Operator:

Good day, and welcome to the FedEx Fiscal Year 2024 Fourth Quarter Earnings Call. All participants are in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, that this event is being recorded. I would now like to turn the conference over to Jeni Hollander, Vice President of Investor Relations. Please go ahead.

Raj Subramaniam:

Thank you, Jeni. Our fourth quarter performance marks a strong end to a year of successful execution. We delivered year-over-year operating profit growth and margin expansion in every quarter of FY 2024. We lowered our capital intensity, reaching our FY 2025 target of less than 6.5% a year early. With lower CapEx and higher free cash flow, we returned nearly $4 billion to stockholders. And we meaningfully improved our return on invested capital. The entire industry faced a challenging demand environment in FY 2024. Our team focused on what we could control. And as a result, we delivered full year earnings towards the higher end of our original guidance range, up 19% year-over-year on an adjusted basis. We did this despite a decline in revenue compared to our initial growth expectations. We also advanced our network transformation, continuing to rollout Network 2.0 and finalizing the transition to One FedEx, which went into effect June the 1st. We did all of this while maintaining an intense dedication to serving our customers, a relentless pursuit of innovation, and an unwavering commitment to our people, service, profit culture. Our transformation journey will continue in FY 2025 as we build on the team's outstanding progress. Now turning to the quarter in more detail. At the enterprise level, revenue growth inflected positive this order as expected. While we saw modest yield improvement and signs of volume stabilization across segments, we have not yet seen a notable increase in demand. Continued execution of DRIVE, alongside effective expense management enabled year-over-year improvements to adjusted operating income, margins, and earnings per share. Let me pause here to acknowledge and provide context around the team's tremendous Q4 and full-year results. Ground delivered its highest adjusted operating income in company history for both the fourth quarter and the full year. At freight, fourth quarter operating income increased despite significant demand weakness. In fact, because of our strong fourth quarter performance, freight ended fiscal year 2024 with full year operating margin equal to last year's all-time high. Adjusting -- adjusted Express operating margin increased sequentially in the quarter, but declined year-over-year as expected. We continue to take action to unlock the full profit opportunity that exists in this business. DRIVE continues to change the way we work at FedEx. We achieved our target of $1.8 billion in structural costs out in FY 2024, with approximately $500 million from air network and international, $550 million from G&A, and $750 million from surface network. In our air network, structural network transformation and reduced flight hours drove the Q4 savings. Within G&A, we realized procurement savings by centralizing third party transportation, short equipment, and outside service contracts. Our surface network continued to maximize the use of rail. As part of that effort, freight now handles nearly 90% of the [drudge] (ph) volume, up from about 25% just one year ago. Looking ahead, we are firmly on track to achieve our target of $4 billion of savings in FY 2025 compared to the FY 2023 baseline. Let me spend a moment on Europe, where we are executing on the $600 million FY 2025 DRIVE savings target we have shared previously. I would like to thank Karen Reddington for her more than 27 years of service at FedEx, most recently as our Europe Regional President. Couple of weeks ago, Karen announced her impending retirement. We wish her all the very best. Walter Roles, who was an exceptionally seasoned and experienced executive, will become our Europe Regional President on July 1st. Walter has been leading our Europe DRIVE domain since his 2022 inception. I'm confident that under Walter's leadership, the team will continue to advance DRIVE initiatives to support improved performance. John, Brie, other FedEx executives and I were in Europe visiting the team just last week. Our team members there are working with rigor to execute on our efficiency plans and our performance improved on a year-over-year basis. The fourth quarter route optimization, improved thought processes, and productivity gains led our Europe DRIVE domain savings. The actions are already underway for FY 2025. I left the continent encouraged by our progress and with even more conviction in the opportunity ahead. On June 1, we reached an important milestone in our transformation, what we call One FedEx. This is the consolidation of FedEx Express, FedEx Ground and FedEx Services into Federal Express Corporation. There are many benefits. This foundational step improves efficiency and reduces cost. Allows our teams to move with speed and makes it easier for our team members to manage their FedEx couriers. In Q4, we also continued to roll out Network 2.0, including the launch in Canada, our largest market yet. In the first half of FY 2025, we will complete the Canada transition and optimize dozens of additional locations in the U.S. We expect to significantly pick up the pace into FY 2026. Importantly, even as we streamline our structure, we are maintaining our strong service levels, and we continue to offer the widest portfolio of services with the most compelling value proposition for our customers. Our integrated portfolio offering is a long-term driver of sustained profit improvement and a key enabler of our Tricolor network design. We also continue to leverage data to create a more flexible, efficient and intelligent network. In November of 2023, we began introducing a new tool to our contracted service providers in the US to track and drive improvement across key operating metrics tied to demand, safety, service and productivity. This tool is a common platform that we plan to scale globally, providing insights and enabling outcomes that are beneficial to FedEx, our contracted service providers, and our customers. Across the 65% of service providers currently using the platform is already driving service and safety improvements, which are translating into cost savings. Real-time visibility tools like this are critically important as we start to pull packages across our network, irrespective of service offerings. Our FY 2024 results laid a strong foundation as we kick off the new fiscal year. In fiscal 2025, we will continue to execute on our transformation strategy and expect to deliver adjusted EPS growth of 12% to 24%. John will provide more detail on our outlook and the underlying assumptions shortly. With the recent completion of the FY 2025 planning process, we have turned our focus to the next phase of our long-term stockholder value creation plans. As a part of this work, our management team and the Board of Directors, along with outside advisors are conducting an assessment of the role of FedEx Freight in our portfolio structure and potential steps to further unlock sustainable shareholder value. We're committed to completing this review thoroughly and deliberately by the end of the calendar year. We'll conduct this assessment while continuing to focus on customers, team members, and the safety of our operations. Before I close, I want to thank our FedEx team members for their continued commitment to our customers and their focused execution in FY 2024. I'm truly excited about the value creation opportunities in front of us as we continue to win profitable share, execute on our structural cost initiatives and leverage the insight from the vast amount of data we compiled from moving more than $2 trillion worth of goods every single year. We are firmly on track to achieve our $4 billion FY 2025 DRIVE cost savings target compared to the FY 2023 baseline. We expect another $2 billion to follow from Network 2.0. Our Tricolor strategy will improve the efficiency and asset utilization of the entire FedEx system. We expect to continue lowering our capital intensity, improving ROIC, drawing free cashflow, and delivering significant returns to stockholders. We have a clear line of sight for achieving 10% adjusted operating margin on $100 billion revenue. I have never been more confident in our future as we create the world's most flexible, efficient, and intelligent network. With that, let me turn the call over to Brie.

John Dietrich:

Thanks, Brie. For fiscal year 2024, we delivered $6.2 billion of adjusted operating profit, which is nearly a $900 million or 16% year-over-year improvement. Adjusted operating margin expansion of 110 basis points and adjusted EPS up 19%. This is a very strong result in a year where revenue was down 3% or nearly $2.5 billion. We also reduced our capital intensity and achieved our CapEx to revenue target of 6.5% or less, a year ahead of schedule. And with the continued strong cashflow and lower capital intensity, we returned nearly $4 billion to stockholders. These results reinforce that our transformation efforts are taking hold and demonstrate our commitment to creating value for our shareholders. Taking a closer look at our Q4 consolidated performance on a year-over-year basis. Adjusted operating income increased by over $100 million, and adjusted operating margin expanded by 40 basis points. At Ground, the team delivered another strong quarter. Adjusted operating income increased by $133 million, and adjusted operating margin expanded by 130 basis points. This was driven by continued progress on DRIVE, increased yield, lower self-insurance cost, and commercial volume growth. At Freight, operating income increased by $58 million and operating margin improved by 220 basis points, driven by higher yield. Freight's continued focus on revenue quality and cost management has enabled improved profitability, despite the soft demand environment. As directionally expected, adjusted operating income at Express fell by $92 million in the quarter and adjusted operating margin was down 90 basis points. Express results were pressured by lower international yield, higher purchased transportation costs due to the launch of our Tricolor initiative, and a headwind from annual incentive compensation. DRIVE cost reductions and higher US domestic package yield partially offset these pressures. With respect to Europe, earlier this month we announced a planned reduction in the size of our European non-operational staffing to further support Express profit improvement. We expect $125 million to $175 million in annualized benefits beginning in FY 2027 with tailwinds starting later in FY 2026. Decisions like these are never easy, but are a necessary step to improve profitability in the region. In addition to our segment results, our fourth quarter results include a non-cash impairment charge of $157 million relating to our decision to permanently retire 22 Boeing 757 aircraft from our US domestic network, along with seven related engines. These actions, coupled with the previously announced retirement of nine MD-11’s in the quarter, resulted in the permanent removal of 31 jet aircraft from our fleet in FY 2024. This reflects our strategy to continue to right size our air network capacity with demand and unlock additional operating efficiencies. Now turning to our outlook for fiscal year 2025. Our adjusted earnings outlook range for the year is $20 to $22 per share. Let me talk through our key assumptions and variables. Starting with revenue, we expect low to mid-single digit growth, driven by improving trends in US domestic parcel and international export demand. The primary factors that will ultimately determine our revenue growth are

Daniel Imbro:

Hey, good afternoon, everybody. Thanks for taking the question. Maybe I want to ask on the Express side, some margins obviously came in at 2.6 for the year. I think, obviously, it's been a volatile, but with the cost progress in Europe, the USPS contract shift, and then just other moving factors in the core business, can you talk about how you expect those margins to trend, both in the near term and then as we move through fiscal 25? Raj, you gave a little bit of color, I think, on some of the USPS headwinds and timing, but any more detail there and quantifying that would be helpful. Thanks.

John Dietrich:

Yes. No, thanks, Raj. And I think you covered it very well. We are pleased to see the sequential improvement in our margins, but recognize we have more to go. I will also add, there is a significant sense of urgency as well. DRIVE is heavily focused on the Express business. And as Raj mentioned, this is going to be a key part of our margin expansion as we go forward here. And we'll look forward to updating you along the way.

Scott Group:

Hey, thanks. Afternoon. So in the bridge, the $500 million postal headwind for the year, how much of that is in Q2 and what do you think that should mean for sort of like the quarterly earnings cadence. And I guess ultimately how much of the revenue decline with the post office do you think you can fully offset over the next few quarters? And then if I may, just a separate topic, Raj, can you just talk about like the puts and takes of why you would or wouldn't go ahead with an LTL spin? Thank you.

Raj Subramaniam:

Yes, Scott, at this point, all I'm going to say is that, the assessment of FedEx Freight and the company's portfolio structure is well underway. We'll do this analysis thoroughly, deliberately, and when we have something to communicate on this, we'll, of course, do so. Thank you, Scott.

Operator:

And our next question will come from Chris Wetherbee with Wells Fargo. Please go ahead.

Raj Subramaniam:

Okay. Let me start and then give it to John. Honestly, at this point, I'm not going to say much more on this topic than what I've already said. As I said, we are looking at the FedEx Freight and the company's portfolio structure, and we'll do the analysis, and we'll come back to you when we have something to say.

Operator:

And our next question will come from Conor Cunningham from Melius Research. Please go ahead.

Brie Carere:

Sure. Thanks, Conor, it’s Brie. From a macro perspective, we are expecting sort of moderate improvement as we work our way through this fiscal year. As we look at kind of the sub segments of our business from a B2B perspective, we are forecasting the overall B2B market to be around 2% growth. E-commerce will be ahead of that. As you've just seen, you know, e-commerce reset is somewhat done. When we just looked at e-commerce as a percentage of retail and in calendar year Q1, we actually were up 1% year-over-year. So we do like the fundamentals from an e-commerce perspective that will help us here in the United States and around the world. And then from an air cargo perspective, we are looking at the growth in the market around 4%. So, as we work through the year, we do expect there to be modest improvement. We are forecasting that we will have to take some small market share in our profitable target segment. And we feel really good about the plan as we move forward through the year.

Operator:

And our next question will come from Ken Hoexter with Bank of America. Please go ahead.

Raj Subramaniam:

Thank you. Let me start, and then John can weigh in on this. Again, I appreciate the question. We are very pleased, firstly, with the execution and transition to One FedEx, which delivers multiple benefits. Firstly, it's more efficient in reducing overlapping costs, but more importantly, it's much more effective. And we are an organization and makes it also easier for our team members to manage their couriers much better. On the Network 2.0, we continue to make significant progress in this regard. In one of the biggest markets, obviously, the one is Canada. And in first half of fiscal year 2025, we'll complete the Canada transition and then we expect to significantly pick up the pace into FY 2026. John?

Operator:

And our next question will come from Brandon Oglenski with Barclays. Please go ahead.

Raj Subramaniam:

Well, I'll start first and then maybe Brie can comment on it. Absolutely, we are making sure that our customer experience actually gets better. And we now have a very rigorous process to DRIVE, the rigor and discipline that they have established on multiple projects that's associated with this is very critical. So we will follow this very carefully and rigorously and make sure that our customer experience gets better as we go through this process.

Operator:

And our next question will come from Tom Wadewitz with UBS. Please go ahead.

John Dietrich:

Yes. Thanks, Tom. It's John. Yes, the $600 million is very important to DRIVE, and it's one of our top priorities. As Raj mentioned, we were all just in Europe last week, meeting with the team, leadership, not only there to support them but also to stress the urgency of how important this is. And we're looking at every aspect of our operation in Europe. There will be new leadership as well, and we're going to continue to focus not only on the commercial side but some operational efficiencies, including the network. There's also opportunity now that we're in Network 2.0 full swing of implementation to leverage the expertise that John Smith and his team bring on the U.S. side, which is where we're very strong. We'll work in coordination with our team in Europe, something that's been done in the past but we're really taking it to the next level. So I think all those things are key, and we're serious about the $600 million, and we look forward to updating you on our progress in the other category -- the other main categories.

Operator:

And our next question will come from Jon Chappell with Evercore ISI. Please go ahead.

John Dietrich:

Sure. Thanks, Jon. Yes, the $2.2 billion is structural in nature, so from our perspective, that is all within our control. And to the extent the macro environment doesn't cooperate, we're going to keep at it. The $2.2 billion includes projects that are in motion now. And as I've said in prior calls, some of our programs are going to overdeliver, some may underdeliver, but the pipeline is constant. So we're going to adapt aggressively not only to the plans that are in place, but also to the change in the demand environment as well.

Operator:

And our next question will come from Jordan Alliger with Goldman Sachs. Please go ahead.

Brie Carere:

Yes. Great question, Jordan. So as we think about this year's revenue plan, you will see it be largely volume-driven, and it will be driven from a deferred and an e-commerce perspective. As we have just mentioned, we do think e-commerce is going to outpace the B2B growth. To your point, from a speed perspective, we are actually seeing the speed conversation elevate in the market, especially with what we would consider sort of your Tier 1 or your household brand. From a competition perspective, we're absolutely increasing that conversation. Actually, there was increased demand from a speed perspective within it. So I hope that gives you a little bit more clarity, but we do see volume moving throughout the year.

Brian Ossenbeck:

Hi, good afternoon. Thanks for taking the question. So Brie, maybe just to follow up on the demand environment. Can you tell us what you expect from peak season and how the planning and integration and visibility, I guess, more importantly, is going with the major [indiscernible] prior years, where it's been a little bit harder to get maybe the right information and the right assets in place? And then, John, can you just give us any sense, maybe you want to give formal guidance, but any sense in terms of how the DRIVE $2.2 billion will rollout throughout each quarter this year? Thanks.

Raj Subramaniam:

Before John goes, I just want to make sure that on the terms of the volume growth, what we're expecting is low single-digit volume growth for the year.

Operator:

And our next question will come from Bascome Majors with Susquehanna. Please go ahead.

Raj Subramaniam:

Bascome, as I have said before, I'm not going to comment too much more on this. We have already said historically about what value FedEx is part of the network. We'll do the full analysis, and again, like I said, it's going to be very thorough. And when we have something to talk about, we will definitely communicate it.

Ravi Shanker:

Thanks. Good afternoon, everyone. Just want to confirm that the headcount reductions in Europe, were they part of DRIVE? I mean, given that you're going to see the benefit of that in FY 2027, just wondering if that was incremental. And also kind of when you think of the actions you're taking right now, how much of that is commercial kind of operating, kind of revenue-driven versus actual cost cutting in Europe? Thank you.

Operator:

And our next question will come from David Vernon with Bernstein. Please go ahead.

Raj Subramaniam:

Well, David, thank you for the question. As we've heard from several investors and analysts in this regard and obviously, we take input from our shareholders very, very seriously, and so this is the right time in our natural planning calendar. As far as Tricolor goes, no changes. We're moving on ahead. Thank you.

Stephanie Moore:

Hi, good afternoon. Thank you. Maybe a question for Brie here. You noted you're pleased by the pricing capture that you've been able to achieve as noted in light of the current pricing environment. Can you maybe talk a little bit about what you're seeing in the current pricing environment from i.e., competitive standpoint or overall rationality? Thanks.

Operator:

And our next question will come from Bruce Chan with Stifel. Please go ahead.

Brie Carere:

Sure, I'll start with the last question and then I'll certainly turn it to the boss to talk about the overall tariff situation. So from an e-commerce perspective, yes, e-commerce is the largest driver of intercontinental out of China. But actually around the world, both domestically and internationally, we are really proud of how diversified our revenue base is. Yes, we have a great relationship with all of the major e-commerce players out of China. But the benefit of those customers is that they're really large. And so we can partner with them to find the right solution, what makes sense for us as well as what makes sense for them. No one carrier can serve their entire needs, and I think we found a very productive and profitable relationship. And again, I do want to emphasize, very diversified base. Thanks.

Operator:

And this will conclude our question-and-answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day. And welcome to the FedEx Fiscal Year 2024 Third Quarter Earnings Call. All participants are in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Jeni Hollander, Vice President of Investor Relations. Please go ahead.

Raj Subramaniam:

Thank you, Jeni, and welcome to your first earnings call at FedEx. We're happy to have you on board leading the Investor Relations team. Before we discuss the quarter, I would like to congratulate Bob Carter on his upcoming retirement, which we announced last week. He has served as CIO for the last 24 years, leading FedEx in modernizing our IT infrastructure. I'm immensely grateful to Rob for his numerous contributions in establishing FedEx as an innovative, data driven and a people focused company. We thank him for his dedication and service to FedEx over the years and wish him well in his upcoming retirement. Thank you also to the FedEx team for their exceptional work in Q3 by providing superior service for customers and delivering strong results, all while advancing our transformation initiatives. For the third consecutive quarter, we delivered operating income growth and margin expansion in a declining revenue environment. This is a very positive dynamic and a unique one in our industry. It demonstrates clear progress on our transformation and ability to manage what's within our control through DRIVE. We're strengthening our value proposition, improving the customer experience and increasing profitability. This progress supports our long-term goals for sustainable margin expansion, improvements in ROIC and value creation for our stockholders. Now turning to the details. Our transformation is driving continued improvements in adjusted operating income, margins and earnings per share. At the enterprise level, we delivered a 16% improvement in adjusted operating income and adjusted margin expansion of 90 basis points compared to the prior year even as revenue declined 2%. Adjusted operating income growth was driven by continued strength at Ground and improvement at Express. At the segment level, I'm particularly pleased with the results at Ground where adjusted operating income increased 14% on 1% revenue growth and adjusted operating margin improved to over 11% in the quarter. This reflects continued progress controlling expenses and effective yield management, including the ramping benefits from DRIVE. At Freight, the team's continued focus on profitable growth and cost management delivered strong margins and mitigated year-over-year volume challenges. Service levels remain exceptionally high, demonstrating our differentiated execution capabilities. We're also making progress at Express where adjusted operating income increase enabled by our ability to remove structural costs. Looking ahead, we are reaffirming the midpoint of our fiscal '24 adjusted EPS range while narrowing the range to $17.25 to $18.25. In fact, we now expect to deliver adjusted earnings above the midpoint of the range we shared last June despite full year revenue expectations that have deteriorated significantly over the past nine months. This is clear evidence of our ability to execute. Turning to the Express business. It is my top priority to continue to make the changes necessary to align our air network with an evolving demand environment and unlock the full profit opportunity. While we have made progress at Express this quarter, there are several areas we're aggressively working to address in order to accelerate profit improvement; service mix, network utilization, continued inflation and other cost headwinds. First with respect to service mix. We're seeing a clear international market shift towards deferred services. This is tied in part to the rapid growth of many of our e-commerce customers where we are a critical enabler of global trade offering unique solutions for our customers. More on how we are addressing this mix shift shortly. Second, weakness in global trade continues to constrain demand in our international business, which has remained challenged for longer than expected. As such, we're continuing to proactively realign our air network to match capacity to demand. And third, this quarter express experienced over $200 million of inflationary pressure on a year-over-year basis. We offset this with benefits from DRIVE, as well as responsible headcount management. The dynamics I just outlined create significant opportunities for us to improve our network utilization. Last quarter, we introduced our Tricolor strategy. Ultimately, this network design will enable us to improve the efficiency and asset utilization of the entire FedEx system; put the right product in the right network, taking advantage of our continental surface networks in Europe and our market leading FedEx Freight LTL network in the United States; and profitably penetrate new market segments at the right cost structure, including the premium airfreight market. As we move forward, we are managing the execution of Tricolor with the rigor and discipline of DRIVE and this will be a key element to our success. Moving to another area of opportunity. In Europe, we continue to improve our service levels and focus on commercial execution. However, the B2B environment remains challenged. And in this context, we are making progress on DRIVE on track to generate $600 million of savings in fiscal year 2025 and seeking further profit optimization opportunities. As we have mentioned in previous calls, we are also experiencing a continued headwind for the United States Postal Service, which has reduced volume. Despite this volume and revenue draw down, our service obligations to the USPS remain fixed. Express and across the business, DRIVE remains a key enabler of improved profitability both in the near and the long term as we change the way we work and identify areas for structural cost reduction. In Q3, we delivered $550 million of benefits from DRIVE, offsetting the impact of revenue declines and cost pressures. I'm encouraged by the progress across all three categories. This includes $290 million in our surface network, $110 million of savings in air network and international operations, and $150 million of G&A. Given the progress we have made year-to-date, we will deliver on our goal of $1.8 billion in permanent cost reduction benefits from DRIVE this fiscal year and are highly confident on the additional $2.2 billion in fiscal year '25. The work we are doing with DRIVE is also helping advance planning for Network 2.0. This quarter, we rolled out our new surface operations leadership structure. Under this new structure, leaders and their teams will be responsible for all Express and Ground package operations and facilities in their respective divisions, regions and districts. This for enhance operational execution and offer greater insights into the package business overall with accountability at all levels. More broadly, we have now implemented Network 2.0 in over 50 locations with dozens more to follow in calendar 2024, all while maintaining outstanding service. And as a reminder, we will begin the rollout of Canada in April and expect to complete this transition by October of 2024. And as part of our transformation, we are on track to complete the consolidation of FedEx operating companies into one streamlined and simplified organization, creating efficiencies as we build a stronger, more profitable enterprise. In June 2024, FedEx Express, FedEx Ground and FedEx Services, will consolidate into Federal Express Corporation. The work we're doing to create a more flexible, efficient and intelligent network is translating into direct improvements in our customer offering and profitability. When severe weather hits, it can cause a domino effect of delays and reduced service levels across our network. While we have always used data and analytics to assess the effect of weather events, our new weather contingency playbook developed by our planning, engineering and Dataworks teams enhances the process by leveraging predictive capabilities to proactively divert storm bound volumes across our networks. By combining the power of digital insights and predictive analytics with our physical network, we effectively mitigated the impact of the January winter storm that hit our Express hub in Memphis by shifting Memphis bound Express volume to ground our freight at the origin location. Despite this year's event having a longer impact to Memphis operations when compared to the weather event in February 2023, our network recovery was twice as fast. This quarter, we also announced a significant initiative, FDX, the fully integrated data driven commerce platform that connects the entire customer journey from demand to returns. It will provide real time visibility to help our customers optimize and grow their business, leveraging our analytical capabilities and data from the 15 million packages we deliver every day. I'm excited to have Shriram Krishnasamy serving as Chief Digital and Information Officer effective July 1st. His proven track record of driving optimization and innovation for our business through data and insights, combined with his deep knowledge of the network, will be critical to moving FedEx forward as we become a data driven digital first company. As I look across the business and these financial results, there are clear signs of progress on our transformation. Our strategy is generating results and we are well placed to maintain our leadership position while delivering improving financial outcomes. Together, we remain focused and committed to our long term goals, supporting the creation of significant long term value for our stockholders. With that, let me turn the call over to Brie.

