Q1 2025 FedEx Corp Earnings Call
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Unknown Attendee: Good day, and welcome to the FedEx fiscal year 2025 first quarter earnings call. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: Good day and welcome to the FedEx fiscal year 2025 first quarter earnings call. All participants are in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Unknown Attendee: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded.
Jenifer Hollander: I would now like to turn the conference over to Jenny Hollander, Vice President of Investor Relations. Please go ahead.
Speaker Change: I would now let's turn on the conference over to Jenny Hollander, Vice President of Investor Relations. Please go ahead.
Rajesh Subramaniam: Good afternoon, and welcome to FedEx Corporation's first quarter earnings conference call. The first quarter earnings release, Form 10-Q and staff book are available on our website at investors.fedex.com. This call and the accompanying slides are being streamed from our website. Where the reply and slides will be available for about one year.
Jenny Hollander: Good afternoon and welcome to FedEx Corporation's first quarter earnings conference call. The first quarter earnings release, Forum 10Q and staff book, are available on our website at investors.fedex.com.
Speaker Change: This call in the accompanying slides are being streamed from our website where the replay and slides will be available for about one year.
Unknown Attendee: During our Q&A session, collars will be limited to one question to allow us to accommodate all those who would like to participate.
Speaker Change: During our Q&A session, collars will be limited to one question to allow us to accommodate all those who would like to participate.
Unknown Attendee: 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 risk, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC.
Speaker Change: Certain statements in this conference call may be considered forward-looking statements as defined in the private securities litigation reform act of 1995.
Speaker Change: Such forward-looking statements are subject to risk uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC.
Unknown Attendee: 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 measures.
Speaker Change: Today's presentation also includes certain non-gap financial measures. Please refer to the Investor Relations portion of our website at FedEx.com, or a reconciliation of the non-gap financial measures that's best known as call to the most directly comparable gap measures.
Rajesh Subramaniam: Joining us on the call today are Raj Supermanium, President and CEO; Bre Carrey, Executive Vice President and Chief Customer Officer; and John Dietrich, Executive Vice President and CSO.
Speaker Change: 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 CSO. Now I will turn the call over to Raj.
Rajesh Subramaniam: Now I will turn the call over to Raj. Thank you, Jenny, and good afternoon. Our results reflect the challenging Q1 demand environment, which was weaker than we expected, particularly in the U.S. domestic package market. Looking at our performance on a year-over-year basis, there are several factors that play weakness in the industrial economy, pressure on B2B volumes, particularly in the U.S. We saw increasing demand for our low yielding services, and some of this demand increase was driven by a shift in customer preference worldwide from priority to deferred services. And we continued to execute on structural cost reductions via drive, which partially offset revenue and expense pressure.
Raj Subramaniam: Thank you, Jenny and good afternoon.
Raj Subramaniam: Our results reflect a challenging Q1 demand environment, which was weaker than we expected, particularly in the U.S. domestic package market.
Raj Subramaniam: Looking at our performance on a year-over-year basis, there are several factors that play. Witness in the Industrial Economy, pressure or B2B volumes, particularly in the US.
Raj Subramaniam: We saw increasing demand for our lower yielding services.
Speaker Change: and some of his demands increased with Southern by a ship. In custom uproar friends, war light from priority to the Ford services.
Speaker Change: and we continued to execute on structural cost reductions via drive, which partially offset revenue and expense pressure. That said, we now expect the cadence of drive related savings throughout the year to increase sequentially by quarter.
Rajesh Subramaniam: That said, we now expect the cadence of drive-related savings throughout the year to increase sequentially by quarter. And we had one pure operating day in the quarter. Notwithstanding this difficult quarter, with the actions we are taking, we remain confident in the trajectory ahead. We are on track to deliver the $4 billion of savings through drive in FY25 compared to the FY23 baseline. Man. We have recently implemented significant new pricing actions relating to both demand and fuel surcharges, which will benefit us in the coming quarters. We're making significant progress on our network transformation. We're prepared for the exploration of the U.S.
Speaker Change: and we had one fewer operating day in the quarter.
Speaker Change: Notwithstanding this difficult quarter, with the actions we are taking, we remain confident in the trajectory ahead.
Speaker Change: We are on track to deliver the $4 billion savings to drive an F-25 compared to their F-23 baseline.
Speaker Change: We have recently implemented significant new pricing actions relating to both demand and fuel surchargees which will benefit us in the coming quarters.
Speaker Change: We're making significant progress on our network transformation.
Rajesh Subramaniam: Postal Service contract, and we're continuing to roll out Network 2.0. The implementation of tri-color, which is the redesign of our global air network, is well underway. The demand chain changes we're seeing in the market make tri-color an even more instrumental element of our long-term strategy to increase flexibility of a network, lower our cost to serve, and grow in new profitable markets. Taken together, our network transformation actions will drive improved profitability by unlocking efficiencies, improving density, and creating a more flexible network. This will strengthen our competitive position while simultaneously supporting our objectives for improved profitability and returns.
Speaker Change: We prepare for the exploration of the U.S. Postal Service contract and we are continuing to roll out network 2.0.
Speaker Change: The implementation of tricolor, which is the redesign of our global and network, is well underway.
Speaker Change: The demand changes we're seeing in the market make tricolor and even more instrumental element of our long-lick term strategy to increase flexibility of our network lower our cost to serve and grow in new profitable markets.
Speaker Change: They can together our network transformation actions will drive improved profitability by unlocking efficiencies, improving density and creating a more flexible network.
Speaker Change: This will strengthen our competitive position while simultaneously supporting our objectives for improved profitability and returns.
Rajesh Subramaniam: Our innovative data driven solutions also supporting our transformation and enabling a better experience for our customers. Additionally, our seamless transition to one FedEx at the start of Q1 allows us to operate more efficiently and effectively as we implement our strategies. Accounting for these factors are updated expectations for the remainder of the fiscal year and our Q1 performance. We are narrowing our FY25 adjusted EPS outlet range to $20 to $21. John will provide more color on the underlying assumptions shortly. Drive has evolved from a targeted transmission effort to being the foundation for how we work across the enterprise.
Speaker Change: Our innovative data-driven solutions are also supporting our transformation and enabling a better experience for our customers.
Speaker Change: Additionally, our seamless transition to one FedEx at the start of Q1 allows us to operate more efficiently and effectively as we implement our strategies.
Speaker Change: Accounting for these factors are updated expectations for the remainder of the fiscal year and our Q1 performance.
Speaker Change: Renarrowing RF525 adjusted EPS Outlook range to $20 to $21.
Speaker Change: John will provide more color on the underlying assumptions shortly.
John Dietrich: Drivers evolve from a targeted transmission effort to being the foundation for how we work across the enterprise. The first quarter, which sheves $390 million of bribe-related savings.
Rajesh Subramaniam: The first quarter we achieved $390 million of drive related savings. Blaking this down by category, approximately $90 million came from our surface network, $160 million from our air network and international, and $140 million from GNA. Our surface operations focused on efficiency in line haul planning. In air and international, we maintained focus on transforming our network while maximizing staff efficiency at hubs and ramps. In Europe, we further optimized in-station processes. Within GNA, we continued to improve the efficiency of our IT function. We also continued our transition from a regional base procurement support model to one that centralized and organized by spend category.
John Dietrich: Breaking this down by category, approximately $90 million same from our Surface Network, $160 million from our Air Network and International, and $140 million from GNA.
John Dietrich: A surface operations focused on efficiency in line-hard planning.
John Dietrich: In air and international, we maintain focus on transforming our network while maximizing staff efficiency at hubs and ramps.
John Dietrich: and Europe, we further optimized instation processes.
John Dietrich: Within GNA, we continue to improve the efficiency of our IT function.
John Dietrich: We also continued our transition from a regional-based procurement support model to one that centralized and organized by spend category. We're collaborating across sourcing finance and the businesses to drive cost out.
Rajesh Subramaniam: We are collaborating across sourcing finance and the businesses to drive costs out. Looking ahead, we expect our quarterly drive cost reductions to build quarter over quarter throughout the year. Within our surface operations, we will keep focusing on the end-to-end efficiency initiatives, including optimizing our rental fleet and maximizing rail usage. In the air network and international category, a majority of our savings in the remainder of the year will come from Europe. While we realize some Europe savings in the quarter, most of our Europe-related drive savings will skew towards the second half of FY25. As we achieve efficiency and productivity improvements across the region.
John Dietrich: Looking ahead, we expect our quarterly drive-cost reductions to build quarter or quarter throughout the year. Within our service operations, we'll keep focusing on the end-to-end efficiency initiatives, including optimizing our rental fleet and maximizing the rail usage.
John Dietrich: In the air network and international category, a majority of our savings in the remainder of the year will come from Europe.
John Dietrich: While we realize some Europe savings in the quarter, most of our Europe-gladed drive savings was due towards a second half of FY25, as we achieved efficiency and productivity improvements across the region.
Rajesh Subramaniam: Engraged by the progress we are making in Europe, improving service levels, reducing churn, and winning new business despite difficult market conditions. We continue to expect $600 million of cumulative bribe-related savings from Europe, which will help us exit the year with a better performing European business. Across the air network, more broadly, we'll maintain our focus on managing our fleet and broader air operation efficiently. And within GNA, we'll continue to optimize functions globally to focus on IT and outside when the spend. In the first quarter, we continue to introduce Network 2.0 in select markets. Canada, which is our biggest network optimization yet, is well underway.
Speaker Change: The main courage by the progress you are making in Europe, improving service levels, reducing churn, and winning new business despite difficult market conditions.
Speaker Change: We continue to expect $600 million of cumulative bribe-related savings from Europe, which will help us exit the year with a better performing European business.
Speaker Change: Across the air network more broadly, we'll maintain our focus on managing our fleet and broader air operation efficiently.
Speaker Change: And within GNA, we'll continue to optimize functions globally, the focus on IT and outside Render's spend.
Speaker Change: In the first quarter, we continue to introduce network 2.0 in select markets.
Rajesh Subramaniam: On completion of Canada's rollout in early calendar year of 2025, nearly 200 facilities across the US and Canada will be handling consolidated and integrated ground and express volume. Optimizations will resume post-speak and continue to ramp into FY26. As we have shared before, we're taking a coordinated and deliberate approach to maintain and enhance customer service while also applying learnings from each rollout to later integrations. For example, we're optimizing pickup and delivery operations to best leverage existing assets and resources, including facilities, equipment, and team members. We're also now looking at geographic markets more holistically rather than by location by location.
Speaker Change: Canada, which is our biggest network optimization yet, is well underway.
Speaker Change: On completion of Canada's rollout in early calendar year of 2025, nearly 200 facilities across the US and Canada will be handling consolidated and integrated ground and express volume.
Speaker Change: Optimizations will resume post-speak and continue to ram into FY26.
Speaker Change: As we have shared before, we're taking a coordinated and deliberate approach to maintain and enhance customer service while also applying learning from each rollout related integrations.
Speaker Change: For example, we're optimizing pickup and delivery operations to best leverage existing assets and resources, including facilities, equipment and team members.
Speaker Change: We're also now looking at geographic markets more holistically, rather than by location, the location.
Rajesh Subramaniam: This enables us to consider volume and customer mix across an entire market. Our strategy is working. We continue to see roughly a 10% reduction in pickup and delivery costs in markets where we have fully rolled out Network 2.0. Service levels in these markets are meeting or exceeding our network average. We're also leveraging new technologies to facilitate high-quality service. For example, we recently launched what we call the Shipment Eligibility Orchestrator. This is an innovative internal decision making engine that leverages machine learning to dynamically route packages in real time. For network 2.0, one application of this tool ensures that we direct high-priority health care and time-sensitive shipments to designated carriers trained to handle them.
