we continue to use an adjusted operating profit of $6.3 billion, the equivalent of $17.75 in adjusted EPS, as the midpoint of our narrowed outlook range.

John: That we experienced $800 million of international export yield pressure as peak surcharges diminished and product mix continues shifting toward deferred.

John: Variable compensation increases by $300 million.

John: And that these pressures are more than offset by $1 8 billion and structural cost savings from drive.

John: At the midpoint, we would expect fiscal 2024, adjusted operating income to increase approximately 17%.

John: Despite revenue declining by a low single digit percentage.

John: As I've discussed on prior calls we remain focused on reducing our capital intensity and continuing to provide increased stockholder returns.

John: As well as maintaining a strong balance sheet prudent capital allocation and improving return on invested capital.

John: Our capital investment priorities will be on improving efficiency modernizing facilities and optimizing our network.

John: Capital expenditures for the quarter were $1 4 billion, bringing year to date capex of $4 billion.

John W. Dietrich: To walk the bridge to $6.3 billion of adjusted operating profit, we're now assuming that revenue net of cost increases is up $200 million, that we experience $800 million of international export yield pressure as peak surcharges diminish and product mix continues shifting toward deferred, Variable compensation increases by $300 million, and that these pressures are more than offset by $1.8 billion in structural cost savings from drive. At the midpoint, we would expect fiscal 2024 adjusted operating income to increase approximately 17% of the total operating income of the state, despite revenue declining by a low single-digit percentage. As I've discussed on prior calls, we remain focused on reducing our capital intensity and continuing to provide increased stockholder returns, as well as maintaining a strong balance sheet, prudent capital allocation, and improving return on invested capital. Our capital investment priorities will be improving efficiency, modernizing facilities, and optimizing our networks. Capital expenditures for the quarter were $1.4 billion, bringing year-to-date capital expenditures to $4 billion.

John: And we now anticipate capital spend of $5 4 billion for the full year, which is down over $700 million from last year and down $300 million from our prior forecast of $5 7 billion.

John: We also continue to expect aircraft related capex to decline to approximately $1 billion in Fiske.

Fiscal year 'twenty six.

John: And we expect Capex as a percentage of revenue will keep declining in the future as we reduce our facilities footprint through network <unk> and continue to plan for lower annual aircraft Capex beyond fiscal year 'twenty six.

We currently have 37 jet aircraft parked, which is up from 20 last quarter and as previously communicated we will retire nine more MD elevens in Q4.

John: Consistent with our goal of increasing stockholder returns, we completed a $1 billion accelerated share repurchase transaction in the third quarter.

John: Bringing our total share repurchases for the first nine months of the fiscal year to $2 billion.

And we expect to repurchase an additional $500 million of common stock in the fourth quarter.

John: <unk> total fiscal year 'twenty for repurchases to $2 5 billion.

John W. Dietrich: We now anticipate capital expenditure of $5.4 billion for the full year, which is down over $700 million from last year and down $300 million from our prior forecast of $5.7 billion. We also continue to expect aircraft-related capex to decline to approximately $1 billion in fiscal year 26, and we expect CapEx as a percentage of revenue will keep declining in the future as we reduce our facility footprint through Network 2.0 and continue to plan for lower annual aircraft CapEx beyond fiscal year 26. We currently have 37 jet aircraft parked, which is up from 20 last quarter. And, as previously communicated, we will retire nine more MD-11s in Q4. Consistent with our goal of increasing stockholder returns, we completed a $1 billion accelerated share repurchase transaction in the third quarter, bringing our total share repurchases for the first nine months of the fiscal year to $2 billion.

John: While also paying our dividend in line with our previously stated capital return plan.

John: I'm also pleased to announce that our board of directors has authorized a new $5 billion share repurchase program, which augments the 600 million that remains available for repurchase under the $5 billion 2021 authorization.

John: This reinforces our commitment to support long term stockholder returns.

John: Overall, I want to acknowledge and thank the entire team for their efforts and continuing to improve profitability in a challenging revenue environment.

John: We have more work to do but I'm encouraged by the commitment and focus I have seen from our teams to advance our transformation and provide our customers and stockholders with even greater value.

Speaker Change: With that let's open it up for questions.

Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

John W. Dietrich: Thank you for your attention, and we expect to repurchase an additional $500 million of common stock in the fourth quarter, bringing total fiscal year 24 repurchases to $2.5 billion, while also paying our dividend in line with our previously stated capital return plan. I'm also pleased to announce that our board of directors has authorized a new $5 billion share repurchase program, which augments the $600 million that remains available for repurchase under the $5 billion 2021 authorization. This reinforces our commitment to supporting long-term stockholder return. Overall, I want to acknowledge and thank the entire team for their efforts in continuing to improve profitability in a challenging revenue environment. We have more work to do, but I'm encouraged by the commitment and focus I've seen from our teams to advance our transformation and provide our customers and stockholders with even greater value. With that, let's open it up for questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keypad.

Please limit yourself to just one question.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: Today's first question comes from Jordan <unk> with Goldman Sachs. Please go ahead.

Jordan: Yes, hi.

Jordan: Thanks for the update on drive I did the math right I think there is about three.

Jordan: <unk> hundred $85 million or so left for the final quarter of this fiscal year, maybe talk to where you think this money where the savings which buckets are going to go to surface Air G&A and I'm also just sort of curious on the surface side.

Jordan: Much of that is actually tied to express surface stuff. Thanks.

Jordan: So thank you Jordan for the question it's John.

John: I'm not going to speak specifically to the number you raised with regard to the remainder of the year and drive except to say.

John: That we are committed to the $1 8 billion for the fiscal year.

John: I think it's safe to assume that's spread across all of our operating companies.

John: And with regard to your question on surface.

John: Predominantly ground.

John: But as we continue to migrate towards network <unk> and through our drive initiatives. There's a lot of complementary work that's being done together by the teams.

So those savings are being realized both at express and ground.

John: The next question is from Tom <unk> with UBS.

John: Okay.

Tom: Yes, good afternoon.

Jordan Alliger: To withdraw your question, please press star then two. Please limit yourself to just one question. At this time, we will pause momentarily to assemble our rosters. Today's first question comes from Jordan Alliger with Goldman Sachs. Please go ahead.

Tom: Wanted to ask you a bit about the trajectory of the margin unexpressed.

Tom: Excuse me the February quarter was quite a bit better than expected and I'm. Just wondering how do we think about that as you go into fiscal 'twenty five I think two specific items, you did mentioned $1 $600 million improvement.

Jordan Alliger: Yeah, hi. Thanks for the update on Drive. If I did the math right, I think there's about $385 million or so left for the final quarter of this fiscal year. Maybe talk to them about where you think this money is going to go, where the savings are, which buckets are going to go to, surface, air, G&A. And I'm also just sort of curious, on the surface side, how much of that is actually tied to express surface stuff then? So thank you, Jordan, for the question. It's John.

Tom: Improvement in Europe that I think would go to express.

Tom: Visibility on that and also how we should think about postal.

Tom: But you had some comments and I think that's been characterized as a 400 million headwind. So is it reasonable to say that thats $400 million kind of add back to the numbers. So anyway, just some broader comments on express and some of the bigger items. Thank you.