John Dietrich:

Thanks, Brie. Our third quarter results reflect ongoing progress on our DRIVE initiatives, as well as our continued focus on service and revenue quality. As a result of these efforts, we delivered operating income growth and margin expansion for the third quarter in a row despite declining revenue in a challenging market environment. Taking a closer look at our performance in the quarter on a year-over-year basis and at the enterprise level, adjusted operating income increased by $192 million and adjusted operating margin expanded by 90 basis points. At Express, adjusted operating income increased by $134 million and adjusted operating margin expanded 130 basis points. The benefits of DRIVE initiatives and an additional operating date more than offset lower revenue. At Ground, the team delivered another quarter of strong results. Adjusted operating income increased by $120 million and adjusted operating margin expanded by 140 basis points due to cost reductions and yield improvement. Despite slightly lower volumes and in an inflationary environment, ground cost per package was flat year-over-year with lower line haul expenses and improved dock productivity offsetting higher first and last mile costs. And at Freight, while operating margin remained strong operating income declined by $46 million and operating margin declined by 170 basis points, driven by lower fuel surcharges, reduced weight per shipment and lower shipments. These results also reflect the lapping of a $30 million facility gain last year, partially offset by the benefit of an additional operating day during the quarter. Looking at the quarter overall, weather had an immaterial year-over-year effect on profitability. Before turning to the outlook, I'd like to spend a few moments updating you on our cost reduction initiatives, including DRIVE and more specifically G&A. As an initial matter and as part of responsible headcount management, we have reduced our workforce by nearly 22,000 over the last year and expect additional opportunities in the future as we move forward with our transformation. Within G&A, we continue to make significant changes to how we approach areas like procurement and technology, so that we are a more efficient digitally led organization. In addition, global functional alignment provides savings opportunities. I'm pleased that we have achieved $350 million of G&A savings year-to-date, including $150 million in the third quarter. Taking a closer look at sourcing and procurement, we've continued to evolve the sourcing and procurement function from a segregated and regional structure to a centralized global organization that will manage most third party spend across the entire enterprise. With new leaders in place, we're developing new category strategies and have already identified about 20 discrete categories that will manage centrally in cooperation with functional leaders. By implementing these new strategies at the enterprise level, we'll have tighter spend oversight, we'll better leverage our scale and buying power and generate significant cost savings. Overall, I'm very pleased with our enterprise wide drive progress this quarter and we will deliver $1.8 billion in savings for the full fiscal year. Now turning to our fiscal year outlook, and as Raj shared earlier, based on our performance year-to-date and our current view of the rest of the year, we are reaffirming the midpoint of our adjusted EPS range, while narrowing our outlook from the prior range of $17 to $18.50 to $17.25 to $18.25. At the midpoint of the narrowed range, we continue to assume a low single digit percentage decline in revenue for the full year. As always, we'll closely monitor the global demand environment and other key factors, including inventory restocking, global trade, inflation and e-commerce trends, which informs our view of overall expected revenue. With regard to our fourth quarter expectations, as implied by our outlook range, we expect year-over-year profit improvement despite lapping the onset of certain structural benefits executed in last year's fourth quarter at Express and Ground. Looking on a sequential basis, the leap day in the third quarter affects our typical seasonality. At the segment level, we're maintaining our full year expectations for a modest year-over-year adjusted margin contraction at Express, adjusted margin improvement at Ground and strong but lower year-over-year margin at Freight. At Express, we're looking at every aspect of the business, including taking a fresh look at additional opportunities to improve our European business. And we're confident in our ability to unlock more value at Express and across all our businesses as we continue to seek optimization opportunities. Our bridge shows the operating profit elements embedded in our full year outlook. For illustrative purposes, we continue to use adjusted operating profit of $6.3 billion, the equivalent to $17.75 of adjusted EPS as the midpoint of our narrowed outlook range. To walk the bridge to $6.3 billion of adjusted operating profit, we're now assuming that revenue net of cost increases is up $200 million, that we experience $800 million of international export yield pressure as peak surcharges diminish and product mix continues shifting toward deferred, variable compensation increases by $300 million and that these pressures are more than offset by $1.8 billion in structural cost savings from DRIVE. At the midpoint, we would expect fiscal 2024 adjusted operating income to increase approximately 17% despite revenue declining by a low single digit percentage. As I've discussed on prior calls, we remain focused on reducing our capital intensity and continuing to provide increased stockholder returns, as well as maintaining a strong balance sheet, prudent capital allocation and improving return on invested capital. Our capital investment priorities will be on improving efficiency, modernizing facilities and optimizing our network. Capital expenditures for the quarter were $1.4 billion, bringing year-to-date CapEx to $4 billion. And we now anticipate capital spend of $5.4 billion for the full year, which is down over $700 million from last year and down $300 million from our prior forecast of $5.7 billion. We also continue to expect aircraft related CapEx to decline to approximately $1 billion in fiscal year '26. And we expect CapEx as a percentage of revenue will keep declining in the future as we reduce our facilities’ footprint through Network 2.0 and continue to plan for lower annual aircraft CapEx beyond fiscal year '26. We currently have 37 jet aircraft parked, which is up from 20 last quarter. And as previously communicated, we will retire nine more MD-11s in Q4. Consistent with our goal of increasing stockholder returns, we completed a $1 billion accelerated share repurchase transaction in the third quarter, bringing our total share repurchases for the first nine months of the fiscal year to $2 billion. And we expect to repurchase an additional $500 million of common stock in the fourth quarter, bringing total fiscal year '24 repurchases to $2.5 billion while also paying our dividend in line with our previously stated capital return plan. I'm also pleased to announce that our Board of Directors has authorized a new $5 billion share repurchase program, which augments the $600 million that remains available for repurchase under the $5 billion 2021 authorization. This reinforces our commitment to support long term stockholder returns. Overall, I want to acknowledge and thank the entire team for their efforts in continuing to improve profitability in a challenging revenue environment. We have more work to do but I'm encouraged by the commitment and focus I've seen from our teams to advance our transformation and provide our customers and stockholders with even greater value. With that, let's open it up for questions.

Jordan Alliger:

Thanks for the update on DRIVE. If I did the math right, I think there's about $385 million or so left for the final quarter of this fiscal year. Can you maybe talk to where you think this money or the savings, which buckets are going to go to surface, air, G&A? And I'm also just sort of curious on the surface side, how much of that is actually tied to Express surface stuff?

Operator:

The next question is from Tom Wadewitz with UBS.

John Dietrich:

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

Jonathan Chappell:

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

Operator:

The next question comes from Bascome Majors with Susquehanna.

Raj Subramaniam:

Bascome, let me start, and then John can add on to this. First of all, we are well on track to complete our consolidation of FedEx operating companies. This has been -- a lot of great work has already been done and into one streamlined and simplified organization. I think two words kind of describe this move, one is efficiency, the other one is effectiveness. I think we are looking forward to the structure that actually moves us forward on both fronts. And I think at the end of the day, this transformation efforts will set us up to drive improved performance and profitability over the long term. I'll give it to John to talk about the rest of it.

Operator:

The next question comes from David Vernon with Bernstein.

Raj Subramaniam:

I think I'm going to take a minute here to talk about Tricolor, because I think it's a good opportunity. So bear with me for the time I'm going to take here. Firstly, Tricolor is a fundamental redesign of our network to improve the utilization of assets, our ROIC, profitability and our operating margin. And first and foremost, our overall capacity will be determined by the demand environment and Tricolor will allow us to better flex our capacity to mass demand. Now within that capacities when we'll break it into three networks, purple, orange in white, we call it, and that cater to the different cohorts of traffic. The idea is to move the right product and the right network while reducing the cost to serve. The purple network will be a highly optimized and a leaner network designed to move international priority parcel volume that protects our value proposition in different geographies. Now this network now becomes much more parcel centric, will have significantly better service but also density, and that density will improve the revenue proposition and revenue per flight. Now turning to the orange network, that will cater to the premium freight traffic. And these are FedEx planes that will operate off cycle from the purple system, which allows two things. Firstly, it allows us the ability, once again, to maximize density and asset utilization. It also de-congest hubs and improve service. But most importantly, it allows a truck fly truck model that reduces the cost to serve. And in this context, it should be noted that we are fully leveraging the existing capacity in our trucking networks in the US and Europe. Prior to fiscal '24, we haven't really moved any international freight shipments in our market leading LTL network with FXF. And now it's already begun to change, but in Tricolor it will take for hold here. So by doing so, we reduced the cost to serve and we are able to target more of the premium air freight segment. Now I'm going to call it a new term, think of it as the global LTL segment, that's what this is about. Now as you rightly asked, are we adding capacity to go up a low yield and profit, answer is no. We are going to get the overall capacity by the premium demand. It should also be noted that 20% of the global air freight shipments approximately drive about 80% of the weight, which is a primary target for freight forwarders. We're going to focus on the other 80% that will readily work with the model I described. So the white network then is primarily use of passenger billing capacity to move lower yielding e-commerce and deferred track. So these three networks working in concert with high technological orchestration is what we call Tricolor. Let me just reinforce again that it helps the baseline productivity, it improves our existing asset utilization and makes the entire system more efficient. And we're going to manage the execution of Tricolor with the rigor of drive and to ensure success. So again, thanks for the question.

Brian Ossenbeck:

Just wanted to come back and maybe better understand the moving pieces for Express during the quarter. Obviously, quite a strong result but there's often times some impact from fuel, incentive compensation, I think, there’s a bit of a tailwind here as that changed a little bit as well. So maybe -- and then weather, that was a pretty significant surprise considering it was as difficult as you mentioned, Raj, but it seems like it really didn't affect the network. So maybe, John, if you can unpack some of the moving pieces? And then Raj, if you can comment on the durability of the network if weather is just isn't going to be as big of an impact going forward?

Raj Subramaniam:

And Brian, I don't think I have much to add to what John has talked about. I think the idea that we use our latest and greatest in digital tools and the notion that we are now able to look at FedEx as a overarching network and able to move things helps us. Of course, we’ve got to -- you've got to see as the weather patterns that are very impossible to predict, but I'm just pleased with the work that we did this time around, and we'll continue to get better in this regard.

Jeff Kauffman:

Thank you for the detail on DRIVE. Jeni, welcome. Look forward to working with you. Real quick, the puck doesn't stay in one place, it's always moving around, and I think you're alluding to this with what you're doing with DRIVE and Tricolor. But I'm just kind of curious from your perspective. We announced this plan about what year and half ago back at the analyst meeting almost two years ago. How has the network design and some of the DRIVE goals when you're completed with this changed since you began this process?

John Dietrich:

I think what I would add to that as well is, to your comment about kind of changing environment, the teams meet weekly on this. And there are some programs that are delivering more than we expected and there are some programs that are delivering less than we expected, but we're always looking to fill the pipeline as well on additional opportunities. And that's an ongoing project and that speaks to DRIVE being part of our culture going forward, that's not going to stop. And we're going to adapt to a changing environment and I think that will help us as we move forward.

Ken Hoexter:

So Raj -- and I guess I love the results in terms of the speed here at Express, but I'm confused a bit by the messaging. Last quarter, you talked about seasonal declines at Express and what occurred from Express going down to -- which should be maybe near breakeven given the seasonal moves, yet it was up so significantly 130 basis points year-over-year. Was there a massive shift in the DRIVE or other programs or your speed of execution? Because it sounds like from what you're saying on the targets, nothing has really changed. But I'm just wondering what shifted intra-quarter so much that we're now seeing this quick of an improvement? And then just a side clarification. Did you say Canada was about to be rolled out, because I thought you had already said that with Hawaiian Alaska, Canada was done. So maybe I wanted to clarify that.

Brie Carere:

And Ken, I'm just happy to clarify, from a Network 2.0 perspective, the Canada plan has not changed. Alaska and Hawaii are done and we are beginning the rollout of the integration in Canada that will begin this April, and we will be done before peak and it's on track.

Brandon Oglenski:

Maybe if we can follow-up there on Network 2.0. Raj, I think you mentioned you've made some management changes on both Ground and Express surface operations in the US. Can you talk maybe a little bit more about that and how that plays into long term integration?

Operator:

The next question is from Scott Group with Wolfe Research.

John Dietrich:

And let me start by saying on that $2.2 billion, that's certainly our goal to have that all flow through. But we have to be realistic and understand that a lot of the pressures that we're seeing today are expected to continue for a while. And while we're going to continue to focus on those things within our control, there are certain things outside of our control. And so our goal is to have as much pass through to the bottom line as possible and we look forward to keeping you up to speed on that, including when we next talk in June. With regard to Ground, exceptional story, exceptional performance from the team. I believe those margins are sustainable. And there's still a number of projects in the pipeline that allow us to continue to grow and expand that business and those margins. So again, that's going to be our focus as well.

Helane Becker:

I have, I guess, two questions. One is, as part of the whole redesign of the network and the business and collapsing everything into one. Have you thought about shifting to a calendar year rather than staying on a May fiscal year? And my second question is maybe for Raj. A lot of investors push back to me about the business that the way you're structuring the business, and I noticed the stock aftermarket was up quite a lot after the earnings release. Why do you think investors are so skeptical of your business plan and aren't willing to give you the credit that maybe you deserve for the changes you've made as speedily as you've made them?

Raj Subramaniam:

And Helane, as part to your second question, all I can say is that we, as a team, are very much convinced that we have a unique story at FedEx here. At the opportunities that we have won in the industry is one thing, but within the industry, we have a unique opportunity because of the strategies that we have deployed. We started moving early than anybody else. We are performing better than our competition, both on the top and the bottom line. And we have a longer runway because of the opportunities we have identified. And so we will try to educate as many people as we possibly can on our strategy and where we are. But we are just seeing the early stages of what's possible at FedEx. Any one particular quarter sometimes kind of throw you off but the long term strategy is sound and we all believe in it, and it's going to be a good run in the next three, four years.

Ravi Shanker:

Apologies if I missed this, but regarding the USPS contract, kind of when do you expect that reach fruition? Is that something that happened in FY24 or '25? Can you also share how much of the volume has come off already and kind of how much would you dimension kind of that net with the new contract ends up being?

Operator:

The next question is from Stephanie Moore with Jefferies.

John Dietrich:

Yes, certainly, there's going to be some investment required when you're consolidating facilities, particularly sort facilities but there's also upside in that you're able to reduce your facilities footprint along the way. So that will involve certainly some planning and processes, analysis and all that. But we're excited actually about the end game here and that is our overall footprint will far -- the benefits of that will far exceed the investment and contribute to a really efficient network.

Operator:

The next question is from Bruce Chan with Stifel.

Brie Carere:

John Smith and Scott Ray are crushing it. When we went back and looked at our Q4 the toughest quarter to -- I should say, Q4 calendar year, the toughest quarter to deliver awesome service, not only are we faster, I am quite confident, we -- on those higher standards, from a delivery service perspective, we also had better reliability. How are they doing this? It's discipline. It's day in and day out execution. We look at our service metrics every single morning. We talk about Net Promoter Score every week at our Revenue Management Committee. And to Raj's coverage, on the integrated leadership team now with the service organization, we absolutely expect to extend that across the entire network, and I just could not be more appreciative of our operators and how well they're doing.

Operator:

The next question is from Conor Cunningham with Melius Research.

Brie Carere:

I think we've got the best returns portfolio in the market. When you look at our retail coverage as well as our transportation solution, it is best-in-class. And when we looked at our January numbers, the FedEx Ground returns portfolio did see some healthy growth. You layer that on with the new announcement of our FDX platform, we are going to be the only provider that has not only the physical capabilities but a very comprehensive digital capability. And what do I mean by that? We are going to be able to help all retailers, brands and merchants process their returns on their Web site, manage their exchanges, manage the inventory, integrate their branded tracking and communications to customers. It's a really powerful offering. As I mentioned earlier, we started to preview this with some customers. We've got some pretty big names in what we're calling our private preview. And I look forward to sharing more results once we do the full launch later in the fall. I think I'll stop there. I'm enthusiastic about this…

Operator:

The next question is from Scott Schneeberger with Oppenheimer.

Brie Carere:

I think from a peak perspective, we're really pleased with how we're managing peak from a service, from a customer and from a profitability perspective. First and foremost, the team starts literally now for this coming peak. And what do I mean by that? We are already talking to customers about what their peak requirements are for next year. And so that John and Scott have advanced planning. And then, of course, as we get closer to peak, we take the top 100 customers and we are managing forecast on a weekly basis. I think some of the integrated planning that we are doing with Dataworks is also incredibly helpful so that we have real time information. We're not waiting for spreadsheets should be passed over, but we've actually got real time visibility into some of our largest customers, which has been incredibly helpful. So I don't anticipate us doing much different this year but more of the same. And again, I also was really pleased with the peak surcharge capture. We are ensuring that the customers that really drive the investment we need in December we're getting recruited for that cost. So we feel good.

Operator:

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

Operator:

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

Operator:

Good day, and welcome to the FedEx Fiscal Year 2024 Second Quarter Earnings Call. All participants are in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Stephen Hughes, Director of Investor Relations. Please go ahead, sir.

Raj Subramaniam:

Thank you, Steve, and good afternoon, everyone. Let me begin by thanking the FedEx team for their commitment to delivering yet another strong holiday season. This peak, FedEx has the best service offerings in the industry. This includes the most expansive global network and the fastest US ground service with the broadest weekend residential coverage. Strong service and speed are also come in with a more aggressive peak transit compared to this time last year, with the ground time and transit in the US at 1.94 days. I'm incredibly proud of the team's ability to sustain superior service levels while we continue to transform our global network. Our second quarter performance reflects clear signs of progress in our transformation in what remains a difficult demand environment. We are moving with speed and agility to deliver on DRIVE, which is supporting improved profitability and enabling us to maintain our earnings outlook for the year, even as our revenue expectations have moderated further. As you can see in our results, in Slide 6, our transformation is driving improved profitability. At the enterprise level, we delivered a 17% improvement in adjusted operating income, and adjusted margin improvement of 110 basis points compared to the prior year even as the total revenue declined 3%. These results reflect benefits from DRIVE, a continued focus on revenue quality, and meaningful differentiation across our products and services as we build the world's smartest logistics network. Our focused execution enabled us to retain a majority of the high-quality volume we won over the summer from UPS and as a result of the Yellow shutdown. In the segment level, Ground continued to deliver outstanding results with adjusting operating income up 57%, and adjusted margin expansion of 370 basis points. This was driven in part by revenue growth due to higher yield and volume combined with solid operational performance. Freight delivered strong performance as well, driving double-digit profit improvement, and margin expansion of over 270 basis points compared to the prior year. Express total revenue declined due to both volume and yield pressures. These headwinds more than offset continued benefits from DRIVE and led to a margin decline compared to the prior year. There's more work to do at Express, where we are structurally re-designing our network for speed and density. We continue to make progress at Express to unlock the value that exists across this business. Turning to Slide 7. DRIVE continues to fundamentally change the way we work. The impact of DRIVE is clear, as our lower cost structure enables improved profitability. Just look at the powerful chart on the left-hand side of this slide. If you look across market cycles over the last 15 years, we have now delivered two consecutive quarters of operating income growth against declining revenues. When you step back and review how our business has performed in environments with suppressed demand, we are delivering much better profitability today than we have historically. In the quarter, we reduced costs by approximately $200 million in our Surface Network, including our US Express operations. This was driven by shifting to a single daily courier dispatch, applying dock productivity initiatives, consolidating underutilized sorts, and maximizing the use of rail. Across our Air Network and International operations, our DRIVE initiatives are helping offset pressures with about $115 million in total cost reductions in Q2, primarily driven by structural flight takedowns. And in G&A, we're making significant changes to how we approach procurement and functional excellence. In the second quarter, we realized over $100 million in savings driven by reducing the use of temporary labor, leveraging the scale of the Enterprise to negotiate favorable surface transportation rates, optimizing certain benefit programs, and lowering headcount. Given our progress, we are highly confident that we'll deliver on our goal of $1.8 billion in cost reduction benefits from DRIVE this fiscal year. Turning to Slide 8. Despite progress on DRIVE, profitability at FedEx Express was pressured by an ongoing volume mix-shift and related yield headwinds. Our ability to drive margin improvement in the near term has been constrained by transitory factors including the year-over-year decline in the US Postal Service volume, combined with minimum required service obligations associated with our current USPS contract. And also, the timing of the structural redesign of our Air Network. Historically, our unmatched global Air Network was primarily built on a hub-and-spoke system to support speed and global connectivity. With the rapid growth of e-commerce and as volume mix continues to shift to deferred, we recognize the need to reconfigure our network to focus on both speed and density. This fundamental network redesign, which we call Tricolor design, is momentus in our history, and includes several key elements. First, we will deploy what we call our Purple Tail fleet, which is our FedEx-owned assets timed for delivering high-priority high-margin volumes using the existing hub-and-spoke model. This is our Purple Network, which will be the backbone of our International Priority parcel business. Second, we will re-time a portion of our Purple Tail flights for what we call our Orange Network which will operate off-cycle. This change will give us time to build density, decongest our hubs during the precious night short, and feed into our Surface Networks, including our International Road Network, as well as FedEx Ground and FedEx Freight in the US. This provides us a differentiated capability to drive profitable, less capital-intensive growth in the sizable global deferred parcel and airfreight markets. And third, we will continue to leverage our Global Partner Network as an adaptive capacity layer, particularly on imbalanced trade lanes. This is our White Network. These changes will improve the utilization of our assets, increase margins, and enhance ROIC. The Air Network redesign is a critical piece of our DRIVE execution at Express and will support the realization of our targeted $4 billion of total DRIVE savings in fiscal year 2025. We are approaching this network transformation in a deliberately measured manner to ensure we continue to provide our customers with the best service levels in the industry. Simultaneously, as you know, we are executing Network 2.0. Taken together, these efforts will improve our ability to protect profitability and returns through various market environments. Big picture, we are making clear progress on our transformation and DRIVE is having a real impact. Additionally, our team is advancing efforts to combine the strength of our physical transportation network with our digital and data-driven solutions. We are leveraging our world-class engineering skill base to deliver cost-effective cutting-edge capabilities globally. Earlier this month, we opened our first Advanced Capability Community or ACC in Hyderabad, India, which will serve as a hub for our technological and digital innovation. I'm truly excited about the opening of the ACC and the vast opportunity to use digital to run our business better, enhance our customer experience, and generate new profitable revenue streams. Overall, I'm confident we have the right strategy and the right team in place to create significant stockholder value. In these last few months and weeks, our team's dedication to the Purple Promise has been tremendous and I would like to express my sincere thanks to our colleagues. This performance has put FedEx in good position as we enter the final structural peak and deliver the best service offerings in the industry. With that, let me turn the call over to Brie.