Speaker Change: This enables us to consider volume and customer mix across an entire market.
Speaker Change: A strategy is working.
Speaker Change: We continue to see roughly a 10% reduction in pick-up and delivery costs and markets where we have fully rolled out network 2.0.
Speaker Change: Service Levels in these markets are meeting or exceeding our network average.
Speaker Change: We are also leveraging new technologies to facilitate high quality subs.
Speaker Change: For example, we're recently launched what we call the Shipman-Elegibility Orchestrator.
Speaker Change: This is an innovative internal decision making engine that leverages machine learning to dynamically route packages in real-time.
Speaker Change: for Network 2.0, one application of this tool ensures that we direct high priority health care and time-sensitive shipments to designated couriers trained to handle them.
Rajesh Subramaniam: Shipment eligibility orchestrator is an evolving learning platform where we're adding new use cases by the day. In the first quarter, we also successfully piloted our new ultimate solution, which optimizes last mile delivery costs. It does this by holding early ground stops when another package is designed for the same stop the following day. We will do this while ensuring an on-time delivery for all packages. Ultimatch is increasing stop density and will help lower our cost per package. We look forward to expanding the capability throughout the year.
Speaker Change: Shipman illegibility orchestrator is an evolving learning platform where we're adding new use cases by the day.
Speaker Change: In the first quarter, we also successfully piloted our new Old Tomatoes solution, which optimizes last mile delivery costs.
Speaker Change: It does this by holding early ground stops when another package is designed for the same stop the following day.
Speaker Change: We will do this while ensuring an on-time delivery for all packages. Ultimatch is increasing stop density and will help lower our cost per package.
Rajesh Subramaniam: And this month, aligned with our mission to make supply chains smarter for everyone, we announced a strategic alliance investment with Nimble. Nimble is an AI robotics and autonomous e-commerce fulfillment technology company. FedEx Supply Chain will use Nimble's cutting-edge fulfillment systems to streamline our operations, further penetrate the global e-commerce market, and unlock new opportunities for customers.
Speaker Change: We look forward to expanding the capability throughout the year.
Speaker Change: And this month, aligned with our mission to make supply chains smarter for everyone, we announce the strategic alliance and investment with Nimble. Nimble is an AI robotics and autonomous e-commerce fulfillment technology company.
Speaker Change: FedEx supply chain will use Nimble's cutting-edge fulfillment systems to streamline our operations for the penetrate the global e-commerce market and unlock new opportunities for customers.
Rajesh Subramaniam: As we shared last quarter, we're conducting an assessment of the role of FedEx Freight in our portfolio structure. The assessment is well underway and on track to be completed by the end of the calendar year. All while we continue to deliver safe and reliable service to our customers.
Speaker Change: As we shared last quarter, we're conducting an assessment of the role of FedEx Freight, you know, a portfolio structure.
Speaker Change: The assessment is well underway and on track, to be completed by the end of the calendar year, all while we continue to deliver safe and reliable service to our customers.
Rajesh Subramaniam: Before I close, I would like to congratulate Mark Allen, our General Counsel and Secretary, on his upcoming retirement. During his distinguished 42-year career with FedEx, Mark has served as an instrumental counselor and a business partner. FedEx has benefited from his strong business acumen, unassuming leadership, and vast international experience. We thank him for his service. I'm excited to welcome Jean Adams into her new role as General Counsel and Secretary of FedEx, and the company, and advocating for policies that support our customers and our industry. I know her expertise and insights will be invaluable as we continue to transform FedEx.
Speaker Change: Before I close, I would like to congratulate Mark Allen, our General Counsel and Secretary on his behalf of the Minotriment.
Speaker Change: During his distinguished 42-year career with FedEx, Mark has served as an instrumental counselor and a business partner.
Speaker Change: FedEx has benefited from his strong business acumen.
Speaker Change: An assuming leadership and vast international experience.
Speaker Change: We thank him for his service.
Speaker Change: I'm excited to welcome Jen Adams into the new role as General Counsel and Secretary of FedEx effective September 24.
Speaker Change: Gina Jordan, the company in 1992
Gina Jordan: Since 2001, she has led government and regulatory affairs.
Speaker Change: Jenifer brings extensive experience addressing many of the most important issues facing our company and advocating for policies that support our customers and our industry.
Speaker Change: I know her expertise and insights will be invaluable as we continue to transform FedEx.
Rajesh Subramaniam: I also want to take this opportunity to thank the entire FedEx team for their hard work and dedication as we transform our network for a pair of feet and deliver for our customers. I remain confident in the value creation opportunities ahead as we focus on growing revenue profitably, reducing our structural costs, and leveraging the insights from our vast collection of data.
Speaker Change: I also want to take this opportunity to thank the entire FedEx team for their hard work and dedication as we transform on network for careful peak and deliver for our customers.
Speaker Change: I remain confident in the value creation opportunities ahead as we focus on growing revenue profitable, reducing our structural costs and leveraging the insights from our vast collection of data.
Brie Carere: Now, let me turn the call over to Brie. Thank you, Raj, and good afternoon, everyone. Despite a challenging demand environment, our team continued to deliver high quality service to our customers. They are drawn to our distinctive advantages, including our industry-leading weekend delivery, robust portfolio, and daily weekday delivery in rural areas that the competition simply can't match. Our value proposition continues to attract customers in high value segments such as healthcare and small and medium business. In the front half of the calendar year 2024, we continued to gain profitable market share in the United States and around the world.
Speaker Change: Now, let me turn the call over to Brie.
Brie Carere: Thank you Rajesh and good afternoon everyone.
Brie Carere: Despite a challenging demand environment, our team continued to deliver high-quality service to our customers.
Brie Carere: There are drawn to our distinct advantages, including our industry leading weekend delivery, robust portfolio, and daily weekday delivery in rural areas at the competition simply can't match.
Brie Carere: Our value proposition continues to attract customers and high value segments, such as healthcare and small and medium business.
Brie Carere: In the front half of the calendar year 2024, we continued to gain profitable market share in the United States and around the world.
Brie Carere: Let's review first quarter top line performance by segment on a year of a year basis. At Federal Express, revenue declined 1%. This was driven by one fewer operating day and a mixed shift toward deferred services. Slightly lower US domestic average daily package volume was offset by higher international export package volume. Yield remained positive, driven by higher base rates and fuel surcharges, with growth partially offset by a tapering of international export demand surcharges. At FedEx Freight, revenue declined to 2%, driven by reduced weight per shipment and priority shipment, lower fuel surcharges in one fewer operating day.
Brie Carere: Let's review first quarter top line performance by segment on a year over year basis.
Speaker Change: At Federal Express, revenue declined 1%. This was driven by one fewer operating day in a mix shift toward deferred services.
Speaker Change: Slightly lower U.S. domestic average daily package volume was offset by higher international export package volume. Yield remained positive, driven by higher base rates and fuel surcharges, with growth partially offset by a tapering of international export demand surcharges.
Speaker Change: At that exprate revenue declined to 2% driven by reduced weight, pershitment, and priority shitments, lower fuel surcharges in one fewer operating day.
Brie Carere: Revenue per shipment, however, was up 2%, demonstrating our continued focus on revenue quality. We continue to leave the LTL mark in total revenue share while maintaining a great revenue per 100 weight.
Speaker Change: Revenue for shipment, however, was up 2% demonstrating our continued focus on revenue quality. We continue to leave the LTL market total revenue share while maintaining a great revenue per hundred-way.
Brie Carere: Turning now to volume trends by service during the quarter. Volumes were pressured, led by weakness in the US market, partially offset by international growth. Across US domestic express services, volumes declined 3% due to a weaker V2B demand environment. Ground volumes were slightly higher, driven by a targeted FedEx Ground economy growth strategy. We continue to focus growth on customers who have both a FedEx Ground Economy and a FedEx Ground Home Delivery requirement. This improves both total yield and customer profitability. International export package volumes increased 9% in the quarter, driven by the international economy, which is largely consistent with recent quarterly trends.
Speaker Change: Turning now to volume trends by service during the quarter, volumes were pressured, led by weakness in the US market, partially offset by international growth.
Speaker Change: Across U.S. domestic express services, volumes declined 3% due to a weaker B2B demand environment.
Speaker Change: Groundbimes were slightly higher driven by a targeted FedEx ground economy growth strategy. We continue to focus growth on customers who have both a FedEx ground economy and a FedEx ground home delivery requirement. This improves both total yield and customer profitability.
Speaker Change: International export package volumes increased 9% in the quarter, driven by international economy, which is largely consistent with recent quarterly trends.
Brie Carere: At FedEx Freight, both weight per shipment and average daily shipment declined 3%. We attribute some of this weakness to a shift as heavier freight to the truckload market due to the excess truckload capacity and associated lower rates.
Speaker Change: At that exprate both weight-per-shipment and average daily shipments declined 3%.
Speaker Change: We attribute some of this weakness to a shift as heavier freight to the truck load market due to the excess truck load capacity and associated lower rates.
Brie Carere: As a reminder, our contract with the United States Postal Service expires later this month, and we will be making network adjustments post expiration. During the quarter, we continue to meet our service commitment, with revenue near contract minimums, as we expected. We are operating in a very competitive but still rational pricing environment. Against this backdrop, we maintain our focus on revenue quality and continue to grow the yield in the first quarter. But at a lower rate than we expected, especially here in the United States. At Federal Express, package yield increased 1% overall, driven by US Priority and international domestic.
Speaker Change: And as a reminder, our contract with United States Postal Service expires later this month, and we will be making network adjustment post expiration. During the quarter we continue to meet our service commitment with revenue near contract minimums as we expected.
Speaker Change: We are operating in a very competitive but still rational pricing environment. Against this backdrop we maintain our focus on revenue quality and continue to grow the yield in the first quarter. But at a lower rate than we expected, especially here in the United States.
Speaker Change: At Federal Express, package yield increased 1% overall, driven by US priority and international domestic.
Brie Carere: Yield for our ground services came in roughly flat, driven by growth and lower-yielding residential volume. As expected, the combined international priority and international economy parcel yield declined, primarily due to the tapering of demand surcharges. At FedEx Freight, revenue per shipment was up 2% as we continued to lean into our revenue quality strategy. Lower weights and decreased fuel surcharge revenue due to the lower fuel prices partially offset strength in base yields. Overall, the LTL pricing environment remains disciplined and rational.
Speaker Change: Yield for our ground services came in roughly flat, driven by growth and lower yielding residential volume. As expected, the combined international priority in international economy parcel Yield declined, primarily due to the tapering of demand surcharges.
Speaker Change: At FedEx Freight, revenue for shipment was up 2% as we continued to lean into our revenue quality strategy.
Speaker Change: Lowering weights and decreased fuel surcharge revenue due to the lower fuel prices, partially offset strength and vacials. Overall, the LTL pricing environment remains disciplined and rational.
Brie Carere: Importantly, we announced several pricing actions that we expect to improve yield in the coming quarters. Last week, we shared plans for a 5.9% general rate increase effective in January. We expect a high GRI capture this year. We have increased our US and international fuel surcharge tables and announced new demand surcharges, which take effect in the coming days and weeks. The broader approach to demand surcharges reflects the requirement to cover our incremental peak costs to deliver an outstanding service during the holiday season.
