Q2 2025 FedEx Corp Earnings Call
Good day and welcome to the Fedex fiscal year 2025 second quarter earnings call. All participants are in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key.
Followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question you May press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to MS. Jenny Hollander, Vice President of Investor Relations. Please go ahead.
Jenny Hollander: Good afternoon.
Speaker Change: Noon and welcome to Fedex Corporation's second quarter earnings Conference call. The second quarter earnings release, Great assessment results release Form 10-Q, and Stat book are on our website at investors Dot Fedex Dot com this call and the accompanying slides are being streamed from our website.
Speaker Change: During our Q&A session callers will be limited to one question to allow us to accommodate all those who would like to participate.
Speaker Change: Certain statements in this conference call maybe considered forward looking statements as defined in the private Securities Litigation Reform Act of 1095.
Speaker Change: Such forward looking statements are subject to risks uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward looking statements.
For additional information on these factors please refer to our press releases and filings with the SEC. Today's presentation also includes certain non-GAAP financial measures. Please refer to the Investor relations portion of our website at Fedex Dot Com for a reconciliation of the non-GAAP financial measures discussed on this call to the most <unk>.
<unk> comparable GAAP measures joining.
Raj Subramaniam: Joining us on the call today are Raj Subramaniam, President and CEO, Bruce <unk> Executive Vice President and Chief customer Officer, and John <unk> Executive Vice President and CFO now I will turn the call over to Raj.
Speaker Change: Thanks Jenny.
Speaker Change: We are on the home stretch of peak and I want to begin by thanking our team members for their hard work and dedication as we deliver an outstanding holiday season for our customers.
Speaker Change: Today marks an important step in our transformation.
Speaker Change: Following our assessment of Fedex freight, which we announced and commenced back in June.
Speaker Change: We have decided to pursue a full separation of this business, which will result in two industry leading public companies.
Speaker Change: Through the separation, we believe we will unlock significant value for stockholders.
Speaker Change: Allowing for continued commercial operational and technological cooperation between both businesses.
Speaker Change: The separation will also enable both companies to benefit from enhanced focus and competitiveness.
Speaker Change: Fedex This will ensure strong execution of our near and longer term strategic priorities, while preserving the benefits freight and Fedex enjoy from their longstanding connectivity.
Speaker Change: Each independent company will be well capitalized with flexibility to invest in profitable growth, while continuing to return capital to shareholders.
Speaker Change: I would like to provide a brief overview on the compelling value proposition of both businesses starting with Fedex freight.
Speaker Change: We're excited to create a leading LDL pure play the largest carrier by revenue with the broadest network and the fastest transit times.
Speaker Change: Fedex freight has deep relationships with customers, who turn to us.
Speaker Change: Our reliability simplicity and choice of services.
Speaker Change: <unk> has maintained its leading market share position for a long time and increased operating profit nearly 25% on average per year over the last five years, expanding operating margin by approximately 1100 basis points.
Speaker Change: The team's focus on safety facility utilization revenue quality and operational efficiency has driven this performance and these factors will continue to guide <unk> go forward strategy supported by a strong balance sheet.
Speaker Change: As a separate company freight will be better positioned to unlock its full value potential.
Speaker Change: Areas, where we see the greatest opportunity to include.
Speaker Change: First an expanded dedicated LDL salesforce led by Tom Connolly, our new VP of LDL sales was nearly 30 years of experience.
Speaker Change: We've already begun to build out this team and we expect to add more than 300, LTM specialists by the time of separation.
Speaker Change: Second and enhanced LTM specific pricing and invoicing system that drives faster speed to market more into two contracts and is more tailored to this particular market.
Speaker Change: Third improved freight and Fedex network efficiencies focused on accelerating speed improving coverage optimizing touches and lowering our cost to serve.
Speaker Change: And for <unk>.
Speaker Change: <unk> focused automation, which will drive efficiency and reduce outside vendor spend.
Fedex freight portfolio of solutions, which includes both priority and economy services is also well positioned to benefit from the long term market dynamics shaping the <unk> industry.
Speaker Change: As you pursue the separation, we will remain focused on customer experience by sustaining or improving service to our customers.
Speaker Change: To ensure the focus and seamless transition land small will continue to serve as president of Fedex freight as we execute on our separation.
Speaker Change: The long standing cooperation between Fedex and Fedex freight will continue through commercial operational and data and technology agreements to enable seamless continuity of service and capture existing benefits from the relationship.
We have an unmatched customer value proposition.
Speaker Change: With two separate companies, we will ensure commercial collaborations that creates a seamless transition for our customers, especially those that turned to Fedex for all three services.
Speaker Change: From an operational perspective.
Speaker Change: In addition to the network efficiencies I mentioned earlier.
Speaker Change: We will continue to provide the line haul for Fedex strategically, including Tricolor peak season and trade support.
Speaker Change: This requires minimal change as freight already receives a direct financial benefit from supporting Federal Express why our intercompany agreements.
Speaker Change: Additionally, we will implement shared technology and service agreements to facilitate the transition and beyond.
Speaker Change: Through these agreements Fedex will provide freight with tech platforms that effectively connect the two businesses as needed and ensure business community.
Speaker Change: Given the strong reputation and familiarity of our brand we plan for the new company to continue to operate under the Fedex freight name.
Speaker Change: Putting all of this together customers will continue to enjoy the superior service speed and coverage.
Speaker Change: Do you expect from Fedex freight while also maintaining access to the unparalleled global ecosystem of Fedex services.
Now turning to Fedex.
Speaker Change: We pioneered the express transportation industry or 50 years ago and remain the industry leader today.
Speaker Change: Customers choose us for our advantaged value proposition enabled by our service speed and breadth of coverage.
Speaker Change: We delivered nearly 17 million packages each business day to over 220 countries and territories.
Speaker Change: We link more than 99% of the world's GDP.
Speaker Change: We transported approximately two trillion dollars worth of goods every year by connecting 3 million shippers to 225 million consumers.
Speaker Change: In the U S.
Speaker Change: Weekend and rural coverage also serviced competitive advantage.
Speaker Change: And regenerate or one petabyte of data every single day, which provide insights that drive how we run our company more efficiently how we serve our customers.
Speaker Change: Our customers manage their own supply chains.
Speaker Change: The ongoing progress at Fedex gives me confidence that this standalone business will continue to thrive into the future.
Speaker Change: During and post separation, we will continue to focus on delivering significant value to stockholders through our strategic initiatives, which are cementing our leadership position as the world's best transportation and supply chain technology company.
Speaker Change: This includes drive which continues to change the way we work.
Speaker Change: We are on track to deliver $4 billion in savings by the end of FY 'twenty five versus the FY2023 baseline.
Speaker Change: <unk>, which will deliver on the promise of a more efficient network, including one truck one neighborhood.
Speaker Change: Along with consolidated facilities.