John Dietrich:

Thanks, Brie. I'll start on Slide 17. Despite a revenue decline, the FedEx team delivered improved profitability with strong adjusted operating margin growth, driven by a continued focus on revenue quality and execution of the Company's DRIVE initiatives. Taking a closer look at our segment performance in the quarter, starting with Ground, the team continues to deliver strong results. Adjusted operating income increased 57% due to yield improvement, cost reductions, and higher volumes. Cost per package declined 2% driven by lower line-haul expense, and improved first and last-mile productivity. At Freight, operating income increased 11% during the quarter, driven by higher yields and increased efficiency, partially offset by lower shipments. The team continues to focus on improving profitability while navigating this lower demand environment. And at Express, profitability was pressured as impacts of softening demand on revenue were only partially offset by structural and volume-related cost improvements. Adjusted operating income at Express declined 49% during the quarter on a 6% decline in revenue. As Raj mentioned, we have more work to do at Express and I'm confident that the structural redesign of our network and other DRIVE initiatives once complete, will make us more resilient in future periods of demand weakness. Now turning to our fiscal year outlook. Based on our performance year-to-date and our current view of the rest of the year, we are reaffirming our outlook for adjusted EPS in the range of $17 to $18.50. At this midpoint of the range, we're now assuming a low single-digit percentage decline in revenue. This is lower than our previous assumption of flat revenue growth. The reaffirmation of our earnings outlook despite the weaker demand environment, reflects the continued benefits of our transformation. We'll continue to closely monitor the global demand environment and other key factors, including inventory restocking, inflation, and e-commerce trends, which informs our view of overall expected performance. With regard to our third quarter expectations, as we've shared previously, we anticipate our typical seasonality, which implies a lighter quarter sequentially for earnings. We're also facing a higher comp at Ground given our exceptionally strong operating income performance during the third quarter of last year. At the enterprise level, we continue to expect year-over-year adjusted margin expansion in FY 2024. At the segment level, we continue to expect adjusted margin improvement in FY 2024 at Ground. We also continue to expect Freight margin to remain strong in FY 2024, but lower than FY 2023, given volume reductions and yield pressure. And we now anticipate a modest year-over-year adjusted margin contraction at Express. Turning to Slide 19, and consistent with previous quarters, we're providing a bridge to share how we're thinking about operating profit considerations embedded in our full year outlook. For illustrative purposes, we continue to use adjusted operating profit of $6.3 billion equivalent to the adjusted EPS midpoint of $17.75. As a reminder, and while our revenue performance will vary based on market trends, we are committed to delivering the $1.8 billion in structural cost savings from our DRIVE initiatives. Importantly, while this bridge remains the same as what we showed you in the first quarter, the composition of the second bar showing revenue net of cost increases, has changed significantly. We now forecast materially lower revenue but expect to achieve the same net profit impact of $500 million at the midpoint, as we proactively manage volume-related expenses and revenue quality in this difficult demand environment. Now moving to Slide 20. We remain focused on maintaining a strong balance sheet, prudent capital allocation, improved return on invested capital, all while providing increased shareholder returns. Our liquidity position remains strong, ending the quarter with $6.7 billion in cash. Capital expenditures for the quarter were $1.3 billion, bringing year-to-date CapEx to $2.6 billion. And we continue to expect to achieve our target of less than 6.5% CapEx-to-revenue for the year. As we've previously stated, our capital expenditures will decline as we continue to reduce capital intensity, by reducing facility and other capacity investment, and continue to plan for lower annual aircraft CapEx. We still anticipate aircraft-related CapEx to decline to approximately $1 billion in fiscal year 2026. Consistent with our capital return priority, we completed another $500 million accelerated share repurchase transaction in the quarter. This brings our total share repurchases for the first six months of the fiscal year to $1 billion and $2.5 billion over the last 18 months. Looking ahead, we expect to repurchase an additional $1 billion in common stock this fiscal year, while also paying our dividend in line with our previously stated capital return plan. Before we turn to Q&A, I just wanted to comment, that now that I'm nearly five months into my new role as CFO, I'm even more excited about our strategy, relentless focus on execution, and the opportunity ahead to create long-term value for all our stakeholders. I want to thank all our team members for their continued efforts and focus on our common goals. With that, let's open it up for questions.

Ken Hoexter:

Great. Good afternoon. So, I guess, John or Raj, maybe just sticking with Express to start. Margins were down year-on-year. I get volumes were down and you have negative leverage. But just to be at 1.7%, we're seeing higher purchase trends, higher employee expense. I guess, what does it really take, maybe just walk us through, one, why margins are stubbornly so low. And then, two, you're talking about a new plan in terms of the Orange, Purple, and White plan. Are we talking about structurally changing Express in pulling additional costs out, parking more planes, pulling employees out? What does it take to get the structural margin out of this low bar? And I get you're still in the middle of your range, so I get the earnings outlook. I'm just trying to understand just the constraint on Express and the ability to get the margins up there over time.

John Dietrich:

Yes. Thanks, Raj. I echo everything you said. I think the only thing I would add is that, our cost structure, Ken, anticipated a little higher demand than what we saw, so we will be laser-focused on bringing out as much of that cost as possible as we go forward.

Chris Wetherbee:

Hey, thanks, good afternoon. Maybe sticking on the back of that answer, John. I guess as you think about the sequential performance in Express from 1Q to 2Q, I don't think we've seen nearly since maybe fiscal 2011, a deterioration in operating profit, revenue was up sequentially, so I guess, was it just a mix that was moving around, or maybe miss judging what you thought the demand environment was going to look like? And then, as we think about the back half of the year in Express, you're facing particularly easier comps, both on a revenue and a profit basis, so I know margin is down for the full year, but can you can get margin and profit up in the back half of the fiscal year in Express?

Operator:

The next question will come from Helane Becker with TD Cowen. Please go ahead.

Brie Carere:

Good afternoon. Great question. So, from a USPS perspective, yes, this was a significant headwind this quarter as it was last quarter. From a negotiation perspective, we are having very collaborative negotiations with the Post Office, but I think we've also been very clear that it will take quite a significant change in contractual terms and agreement to renew that contract. We continue to value the partnership. We're both at the table. And of course, we are honoring our service commitments. And with the current volume levels, that is a headwind this fiscal year. So, we're still negotiating. As soon as we have a renewed contract or a decision, we'll let all of you know. I am optimistic one way or the other we will improve the profit situation at Express regardless of our relationship with the Post Office.

Scott Group:

Hey, thanks. So, if I look, Ground yields were up about 1% in the quarter. Ground volumes in November now are flat. So going forward, is this still an environment where Ground margins should be improving year-over-year? I get the comps are harder, so less improvement, but you think you still see improvement in the back half of the year in Ground margin improvement? And then John, you talked about just seasonality lower in Q3. Maybe just some directional color on how much lower, and then what that means for Q4 and all that. Thank you.

Operator:

The next question will come from Brandon Oglenski with Barclays. Please go ahead.

Raj Subramaniam:

Let me start on the latter question and I'll have John hit the former. We'll size the overall capacity to what the demand looks like and we're very -- we are very prudent in that. In fact, we've taken out a lot of flight hours in the last 12 months accordingly. So, the one part of it is sizing the capacity to demand. But within that capacity, now there is a fundamental restructuring that allows us to really improve our service on our core IP business, improve density across all our networks, and then essentially bring to a lower cost point and access some of our Ground networks that are really unparalleled. So, that's the idea with Tricolor. And so, let me turn it over to John for the other part.

Operator:

The next question will come from Jack Atkins with Stephens. Please go ahead.

John Dietrich:

Thanks, Jack. It's John. So, yes, Tricolor was factored into our outlook. It's something we've been looking at for quite a while. It's very well-developed. We're looking forward to implementation. And it is factored into our full year outlook. From a cost standpoint, we're leveraging, as Raj said, the assets that we have. There may be some incidental facilities costs that we incur, but nothing that I would describe in the material category.

Tom Wadewitz:

Yes. Good afternoon. I wanted to see if you could offer some -- a little bit of help on the -- what the yields look like ex-fuel, so perhaps Ground and domestic Express. What did those revenue per piece numbers look like, ex-fuel? And then some thoughts on what the pricing environment is doing. I mean I think there's certainly been some kind of evidence out there that UPS is competing to get business back and you are competing as well. And so, I'm just wondering if you are seeing some of that and that's a point of pressure as well just in terms of getting a bit less price than you had expected?

Operator:

The next question will come from David Vernon with Bernstein. Please go ahead.

Raj Subramaniam:

So, we are very confident in the future potential for Express. I think if you look at the -- I mean, you got to take a step back and look at the vagaries of the global supply chain over the last few years. And we have -- the pandemic was one of those biggest supply chain bullwhip effects we have seen in the last 30 or 40 years and we are in the aftermath of that. We have seen now multiple quarters of the market being down. So, here we are in a situation where we are growing faster than the market and yet the overall demand environment is weak for our sector. So, the structural changes that we are putting into the Express network are real and they are actually designed to improve our profitability and return on invested capital. I'm very confident that the margins in Express will return and the structural cost takeout that's continuing to take place, it will serve us very well, and especially as the demand profile returns, it's going to be an -- it's going be very good opportunity for FedEx in the future.

Conor Cunningham:

Hi, everyone. Thank you. Just quickly, does the pilot contract -- does the lack of pilot contract, I don't know what you can do it just in terms of pulling out Express costs? And then on Network 2.0, I think in the past, you've talked about how you're testing that in certain markets, just curious on how those markets have performed relative to the expectations. Thank you.

Operator:

Your next question will come from Allison Poliniak with Wells Fargo. Please go ahead.

Raj Subramaniam:

Hey, Allison, we didn't hear the first part of your questions. Could you please repeat it?

Raj Subramaniam:

So -- and just to answer that question, well, I think one of the things that you'll remember is that, we've -- a lot of the growth that's happening in the International space is in -- is happening in the deferred space, in the Air freight space and also e-commerce. So, whether -- as a future market evolves, this is the right design for us to be able to serve each part of the market with the right network in place. Now, how much, where it's going to fit in, that's yet to be determined as the market evolves. But again, what we are designing for is the right network for the right kind of traffic so we have an opportunity to be able to grow profitably in the International space.

Amit Mehrotra:

Thanks, operator. Hi, everybody. I guess, I just want to come back to I think Chris Wetherbee's question, and talk about -- I mean, typically, John, we see Express profits go down, I don't know, about 50% sequentially from 2Q to 3Q. Obviously, 2Q is not what we wanted it to be, but any sense of seasonality, normal seasonality, or are we -- is it that type of magnitude relative to where we are in the second quarter? And then just related to that, I'm having a little bit of a hard time or really a lot of hard time understanding, sequentially, revenue was up in Express, packages were up, composite yield was up, DRIVE savings were up, but then profits were down. So, maybe you can dumb it down for me, but I really don't understand why profit would be down sequentially when all those pieces of mix and revenue were up sequentially. Thank you.

Operator:

The next question will come from Jon Chappell with Evercore ISI. Please go ahead.

John Dietrich:

Great. Thank you. That's really a great question. And, I think the answer is yes to all of that, right. And what I would throw in as well is, maintaining our high standards of service that Brie talked about. We're factoring in all those factors, the ability to take on additional volumes when it returns, coupled with maintaining the highest quality service that Brie talked about, but also with a sense of urgency to be focused on that which we can take out as quickly as possible, without prejudicing those two very important factors.

Bascome Majors:

Thanks for taking our questions. It sounds like the deferred day network underutilization there with your core customer has been a bigger problem than when he has realized the bottom-line of Express. Can you talk a little bit about if we get to a point where you do end up walking away or significantly downsizing that customer into next year? What are your options for consolidating that network, either with some of your Ground opportunities or the night network? Are there options for the day network going away sizeably by subtraction trend into next year and the year beyond? Thank you.

Operator:

The next question will come from Brian Ossenbeck with J.P. Morgan. Please go ahead.

Brie Carere:

Yes. Great question. And we'll start with the second one first. We are seeing, yes, a very disciplined freight market and I will say, I think we're leading in disciplined freight. If you look at the volume that we took during the summer, we really like what we got. We actually were quite surprised that we found some really high-yielding customers and those customers have been very vocal about the great service that FedEx Freight is delivering, and so market is rational, we're delivering a great service. Lance and the team have just done an outstanding job. And so, we continue to be very optimistic about the margin profile in the future of FedEx Freight. I have to admit I forgot the first half of the question.

Operator:

The next question will come from Jordan Alliger with Goldman Sachs. Please go ahead.

Raj Subramaniam:

Yes. Thank you, Jordan. I think on the macro, we have been pretty consistent over the last few quarters about some of the -- two or three things. One is that the industrial production around the world continues to be weak, and again, that's reflected in our Express Freight numbers and even in our domestic Express numbers. Even though we are growing faster than the market, we -- these are headwinds to the industry -- for the industry volume. On consumer spending, I think the mix between goods and services, I think now that's nearly back to the pre-pandemic levels. As far as inventory is concerned, we believe that the inventory destocking phase is over. And but the restocking phase is yet to begin in earnest. So, we -- for the rest of the fiscal year, we have assumed -- we are not assuming any kind of improvement in these trends. Obviously, if that changes, that will be a positive. And we are definitely -- and we've said this over and over again over the last few quarters, we are have focused on the things that we can control and that's why we are so focused on the execution of DRIVE and again, I'll just reiterate that I am so proud of the team for delivering a meaningful bottom-line improvement despite the challenges in the top-line.

Scott Schneeberger:

Thanks very much for taking the question. It's, Brie, probably for you. Could you address, as you took a good amount of share over the summer from UPS, and its situation? What are you seeing competitively out there now that we're in peak season as far as, it was asked a little earlier on pricing, but how are you holding up as far as maintaining your customers, if you could address this on large, and on small and mid-size? And it's a go-forward question as well, going into the next year and how you think you'll hold up there? Thanks.

Operator:

The next question will come from Stephanie Moore with Jefferies. Please go ahead.

Brie Carere:

Sure. Great question. I think, as Raj mentioned, of course, we're tracking all of the same economic indicators that all of you are tracking. And when you look at some of those indicators, you do start to see some optimism. What we're doing is, we're planning conservatively. Right now, we believe that there will we will see FedEx sequential improvement throughout the back0 half, but the overall market demand will not change within our fiscal year. When we've seen the momentum, I talked about a couple of places where we've got momentum, specifically on parcel, that -- the vast majority of that is two things, it's e-commerce and its market share gains. When we look at the largest indicator of industrial production and what we're seeing, we're not seeing a lot of restocking in our numbers yet. It doesn't mean that it won't come, but we're not seeing it yet. One of the greatest indicators of that is, actually, if you look at our Freight business outside of the United States, weights are not where they need to be. Shipment volume was decent, but it's really the weight that we're looking at and weight per shipment is still down dramatically as you can see in the numbers. So, we're planning conservatively. We're focused very much on what we can control. And of course, we'll keep you updated as things move on.

Bruce Chan:

Great. Thanks for the time. Just maybe I want to get a follow-up on Network 2.0. If you could give us an update on where you are with the market network integration? I imagine it was a little bit slower during peak season, but what's been completed at this point, and what markets are next? And then maybe just a follow-up for John here, in terms of the model, where should we think about where the impact of those changes occur with regard to the up guidance?

John Dietrich:

Yes. And Raj, what I would just add to that is that our expectations as a result of all of that planning is factored into our guidance.

Raj Subramaniam:

So, thank you very much. And in closing, we are showing clear progress on our transformation, delivering an unprecedented two consecutive quarters of operating income growth and margin expansion even with lower revenue. At the same time, we are providing our customers with outstanding service and speed through the peak and beyond. I'm very confident in our path ahead as we become a more flexible, efficient, and intelligent Company. Let me take this opportunity to once again thank the FedEx team members for delivering just a simply an outstanding peak. I was the best peak season I can remember in some time to come. And we also take this opportunity to wish everyone on this call and all our FedEx team members a very, very happy holiday season. Thank you very much.

Operator:

Good day and welcome to the FedEx Fiscal Year 2024 First Quarter Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Mickey Foster, Vice President of Investor Relations. Please go ahead, sir.

Raj Subramaniam:

Thank you, Mickey, and good afternoon. I would like to first congratulate Mickey on his upcoming retirement. He has led our Investor Relations team for nearly 18 years, spanning 70 earnings calls, and after tomorrow, 18 annual meetings. He will be missed by all and especially this audience, and we thank him for his outstanding service to FedEx over the years. Let me also take this opportunity to welcome John Dietrich, our Chief Financial Officer for FedEx. With more than 30 years of experience in the aviation and air cargo industries, John brings a unique blend of financial and operational expertise to our leadership team at a very important time for this company. He's already hit the ground running and I'm very happy that he has joined FedEx. So now turning to the quarter. We entered fiscal year '24 with strength and momentum, delivering results ahead of expectations in what remains a dynamic environment. I'm proud of what the FedEx team has accomplished over the last 12 months. Amid significant demand disruption, we delivered on what we said we would do, driving over $2 billion in year-over-year cost savings in fiscal '23. We are now well advanced in executing on that transformation to be the most efficient, flexible and intelligent global network. Our first quarter progress gives me great conviction in our ability to execute going forward. We came into the quarter determined to provide excellent service to our customers despite the industry dynamics. We achieved that goal while delivering innovative and data-driven solutions that further enhance the customer experience. As a result, we are well positioned as we prepare for the peak season. As you can see in our results on slide six, our transformation is enhancing our profitability. Ground was a bright spot with higher revenue year-over-year driven by higher yield. On top of this growth, Ground drove exceptional operational performance, leading to its most profitable quarter ever on an adjusted basis. As expected, total revenue declined as volumes and yields were pressured at Express and Freight. We indicated last quarter that Express revenue would be adversely impacted by international export yield pressure as well as a change in strategy by the US Postal Service, which we are addressing through DRIVE as we build a more nimble airline. For the total company, we delivered 200 basis points of adjusted margin improvement as we realize efficiencies across our networks. This performance is a testament to the power of DRIVE and the FedEx team working collaboratively to implement structural cost reductions throughout the enterprise. During the quarter, labor negotiations at our primary competitor and the bankruptcy of Yellow disrupted the market. Our priorities were clear. Protect our customers, deliver outstanding service and focus on high-quality revenue. We delivered on those priorities, leveraging our flexible network to profitably add volume while maintaining the highest levels of service. While we capture upside as a result of these onetime events, we were highly discerning in terms of the business we accepted in keeping with our goal to drive high-quality revenue. Importantly, we expect to maintain the majority of the volume we added in the quarter. I want to thank our FedEx team for deftly navigating these conditions to execute on our disciplined strategy. Now turning to DRIVE. We are fundamentally changing the way we work. DRIVE is taking cost out of our network and we are on track to deliver our targeted $1.8 billion in structural benefits from DRIVE this fiscal year. At Ground, our DRIVE initiatives reduced costs by $130 million this quarter. These savings were primarily driven by lower third-party transportation rates as a result of a newly implemented purchase bid system as well as optimized rail usage, the continued benefit from reduced Sunday coverage and the consolidation of sorts. At Freight, we continue to manage our cost base more effectively. For example, during the quarter, Freight completed the planned closure of 29 terminal locations during August. And at Express, despite headwinds from Asia yields and the US Postal Service, we delivered on our plan. We're making our global network more efficient primarily through structural flight takedowns and efficiencies at our hubs and sorts as we right-size the capacity across the network. In Europe, DRIVE initiatives are on track and we expect them to gain further traction over the course of the year and into FY'25. Looking ahead, we are excited to leverage John's aviation experience as we continue to transform our air network. And our DRIVE expectations for this year include the G&A savings we have previously outlined, which we believe will start to ramp in the second half of this fiscal year. Finally, on slide eight, I will provide a brief update on our key strategic focus areas as we move into the next phase of our transformation. This includes One FedEx, which is how we are better aligning our organization to enable Network 2.0. We are well underway with plans to simplify our organization. In June 2024, FedEx Express, FedEx Ground and FedEx Services will consolidate into one company, Federal Express Corporation. The reorganization will reduce and optimize overhead, streamline our go-to-market capabilities and improve the customer experience. To-date, we have implemented or announced Network 2.0 in several markets, including Alaska, Hawaii and Canada. As each market is different, we're continuously learning and tailoring the network to adapt to the operational characteristics unique to each region while delivering the highest quality service for our customers. We'll continue to use both employee couriers and service providers for pickup and delivery operations across the network. As with any significant transformation, these changes are being thoughtfully executed and will take time to complete. The network that FedEx has built over the last 50 years provides us a foundation that is unmatched. This physical network enables us to transport millions of packages a day around the world, generating terabytes of data that contain invaluable insights about the global supply chain. We are focused on harnessing the power of this rich data to make supply chains smarter for everyone, for our customers, for our customers' customers and for ourselves. As we move to the next phase of our transformation, I have given the team three specific challenges, to use data to make our network more efficient, make our customer experiences better and drive new profitable revenue streams through digital. Looking ahead to the rest of FY'24, we remain focused on delivering the highest-quality service and aggressively managing what is within our control. Factoring in better-than-expected first quarter results, we are increasing the midpoint of our adjusted EPS outlook range. As we continue to deliver on our commitments, I'm confident we have the right strategy and the right team in place to create significant value. With that let me turn the call over to Brie.

John Dietrich:

Thank you, Brie, and good afternoon, everyone. I'm really excited to be here. It's been a full sprint these last few weeks as I continue to get up to speed with this great company. As some of you may know, I've done business with FedEx throughout my career. Through that experience, I've always admired how FedEx literally created a new industry and has built a differentiated network that serves customers all over the world. I've also admired its great culture that has thrived through the People-Service-Profit or PSP philosophy. After only being here a few short weeks, I've seen the incredible opportunity we have before us. Not only will we continue to provide our customers with the best service and product offerings, but our plans to bring our businesses together through One FedEx and execute on DRIVE and Network 2.0 initiatives will be truly transformative. These initiatives will leverage and optimize everything that the talented teams across FedEx have built over the last 50 years. It will make us smarter, it will make us more efficient and it will enable us to serve our customers better. Before getting into the numbers, I want to share a brief overview of the priorities that will guide me and the finance organization as we move forward. First and foremost, I'm committed to setting stringent financial goals that reflect the significant opportunity we have to improve margins and returns. This will be enabled by the DRIVE initiatives and the integration of Network 2.0 as we move towards One FedEx. I've been really impressed by the tremendous amount of work already completed on DRIVE from the initiatives in place, the accountability embedded in the program and the team's steadfast focus on execution. In terms of our capital priorities, I'll focus on maintaining a healthy balance sheet, returning cash to shareholders and reinvesting in the business with a focus on the highest returns. Our finance organization will partner closely with Raj and the leadership team to ensure we deliver consistent progress towards these priorities with the goal of delivering significant value for our employees, partners, customers and shareholders in the years to come. Finally, a guiding principle for me will be to have open and transparent communication with all key stakeholders, including all of you in the financial community. I already know some of you from my prior roles. I look forward to continuing to work together and engaging with the rest of you in the weeks and months ahead. Now taking a closer look at our results. Our fiscal year 2024 is off to an outstanding start as demonstrated by the strong operational execution in the first quarter. At FedEx Ground, DRIVE initiatives are taking hold and we delivered the most profitable quarter in our history for that segment on an adjusted basis. Adjusted operating income at Ground was up 61% and adjusted operating margin expanded 480 basis points to 13.3%. These strong results were driven by yield improvement and cost reductions, including lower line haul expense and improved first and last mile productivity. As a result, cost per package was down more than 2%. At FedEx Express, the business was able to improve operating income despite a decline in revenue. This further demonstrates that DRIVE is working. Adjusted operating income at Express was up 14% and adjusted operating margin expanded 40 basis points to 2.1%. Cost reductions and transformation efforts at FedEx Express included structural flight reductions, alignment of staffing with volume levels, parking aircraft and shifting to one delivery wave per day in the US, all of which more than offset the impact of lower revenue. It's important to note that expanding operating margins and reducing cost at Express will be a key focus for me and the team. At FedEx Freight, the team diligently managed costs and revenue quality amid a dynamic volume environment. Operating margin declined 290 basis points based on lower fuel surcharges and shipments but remained strong at 21%. Now turning to our fiscal year outlook on slide 17. As we've been discussing, we're beginning to see the benefits of our DRIVE initiatives and our focus on improved revenue quality. Based on our solid first quarter performance and our view of the rest of the year, we're raising the low end of our full year adjusted earnings per share outlook by $0.50. We're now expecting adjusted EPS in the range of $17 to $18.50. We're confident we can deliver on this higher earnings outlook despite the constrained demand environment. We're now assuming revenue to be relatively flat at the midpoint of our fiscal year 2024 adjusted EPS outlook range. Of course, an improvement in demand would translate into greater operating leverage and earnings upside, supporting the high end of our range. We'll be closely monitoring the demand environment going forward, including economic activity in North America, Europe and Trans-Pacific trade. We'll also be keeping a close watch on other key factors that impact the demand environment, including inventory restocking, inflation and e-commerce trends. Turning to slide 18. And consistent with last quarter, we want to share how we're thinking about the operating profit considerations embedded in our full year outlook. For illustration purposes, we used adjusted operating profit of $6.3 billion, which is the equivalent of the adjusted EPS midpoint of $17.75. Within this outlook, we're highlighting a few key assumptions. Revenue, net of cost increases, is now expected to be up $500 million due to improved revenue quality and flow-through at Ground. We continue to expect approximately $800 million of international export yield pressure as demand surcharges significantly diminish and service mix continues shifting towards deferred offerings. As a result of our strong first quarter performance, we're also planning for a $600 million increase in variable compensation. These headwinds are more than offset by the $1.8 billion in structural cost savings from our DRIVE initiatives, which we shared with you last quarter and are on track to achieve. Moving on to slide 19. We remain steadfast in our commitment to prudent capital allocation and shareholder returns. Our liquidity position remains strong and we ended the quarter with $7.1 billion in cash. Capital expenditures for the quarter were $1.3 billion and we continue to expect to achieve our target of less than 6.5% CapEx to revenue for the year. Our capital expenditures at Ground will decline as we reduce capacity investment, and we're planning for lower annual aircraft CapEx over time, which we expect to be approximately $1 billion in fiscal year '26. And as we previously communicated, we're standing behind our commitment to capital discipline by tying executive compensation to ROIC. Given improved earnings, we're generating significant and improved cash flow. This is supporting our ability to enhance shareholder returns demonstrated by the completion of our $500 million accelerated share repurchase program in the quarter. Looking ahead, we expect to repurchase an additional $1.5 billion in common stock this fiscal year while we're also paying our dividend. With that, let's open it up for questions.