Speaker Change: Importantly, we announced several pricing actions that we expect to improve yield in the coming quarters. Last week, we shared plans for a 5.9% general rate increase effective in January. We expect a high-gear eye capture this year.
Speaker Change: We have increased our U.S. and international fuel surcharge tables and announced new demand surcharges, which take effect in the coming days and weeks.
Speaker Change: The broader approach to demand surcharge is reflects the requirement to cover our incremental peacauce to deliver an outstanding service during the holiday season.
Brie Carere: Looking at FY25, we now expect revenue to grow at a low single-digit rate. We previously expected low to mid-single-digit revenue growth this fiscal year. At the mid-point of our outlook range, we expect the demand environment to moderately improve as we move through the year, driven by slight recovery in the industrial economy, e-commerce growth, and low inventory levels. We anticipate some improvement in the pricing environment, skewed toward the second half of the fiscal year. We also expect modest improvement in the U.S. domestic ground parcel volume, with the year-over-year increased growing, particularly in the back half of the fiscal year.
Speaker Change: Looking at FY25, we now expect revenue to grow at low single digit rate.
Speaker Change: We previously expected low to mid-single-digit revenue growth this fiscal year.
Speaker Change: At the midpoint of our outlook range, we expect the demand environment to moderately improve as we move through the year, driven by slight recovery in the industrial economy, e-commerce growth and low inventory levels.
Speaker Change: We anticipate some improvement in the pricing environment skewed toward the second half of the fiscal year. We also expect modest improvement in the U.S. domestic ground parcel volume, but the year of year increased growing, particularly in the back half of the fiscal year.
Brie Carere: We expect LTL shipment to reflect positive later in the fiscal year, and our outlook assumes continued strength in Asia export volume demand.
Speaker Change: We expect LTL shipment to reflect positive later in the fiscal year, and our outlook assumes continued strength and age-to-export volume demand.
Brie Carere: The current environment increases our conviction that the market requires a provider with a portfolio with both express and deferred, personal and air freight solutions. Our tri-color strategy positions us to evolve our international business as the market shifts while delivering these services more profitably. In Q1, we established the international network design, and we will continue to optimize our operations to improve profitability. Plant enhancements include both operational and pricing changes, which will drive increased density per flight, lower last mile cost, and improved international dimension capture.
Speaker Change: The current environment increases our conviction that the market requires a provider with a portfolio with both expressed and deferred parcel and air freight solutions. Our Tri-color Strategy positions us to evolve our international businesses, the market shifts, while delivering these services more profitably.
Speaker Change: In two one we establish the international network design and we will continue to optimize our operations to improve profitability.
Speaker Change: Planned enhancements include both operational and pricing changes, which will drive increased density per flight, lower last mile cost, and improved international dimension capture.
Brie Carere: As part of this strategy, in Q1, we launched our new FedEx International Deferred Freight service, which has a slower transit time than International Economy Freight. We will use this extra time to both build dense skids and increase the proportion of volume that is trucked to its final destination.
Speaker Change: As part of this strategy, in Q1, we launched our new FedEx International Deferred Great Service, which has a slower transit time than international economy freight.
Speaker Change: We will use this extra time to both build dense skids and increase the proportion of volume that is tracked to its final destination.
Brie Carere: Looking ahead to peak, I am particularly excited about the great service we will deliver for our customers. This holiday season, consumers will have improved visibility to their shipment via real-time map view. And just in time for peak, we will launch our picture proof of delivery attempt, which will provide customers with a picture of a door tag in the event of a misdelivery. This feature will bolster communication about the delivery attempt and elevate the customer experience.
Speaker Change: Looking ahead to peak, I am particularly excited about the great service we will deliver for our customers. This holiday season, consumers will have improved visibility to their shipment via a real-time map view.
Speaker Change: And just in time for Pete, we will launch our picture proof of delivery attempt, which will provide customers with a picture of a door tag in the event of a misdelivery.
Speaker Change: This feature will bolster communication about the delivery attempt and elevate the customer experience.
Brie Carere: In closing, I am proud of our team's hard work and dedication during a difficult quarter. I am confident our pricing actions, our distinct service advantages, and of course, our world-class teams will position us incredibly well as we head into peak.
Speaker Change: In closing, I am proud of our team's hard work and dedication during a difficult quarter. I am confident our pricing actions, our distinct service advantages, and of course, our world-class team will position us incredibly well as we head into peak. And with that, I'll turn it over to John to discuss the financials in more detail.
John Dietrich: And with that, I'll turn it over to John to discuss the financials in more detail. Thank you, Bri, and good afternoon, everyone. As Raj and Bri both mentioned, our first quarter results reflect a more challenging environment, which pressured Q1 profitability despite our ongoing progress to reduce structural costs through Drive. I'll start with a Q1-adjusted operating income bridge to help explain the quarterly dynamics on a year-over-year basis. Our first quarter results were negatively affected by soft revenue trends, with a global decline in priority volume and growth in deferred volume. This dynamic pressure guard results twofold. First, it constrained yield growth, with total package yield up 1% year-over-year, almost 1% point lower than we expected.
John Dietrich: Thank you, Brie, and good afternoon, everyone.
John Dietrich: As Rajesh and Brie both mentioned, our first quarter results reflect a more challenging environment, which pressured Q1 profitability, despite our ongoing progress to reduce structural cost to drive.
John Dietrich: I'll start with a Q1 adjusted operating income bridge to help explain the quarterly dynamics on a year over your basis.
John Dietrich: Our first court results were negatively affected by soft revenue trend, with a global decline in priority volume and growth in deferred volume.
John Dietrich: This dynamic pressured our results too fold.
John Dietrich: First, it constrained yield growth with total package yield up 1% year over year, almost 1% point lower than we expected.
John Dietrich: Yield was most constrained internationally, with added pressure from more volume in lower yielding services and reduced demand surcharges. Second, the increase in international economy volume was the primary driver of the $124 million increase in purchase transportation expense at Federal Express. In addition, we had one fewer operating day in the quarter, resulting in approximately $170 million.
John Dietrich: Yield was most constrained internationally with added pressure from more volume and lower yielding services and reduced demand surcharges.
John Dietrich: Second, the increase in international economy volume was the primary driver of the $124 million increase in purchase transportation expense at Federal Express.
John Dietrich: In addition, we had one fewer operating day in the quarter, resulting in an approximately $170 million headwind.
John Dietrich: Wint. We were able to partially offset these headwinds and normal inflationary cost pressures with about $390 million of structural cost savings from Drive. As Raj mentioned, we now expect quarterly drive-related savings to build throughout the year. So while our Q1 drive results were solid, they were below expectations from a timing standpoint and will increase sequentially through the remainder of FY25. All these factors combined resulted in an adjusted operating profit decline of $382 million. Moving to a breakdown by segment, at Federal Express, adjusted operating profit decreased $337 million year over year, with $150 million of the decline due to one fewer operating day.
John Dietrich: We were able to partially offset these headwinds and normal inflationary cost pressures with about $390 million of structural cost savings from drive.
John Dietrich: As Raj mentioned, we now expect quarterly drive-related savings to build throughout the year.
Raj Subramaniam: So while our Q1 drivers' results were solid, they were below our expectations from a timing standpoint and will increase sequentially through the remainder of FY25.
Raj Subramaniam: All these factors combined resulted in an adjusted operating profit decline of $382 million.
Raj Subramaniam: Moving to a breakdown by segment.
Raj Subramaniam: At Federal Express, adjusted operating profit decreased $377 million over year, with $150 million of the decline due to one fewer operating day.
John Dietrich: The remaining $187 million reduction was a result of the reduced flow-through associated with the revenue softness and the shift toward deferred service offerings, partially offset by drive savings. Increased demand for international economy and higher rates were the primary drivers of higher purchase transportation costs. Taking the revenue and associated cost together, international economy growth provided a modest benefit to profitability. We expect international economy profitability to continue improving as we execute on tri-color. Additionally, we were expecting to achieve higher revenue and profit flow-through from US premium services in Q1, which did not materialize. As a result, we are adjusting our US domestic network to reflect the softer demand environment.
Raj Subramaniam: The remaining 187 million dollar reduction was a result of the reduced flow through.
Raj Subramaniam: Associated with the revenue softness and the shift toward deferred service offerings, partially offset by drive savings.
Raj Subramaniam: Increased demand for international economy and higher rates were the primary drivers of higher purchase transportation costs.
Raj Subramaniam: Taking the revenue and associated costs together, International Economy Growth provided a modest benefit to profitability.
Raj Subramaniam: We expect international economy profitability to continue improving as we execute on Tri-Color.
Raj Subramaniam: Additionally, we were expecting to achieve higher revenue and profit flow through from U.S. premium services in Q1, which did not materialize.
Raj Subramaniam: As a result, we are adjusting our U.S. domestic network to reflect the softer demand environment.
John Dietrich: At FedEx Freight, while operating profit was down $43 million, nearly half this decline was due to one fewer operating day. Lower weight per shipment and decrease priority volumes continue to be headwinds, partially offset by base yield improvement. In light of our Q1 performance in the current demand environment, we are narrowing our FY25 EPS outlook range. We now expect $20 to $21 in adjusted EPS for FY25 compared to the prior range of $20 to $22. At the top end of our range, we assume an improvement in the pricing environment and the industrial economy. At the low end of the range, we assume the pricing environment continues to be very competitive, and the industrial economy remains challenged.
Raj Subramaniam: At FedEx Freight, while operating profit was down $43 million, nearly half this decline was due to one fewer operating day.
Raj Subramaniam: Lower weight per shipment and decrease priority volumes continue to be headwinds, partially offset by base yield improvement.
Raj Subramaniam: In light of our Q1 performance in the current demand environment, we are narrowing our FY25 EPS Outlook range.
Raj Subramaniam: We now expect $20 to $21 in the adjusted EPS for FY25, compared to the prior range of $20 to $22.
Raj Subramaniam: At the top end of our range, we assume an improvement in the pricing environment and the Industrial Economy.
Raj Subramaniam: At the low end of the range, we assume the pricing environment continues to be very competitive and the industrial economy remains challenged.
John Dietrich: As Bree shared, we now anticipate our revenue growth rate to be in the low single digits. Regarding our expected earnings cadence for the remainder of the fiscal year, the US Postal Service contract termination headwind will begin in Q2 as expected. We plan to reduce our daytime flight hours by approximately 60% with the majority of that reduction taking place in October. We anticipate a negative effect in Q2 from the timing of Cyberweek, which shifts into Q3 this fiscal year. Overall, from an EPS perspective, we expect lower-than-normal seasonality in Q2 and better-than-normal seasonality in the fiscal second half.
Raj Subramaniam: As Brie shared, we now anticipate our revenue growth rate to be in the low single digits.
Brie Carere: Regarding our expected earnings cadence for the remainder of the fiscal year.
Speaker Change: The U.S. Postal Service Contract Termination Headwind will begin in Q2 as expected. We plan to reduce our daytime flight hours by approximately 60% with the majority of that reduction taking place in October.
Speaker Change: We anticipate a negative effect in Q2 from the timing of cyberweek, which shifts into Q3 this fiscal year.
Speaker Change: Overall from an EPS perspective, we expect lower than normal seasonality in Q2, and better than normal seasonality in the fiscal second half.