Tom: Great. Thanks, Tom It's John again, yes, we're quite pleased with the progress we've made at express and the margin expansion.

John W. Dietrich: And I'm not going to speak specifically to the number you raised with regard to the remainder of the year and the drive, except to say that we are committed to $1.8 billion for the fiscal year. And I think it's safe to assume that it's spread across all of our operating companies. And with regard to your question about surface, it's predominantly ground.

John: As Raj mentioned this is all of our primary focus to continue that expansion and we're excited about the opportunities that lie ahead for us and drive.

John: With regard to Europe that will be a key focus area of ours, and we are committed to the $600 million.

John W. Dietrich: But as we continue to migrate towards Network 2.0 and through our drive initiatives, there's a lot of complementary work that's being done together by the teams. So those savings are being realized both at Express and on the ground. The next question is from Tom Wadowitz with UBS, and more. Yeah, good afternoon.

John: That you mentioned.

John: And the postal service certainly as we're negotiating towards a deal if that deal were to materialize you would expect that it's mutually beneficial for both sides.

John: So we're looking forward to bringing that to closure as soon as possible.

John: And all of that will contribute to our ability to continue to expand our margins at our largest sector at express.

Thomas Wadewitz: I wanted to ask you a bit about the trajectory of the margin on Express. Excuse me, the February quarter was quite a bit better than expected. And I'm just wondering, how do we think about that as you go into fiscal 25? I think two specific items you mentioned, one, the 600 million improvement in Europe that I think would go to Express and just kind of visibility on that. And also how we should think about postal services. Brie, you had some comments, and I think that's been characterized as a 400 million headwind. So, you know, is it reasonable to say that that's 400 million? You kind of add back to the number.

John: The next question is from Jonathan Chappell with Evercore. Please go ahead.

Jonathan B. Chappell: Thank you good afternoon I am.

Jonathan B. Chappell: You had mentioned a competitive but rational market environment as it relates to pricing and yields we are several quarters into the demand downturn here and of course, there's been some competitive issues directly.

Jonathan B. Chappell: And in your business as you look forward, if we continue to kind of bounce along this bottom on demand internationally, but I think more specifically to the United States does the pricing environment start to waver at all of it do you really need a macro tailwind in before we can see maybe a stabilization and a reacceleration of yield.

Speaker Change: Hi, Jonathan Thanks for the question.

Jonathan B. Chappell: I think from a competitive environment perspective, yes. It is competitive but I don't think that's particularly different in our industry. We're very used to a competitive environment and the market does still quite rational to me when we look at the yield.

Thomas Wadewitz: So, anyway, it's just some broader comments on Express and some of the bigger items. Thank you. Great. Thanks, Tom. It's John again.

John W. Dietrich: Yeah, we're quite pleased with the progress we've made at Express and the margin expansion. As Raj mentioned, this is all our primary focus to continue that expansion, and we're excited about the opportunities that lie ahead for us in DRIVE. With regard to Europe, that will be a key focus area of ours, and we are committed to the $600 million that you mentioned. And the Postal Service, certainly, as we're negotiating towards a deal, if that deal were to materialize, you would expect that it would be mutually beneficial for both sides. So we're looking forward to bringing that to closure as soon as possible. And all of that will contribute to our ability to continue to expand our margins at our largest sector, Express. The next question is from Jonathan Chappell with Evercore. Please go ahead.

Jonathan B. Chappell: Focus for the team I'm actually pleased with the discipline about the sales and the pricing organization. If you remove the fuel headwind across each one of our segments Express ground and Fedex freight we have kind of low single digit yield improvement at the base. So I think the team is continuing to execute on our revenue quality strat.

Jonathan B. Chappell: And from a momentum perspective, we do have some headwinds this year that will diminish next year, especially in the international market.

Jonathan B. Chappell: Think about calendar year 'twenty three from an airfreight perspective, the overall airfreight market yields decreased between 30, and 40% that is not going to repeat next year and then of course from an international demand surcharge. It will continue to be a headwind in FY 'twenty five but less of a headwind in this fiscal year.

Jonathan B. Chappell: Thank you. Good afternoon. Brie, you mentioned a competitive but rational market environment as it relates to pricing and yields. We are several quarters into the demand downturn here, and of course, there's been some competitive issues directly in your business. As you look forward, if we continue to kind of bounce along this bottom on demand internationally, but I think more specifically in the United States, does the pricing environment start to waver at all? Do you really need a macro tailwind before we can see maybe a stabilization or reacceleration of yields? Hi Jonathan.

Bascome Majors: The next question comes from Boscombe majors with Susquehanna.

Bascome Majors: Okay. Thanks for taking my question. So in June you'll complete the legal consolidation of express ground and services as part of the one Fedex effort.

Bascome Majors: Can you give us a look at how that will change how you manage the business starting in July how it will change how you report your financials and operating stats.

Can you give us some assurance that we'll get a deep history of comparable financial and operating data to help track your progress as you get further into the operational side of the integration in 2025, six and seven thank you.

Jonathan B. Chappell: Thanks for the question. I think from a competitive environment perspective, yes, it is competitive, but I don't think that's particularly different in our industry. We're very used to a competitive environment, and the market does feel quite rational to me. When we look at the yield focus for the team, I'm actually pleased with the discipline of both the sales and the pricing organization. If you remove the fuel headwind across each one of our segments, Express, Ground, and FedEx Freight, we have a kind of low single-digit yield improvement at the base. So I think the team is continuing to execute on our revenue quality strategy. And from a momentum perspective, we do have some headwinds this year that will diminish next year, especially.

Speaker Change: Thank you <unk>, let me start and then John can add ons. This first of all we are well on track to.

Speaker Change: To complete our consolidation of Fedex operating companies as a server in a lot of great work has already been done and into one streamline and simplify our organization having towards going to describe this move.

Speaker Change: This efficiency of other one is effectiveness I think.

John: We are we are looking forward to the structure of that it actually moves us forward on both fronts.

John: Think at the end of the day.

John: This transformation efforts will set us up to drive improved performance and profitability over the long term I will give it to John to talk about the rest of it.

John: Yes, Thanks Raj.

Jonathan B. Chappell: Especially in the international market. If you think about calendar year 23 from an air freight perspective, the overall air freight market yield decreased between 30 and 40%. That is not going to happen next year.

John: From a reporting standpoint, and we'll be providing more details regarding the new reporting structure as we go forward.

John: But I think it's fair to say that we'll continue to break out both ground and express yield and volume by services. We currently do.

Bascome Majors: And then, of course, from an international demand surcharger, it will continue to be a headwind in FY25, but less of a headwind than this fiscal year. The next question comes from Bascome Majors with Susquehanna. Thanks for taking my question. So in June, you'll complete the legal consolidation of Express Ground and Services as part of the OneFedEx effort. Can you give us a look at how that will change how you manage the business starting in July, how it will change how you report your financials and operating stats, and can you give us some assurance that we'll get a deep history of comparable financial and operating data to help track your progress as you get further into the operational side of the integration in 2025-60? Thank you.

John: And frankly continue to provide sufficient data for you all to monitor the performance in those business segments.

John: The next question comes from David Vernon with Bernstein.

David Scott Vernon: Hey, good afternoon, everyone and thanks for taking the question to Roger in your prepared remarks, you talked about.