Jonathan Chappell:

Thank you. Good afternoon. Brie, if I can ask you a question. You've had a major competitor that's really been very disciplined on price over the last few years. But now after some of the disruptions that you mentioned in your prepared remarks, it seems like they may be more aggressive on price to win back volume. How does that change the way you think about strategy, both as it relates to share and pricing not just for this year but kind of for the two to three year time period?

Jonathan Chappell:

Thanks, Brie.

Jack Atkins:

Okay, great. Thank you, and first, John, congrats to you on your new role with FedEx and Mickey, congratulations on your great career. So I guess I would like to maybe dig into the revenue guidance for a moment in terms of what's changing there. It feels like the macro assumptions are perhaps a bit weaker, but we have some competitive dynamics both in Freight and at Ground that are helping. Could you maybe kind of help us understand a little bit, Brie, in terms of what's changing to your macro outlook? And it seems like you're a bit more conservative there.

Raj Subramaniam:

Yeah, Jack, let me just add on to the last point that Brie just mentioned, that's really important as we -- even despite the fact that we have lower revenue expectations, we actually raised the bottom line. This is a sign of our DRIVE execution working. Last time on the call, I gave you all a simple formula of 1%, 2%, 3%. 1% revenue growth for the bottom of the range and 3% for the top of the range, well, I can now say it's minus 1%, 0%, 1%. It's not quite as catchy as 1%, 2%, 3%, but in fact, it's a better performance. Thank you for the question, Jack.

Operator:

The next question will come from Tom Wadewitz with UBS. Please go ahead.

John Dietrich:

Hi, Tom. This is John. Thanks for that question. Yes. Look, we've demonstrated substantial improvement in year-over-year margins in Q1 and we anticipate continued improvement in Q2 on a year-over-year basis. Also, we're focusing on revenue quality, which resulted in solid yields in Q1, up 6% year-over-year, excluding fuel surcharges, which also helped boost margin. I think the team is doing a great job identifying those opportunities with the best revenue quality and we'll continue to do so. And as Brie mentioned, we got this business and we want to keep it. So thanks for the question.

Jordan Alliger:

Yeah, hi, thanks. Just curious, can you talk a little bit more about DRIVE? You sort of talked about some of the things that you've worked on this quarter, but can you maybe tease up what we could expect the upcoming quarters or two, whether it be cost saves, aggregate cost saves expected in the second quarter, and maybe some of the targeted areas in Ground and Express from here, what we could look forward to? Thanks.

John Dietrich:

Yeah, thanks, Raj, and I echo everything that you said. And as I said in my remarks, one of the things I'm most impressed with is the rigor around this program and the accountability in the project plan. It's really extraordinary to see that come together such that we're really confident in our -- reaching our goal of the $1.8 billion for the year. And to Raj's point, it's coming from everywhere in the organization. One of the examples we used was the example of Ground. I think it was the $130 million we referenced. The reason I referenced that, not only because of the significant savings, because it also adopted some technology tools, which helped us and our bidding system, which allowed us to capture more revenue and a more efficient basis bidding system. So it's a combination of everything, operational execution, leveraging technology and going after the market. So thank you.

Scott Group:

Hey, thanks. Afternoon. I'm in a car. Hopefully you can hear me okay. John, any color how much of the $1.8 billion of DRIVE you've gotten so far? And then I know you said Ground margins would continue to improve year-over-year in Q2. Any thoughts on sequential margins at Ground and just across the rest of the business for Q2? Thank you.

Operator:

The next question will come from Chris Wetherbee with Citigroup. Please go ahead.

John Dietrich:

Sure. With regard to DRIVE first, it really is coming from every aspect of the organization. We highlighted Ground. But for some of the flight restructurings, for example, I think Express is doing a nice job there as well, taking down aircraft as well as revised the flight schedules and that will be a continued focus for me. I'm not going to be listing by group exactly where, specifically on the savings. But in the aggregate, what I will say is we're committed to achieving and will achieve that $1.8 billion for the year. With regard to the guidance, look, we took a thoughtful approach on guidance. It was a strong quarter, we recognize that and we're delighted to have been able to raise our guidance for the full year. Not only does that reflect strong execution for the quarter but really a focus on those things that we can control amid a soft market. Things are playing out largely as we expected. And there are going to be puts and takes. Yes, we enjoyed some upside from UPS and Yellow. But as Brie mentioned, it was a soft market. There were some offsets there and yield pressure in the soft market. Also embedded in our outlook is $600 million in incremental variable compensation through the balance of the year. That's $100 million more than our prior estimate. But at the end of the day, we're really pleased to have increased the lower end of the range, even when we're seeing this uncertainty, and we will keep you posted as the year progresses.

Brian Ossenbeck:

Hey, thanks. Good evening. Just wanted to ask about another angle of the Teamsters contract negotiation. Obviously, we've seen a lot of these union contracts get reset higher. This one reset the bar for comp and benefits in logistics and I think it came in even higher than you guys expected. So do you think there's a catch-up across the board from a cost perspective as you look across your various segments as they now deal with what was reset in the reality in the market? Thanks.

Operator:

The next question will come from Allison Poliniak with Wells Fargo. Please go ahead.

Raj Subramaniam:

Thank you for the question, Allison. The peak season, I would say, is that there is really no difference in our approach other than to say our service is really strong. We expect normal seasonality versus the volumes we are seeing today and probably year-over-year comparable to where we were last year. And the networks are running very well and the team is ready to support our customers during this most important season. And Brie I don't know if you want to add any more to it than I just what I just said.

Allison Poliniak-Cusic:

Thank you.

Ken Hoexter:

Hey, great. Good evening. Mickey, best of luck in retirement. It's been a great 18-year run. And John, welcome. Look forward to working with you. Just overall a great job in results and particularly at Ground. But at 2% margins at Express, any reason we're not seeing maybe more leverage at Express, given the moves you've made with parked aircraft and the structural change you talked about? Maybe walk through some of the timing on the gains at Express in particular? And I guess to wrap it up, like given the beat of $0.80 in the quarter versus the Street, yet you're raising the bottom target by $0.50, is that -- are there softening gains the rest of the year on some of the margins? I know you talked about the $600 million in cost, but you had prior talked about $500 million. So I'm just wondering if there's maybe some slimmer margins that you're looking at in other areas. Thanks.

John Dietrich:

No, Raj, I think you've really captured it. All the significant headwinds that Express faced, yet they were able to turn a profit and the year-over-year improvement is exceptional. But that said, we're going to be focusing on those markets. We're going to be focusing on continuous improvement. We're going to be focusing on the DRIVE initiatives to keep improving those margins. And on the guidance, yes, I think, Raj covered it. Thank you.

Amit Mehrotra:

Thanks, operator. Hi, everyone. Congrats on the quarter. John, I guess wondering on the Ground performance, obviously, it's incredibly strong. I'm just wondering if you would -- is there anything to ring-fence there that you would consider kind of onetime due to the volume diversion opportunity? I'm just looking at that plus 4 in August and wondering is there any cadence shift throughout the month and some of that volume went back. And I guess just clarifying on Express, I think, it sounds like there was a $150 million step-up sequentially in Express related to the incentive comp. Can you just confirm that? I can get it from the Q, but I was just wondering that maybe that may explain why the decremental sequentially were so high. And I guess that moderates as we go on because that's now in the cost structure. If you could just clarify that.

Operator:

The next question will come from Bascome Majors with Susquehanna. Please go ahead.

Brie Carere:

Sure. Great question. We're actually really pleased with the progress that we're making. Our pricing team along with DataWorks are building a great platform to be able to dynamic -- to price more dynamically. Where we are currently using this capability now is we have made our peak surcharges around the world more dynamic. We have a great spot pricing capability that we're using in our airfreight products that we are using to kind of match capacity to the market as well as we're starting to use that domestically in some backhauling. We've got a long road map of things that we're going to bring to market that we're very excited about to drive revenue quality. But I have to -- I really don't want to share much more than what's already visible in market because I certainly don't want to provide any competitive intelligence that I don't need to.

David Vernon:

Hey, good evening, and thanks for making the time, Mickey. Congratulations, John. Welcome to the circus. Quick question for you on the cost per piece in the Ground segment. The 10.30 sort of sequentially is a big surprise. How should we feel about that number in absolute terms as we look at the rest of the year? Should we be kind of running at that 10.25, 10.35 range? Are there additional things that are going to be popping in and out of that on a cost per piece basis? I'm just trying to get a sense for kind of where we should be expecting the cost structure for the full year. And if you could talk a little bit more about the drivers in this quarter. You mentioned line haul. I'm just wondering if you renegotiated a bunch of line haul rates in a down truck market, that kind of thing, which is going to -- which should be sticky for the rest of the year. Thank you.

Operator:

The next question will come from Brandon Oglenski with Barclays. Please go ahead.

Raj Subramaniam:

Well, thank you for the question. Things are going quite well as we feel we are on track to complete our Network 2.0 by our commitment of fiscal year '27. As you know, we have announced and/or implemented optimization changes in Alaska, Hawaii, Canada as well as several other locations in the Lower 48. And we are definitely learning a lot in this process. I mean, we have technology, we have facilities, we have people. And our principle is pretty straightforward, which is going to be data-driven and it's going to follow the PSP philosophy. And again, it's important to note that we will continue to use both the courier and the service provider model for pickup and delivery operations tailored to the characteristics of each market. So, so far, so good. And again, we are putting all this in place as we move forward. And post peak, we'll announce the next wave of rollout of Network 2.0.

Helane Becker:

Thanks very much, operator. Mickey, congratulations. John, welcome on board. And thanks for the time, team. So my number one question is the UAW is doing these targeted strikes. And I know automotive and automotive parts is a big part of your vertical, one of your big verticals. I'm kind of wondering how you're thinking about that, the impact in the current quarter, how you're thinking about mitigating any impact and so on, if you can help out there. Thanks.

Operator:

The next question will come from Bruce Chan with Stifel. Please go ahead.

Brie Carere:

So from a Network 2.0 perspective, I'm actually really excited about this from a FedEx Service perspective. The piece that I mentioned in my opening remarks is pickup, and I just wouldn't underestimate this. We have long known that this was an opportunity. And when Raj talked about some of the early learnings in the US market, we knew it was an opportunity but the enthusiasm from customers on how much easier it is to manage as we collapse and make the -- not just the pickup experience, the physical pickup one, but we also will rationalize our pricing there and we will automate pickups in a more streamlined fashion. So it's a better customer experience. To date, we do not -- we have not yet found opportunities to speed up the network from a Network 2.0 perspective, but we continue to iterate. What we have found is it's a lot easier to respond and adapt in the network as we bring them together. And so that has also been something that customers have asked for especially in the B2B space and health care. So we are learning a lot, but the net takeaway is customers are actually very supportive and excited about Network 2.0.

Ravi Shanker:

Thanks to everyone and Mickey good luck and thanks for the help over the years. Brie, just one quick follow-up for you. You said that pricing traction was good so far, and you're converting a pretty decent amount of the base rate increase. What percentage of that? I think historically, it's been like closer to 50%. What rate are you converting right now? And also, you said that the pricing environment remains pretty rational. But you saw the US post office basically say they're not going to have any pricing surcharges and the USPS, the UPS changes were noted on the call. I think Amazon is launching some competitive service as well. Do you think 2024 could be a tougher environment pricing-wise across the industry?

Operator:

The next question will come from Stephanie Moore with Jefferies. Please go ahead.

Brie Carere:

Sure. Happy to answer that question. So when we talk about the volume that came on, I think it's important to split it. Actually, if you look at both, half of it came directly from Yellow customers, so give or take, about 2,500 pieces a day. And the reason being is that Yellow had a lot of low-quality revenue. And so there was some revenue there and some customers that really didn't want to pay for the value of the FedEx Freight fee and the quality that we provide. What happened, however, was some competitors took on more Yellow volume and their service was not what it needed to be. And so as a result, we went and got an additional 2,500 pieces from the market. Net takeaway is the margin of the 5,000 was very healthy. The sales team was incredibly disciplined and both Lance and I are very, very pleased with that volume that the network is running really well. And I am confident that we will keep the majority of that and that's what we plan to do.

Jeffrey Kauffman:

Thank you very much for squeezing me in. And congratulations, John. And Mickey, it's been great working with you all these years, so thank you. John, a question for you, and I just wanted to go back and clarify kind of what Ken Hoexter was asking on the guidance. The adjusted earnings went up, I guess, about $0.25 at the midpoint and you highlighted the reasons why. But it looked like the unadjusted earnings went down about $0.15 at the midpoint. You took the high end of the range down to $16.60 and the low end up a little bit. And I just want to understand, you talked about the $100 million of incremental incentive comp. You talked about some of the continued yield pressure. You talked about some of the negatives. And then I saw that it looked like you also extended the adjustment range for the business optimization costs up from about $500 million to $620 million. So is that the net that explains the difference between the $0.15 reduction in the unadjusted guidance and the $0.25 increase in the adjusted guidance at the midpoint?

Jeffrey Kauffman:

Okay. That's my question. Thank you very much.

Raj Subramaniam:

Thank you very much, operator. Let me say that in closing how proud I am of our team for delivering such a strong start for the year. Our execution of the structural cost reductions remain on track, and as we prepare for peak, we will continue to make every FedEx experience outstanding for our customers. We've proven that DRIVE is changing the way we work, and we're enabling continued transformation across FedEx as we build the world's most flexible, efficient and intelligent network. Thank you for your attention today. I will see you next time.

Operator:

Good day, and welcome to the FedEx Fiscal Year 2023 Fourth Quarter Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mickey Foster, Vice President of Investor Relations. Please go ahead, sir.

Raj Subramaniam:

Good afternoon, everyone. Before I start my remarks, I first want to acknowledge the upcoming retirement of Mike and his terrific contributions and accomplishments at FedEx over the last 18-years. Mike was named CFO in March of 2020, and I'm grateful for his leadership over the three years since then as we navigated a global pandemic and significant change. Due to his tireless work, FedEx is on solid footing as we execute the next phase of our strategy. Above all, Mike has been a good friend and a colleague of mine, and I wish him all the very best. Now let me turn to my remarks for the quarter. Thanks to the hard work of the FedEx team, we have demonstrated continued progress on our journey to transform into the world's most flexible, efficient, and intelligent network. In the fourth quarter, we introduced and began preparing for one FedEx. At the same time, we continued to bend the cost curve through our DRIVE initiatives. This supported our fiscal year 2023 earnings, which came in above the midpoint of our March outlook, despite continued soft demand and an unplanned year-end tax expense, which negatively impacted our earnings by $0.18 for the quarter. Our operating performance remains solid. We're entering fiscal 2024 with a continued focus on areas within our control and a commitment to execute swiftly on our priorities. This focus will support sustained profit improvement in FY ‘24 through an environment that we expect to remain marked by demand challenges, particularly in the first-half. Turning to slide six, I will start with a snapshot of the quarter. Total revenue in the fourth quarter was down 10% year-over-year as volumes declined with demand remaining soft across the market. With this said, the rate of volume decline in Ground and Express improved sequentially. As expected, yield trends have been pressured in international markets where the supply demand balances have changed. We continue to maintain our focus on revenue quality and are committed to our disciplined pricing approach focused on the long-term. While we expect these pressures to persist, we do expect moderation throughout the fiscal year. With our execution, on a number of cost actions, we delivered adjusted operating profit of $1.8 billion. Our fourth quarter performance enabled us to close out the year with an adjusted operating margin of 6% and adjusted earnings per share of $14.96. While our revenue declines were in line with the industry, I'm pleased to note that our flow through performance continues to improve, and we believe is the best in the industry in the first quarter of calendar year. Beyond the headline numbers, our results this quarter embed continued progress on our transformation. I'm pleased to see our cost out efforts take hold, but I'm also equally excited about the operational improvements we are driving as we build the smartest logistics network in the world. For example, our market leading picture proof of delivery is now available to 90% of global residential deliveries, having launched in Europe earlier this month. Picture proof of delivery gives our customers visibility to their delivered shipment at the click of a button and it has led to a 14% reduction in disputed delivery cases and contributed to a 17% reduction in call volume in the United States. Our four hour estimated delivery time window which we have rolled out to 47 countries is also improving the customer experience. And at Ground, our dock modernization efforts are enhancing productivity, helping us run our dock smarter with new technology and key data insights. This includes a new network operating plan that uses machine learning to develop more detailed and accurate volume forecast. Ground remained a standout in this quarter as the team delivered operating income of over $1 billion. For the first time in company history, the Ground team expanded margins despite lower volumes in the second-half. This is a clear indication our drive transformation is working and gives us confidence as we push forward. And amid continued volume pressure, cost per package this quarter increased only 1.9%. This was supported by a total reduction in operating expenses of $350 million as the company continued to manage staffing levels effectively, benefited from stock closures and consolidations and reduced Sunday operations. These actions help bring Ground's fourth quarter operating margin to 12.1%. At Express, we have made significant progress aligning costs with underlying demand. Our initiatives continue to ramp and we expect accelerating benefits in the upcoming fiscal year. Demand dynamics combined with yield pressure drove a 13% decline in revenue at Express. This performance was generally in line with our expectations coming into the quarter. In the phase of these headwinds, the Express team was able to accelerate cost and productivity efforts driven by a combination of structural and volume-related initiatives. The Express team reduced total flight hours by 12% year-over-year and permanently retired 18 aircraft, including 12 MD-11s this quarter. The team is also planning to take another 29 aircraft out of schedule flying in fiscal 2024. In addition, we made excellent progress implementing structural cost savings initiatives beyond flights, including certain domestic efficiency initiatives. This includes the shift to a single daily dispatch of couriers, which achieved its target of [$15] (ph) million in fourth quarter savings, as well as accelerated hub productivity measures. In Europe, we continue to improve operational execution across the region. Notably, we announced the official opening of two of our hubs this quarter. In April, we reopened our international road hub in Duiven, Netherlands and this month, we opened our new state-of-the-art road hub in Novara, Italy. These two facilities have enhanced their capabilities, enabled more efficient routing, and improved our service on the continent. In aggregate, total operating expenses at Express were down $1.1 billion in the quarter. The magnitude of the operating margin decline has continued to narrow sequentially as our initiatives take hold. At Freight, the team is focused on maintaining pricing discipline, while flexing costs to protect profitability. The Freight team was able to reduce operating expenses by over $330 million in the fourth quarter. This will be further supported by our announced plan to close and consolidate 29 locations, which will be completed by August. Consolidation will improve service levels, while lowering our cost to serve. Further, we have conducted another round of furloughs to match staffing with volume levels and are limiting, hiring of salaried employees. Turning to slide seven. We continue to make significant progress in taking cost out of our network, delivering a $2 billion year-over-year reduction in operating cost in the fourth quarter of FY ’23. This included more effectively matching flying with demand, marking the first quarter of this year where our flight hours declined more than the underlying volumes. Additionally, we continue to aggressively manage headcount, including attrition to align our teams with the network changes underway. We exceeded our target with U.S. headcount down by about 29,000 in FY ‘23. Also included in these cost reductions are ramping benefits from the numerous initiatives we have identified across the 14 DRIVE domains. Given our progress, we are confident that we can deliver on our previous goal for about $1.8 billion in cost reduction benefits from DRIVE this fiscal year and $4 billion of permanent cost reductions in fiscal year 2025. As we introduced in April, between now and June of 2024, we will be consolidating our operating companies into one unified organization. One FedEx is the next step of this journey to realize our full value potential. It aligns our organization to one corporate structure that will facilitate the execution of our DRIVE transformation and will further enable the work that's underway in Network 2.0. Our work towards this goal is already taking shape. We have taken a significant step forward in the implementation of Network 2.0 with today's announcement of the transformation of our Canadian operations. In April of 2024, we will begin to transition all FedEx Ground operations and personnel in Canada to FedEx Express, creating a truly integrated and unified Canadian network. This unification is enabled by the nature of the Canadian market where the population is heavily concentrated in a few key geographies currently serviced by both OpCos. Consolidation will create significant efficiencies throughout the business from first to last mile and across our support teams. We expect this change in Canada to generate an annualized benefit of over $100 million upon completion in FY ‘25. We've announced transitions in 20 markets and Canada marks the first large scale implementation of Network 2.0, which builds up the learnings from our completed transitions in other geographies. To be clear, we're not taking a one size fits all approach to our Network 2.0 strategy. Success depends on a mix of models including employees, and contracting with service providers as all are important pieces of how FedEx moves packages. Looking ahead to FY ’24, we're entering the year with a clear focus on what is within our control in an underlying environment that remains dynamic across geographies. This backdrop is likely to pressure revenue growth particularly in the near-term. As a result we're taking a prudent approach to our full-year outlook that builds upon our solid finish to FY ‘23. We'll also make progress on reducing capital intensity by continuing to focus on the highest return opportunities in an efficient manner. After FY ‘25, we have no additional firm commitments on Jet Aircraft CapEx. As such, we expect our aircraft related CapEx to decrease after FY ‘24 and be approximately $1 billion in FY ’26. This capital allocation strategy represents our approach to a more efficient and nimble network. We will continue to look for additional opportunities as we proceed with our aircraft modernization strategy. We'll bring this discipline along with our improved flexibility and agility to ensure that we are successful given the uncertain external environment. In closing, I'm confident that the progress we are making on our transformation will translate into improved margins, returns and cash flow throughout the year. At the same time, our commitment to driving operational improvement will further enhance the customer experience. Now let me turn it over to our Chief Customer Officer, Brie Carere, who will discuss market trends and our commercial strategy in more detail.