John Dietrich: Deporting this cadence are ramping, drive savings that we are confident we will deliver in the quarters ahead. Turning to our updated full year operating income bridge, which shows the year-over-year operating profit elements embedded in our full year outlook. This bridge now reflects adjusted operating profit of $7 billion, which is equivalent to $20.50 adjusted EPS, the midpoint of our outlook range. For revenue net of costs, which now includes variable incentive compensation, we expect a $100 million headwind reflecting our lower revenue projection and the shift in the volume mixed dynamic I mentioned earlier. We now forecast a $500 million headwind from international export yield pressure, up $100 million from our prior expectations due to lower than expected base yields and the mixed shift to international economy.
Speaker Change: Supporting this cadence are ramping drive savings that we are confident we will deliver in the quarters ahead.
Speaker Change: Turning to our updated full-year operating income bridge, which shows the year-over-year operating profit elements embedded in our full-year outlook.
Speaker Change: This bridge now reflects adjusted operating profit of $7 billion, which is equivalent to $20.50 a adjusted EPS, the midpoint of our all-agrange.
Speaker Change: for revenue net of costs, which now includes variable incentive compensation. We expect a $100 million headwind reflecting our lower revenue projection and the shift in the volume mixed dynamic I mentioned earlier.
Speaker Change: We now forecast a $500 million headwind from international export yield pressure, up $100 million from our prior expectations, due to lower than expected base yields and the mixed shift to international economy.
John Dietrich: We still expect about $300 million headwind from two fewer operating days, one that was in Q1 and one that will be in Q4, and lastly, we anticipate a $500 million headwind from the U.S. Postal Service contract termination. And as I just mentioned, we remain confident in our ability to offset these headwinds with $2.2 billion from incremental drive savings. Further supporting this revised outlook is our commitment to revenue quality, including our latest demand surcharges, which are broader than they have been historically, and fuel surcharge table adjustments, as Bre mentioned. For the full year at the segment level, we continue to expect adjusted operating margin expansion at Federal Express.
Speaker Change: We still expect about $300 million headwind from two fewer operating days, one that was in Q1 and one that will be in Q4. And lastly, we anticipate a $500 million headwind from the U.S. Postal Service Contract Termination.
Speaker Change: And as I just mentioned, we remain confident in our ability to offset these headwinds with $2.2 billion from incremental drive savings.
Speaker Change: Further supporting this revised outlook is our commitment to revenue quality, including our latest demand surcharges, which are broader than they have been historically, and fuel surcharge table adjustments, as Brie mentioned.
Brie Carere: For the full year at the segment level, we continue to expect a just-ed operating margin expansion at Federal Express.
John Dietrich: At FedEx Freight, assuming the challenging revenue environment persists. We now anticipate a modest decline in operating margin. At the midpoint of this new outlook range, we expect to deliver 15% adjusted EPS growth.
Brie Carere: At FedEx Freight, assuming the challenging revenue environment persists.
Brie Carere: We now anticipate a modest decline in operating margins.
Brie Carere: At the midpoint of this new outlook range, we expected to deliver 15% adjusted EPS growth.
John Dietrich: Moving the capital allocation in Q1, capital expenditures were $767 million. We are on track to invest $5.2 billion in CAPEX for FY25, which is flat versus FY24, and we still anticipate strong adjusted free cash flow this fiscal year. We'll be allocating capital to the highest return segments of our portfolio, and we remain committed to improving our ROIC. Supported by our healthy cash on hand and strong adjusted free cash flow, we completed $1 billion in stock repurchases in Q1 and planned to repurchase an additional $1 billion in Q2. Overall, I remain confident in the transformation initiatives underway, which will translate to improved profitability in FY25 and beyond.
Brie Carere: Moving to capital allocation in Q1, capital expenditures were $767 million.
Brie Carere: We are on track to invest $5.2 billion in CapEx for FY25, which is flat versus FY24 and we still anticipate strong adjusted free cash flow this fiscal year.
Brie Carere: We'll be allocating capital to the highest return segments of our portfolio and we remain committed to improving our ROIC.
Brie Carere: Supported by our healthy cash on hand and strong adjusted free cash flow. We completed $1 billion in stock repair purchases in Q1 and planned to repurchase an additional $1 billion in Q2.
Brie Carere: Overall, I remained confident in the transformation initiatives underway, which will translate to improve profitability in FY-25 and beyond.
Unknown Attendee: And with that, let's open it up for questions. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you were using a speaker phone, please pick up your handset before pressing the keys. To draw your question, please press star, then two. Please limit yourself to one question.
Speaker Change: And with that, let's open it up for questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then one on your touch-tone phone. If you were using a speaker phone, please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question, please press star then too.
Unknown Attendee: At this time, we will pause momentarily to assemble our roster. Foster.
Speaker Change: Please limit yourself to one question. At this time, we will pause momentarily to assemble our roster.
Brian Ossenbeck: The first question today is from Brian Ossenbeck with J.P. Morgan. Please go ahead.
Speaker Change: The End
Speaker Change: The first question today is from Brian Oftenback with JP Morgan. Please go ahead.
Brian Ossenbeck: Good evening. Thanks for taking the question. I just wanted to see if you could give a little bit more color on the negative mix shift. It seems like it's pretty pervasive, but they do a little bit in the US and also some international. And, you know, why do you think you can push through the additional demand surcharges, fuel surcharges, and a GRI.
Brian Oftenback: Good evening, thanks for taking the question.
Brian Oftenback: I just wanted to see if it could give a little bit more color on the negative mixture, it seems like it's pre-prevacent but they do a little bit in the US and also some international and you know, why do you think?
Brian Oftenback: You can push through the additional dimension of charging, fuel surcharges and a GRI. So maybe you can describe those two together because it doesn't seem like it's a instructive environment to keep on raising prices at that level. Thank you.
Brie Carere: So maybe you can square those two together because it doesn't seem like it's an instructive environment to keep on raising prices to that level. Thank you.
Brie Carere: Good afternoon, Brian. It's great. Thank you for the question.
Brie Carere: So from a pricing perspective, you know, obviously we look at our entire and our collective pricing strategy and each individual component, but then, of course, them holistically. We have been setting kind of the market in the yield, and we're very confident in the capture rate from a GRI that we anticipate in January.
Brian Oftenback: Good afternoon, Brian. It's Brie. Thank you for the question. So, from a pricing perspective, you know, obviously we look at our entire and our collective pricing strategy in each individual, component, but then of course, them holistically. We have been studying time of the market in the yield and we're very confident in the capture rate from a GRI that we anticipate in January. From a demand surcharge is perspective. I think we have two different factors that we're looking at here. One, we did make the change for the demand surcharge for the domestic market from an e-commerce perspective. As we have kind of talked about over the last couple of years, demand surcharges are necessary to improve the profitability and make sure that we deliver the outstanding surface that customers expect because of course this is the most important topic.
Brie Carere: From a demand surcharges perspective, I think we have two different factors that we're looking at here. One, we did make the change for the demand surcharge for the domestic market from an e-commerce perspective. As we have kind of talked about over the last couple of years, demand surcharges are necessary to improve the profitability and make sure that we deliver the outstanding service that customers expect because, of course, this is the most important time of the year for retailers. And this year, we had to make a shift in addition to using demand surcharges for the customers that drive the peaking factors.
Brian Oftenback: of the year for retailers.
Brian Oftenback: and this year we had to make a shift in addition to...
Brie Carere: We had to have a more widespread distribution, but we really are still emphasizing on the customers that drive the increase, so we're very confident on the capture from a demand perspective.
Brian Oftenback: using demand surcharges for the customers that drive the peaking factors. We had to have a more widespread distribution, but we really are so emphasizing on the customers that drive the increase, so we're very confident on the capture from a demand perspective. And then fuel, obviously, when we look at the total yield or customer spend from an international perspective, we think that this is the right mix and the right approach to make sure that we are growing our yield. We still believe that the International Service at FedEx is just a great value, and that we're very confident from a capture perspective. When we look at the to your point, the demand distribution, I would say from an international perspective, we knew that there would be the demand surcharges in our actual would behave.
Brie Carere: And then fuel, obviously, when we look at the total yield or customer spend from an international perspective, we think that this is the right mix and the right approach to make sure that we are growing our yield. We still believe that the international service at FedEx is just a great value, and that we're very confident from a capture perspective.
Brie Carere: When we look at the to your point, the demand distribution, I would say from an international perspective, we knew that there would be the demand surcharge in an international would behave a little differently than the peak surcharges here in the United States, and we had anticipated that. And it was actually there was more pressure there in first quarter. We do anticipate that pressure to taper as we go through the year, and what do I mean by that? We can see the strength still and the Asia export market. And we can see the stickiness and demand surcharges, so we've made some changes there. So we do expect that that will improve through the year.
Brian Oftenback: of a little differently than a peak surcharges here in the United States and we hadn't anticipated that and it was actually there was more pressure there in first quarter. We do anticipate that pressure to taper as we go through the year and what do I mean by that. We can see the strength still in the age of export market and we can see the stickiness under man surcharges so we've made some changes there so we do expect that that will improve through the year. So I think that kind of gives you just how we're thinking about the pricing and the mixed drift.
Brie Carere: So I think that kind of gives you just how we're thinking about the pricing and the next shift.
Jordan Alliger: The next question is from Jordan Alliger with golden sex; please go ahead. Yeah, hi, I was wondering, you talked about the lower than normal second quarter, EPS seasonality. Can you do some sense for order of magnitude below normal, and how do you define normal, is it like a percentage of typical failure earnings?
Brian Oftenback: The next question is from Jordan Allager with Goldman Sachs, please go ahead.
Jordan Allager: Yeah, hi, I was wondering, you talked about the lower than normal second quarter EPSC's now, can you give some sense for order of magnitude below normal and how do you define normal as a percentage of typical, full year earnings?
Jordan Alliger: And I guess following that will give confidence on the sharp second half brand. Is it more of the economy? Is it mix? Is it be to be coming back? Thanks.
Speaker Change: And I guess following that will give confidence on the sharp second half gram, is it more the economy, is it mix, is it b to b coming back, thanks.
John Dietrich: Yeah, thanks, Jordan. It's, it's John, and we're really not in a position to give quarterly guidance, but what I can share with you is our expected cadence. So, you know, regarding our expected earnings cadence for Q2, as we talked about, you know, we're going to experience the US Postal Service contract termination. That will be a headwind that begins in Q2, and we also anticipate a negative effect in Q2 from the timing of Cyber Week. So that's going to push into Q3.
John Dietrich: Thanks Jordan, it's John and we're really not a position to give quarterly guidance, but what I can share with you is our expected cadence. So, you know, regarding our expected earnings cadence for Q2, as we talked about, you know, we're going to experience the U.S. Coastal Service Contract Termination.
John Dietrich: That will be a headwind that begins in Q2, and we also anticipate a negative effect in Q2 from the timing of cyberweek.
John Dietrich: So overall, from an EPS perspective, we expect lower than normal seasonality in Q2 and better than normal seasonality in the fiscal second half of the year. And you know, to your question, supporting our view on this is the ramp up in drive savings. As well as the revenue actions, really tangible meaningful revenue actions that we talked about. So, you know, that's why we're focused on certainly the whole year, but that upside in the second half.
John Dietrich: So that's going to push into Q3.
John Dietrich: So, overall, from an EPS perspective, we expect lower than normal seasonality in Q2 and better than normal seasonality in the fiscal second half of the year.
John Dietrich: and to your question, supporting our view on this is the ramp up in drive savings, as well as the revenue actions, really tangible, meaningful revenue actions that Brie talked about.