Speaker Change: We are targeting $2 billion in savings by the end of FY 'twenty seven.
Speaker Change: Tri color the redesign of our global Air network, which positions us for strategic growth, while improving the efficiency and asset utilization of the entire Fedex system.
Speaker Change: As a separate company Fedex will strengthen <unk>, leading value proposition with an emphasis on delivering outstanding service continuing to provide a differentiated offering and premium segments.
Speaker Change: And remaining focused on higher yielding service.
And.
Speaker Change: Building on our technology ecosystem to create smarter supply chains for all.
Speaker Change: Our capital allocation priorities remain unchanged we.
Speaker Change: We will prioritize.
Speaker Change: Maintaining a strong balance sheet and investment grade profile.
Speaker Change: We will continue to make high return investments in the business, while reducing capital intensity and increasing stockholder returns through buybacks and dividends.
Speaker Change: Looking ahead.
Speaker Change: We expect to execute the separation within approximately 18 months.
Speaker Change: Claude Russ will lead our separation management office, bringing the drive rigor and accountability that we used to run our operations.
Speaker Change: Claude has spent nearly 25 years at Fedex as the former CFO of Fedex freight.
Speaker Change: He is well worst in our freight business and the LTE market dynamics.
Speaker Change: Claude is currently enterprise VP of finance.
Speaker Change: It's been a critical enabler enabler of our drive execution.
Speaker Change: Today, we have shared the outcome of the assessment in our initial plans as we have new details and separation milestones to share we will keep you updated.
Speaker Change: Upon completion. This full separation will result to strong well capitalized industry leaders, Fedex freight, which will benefit from continued strategic and operational competitiveness and more flexible capital allocation.
Speaker Change: And Fedex well positioned to continue executing on our strategic initiatives and pursuit of sustainable profitable growth.
Speaker Change: We are confident the separation is the right strategic decision for Fedex and Fedex freight at this point in our evolution with a clear path ahead to create significant long term stockholder value.
Speaker Change: Importantly for our employees and our customers it's business as usual as we look forward to a seamless transition.
Speaker Change: We are used to navigating change and we will do it while continuing to deliver on the purple promise every single day.
Speaker Change: Now turning to our Q2 results.
Speaker Change: Looking across the enterprise, we delivered sequential improvement both in drive savings in adjusted operating profit.
Speaker Change: At Federal Express Corporation, we achieved strong results on a year over year basis, and greater flow through to the bottom line with adjusted operating profit up 13% on essentially flat revenue.
Speaker Change: We did this despite the challenging demand environment as well as headwinds, we've previously identified including the U S Postal service contract exploration.
Speaker Change: And the timing shift of cyber week.
Speaker Change: This is evidence that our transformation is clearly working.
Similar to last quarter, we experienced weakness in the industrial economy, which negatively affected our BTB volumes, particularly in the U S domestic package and the <unk> markets.
Speaker Change: Continued market pressure, coupled with difficult year over year comparisons weighed on our freight segment in the second quarter.
With <unk> revenues, comprising nearly 60% of our package business of 90% of our LT LDL business.
Speaker Change: We are well positioned for profitable growth when the industrial economy recovers.
Speaker Change: Against this backdrop and in support of evolving market dynamics, we continue to create a more flexible.
Speaker Change: <unk> and intelligent Fedex as we deliver for our customers.
Speaker Change: We achieved drive savings of $540 million in Q2.
Speaker Change: We remain confident that we will deliver our targeted $2 2 billion.
Speaker Change: And incremental savings in FY 'twenty five.
Speaker Change: Our network <unk> rollout continues in the Canadian market integration will be largely complete in early calendar year 'twenty five.
Speaker Change: But the exploration of the U S. Postal service contract is strategically matching capacity with demand and flexing the network as needed to transport packages more efficiently.
Speaker Change: At the end of September will reduce our U S domestic daytime flight hours by nearly 60% and swiftly began to reduce other associated costs.
Speaker Change: And we delivered solid service for our customers. This is always a priority and is especially important during peak.
Speaker Change: I'm very pleased with how our teams are navigating a condensed period between Thanksgiving and Christmas So far during peak they are delivering more packages per day on average while maintaining the high quality shipping experience that our customers expect with.
Speaker Change: With the ground average time in transit at two days in the U S. This peak.
Speaker Change: As we look to the second half of the fiscal year, we remain focused on what is within our control.
Speaker Change: Executing against our transformation initiatives to reduce our cost to serve and drive improved performance.
However, amid continued uncertainty around the demand environment, we are updating our expectations for FY 'twenty five.
Speaker Change: We now expect an adjusted EPS outlook range of $19 to $20 <unk>.
Speaker Change: John will provide more color on the underlying assumptions shortly.
Speaker Change: Turning to drive on past earnings calls I've talked about drive structural cost optimization program.
Speaker Change: The reality is that within Fedex drive has evolved to be so much more.
Speaker Change: It's a new data and technology driven business architecture that has changed how we work across our entire enterprise.
Speaker Change: Introducing more rigor and accountability to every decision, we make leading to a continuous cycle of efficiency and optimization.
Take Europe, where we expect to achieve $600 million in total drive savings by the end of the fiscal year.
Our European business is predominantly a ground based business, we introduced new European leadership over the summer, including as senior operator from our U S surface team.
Speaker Change: In the spirit of one Fedex, we're bringing hub in sort of best practices from U S to Europe, and we have achieved many reason wins.
Speaker Change: Our progress includes revenue growth, which combined with the drive benefits lead to improved performance this quarter.
Speaker Change: This gives us confidence in Europe's near and longer term trajectory.
Speaker Change: Our ability to enhance the financial performance of our European business starts with technology.
Speaker Change: Having implemented a common data platform, we now have a better view of our European network assets and cost to serve using these insights to increase efficiency in the region for.
Speaker Change: For example, with our improved routing and Europe.
Speaker Change: Via the enhanced data flow, we reduce the number of touches on intra European packages. This is not only improving productivity, but also expediting clearance leading to better service.
Speaker Change: We also introduced dimension on pricing at our Charles de Gaulle hub in Paris.
Speaker Change: This enhancement enabled by new and updated technology.
Speaker Change: Seamlessly captures package dimension and weight and then applies integrates applicable surcharges, whereas standardized processes. As a result, we are now better and more accurately compensated for the goods, we transport, especially for the higher margin packages with unique dimensions.
Speaker Change: We will continue to rollout of this capability to other European facilities over the next year.
Speaker Change: Together with non stackable shipment surcharges, we expect this initiative to deliver an operating income benefit of over $50 million in FY 'twenty five.
This is a prime example of our new business architecture translating into improved financial and operational outcomes.
Speaker Change: Looking ahead across Europe.
Speaker Change: The team remains focused on deploying the right value proposition and network design, the digital tools that enhance the customer experience and the right processes to deliver this experience efficiently and effectively.
Speaker Change: Improving our financial performance in Europe is a top priority for our entire leadership team.