David Scott Vernon: The Frac, all our strategy and going after the premium airfreight market could you talk a little bit more about about what that is I guess I'd always been really assumption that you guys will have a premium part of the airfreight market and how does this realignment actually open up some revenue that may be you don't have access to today.

Speaker Change: Thank you David.

David Scott Vernon: I think I'm going to take a minute here to talk about Tri color because I think that's a good opportunity. So bear with me for the time I'm going to take here, Firstly tricolor as a fundamental redesign of our network to improve the utilization of assets, our ROIC see profitability and our operating margin and first and foremost our overall capacity will be.

Rajesh Subramaniam: Thank you, Bascom, and let me start, and then John can add on to this. First of all, we are well on track to complete our consolidation of FedEx operating companies. There has been a lot of great work that's already been done into one streamlined and simplified organization. I think two words are going to describe this move. One is efficiency, and the other one is effectiveness.

David Scott Vernon: Determined by the demand environment tricolor will allow us to better flex our capacity to match demand.

David Scott Vernon: Now within that capacities, when we'll break it into three networks purple orange and white recall, it and that cater to the different cohorts of profit.

David Scott Vernon: The idea is to move the right product in the right network, while reducing the cost to serve.

Rajesh Subramaniam: I think we are looking forward to the structure that actually moves us forward on both fronts. And I think, at the end of the day, these transformation efforts will set us up to drive improved performance and profitability over the long term. I'll give it to John to talk about the rest of it.

David Scott Vernon: The purple network will be a highly optimized in a leaner network designed to move international priority parcel volume.

David Scott Vernon: That protects our value proposition in different geographies.

This network now becomes much more personal centric.

David Scott Vernon: Have significantly better service, but also density and that density will improve the revenue per position on revenue per flight.

David Scott Vernon: And from a reporting standpoint, and we'll be providing more details regarding the new reporting structures as we go forward, but I think it's fair to say that we'll continue to break out both land and express yield and volume by service as we currently do. And frankly, continue to provide sufficient data for you all to monitor the performance in those business segments. The next question comes from David Vernon of Bernstein. Hey, good afternoon, everyone, and thanks for taking the question. So, Raj, in your prepared remarks, you talked about the tricolor strategy and going after the premium air freight market. Could you talk a little bit more about what that is?

David Scott Vernon: Now turning to the Orange network that will cater to the premium freight traffic and these are.

David Scott Vernon: Fedex planes that will operate off cycle from the purple system, which allows us two things firstly.

David Scott Vernon: This is the ability once again to maximize density and asset utilization.

David Scott Vernon: So they can just hubs and improved service.

David Scott Vernon: But most importantly, it allows the truck flight truck model that reduces the cost to serve and in this context. It should be noted that we are fully leveraging the existing capacity in our trucking network in the U S and Europe.

David Scott Vernon: Here to fiscal 'twenty, four we Havent really moved any international freight shipments and our market, leading LPL network with FX F.

David Scott Vernon: I guess I'd always been under the assumption that you guys were the premium part of the air freight market. And how does this realignment actually open up some revenue that maybe you don't have access to today? Thank you, David.

David Scott Vernon: And now it's already begun to change, but then tricolor it'll take foothold here so.

David Scott Vernon: So by doing so we reduced the cost to serve and we're able to target more of the premium air freight segment now I am going to coin a new term think of it as the core on core global LDL segment. That's what this is about.

Rajesh Subramaniam: Well, you know, I think I'm going to take a minute here to talk about Tricolor because I think it's a good opportunity. So bear with me for the time I'm going to take. Firstly, Tricolor is a fundamental redesign of our network to improve the utilization of assets, our ROIC, profitability, and our operating margin.

David Scott Vernon: Now as you rightly asked is are we adding capacity to go up a loyal and perfect answers no.

Sure.

We are going to date, our overall capacity by the premium demand should also be noted that 20% of the global air freight shipments approximately drive about 80% of the weight.

Rajesh Subramaniam: First and foremost, our overall capacity will be determined by the demand environment, and Tricolor will allow us to better flex our capacity to match demand. Now within that capacity is when we'll break it into three networks, purple, orange, and white, we call them, and that cater to the different cohorts of traffic. The idea is to move the right product from the right network while reducing the cost to serve.

David Scott Vernon: Which is a primary target for freight forwarders.

David Scott Vernon: Are going to focus on the other 80% that will readily work with the model I described.

David Scott Vernon: So the wide network, then is primarily use of passenger belly capacity to move lower yielding e-commerce and deferred traffic. So these three networks working in concert with high technological orchestration is what we call Tri color. Let me just reinforce again that helps the baseline productivity and improves our <unk>.

Rajesh Subramaniam: The Purple Network will be a highly optimized and leaner network designed to move priority parcel volume that protects our value proposition in different geographies. Now that this network has now become much more parcel-centric, we'll have significantly better service, but also density. And that density will improve revenue per position and revenue per flight. Now turning to the Orange Network, that will cater to premium freight traffic. And these are FedEx planes that will operate off-cycle from the Purple system, which allows a few things. Firstly, it gives us the ability, once again, to maximize density and asset utilization. It will also decongest hubs and improve service. But most importantly, it allows a truck-fly-truck model that reduces the cost to serve. And in this context, it should be noted that we are fully leveraging the existing capacity in our trucking networks in the U.S. and Europe. Prior to fiscal 24, we really didn't move any international freight shipments in our market-leading LTL network with FXF.

David Scott Vernon: Listing assay utilization and makes the entire system more efficient and we're going to manage the execution of tri color with the rigor of drive and to ensure success. So again, thanks for the question.

David Scott Vernon: The next question comes from Brian <unk> with JP Morgan. Please go ahead.

Hey, Thanks for taking the question.

Brian: Just wanted to come back and maybe better understand the.

Brian: The moving pieces for expressed during the quarter, obviously quite a strong result that there's often times some impact from fuel incentive compensation I think it was a bit of a tailwind here has that changed a little bit as well. So maybe and then whether that was in place.

Brian: Pretty significant so.

Brian: Apprise considering it was is typically as you mentioned Raj, but it seems like it really didn't affect our network. So maybe John if you can unpack some of the moving pieces and then Raj if you can comment on.

Brian: The durability of the network, if whether it just isn't going to be as big of an impact going forward.

Yeah, Thanks, Brian I'll start with that last point, because I think it's worth repeating on the weather piece, which ties into some of our digital strategies and our ability to adapt to allow for what was.

Rajesh Subramaniam: And now it's already begun to change, but in tricolor, it'll take full hold. So by doing so, we reduce the cost to serve, and we're able to target more of the premium air freight segment. Now, I'm going to coin a new term.

Brian: The actually poor weather here in Memphis to be rerouted and in a manner that had an immaterial impact on us so.

Brian: As you would expect there is there was a lot of moving parts.

Brian: Press, both positive and negative.

Rajesh Subramaniam: Think of it as the quote-unquote global LTL segment. That's what this is about. Now, as you rightly asked, are we adding capacity to go up in low yield traffic? The answer is no.

Brian: And the levers are drive the focus on slight reductions.

Brian: For example, we had 5% fewer flight hours in the quarter.