John Dietrich: So, you know, that's why we're focused on certainly the whole year, but that upside in the second half. Thank you.
Unknown Attendee: Thank you.
Jonathan Chappell: The next question is from Jonathan Chappell with Evercore. Please go ahead.
John Dietrich: The next question is from Jonathan Chappelle with Evercore, please go ahead.
Jonathan Chappell: Thank you.
Jonathan Chappell: Good afternoon. John, kind of sticking with that theme, you know, you noted the 390 in drive in the first quarter was lower than what you anticipated. So can you help us understand why that fell short of your first quarter target.
Jonathan Chappelle: Thank you. Good afternoon. John kind of sticking with that theme. You noted the 390 and drive in the first quarter was lower than what you anticipated. So can you help us understand why that fell short of your first quarter target? And if you can't give the cadence quarterly from here, or at least how much is going to be back halfway to it.
Jonathan Chappell: And if you're not, if you can't give the cadence quarterly from here, or at least how much is going to be back half weighted, what gives us the confidence that the 2.2 is still attainable. We're coming off a quarter when the quarterly target couldn't be hit. Yeah, thanks.
Speaker Change: What gives us the confidence that the two point two is still attainable? We're coming off a quarter when the quarterly target can be hit.
John Dietrich: Thanks, Jonathan. Look, we had a lot of positive momentum coming through Q4 last year, last fiscal year, and into the first quarter. And as many of you may have heard me say in the past with regard to these drive initiatives. Many of them over deliver; some of them under deliver; some of them produce on time; some, perhaps, a little later in time. What I can tell you is there's a very robust drive process.
Speaker Change: Yeah, thanks, Jonathan. Look, we had a lot of positive momentum coming through Q4 of last year, last fiscal year and into the first quarter.
Speaker Change: and as many of you may have heard me say in the past, with regard to these drive initiatives.
Speaker Change: Many of them over deliver some of them under deliver, some of them produce on time, some perhaps a little later in time. What I can tell you is there's a very robust drive process.
John Dietrich: And we feel very strongly that while we're pleased with the 390 that we delivered, we would like to see more based on that positive momentum, but we're committed to the 2.2 billion for the fiscal year. And I'll just also refer to, you know, the 1.8 from last year; we laid that marker down and we delivered on it. I personally, as well as other members of the senior team, sit on the drive initiative sessions which occur every week. So that's really what gives me the confidence: seeing the progress, seeing the commitment of the teams, and frankly, the strong pipeline of initiatives that are delivered every week.
Speaker Change: and we feel very strongly that while we're pleased with the 390 that we've delivered.
Speaker Change: We would like to have seen more based on that positive momentum, but we're committed to the 2.2 billion for the fiscal year.
Speaker Change: and I'll just also refer to, you know, the 1.8 from last year. We laid that marker down and we delivered on it.
Speaker Change: I personally, as well as other members of the senior team sit on the drive initiative sessions which occur every week. So that's really what gives me the confidence seeing the progress, seeing the commitment of the teams.
Speaker Change: and, frankly, the strong pipeline of initiatives that are delivered every week. And so, it's an evolving exercise, but at the same time, we're committed to those numbers. Thank you.
John Dietrich: And so it's an evolving exercise, but at the same time, we're committed to those numbers. Thank you.
Tom Waterwitz: And the next question is from Tom Waterwitz with UBS. Please go ahead. Yeah, good afternoon. Wanted to ask you about some of the pressure from purchase transportation costs that were up quite a bit. I think you alluded to them being driven somewhat by international economy growth.
Speaker Change: The next question is from Tom Waterwitz with UBS. Please go ahead.
Tom Waterwitz: Yeah, good afternoon. I wanted to ask you about some of the pressure from purchase transportation costs. We're up quite a bit. I think you.
Tom Waterwitz: So I mean, I guess the question is, you know, is there something that's a little bit wrong right now with the international economy that you're not making money with it, or it's just like calibrated wrong because it seems like that that's part of the problem with the with PT going up. So yeah, how do we think about IE and also, you know, the equation for PT expense to be more manageable and less of a drag on margin. Thank you.
Tom Waterwitz: Aluded to them being driven somewhat by internationally economy growth. So, I mean, it gets the question is...
Speaker Change: You know, is there something that's a little bit wrong right now with their nationally economy that you're...
Speaker Change: Not making money with it or it's just like calibrated wrong because it seems like that
Speaker Change: That's part of the problem with P.T. going up. Yeah, how do we think about IE and also the equation for P.T. expense to be more manageable and less of a drag on margin? Thank you.
John Dietrich: Sure, thanks, Tom. So yeah, as mentioned, the purchase transportation cost did increase, and really there are three major drivers of this absolute expense increase. First, I'll note that the PT included $130 million of your over your increase, which was from higher freight boarding revenue in our logistics operating segment. This increase in purchase transportation expense was directly related to increase in revenue and logistics.
Speaker Change: Sure, thanks Tom.
Speaker Change: So, yeah, as mentioned, the purchase transportation cost did increase, and really there are three major drivers of this absolute expense increase. And first, I'll note that the PT included $130 million of your over your increase, which was from...
Speaker Change: Higher-Fraight-forwarding revenue in our logistics operating segment, and this increase in purchase transportation expense was directly related to increase in revenue logistics.
John Dietrich: So that's the first element. Second, with regard to Federal Express, most of our PT spend is related to our contracted service provider pick up and delivery surface line haul spend both in the US and internationally, and the remainder at FEC is driven by air commercial line haul. So, in the ordinary course, it's important to note that this is a $4.7 plus billion spend line item and the ordinary course increases of our rates amount to do about $140 million of PT expense increase that was partially offset by the efficiency gains and, of course, one fewer operating day.
Speaker Change: So that's the first element. Second, with regard to federal express, most of our PT spend is related to our contracted service provider pick up in delivery.
Speaker Change: Surface Line Hall Spend both in the U.S. and internationally, and the remainder at Episope is driven by air commercial line hall.
Speaker Change: I'm so in the ordinary course, it's important to note that this is a $4.7 plus $1 billion spend line item
Speaker Change: and the Ordinary Course increases.
Speaker Change: of our in our race. I'm bound to do about $140 million of PT expense increase. That was partially offset.
John Dietrich: So that's a second element. And then finally, the third 120 million of PT expense was additional commercial airline haul capacity, which ties in with your point on the international economy as well as some investment in tri color, but what I can say is that those volumes were contributory to the year of your profit. So a little pressure on margin, but they were contributory and not lost making.
Speaker Change: By the efficiency gains, and of course one fewer operating days.
Speaker Change: So that's the second element, and then finally the third.
Speaker Change: 120 million of PT expense was additional commercial air line haul capacity, which ties in with
Speaker Change: Your Point on the International Economy, as well as some investment in tri-color, but what I can say is that those volumes were contributory to the year of your profit. So, little pressure on margin, but they were contributory and not loss-making.
John Dietrich: So hopefully that gives you some clarity on that.
Daniel Imbro: The next question is from Daniel Embro with Stevens. Please go ahead. Thanks. Good evening, guys.
Speaker Change: So hopefully that gives you some clarity on that.
Speaker Change: The next question is from Daniel Embro, with Stephens, please go ahead
Daniel Imbro: More asked one on the FedEx Freight side. So you guys have been closing locations for a little while. You close the more here on one queue.
Daniel Embro: and thanks. Good evening guys. More F1 on the FedEx, Freight Side. So you guys have been closing locations for a little while. You've closed some more here on one cue. I guess Harry is thinking John about capital deployment.
John Dietrich: I guess how are you thinking, John, about capital deployment towards that segment and actually reinvesting into growth, and then it relates to this future review. Probably understand by year end, we'll get the update, but what are the factors you guys are still digging into as you decide what's the best decision for this asset over time. Thanks. Sure, thanks for that question. Yeah, with regard to freight, it's absolutely part of our capital investment program and our plans. As I mentioned in my remarks, you know, we're looking to invest in those areas of the business that's going to provide.
Speaker Change: Towards that segment and actually reinvesting into growth and then in the release of this future review, probably gonna stand by year end, we'll get the update. But what are the factors you guys are still digging into? As you decide, what's the best decision for this asset over time? Thanks.
Speaker Change: Sure, thanks for that question. Yeah, with regard to freight, it's absolutely part of our capital investment program and our plans as I mentioned in my remarks.
Rajesh Subramaniam: The best ROIC and freight is certainly one of them. We feel really good about our investment on the airside in our fleet. And in fact, that spend is coming down, and that allows us in capital to deploy into some of the other areas of the business, and freight is absolutely one of them. So stay tuned on terms of the details on that, but from a capital standpoint, you know, we're going to continue to manage our capital intensity. I think, you know, from my perspective, on a year-over-year basis, that's a really good news story. We saw both, you know, flat expectations year over year as well as some sequential reductions from Q4 of last year.
Speaker Change: You know we're looking to invest.
Speaker Change: in those areas of the business that's going to provide the best RIC and freight is certainly one of them.
Speaker Change: We feel really good about our investment on the airside and our fleet. In fact, that spend is coming down and that allows us in capital to deploy.
Speaker Change: and to some of the other areas of the business and freight is...
Speaker Change: is absolutely one of them. So stay tuned on terms of the details on that, but from a capital stamp point, you know, we're going to continue to...
Speaker Change: Manage our capital intensity, I think, you know, from my perspective on a year over year basis, that's a really good news story, we saw both, you know, flat expectations year over year, as well as some sequential reductions from Q4 of last year.
Rajesh Subramaniam: And so facilities are definitely a part of it. It's all part of our integrated plan on One FedEx and Network 2.0 as well.
Speaker Change: and so facilities are definitely a part of it, it's all part of our integrated plan on one FedEx and network 2.0 as well.
Rajesh Subramaniam: Daniel Spree, the only other thing that I would like to add is I just wanted to make sure there was an assumption in that question that we were constraining growth at FedEx Freight because of capital allocation; that is not at all the case. Obviously, there's a tough freight environment right now, but Lance, John, and I are very committed to profitably growing the FedEx Freight portfolio. Well, we feel really good about our value proposition. So we are looking always for doctor or expansion in the right markets, and where we make closures, they simply just are not the right place from a growth perspective.
Speaker Change: Hey Daniel, it's free. The only other thing that I would like to add is I just wanted to make sure there was an assumption in that question that we were constraining growth of FedEx freight because of capital allocation that is not at all the case. Obviously, there's a tough freight environment right now, but Lance John and I are very committed to profitably growing the FedEx freight portfolio when we feel really good about our value proposition. So we are looking always for Dr. Or Expansion in the right markets and where we may produce a simple just for a not an right place from a growth perspective.
Chris Wetherbee: The next question is from Chris Wetherbee from Wells Fargo. Please go ahead.
Speaker Change: The next question is from Chris Letterby from Wells Fargo, please go ahead.
Chris Wetherbee: Hey, thanks.
Chris Wetherbee: Just as we're thinking to try to calibrate a little bit appropriately here, John, maybe if you can help us on the second quarter, just is there enough in terms of the walk as you move from one Q to two Q for earnings to be up sequentially? I guess it would maybe be the first question.
Chris Letterby: Hey, thanks. Just as we're thinking to try to calibrate a little bit appropriately here, John. Maybe if you can help us on the second quarter, just...
Chris Letterby: Is there enough in terms of the walk as you move from one Q2Q for earnings to be up sequentially? I guess would maybe be the first question and I guess maybe for Brie just very quickly on the pricing side. Obviously, you can big peak season surcharges that it can be been announced so far. How do you think about sort of the compliance or capture rate around that? And any sort of early indications you're having from your customers on their likely to then kind of, you know.