Speaker Change: I am very encouraged by our recent progress and confident in the opportunity ahead.
Speaker Change: In October just in time for peak we.
Speaker Change: We celebrated the Grand opening of our new state of the art sorting facility at our Memphis World hub.
Speaker Change: This new sorting facility marks an important milestone in our modernization efforts improving the work experience for our employees and service for our customers, while increasing the efficiency of our hub.
Speaker Change: We also continue to rollout network to auto in select markets in the first half of Q2, and we have now optimized 200 stations to date.
Speaker Change: And we are continuing to execute on tricolor, our international Air Network design strategy, which is improving density and asset utilization across the enterprise while targeting profitable growth.
Speaker Change: Before I close.
Speaker Change: I want to thank the Fedex team once again.
Speaker Change: Approach the end of our peak season.
Speaker Change: They make every Fedex experienced outstanding positioning us well through peak and beyond.
Speaker Change: Now, let me turn the call over to breathe.
Speaker Change: Thank you Raj market conditions remain soft, but our solid service levels unique value proposition and innovative offerings supported our Q2 performance and have positioned us well for a successful peak season.
Speaker Change: Consolidated revenue declined 1% in the quarter driven by the weak industrial economy.
Speaker Change: <unk> manufacturing PMI has indicated a contraction for 24 out of the past 25 months, representing the second longest downturn in U S history.
Speaker Change: Reviewing each segment on a year over year basis now.
Speaker Change: At Federal Express revenue was essentially flat.
Speaker Change: Yields across our services were partially offset by volumes, which declined year over year.
Speaker Change: We again saw increased demand for our lower yielding services.
Speaker Change: All of this demand increase was driven by a shift in customer preferences, particularly with the shift from home delivery to ground economy, but the majority was due to organic demand and not related to trade down between services.
Speaker Change: At Fedex freight lower volumes fuel surcharges and weight per shipment drove the top line decline.
Speaker Change: Year over year comparisons were challenging as some customers one last year from the yellow bankruptcy have since left in search of lower prices.
Speaker Change: That being said, we are ready to capture additional profitable volume when the market returns.
Speaker Change: Turning now to volume trends by service during the quarter.
Speaker Change: Volumes were pressure led by weakness in the U S domestic market, partially offset by strong international growth.
Speaker Change: Across U S. Domestic express services volumes declined 1%, primarily due to weakness in the industrial economy.
Speaker Change: Ground volumes were down 1% as well with the <unk> b to b environment weighing on ground commercial growth.
Speaker Change: While we recognize that e-commerce will continue to outpace <unk> growth in the years ahead, we know that the priority customer base is stable with low rates of churn.
Speaker Change: And the current priority volume weakness reflects the state of the broader global macroeconomic environment.
Speaker Change: Brown residential volumes were adversely affected by a difficult comparison due to cyber week, which occurred in Q2 last year and as in Q3 this year.
Speaker Change: International export package volumes increased 9% in the quarter driven by international economy, which is largely consistent with recent quarterly trends.
Speaker Change: Within SEC average daily pounds were up 10% for international priority freight and 5% for international economy freight.
Speaker Change: This signals early progress from our tricolor strategy to drive profitable growth in the global airfreight market.
Speaker Change: At Fedex freight the soft industrial economy led to weakness in both weight per shipment is down 3% and average daily shipments down 8%.
Speaker Change: The pricing environment is competitive, but I encourage that revenue quality actions are gaining traction.
Speaker Change: Revenue quality remains our highest priority as we ensure that revenue growth is benefiting the bottom line.
Speaker Change: Our federal Express composite package yield increased 1% driven by international priority U S priority home delivery and ground commercial.
Speaker Change: Overall yield for ground services was flat with yield growth at home delivery and ground commercial offset eyeground economy.
Speaker Change: As expected international economy parcel yield declined due to mix and lower weight per shipment.
Speaker Change: Moving to Federal Express freight composite freight yield was up 4% driven by lower postal service volumes tied to the contract exploration and also successful commercial execution in the international export freight market.
Speaker Change: At Fedex freight revenue per shipment was down 4% driven by decreased fuel surcharge revenue due to lower fuel prices and lower weight per shipment.
Speaker Change: We are through a significant part of peak and projected demand surcharge revenue over the season, it will be up year over year.
Speaker Change: I am confident that this pricing strategy is supporting our revenue and profit expectations for the third quarter.
Speaker Change: Looking at the second half of fiscal year 'twenty five we anticipate consolidated revenue consolidated revenue to be up slightly on a year over year basis in both Q3 and Q4.
Speaker Change: While we still have five days ago I am very pleased with December volumes, which are ahead of our forecast we expect our general rate increase of five 9%, which goes live in January to have a very strong capture.
Speaker Change: But I'll express revenue growth in the back half will be supported by ground residential and international economy volume growth driven in Asia and also three European market share acquisition, we continue to see strong commercial traction, particularly in Europe.
Speaker Change: At Fedex freight, we anticipate revenue to decline slightly in the second half due to continued softness in average daily shipments and modest yield improvement.
Raj Subramaniam: As Raj mentioned in January we began and hiring 300 incremental LDL specialists. We believe this increased focus will provide better support for our customers and enable us to accelerate profitable growth.
Raj Subramaniam: As we wrap up the calendar year, it's a great time to remind you of our commercial strategy I am proud to lead the best team in the industry and I am confident that the commercial strategy. We have in place will drive significant value in the years ahead.
Our strategy is in service of our vision to make supply chain smarter for everyone.
Raj Subramaniam: For our customers our mission is to be their unrivaled partner in moving their business forward.
Raj Subramaniam: To deliver on this mission, we will provide a superior digital portfolio and customer experience, it's essentially the purple promise ciudadano powered by the <unk> X platform.
Raj Subramaniam: In fiscal year 'twenty stacks, we will begin the transition of our Fedex Dot com customer base to the <unk> platform.
Raj Subramaniam: This will improve our speed to market and allow us to expose new capabilities like advanced visibility for the millions of Fedex small and medium customers.
Raj Subramaniam: We are designing new experiences for high value segments and planning for above market growth. We are already have a differentiated portfolio. Our target segments are either be for both health care and automotive domestic.
Raj Subramaniam: Domestic E Commerce global Airfreight and of course Europe.
Raj Subramaniam: First <unk>, we have experienced tremendous success in health care, which has been our priority BW vertical.
Raj Subramaniam: But I will express already has a double digit percentage of our revenue in the fast growing $70 billion health care segment.
Raj Subramaniam: And this segment is an important contributor to Fedex profit today.
Raj Subramaniam: This fiscal year, we expect to gain market share in the U S by leveraging our unique portfolio, including cold chain support our new quality management program and Fedex surround monitoring and intervention.
Raj Subramaniam: While most of our health care revenue is U S based the international health care market represents significant opportunity, we will globalize, our portfolio and accelerate revenue growth outside of the United States.