Mike Lenz:

Thanks, Brie. I'll start on slide 14. The FedEx team demonstrated strong operational execution to close out fiscal 2023. Looking at our transportation segment performance for the fourth quarter, starting with Ground, which continues to deliver strong results. Operating income increased 18% and operating margin expanded 210 basis points to 12.1% even with volumes down 6%. Margin expansion was supported by yield growth of 5% and strong cost controls driven by lower line haul expense. At Express, we're seeing sequential operating margin improvement as our team continues to move with urgency to drive structural and volume related cost improvements. Adjusted operating income declined 47% and adjusted margin contracted 320 basis points to 5% as package volumes were down 7% and yields declined 3%, due to international package yield pressure. At Freight, the team continues to navigate a softening volume environment. Operating income decreased 26% and operating margin declined 210 basis points as shipments declined 18% and yield moderated. Our fourth quarter results include several non-cash items. We recorded an impairment charge of $70 million related to the decision to permanently retire from service 18 aircraft and 34 related engines. The results also include $47 million of goodwill and other asset impairment charges related to the ShopRunner acquisition. In addition, we incurred an unplanned tax expense of $46 million from a revaluation of certain foreign tax assets. To provide additional color on recent demand trends and what we are planning for in our outlook, slide 15 shows trailing monthly volume trends over the last six months for our major service categories. Volume declines continued in the quarter, while still negative, Ground in U.S. Domestic Express year-over-year package volume trends improved into May on a sequential basis. As we look to the first quarter of FY ‘24, we expect volume declines to continue to moderate at Express and Ground as we lap the onset of softer volumes, while freight will continue to experience pressure. This brings me to our FY ‘24 earnings outlook on slide 16. We remain acutely focused on maintaining our strong commercial position, prioritizing revenue quality, and driving profitability improvement through our efficiency initiatives supported by DRIVE. These efforts are more effectively aligning our cost base with demand, reducing our permanent costs, and increasing the flexibility of our network. We do expect external business conditions to remain challenging near-term and they remains significant uncertainty with respect to the timing of demand recovery, particularly in the back half of our fiscal year. As a result, we are preparing for several potential outcomes as we think about the year ahead. This led us to establish an adjusted earnings per share outlook range of $16.50 to $18.50 for fiscal 2024. In a demand environment, it remains consistent with what we are currently experiencing, we anticipate flattish revenue for the full-year and full-year adjusted earnings per share toward the low-end of the range. Should macroeconomic conditions support an improving demand environment in the back half of the year? We expect to see modest volume improvement for the year. In this scenario, we expect revenue to be up low-single-digit percentage for the full-year. This would also translate into greater operating leverage from our more efficient network on a higher revenue base, driving an outlook for full-year adjusted earnings per share closer to the high-end of our range. The key external factors that we’ll determine the FY ’24 outcome are broader economic activity in North America, Europe and in Transpacific trade, inventory restocking, and the development of e-commerce activity as we continue to differentiate our offering. At Express and Ground, we expect to build on fourth quarter cost momentum and see adjusted margin improvement in FY ‘24. Freight margins will remain strong in FY ‘24, but lower than FY ‘23 given significant volume reductions and yield pressure. Turning to other aspects of our outlook. First, we expect a $230 million net non-cash pension headwind with a $330 million headwind below the line, offset by a $100 million lower pension service costs. Partially offsetting this below the line impact, we expect higher interest income on our cash balances. Our projection for the full-year effects of tax rate is approximately 25% prior to the mark-to-market retirement plan adjustment. We are projecting $500 million of business optimization cost at FY ‘24 associated with our transformation. We still expect a total pretax spend of $2 billion through FY ‘25 and the timing and amount of these business optimization expenses may change as we revise and implement our plans. Moving to the next slide, we want to share how we're thinking about the operating profit considerations embedded in our expectations for the full-year. For illustrative purposes, I use adjusted EPS of $17.50, the midpoint of the outlook range. This scenario is based on modest demand recovery leading to limited coverage of base cost inflationary pressures. In addition, we expect approximately $800 million of international export yield pressure as peak surcharges significantly diminish and product mix continue shifting toward deferred offerings. We also include a $500 million increase in variable compensation to ensure our compensation package is competitive. This is critical to retain key talent as we execute our DRIVE transformation. Importantly though, these pressures are more than offset by the $1.8 billion in cost savings from DRIVE. Together, these illustrative components lead to FY ‘24 adjusted operating profit of approximately $6.2 billion at the midpoint of our outlook. Moving to slide 18, we continue our unwavering focus on efficient and responsible capital allocation in our pursuit to drive shareholder returns. For the year, we ended with $6.8 billion in cash in line with where we began the year, despite the challenging business environment. We accomplished this through continued improvement in cash conversion cycles and net working capital along with reduced capital expenditures. Capital expenditures were $6.2 billion which represented 6.8% of revenue, versus 7.2% of revenue in fiscal 2022. FY ’23 CapEx was slightly higher than our projection due largely to timing, as easing supply chain constraints accelerate the delivery of equipment and other projects. With a slight acceleration of certain spend into FY ‘23, we are now projecting $5.7 billion in CapEx for FY ‘24, which achieves our target of less than 6.5% CapEx as a percentage revenue a year earlier than we projected. Our fiscal 2023 adjusted free cash flow of $3.5 billion supported the repurchase of approximately $1.5 billion in stock at an average share price of approximately $163 a share and we paid $1.2 billion of dividends. In addition, we funded $800 million in voluntary pension contributions. Looking ahead, we will continue to invest and attractive return improvement initiatives. We're committed to further reducing capital intensity. Capacity investments at Ground will decline in addition to the lower aircraft expenditures expressed Raj mentioned. And we expect to repurchase an addition of $2 billion stock in fiscal 2024. As previously announced, we are raising our dividend by 10%, which increases our adjusted payout ratio to over 30%. These significant stockholder returns reflect confidence in our continued execution of profitability and return improvement initiatives. Lastly, we are planning for $800 million of voluntary pension contributions to our U.S. plans, which were 94.5% funded at year-end. In closing, we are making progress on our transformation and remain focused on delivering shareholder value by driving improved profitability, lowering our capital intensity, while continuing to deliver strong return of excess cash to shareholders. And with that, let's open it up for questions.

Allison Poliniak-Cusic:

Hi, good evening. Just want to go back to the optimization in Canada. I know you talked a little bit about the uniqueness of the region. Could you maybe talk to how does that impact the deployment of the optimization? And then more importantly, relative to say the U.S., how is the scale different in Canada versus U.S. and how that deployment would go forward? Thank you.

Operator:

The next question will come from Jordan Alliger with Goldman Sachs. Please go ahead.

Mike Lenz:

Sure, Jordan, this is Mike. So let me break that down to a couple of elements. First, the demand projection we're talking about for the second-half of the year would be relative to what we have been currently experiencing, so that's the degree of uncertainty there in terms of how that flows going to the back half of the year. In the front half of the year, keep in mind that the significant inflection that we saw last year was very late in the first quarter, with that most pronounced at Express. So, we will be lapping that for the first quarter, and in addition, the trail-off in Freight volume accelerate into the mid to upper teens later in the calendar year as well, but largely in the falls when that started, so you got to think about the first quarter considerations there as you put the whole year together and our modeling. But in terms of the outlook overall, we're not projecting any material inflection in the demand environment to get to that point there that you've referenced.

Jon Chappell:

Thank you. Good afternoon. Mike, just sticking with you on slide 17, the $300 million of revenue, net of cost increases, is there any way to break down how much of that is volume versus price? And if it is more kind of price-driven, the $2.7 billion of variable cost that you took out this year, how much do you have added back in fiscal '24?

Operator:

The next question will come from Brian Ossenbeck with JP Morgan. Please go ahead.

Brie Carere:

Okay, I think I got all that Brian. I think you got a couple of questions. Let's start with the last part first, so I think the question was, are we seeing any benefit from the UPS labor negotiation, so the short answer is, in Q4 we did not see any material benefit because of those discussions and we have not planned for any benefit moving into fiscal year ‘24. What I can tell you is that this has opened a lot of doors. We're having a lot of great conversations with legacy UPS customers and we feel really strong -- we feel really good about the sales pipeline because of the strong value proposition we have versus our primary competitor. I think the other question was about the mix and are we seeing any customers make trades within the portfolio where we're seeing that most pronounced and we have plan for it, to Mike's point, it's in our range accounted for is in Asia. Obviously, capacity has come back relative to demand, and we did reopen our IE product in the fourth quarter, that has performed well, and actually I'm really pleased with the performance that I'm seeing from the Asia-Pacific team and their sales pipeline, but that's where we've seen the biggest shift.

Jack Atkins:

Okay, great, thank you for taking my question. So, I guess maybe if I could a two-parter here, the guidance itself, I think the bottom-end, Mike, if the way you described it, if I understood it correctly, contemplates the operating environment remains as it is right now, if we were to see things deteriorate in terms of just underlying customer demand, is the company prepared to maybe pull forward some of the DRIVE savings from FY '25 into FY '24, is that even really possible at this point, if you maybe you could talk about that? And then for Brie for the second part of the question is the $800 million of International Export yield pressure that you guys are going to be seeing this year, is that going to fully capture sort of getting back to sort of pre-COVID levels there? Again, thanks for the two-parter, but would appreciate the effect.

Raj Subramaniam:

And let me just jump in before I turn it on to Brie here, so it's a simple one, two, three formula. At 1%, we are at the low-end of the range; at 2%, we're in the middle; at 3%, we are at the higher-end of the range in terms of revenue growth. Now, to go beyond that, we become non-linear in terms of significant operational leverage, so, yes, DRIVE is working and we have flexibility to pull additional levers as we need to. Brie?

Operator:

The next question will come from Chris Wetherbee with Citigroup. Please go ahead.

Mike Lenz:

Sure, Chris, this is Mike. The $1.8 billion, it is a sequential build, as we go through, we continue with the discipline and rigor of the DRIVE framework. So, as certain things are implemented during the year, we won't get the full run-rate of that, because there is a continuous flow of initiatives. So it will be least amount of that $1.8 billion will be in the first quarter and build as we go through the year and then that gives us the run-rate momentum then to get to the $4 billion fully by FY '25.

Brandon Oglenski:

Yes, thank you, and good afternoon. Raj, I think in your prepared remarks you said that you've already transitioned something like 20 markets to One FedEx operation, but not every market is the same. Can you elaborate on that a little bit and how this hybrid model going to work in the States, where you do have overlapping contractors and potentially employee drivers? Thank you.

Operator:

The next question will come from Tom Wadewitz with UBS. Please go ahead.

Raj Subramaniam:

Tom, firstly, I may say this much, as I said in my prepared remarks, this is the first time in history of FedEx that's in the FedEx Ground where the volumes declined and our operating margin expanded. So clearly this is beyond just flexing for volume and we have -- this is really DRIVE taking effect as well. So this is -- we're just very, very pleased with how John and his team is performing in Ground, and by the way I'll give kudos to the Express team and Richard's team as well, as we have started to see significant improvement in the fourth quarter. To your question about the macro. So when we talked in September, we pointed to three things. We said that the industrial economy was slowing down and because of inflation, interest rates, and slowdown in global trade, we said that the consumer spending was shifting to services versus goods. And then thirdly, there was an e-commerce reset coming out of -- coming out of the pandemic. Well, all those three things happened and they were detrimental to volume for the whole industry, so I mean roughly the same revenue performance on the calendar quarter that is comparable across the sector. If you look ahead here, at this point, the one and two are basically along the same lines we have seen in the last few months. I think on the e-commerce side, we expect to see growth now. I think the reset is probably complete and e-commerce is going to grow into the next calendar -- sorry, the next -- this FY ‘24 timeframe. So, we're watching this very carefully. The visibility, especially in the second-half is very difficult, given the dynamic circumstances we are seeing. We will see how the industrial production goes. We'll see how GDP and trade goes, and we'll follow the inventory stocking and inventory to sales ratio very carefully, and -- but at the end of the day, we are focused on the things we can control. We made a determination that we are going to come out of this stronger than we went in and exactly what we're doing and I'm very, very pleased with the way we are executing DRIVE. So sorry for the long answer, Tom, but I thought I want to give you a full perspective there.

Operator:

The next question will come from Ken Hoexter with Bank of America. Please go ahead.

Mike Lenz:

That was a lot. Certainly, like I said, we will see margin improvements at Express and at Ground in ‘24. Freight will definitely will see some margin pressure there, so I'm going to leave it at that. The Freight will mitigate, like I said earlier, we will see the largest margin pressure at Freight in Q1 and that will mitigate as we move through the year. Similarly, I would expect the Express margin improvement to improve to a greater degree beyond Q1, as well as we move through the year. So I'll leave it at that. As it relates to Europe, we are absolutely -- as a component of that Express improvement projecting improved profitability in Europe, keep in mind that within the DRIVE domains, we've identified $600 million of value that we will realize from the Europe initiatives there. So we will absolutely see progress on that in ‘24 and going forward.

Scott Group:

Hey, thanks, good afternoon. So, Raj, in one of the earlier answers, you basically said one, two, three, right, for the earnings sensitivity and revenue sensitivity. So that's basically every billion of revenue gets you an extra dollar of earnings, is that the right sensitivity to think about just longer-term beyond just this year as Freight eventually recovers? And then just separately, the $5.7 billion of CapEx this year, how much is included in aircraft? I just want to get a sense of what the CapEx could look like in a couple years when we're spending a lot less on planes. Thank you.

Raj Subramaniam:

And Scott, on the one, two, three, I just wanted to keep the math straight-forward here, it's simple one, two, three formula, but the point I wanted to make also is that, as it accelerates beyond that, then the curve becomes non-linear. As you know, we have significant operating leverage. I think you are the one who called it, opening the jaws of the crocodile then that's kind of what's going to happen.

Conor Cunningham:

Hey, everyone, thank you. Just on the ‘24 revenue assumption, I'm a little confused on how that will work with export yield pressure. It just seems like the other lever is going to be volumes in general. Just to be super clear, are you assuming a year-over-year increase in '24 at the midpoint? Just any help there would be great. Thank you.

Operator:

The next question will come from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Brie Carere:

Yes, absolutely, it's a fair question. So we planned right now for flattish to single -- low-single revenue growth and that's really basically on the backdrop of the economy that we're experiencing right now. We're all watching the consumer, as Raj talked about, we are still seeing consumer strengths here in the United States, but we are seeing an e-commerce reset. So from a green shoots perspective, one of the things that we're going to be looking at is that e-commerce growth, it's sitting at 7% to 8%, it's important to note our percentage of that is closer to 2% to 3%, because we don't play in grocery and obviously within that 7% to 8% is also, buy online, pickup in-store, so we will be keeping an eye on that consumer strength here in the United States and would love to see, as we head into peak, a little bit of a different shift. We have not seen that yet, but we'll be watching for it. And then the other thing, from an Asia perspective is we're going to watch closely on Asia reopening. We haven't seen significant uptick there, but if that happens to Roger's point, that will absolutely be a tailwind for us. And then, honestly, our own execution in Europe. I'm really pleased with the service that the European team is delivering. We've got some green shoots in the domestic markets in Europe and we're working that really, really hard from an operations and a sales perspective. So there are definitely some green shoots we're working on.

Helane Becker:

Thanks, operator. Hi, team. So, easy questions. I think the pilots are rolling on a new contract and I'm wondering if the cost increase associated with that is included in the guidance. And the other part of the question is as you reach higher, your older aircraft, are you also retiring pilots or is there an excess of pilots?

Operator:

The next question will come from Scott Schneeberger with Oppenheimer. Please go ahead.

Mike Lenz:

Scott, look, as Raj mentioned, flight hours were down 12% in the fourth quarter, which is greater than the volume decline, so we've taken significant flying out of the network. We've said that that was anticipated once the supply-demand constraints were eased and so that is the decision to then retire these aircrafts because we continue to reduce the Trans-Pacific and Trans-Atlantic flying to match demand, and we'll continue to lean into that as well as utilizing the flexibility of capacity in the market.

David Vernon:

Hey, thanks for fitting me in here. So, Mike, in the scenarios you've outlined for us, is there a scenario where margins on a consolidated basis don't get better on an adjusted basis in 2023 or are we looking for margin expansion? And then, Brie, as you think about the large customer change in behavior, I assume we're talking about the post office, are we expecting more of that priority mail revenue to decline given what [DeJoy] (ph) said publicly around the desire to Ground some of that traffic, and then how do we think about that sort of in connection with that your desire also to kind of reduce the fly network a bit.

Brie Carere:

Yes, the customer we are talking about is the United States Postal Service. Obviously, we've had a long and productive and profitable relationship with the post office, you're correct. Their 10-year strategic plan is to track more volume and fly less, so to Mike's point earlier, we have accounted for that in this year's fiscal range. We are committed to meeting the service obligations in that contract, which does end in September 2024 and so we've accounted for that headwind. At that point, it will become a tailwind as we either renegotiate or we will adjust our network accordingly.

Joseph Hafling:

Great. Good evening. This is actually Joe Hafling on for Stephanie. Thanks for squeezing me at the end. I'll keep it to one. My question is maybe for Mike, it's a bit in the weeds, looking at Ground operating profit expansion, purchased transportation costs are obviously down big year-over-year at 40%, I think it's the lowest percent of revenue in 10-years or something with the softer macro, so how should we think about PT, particularly in the context of a volume rebound and the need to maybe source third-party capacity if the macro improves, especially as more cost are coming out of the network? Thank you.

Operator:

The next question will come from Bruce Chan with Stifel. Please go ahead.

Mike Lenz:

Sure and thanks for that, Bruce. But yes, on the LTL side, look, you've seen how fast the team reacted to declining volume environment earlier in the year and we still we're expanding margins that accelerated, so that was more challenging. So, look, we will continue to look to optimize the facilities. It's a holistic perspective, so the 29 facilities, were smaller ones that weren't the most efficient, so as we lean into what could be a demand recovery, that volume could be accommodated within the larger facilities and that just has that much more incremental contribution as and when that comes back.

Amit Mehrotra:

Thanks. Hi, everyone. Mike, I know there's a lot of questions on the long-term 12-month period, that's hard, I get it, but maybe help us calibrate expectations for the near-term, do you expect Express and Ground profit to be up in the next quarter? I know their seasonality, but the question, there's obviously DRIVE savings? And then, Raj, the decision to go external for the CEO search that obviously wasn't lost upon me that external criteria, that's a big deal for FedEx, obviously and I'm wondering if you can talk about what your -- what the Board -- what you're trying to achieve there in terms of hiring somebody from the outside, which really hasn't happened before for such a senior position. Thank you.

Raj Subramaniam:

And Amit, yes, first of all, let me again thank Mike for just incredible work over the last 18-years and particularly in the last three and we have a fantastic finance team and a great organization. From our succession planning, we are looking at somebody who has deep financial expertise, but also strong operational capabilities, and help lead FedEx through our DRIVE transformation program. So again, thank you for your question.

Raj Subramaniam:

Thank you, operator. Before we close, I want to give Mike an opportunity to say a few words.

Raj Subramaniam:

Thank you, Mike. In closing, I also want to thank our team members for their hard work and dedication as we build the world's smartest logistics network. We made tremendous progress on our transformation efforts in fiscal year '23 and the team is already moving with urgency as we enter fiscal year '24. We know there's significant opportunity ahead and I'm confident in our ability to continue to execute. Thank you very much.

Operator:

Good afternoon, and welcome to the FedEx Corporation Third Quarter Fiscal 2023 Earnings Call. Currently all callers have being placed in a listen-only mode. And following management’s prepared remarks the call will be opened up for your questions. [Operator Instructions] Please be advised that today’s call is being recorded. I will now turn the call over to Mickey Foster, Vice President of Investor Relations at FedEx. Thank you. Sir, you may begin.

Raj Subramaniam:

Good afternoon, everyone. Thanks to the hard work of the FedEx team, our third quarter earnings were ahead of our expectations in what remains a challenged demand environment. The team delivered outstanding service throughout and following peak despite significant weather disruptions across the United States. Importantly, our third quarter results also reflect our continued progress on the fundamental transformation of FedEx as we moved with urgency to realign our cost structure. Our cost reduction actions supported margin expansion at both ground and freight, but have not yet fully offset the impact of continued pressures at Express. Results at Express came in below where they need to be and below the potential we know exists in this business. We’re committed to addressing these cost imbalances, and we will be taking further actions in the coming months, including a more pronounced readjustment of the air network. Because of the magnitude of changes, we are planning across our air network and our continued need to maintain high service levels, there’s a lag in the timing of expense adjustments. We expect to see sequential progress in the fourth quarter. Overall, our efficiency efforts are gaining traction ahead of schedule. And I’m pleased that this translates into an improved earnings outlook for fiscal year ‘23. Now turning to slide 6 for a snapshot of the quarter. Volumes declined by a low double digit percentage across all segments partially offset by higher yields at Ground, U.S. Domestic Express and Freight. This led to a year-over-year revenue decline. While revenue fell across all segments, the decrease was most pronounced at Express. Adjusted operating margins and EPS declined year-over-year as volume softness was partially offset by higher yields and cost reduction actions. Last quarter, we shared our expectation for continued pressures from lower volume and inflation. But what is also embedded in these results and what I’m seeing firsthand every day are tangible signs of the fundamental transformation happening at FedEx through DRIVE. We are right sizing our cost base to match today’s realities and creating a more efficient and agile network. We’re not simply taking out cost, we are simultaneously focused on running our business more efficiently, flexibly and profitably, which will create significant value for our stockholders in the years to come. I’m particularly pleased with the progress we’re seeing in ground. The team has taken aggressive actions to address its cost structure and has effectively mitigated volume pressures. One of the key drivers at Ground was the ability to manage staffing levels and associated expenses, which resulted in reduced salaries, benefits and purchase transfers -- transportation costs. Combined, these expenses were down 8% year-over-year. Despite the dynamic environment, Ground continued to deliver for its customers during peak with an average time in transit of approximately 2 days, compared to 2.35 days in fiscal year 2022. In aggregate, these initiatives led to a modest increase in cost per package of 1%, despite 11% volume declines, and total operating expenses were down $345 million year-over-year. When combined with our continued focus on revenue quality, total operating income was up 32% year-over-year and operating margin of 9.7% that improved 240 basis points year-over-year. Freight has also illustrated disciplined commitment to profitable growth, revenue quality and managing cost of volumes. The team continues to execute cost reduction actions in this regard. Beyond day-to-day management of variable costs, the Freight team is temporarily parking and selling equipment to right size the fleet and reduce future maintenance costs. The team is also limiting hiring and furloughing employees to match staffing with volume levels. We’re taking the relevant learnings from this proven Freight model and implementing them at both Ground and Express. Total operating expense at Freight was down 6%, supporting 270 basis points of margin expansion in the quarter. Importantly, our cost initiatives did not compromise the consistent outstanding service levels delivered by the Freight team. Turning to slide 7. We have made significant progress in taking costs out of our network with $1.2 billion in year-over-year cost savings in the third quarter. We are highly focused on taking permanent costs out of the system and remain on track to generate permanent savings of $1 billion this fiscal year relative to plan. Last month, we announced a streamlined reporting structure that will reduce the size of our officer and director team by more than 10%. We will continue to aggressively manage headcount including attrition to align our teams with the network changes underway. By the end of this fiscal year, we expect U.S. headcount to be down roughly 25,000 year-over-year. At Express our cost base is constrained in the short-term, where Express network is vast and complex and requires time to adjust to changing demand conditions. Therefore, we’re taking additional steps to address our fixed expense structure. This quarter, we reduced flight hours by 8% and salary and benefit expenses by 4%. We also parked an additional nine aircraft, downgauged on certain routes and implemented various productivity improvements. As a result of these actions, we mitigated 45% of total revenue declines on an adjusted basis. This was significant improvement versus the first half. Within the U.S. Domestic Express, we implemented a single daily dispatch of couriers in February. This change removes domestic pickup and delivery routes, improves hub and ramp efficiency. We expect this will achieve about $50 million in savings in Q4 and ramp up to about $300 million annual savings by fiscal 2024. We expect progress to accelerate in the fourth quarter with total flight hours expected to be down double digits and further FTE reductions by year-end. This will support mid to high single digit reductions in total expenses year-over-year at Express. We also plan to temporarily park additional aircraft in the fourth quarter. With continued cost discipline, we anticipate sequential operating margin improvement in the mid single digits for the fourth quarter. Assuming the challenging demand environment persists in Q4, we expect to be able to mitigate at least 60% of the revenue related headwinds we’re facing at Express. This supports improved profitability in the fourth quarter compared to the third. We will build profitability from here at Express. Before we dive into the financial results in more detail, I’ll provide a quick update on DRIVE, the program to support our transformation to create a more nimble, efficient and profitable FedEx. We are on track to deliver $4 billion of permanent cost reduction by the end of fiscal 2025. I’m very pleased with the progress the team has made in identifying actions that will not only reduce costs but make our network more agile and flexible as we execute Network 2.0. One part of this effort, as shown on slide 8, is to reconfigure our air network. This requires many steps, including plans currently being developed to phase out our fleet of MD-11s. Our aircraft modernization program and use of 777s and 767s affords us the ability to flex our plans. And as we operate more collaboratively, we are leaning into the ground transportation more, requiring less CapEx while enabling us to reconfigure our network more quickly. This directly supports our goal for meaningful ROIC improvement in the coming years. We’re excited to share more about the strategy at our DRIVE program update on April 5th. There, we will focus on the actions we are taking to improve our performance, along with additional information to help you better model the impact on our progress. Now, let me turn it over to our Chief Customer Officer, Brie Carere, who will discuss market trends and our commercial strategy in more detail. Brie?