Chris Wetherbee: And I guess maybe for Bree just a little, very quickly on the pricing side. Obviously, some big peak season surcharges that have come you've been announced so far. I guess how do you think about sort of the compliance or capture rate around that and any sort of early indications you're having from your customers on their the likelihood of then kind of coming through coming to fruition. Yeah, thanks, Chris.
John Dietrich: I'll take the first part of that and then turn it over to Bree.
Speaker Change: Coming to fruition.
John Dietrich: Yeah, but on a sequential basis when we talk about the revenue actions and the pricing actions that Bree talked about, coupled with the drive savings that we expect and are committed to.
Speaker Change: Thanks Chris, I'll take the first part of that and then turn it over to Brie.
Speaker Change: Yeah, but on a sequential basis, when we talk about the revenue actions and the pricing actions that Brie talked about coupled with the drive savings that we expect and are committed to, yeah, we see Definitely the opportunity for sequential quarter over quarter profit improvement.
Brie Carere: Yeah, we see definitely the opportunity for sequential quarter-over-quarter profit improvement. Hi, Chris, from a demand surcharge perspective. Obviously, you know, we've got several years of track record, and also, you know, our large customer peak surcharges are already pre-negotiated. So I feel pretty good from a capture perspective there.
Brie Carere: Hi, Chris from a demand search hards perspective, obviously, you know, we've got several years of track record and also, you know, our large customer peak surcharges are already pre-negotiated, so I feel pretty good from a capture perspective there. We have to your point change methodologies a little bit. I think we've been conservative in our estimate on the capture right there and that is reflected already in the range provided. So I think we've got the right balance. I am optimistic about the capture, because I think customers do understand that there's a lot of pressure on the network, especially this year. If you think about the shopping period for this year, there's five less shopping days, which means there's three less operating days, and so it really is a condensed peak period at night.
Brie Carere: We have to, your point, change methodologies a little bit. I think we've been conservative in our estimate on the capture right there, and that is reflected already in the range provided. So I think we've got the right balance. I am optimistic about the capture because I think customers do understand that, you know, there's a lot of pressure on the network, especially this year.
Brie Carere: If you think about the shopping period for this year, there are five less shopping days, which means there are three less operating days. And so it really is a condensed peak period. And I think our customers understand that and therefore understand the broader approach from a peak demand perspective.
Brie Carere: I think our customers understand that and therefore understand a broader approach from a peak to man's perspective.
Stephanie Moore: The next question is from Stephanie Moore with Jeffries. Please go ahead. Hi, you have to move. Thank you.
Brie Carere: The next question is from Stephanie Moore with Jeffries, please go ahead.
Stephanie Moore: Many of you take a step back here looking at the quarter; clearly, some challenges. I've got your control really that you that you called out impacting the top line, kind of the four year expectations. But if you've got to look at the performance of the quarter, you know, given it was a bit more of a challenging top line environment. You know, still saw a pretty material impact to overall earnings, kind of going quarter to quarter here for Q to one Q. So do you think about your ability to kind of flex your network and adjust to maybe some of these challenges that can pop up in your quarter.
Stephanie Moore: Hi, everyone. Thank you.
Stephanie Moore: May you take a step back here looking at the quarter, clearly some challenges, a failure control, really, that you've called out, impacting the top line, kind of the full year expectations.
Speaker Change: But if you kind of look at the performance of the quarter, you know, given it was a bit more of a challenging top line environment. You know, still saw a pre-material impact to overall earnings kind of going quarter to quarter here for keto-1Q. So, do you think about your ability to kind of flex your network and adjust to?
Stephanie Moore: How would you kind of rate your performance, and if you think back, if there's something that should have been done differently, you know, drive savings, you haven't even called out. But just as again, you can flex your network, maybe just some insight there would be helpful. Thanks.
Speaker Change: and maybe some of these challenges that can pop up in your corner, how would you kind of rate your performance? And if you think back, it's just something that should have been done differently. You know, drive-sadies, you don't have to be in calm-out, but just as again, you can flex your network. Maybe just some of you can say there would be helpful. Thanks.
John Dietrich: Yeah, thanks, Stephanie.
John Dietrich: It's John. Yeah, no, it's a great question, and I think the team does an excellent job of monitoring the demand trends and adjusting as best we can. Pretty dramatic changes, though, when you talk about the mix shift that we experienced. And, you know, volumes were there; volumes were, for the most part, pretty strong. And when you're operating such an expansive network, it takes a little bit of time to adjust, but we're looking at that every day. And frankly, every week in making schedule adjustments.
Speaker Change: Thanks, Stephanie. It's John. Yeah, no, it's a great question and I think the team does an excellent job of monitoring the demand trends and adjusting.
John Dietrich: as best we can. Pretty dramatic changes, though, when you talk about the mixed shift that we experienced.
John Dietrich: and volumes were there, volumes were for the most part, pretty strong and when you're operating such an expansive network, it takes a little bit of time to adjust, but we're looking at that every day and frankly every week and making schedule adjustments.
John Dietrich: And frankly, as we look forward here, as part of the winding down of the postal service contract, I think we're going to have some additional flexibility to continue to create the network of the future, which is going to allow for some additional efficiencies and flexibility. So, you know, we're optimistic about that, but when, again, you're talking about a large network, it's tough to flip a switch, if you will. But I think the team does a great job of monitoring that and adjusting.
John Dietrich: and, frankly, as we look forward here, as part of the winding down of the Pulsoservice Contract, I think we're going to have some additional...
John Dietrich: Flexibility to continue to create the network of the future, which is going to allow for some additional efficiencies and flexibility.
John Dietrich: So, you know, we're optimistic about that, but when again, you're talking about a large network it's tough to flip a switch, if you will, but I think the team does a great job of monitoring that and justing.
Brandon Oglenski: The next question is from Brandon Oglinski with Barclays. Please go ahead. A good afternoon, and thanks for taking the question. Raj, I guess if I listen to the call only, you know, sounds like drive is working. FedEx1 is low in her way. The tri-call initiative is supposedly delivering, you know, profitable market share. But, you know, and I guess it's kind of just feeding off that last question. The reality is, this is one of the lowest profit, you know, first quarters that we've seen since maybe 2009. In EPS is, you know, very much run rating well below your full year range here.
Speaker Change: Thank you for watching!
Speaker Change: Thank you for watching.
Speaker Change: The next question is from Brandon Oglenski with Barclays, please go ahead.
Brandon Oglenski: Hey, good afternoon and thanks for taking the question.
Brandon Oglenski: Rajesh, I guess if I listen to the call only, you know, Tom's like drive is working. FedEx wanted to well underway the Tri-Colour initiative is supposedly delivering, you know, profitable market share.
Speaker Change: But I guess it's kind of just feeding off that last question. The reality is this is one of the wellest prophet, you know, first quarters that we've seen from maybe 2009.
Brandon Oglenski: So, I think it's just, it's really hard to get credibility with investors with these types of numbers. And with costs that are actually up, even though supposedly drive is underway.
Speaker Change: and EPS is a very much run rating well below your full-year range, I think it's really hard to get credibility with investors with these types of numbers.
Rajesh Subramaniam: So, I don't know, can you just give us some concrete examples of what's going to change? I get it. The post office contract is going away. Being taken down daytime fine is a step in the right direction. But incrementally, how do we get to that much higher earnings wrong rate?
Speaker Change: and with costs that are actually up, even those supposedly dry, is under way. So, Andrew, can you just give us some concrete examples of what's going to change? I get it, the post office contract is going away. Things taking down daytime flying is a step in the right direction. But incrementally, how do we get to that much higher early and during the right?
Rajesh Subramaniam: Well, thank you, Brandon, for the question.
Rajesh Subramaniam: I will just start by saying yes, this point that we just talked about before.
Andrew: Well, thank you Brandon for the question I will just start by saying yes, this point that we just talked about before.
Rajesh Subramaniam: The soft industrial economy is clearly weighing on the BDB volumes. And, you know, it was definitely much weaker than we expected. And we have to make adjustments accordingly. And, you know, as you know, shipments linked to industrial production are highest yielding and most profitable. At the same time, e-commerce is resetting and starting to grow again. And we're also seeing some modest improvements in global trade. So, the dynamics of the profile of our traffic changed.
Speaker Change: The soft indiscene economy is clearly weighing on the BTV volumes and...
Speaker Change: and it was definitely much weaker than we expected.
Speaker Change: and we have to make adjustments accordingly. And, you know, as you know, shipment linked to industrial production or a high as yielding and most profitable.
Speaker Change: At the same time, e-commerce is resetting and starting to grow again, and we also seeing some modest improvements in global trade, so the dynamics of the profile of our traffic changed.
Rajesh Subramaniam: Having said all this, you know, we're absolutely focused on what we can control. And this is the mantra that we have preached over the past two years. And we have got real good success that we have demonstrated over several quarters. We have a very, very deep sense of urgency in executing our structural cross-production programs. You can take that to the bank. We have high 11 equality initiatives that Brie talked about. We have profitable growth opportunities that we are lining up as well. And everything, I mean, everything is now being done with the rigor and the discipline of drive.
Speaker Change: Um...
Speaker Change: Having said all this, you know, we're absolutely focused on what we can control.
Speaker Change: and this is the mantra that we have preached over the past two years and we have got real good success.
Speaker Change: that they've demonstrated over several quarters. We have a very, very deep sense of urgency in executing our structural cross-production programs. You can take that to the bank. We have...
Speaker Change: at Avenue Quality Initiatives that Brie talked about.
Speaker Change: We are profitable growth opportunities that we are lining up as well.
John Dietrich: This is a proven method of success. And I'm very confident that our execution will get us to support our FI-25 guidance.
Speaker Change: and everything is now being done with the rigor and the discipline of drive. This is a proven method of success and I'm very confident that our execution will get us to support our F-25 guidance.
John Dietrich: I'm going to turn it to John to talk about any specifically some examples on the drive side and maybe Brie on the growth side. Sure, Raj. Thank you. So, again, across the board, as we look at surface operations, for example, we're going to continue to optimize our staffing and enhance efficiencies across all our segments, frankly. And the implementation of some of our technology tools is going to facilitate not only present day, but also as we look forward into Network 2.0. It's going to be a key element of that on the air network. We're looking at the entire network.
Speaker Change: I'm going to turn it to John to talk about any specifically some examples on the drive side and then we bring on the growth side.
John Dietrich: Thank you. So, again, across the board, as we look at surface operations, for example, we're going to continue to optimize our staffing and enhance efficiencies across all our segments, frankly.
John Dietrich: and the implementation of some of our technology tools is going to facilitate not only present day, but also as we look forward into network 2.0 it's going to be a key element of that.
John Dietrich: I mentioned what we're able to do once we're relieved of the postal service flying. But our air network, there's more we can do in Europe. There's more we can do internationally and matching the size of aircraft, the gauge of aircraft with the demand profiles. There's a lot of great work being done there. Europe is another area where we're going to be able to have, as Raj mentioned in his initial comments. You know, some opportunity there and leveraging not only the drive initiatives. , but as Rajesh mentioned, it's a significant ground operation there, and we're leveraging the expertise of what we do exceptionally well here in the US to facilitate and continue to improve what we're doing in Europe.