Raj Subramaniam: Automotive is also a massive market and we are focused on what we estimate to be a $10 billion market within this industry that requires premium services critical to automotive supply chain.
Raj Subramaniam: We have created in the automotive vertical and expect to provide new benefit in early fiscal year 'twenty six.
Raj Subramaniam: Our second priority is the U S domestic e-commerce market.
Raj Subramaniam: E Commerce will continue to drive 90% of the market incremental parcel growth in the years ahead.
Raj Subramaniam: Within our U S ground services are superior speed and coverage get Fedex our competitive advantage.
Raj Subramaniam: Not to mentioned Petro proof of delivery, which continues to help us close new business.
Raj Subramaniam: As we execute on networks at auto we will continue to lower our cost to serve which will lead to improved incremental flow through from these volumes.
Raj Subramaniam: Our third target segment, the global Airfreight market. This is a market with significant potential. We currently have a low single digit market share in the $80 billion airfreight market.
Raj Subramaniam: International priority freight already serves as a profit driver for us our tricolor strategy is a necessary condition to competing and winning in this market.
Raj Subramaniam: Commercially we have also made numerous changes to improve our performance. We have created a dedicated sales organization and new customer service model and are investing in the digital experience. The airfreight market is fragmented and the shipping processes are antiquated, it's a market ripe for disruption.
Raj Subramaniam: Fourth is Europe.
Raj Subramaniam: The European parcel market is roughly $130 billion.
And we will continue to grow in the years ahead.
Raj Subramaniam: Our mix of revenue in Europe is already favorable with the majority coming from <unk>.
Raj Subramaniam: As Raj mentioned Q2 revenue in Europe grew nicely with strong execution.
Raj Subramaniam: Drive continues to transform our cost to serve and improve service on the continent, while enabling us to lean into the most attractive parts of the market.
Regardless of the target segment revenue quality and capacity management are critical to growing profitably.
Raj Subramaniam: We have made tremendous progress in yield capture in the last several years a great example, total non standard surcharges are generating a significant year over year benefit of over $180 million annualized.
Raj Subramaniam: This is the result of a new AI image capture process.
Raj Subramaniam: In calendar year 2025, we will accelerate our work on an end to end capacity management system.
Raj Subramaniam: Within <unk> there is a digital twin of the network. We now have real time view of the network capacity globally, we will use AI in our digital quote platform to profitably sell voids at a scale and pace that was previously not feasible.
Speaker Change: I'm very confident about the future as we lean into these commercial priorities I am proud to be part of the best team in the industry and extend my sincere. Thank you to the team members as they deliver for our customers. This peak season, and with that I'll turn it over to John.
John: Thank you Barry.
John: Despite soft market conditions, our Q2 performance demonstrates the team's strong commercial execution and actions to lower our costs are.
John: We sequentially grew adjusted operating profit by approximately $170 million and increased our adjusted earnings per share year over year with the growth driven primarily by our Federal Express segment.
John: And we achieved these results despite revenue declining 1%.
John: Walking through the dynamics of the quarter soft global industrial economy, coupled with the competitive pricing environment constrained our results.
John: The postal service contract exploration.
John: Negatively affected two months of the quarter, resulting in additional operating profit headwind. However.
John: However, our plans to remove costs associated with this contract exploration are on track.
Drive benefits of $540 million offset these headwinds and supported our consolidated year over year adjusted earnings growth.
John: Providing more detail by segment at Federal Express we grew adjusted operating income by $146 million year over year as.
As a result of drive savings base yield improvement and increased international export demand.
John: We achieved this result, despite inflationary pressures in several significant headwinds, including the postal service contract expiration on.
John: $90 million headwind from the cyber week timing shift.
John: And a $20 million headwind from the hurricanes in the southeast U S.
Speaker Change: As Raj and Brie mentioned, we're pleased that in Europe, Our continued network optimization initiatives and strong execution contributed to the profit improvement at Federal Express.
Speaker Change: And the ramping of our tricolor strategy drove higher average daily pounds and yields year over year for Federal Express International freight.
In Q2, we decreased total U S domestic flight hours, 24%.
Raj Subramaniam: Largely due to the 60% reduction in daytime flight hours that Raj mentioned due to the expiration of the postal service contract.
Raj Subramaniam: At Fedex freight while operating profit was down $179 million approximately $30 million of this decline was due to our lapping the gain on sales of multiple facilities in Q2 of FY 'twenty four.
Raj Subramaniam: Consistent with the broader <unk> market.
Raj Subramaniam: Lower average daily shipments fuel surcharges and weight per shipment continued to be a headwind largely due to the soft industrial backdrop.
Raj Subramaniam: These pressures were partially offset by cost management and continued base yield growth.
Raj Subramaniam: Moving to drive and as planned we delivered a sequential improvement and savings in Q2 versus Q1.
Raj Subramaniam: G&A savings of $210 million in Q2 were a significant lever in the quarter as we continued to optimize our I T and back office functions and reduce outside vendor spend.
Raj Subramaniam: Surface savings of $150 million benefited the quarter as we continued to maximize third party rail usage, which lowers our cost to serve on our deferred service offerings.
Raj Subramaniam: And adding the $180 million from Air network in International we achieved $540 million total savings in the quarter.
Raj Subramaniam: As we look to the back half of fiscal 2025, we continue to expect a sequential build and drive savings and we're encouraged by the trends we're seeing in base yields.
Raj Subramaniam: However, the global industrial economy continues to constrained demand on our most profitable priority and commercial services.
Raj Subramaniam: As a result.
Raj Subramaniam: We are revising our FY 'twenty five adjusted diluted EPS outlook to 19% to $20 compared to the prior range of 20% to $21.
Raj Subramaniam: At the top end of our range, we assume revenue was up a low single digit percentage drill.
Raj Subramaniam: Driven by a modest improvement in industrial production.
Raj Subramaniam: Adding to higher flow through from BW demand.
Raj Subramaniam: At the low end of the range, we're assuming low single digit decline in revenue.
Raj Subramaniam: Due to incremental softness in the industrial economy, and the pricing environment.
Raj Subramaniam: Regarding our expected earnings cadence for the second half of the fiscal year.
Raj Subramaniam: At Federal Express, we anticipate Q3 will benefit from ramping drive savings improved.
Raj Subramaniam: Improved top line flow through due to the timing of cyber week.
Raj Subramaniam: <unk> revenue quality actions.
Raj Subramaniam: And the encouraging peak demand that brie talked about however.
However, as a reminder, the postal service headwind is expected to increase in Q3 and will lessen in Q4 as we exit the fiscal year and the Q3 postal service headwinds will more than offset the benefit of the cyber week timing shifts.
Raj Subramaniam: We continue to anticipate drive savings to build incrementally in Q3, and Q4 with a full year total of $2 2 billion.