Brian: And there are some additional benefits that flow from that on your cost side, because when you are not flying airplanes, youre able to avoid certain maintenance costs.

Rajesh Subramaniam: We are going to gate the overall capacity by the premium demand. It should also be noted that 20% of global air freight shipments drive about 80% of the way, which is a primary target for freight forwarders. We're going to focus on the other 80% that will readily work with the model I described.

Brian: <unk> team is doing an exceptional job of managing its cost for aircraft that are grounded whether youre using what's called Green time on engines that are available.

Brian: Limiting your inventory purchases and so forth. So it's really a <unk>.

Brian: Across the gamut, where we're seeing improvement there.

Rajesh Subramaniam: So the wide network, then, is primarily the use of passenger belly capacity to move low-reeling e-commerce and deferred traffic. So these three networks working in concert with high technological orchestration are what we call tricolor. Let me just reinforce again that it helps baseline productivity, it improves existing asset utilization, and makes the entire system more efficient. And we're going to manage the execution of tricolor with the rigor of drive to ensure success. So again, thanks for the question. The next question comes from Brian Ossenbeck with J.P. Morgan. Please go ahead.

Brian: All in the midst of some revenue headwinds as that Raj and Brie talked about so we're going to continue to keep our head down and focused on our costs.

Speaker Change: One of the things I like to say this is a journey not a destination and we still have a long way to go at express and it is our primary focus and look forward to keeping you posted on further improvements and Brian I don't think I have much to add to what John has talked about.

Brian: The idea that we use our latest and greatest in digital tools and the notion that we are now able to look at the Fedex.

Brian: The overarching network and be able to move things helps us of course, we're going to you're going to see as the weather patterns are another very impossible to predict but I'm just pleased with the work that we did this time around and we'll continue to get better in this regard.

Brian Ossenbeck: Hey, thanks for taking the question. I just wanted to come back and maybe better understand the moving pieces for Express during the quarter. Obviously, quite a strong result, but there's oftentimes some impact from fuel.

Brian: The next question comes from Jeff Kauffman with vertical research partners.

Jeffrey Asher Kauffman: Thank you very much.

Jeffrey Asher Kauffman: Thank you for the detail on drive.

Jeffrey Asher Kauffman: Jenny welcome look forward to working with you.

Brian Ossenbeck: Incentive compensation, I think, was a bit of a tailwind here as that changed a little bit as well. So maybe, and then weather, you know, that was a pretty significant surprise considering it was as difficult as you mentioned, Raj, but it seems like it really didn't affect the network. So maybe, Jonathan, you can unpack some of the moving pieces, and then Raj, if you can comment on the durability of the network, whether it just isn't going to have as big of an impact. Thank you. Yeah, thanks, Brian.

Jeffrey Asher Kauffman: Real quick.

Jeffrey Asher Kauffman: The puck doesn't stay in one place, it's always moving around and I think you were alluding to this with with what Youre doing with drive in Tri color, but I'm just kind of curious from your perspective, we announced this plan about.

Jeffrey Asher Kauffman: What year and a half ago.

Jeffrey Asher Kauffman: No.

Back at the analyst meeting almost two years ago.

Jeffrey Asher Kauffman: Has the network design and some of the drive goals. When you are completed with this changed since you began this process.

John W. Dietrich: I'll start with that last point because I think it's worth repeating on the weather piece, which ties into some of our digital strategies and our ability to adapt to allow for what was substantially poor weather here in Memphis to be rerouted in a manner that had an immaterial impact on us. So, as you'd expect, there were a lot of moving parts that expressed both positive and negative. And the levers of drive, the focus on flight reductions, for example, we had 5% fewer flight hours in the quarter. And there are some additional benefits that flow from that on your cost side because when you're not flying airplanes, you're able to avoid certain maintenance costs.

Speaker Change: Well I think we introduced tricolor in the last conference call and I think this design is just being put in place as we as we are as we are speaking here.

Speaker Change: And.

Speaker Change: So in terms of the drive commitments, we had originally talked about $4 billion by FY 'twenty, five and one less than 50% in FY 'twenty for railroad as we will hit those numbers.

Speaker Change: For FY 'twenty, four and on track for FY 'twenty five.

Speaker Change: Again, the other part of it of course network toward auto, which we said $2 billion by FY 'twenty, seven and Thats underway so would the.

Speaker Change: With the focus on making sure that we have structural cost reductions, we have network redesigns with the whole.

John W. Dietrich: The Air Ops team is doing an exceptional job of managing its cost for aircraft that are grounded, whether you're using what's called green time on engines that are available, limiting your inventory purchases, and so forth. So it's really across the gamut where we're seeing improvement there, all in the midst of some revenue headwinds that Raj and Brie talked about. So we're going to continue to keep our heads down and focused on our costs. One of the things I like to say is this is a journey, not a destination, and we still have a long way to go at Express, and it is our primary focus. We look forward to keeping you posted on further improvements. And Brian, I don't think I have much to add to what John has talked about.

Speaker Change: Fedex portfolio in play.

Speaker Change: And the idea that we are moving forward on our digital tools. All three are working and I think.

Speaker Change: We've got work to do but as we've made some good progress John is going to add more to what I just said.

John: I think what I would add to that as well as to your comment about kind of changing environment.

John: The teams meet weekly on this and there are some programs that are delivering more than we expected and there are some programs that are delivering less than we expected.

John: But we're always looking to fill the pipeline as well on additional opportunities and that's an ongoing.

John: Project and that speaks to drive being part of our culture going forward, that's not going to stop and we're going to adapt to a changing environment.

John: That will help us as we move forward.

John: The next question comes from Ken <unk> with Bank of America.

Rajesh Subramaniam: I think the idea that we use the latest and greatest in digital tools and the notion that we are now able to look at FedEx as an overarching network and able to move things helps us. Of course, we've got to say. We're going to continue to see as the weather patterns, you know, those are very impossible to predict, but I'm just pleased with the work that we did this time around, and we'll continue to get better in this regard. The next question comes from Jeff Kauffman with Vertical Research Partners. Thank you very much.

Hey, great good evening.

Ken: So Raj and team I guess I loved the results in terms of the speed here at express, but I'm confused a bit by the messaging last quarter, you talked about seasonal declines at express.

Ken: And what occurred from express going down too.

Ken: It should be maybe near breakeven given the seasonal moves yet it was up so significantly under 30 basis points year over year was there a massive shift in the drive our other programs or your speed of execution, because it sounds like from what Youre, saying on the targets nothing has really changed but I'm just wondering what's shifted intra quarter. So so much that we're now seeing.

Jeffrey Kauffman: Thank you for the detail on Drive. Jenny, welcome. I look forward to working with you. Real quick, you know, the puck doesn't stay in one place. It's always moving around, and I think you're alluding to this with what you're doing with Drive and Tricolor. But I'm just kind of curious from your perspective.

This quake of an improvement and then just I'm sorry, just a slight clarification did you say, Canada was about to be rolled out because I thought you had already said that with Hawaii and Alaska, Canada was done so just maybe I wanted to clarify that thanks.

Rajesh Subramaniam: We announced this plan about a year and a half ago, back at the analyst meeting almost two years ago. How has the network design and some of the drive goals when you're completed with this changed since you began this process? Well, I think we introduced Tricolor on the last conference call, and I think this design is just being put in place as we are speaking here.