Mike Lenz:

Thank you, Brie. Starting with our performance in the third quarter. We delivered earnings ahead of our expectations as our team moved with urgency to align our costs with lower revenue as global volumes remain under pressure. Turning to the transportation segments. At Ground, operating income increased 32% and operating margin expanded 240 basis points to 9.7%. Margin expansion was supported by both, yield growth of 11% and cost reduction actions. These factors were partially offset by lower package volume, higher infrastructure costs related to previously committed projects and increased other operating expenses. And at Freight, the team’s focus on revenue quality and managing costs drove better profitability as operating income increased 15% and margins expanded 270 basis points. This was driven by revenue per shipment, up 11%, as well as a gain on a facility sale and partially offset by decreased shipments. At Express, our results continue to be pressured, and our team is acutely focused on driving improved profitability. Adjusted operating income declined 81% due to 10% lower package volumes as cost reductions lagged volume declines. Volume pressures were partially offset by improved yields. Revenue per package grew 3% year-over-year, primarily driven by higher fuel surcharges and base rates, partially offset by exchange rate impacts. Yield growth decelerated and inflected negatively in international export, increasing pressure on profitability. Despite our performance in the third quarter, due to the actions we are taking in Express, we expect to see sequential operating profit and margin improvement in the fourth quarter. To provide additional color on recent demand trends and what we are planning for in our outlook, slide 17 shows trailing monthly volume trends for our major product categories. Volume declines continued throughout the quarter. While still negative, U.S. Domestic Express, International Priority and Ground Package trends improved somewhat into February on a sequential basis. As we look to the fourth quarter, we expect volume declines to continue moderating at Express and Ground as we lap the onset of softer volumes. Yield growth will be pressured as year-over-year fuel surcharge comparisons normalize and customer demand shifts, most prominently in Asia. Moving to slide 18. Our focus on efficient and responsible capital allocation has not wavered. We are in an era of lower capital intensity at FedEx. Last fiscal year, CapEx was 7.2% of revenue, down from our historical levels of roughly 8%. By fiscal year ‘25, our commitment is to be at 6.5% or lower. As I mentioned in December, we reduced our fiscal year ‘23 capital spend forecast to $5.9 billion, which is approximately a $900 million reduction from initial plans for the year to account for the lower demand environment. We are prudently deferring and slowing the pace of projects, improving our capacity utilization and planning for moderated aircraft fleet investment to drive ROIC improvements. In line with this approach, we expect capital spend to be roughly flat in fiscal 2024 versus fiscal 2023 and be down as a percentage of revenue. Turning to liquidity. Our cash position remains a source of strength. We ended the quarter with $5.4 billion in cash and continue to generate solid cash flows, which supports our capital return strategy. We remain committed to rewarding our stockholders as we transform our business and execute on our long-term strategy. In fiscal year ‘23, we will return $2.7 billion to our stockholders. In summary, our capital allocation strategy reflects our commitment to reducing capital intensity and creating value for stockholders while continuing to reinvest in FedEx for today and tomorrow. Turning to slide 19. In the fourth quarter of 2023, we expect market conditions to continue to negatively impact revenue and operating profit. However, on a sequential basis, we expect FedEx’s fourth quarter results to follow our historical seasonal pattern, representing the high watermark on the year. We will continue to execute on the previously identified cost actions and identify additional opportunities to reduce costs in order to mitigate the impact of volume declines on our operating results. As part of these reductions, we will manage capacity to lower demand levels, including further reducing flight hours at Express and reducing Sunday operations, closing certain sort operations and taking other line-haul expense actions at Ground. We are executing targeted actions to reduce shared and allocated overhead expenses, reducing vendor utilization, deferring certain technology projects and discontinuing same-day city operations at FedEx Office. In addition, we expect to achieve savings related to further headcount attrition and the elimination of certain global officer and director positions, which we announced in February. Putting these factors together, our updated expectation for full year adjusted earnings is $14.60 to $15.20 per diluted share. And with that, let’s open it up for questions.

Ken Hoexter:

Hey. Great. Good afternoon. And great job on pulling some of the costs forward. Maybe Mike or Raj, maybe talk a little bit about that sequential improvement. You’re talking about a seasonal improvement, but I mean, you normally have that. And Mike, you mentioned you’d normally have that seasonal improvement in the fourth quarter. So, I’m trying to understand, are you muting that expectation, or are you ramping that expectation into the fourth quarter given the additional cost pull forward than what we would normally see between a fiscal third and fourth quarter? If you can kind of walk through maybe some of those detailed cost pullouts and the impact for the quarter.

Operator:

We’ll take our next question from Chris Wetherbee of Citigroup.

Brie Carere:

Sure. Happy to help, Chris. It’s Brie. From a volume decline perspective, what we anticipate seeing in Q4 is that the decline will get less. So sequentially, the volumes will improve from Q3 to Q4. And actually, when we’re thinking about Express, we think that trend will continue into Q1 as well. That is here in the U.S., but also from an international perspective, as we talked about, we’re going to open up international economy. So, we do think that the volume decline will moderate Q4 over Q3 as well as Q1 over Q4. And again, I am talking about that decline year-over-year. I hope that helps, Chris.

Jack Atkins:

So I guess, as we think about the DRIVE initiatives here, is there any way you can help us maybe frame up how much of that -- of the $4 billion in savings have been implemented so far in terms of those actions. And then, I guess, as you sort of think forward, obviously, there’s a lot of uncertainty out there from a macro perspective. Are you prepared to pull more levers to be able to take costs out of the business if we start to see a further deterioration in the demand environment?

Operator:

Our next question is from Jordan Alliger of Goldman Sachs.

Mike Lenz:

So okay, Jordan, the -- yes, we will -- the $1 billion of permanent that Raj alluded to, we will realize that this year. The bulk of that is at Express, and we will see more traction on that, particularly in Q4 here. We’ve highlighted the flight frequencies that we’ve been reducing. We have -- we had -- as Raj said, we had nine more aircraft parked during the third quarter, and we’re projecting to park six more during the fourth quarter. So, that is illustrative of the takedowns and reductions underway there. And then also another component of the $1 billion, was taking out investments in that and initiatives and projects that we don’t anticipate picking up.

Tom Wadewitz:

Yes. And also strong execution on the cost side, right? It’s good to see it coming through the numbers. On the Ground side, I know you’ve given us good information on the call, but just wondered if you could dig into things a bit further of -- within the quarter, what was the most important drivers of improvement. It seems like purchase -- both purchase transportation and your comp and benefits were down quite a bit. And then -- so what were the biggest levers in those? And then, I think it was a year ago or a while back, we were talking about labor shortages and the sorts really being a factor. Presumably, you had adequate labor. How much of that was a factor in the Ground improvement as well? Thank you.

Operator:

Our next question is from Jon Chappell of Evercore ISI.

Brie Carere:

Yes. Thanks for the question, Jon. I actually don’t think it’s surprising. This is getting back to what we do best. We have been known historically for our customer experience and for our service. And we know when the network is running, it’s most productive. Service actually moves with productivity. So, I feel really good about it. I absolutely think that it is sustainable. And in fact, we’re going to continue to do better from a service perspective. So, this is what we said we would do. This is what we knew we would do. We’ve got a little bit more work to do, but it feels really good. And I think the sales team is really loving the momentum that it’s giving them. So, I hope that helps clarify.

Helane Becker:

So, maybe, Brie, this one is for you. I think you talked a little bit about the costs and the progress that you’re making there on showing some improvement. But can you maybe parse out the difference between what you’re gaining on fuel surcharges? And what you’re gaining in the ability to actually raise price? I think you also said something about your uptake is holding out better than you thought it would or maybe holding out better than expected? Or maybe I put those words in your mouth. So, if you could just kind of talk about fuel surcharges versus price maybe there. Thank you.

Operator:

Our next question is from Brandon Oglenski of Barclays.

Raj Subramaniam:

Brandon, thanks for the question. The main issue in Express is the demand softness was most pronounced at Express. It had the highest revenue impact. You also know Express has the highest fixed cost structure. But we are making progress on the cost side. In Q1, the cost was up year-over-year, Q2 was flat. Q3, the costs are down $430 million year-over-year, and Q4 is going to get even better from there. We’re making progress on the air, as we’ve talked about before. We have -- the single daily dispatch was launched in the U.S. Domestic Express operation in February. You’ll see the full impact of that for the quarter in Q4. And then, as we look ahead, we are fundamentally going to make this network much more agile and flexible and supported by technology. And when you -- we will talk to you a little bit more about that at the April 5th meeting. Mike, I don’t know if you want anything to add to that, I think…?

Raj Subramaniam:

That covers it. Thank you.

Allison Poliniak-Cusic:

I just want to ask on the Trans-Pacific lane, I know it’s an important lane for you. Just with all the dislocations, are you seeing any sort of structural shift away from that that concerns you? Are you moving? Just any color on what you’re seeing in that market would be great. Thanks.

Operator:

Our next question is from Ariel Rosa of Credit Suisse.

Mike Lenz:

Sure, Ariel. So certainly, as the environment has evolved here in the last 6 to 9 months, that’s heightened our emphasis on efficiency and cost initiatives to realize margin improvement and drive improved returns on invested capital. And so, the DRIVE framework is allow -- enabling us to relentlessly pursue these initiatives in a number of fronts. We talked about flexing the labor hours, the air network, the structure of the ground surface transport. So again, a lot of progress, more to go, but we’re very confident that Express can realize the full potential going forward.

Stephanie Moore:

I wanted to touch a bit on, I think, the color provided today and certainly in the Q&A and just what’s going on in the Express segment is very clear and certainly more to come there. I wanted to dig in a little bit about maybe the Ground segment and trying to triangulate what has caused you to raise expectations for the full year? I mean just kind of the Ground is clearly -- you’ve made a lot of progress as noted on salary employee benefits down quite a bit, but also purchase transportation down quite a bit. So, as you look at the Ground and particularly the strong performance in the third quarter, can you kind of pinpoint in a little bit more detail what exceeded your original expectations as you look at the full year? Thanks.

Operator:

Our next question is from Scott Group of Wolfe.

Mike Lenz:

Okay, Scott. So first, for the gain on the sale was roughly about $30 million at the Freight company for the facility there. And then yes, the reference for Ground was that the year-over-year improvement for the fourth quarter, we wouldn’t anticipate it to be as large as what we realized here in the third quarter. So, that’s the two freebies. On your other question, I mean, look, we are holistically adjusting the cost base on all dimensions, all areas. Every dollar is under scrutiny. So, that entails both, the adjustments for reduced volume levels across the board, and you see progress there in a number of the lines, and then gaining traction as we lean into realizing the structural reductions with DRIVE. So, we will look forward to updating further about how the various initiatives are playing out here when we see you on April 5th.

Brian Ossenbeck:

So, something similar here, Mike. Can you just quantify the impact of weather, given how Express performed? I don’t know if that was large or worth quantifying. And then just to come back to DRIVE one more time, maybe level set expectations, if you could. I think, Raj, you’ve talked about how we’re going to get a lot more granular details and metrics and the work streams. I don’t think we’ve really gotten that much in the past, or at least not that consistently. So, should we expect to get that updated on a regular basis? Are we going to see benchmarks in terms of where you are now and how that’s going to roll out through the various segments in the different work streams? And how should we be thinking about that coming up here in a couple of weeks? Thank you.

Raj Subramaniam:

Well, let me just say this much. I think I’m just delighted with the sense of urgency and with what the team is working. The DRIVE program is -- creates a lot more rigor, and I’m just thrilled with the progress as the team has applied this rigor and discipline to the work at hand and look forward to showcasing them to you in just a couple of weeks here. During that update, you can expect a deeper dive onto the domains that we have identified, which is shown on this slide. We’ll show you the metrics that we’ve been tracking. And I think that will be -- it will give you a much better way for you to understand our business. And I think it’s fundamental to the transformation underway at FedEx. Thank you, Brian.

Bascome Majors:

You generated about $1 billion of free cash flow in the first three quarters of the year on a fully burdened GAAP basis. Can you talk a little bit about with the raised EPS outlook in just 2.5 months left in the fiscal year, where do you think you’re going to come out in free cash flow for fiscal ‘23? And maybe qualify that with how much of a drag do you think you’re seeing on a cash basis for some onetime costs related to the initiatives that you’re rolling out to take structural costs out of the business? Thank you.

Bascome Majors:

On what free cash flow could be. Yes.

Operator:

Our next question is from Bruce Chan of Stifel.

Brie Carere:

Yes. Hey. It’s a very fair question. From a European perspective, I do think it’s important to remind everybody that we have a very unique value proposition in Europe. There are real stickiness with the parcel and the freight bundle. And also, our sales and our customer service team do an incredible job with very personalized and social -- or solution-oriented selling. So, for the customer base that is there, it is sticky. They value the bundle. We’ve got opportunity to take profitable share. But I think the ability to get that GRI capture really emphasizes the loyalty that we do have in that customer base and honestly, an opportunity to go take some more profitable share in Europe.

David Vernon:

Hey. Good afternoon. Look forward to seeing you guys in a couple of weeks. Raj or Mike, I’d like to talk -- I’d like to ask you to talk a little bit more about the fleet strategy going forward. I know you mentioned the intention to park the MD-11s. We’re running 422 trunk aircraft right now. If we were to kind of run this volume in the new fleet design, how big of an aircraft fleet would you guys have? I’m just trying to get a sense for and find some way to answer the question that I often get from investors, which is how do we underwrite lower CapEx going forward? Aren’t they just going to need to replace those 60 aircraft? Thank you.

Operator:

Our next question is from Amit Mehrotra of Deutsche Bank.

Mike Lenz:

Sure. Matt, let me address the aspects of that. So first, the way we have structured the DRIVE framework is that we have 12 domains with individuals assigned to each of those that are accountable and own the realization of the opportunities that are identified there. Now, of course, there’s multiple teams, and there’s multiple sub initiatives under that to enable those outcomes. But to the question of how do we measure and have accountability, that is definitely the structure and framework that we have in place. To your question about Express margin and profit volatility, that’s precisely what Raj was highlighting is a primary focus is to make the business more agile, more flexible with the various deployment of technology, making our fleet more flexible so that we can react and adjust. So, certainly realize that we need to build from here, and fully anticipate that going forward, and we will be relentlessly focused on that across the board.

Ravi Shanker:

A couple of follow-ups here. Just on the ground actions in the third quarter that kind of helped drive the margin higher than expected. Can you help us understand if these are a permanent change in the way you treat peak season or even a permanent change in the way Ground is run every quarter, or was it just a reaction to, obviously, peak season this time being less robust than it was the last two years? I’m trying to get a sense of whether it was just a tactical move and you guys kind of pivoted very quickly to the market, or if it’s more of a permanent change in the way you deal with peak season?

Operator:

Our next question is from Jeff Kauffman, Vertical Research Partners.

Brie Carere:

Hey. Jeff, thanks for the question. So I think first and foremost is that our primary goal is to maintain and improve the service momentum that we’ve created. And so, as we think about any potential exogenous factor in the market that might put stress in the market, our goal is to protect our customers and to make sure that we’re there for them. So absolutely, as customers are inquiring about available capacity at FedEx, we have been really clear that, yes, of course, we would entertain any good business, and we’d love to talk to them. We do need to have that business on board and those contracts signed by the end of March. We are not going to put or staff up like this is a peak factor. We are going to plan for long-term partnerships with customers. And anybody that wants to come and enjoy the FedEx value proposition, we’re happy to talk to them prior to March 31st.

Raj Subramaniam:

Thank you, operator.

Raj Subramaniam:

Well, thank you, operator. In closing, I want to thank our team members as FedEx was once again the only delivery company ranked in the top 20 of the Fortune World’s Most Admired Companies. We also were named earlier this week as one of the world’s most ethical companies by Ethisphere. This recognition would not have been possible without the commitment and dedication of our people around the world. And as we celebrate our 50th anniversary next month, I’m most excited about the ways that this team will continue to innovate and deliver for the next 50 years. Thank you very much.

Operator:

Good day, everyone, and welcome to today's FedEx Corporation Second Quarter Fiscal 2023 Earnings Call. Today's call is being recorded. And now at this time, I would like to turn the call over to Mickey Foster, Vice President of FedEx Investor Relations. Please go ahead.

Raj Subramaniam:

Thank you, Mickey, and good afternoon, everyone. Let me begin by thanking our more than 550,000 employees who are working diligently to deliver another strong peak season for our customers. I'm extremely proud of the team's ability to sustain excellent services season while we continue to transform our global network vis-à-vis to the FedEx team. I'm encouraged by our second quarter results and the momentum underway against our Deliver Today, Innovate for Tomorrow strategy. We exceeded our Q2 earnings and cost action goals shared in September, even as the environment remained challenged. At the same time, there is more work to be done. The declining demand trends we saw at the end of Q1 softened further in the second quarter, and we are moving faster and with more determination than ever to accelerate our cost actions. Today, we will provide more detail on those cost actions and our plan to structurally transform our network to be nimbler, leaner and more efficient, supported by our DRIVE program. Turning to Slide 6 for a snapshot of the quarter. Volumes declined across all segments, primarily at Express down low double digits. As such, revenue was down 3%, driven by a decline at FedEx Express, which was partially offset by growth at FedEx Freight and FedEx Ground. Adjusted operating margin and EPS declined with volume weakness, partially offset by higher yield and cost management actions. All of this said, we knew coming into this quarter that we would continue to be challenged by volume softness and high inflation. I'm exceptionally proud of the team's execution to-date, which enabled us to exceed the second quarter earnings and cost targets. A great example of our meticulous focus on cost actions was a result at FedEx Ground, where, despite volume being down 9% in the quarter, we were able to grow both operating income and margin. And FedEx Freight due to operating margin improved 320 basis points due to the continued focus on revenue quality, aligning the cost structure to lower volume levels and delivering an outstanding customer experience. Now I'll provide an update on our aggressive and decisive plan to cut costs in fiscal '23 relative to our June plan. In Q2, we achieved over $900 million of savings, exceeding the cost target we shared with you last quarter. This brings our total year-to-date progress to $1.2 billion. As we look to the remainder of the fiscal year, we have identified additional savings, bringing our target for fiscal year '23 to be approximately $3.7 billion in cuts. Turning to Slide 8. As we execute these cost actions, we are also laser-focused on delivering upon the superior service that has defined FedEx throughout our nearly 50-year history. As I mentioned, our team is performing exceptionally well this peak season, with ground time in transit in the U.S. at just two days. FedEx Ground is delivering holiday shipments faster to more locations than our nearest competitor. Our ground service is now back to pre-pandemic levels, supported by continued enhancements to our route optimization and package handler scheduling technologies. Service levels also continued to improve at Express. In Europe, we have made strong progress with Italy, France, Germany, Spain and the U.K. showing sustained high levels of service performance. The service challenges at Paris Charles De Gaulle Airport have been largely alleviated, and we are capitalizing on efficiencies in the network to further improve service. We're taking swift action to address the remaining issues for our intra-Europe service, including the reopening of our Netherlands ground hub in October, which will continue to improve transit and depressurize the rest of the network and completing the Novara Italy road hub in February of 2023. Moving to Slide 9. I'll now provide an update on our ongoing structural transformation. We have spent 50 years building our networks and growing our portfolio. As a result, we now have the most extensive network of any provider in the industry. We are now focused on optimizing this network to realize our full value potential. This includes advancing our global transformation through DRIVE, our comprehensive program to support long-term profitability and deliver on our fiscal year '25 financial targets. DRIVE is how we are executing that strategy, achieving more than $4 billion in annualized structural cost reductions by fiscal year 2025. I'm confident I have the full commitment of our executive team, our Leading DRIVE with purpose and a sense of urgency and of Sriram Krishnasamy, our Chief Transformation Officer, who is facilitating the program. We have identified 14 specific focus areas, which we call domains to target for efficiency improvements. Each is led by an executive sponsor and is aligned around a strategic vision for the business. We are measuring success against each domain's FY '25 permanent cost savings target in addition to using clear operational metrics to track financial and service level progress. Our focus within DRIVE is in three main areas

Mike Lenz:

Thanks, Brie. I'll start on Slide 16. In the second quarter, we delivered improved alignment between variable costs and lower revenue amid a more challenged volume environment that impacted our profitability. Second quarter revenue was approximately $700 million below the lower end of the range we expected coming into the quarter. Approximately $300 million of this variance was due to an accelerated decline in forwarding revenue at FedEx Logistics. The remaining variance versus our Q2 outlook was driven about half by Express and the balance by Ground and Freight combined. We have moved faster to offset this shortfall with cost reductions, reducing the lag between incremental volume softness and the savings offsets realized. This, combined with an additional $200 million in discrete cost actions, led to improved earnings relative to our Q2 outlook. Turning to the Transportation segments. Starting with Express, profitability continues to be pressured. Adjusted operating income declined 65% due to lower volumes as cost reductions lagged accelerating volume declines. Volume pressures were partially offset by yield management actions. Package yield grew 8% year-over-year, primarily driven by higher fuel surcharges and base rates, partially offset by exchange rate impacts. Yield improvement slowed from Q1 levels across nearly all products and regions. In Ground, operating income increased 24% and operating margins expanded 130 basis points to 7.1%, supported by yield growth of 13% as higher fuel surcharges, product mix and pricing initiatives drove improvement. Our cost reduction actions, combined with solid execution by the ground team to adjust near-term variable costs amidst greater volume declines also supported margin improvement. These factors were partially offset by increased costs, including higher purchase transportation and other operating expenses. And at Freight, the team continues to drive strong profitability with operating income increasing 32%. This was driven by yield improvement, including higher fuel surcharges, partially offset by decreased shipments as well as higher wage rates. Turning to Slide 17. I'd like to build on what you heard from Raj on our near-term cost savings, reviewing our progress by category. As mentioned, we've identified $3.7 billion in discrete cost reductions relative to our plans going into fiscal '23, which is $1 billion higher than our prior projection. Express is where we have the most work to do and where the majority of the reductions are focused. A large portion of those savings is coming from reduced flight frequencies. Year-to-date, we've reduced eight international routes and 32 U.S. domestic routes, while parking five additional aircraft. This translates into pulling down U.S. domestic flight hours by 6% and international flight hours down 7% in the second quarter year-over-year. Moving to 18. In addition to the expense actions, we are also lowering our FY '23 capital spend forecast by an incremental $400 million to $5.9 billion, which represents an approximate $900 million reduction from our initial plans for the year. With the lower demand environment, we're deliberately deferring and slowing the pace of projects as we maintain the emphasis on using our assets more efficiently and reducing our overall capital intensity. Our liquidity remains a source of strength, and we ended the quarter with $4.6 billion in cash. We continue to generate solid cash flows supporting our capital return strategy. We executed a $1.5 billion accelerated share repurchase transaction, which will be completed by the end of this calendar year. Our capital return strategy reflects our commitment to reducing capital intensity and creating value for shareholders while continuing to reinvest in FedEx for today and tomorrow. Provide additional context for the changes in demand during the first half and what we are planning for in our outlook, on Slide 19, we've shown first half monthly volume trends for our major product categories. Volume declines continued to accelerate across major product categories, both in the U.S. and internationally throughout the second quarter. As we look to the second half of the year, we expect volume declines to begin moderating in Express and Ground by the end of the third quarter with comparisons easing further in the fourth quarter as we lap the onset of softer volumes. Yield growth will be increasingly pressured as year-over-year fuel surcharge comparisons normalize and customer demand shifts most prominently in Asia. This brings me to our outlook on Slide 20. While we continue to aggressively drive cost reduction actions, we expect business conditions to remain challenging in the second half of FY '23. Our current expectation for full year adjusted earnings per share is between $13 and $14. On a quarterly basis, we expect results to follow our historical seasonal pattern with lower earnings in the third quarter versus the second quarter and highest in the fourth quarter. Second quarter adjusted expenses were essentially flat year-over-year as inflation impacts, particularly fuel, offset our activity reductions on an absolute basis. As we move through the second half, we project year-over-year expenses to increasingly decline as our cost initiatives accelerate in conjunction with lapping certain inflationary increases. Closing, I'd like to reiterate that the entire team continues to aggressively identify and implement both immediate cost reductions as well as structural cost efficiencies to drive improved performance. With that, we'll open it up for your questions.