Raj Subramaniam: At Fedex freight we expect a continued softness in the U S industrial economy, and lower fuel prices to pressure op profit for the remainder of FY 'twenty five.
Raj Subramaniam: Finally, our fourth quarter is typically our strongest earnings quarter of the year. We expect this dynamic to continue despite having one fewer operating day in Q4.
Raj Subramaniam: I would now like to turn to our latest full year adjusted operating income bridge.
Raj Subramaniam: Which shows the year over year operating profit elements embedded in our revised outlook.
Raj Subramaniam: This bridge now reflects adjusted operating profit of $6 6 billion equivalent to $19 50 of adjusted EPS.
Raj Subramaniam: For revenue net of costs, we now expect a $700 million headwind compared to the $100 million FY 'twenty five headwind assumption, we shared last quarter.
Raj Subramaniam: This reflects both our lower revenue assumptions and continued inflationary pressures.
Raj Subramaniam: At the same time, we now forecast a $300 million headwind from international export yield pressure.
Raj Subramaniam: Which is an improvement compared to the prior $500 million estimate.
Raj Subramaniam: This is the result of execution on our revenue quality initiatives internationally.
Raj Subramaniam: We still expect about a $300 million headwind from two fewer operating days one that was in Q1 and one that will be in Q4.
Raj Subramaniam: And lastly, we anticipate a $500 million headwind from the U S postal service contract exploration.
Raj Subramaniam: We remain confident in our ability to offset these headwinds with the $2 2 billion from incremental drive savings.
Raj Subramaniam: Further supporting this revised outlook is our continued commitment to revenue quality as evidenced by our calendar year 'twenty five general rate increase peak surcharges and fuel table price changes announced in recent months.
Raj Subramaniam: For the full year, we continue to expect year over year adjusted operating margin expansion at Federal Express and operating margin contraction at Fedex freight given the challenging industrial production environment.
Raj Subramaniam: At the midpoint of our revised FY 'twenty five outlook.
Raj Subramaniam: We are assuming nine 6% adjusted EPS growth on approximately flat revenues.
This expectation further highlights how drive is fundamentally changing the way we do business.
Raj Subramaniam: We're improving our cost structure to enable us to profitably grow with e-commerce and are well positioned to see significant incremental margins on our priority services once global industrial production improves.
Raj Subramaniam: It remains my highest priority to ensure that we continue to unlock the value that I know exists in our business.
Raj Subramaniam: Moving to capital allocation.
Raj Subramaniam: We remain committed to reducing our capital intensity, while increasing our capital returns.
Raj Subramaniam: In Q2 capital expenditures were approximately $820 million.
Raj Subramaniam: Our planned FY 'twenty five capex remains $5 2 billion.
Raj Subramaniam: Which is flat on a year over year basis, and this will translate into continued strong levels of adjusted free cash flow.
We completed an additional $1 billion in share repurchases in Q2, bringing the year to date total to $2 billion.
Raj Subramaniam: With an additional $500 million of repurchases planned for the fiscal second half.
Raj Subramaniam: I remain confident in our near and long term ability to grow earnings while continuing to deliver strong levels of adjusted free cash flow.
Raj Subramaniam: Which will support increased shareholder returns in the years ahead and.
Raj Subramaniam: And with that let's open it up for questions. Thank.
Raj Subramaniam: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: You're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please limit yourself to one question and at this time, we'll pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Chris Wetherbee with Wells Fargo. Please go ahead.
Okay, great. Thanks, good afternoon.
Speaker Change: Maybe I could just hit on the guidance for a moment. So yes, I think the second quarter results were generally in line with at least what you guys talked about on the last call. So as we think about the dollar cut coming from the back half of the year that John you talked about sort of the industrial production outlook and maybe that's a bit more tempered I guess I also wanted to kind of think about LTE L or the.
Speaker Change: Freight business within that context. It was it was obviously under some pressure here I guess, maybe if you could help break down the moving pieces of the dollar and a little bit more detail and then also talk about the cadence of how that plays out is it a little bit more <unk> weighted or is it a little bit more <unk> do you think things get better by the time, we get to the end of the fiscal year, just kind of curious how to think about that.
Speaker Change: <unk>.
Speaker Change: So thanks, Chris I appreciate the question. So as you know our prior guidance factored in.
Speaker Change: Drive savings as well as the pricing actions that we implemented however, the expected volumes and related revenue just didn't materialize.
Speaker Change: Our updated adjusted EPS range, which is in the 19 to $20 reflects our revised revenue expectations and from a timing standpoint, and while we're not giving quarterly guidance I can tell you that Q3 will benefit from ramping drive savings.
Speaker Change: Improved top line flow through due to the timing of cyber week that we talked about.
Speaker Change: And continued revenue quality actions and as Brie talked about we're seeing encouraging signs from from our peak demand.
Speaker Change: It's important to remember for Q3, though that the USPS headwind is expected to increase in Q3, and then somewhat lessened in Q4.
Speaker Change: But that headwind will more than offset the benefit of the cyber weekend. Just mentioned, we continue to anticipate drive savings to build incrementally in Q3 and Q4.
Speaker Change: And from a Q4 standpoint that is traditionally our strongest earnings quarter of the year and we expect this dynamic to hold so and that's true despite even having one fewer operating day. So hopefully that gives you some more perspective.
Speaker Change: And just.
Speaker Change: The next question will come from Kenn Hoekstra with Bank of America. Please go ahead.
Kenn Hoekstra: Hey, great and congrats on the freight spend obviously long anticipated and a great move to Sienna and value creation, but my question is <unk>.
Speaker Change: You talked a little bit about.
Speaker Change: Peak season here and how it's shifting into third quarter, maybe can you give a little more color on kind of you mentioned the peak was strong is there anything we can read into that in terms of volumes the ability to get price to flow through I guess I'm more focused on the volumes both at ground and express.
Speaker Change: Thanks.
Speaker Change: Yeah, Hey, Ken Great.
Speaker Change: Great question. So from a December perspective, we are pleased I will say it picked up right. After cyber Monday. It was a very strong weekend. We are from a December perspective, I'm pleased volumes are running ahead of forecast and as I mentioned, our peak surcharge capture from an absolute dollar amount will be up year over year. So we do think.
Speaker Change: But December is going to be a very strong month that being said I do want to talk about our top line outlook for the back half of the year, because we do not necessarily believe that December performance is going to carry through in the back half. So as we're thinking about the back half topline outlook, we're looking at some improvement.
Speaker Change: Youre going to see that improvement come in the form of domestic volumes in particular at ground, we think that that will improve in the back half. We do anticipate that Q2 was the trough for Fedex freight from a revenue perspective, and then from an international actually what we think we will see in the back half is that total volume will look.
Speaker Change: A lot like the first half with actually some slight softening in Asia. So we're very pleased with December the execution is going to be great. The capture is going to be great, but we're not yet thinking that this is a signal of more to come in the back half.