Ken: So hey, Ken it's John I'll start with the last one it's about to be rolled out. It has not been completed and Bruce can talk more about that in a minute.

Ken: But Q3 as I mentioned earlier was a combination of things.

Ken: We saw wild.

Speaker Change: While the revenue was software focused on quality revenue the cost controls.

Rajesh Subramaniam: And so in terms of the drive commitments, we had originally talked about $4 billion by FY25 and less than 50% in FY24. We will hit those numbers for FY24 and be on track for FY25. And again, the other part of it, of course, is Network 2.0, which we said would cost $2 billion by FY27, and that's underway. So with the focus on making sure that we have structural cost reductions, we have network redesigns with the whole FedEx portfolio in play, and the idea that we are moving forward on our digital tools, all three are working. And I think we've got work to do, but as we've made some good progress, John's going to add more to what I just said. Yeah,

Speaker Change: We're.

Speaker Change: Solid and strong and there were some other levers that were alluded to earlier as you can see variable comp. For example for example was down so that was a contributor but all these things taken together resulted in us and our focus on improving our results.

Speaker Change: For Q3.

Speaker Change: Yes, and Ken I'm, just happy to clarify for the network Ciudadano perspective, the Canada plan has not changed Alaska and Hawaii are done.

Speaker Change: And we are beginning the rollout of the integration in Canada that will begin this April and we will be done before peak and it's on track.

Speaker Change: The next question comes from Brandon <unk> with Barclays.

Brandon: Hi, good afternoon, and thanks for taking my question.

Brandon: Maybe if we can follow up there on network to Plano Raj I think you mentioned you have made some management changes on both ground and express surface operations in the U S. Can you talk maybe a little bit more about that and how that plays into long term integration.

John W. Dietrich: I think what I would add to that as well is to your comment about a kind of changing environment. The teams meet weekly on this, and there are some programs that are delivering more than we expected, and there are some programs that are delivering less than we expected. But we're always looking to fill the pipeline as well with additional opportunities. And that's an ongoing project. And that speaks to the drive being part.

Rajesh Subramaniam: Yeah. Thank you Brandon I think.

Speaker Change: First the first of all yes network to <unk> is on track and we just say.

Speaker Change: Step back here, you'll recall that we plan.

Rajesh Subramaniam: Plan to deliver $2 billion in savings by the end of fiscal 2007, and we're taking that measured and deliberate approach.

Rajesh Subramaniam: And as we have just rolled out our new leadership structure.

Rajesh Subramaniam: In the United States, and it's obviously, a much more streamlined structure and much more effective structure and essentially with the goal of.

John W. Dietrich: of our culture going forward. That's not going to stop, and we're going to adapt to a changing environment. And I think that will help us as we move forward. The next question comes from Ken Hoexter with Bank of America. Hey, great. Good evening.

Rajesh Subramaniam: Putting one truck in one neighborhood design interaction.

Rajesh Subramaniam: We are encouraged by the early results, we're seeing in the initial rollout as well as so far network toward auto model on the whole is up approximately 10% reduction in <unk> cost and maintain very strong service levels as we become more tech enabled in this regard will deliver even greater improvements and as we have.

Kenneth Scott Hoexter: So Raj and Tim, I guess I love the results in terms of the speed here at Express, but I'm confused a bit by the messaging. Last quarter, you talked about seasonal declines at Express and what occurred between Express going down to, you know, which should be maybe near break-even given the seasonal moves, yet it was up, you know, so significantly, 130 basis points year over year. Was there a massive shift in the drive or other programs or your speed of execution?

Rajesh Subramaniam: Already talked about we are focused on implementation of Canada before peak and I'm also happy to say that I'm very excited about network put auto from a service perspective, because it will drive a better customer pickup experience. So we are on our way on track and again some ways to go.

Rajesh Subramaniam: The next question is from Scott Group with Wolfe Research.

Scott H. Group: Hey, Thanks afternoon. So.

Scott H. Group: John This year is the $1 billion <unk> of drive savings and you've talked about $900 million of offset so about $900 million of actual profit.

Kenneth Scott Hoexter: Because it sounds like from what you're saying on the targets, nothing's really changed, but I'm just wondering what shifted intra-quarter so much that we're now seeing this quick of an improvement? And then, just, just a side clarification. Did you say Canada was about to be rolled out? Because I thought you had already said that with Hawaii and Alaska, Canada was done.

Scott H. Group: As we think about.

Scott H. Group: Fiscal 'twenty five do you think the.

Scott H. Group: Actual profit improvement should be closer to the $2 2 billion of drive savings or do you think there is another year of material.

Offsets to that drive in fiscal 'twenty five and then just separately just no one's asked about ground, yet and it's by far the biggest part of the business. So if I can just ask one.

Kenneth Scott Hoexter: So, I just, maybe I want to clarify that. So, hey, Ken, it's John. I'll start with the last one.

The margins.

Scott H. Group: 12% this year.

Scott H. Group: Do you think there is further margin improvement to Golar ground. Thank you.

Scott H. Group: Yeah.

John W. Dietrich: It's about to be rolled out. It has not yet been completed, and Brie can talk more about that in a minute. But, you know, Q3, as I mentioned earlier, was a combination of things. We saw that while revenue was soft, we were focused on quality revenue. The cost controls were solid and strong, and there were some other levers that were alluded to earlier. As you can see, VarioComp, for example, is down, so that was a contributor.

Speaker Change: Thanks Scott.

Speaker Change: And let me start by saying on that $2. Two that's certainly our goal to have that all flow through.

Speaker Change: But we have to be realistic and understand that a lot of the pressures that we're seeing today are expected to continue for a while.

Speaker Change: And while we're going to continue to focus on those things within our control there are certain things with our outside of our control and so our goal is to have as much pass through to the bottom line as possible and we look forward to keeping you up to speed on that including when we next talk in June.

Speaker Change: With regard to ground.

Speaker Change: Exceptional story expect exceptional performance from the team.

John W. Dietrich: But, you know, all these things taken together resulted in us and our focus on improving our results for Q3. Yeah, and Ken, I'm just happy to clarify from a Network 2.0 perspective that the Canada plan has not changed. Alaska and Hawaii are done, and we are beginning the rollout of the integration in Canada that will begin this April, and we will be done before peak, and it's on track.

Speaker Change: I believe those margins are sustainable and there is still a number of projects in the pipeline that allow us to continue to grow and expand that business and those margins. So again thats going to be our focus as well.

Speaker Change: The next question comes from Helane Becker with TD Cohen.

Oh, thanks, very much operator, hi team I have I.

Helane Renee Becker: I guess two questions. One is as part of the whole redesign of the network in the business and collapsing everything into one have you thought about shifting to a calendar year rather than staying on our may fiscal year and my second question is maybe for Raj.

Brie Carere: The next question comes from Brandon Oglenski with Barclays. Hi, good afternoon, and thanks for taking my question. Maybe if we can follow up on Network 2.0, Raj, I think you mentioned you've made some management changes on both ground and express surface operations in the U.S. Can you talk maybe a little bit more about that and how that plays into long-term integration? Sure.

Helane Renee Becker: A lot of investors pushback to me about the business that is.