Tom Wadewitz:

Yes. Wanted to see if you could give a sense of what drives the $1 billion in cost take out. And then I don't know if you look at the broader frame. Raj, you talked about some of the split. But can you give like the detail or a bit of breakout from Express, Ground and shared services on the $4 billion number also?

Operator:

Next, we'll hear from Helane Becker of Cowen and Company.

Mike Lenz:

So, we certainly have deferred a number of facility projects and initiatives. So that is a component there as well as looking to pause other certain major projects at a phase of completion as we evaluate the chain circumstances. Another piece of it is a change in our aircraft payment schedule as well. So, we've pushed that out further, but the number of deliveries remains unchanged, just a timing in that sense.

Mike Lenz:

Well, so Helane, we will see mitigating in terms of the year-over-year increase in wage rates relative to what we were seeing earlier in the year. And in addition, as we flex down the networks, particularly post peak, we'll have a ramp down in terms of the resources deployed there as we typically do, but certainly going to move quickly as we come past the successful peak that we're in the middle of right now. So expect further progress in that line going forward as well.

Jordan Alliger:

So, a question on the $13 to $14 range. Maybe some more perspective, obviously, you beat in the second quarter, you're upping the cost saves by $1 billion. I mean how do we think about that from a conservative perspective? Is it conservative? And -- or maybe some context in your view of the economy. I mean are we assuming a recession in those numbers because it would seem, especially with the monitoring decline in volume, that the cost saves are basically all the second half operating profit. So, I'm just wondering if you've kind of taken a very conservative approach.

Operator:

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

Mike Lenz:

Okay. Ken, how I would address that is as you saw in the second quarter, the revenue environment was below our expectations. So therefore, we are assuming that going forward into the second half of the year, which motivated further near-term takeouts of cost relative to what we had planned for FY '23. So we will project revenues to be down year-over-year in Q1, but we're also going to see a ramp-up in absolute expense reductions as we move through Q3 and even more so into Q4. So that's the absolute basis when you look at it for year-over-year.

Mike Lenz:

Well, Ken, maybe we talked about a permanent reductions of $1 billion from FY '23. And that recognizes we were operating in very unique circumstances over the last 1.5 years, 2 years. And so those takeouts would not return under any range of normalized demand scenarios that you might consider. And of course, most of that's in Express. I mentioned that we parked five additional aircraft during the second quarter. By the end of the fiscal year, we're projecting to park 11 additional aircraft. So hopefully, that gives you a little more context for how we're thinking about resizing the network and most of those will be wide-bodies.

Mike Lenz:

Thank you, Ken. Really appreciate it.

Scott Group:

Mike, can you just talk about the margin expectations for the segments in the back half? Can Ground continue to improve? Can Freight continue to improve? Can Express get back to margin improvement? And then Brie, sounds like you were talking about pricing slowing. I wasn't sure if that was a parcel comment, an LTL comment. So if you could just give us a little bit more color.

Brie Carere:

Sure. Fair question, Scott. So from a yield perspective, let's talk front half versus back half. When we look at the domestic parcel market, we are still anticipating in the back half that we will have growth both Express and Ground in the parcel market, although less growth than we did in the first half. The same holds true for FedEx Freight domestically. Back half, we are still anticipating yield growth in the inflationary environment, although much less than the front half. And then as we go to the international markets, the largest change that we will experience in the back half is we are anticipating that we will see our Asia yields decrease in the second half. Now I want to be really clear that we've accounted for that within the range that Mike has given us, and we also anticipated this. And the Asia team does a really good job of managing volume, yield and margin. And our trans-Pacific lane is still a very profitable and healthy lane for us. So it is within the range, but that's how we're thinking about yield front half versus back half.

Brandon Oglenski:

And I second Ken's thoughts on Jeff and Elizabeth. Guys, can you just help us understand, I mean, if you're going to achieve $3.7 billion this year, isn't that very similar to the 2025 DRIVE target? I think that might be the confusion that a lot of folks aren't fully understanding here. And Mike, we heard you that $1 billion are permanent this year. But can you talk to maybe the other $2.7 billion that might come back, but then you're going to shed an incremental $3 billion between now and then?

Operator:

And next, we'll hear from Allison Poliniak of Wells Fargo.

Mike Lenz:

Yes, You hit it. Absolutely, Allison, we are -- that's why we have ramped up the degree and intensity around the structural cost reductions. We made great progress to date in identifying those and are looking to use the insights as we've made progress on those to identify even more. And if the environment changes, then we will react as you saw in the second quarter here to adjust even further in the near term as well.

David Vernon:

So Raj, I was wondering if you could maybe kind of bring this stuff up a level, right? If we're talking about $13 to $14 in adjusted earnings in this fiscal year, is that a base from which you can start to build in fiscal '24 and '25, or are we still got a little bit of risk in terms of chasing the ball down the hill from an economy standpoint? And then as you think about the longer-term targets that you put out there, is there any contemplation of actual changes to the product portfolio or the composition of the many different companies that make up FedEx as part of this transformation effort? Or are we just kind of doing the same sort of mix of stuff a little bit better?

Operator:

Next, we'll hear from Stephanie Moore of Jefferies.

Raj Subramaniam:

And let me hit a high level and then Brie adds additional details, we can jump in right afterwards. On the macro aspects of it, the two things we flagged were that the industrial economy is slowing around the world and with Europe being the hardest hit and that there is an e-commerce reset, and both those things happened exactly like we said we're going to happen. The good news was we reacted -- we moved much faster to adjust to these circumstances. And we are absolutely focused on what we can control. And again, I'm very, very proud of the progress we have made. And -- but again, we know there's more work to be done, and we will continue to improve our cost structure. Regarding China, we haven't seen any fundamental change in the volume profile one way or the other in the last few weeks. We are obviously monitoring this very, very carefully, and it's very too early for us to make any further comments on this at this time. Brie, anything to add here?

Operator:

Next, we'll hear from Jack Atkins of Stephens.

Raj Subramaniam:

Okay. Thank you, Jack. Listen, we are -- the drive is the way we work and every project that we now go through has started to go through a significant hurdle to make sure those plants are approved and then, obviously, that has to make sense from a financial perspective and from an ROIC perspective. So good news so far is that projects that have come through here have -- we are very high returns, and it changes the fundamental way we think about how we go forward here. So Mike, I don't know if you want to add to that comment.

Operator:

[Operator Instructions] We'll next hear from Chris Wetherbee of Citi.

Raj Subramaniam:

Well, let me just talk about the macro environment. I think the main macro issue in the United States is really the e-commerce reset. If you were to just follow along here prior to the pandemic e-commerce represented about 16% of retail. During the pandemic, it peaked at about 22%. And ever since, it's been kind of going down. We are probably about 18% or 19% right now. It's still higher than 16%, but not quite high as 22%. So that's the part of the reset that's going on in the U.S. domestic package business. Of course, we have also taken certain revenue quality actions on some of the segments of the traffic, specifically FedEx Ground economy. And so that's the only other part that would be unique to FedEx. But other than that, this is, I would say, the biggest macro here is e-commerce reset.

Amit Mehrotra:

So Mike, I just wanted to ask maybe a couple of quick ones. So I wanted to understand the drag in Express coming from the European Ground business, so basically the legacy TNT business? Because I understand there's cyclicality in the air network and you're bringing flight hours down, which is great. But I'm just trying to understand what the legacy TNT business, what the overall impact that has had or will have on kind of the express proper profile. I don't know if that means that you can give us an idea of what that business is making or losing or the contribution of that is to the overall Express profit, but I think that would be helpful. And then the follow-up I wanted to ask was on the Freight business. And I don't ask a lot of questions about the Freight business, but it's a big piece of the profit pools today? I don't know if Lance is on, but what I noticed is the yields in the freight business were down sequentially, which is something we typically haven't seen quarter-on-quarter. And of course, this is in the context of FedEx being part of kind of that pricing war 12 years ago in the LTL business. Is this an indication that FedEx is lowering price to get more volumes in Freight? Can you talk about the pricing discipline in the Freight business, both with respect to FedEx and also as the industries you see it as well?

Brie Carere:

Thanks Mike. Fair question from a FedEx Freight perspective. When we looked at Q2, the one thing that we did see that was slightly different from Q1 is weights actually were slightly down in Q2. From a revenue quality perspective, however, we have to remember, number one, that we are seeing all of the public carriers behave very rationally and the market is very disciplined. Number two, within that market, FedEx Freight has the premium value proposition. We have two types of service. So, we have a great opportunity that is very profitable for FedEx for allow customers to move from our priority to our economy service. And we've got two great opportunities within FedEx, right? We've got FedEx Freight Direct, which we're still seeing high demand for. And we've got a very profitable service into Canada that we're very focused on. So we are going to continue to be disciplined. We absolutely know the history, and we are focused right now on doing our part to be very disciplined within the industry.

Scott Schneeberger:

Raj, one for you and then one for Brie. Raj, you've given a good overview with regard to DRIVE. I'm just curious when in the first half, we may expect this update call and what type of information we'll receive there, these 14 domains you're targeting, maybe you could speak to the there, I'd be curious to hear? And then, Brie, the question for you is you spoke about improving service levels and a really good pipeline for small and intermediate-sized businesses. Could you delve into that a little bit more on how that's working for you and the sales team domestically and in Europe?

Brie Carere:

Thanks, Raj. So I love this question. Let's talk about our momentum. Here in the United States, as we talked about, we've had a great peak. The ground team and I know the operators who are listening, I know we're not done yet. I know we have a very, very busy week still to execute. But as I sit here right now, we've had just stellar service in the field, and I couldn't be more proud of the team. So as we kind of turn the chapter on this calendar year to next calendar year, domestically, we have the very best value proposition, more faster than our primary competition. We have this great new feature, which is getting great response in the field for picture, proof of delivery. We have Sunday service. We have brand-new digital capabilities called estimated date of delivery, which gives our e-commerce retailers greater accuracy on their delivery times, and we're getting really great feedback. And as you all know, our primary competitor has to manage through a significant labor conversation. So, we're going to come out of this peak very, very strong, and we are very confident in the momentum that Jill and her team are building in January. The same is true as we look into Europe. We have got quarter-over-quarter momentum. We've got three primary lines of business that we sell. In the domestic, we are optimizing. From a domestic perspective, we are there for the profitability of international and we have opportunity to optimize those networks and put some volume in the domestic networks and service is excellent in the domestic networks in Europe, and I'm really pleased with Karen and the team there. From an intercontinental perspective, we have a product called FedEx National Connect Plus, and it has done really well for us, and the team has continued to get the right business from Europe into the United States. And then from an intra-European perspective, that has been where we're challenged. But I'll tell you the brand has done a lot of hard work for us. Customers want to do business with FedEx. And quarter-over-quarter, we've seen service improvement. And with that, we have seen our pipeline and the confidence grow, and I believe that you will continue to see quarter-over-quarter improvement out of our European division. So yes, I'm looking forward to January, and I think we have the best sales team in the business to go and execute the plan I just talked about.

Brian Ossenbeck:

Maybe just a follow-up with Brie. Can you talk about your confidence in getting that high capture rate from a domestic price perspective? And how you're going to balance that with our relation and the declining volume environment? And maybe you can talk a little bit about competition. And if you think there's a room to see more of that creep in here as more packages go that are lighter weight and shorter distance and the e-commerce growth you continue to see? And then separately, you mentioned the team's negotiation. I would really like to hear more about how you're approaching that both in the near term to make sure that you're able to protect your own service and longer term, if that presents any opportunities to gain share?

Operator:

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

Operator:

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

Operator:

Good day, everyone and welcome to the FedEx Corporation First Quarter Fiscal Year 2023 Earnings Conference Call. Today’s call is being recorded. At this time, I will turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead.

Raj Subramaniam:

Thank you, Mickey and good afternoon everyone. I’d like to start today by acknowledging our pre-announced first quarter earnings results and updated outlook we provided last week. Our network capacity did not align with the demand we experienced as the quarter progressed. But as communicated last week, we have taken swift actions to address what’s within our control. Getting cost out rapidly is my priority and today, I will outline why I am confident in our ability to drive improved performance and profitability through aggressive cost actions. Before providing more details around these actions, let me briefly discuss what happened since we last spoke to you in June. We saw a decline in our volumes during the first quarter, which accelerated in the final weeks. Our softening volumes in Asia and the U.S. were predominantly due to the economy while the shortfall in Europe was both economic and service related. Therefore, we had costs in the system for volumes that didn’t materialize. While we immediately took action, savings from these cost efforts lagged the volume decline due to the scale of our operations. As a result, while revenue was up 6% year-over-year, these dynamics translated to volumes being down year-over-year at all our transportation segments. The volume decline directly impacted our bottom line driving total company adjusted operating income down roughly 18% year-over-year. Now what matters most is what we are doing about it, and this brings me to our aggressive and decisive plan to reduce costs. I’ll speak to you – I will speak to our actions in 2 parts

Mike Lenz:

Thank you, Brie. While revenue was up 6% for the quarter, profitability was challenged with operating income down 18% on an adjusted basis, and adjusted operating margin down 150 basis points year-over-year. At Express, adjusted operating income declined 72% due to lower average daily package and freight volume and increased expenses as cost reductions lagged volume declines. These factors were partially offset by yield management actions, including higher fuel surcharges. Package yield, including fuel, grew 16% year-over-year. Turning to Ground, operating income increased 3%, primarily due to yield improvement and home delivery volume growth. Yield including fuel grew 12% year-over-year. These factors were partially offset by higher operating expenses, driven by increased purchase transportation and other operating expenses. Freight delivered another strong quarter with operating income increasing over 67% as the Freight team continues to execute. This was driven by yield management actions, including higher fuel surcharges. Yield, including the surcharges, grew 27%. This was partially offset by higher salaries and employee benefits as well as lower shipment volumes. To address the changed environment, we’re focused on what’s within our control and moving with urgency to take costs out of the network. Our team is operating at speed to identify cost-saving opportunities and accelerate for implementation. The $2.2 billion to $2.7 billion fiscal ’23 savings we’re targeting are relative to our initial plans heading into the year. The majority of this year’s savings will come from Express where the demand change has been most pronounced. We expect about $1 billion of our fiscal ’23 savings to be permanent in nature, with slight reduction as the largest component along with corporate and back office costs. These permanent cost reductions were not part of the Deliver Today, Innovate for Tomorrow strategy we shared in June, which is about how we structurally optimize our networks. These reductions are directly related to flexing in a changed environment with a view to build back differently in the future. As Raj mentioned, we remain committed to the profit improvement objectives we shared at our June investors meeting. We have launched efforts to accelerate initiatives, identify incremental opportunities and implement metrics to track progress under the DRIVE program. So next, I’ll give more details on the targeted $4 billion savings by fiscal ’25 enabled by DRIVE. About $1.4 billion of the total will come from the FedEx Express operating expenses. Four largest areas of opportunity we are actively advancing are

Tom Wadewitz:

Yes. Good afternoon. Wanted to see if you could maybe give us some more perspective on some of the biggest cost reduction actions and just kind of your level of confidence on the execution, it seems like, I guess, parking the planes and taking out capacity is something you have done in prior downturns, but perhaps rationalizing sorting centers seems like a new thing in Ground. And I guess, the labor markets, maybe it’s a little tougher to take labor market if you think you might need it back. So I just wanted to see if you could give maybe a bit more detail on your visibility to those cost actions and kind of how they come through? Thank you.

Operator:

We will take our next question from Brian Ossenbeck with JPMorgan. Please go ahead.

Raj Subramaniam:

Okay. Let me start and then Brie can talk about some of the trends you are saying. Listen, I can’t comment on what our competition is seeing or not seeing. All I can say is the trends that we are seeing in the marketplace and we want to get out ahead of this. And listen, the whole – at the end of the day, the macro is going to ebb and flow. It’s really the activities that we do that matters at the end of the day and we want to take control of what we can control. And that’s why we are being very aggressive on our cost actions. And again, we will let the economic environment, the things that we don’t control it will do what it will do. We will just – we will focus on the issues that we can control in primarily on the cost side. I will let Brie talk about the revenue trends.

Operator:

We will take our next question from Brandon Oglenski with Barclays. Please go ahead.

Raj Subramaniam:

Well, thank you, Brandon. I think we are absolutely fully committed to taking cost levers out. We have talked about that in three buckets

Jordan Alliger:

Yes. Hi, sort of question for you, in light of what could you have done different in the quarter. I guess the magnitude of the Express drop-off is so sharp and I get that volumes decelerated. But I’m just curious, like how did it catch you so off-guard? How do you protect against that in the future? And I would have thought that with the contractual customers you’ve had, you might have had more of a heads-up that this deceleration was coming. So maybe you could talk to that. Thank you.

Brie Carere:

Yes. What I will say is that from a customer perspective, our customers are incredibly sticky. And what we experienced, especially in August, both in Asia and here in the United States is two things, is their demand actually wasn’t there and our customers missed their own forecasts. So I think from a customer relationship perspective, we are working with them furiously to help them manage their – the difficulties that they are experiencing in their own business. But from a customer stickiness perspective, this is absolutely a reduction of demand within their own business, not a share loss implication.

Operator:

We will take our next question from Helane Becker with Cowen. Please go ahead.

Raj Subramaniam:

I’ll – let me hit the trade lanes first and then we will go to aircraft. I think we have – we’ve taken down 11% of Trans-Pacific daily frequencies, 9% of transatlantic daily frequencies and 17% of daily frequencies in the lane between Asia and Europe. And we will continue to look at it and we will see what needs to happen post peak, depending upon how the volume we will sold. Mike?

Operator:

We will take our next question from Chris Wetherbee with Citi. Please go ahead.

Mike Lenz:

Okay, Chris, so this is Mike. Let me take that in two parts. First, you asked about the second quarter in that. So as we emphasize, we saw the downturn in the demand in the latter part of Q1. And as we expect those trends to persist through all of Q2, while we’ve accelerated or we will realize more of the cost savings in Q2 as you highlight, we also have 3 full months of that step change in demand that occurred late in Q1. So that certainly pressures Q2 margins. As we go through the year, the savings build and we expect then that the pressures relative to Q2 will mitigate as we go through – be less as we go through the year.

Ken Hoexter:

Hey, great. Good afternoon. Just before I get to the question, I just wanted to understand why you chose to launch your Q&A with CNBC versus hosting a conference call. I just want to understand the philosophy of what we can expect of the message going forward and how you plan on distributing it. Obviously, you had technical issues today, but just to try to understand why you chose that route in getting a message out. But my question is, how do you solve the festering Ground contractor issue? It seems like you talked about purchase transportation cost scaling. You mentioned in your statements, you’ve pulled some networks. Some have turned their routes in. It seems like there is really deep concern. Is there opportunity to use this, I don’t know whether the cost savings or something, to change the structure there, to resolve some of these issues that the contractors seem to have. Thanks.

Raj Subramaniam:

As far as the perceived issues on the Ground side, let me just assure you, first of all, that the service levels at FedEx Ground are now reached pre-pandemic levels and we are very well positioned for peak. The 6,000 contractors, we have 96% of them have signed the peak incentive program. And to put that in perspective, this is running ahead of where we were last year. So a lot of those were in the media. They are all much more of a perception issue than reality, and we are well positioned for peak and we have the support from our team.

Amit Mehrotra:

Thanks. Hi, everyone. Mike, I just wanted to ask about the cost-out initiatives this year and if it’s a gross or net number. Because obviously, the company has a $90 billion cost structure. If it’s not net, $2.2 billion to $2.7 billion, it may sound like a lot but if you have 3% inflation on that number, it wipes out the entirety of the cost savings. So I want to know how you think about that if that’s a fair or unfair way of characterizing it. And then just very simply, are Express profits going up from here in the fiscal second quarter or are they going down from here, if you can just answer that as well? Thank you.

Amit Mehrotra:

Well, just if you’re just giving me a chance to follow-up on that. And then the second question was if Express profits are going up from where we were in the fiscal first quarter, the 1.7% margin or even just absolute profits, are they going up or are they going down in the second quarter? And the way you characterized the answer just now, it just seems like there is still no – if inflation offsets the growth cost takeout, then basically all of the revenue decline prospectively drops to the bottom line. And so I just wanted to understand how you – if you agree with that or how you think about that.

Operator:

We will take our next question from Jack Atkins with Stephens. Please go ahead.

Raj Subramaniam:

Jack, I think I’m very, very confident in the team that we have. There is a lot of experience here. We have several new players in place. The team is very, very excited. Obviously, we will look at external talent. We already brought an external talent on several areas of this company, so they are not worse of that at all. It’s just that we have a very, very good team, Jack, and I’m very confident that we can deliver.

Jon Chappell:

Thank you. Good afternoon. Brie, I want to ask you about the service challenges that you referenced. I just want to make sure, is that strictly in Europe? We’re now 6 months past the finality of the integration of TNT. Are you confident that those service issues are behind you? And then the final thing is you think about cost cutting across all the regions, is there a risk that cost cutting could exacerbate some of the service issues going forward?

Operator:

We will take our next question from Ravi Shanker with Morgan Stanley. Please go ahead.

Brie Carere:

Fair question. I think the answer is inflation. Last year, we had a 5.9% increase in post, and by the way, we have just an incredible insight into our pricing discipline in the market and the commercial tools the team have are just best-in-class. So last year, we did a 5.9%. It was incredibly sticky. We had continued cost increases throughout the year, and so we felt that the 6.9% was appropriate for this year’s GRI. We will monitor post-implementation stickiness. And of course, we’re constantly looking to balance the yield and the volume and make sure that we get the right volume levels from a utilization perspective. But given the inflationary backdrop, yes, we thought this was the right increase for the year.

Ari Rosa:

Great. Thanks. So Raj, as I look at FedEx Freight, it’s now producing almost 4x the operating income of Express. Just could you talk maybe about how you think about the sustainability of the performance on the Freight side, particularly as we head into a potential downturn? And then to what extent, if we see some of the strength at Freight starting to wane, is it possible that starts to eat into some of the gains that you might see from cost savings at the other units?

Operator:

We will take our next question from Bruce Chan with Stifel. Please go ahead.

Brie Carere:

So the short answer is the vast majority of our volume miss was macroeconomic. We talked about it kind of when you think about the miss, it really was predominantly at Express, with Asia being the largest issue. We believe that was entirely macroeconomic. And then when we get into Europe, there was a split between service and the macroeconomic decline. I will tell you two things. From a service perspective, when we say service issues, specifically what we’re talking about is on the Express portfolio within Europe, across the European network is that we are not hitting that time-definite mark at the level that we expect of FedEx. And so we need to kind of increase that service commitment there. What I will tell you is that the sales team and our customer base absolutely wants FedEx participating in this market. And we have had strong indications that customers are looking for us in their portfolio in Europe. We have great relationships with large globals here in the United States, and they want us as part of their portfolio in Europe. So I’m very optimistic about the future in Europe.

Bascome Majors:

Raj, you’ve managed through a lot of change at FedEx since 2016. Just to mention the TNT acquisition, the cyber-attack, the trade war downturn and the pandemic, a change in leadership from a founder and whatever we’re going to call the cyclical reversal when we look back on it in a few years here. But as you step back and reflect, are there any management mistakes that FedEx did make? And if so, what can you learn from those mistakes to set your customers and your shareholders up for success over the next 3 to 5 years? Thank you.

Operator:

We will take our next question from Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Mike Lenz:

Okay, Todd. So yes, the basic underlying planning assumptions that we are using is that the demand levels that we experienced in late August will continue through the rest of the year, and so that we’re taking actions accordingly to react to that. So that’s the operating assumption now. I don’t have a crystal ball about contagion in that. But rest assured, we are going to be continuing to focus on the things we can control. And if we need to make further adjustments and reductions in the cost structure, we will move quickly and decisively.