Speaker Change: The next question will come from Ari Rosa with Citigroup. Please go ahead.
Hey, good.
Good afternoon, and congratulations on the strategic move here.
So I'm just curious to hear you talk a little bit about kind of how you see the separation playing out just if you could talk about what are the things that kind of need to be done to ensure a smooth transition and then also what are your thoughts on kind of the risk of customer attrition.
Speaker Change: As you separate out the two businesses and just kind of ensuring that customers arent confused by by the separation or maybe see it as a risk to their operations you guys separating out the two businesses. Thanks.
Speaker Change: Yes. Thank you all right I think.
Speaker Change: We are.
Speaker Change: We decided to separate because of the potential to increase shareholder value with Fedex and Fedex freight as far as so we have put in place.
Speaker Change: The separation management office with Claude Russia's ahead to make sure that we earn from getting from here to day one.
Speaker Change: To the points that you made.
Bryan: As Bryan talked about we have appointed a.
Speaker Change: VP of LTM sales and we are going to add 300 sales folks, but in the next year.
To make sure that we pay more directly.
Speaker Change: Deal with the issue that you talked about we're also going to continue to improve our customer experience.
Speaker Change: Important to note also that.
Speaker Change: The Fedex freight company benefits a lot from the association with Fedex.
Speaker Change: And that association, whether it's commercial whether it's operational or are those technological we will have those arrangements in place as we proceed through the separation so.
Speaker Change: I think we will be able to handle handled this transition quite ball.
The next question will come from Jordan Olinger with of course with Goldman Sachs. Please go ahead.
Yeah, Hi.
Speaker Change: Curious if you could give a little more color around the network 2.0 rollout the progression. That's that's plans from here.
Given the experience with Canada or any other areas.
Speaker Change: What do you think has gone, particularly well.
Speaker Change: What has been the more challenging aspect of it all thank you.
Speaker Change: Yes.
And thank you very much John I think.
Speaker Change: Yeah, we may continue to make significant progress on network throughout all we've taken a deliberate approach to rollout.
Speaker Change: Prioritizing service policy.
Speaker Change: Optimized 200 stations, so far and including 130 in Canada.
Speaker Change: And we will complete the rest of the Canada integration early in 2025 with the last major market being Montreal.
No.
Speaker Change: Feature of how we roll this out everywhere everytime enrollment rollout something we take the lessons learned and when we keep applying into the next one and that's working quite well.
Speaker Change: We are continuing to see.
Speaker Change: 10% PND cost reduction where are we.
Speaker Change: We have a fully rolled out to <unk>. So at the end of FY 'twenty five we expect to have approximately 250 stations integrated so hopefully that answers your question Jordan.
Speaker Change: The next question will come from Daniel <unk> with Stephens, Inc. Please go ahead.
Speaker Change: Hey, good evening, everybody. Thanks, taking the questions John and Ross, maybe one on capital allocation and the balance sheet. So first I guess, how do you envision maybe that being davita up or how do we think about target leverage for each business and then John you've worked hard to reduce the capital intensity of both business things like that how do you envision <unk>.
Speaker Change: Our allocation changing at all with this spin enables certain investments previously werent, making or how does that change.
Speaker Change: Sure. Thanks, Daniel Yeah, no, we're not anticipating anticipating any changes in capital allocation.
Speaker Change: We're continuing to be focused on optimizing our existing business insuring.
Speaker Change: Significant adjusted free cash flow is returned to stockholders thats going to be true both before and after the separation.
Speaker Change: We continue to have the programs in place we're going to.
Speaker Change: We've already accomplished a $1 billion of share repurchases in.
Speaker Change: In Q2 for a total of $2 billion for the full year.
Speaker Change: With the remaining $500 million for the remainder of the year. So that's all going to remain in place now in terms of capital allocation.
Speaker Change: Kind of the post separation environment, that's all going to be.
Speaker Change: Something we're going to be reviewing over the coming months and look forward to keeping you updated on the progress of that.
Speaker Change: The next question will come from Jason Seidl with TD Cowen. Please go ahead.
Jason Seidl: Thank you operator.
Jason Seidl: Evening and thanks for taking my questions. Congrats on the spin, it's always nice to see some value creation out there.
Jason Seidl: I wanted to focus a little bit on the commercial agreement you spoke about you mentioned the ones that were with peak health and Drayage. How long are these agreements for and also what about anything on the bundle side.
Jason Seidl: Between the two companies I'm, assuming existing contracts that are offered will be honored.
Jason Seidl: How should we look at the bundle going forward I'm, assuming they'll just go away.
Jason Seidl: That's a great question. So I think we just need to take a step back and just clarify what the customer base at Fedex freight looks like today, So first and foremost obviously fedex freight would not be the powerhouse that it is today without the incredible strategy to take these three networks together put them together put the Fedex brand on them and then to build off.
Jason Seidl: The incredible relationships that Fedex has with customers that is one of our commercial strengths in deep solutions and partnerships and our customer and that has really created a lot of momentum.
Jason Seidl: That being said if you look at the majority of the Fedex freight revenue base today, while the majority of small customers are bundled also the majority of the actual volume at Fedex freight is negotiated on an independent contractor today, we really made a pivot I guess about four or five years ago and recognizing that when we are.
Jason Seidl: Competing in a fragmented market, we had to negotiate the freight business separately. So those contracts will be honored.
Jason Seidl: The vast vast majority of Fedex freight contracts are renegotiated every year. So of course, they will be honored as we go through this process and Thats why we are very confident in the incremental focus from a dedicated sales team. It's important to note. We have about 75 sales reps today that are dedicated to large account that freight. So this will be additive to them as we go through the <unk>.
Jason Seidl: We will look at the small customer strategy and I anticipate that that will be slightly nuanced, because that's where we really have leverage the benefit of the earned discount program at Fedex. There is a common mess that Fedex freight revenue as diluted because of that broad bundle and that is not true actually the way the earned.
Jason Seidl: Count program works is that as they ship more Fedex freight or more LCL, you actually get incremental benefit on your parcel side. So there is some potential benefiting from small customer improvement to where we are there.
Uncomfortable on our commercial strategy and we can execute it.
Speaker Change: I think what I would add to that from a kind of intra company standpoint, it's important to recognize that.
Raj Subramaniam: Through the separate operating companies previously and as Raj mentioned in his comments freight has benefited.
Raj Subramaniam: From providing services to federal express so a lot of agreements already exist that will just be enhanced as we go forward with the separation. So we're not going to have to reinvent the wheel on this.
Speaker Change: The next question will come from Conor Cunningham with Melius Research. Please go ahead.
Conor Cunningham: Hi, everyone. Thank you maybe coming back to the first question just on EPS the change in the guidance. So so Frank was clearly pressured in the quarter is the entirety of the change in the guidance associated with the freight business. It just seems like the underlying core trends and express are actually improving.