Rajesh Subramaniam: The way you're structuring the business and I noticed the stock aftermarket was up quite a lot. After the earnings release, what why do you think investors are skeptical of your business plan and arent willing to give you the credit that may be you deserve for the changes you've made as speedily.

Brandon Oglenski: Yeah, thank you, Brandon. I think, first of all, Network 2.0 is on track, and we just take a step back here. You'll recall that we said we plan to deliver $2 billion in savings by the end of fiscal 27, and we're taking that measured and deliberate approach. And we just rolled out our new leadership structure in the United States, and it's obviously a much more streamlined structure and a much more effective structure, and essentially with the goal of putting the one truck and one neighborhood design into action. We are encouraged by the early results we're seeing in the initial rollout as well. So far, Network 2.0 as a whole has achieved approximately a 10% reduction in P&D costs and maintained very strong service levels.

Helane Renee Becker: As you've made them.

Speaker Change: Thanks, Helane I'll start on the first part on the calendar year.

Speaker Change: As you'd expect with everything going on there is legal and accounting.

Speaker Change: Exercises that need to take place to get us through this next period, including June one date of one Fedex, but.

Speaker Change: But I can share it.

On my radar to migrate towards that and we will keep you posted.

Speaker Change: On developments towards that.

Speaker Change: And <unk> second question all I can say is that we as a team are very much convinced that we have a unique story at Fedex here.

Speaker Change: The opportunities that we have one in the industry is one thing, but within the industry. We are rather unique opportunity because of the strategies that we've deployed.

Speaker Change: We started moving early than anybody else, we are performing better than our competition competition. Both on the top on the bottom line and we have a long runway because of the opportunities we have identified and so.

Speaker Change: Yes, we will try to educate as many people as we possibly can on our strategy and.

Rajesh Subramaniam: As we become more tech-enabled in this regard, we'll deliver even greater improvements. And as we have already talked about, we are focused on implementing Canada before peak. And I also have to say that I'm very excited about Network 2.0 from a service perspective because it will drive a better customer pickup experience. So we are on our way, on track, and again, we have some ways to go. The next question is from Scott Group with Wolf Research. Hey, thanks, afternoon.

Speaker Change: And where we are but we are just seeing the early stages of what's possible at Fedex.

Speaker Change: Any one particular quarter or sometimes just kind of throw you off but the long term strategy is sound and we all believe in it and there's going to be as good as <unk>.

Speaker Change: The good run in the next three four years.

Speaker Change: The next question is from Ravi Shanker with Morgan Stanley.

Ravi Shanker: Thanks, a lot for anyone.

Ravi Shanker: Apologies if I missed this but.

Ravi Shanker: Regarding the USPS contract kind of when do you expect that to reach fruition.

Scott H. Group: So, John, this year is a billionaire of drive savings, and you've talked about $900 million of offset, so about $900 million of actual profit. As we think about Fiscal 25, do you think the actual profit improvement should be closer to the $2.2 billion of drive savings, or do you think there's another year of material offsets to that drive in fiscal 25?

Ravi Shanker: Is that something that happened in FY 'twenty four 'twenty five and also can you share how much of the volume has come off already.

Ravi Shanker: How much would you dimension that.

Ravi Shanker: Net net with the new contract ends up being thank you.

Gray: Hi, Ravi Thanks for the question it Gray.

Speaker Change: USPS contract I really can't say more than I already said earlier and sure. We are feeling very positive about the negotiation. Both parties are working eagerly we're at the table.

Speaker Change: I think we are days or weeks away from knowing if we will have a contract not months and as we have shared previously their current contract ends on September 29th. So we will know very very soon and I'm certainly not at Liberty to talk about the details of our future contract.

Scott H. Group: And then, just separately, no one's asked about ground yet, and it's by far the biggest part of the business. So if I can just ask one question, the margins, 12% this year. Do you think there's further margin improvement to go on ground?

John W. Dietrich: Thank you. Thanks, Scott. And let me start by saying on that 2.2, that's certainly our goal to have that all flow through. But we have to be realistic and understand that a lot of the pressures that we're seeing today are expected to continue for a while. And while we're going to continue to focus on those things within our control, there are certain things outside of our control.

Speaker Change: The next question is from Stephanie <unk> with Jefferies.

Stephanie: Hi, Good evening. Thank you for the question.

Stephanie: I appreciate the incremental color on network cute auto.

Stephanie: And I was hoping you could maybe provide a little bit of color in terms of some of the investments that have to be made in order to execute on the integration, particularly at <unk> and the execution of a much larger market like Canada any color in terms of maybe.

John W. Dietrich: And so our goal is to have as much pass through to the bottom line as possible. And we look forward to keeping you up to speed on that, including, you know, when we next talk in June. With regard to the ground, exceptional story, and exceptional performance from the team.

Lessons learned from your Alaska and Hawaii.

Stephanie: And then what investments you should expect to see as you implemented in Canada. Thank you.

Stephanie: Yes, Thanks, Stephanie it's John Yes, certainly there is going to be some investment required when you're consolidating facilities, particularly sort facilities.

John W. Dietrich: I believe those margins are sustainable, and there's still a number of projects in the pipeline that will allow us to continue to grow and expand that business and those margins. So again, that's going to be our focus as well.

John: But there's also upside in that you are able to reduce your facilities footprint along the way.

John: So that will involve some certainly some planning and processes.

John: Analysis, and all of that but we're excited actually about the end game here and that is our overall footprint will will far.

Helane Renee Becker: Thanks very much, Operator. And hi, team. I have, I guess, two questions. One is, as part of the whole redesign of the network and the business and collapsing everything into one, have you thought about shifting to a calendar year rather than staying on a May fiscal year? And my second question is, perhaps, for Raj.

John: The benefits of that will far exceed the investment and contribute to a really efficient network.

And honestly from lessons learned I think the team feels really good about their execution to date to Roger's point, we have seen kind of the PND benefits that we anticipated as well as we've seen the team be able to execute from a service perspective, I will say, we are being very disciplined we're being very methodical and we are giving.

Helane Renee Becker: You know, a lot of investors push back to me about the business and, you know, the way you're structuring the business. And I noticed the stock after market was up quite a lot after, you know, the market. Why do you think investors are so skeptical of your business plan and aren't willing to give you the credit that maybe you deserve for the changes you've made as speedily as you've made? Thanks, Helene. I'll start with the first part of the calendar year.

John: Customers the advanced notice as we go into market that was one piece of feedback for customers, even though we anticipate being able to deliver the same level of service with the combined organization as we are as the individual they do want that notification and so we of course are giving customers that advanced notification and to Roger's point on the positive.

John W. Dietrich: You know, as you'd expect with everything going on, there are legal and accounting exercises that need to take place to get us through this next period, including June 1 date for OneFedEx. But I can share it's certainly on my radar to migrate towards that. And we'll keep you posted on developments toward that. Elena, I'll ask you a second question.

John: I cannot under.

John: Emphasize how important that single pickup is to our small customer segment. This has been the only feature gap we had <unk> in that segment and we are about to close that so I'm pretty excited about that.

The next question is from Bruce Chan with Stifel.

Unknown Attendee: Hey, Raj breach Allen and Jenny welcome to the mix here.