Speaker Change: On the air, nothing at work. We're looking at the entire
Speaker Change: Network, I mentioned what we're able to do once we're relieved of the postal service flying. But our air network, there's more we can do in Europe, there's more we can do internationally, and matching the size of aircraft, the gauge of aircraft with the demand profiles, there's a lot of great work.
Speaker Change: being done there. Europe is another area where we're going to be able to have as Raj mentioned in his initial comments, you know, some opportunity there and leveraging, not only the drive initiatives.
Speaker Change: But as Rajesh mentioned, it's a significant ground operation there, and we're leveraging the expertise of what we do exceptionally well here in the US to facilitate and continue to improve what we're doing in Europe.
John Dietrich: And then the progress we're making on GNA is significant, as we're bringing the op-codes together. Just from a procurement standpoint, I mentioned IT; there's a lot of great work being done, of which there's more to do, but we're getting benefit from leveraging our scale on procurement and centralizing that, and just a whole number of initiatives that are going to contribute to the rest of the year, as well as delivering on the 2.2 billion.
Speaker Change: And then the progress we're making on GNA is significant as we're bringing the opcos together.
Speaker Change: It's just from a procurement standpoint. I mentioned IT.
Speaker Change: There's a lot of great work being done of which there's more to do, but we're getting benefit from leveraging our scale on procurement and centralizing that and just a whole number of initiatives that are going to contribute to the rest of the year as well as delivering on the 2.2 billion.
Brie Carere: Brandon, the only thing that I will add, as we talked about the plans that we have for demand surcharges, as well as the fuel surcharge table changes, both the domestic change and the international change, not all of this was planned, or in our original assumptions come June, so that is additive.
Speaker Change: and the only thing that I will add, you know, as we talked about kind of the plans that we have for demands surcharges as well as the fuel surcharge table, changes both the domestic change and the international change, not all of this was planned or in our original assumptions come to that as additive, the impact.
Brie Carere: The impact, there absolutely is impact in Q2, but the majority of the impact will happen in Q3 given just the distribution of peak, and then of course our GRI. So that gives us great confidence because we can forecast this with a lot of granularity. And then I think just additive to what John said, as we look at our European pricing strategy, as I've talked about, we are taking a lot of our tools and capabilities from the US. Yes, into Europe, to improve their profitability and their pricing capture, dimensional capture is significant for Europe, because remember they do have a sizable intra-European freight business, and getting all dimensional capture with both their and large package for parcel is incredibly important to that business. And you can see some of the discipline improving. The international domestic yields did improve, and of course that is a big part of the Europe business, so I'm very confident.
John Dietrich: They're absolutely impacting Q2, but the majority of the impact, you know, will happen in Q3, given just the distribution of peak and then of course our GRI, so that gives us great context or great confidence because we can forecast this with a lot of granularity. And then I think just added it to what John said as we look at our European pricing strategy, as I've talked about we are taking a lot of our tools and capabilities from the US into Europe to improve their profitability and their pricing capture, is significant for Europe because remember they do have a sizable inter-European freight business and getting all dimensional capture with both their and large package for parcel, is incredibly important to that business. And you can see.
John Dietrich: and see some of the discipline improving the international domestic yields did improve, and, of course, that is a big part of the Europe business. So I'm very confident and not only what we've announced, but some of the things that we have coming for Europe.
Brie Carere: And not only what we've announced, but some of the things that we have coming for Europe.
Jason Sidel: And next question is from Jason Sidel with TD Cowan. Please go ahead. Hey, thank you for taking my question. How should we think about the overall macro? I mean, you know, we've seen a very weak industrial environment; you guys seen the point to a weaker parcel volumes that even a trade down. I guess what's in your assumptions going forward for the overall macro, and then as a follow-up. If there is a strike on the East Coast ports and Gulf, how could that potentially impact any air freight volume, should I say.
Speaker Change: And next question is from Jason's side, or with TD Cowan, please go ahead.
Jason: Thank you for taking my question. How should we think about the overall macro? I mean, you know, we've seen a very weak industrial environment.
Jason: and you guys see the point to a weaker parcel volumes that even it trade down. I guess what's in your assumption is going forward for the overall macro. And then as a follow-up, if there is a strike on the East Coast portion goal, how could that potentially impact any air-free button you might see?
Jason Sidel: Okay, thank you, Jason, for the question. The, you know, the clearly this quarter, the industrial economy is weighing our B2B volumes, and the S&P US manufacturing PMI dipped 1.7 points to 47.9, is the lowest reading of the year. And at the same time, e-commerce is resetting and starting to grow again. As of Q2 CY24, e-commerce was 16% of retail sales, which is up from 15.8% in Q1. And the same, and also we are also seeing modest improvement in the global trade data. The trade was up 1.8% euro per year in June and bringing the growth for H1 CY24 is 0.9%.
Jason: Okay, thank you, Jason for the question, you know, the clearly, this quarter, the...
Speaker Change: Industrial Economy is weighing our B2B volumes and the S&P US Manufacturing PMI, dip 1.7.47.9 is the lowest reading of the year.
Speaker Change: And at the same time, E-commerce is resetting and starting to grow again as of Q2, CY24, E-commerce was 16% of retail sales, which is up from 15.8% in Q1.
Speaker Change: and the same, and also, we are also seeing modest improvement in the global trade data. The trade was up 1.8% year over year in June and bringing the growth for H1, CY2040, 0.9%, so this has been the one out of Asia.
Rajesh Subramaniam: So this has been the one out of Asia. Yeah, to give you some idea, the magnitude of the Fed rate cuts yesterday signals the weakness of the current environment. Now, we're not assuming a significant comeback in the industrial environment in the rest of this calendar year. We're cautiously optimistic that industrial production will monitor it moderately improved the second half, but we're dialing in pretty low growth expectations at this point because of the environment.
Speaker Change: To give you some idea, the magnitude of the Fed rate cuts, yes, signals, the weakness of the current environment.
Speaker Change: Now...
Speaker Change: We're not assuming a significant comeback on the industrial environment in the rest of this calendar year.
Speaker Change: We are cautiously optimistic that in the silver action and moderately improves.
Speaker Change: The second half, but we are dialing in pretty low-growth expectations at this point because of the environment we are seeing.
Rajesh Subramaniam: And we are seeing once again, let me just say what it says that, you know, we remain focused on what we can control, and that is really critical for us. The action we're taking on executing on our structural cost savings or our revenue initiatives and growth initiatives are absolutely critical. And we're confident we'll deliver on the guidance that we give you.
Speaker Change: Once again.
Speaker Change: Let me just say what it is, say this
Speaker Change: that, you know, we remain focused on what we can control, and that is really critical for us.
Speaker Change: The action we're taking on executing our structural cost savings or revenue initiatives and growth initiatives are absolutely critical And we are confident we'll deliver on the guidance of the give you And in Jason if I could you had asked about you know the port disruption and my experiences any time you have some port disruption
John Dietrich: And Jason, if I could, you had asked about, you know, the port disruption and my experiences. Anytime you have some port disruption, it generally favors air freight, so we'll be watching that closely. And keep you posted on that.
Jason: It generally favors their freight, so we'll be watching that closely and keep you posted on that.
Conor Cunningham: The next question is from Conrad Cunningham with Milia's research, please go ahead. Mr. Cunningham, is your phone on mute?
Speaker Change: Thank you for watching.
Speaker Change: The next question is from Connor Cunningham with Millios Research, please go ahead.
Speaker Change: Mr. cutting him as your phone on mute.
Speaker Change: The End
Scott Group: Move on to the next question. Is Scott group with Wolf Research? Please go ahead.
Speaker Change: Moving on to the next question, Scott, a group with Wolf Research, please go ahead.
Scott Group: Hey, thanks. Afternoon, guys. I'm in an airport, so sorry about any background noise. Raj, I know we're not through the review yet for LCL, but maybe just what are the puts and takes, the pros and cons, and if you can say, are you, do you feel like it's more or less likely that you move forward with the sale or spin? And while we're on that just topic of like strategic reviews. Is there a point where you think about strategic options for the Europe business if we can't get that the profitability. So Scott, I'll take the first one. You know, as Raj mentioned in his remarks, the assessment is well underway and we're on track to complete it and communicate the outcome of that by the end of the calendar year.
Scott: Hey, thanks, afternoon, guys. I'm in the airport so sorry about any background noise. Raj, I know we're not.
Scott: through the review yet for LPL.
Speaker Change: Maybe just talk, what are the puts and take the pros and cons and if you can say, are you, do you feel like it's...
Speaker Change: More or less likely that you move forward with a sailor's thin and while we're on that just topic of strategic reviews, is there a point where you think about strategic options for the Europe business if we can't get that to profitability?
Scott: So Scott, I'll take the first one. As Raj mentioned in his remarks, the assessment is well underway and we're on track to complete it and communicate the outcome of that by the end of the calendar year.
Rajesh Subramaniam: Okay, and on Europe, let me just say this much: Europe is the top priority for the executive team, and we have a long runway for profit improvement there. In fact, the entire executive committee was in the continent in June to show the support for the team. Our focus is on capturing profitable share while, at the same time, improving our cost profile. In fact, in the fight 24, we saw the financial performance in Europe improve year over year. You're seeing improvement in service levels, the commercial execution, driving profitable share gains, and the service levels have been highest in the past three years.
Speaker Change: Okay, and on Europe, let me just say this is my Europe, it's a top priority for the executive team and we have a long runway for profit improvement there. In fact, the entire Executive Committee was in the continent in June to show the support for the team.
Speaker Change: Our focus is on capturing profitable share while at the same time improving our cost profile.
Speaker Change: In fact, in F-24, we saw the financial performance in Europe improve your year. We're seeing improvement in service levels, the commercial execution, driving profitable share gains, and the service levels have been highest in the past three years.
Rajesh Subramaniam: Now, as we've just talked about before, I mean, Europe is primarily a ground and freight business, and as we are shown in the US, we know how to run a very profitable surface network, and we're taking these learnings from the US and applying it to Europe. Over the past few months, we've done an incredible amount of work in deciding the right physical and technological solutions to enable the streamlined flow of packages and pallets across our inter-European road network. And now this has been put into action. And our U.S.
Speaker Change: Now, as we've just talked about before, I mean, Europe is primarily at ground and freight business, and as we have shown in the US, we know how to run a very profitable surface network, and we are taking these learnings from the US and applying it to Europe.
Speaker Change: Over the past few months, we've done an incredible amount of work in designing the right physical and technological solutions to enable the streamlined full of packages and pallets across our inter-European road network, and now this is being put into action.
Rajesh Subramaniam: domestic surface executive management team is directly involved and intricately involved in the optimization of the European surface network. So with that, we are going to drive improvement in Europe again. So then drive process will improve the station and hub efficiency will optimize the line haul and last mile density. We will continue to improve on our GNA and back office savings as we talked about, you know, implement dimensional pricing or European freight products. And you put in place a revised organization structure, which added expertise from the U.S. surface team. We are confident of this now in Europe, and we are expecting improvement of $600 million over a 523 as part of drive.
Speaker Change: and our U.S. domestic surface executive management team is...
Speaker Change: Directly involved and infregately involved in the optimization of the European surface network.
Speaker Change: So with that, we're going to drive improvement in Europe again, manage to the drive process.
Speaker Change: We'll improve the station and hub efficiency, we'll optimize the line haul and last mile density. We will continue to improve on our GNA and back office savings as we talked about, you know, implement dimensional pricing for European fleet products.
Speaker Change: and the important place of advice, organization structure, which added expertise from the US surface team.