Conor Cunningham: If you could just talk a little about the dynamic between the two businesses and that changes overall. Thank you.
Frank: Sure. Thank you Conor so.
Frank: Look there's a number of considerations the pricing actions, we've implemented are supporting our FY 'twenty five earnings growth assumptions for sure.
Frank: However, our revenue expectations remain constrained.
Frank: Due to the demand environment.
Raj Subramaniam: Largely resulting from the continued weakness in the U S industrial economy that Raj talked about.
Speaker Change: U S premium services, even though theres some we've.
Speaker Change: We talked a little bit about peak, but U S. Premium services are expected to remain muted for a while thereby putting pressure.
On op income and margin, we do expect continued growth from our deferred services.
Speaker Change: Which are contributing but with lower margin and lower flow through to the bottom line.
Speaker Change: So really the top end of our range assumes a modest improvement in global industrial production and slight revenue excuse me slight growth in revenue. The low end of the range assumes revenues declined slightly year over year, driven incremental by incrementally softer industrial production and pricing and the midpoint just assumes flattish revenue year.
Speaker Change: Over a year.
Speaker Change: So we're going to be focused on controlling those things. We can we remain confident in drive and those savings will continue to ramp incrementally during the second half.
Those are some of the considerations that went into our outlook and let me just add one other thing Conor I think of.
Speaker Change: At an overarching level I mean, it's been really surprising for me to see the left for the last 25 months that declining ISI them for 24, So it's really.
Speaker Change: It's very difficult to say when that will turn around in the back of been producing.
As a result, if especially in MPC in this environment.
Speaker Change: It says a lot about what we can do and also shows through what happened when that market turns, but we are assuming that the industrial production.
Speaker Change: And the manufacturing continues to be similar to what we saw in the first half or the second half and as was stated earlier.
Speaker Change: 60% of the revenue for the FCC's comes from B to B, while 90% comes from Mpls, So hopefully that helped through the calculations.
The next question will come from Brian <unk> with Jpmorgan. Please go ahead.
Speaker Change: Hey, good evening, thanks for taking the question.
Speaker Change: So I.
Just wanted to come back to you on the general trends for pricing competition, you mentioned, it's still pretty competitive out there you don't see trade down necessarily but it does sound like the deferred side of the business is growing faster. So I just want to see if you can offer a little bit more comment it sounds like the demand surcharges sticking, but what about the other ones that you've put in put into.
Speaker Change: Place to help optimize the network and sort of get that revenue management moving in the direction.
That you would want how are those sticking and how would that progress from <unk> into the back half of the year.
Speaker Change: <unk>.
Speaker Change: Hi, Brian Great question. So the market certainly is competitive I do feel that it's rational from a pricing strategy as we think about.
Speaker Change: The yields in the back half they are going to remain assured that is a function of two things one the economy and to to your point. There is a mix change I do want to emphasize that we do have some customers trading down. We're also as we go to acquire new volume and customers because all of our customers are simply trading loss you know in a downturn you need new customers to be able to.
Speaker Change: <unk> portfolio.
Speaker Change: And so there is growth in new customers in the different portfolio.
Speaker Change: Pricing strategy perspective, I think the team. Despite the economy is executing really well the pressure that we're seeing is on the base rate and then wait we know every time, we're in a downturn wastes are pressured really across all the portfolio, but especially in the freight portfolio and so theres not a lot that the team can do from a weight perspective, what they can do it.
Speaker Change: He really disciplined and getting the surcharges.
Speaker Change: Those surcharges that drive a disproportionate amount of cost. So <unk> is a great example, theyre executing on peak from a large package perspective, nobody moves large packages better than we do and actually we're seeing that's part of what we're seeing in December and a lot of flow through from a parent perspective as you heard not only are we being disciplined from a large package capture on.
Speaker Change: Surcharge, but the dimensional capabilities that we're putting in to get capture is increasing it and then from a rural perspective, we have the best value proposition here in the United States into the rural markets and that matters for a lot of our customers.
Speaker Change: The last three or 4% of their volume they don't want to have to use a different provider and so we're really being disciplined on getting those surcharges. They are contributing at the base rate is really pressured because of the economy I hope that helps.
The next question will come from Brandon <unk> with Barclays. Please go ahead.
Speaker Change: Hey, good evening and congratulations on the spin I know a lot of your shareholders would definitely be happy here too, but I guess Raj can you expand on what Youre doing differently under drive you spoke about how it's.
Speaker Change: Driving the way you do business today versus what you did yesterday, especially in the context of revenue quality, which I think Barry has mentioned many times and maybe even reflecting on losing your largest customer but it looks like your margins have actually come up so what else in the portfolio potentially can you change looking forward.
Speaker Change: Okay, I'm trying to digest that question, Brian, but let me just start with the drive Firstly I think drivers clearly evolved to be how we work in this company have you established.
Speaker Change: The overarching market, leading approach to overall governance that leaves to disciplined execution.
Speaker Change: And.
Sure.
Speaker Change: It's a data driven approach and and a very rigorous and very timely decision, making an ultimate ultimately leads to much much better execution. So this is going to stand us in good stead as the foundation for Fedex to execute as we go forward.
Speaker Change: Second thing is we also adopted a data first digital mindset and solving problems, while creating differentiation in our service offerings. The underlying technological innovation and transformation that we have created is quite profound and that's those are the two things powering our execution and that's also.
Speaker Change: Why you know as we've changed our vision to making supply chain smarter for everyone, who starts by making our own supply chain smarter.
Speaker Change: Of the $4 billion of.
Speaker Change: Drive savings.
Speaker Change: Roughly $1 8 billion would be directly the result of the new technologies that we've put in place. So that's one.
Drive is all about and as we look at what comes next whether as we implement network to auto or whether we improve and expand on tricolor or expand our operations and expand our performance in Europe. All of those are going to be guided through drive and that's what gives us the confidence of execution I hope.
That answers your question.
Speaker Change: Since you asked.
Speaker Change: The next question will come from Bruce Chan with Stifel. Please go ahead.
Bruce Chan: Hey, good evening everyone.
Speaker Change: Echo the sentiments on the spin great to see.
Speaker Change: Somewhat of an oblique follow up here to Bryan's question, there's been some suggestion of a USPS privatization.
Speaker Change: Maybe we could get your thoughts on what that would mean for the competitive environment.
Speaker Change: Our new bonafide competitor or is that maybe introducing a more material profit mandates and thus, making the service more rational so any any.
Speaker Change: Any thoughts and color there would be great.
Speaker Change: Well it is.
Speaker Change: Very early for us to comment on something like that we will keep.
Speaker Change: Uh huh.
Speaker Change: We are monitoring the developments very very closely obviously, but one of the principles that I think it's important to state here is that is for our industry. It.
Speaker Change: It is important that the package delivery business is not subsidized by the U S. Taxpayer I think thats, a very important consideration set and hopefully that'll that'll be the one portal to get adopted here.