Rajesh Subramaniam: All I can say is that we as a team are very much convinced that we have a unique story at FedEx here. That the opportunities that we have are one thing, but within the industry, we have a unique opportunity because of the strategies that we have deployed. We started moving earlier than anybody else.

Unknown Attendee: I don't know if you've really talked about it but we've been hearing that you've had some pretty material service improvements, especially at ground over the last call it year or so and thats. Despite the cost savings push can you maybe just talk about that a little bit in a word the service levels today, what are the levers that youre pulling and then what kind of opportunity do you have to drive core pricing.

Speaker Change: As a result of that thank you.

Rajesh Subramaniam: We are performing better than our competition, both on the top and the bottom line. And we have a longer runway because of the opportunities we have identified. And so, you know, we will try to educate as many people as we possibly can on our strategy and, you know, and where we are. But we are just seeing the early stages of what's possible at FedEx. You know, any one particular quarter can kind of throw you off, but the long-term strategy is sound, and we all believe in it.

Speaker Change: I Love This question John.

Speaker Change: John Smith, and Scott Ray are crushing it.

Speaker Change: When we went back and looked at our Q4 that the toughest quarter to delight I should say Q4 calendar year, the toughest quarter to deliver awesome service not only are we faster I am quite confident we on those higher standards from a delivery service perspective, we also had better reliability.

Speaker Change: How are they doing methods discipline its day in and day out execution and we look at our service metrics. Every single morning, We talk about net promoter score every week and our revenue management Committee.

Rajesh Subramaniam: And it's going to be a good run in the next three, four years. The next question is from Ravi Shanker with Morgan Stanley. Thanks for talking to me, everyone. Apologies if I missed this, but regarding the USPS contract, when do you expect that to reach fruition? Is that something that happens in FY24 or 25?

Speaker Change: <unk> coverage on the integrated leadership team now the service organization, we absolutely expect to extend that across the entire network and I just could not be more appreciative of our operators and how well they're doing I wanted brita answer to that question because she holds their feet to the fire every single day. So I'm glad you heard the answer.

Ravi Shanker: And also, can you share how much of the volume has come off already, and how much would you dimension that net with the new contract ends up being? Thank you. Hi, Ravi. Thanks for the question. It's Brie.

Brian: From Brian.

Brian: The next question is from Conor Cunningham with Melius research.

Brie Carere: From a USPS contract, I really can't say more than I already said earlier. You know, in short, we are feeling very positive about the negotiations. Both parties are working eagerly. We're at the table. I think we are days or weeks away from knowing if we will have a contract, not months.

Conor T. Cunningham: Hi, everyone. Thanks for getting me in I was hoping you could talk about the opportunity you see just with the E. Commerce return business, you've obviously been a big player there.

Conor T. Cunningham: But theres been a lot of changes in the network is back now a larger focus the reason why I ask obviously theres been a press report about you reengage with Amazon. So just any thoughts there would be helpful. Thank you.

Brie Carere: And as we have shared previously, their current contract ends on September 29th. So we will know very, very soon. And, you know, I'm certainly not at liberty to talk about the details of a future contract.

Speaker Change: Sure Happy to I think we've got the best returns portfolio in the market. When you look at our retail coverage as well as our transportation solution. It is best in class and when we looked at our January numbers. The Fedex ground returns portfolio did see some healthy growth you layer that on with the new announcement of.

Brie Carere: The next question is from Stephanie Moore with Jefferies. Hi, good evening. Thank you for the question. I appreciate the incremental color on Network 2.0. And I was hoping you could maybe provide a little bit of color in terms of some of the investments that have to be made in order to execute on the integration, particularly as you enter or begin the execution in a much larger market like Canada. Any color in terms of maybe lessons learned from your Alaska and Hawaii integration?

Speaker Change: Our <unk> platform, we are going to be the only provider that has not only the physical capabilities, but a very comprehensive digital capability and what do I mean by that we are going to be able to help all retailers brands and merchants process their returns on their web site managers.

Stephanie Lynn Benjamin Moore: And then, you know, what investments we should expect to see as you implement it in Canada? Thank you. Yeah, thanks, Stephanie. It's John.

John W. Dietrich: Yeah, certainly, there's going to be some investment required when you're consolidating facilities, particularly sort facilities, but there's also an upside in that you're able to reduce your facility footprint along the way. So that will involve certainly some planning and processes, analysis and all that. But we're excited actually about the end game here.

Speaker Change: Manage their exchanges manage the inventory.

Speaker Change: Integrate their branded tracking and communications to customers, it's a really powerful offering as I mentioned earlier, we started to preview this with some customers. We've got some pretty big names and what we're calling our private preview and I look forward to sharing more results. Once we do the full launch later in the fall.

Speaker Change: As.

Speaker Change: I'll stop there I havent disaster about that no I will just say this much money and they are integrated into those customers, even I Jim program and it is a no code environment I can set up better trumps policies. So if I can do that anyone can do it.

John W. Dietrich: And that is our overall footprint will will far exceed the benefits of that and contribute to a really efficient network. And honestly, from lessons learned, I think the team feels really good about their execution to date. To Rajesh's point, we have seen kind of the P&D benefits that we anticipated, as well as the team being able to execute from a service perspective. I will say we are being very disciplined. We're being very methodical, and we are giving customers advance notice as we go into market. That was one piece of feedback for customers. Even though we anticipate being able to deliver the same level of service with the combined organization as we are as an individual, they do want that notification.

Speaker Change: The next question is from Scott Schneeberger with Oppenheimer.

Scott Andrew Schneeberger: Thanks, very much everyone.

Scott Andrew Schneeberger: It's basically two questions one to follow up to Bruce is Brie I was hoping if you could kind of give an overview of peak season.

Kind of takeaways or learnings and then I think we have five less calendar days.

Scott Andrew Schneeberger: For the 2024 calendar peak suggest things.

Scott Andrew Schneeberger: That youre going to learn and manage ahead of time.

Scott Andrew Schneeberger: As as it is a much more condensed season and then the second question is for any of you but.

Scott Andrew Schneeberger: And in ground cost per package. It was it was.

Brie Carere: And so we, of course, are giving customers that advance notification. And to Rajesh's point on the positive, I cannot under-emphasize how important that single pickup is to our small customer segment. This has been the only feature gap we had. We had a lot of customers that were coming to UPS in that segment, and we are about to close it.

Scott Andrew Schneeberger: Down 2% in the fiscal second quarter, and you cited improved first and last mile productivity.

Scott Andrew Schneeberger: Flat here in this quarter and an offset was higher first and last mile cost just curious if theres anything we should read into there thanks for taking them off.

Speaker Change: Yeah, I think from a peak perspective, we're really pleased with how we're managing peak from a service from a customer and from a profitability perspective.

Brie Carere: So I'm pretty excited about that. The next question is from Bruce Chan with Stiefel. Hey, Raj, Brie, John, and Jenny, welcome to the mix here. I don't know if you've really talked about it, but we've been hearing that you've had some pretty material service improvements, especially on the ground, over the last, you know, call it a year or so, and that's, you know, despite the cost-saving push. Can you maybe just talk about that a little bit? You know, where are the service levels today? What are the levers that you're pulling?