Speaker Change: We are confident of this now in Europe and we are expecting improvement of $600 million over F-23 as part of drive and we are confident that the United States should be in place with water at the helm. So thank you for that question, Scott.
Rajesh Subramaniam: And, you know, we're confident that the right leadership is in place with water at the helm. So thank you for the questions, Scott.
David Vernon: The next question is from David Vernon with Bernstein. Please go ahead.
Speaker Change: The next question is from David Vernon with Bernstein. Please go ahead.
David Vernon: Mr. Vernon, you should line on mute. Hi, sorry about that. I was in an airport. I was trying to keep the background noise down.
Speaker Change: The End
Speaker Change: Thank you for watching!
Speaker Change: Mr. Vernon, if you're lying on mute.
Speaker Change: [inaudible]
David Vernon: Hi, I'm sorry about that, I was in an airport, I was trying to keep the background noise down. So, John, if you think about the cadence of earnings for the remainder of FY-25.
John Dietrich: So, John, if you think about the cadence of earnings for the remainder of FY25, the 1690 or so, can you give us a sense for how much of that is front versus back-end loaded? And then I know you can't really talk much about beyond the fact that the freight reviews are ongoing. But there's been some discussion in the market about, you know, whether the freight margins as they're reported within your company costs would be similar to what they might be kind of coming out if it was a standalone business. Can you just talk conceptually whether the company costs that are charged to the freight business right now sort of accurately reflect what a burden might be if you had to equip it with a Salesforce, for example.
John Dietrich: 1690 or so. Can you give us a sense for how much that is front versus back end loaded?
Speaker Change: And then I know you can't really talk much about the fact that the freight we've used on going. But there's been some discussion in the market about whether the freight margins as they're reported within your company costs would be similar to what they might be kind of coming out if it was a standalone business. Can you just talk conceptually whether the edge company costs that are charged to the freight business right now sort of actually reflect what a burden might be if you had to equip it with a sales force for example? Thank you.
John Dietrich: Thank you. Yeah, thanks, David. Yeah, I'm not going to comment further on freight. There's a comprehensive assessment taking place that takes all those things into account.
Speaker Change: Yeah, thanks David. Yeah, I'm not going to comment further on freight. There's a comprehensive assessment taking place that takes all those things into account.
John Dietrich: And we'll look forward to reporting back on that. Now, with regard to the cadence, as I said, you know, we're expecting Q2. To be, you know, from a seasonal standpoint below seasonality, and it's going to be back half sequentially. We're going to see continued improvement through the year. And that includes our drive initiatives as well as our profitability initiatives.
Speaker Change: and we'll look forward to reporting back on that.
Speaker Change: Now, with regard to the cadence, as I said.
Speaker Change: We're expecting Q2 to be, you know, from a seasonal standpoint below seasonality and it's going to be back half sequentially, we're going to see continued improvement through the year and that includes our drive initiative as well as our profitability initiative. So, thank you.
John Dietrich: So thank you.
Bruce Chan: The next question is from Bruce Chan with Steeple, please go ahead. Hey, good evening, everyone. You made a couple of mentions of the strong Asia export volumes. Can we just maybe level that on how much of that is coming from the big two or three Chinese e-com players and how you're thinking about those volumes heading in the peak season. And then, you know, maybe just to follow up if we think about these players taking down a lot of capacity during peak season and maybe pushing, you know, air freight costs upwards. What's the sort of net impact here with tri-color?
Speaker Change: The next question is from Bruce Chan with Steefall. Please go ahead.
Bruce Chan: Hey, good evening everyone. You made a couple of mentions of the strong Asia export volumes. Can we just maybe level that on how much of that is coming from the big two or three Chinese e-compliers?
Bruce Chan: and how you're thinking about those volumes heading in the peak season. And then maybe just a follow up, but we think about these players taking down a lot of capacity during peak season and maybe pushing, you know, air freight costs upwards.
Bruce Chan: I imagine that, you know, there's some tailwind to the purple tails, but maybe there's continued PT pressure on some of the other colors. So just, you know, maybe some thoughts on how we should think about that.
Speaker Change: What's the sort of net impact here with Tri-Color, I imagine that there's some tailwind to the purple tails, but maybe there's continued PT pressure on some of the other colors. So just maybe some thoughts on how we should think about that.
Brie Carere: Hey, versus Brie, I think I've got it all. So as we think about Asia export for the rest of the fiscal year, we are expecting sort of continued strength based on what we saw in Q1 from a seasonality. Yes, of course, we will have some seasonal improvement in the peak period coming out of Asia, but we think that the volumes will remain very similar kind of seasonally throughout the year. With regards to the big two, we have very productive relationships with them. However, we've also been very strategic in making sure that the relationship is mutually beneficial.
Speaker Change: Hey, Bruce, it's Brie. I think I've got it all. So as we think about Asia export for the rest of the fiscal year, we are expecting sort of continued strength based on what we saw in Q1 from a seasonality. Yes, of course. We often seasonal improvement in the peak period coming out of Asia, but we think that the volumes will remain very similar kind of season only throughout the year. With regards to the big two, we have very productive relationships with them. However, we've also been very strategic in making sure that the relationship is mutually beneficial. What do I mean by that? Obviously, these are two massive shippers coming out of the Asia market and we have found. I would say...
Brie Carere: What do I mean by that? Obviously, these are two massive shippers coming out of the Asia market, and we have found, I would say, small opportunities to work together relative to our overall Asia business. So, you know, we're really happy with the relationship. They are creative, but we have really focused on the parts of their business where they do need speed and/or where we have available capacity coming into the United States. So, we're happy with these relationships. They will not be a significant growth driver for us, and we're not planning on that. We also do not see any sort of material risk coming out of the result either.
Speaker Change: Small opportunities to work together relative to our overall age of business, so, you know, we're really happy with the relationship that they are creative, but we have really focused on the parts of their business, where they do need speed and or where we have available capacity coming into the United States. So, we're happy with these relationships that will not be a significant growth driver for us and we're not planning on that. We also do not see any sort of material risk coming out of peak as a result either. Thank you.
Brie Carere: And I guess I should say, from a tri-color perspective, just to the last part of your question, we absolutely expect that improved tri-color optimization that John has covered earlier will continue to improve all of our international margins. You know, we really have to think about the tri-color being the right strategy for the entire international system form as we anticipate that deferred volumes will continue to be the largest growth driver in the industry.
John Dietrich: And I guess I should say from a tri-color perspective just to the last part of your question. We absolutely expect that improved tri-color optimization that John has covered earlier. We'll continue to improve all of our international margins. You know, we really have to think about the tri-color being the right strategy for the entire international system form, as we anticipate that deferred volumes will continue to be the largest growth driver in the industry. We'll see you next time.
Ken Hexter: The final question today comes from Ken Hexter with Bank of America. Please go ahead.
John Dietrich: The final question today comes from Ken Hexter with Bank of America. Please go ahead.
Ken Hexter: Great. Thanks for excusing me at the end.
Ken Hexter: I guess maybe just there's still, it seems to be a bit of confusion based on a lot of questions coming in. You know, just on the margin outlook, right? So if you're well, I guess one sequentially, John, you did say it's going to be up both sequentially and you're over a year, right? I think you threw the two things together. But if Raj, I guess we're talking about 5% combined margins now. It is the economic economy service, a negative margin business that is dragging you down.
Ken Hexter: Great, thanks for listening to me in the end. I guess maybe just there still seems to be a bit of confusion based on a lot of questions coming in.
Ken Hexter: You know, just on the margin outlook, right? So if you're, well, I guess one to quenchling John, you did say it's going to be up votes sequentially and you're over year right at, I think you threw the two things together. But if Rajesh, I guess we're talking up 5% combined margins now.
Rajesh: is the economic economy service, a negative margin business that is dragging you down. If international is still losing money, you know, does the $600 million you're talking about get you to break even versus.
John Dietrich: If international is still losing money, you know, does the $600 million you're talking about get you to break even versus peers at 20%?
John Dietrich: Maybe you can talk about kind of where does this go once, once you're done with the, with the drive savings, you know, before network to that, but what is the flow through that we can kind of expect on a net basis. So can I'll start with that. I believe I said sequential. I didn't; I don't believe I said year over year, such as that one clarification. And so, again, from we're not going to be providing quarterly guidance, but for modeling purposes, we're anticipating freight margins to be down for the full year due to the challenging US domestic industrial economy, and we do anticipate.
Speaker Change: Here's a 20% maybe you can talk about kind of where does this go once, once you're done with the drive savings, you know, before Network 2.0, but what is the flow through that we can kind of expect on a net basis?
Speaker Change: So, Ken, I'll start with that. I believe I said sequential. I don't believe I said year over year, such as that one clarification.
Speaker Change: So again, we're not going to be providing quarterly guidance, but for modeling purposes, we're anticipating freight margins to be down for the full year due to the challenging U.S. domestic industrial economy and we do anticipate.
Rajesh Subramaniam: Adjusted FEC margins to be up for FY 25 driven by drive and the recent pricing actions, which will support profitable growth. And let me just add, can that, you know, the items that you just talked about and that let me just recap, you know, with network to auto coming into play in the horizon, we're talking about next in the next couple of years. Improvements that we are seeing in Europe and that'll continue on the I try color will be a huge advantages. We as we restructure the system, these are all creative to the FedEx, FedEx story as we move forward here.
Speaker Change: Joseph F.E.C. margins to be up for FY25 driven by drive and the recent pricing actions, which will support profitable growth.
Speaker Change: And let me just ask, Jen, that the items that you just talked about, and that let me just recap, you know, with network 2.0 coming into play in the horizon we are talking about in the next couple of years, improvements of being seen in Europe and that will continue on.
Speaker Change: The Tri-Color will be a huge advantage as we risk structural system.
Speaker Change: These are all a creative to the FedEx story as we move forward here and so as we...
Rajesh Subramaniam: And so, as we complete the $4 billion of drive savings in fiscal 25, we still have significant drivers of profitable expansion for FedEx in even this year and for some time in the future.
Speaker Change: Complete the $4 billion of drive savings in fiscal 25. We still have significant drivers of profitable expansion for FedEx in this year and for some time in the future.
Rajesh Subramaniam: This concludes our question and answer session.
Rajesh Subramaniam: I would like to turn the conference back over to Raj Subramaniam for any closing remarks. Thank you very much. As you know, we faced a very difficult quarter marked by a weaker than expected demand environment. However, because of the execution focus that we have, I remain confident in the value of creation opportunities ahead. We are focused on delivering structural cost reduction to drive and executing our network transformation plans. And this efforts will lead to a more flexible, efficient, and intelligent network.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks.
Speaker Change: Thank you very much. As you know, we face a very difficult quarter marked by legal and expected demand environment.
Raj Subramaniam: However, because of the execution focus that we have, I remain confident in the value of creation opportunities ahead
Raj Subramaniam: We are focused on delivering structural cost reduction to drive and executing our network Transformation plans, and this efforts will lead to a more flexible, efficient and intelligent network.
Rajesh Subramaniam: Once again, let me thank the FedEx team members for their hard work in dedication and delivering outstanding customer experience as we prepare for the peak season. And thank you all for your time and attention today.
Raj Subramaniam: Once again, let me thank the FedEx team members for their hard work, in dedication and delivering outstanding customer experience as we prepare for the peak season. And thank you all for your time and attention today.
Unknown Attendee: The conference is now concluded. Thank you for attending today's presentation.
Unknown Attendee: You may now disconnect.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: [inaudible]