Speaker Change: The next question will come from Jon Chapell with Evercore ISI. Please go ahead.
Speaker Change: Thank you and good afternoon.
Speaker Change: Brian I was hoping to ask about tariffs at the narrative that tends to be dominated by some of the sentiment around the group right now.
Much different cost structure than were in the first Trump administration. So just as it relates to terrorists have you heard from your customers about any pull forward and I guess secondly, how would you manage a network at the worthy a surge in demand that may be more of like a short term as opposed to a long term secular shift.
Speaker Change: Yeah. It's a great question. So from a December perspective, there might be a little bit of a pull forward as we talked about we are seeing some some movement both in the freight network and in the parcel network from a from.
Speaker Change: From the ports, so there might be a little bit it's hard to tell right now because we're in the middle of peak, how much of that inventory as well as how much is just consumer demand. So obviously it will be much clearer in January from a reaction perspective, I am really pleased with how quickly the airline team is able to respond right now to Rogers.
Speaker Change: Point, we're doing things differently with drive so as far as being able to adapt I'm very confident as Raj was chaired many times, we're everywhere with customer relationships everywhere, so as customers prepare to prevent them where.
Speaker Change: Where they have to pivot with them. So it's very hard at this point and to protect what might happen under a future administrations and we're not going to try to but we are ready to respond with agility.
Speaker Change: And John Let me just say that as.
Speaker Change: As you can imagine we are in a referendum on global supply chains every single day.
Speaker Change: Especially with the high value of economy, and we see this information from the bottom up and we and the fact that we have a scale network already in place at <unk>, 99% of global GDP is a significant advantage because we can move our capacity much much quicker than manufacturing can move and so it is a.
Speaker Change: We're very agile much different than what we've seen.
Speaker Change: Before and that's.
Speaker Change: One other thing I would say is that as you can imagine.
Speaker Change: As part of our value proposition as an end to end delivery and international that includes customs clearance. So we have the data the expertise insights about what it takes to move package from one country to any.
Speaker Change: Any other country in all the commodities and so this becomes a competitive differentiation and advantage for us as we make our customer supply chain smoke.
Speaker Change: The next question will come from Scott Group with Wolfe Research. Please go ahead.
Speaker Change: Hey, Thanks, good afternoon.
Speaker Change: John You said a couple of times the post office headwind is bigger than the cyber week tailwind, but theres a lot more moving parts and so maybe can you just clarify what you're trying to sort of communicate around Q3 expectations and then on the <unk> spin I just want to understand a couple of things.
Speaker Change: Why is it 18 months seems along and then.
Speaker Change: As we do our math is there any way to just think about if theres much if any of the corporate unallocated costs that we should apply to <unk>. Thank you.
So thanks, Scott So let me start with the 18 months.
Speaker Change:
Speaker Change: From a timing standpoint.
Speaker Change: The 18 months period for a transaction of this magnitude is is really consistent with what is reasonable to expect and we do look forward to keeping you posted on our timing and milestones along the way. So we'll look forward to keeping you posted there.
Speaker Change: With regard to the postal service.
Speaker Change: As I mentioned in my remarks, we are on track to.
Speaker Change: To take out cost as planned with the U S. Postal service contract exploration and we talked about the flight hours taken out roughly 60% of our U S. Domestic daytime flight hours have been taken out and that makes up about 24% of our total daytime hours.
Speaker Change: We're also going after all the other related costs.
Speaker Change: So as I mentioned in my remarks.
Speaker Change: Q3 will be impacted.
Speaker Change: Because it'll be a full three months of impact from the postal service contract and that will start to wind down in Q4, and we will start to see it as a tailwind into FY 'twenty six.
Speaker Change: So that just gives you some some background and perspective, we're pleased with the work that's been done there's more to be doing and taking that cost out. So hopefully that gives you. Some good color on the postal service.
Tom <unk>: The next question will come from Tom <unk> with UBS. Please go ahead.
Hi, yes, good afternoon, thanks for Rod.
Tom <unk>: Getting me on for question I appreciate it.
Tom <unk>: Let's see on the L. T L and thanks for all the detail on the spin it's complex, but it's helpful to hear your thoughts.
Jason Seidl: Raj would you anticipate that you get somewhat more volume focused.
Speaker Change: With <unk> in the future you talked about the 100 basis points of improvement in the margin over a period of time and I think that was driven by some of the change in focus on pricing and a lot of discipline I'm wondering would you anticipate that.
Speaker Change: Hiring a bunch salespeople focus on SMB those things would you potentially be more volume focused and maybe compete harder for freight in the future or is that the wrong way to look at it.
Speaker Change: Hi, Tom it's great. So I think first in the main we're really pleased with the discipline that we've got across the team.
Speaker Change: From a revenue quality perspective, we've made.
Right strides as we look forward, we do see this as an opportunity to play offense.
Speaker Change: We are going to invest commercially and new sales people. We know we've got an opportunity from a different industrial mix and as I mentioned earlier from a weight, while our weight is down right now in our base because of the macro when we look competitively. We think there is some opportunity using technology to fill up the capacity, we know the Fedex freight network right.
Speaker Change: Now can run very comfortably at 100 or 105, so we've got some opportunity to be a little bit more strategic also to look at a three PL market. So answer is yes, we're going to play more offense and we think there's some great things to come.
Speaker Change: The next question will come from David Vernon with Bernstein. Please go ahead.
David Vernon: Hey, thanks for that.
David Vernon: Me in here, so I'm coming back to network Sudano I think Raj you mentioned like 225 stations would be consolidate or something like that by the end of I think it was fiscal 2025 can you give us a sense for kind of what percentage of volume you might've touched with the network integration to date.
David Vernon: And then as you think about the timing of when you know.
David Vernon: The more difficult to tackle major metros may start to be coming in play is this a fiscal 'twenty six fiscal 'twenty seven sort of timeline.
David Vernon: Trying to get a better sense for when the rubber really starts to meet the road so to speak on.
David Vernon: The physical integration of the core operations in the heart of the domestic network.
David Vernon: Yeah. Thank.
David Vernon: Thank you David.
David Vernon: The FY 'twenty five numbers 250 stations integrated.
The big lift is going to be in FY 2006.
David Vernon: So we have a 526 in FY 'twenty seven out of the two big ears, but FY 2016 would be the big lift for us.
David Vernon: <unk>.
Raj Subramaniam: This concludes our question and answer session I would like to turn the conference back over to Mr. Raj Super Mani them for any closing remarks. Please go ahead Sir.
Well, thank you operator.
Raj Subramaniam: Rosing I'd like to thank our team members for delivering this outstanding big season.
Raj Subramaniam: We have five more days to go and I really look forward to a very strong finish let me wish all of you listening on this call a very happy holiday season. Thank you so much.
Raj Subramaniam: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Raj Subramaniam: You are muted.
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