Speaker Change: First and foremost the team start to literally now for this coming peak and what do I mean by that we are already talking to customers about what their peak requirements are for next year, and so that John and Scott have advanced planning and that of course as we get closer to peak, we take the top 100 customers and we are managing forecast.

Speaker Change: On a weekly basis I think some of the integrated planning that we're doing with data works is also incredibly helpful. So that we have real time information.

Unknown Attendee: And then, you know, what kind of opportunity do you have to drive core pricing as a result of that? Thank you. I love this question.

Speaker Change: Waiting for spreadsheets should be passed over but we've actually got real time visibility into some of our largest customers, which has been incredibly helpful. So I don't anticipate us doing much different this year, but more of the same and again I also was really pleased with the peak surcharge capture we are ensuring that the customers that really drive the inverse.

Brie Carere: John Smith and Scott Ray are crushing it. When we went back and looked at our Q4, the toughest quarter to deliver, I should say Q4 calendar year, the toughest quarter to deliver awesome service, not only are we faster, but I am quite confident we, on those higher standards from a delivery service perspective, we also have better reliability. How are they doing this? It's discipline. It's day in and day out execution.

Speaker Change: Net we need in December we're getting recouped for that cost so we feel good.

Speaker Change: Yeah, and I'll speak to the ground piece and I think one of the drivers of the margin expansion and cost control at ground was lower line haul expense.

Rajesh Subramaniam: We look at our service metrics every single morning. We talk about the net promoter score every week at our revenue management committee. And Raj's coverage on the integrated leadership team now, the service organization, we absolutely expect to extend that across the entire network. And I just could not be more appreciative of our operators and how well they're doing. Yeah, I wanted Bree to answer that question because she holds her feet to the fire every single day.

Speaker Change: Alluded to and we moved a lot of high cost and AD hoc external line haul spend into our scheduled network.

Speaker Change: And as a result achieved lower rates on the planned line haul purchase transportation and.

Speaker Change: And this is all part of a broader optimization and ongoing optimization, that's taking place in the network through drive and through network <unk>.

Speaker Change: And so every aspect and even those.

Brie Carere: So I'm glad that you heard that answer directly from Bree. The next question is from Conor Cunningham with Melius Research. Hi, everyone.

Speaker Change: First and last mile will be part of that and we're also leveraging.

Speaker Change: The capacity that we have and we do have some additional capacity in the ground network that can absorb additional volumes at no incremental cost so that should help improve margins as well.

Conor T. Cunningham: Thanks for getting me in. I was hoping you could talk about the opportunity you see just with the e-commerce return business. You've obviously been a big player there, but there have been a lot of changes to the network. Is that now a larger focus? The reason why I asked is that, obviously, there's been a press report about you reengaging with Amazon. So just any thoughts there would be helpful.

Speaker Change: Yes.

Speaker Change: This concludes our question and answer session I would now like to turn the conference back over to Raj Subramaniam for any closing remarks.

Rajesh Subramaniam: Thank you operator in closing we saw continued operating income growth margin expansion, despite lower revenue for the third consecutive quarter and this is clear evidence that drive is working.

Brie Carere: Thank you. Sure, I'll be happy to. I think we've got the best returns portfolio in the market. When you look at our retail coverage as well as our transportation solution, it is best in class. And when we looked at our January numbers, the FedEx ground returns portfolio did see some healthy growth. You layer that on with the new announcement of our FDX platform, and we are going to be the only provider that has not only the physical capabilities but a very comprehensive digital capability. And what do I mean by that?

Rajesh Subramaniam: While these results are encouraging it is our top priority to maintain momentum and continued to transform our network and the way we work.

Speaker Change: Once again, let me thank our Fedex team members for their hard work and dedication to delivering outstanding customer service I'm really proud of the work that we have accomplished as we continue to build the world's most flexible efficient and intelligent network. Thank you for your time and attention today.

Speaker Change: Yes.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Brie Carere: We are going to be able to help all retailers, brands, and merchants process their returns on their websites, manage their exchanges, manage inventory, and integrate their branded tracking and communications with customers. It's a really powerful offering. As I mentioned earlier, we've started to preview this with some customers. We've got some pretty big names in what we're calling our private preview, and I look forward to sharing more results once we do the full launch later on. Thank you. I think I'll stop there.

Speaker Change: [music].

Brie Carere: I'm enthusiastic about this. No, I'll just say this much. When you integrate with those customers, even I can program, and it's a no-code environment. I can set up the returns policy, so if I can do that, anyone can do it.

Brie Carere: The next question is from Scott Schneeberger with Oppenheim. Thanks very much, everyone. It's basically two questions.

Scott Andrew Schneeberger: One to follow up to Bruce's. Brie, I was hoping you could kind of give an overview of peak season, kind of takeaways, learnings, and then I think we have five less calendar days for the 2024 calendar peak. So just things that you're going to have to learn and manage ahead of time as it's a much more condensed season. And then the second question for any of you, but just in terms of ground cost per package, it was down 2% in the fiscal second quarter, and you cited improved first and last mile productivity. Flat here in this quarter, and offset was higher first and last mile costs. Just curious if there's anything we should look into there. Thanks for taking them both.

Brie Carere: Yeah, I think from a peak perspective, you know, we're really pleased with how we're managing peak from a service, from a customer, and from a profitability perspective. First and foremost, the team starts literally now for this coming peak. And what do I mean by that?

Brie Carere: We are already talking to customers about what their peak requirements are for next year so that John and Scott have advanced planning. And then, of course, as we get closer to peak, we take the top 100 customers, and we manage forecasts on a weekly basis. I think some of the integrated planning that we are doing with DataWorks is also incredibly helpful, so that we have real-time information. We're not waiting for spreadsheets to be passed over, but we've actually got real-time visibility into some of our largest customers, which has been incredibly helpful. So I don't anticipate us doing much different this year, but more of the same.

Brie Carere: And again, I also was really pleased with the peak surcharge capture. We are ensuring that the customers that really drive the investment we need in December are getting recouped for that cost. So we feel good.

John W. Dietrich: And I'll speak to the ground piece. And I think one of the drivers of the margin expansion and cost control at ground was lower line haul expense, which I alluded to. And we moved a lot of high cost and ad hoc external line haul spend into our scheduled network and, as a result, achieved lower rates on the planned line haul purchase transportation.

John W. Dietrich: And this is all part of a broader optimization and ongoing optimization that's taking place in the network through drive and network 2.0. And so every aspect and even those, you know, first and last mile will be part of that. And, you know, we're also leveraging the capacity that we have. And we do have some additional capacity in the ground network that can absorb additional volumes at no incremental cost. So that should help improve margins as well.

Rajesh Subramaniam: This concludes our question and answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks. Thank you, operator. In closing, we saw continued operating income growth and margin expansion despite lower revenue for the third consecutive quarter. And this is clear evidence that the strategy is working.

Speaker Change: [music].

Rajesh Subramaniam: While these results are encouraging, it is our top priority to maintain momentum and continue to transform our network and the way we work. Once again, let me thank our FedEx team members for their hard work and dedication to delivering outstanding customer service. I'm really proud of the work that we have accomplished as we continue to build the world's most flexible, efficient, and intelligent network. Thank you for your time and attention today. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Speaker Change: Okay.

[music].