Jeff Kauffman:

Thank you very much. And thank you for the guidance on the cost savings as well. I just wanted to ask because I noticed that the other corporate and overhead part of operating income was about $100 million higher than a year ago. It costs money to park planes and I don’t know if you’re furloughing pilots or you’re reducing those hours. It costs money to reduce routes or consolidate sorts or shut down offices. Do you guys have any estimate for where those costs are going to be? How much they are going to be? Where are they running through the regular P&L during the quarter? Or was that the $100 million in incremental costs that I saw going through kind of corporate office and other?

Raj Subramaniam:

And there is also no furlough of the pilots. That’s not even a thing.

David Vernon:

Hey, good afternoon. So I appreciate the added color on the cost saves, but reductions from baseline, kind of difficult to book as profitability. 10 weeks ago, we were looking at a low $20 – EPS number going to something in the low $30s. Is there any to think that those targets for earnings power have actually shifted as a result of what’s happening in the market right now or are we just pushing those out? And does the $4 billion of extra cost saves just kind of gets you back to that 10% margin level?

Operator:

We will take our next question from Jairam Nathan with Daiwa. Please go ahead.

Mike Lenz:

So to clarify, for the cost savings that we’ve identified for FY ‘23, no, there is nothing associated with that. Now previously, as we talked about the broader business optimization initiatives over a number of years, we scoped that, that could be potentially in the $2 billion range but that is over a longer time horizon. But the near-term cost initiatives, there is no special charge for that.

Raj Subramaniam:

Well, thank you very much. And in closing, let me just say, it goes without saying, it was a challenging quarter. This is a real critical moment in time for FedEx to execute and I’m very confident that we will. The actions we are taking are key components on the path to achieve our long-term targets and make FedEx stronger for a better tomorrow. Thank you for your time today, and thank you for your interest in FedEx.

Operator:

Good day, everyone, and welcome to the FedEx Corporation Fourth Quarter Fiscal Year 2022 Earnings Conference Call. Today's call is being recorded. At this time, I’d like to turn the call over to Mickey Foster, Vice President of Investor Relations for FedEx Corporation. Please go ahead.

Raj Subramaniam:

Thank you, Mickey, and good afternoon, everyone. I'd like to start by thanking team FedEx for continuing to move the world forward amid unanticipated challenges. This is most recently displayed during Operation Fly Formula, where in response to the critical shortage rippling across the United States, we have moved hundreds of 1000s of pounds of baby formula from Europe to the U.S. And this weekend, our team will move 52 tons of medical relief to Poland for Ukrainian refugees in coordination with Direct Relief International. Now, turning to our financials, I'm proud to share that in the face of an increasingly challenging global backdrop we finished fiscal '22 with our highest ever revenue of $93.5 billion and adjusted operating income of $6.9 billion, both up 11% year-over-year. This is a testament to our value proposition and continued execution against our long-term strategy. As I shared on the last call, we have worked through many network inefficiencies caused by labor shortages. Although wage rates remain higher than this time last year, they're stabilizing. Still COVID-related conditions slowed global recovery and pressured second half performance. While Q4 volumes were down year-over-year and all our transportation segments compared to the extra ordinary fiscal year '21 we successfully implemented strategic actions that drove double-digit yield improvement across the board with Express composite yield per package up 20%, ground up 11% and freight yield per shipment up 28%. We remain focused on revenue quality as one of the key levers to help offset the ongoing macroeconomic pressures and driving improved margins going forward. Turning to Express, even in the face of higher operating expenses related to inflationary pressures, we delivered improved quarterly operating income and revenue. Our full execution of our new revenue management actions has allowed us to overcome headwinds from COVID lock downs in Asia and geopolitical uncertainty in Europe. At FedEx Ground, we experienced modest revenue growth driven by higher yields as a result of pricing actions and improved volume mix. Volumes declined year-over-year due to our efforts to constrain economy volume as well as slower customer demand. We will continue to leverage opportunities to maximize utilization of existing facilities through operational adjustments, including multiple preload and relay operations. Ground operating expenses continued to be pressured by higher purchase transportation and wage rates although we see these pressures stabilizing. We continue to proactively address labor availability head on through multiple levers. As we increase the frontline retention and refine the recently launched package handlers scheduling tool, we will not only ensure we have the right level of staffing for every sort based on volume, we will ensure a workforce that is safe, efficient and highly engaged to stay and grow with the company. Additionally, we are implementing several technology based initiatives that are driving increased productivity in our line haul and dock operations, as well as continuing our efforts to optimize the last mile. We're seeing early benefit from these efforts with productivity of ground dock operations improving 6% in Q4 compared to Q3. FedEx Freight once again delivered outstanding results with the fourth quarter operating margin of almost 22% driven by a continued focus on revenue quality. A job well done to Lance Moll on his first full fiscal year as Freight CEO and to our Freight and Commercial teams for the solid execution. As we look ahead to fiscal year '23, we expect the macroeconomic risks both in the U.S. and globally to continue to put stress on supply chains and trade. Brie will cover this in more detail shortly. Let me though reaffirm confidence in our key strategies. As CEO, my focus is maximizing total shareholder return driven by improved revenue quality, higher margins and a balanced capital allocation strategy, which Mike will provide more color on shortly. Importantly, our foundational long-term investments have set the stage for another strong year driven by focus on lowering our cost to serve. A great example of where we are going to lower our cost to serve is in Europe. The integrated network and consolidation of many flights into our Charles de Gaulle hub allows us to improve operational efficiency and enhances our network. For instance, since April, the number of European airports we service from CDG increased by 71%, the number of flights intra Europe was reduced by 13%. We are confident that actions like those will drive bottom-line improvement in fiscal year ’23. As we move forward, I’m honored to lead our global team, who enable FedEx to deliver what's next. And speaking of what's next, we are looking forward to hosting our investors in Memphis in a few days. Our goal for this two-day event is for attendees to leave with a deep understanding of our strategies, including financial targets and priorities and how we plan to execute. Now before I turn it over to Brie, I'd like to say a few words about FedEx Express President and CEO, Don Colleran, whose 40-year career with FedEx has been nothing but short of exceptional. As one of the pioneers of our international business, he helped lay a foundation for the significant growth in that sector of the FedEx portfolio. Since assuming his current role in 2019, he has launched new capabilities for our customers, and led our global FedEx Express team through some of the most challenging times, including the COVID pandemic. As announced in March, Don will move into the CEO executive advisor role in September of this year in support of Richard Smith's transition to the CEO of FedEx Express, and will retire from FedEx in December. Don, we appreciate your service and countless contributions to this company. We wish you nothing but the best in your well-deserved next chapter. And now let me turn it over to Brie, who last week was named Chief Customer Officer in a move that aligns several teams under her leadership to give us even greater focus on our commercial strategy and our end-to-end customer experience. So Brie.

Mike Lenz:

Thank you, Brie, and good afternoon, everyone. We had a strong fourth quarter with adjusted earnings per share improving 37% year-over-year, revenue increasing 8% and consolidated adjusted operating margin expanding 50 basis points to 9.2%. These results reflect the outcome of the revenue management emphasis Brie described as we aggressively adjust to mitigate continued inflationary cost pressures. Notable fourth quarter year-over-year expense items included higher shelf insurance costs primarily at ground, as well as a roughly $130 million impact from higher rates for both wages and purchase transportation. Offsetting these headwinds were favorable year-over-year comparisons for variable compensation of approximately 300 million and last year's $100 million contribution to Yale University to support our carbon neutrality goals. With that overview consolidated results, I'll turn to the highlights for each of our transportation segments. Ground reported a 4% increase in revenue with operating income down approximately 260 million, resulting in an operating margin of 10%. Shelf insurance expense increased approximately $200 million, reflecting a higher loss experience, as well as an adjustment to the reserve for the projected cost of claims. There are multiple initiatives underway to mitigate the cost of risk, including new vehicle safety technology, and driver certification standards in our service provider agreements. The strong 11% yield improvement at ground was not enough to offset that headwind along with higher cost of wages and purchase transportation. Looking forward, the continued revenue quality emphasis in conjunction with specific productivity and workforce initiatives will drive improved profitability. Stabilization of the labor market will also support further traction in these areas. And Express adjusted operating income increased by nearly 10% year-over-year with operating margin improving by 20 basis points to 8.2%. This improvement was driven by higher yields, including the favorable net impact of fuel and lower variable compensation was more than offset volume declines. In addition, crew cost per flight hour have been further elevated as operating the network has had to accommodate not only COVID protocols, but also to the routing changes to avoid layovers and locations with stricter COVID regulations, as well as conflict airspace. Freight had an incredible finish to the year with revenue for the fourth quarter, increasing 23% and operating profit growing 67%. These outstanding results are a testimony to freights continued focus on revenue quality and profitable share growth as we build on our strengths as the leader in the LTL market. Turning to FY’ 23, we are projecting continued momentum with a range of 9% to 19% adjusted earnings per share improvement. We expect margin expansion in all of our transportation segments on an adjusted basis as we executed on key priorities, including enhanced revenue quality beyond inflation, technology driven operational efficiency improvements and increasing utilization of our assets. As we began fiscal 2023, we are seeing the lower customer demand translate experience in the fourth quarter continue into June and expect first quarter volumes will continue to be pressured. In addition, Express continues to experience flight constraints due to crew COVID protocols, as has been highlighted industry wide. We do expect both Express air network efficiency and year-over-year volume comparisons across all of our transportation segments to strengthen as we go through the fiscal year. In addition, our outlook includes an approximately $450 million non-cash pension headwind through the lower asset returns realized in fiscal 2022. This is all below the line expense that will be recognized evenly over the year. Our retirement plans operating expense will be relatively flat as lower pension expense will be offset by higher 401(k) expense. And as a reminder, our primary U.S. pension plans were closed to new entrants beginning in 2020. And we introduced a new 401(k) plan with a higher company match in January of 2022. Our projection for the full year effective tax rate is approximately 24% prior to the mark-to-market retirement plan adjustments, and costs related to business optimization initiatives. Turning to capital allocation, our fiscal 2022 adjusted free cash flow of 3.6 billion supported a repurchase of approximately 2.2 billion of our stock and 800 million of dividend payments. In addition, we funded 500 million in voluntary pension contributions and ended the year with a solid $6.9 billion in cash. As we look to fiscal 2023, we remain focused on driving total shareholder return and thoughtfully allocating capital. First, we will continue to invest in an attractive ROIC initiatives. Fiscal 2023 capital expenditures are projected to be roughly the same as the 6.8 billion invested during fiscal 22 which came in lower than our initial $7.2 billion estimate as supply chain considerations extended timelines. Facility investment at Ground will decline as well aircraft expenditures at Express, offsetting that is increasing investment in vehicle replacement, including rollout of our vehicle electrification initiatives, as well as additional automation projects. We project fiscal 2023, CapEx as a percent of revenue to be under 7% compared to 7.2% for fiscal 2022. Next, we expect to repurchase an additional $1.5 billion of stock in the first half of fiscal 2023. And of course, as we announced last week, we are raising our dividend by over 50%, which increases our adjusted payout ratio to over 20%. These significant shareholder return advances reflect confidence in our continued execution and ability to adapt to the evolving market. And lastly, I'd add we are projecting $800 million of voluntary pension contributions to the U.S. plans. So we enter fiscal 2023 with a strong foundation for driving improved profitability and returns. We are mindful of the uncertainty across many fronts, including the pace of global economic activity, inflation, energy prices, additional pandemic developments and further geopolitical risks that are actively adjusting to these changing circumstances. In closing, we are focused on delivering shareholder value by driving profitable revenue growth, expanding margins, lowering our capital intensity, and improving returns to shareholders. And we look forward to sharing additional insights about our plans for this year and beyond at our investor meeting next week here in Memphis. Now we'll be happy to address your questions.

Brandon Oglenski:

Hey, good afternoon, everyone. And Raj and Brie, congrats on the new roles, obviously. Look guys, I know you want to discuss the future next week and we'll be in Memphis for sure. But Raj, could you just give us, what are your priorities for FedEx, obviously, there's a pretty big change after 51 years under, prior leadership and very big shoes to fill after Mr. Smith. And one thing that keeps coming up on this call is revenue quality. So could you just give us a little bit more insight into that perceived change, at least that I'm picking up on?

Brie Carere:

Sure, thanks, Raj. I think, yes, we've mentioned revenue quality a couple of times. We're operating in a very large market and it's not a homogenous market. We have spent a lot of investment getting to the place we are today. And we are incredibly proud of that value proposition. And so we're very focused on customers who value that. And so we're being selective in this market. We're targeting B2B, we're targeting small business. And we're really targeting customers that value the speed and the reliability we provide.

Jack Atkins:

Okay, great. Thank you for taking my question. I guess Brie for you, you noted in your comments that you expected continued above inflationary pricing. I guess when we look at Ground in particular, it doesn't feel like we've been able to see that over the last year at least, with margins down 250 basis points or so, where do you think the disconnect is there? And I guess, as you look forward, perhaps is it a function of maybe the benefits from the pricing initiatives are going to be coming in 23. And we're seeing some lessening of some of these inflationary pressures. Maybe if you could just kind of help us walk through that. That'd be helpful. Thank you.

Mike Lenz:

And Jack, this is Mike. I want to make sure we emphasize too, it's not singularly driven by revenue quality in terms of how we drive ground margins further going forward. We won't repeat the labor challenges of last year, obviously. But in terms of the active initiatives we have underway, we'll get further maturation of the productivity initiatives that we started last year. We've got additional ones coming on later this year. And I alluded to, we've got multiple efforts to mitigate the liability costs and we wouldn't expect the rate of increase that we have experienced in the last couple of years on that front.

Chris Wetherbee:

Hey, great, thanks. Good afternoon, I wanted to ask about the guidance, the EPS guidance, I guess it sounds like there are some headwinds, or at least normalizations in your economic forecast, as you think forward. Yet, from an earnings perspective, obviously, it's a wide range, but the upper end of that range is a nice acceleration in terms of earnings growth and what we've seen. I know there are some headwinds that you've been facing in fiscal 22, that presumably turned to tailwind or at least sort of get mitigated as we go forward. But I kind of wanted to square the sort of body language around the economy being a little bit soft there, but with the optimism about earnings power accelerating from where we are, so can you just help us a little bit with that?

Brie Carere:

I think the only other thing that I will add, as we kind of look at our number one, from a volume forecast perspective, we were conservative, and the range in the volume itself. And then as we go through the year, the comps in the back half, especially here from a domestic perspective, they're actually a little bit easier for us. So we've taken both kind of the economy into consideration, the size of the market, and obviously the year-over-year, but right now we feel pretty good about the range we have.

Amit Mehrotra:

Hey, thanks, operator. Hi, everyone. Raj congrats on the appointment. Wish you really all the success in the world. I guess you guys are preparing to provide the mid to long-term profit targets next week. And it's been a while, so I think that'll be quite welcome. But the question really is, we've seen a lot of uncertainty over the last several quarters, it's an incredibly fast moving market, inflation is really high. And that's actually caused you guys to miss even the nearest of profitability targets. And so the question is, as you guys prepare to come out with these multiyear target, most likely [through] (ph) to the businesses, where does the confidence come from that you're going to be able to hit those targets? And is there an element of cost or idiosyncratic opportunity related to efficiency where gives you guys and should give us confidence in being able to hit that given the experience of last year? And Mike, just related to that, if the company is asking investors to gain confidence in multiyear targets, I think it would be helpful to have some goalposts here and now, around 2023, around what underpins the 15% EPS growth in 2023, with respect to ground margins and express margins, hopefully, I don't know if you guys are willing to engage with that question. But I think it would be helpful to set that up ahead of giving these multiyear targets. Thank you.

Mike Lenz:

Yes, Amit. Well, first, certainly, look, I highlighted three specific elements for ground cost improvements and efficiencies that we will be elaborating on further details next week. And as I said, we expect margin improvement at all of our transportation segments. And the most significant one will be at ground relative to FY 22, looking at FY 23. So appreciate the feedback there and absolutely understand that we need to give specifics and what are the actions that will get us there? I will take one exception there about target in this comment you made, our annual EPS for fiscal 22 fell within the range of guidance that we gave you a year ago. So while I appreciate there may have been different twists and turns along the way, in terms of how we got there, it was indeed within what was a pretty narrow range given all things considered.

Tom Wadewitz:

Yes, great. Appreciate it. And also, others said have said this but we're really looking forward to the further detail next week and the kind of new direction or new elements of the strategy. So looking forward to that. When you look at the fiscal 23, because that's what we're focused on today. Can you give us a sense of just magnitude of some of these big pieces, is it two thirds of it is revenue quality that's giving you the growth? And cost is smaller and cost can grow over time? Or is it something that, cost is a pretty big component of your margin improvement, your earnings growth, just trying to get a sense of the kind of relative frame of that. And I guess I would also kind of look back to the analyst meeting 10 years ago, where you had the Express Improvement Program, and you had a lot of improvement, but it took a couple of years to see that. So, I guess just trying to figure out how quickly we see some of the costs and productivity measures come through, and how big of a component that is versus price and revenue quality in fiscal 23?

Operator:

And our next question will come from Jon Chappell with Evercore ISI.

Brie Carere:

Thanks, Jon. Very fair question. I think a couple of things. Number one, we've absolutely planned conservatively, so that we really can focus on those customers that value us. We have over the last couple of years done, I think a tremendous job negotiating mid- to long-term contracts that I think puts us in a really good place to stabilize the base of our volume. So to Mike's point, if things do soften from an economy perspective, I think we're in a really good position. And we're going to focus on disciplined revenue quality, disciplined targeted growth. And that will be kind of via our primary focus versus kind of selling the network from an alternative perspective. So I feel pretty good about where we are, despite some of the competitive activity and some of the other headlines while reading.

Allison Poliniak:

Hi, good evening. So first on the labor inefficiency, is there a way to quantify what that headwind was to grounding? Have you quantified the absolute wage increase? And then in line with that, a lot of productivity initiatives out there based on your volume outlook, is there a way to think or quantify what those eventual productivity initiatives will contribute to margin expansion in 23, particularly in ground? Just any color there? Thanks.

Allison Poliniak:

I know the context of your low single digit volume increase, a lot of productivity initiatives. I think you talked about the technology and the software related to the doc, some improvement on that side. Is there a way to better understand what that contribution to that margin expansion would be from some of those initiatives as we look to 23 here?

Operator:

And moving on to Jordan Alliger with Goldman Sachs.

Brie Carere:

Thanks, Jordan, appreciate the question. So specifically for Q4, fuel was the largest driver of the revenue quality. We also did, quite frankly, as I mentioned earlier, I thought the team just did a tremendous job within our portfolio of managing to hold on to the really our best and most profitable volume. So when you look at kind of the volume decline, we actually moved the right way within the Express Company domestically, we had lower volumes on deferred than our overnight from a year-over-year perspective. When you look internationally, the intercontinental, the team did a really good job of stabilizing volumes there. And actually, we decided to let some international domestic volume go. And then the same thing happened within ground, we will see the huge difference in ground economy decline versus actually we did a really good job of stabilizing the commercial on the HD, of course, our highest value proposition products. So from a revenue quality perspective, while fuel was the largest driver, we also did a great job. We continue to get inflation plus renewals, and they're really working on making sure from a mix perspective, we get the revenue for the most premium part of our portfolio. So I hope that helps clarify that.

Ken Hoexter:

Great. Good afternoon, Raj, Brie, congrats on the positions and really almost the entire team since the start of pandemic. So again, mirror everybody's sentiment about next week and the conference. But it seems like you've had a coming out of that maybe a week ago, a big capital and return focus, the involvement of an activist, you've now talked about lowering CapEx, maybe talk about what's getting removed from the CapEx or how your thoughts on investment shifts from your prior kind of growth focus and how we should think about that, obviously, you've built a huge cash balance now and maybe talk about your thoughts on capital allocation and distribution going forward. Thanks.

Mike Lenz:

Okay. And you're trying to get me to give away everything from next week. But I'll just -- I'll say, look, we've highlighted before that we were at a significant phase of [leaf] [ph] leading the Express air fleet. And as I said, that is going to come down, we can detail more of that going forward. We've built up the ground network, but the capabilities that are industry leading, and are going to be able to continue to realize value from that going forward and will further utilize that so we don't need to invest as much in the hard assets. We will certainly be investing in technology aspects to more fully utilize it and different -- and creative ways. So it's just a natural evolution from building to having these capabilities. And now transitioning, but I would remind you, too, we repurchased roughly 3% of our shares last year, while the dividend increase was certainly very significant. We've long been looking and striving to increase that in fact, it was the second largest percentage increase. So a few years ago, we actually had a larger percentage increase. So, again, it's just a natural evolution of where we are in terms of capital allocation and driving improved returns. And I look forward to elaborating further next week.

Brian Ossenbeck:

Hi. Good evening. Thanks for taking the question. So I want to comes back to the impact of fuel, and Brie mentioned, it didn't sound like there's any demand destruction or trade down [indiscernible] actually better. So you can elaborate on that and expect that to continue, given where fuel prices are, where surcharges are. And then, Mike, can you just talk about how much of an impact fuel was on a net basis, as mentioned a few times in the press release, and what do you have baked into the guidance next year?

Mike Lenz:

Yes, Brian, look, there's many elements of fuel as a -- when you aggregate it, and as Brie has highlighted before, it's a fundamental component of the overall pricing construct. So I'm not going to parse it out in terms of one specific aspect of it. But I would say in terms of the guidance that we have, the fuel price assumption that we have in there is not as high as current fuel prices. So that is -- maybe a little more help for you on that front.

Bascome Majors:

Yes. Thanks for taking my questions. I understand that you're modeling and guiding to the projections that you have out there and a lot of investors would love to see the economy come out with that. But as they discount, potentially worse scenarios, can you walk us through how the business in your mind would perform in a moderate to deeper recession? And whether or not there are any nuances we should consider versus that followed 40% EPS drawdowns we've seen historically in that type of environment. Thank you.

Mike Lenz:

Yes, Bascome, just to give you some parameters around how we have adapted and adjusted, previously when the trade or macro economic backdrop, and can change on you. In February of 2020, so, just before the pandemic, obviously, we were seeing significant shifts in trade policy and demand. And as a result, we had lowered our frequencies across the Trans Pacific by 20%, from the prior year. Well, then, fast forward a few months later, the pandemic and that when we had to completely realign and shift instead of temporarily parking airplanes. We were trying to get more lift back in the air to support commerce, to support the pandemic efforts on that. So, certainly, one we've demonstrated historically and two, I think as an organization, the ability and the speed at which we were able to adjust amongst all of our networks during the pandemic, gives us every confidence and the learning that we can react faster than we may have thought we could in the past. And we are absolutely prepared to do so.

Helane Becker:

Thanks very much. Hi, everybody. So thanks for the time here. My two questions are this. The passenger airline says are hiring every pilot they can possibly get. And I probably asked you this question before, but how are you thinking about hiring and retention so that you can continue to master your network? And the other question is, I think there was an announcement earlier this week that you took 150 Electric Vehicle from BrightDrop. So I think that's out of the 2500 van order. Can you talk about the CapEx related to that and how you're thinking about sustainability efforts? And if you're going to do it next week? That's fine. I can wait.

Raj Subramaniam:

Yes, thank you, Helane. And yes, the pilot situation, just wanted to make two points. Firstly, I want to say thank you to our pilots who have done a tremendous job during this timeframe, and a big part of the value that they provide here. And secondly because of the work environment that we have in FedEx, there's no dearth of people have wanted to want to get into the FedEx portal. So that we're not seeing that as an issue for FedEx.

Scott Group:

Hey, thanks, afternoon. Mike, you talked about ground seeing the biggest margin improvement this year fiscal 23. I'm wondering, do you think we see that margin inflection in Q1? And, or if it's more later in the year. And then just maybe bigger picture for Raj. And I think there's a lot of hope, or expectation for next week that we're going to hear about big strategic changes and focus at FedEx and cost reductions and things like that. And, understandably, we're not hearing about that today. But do you think would you agree that we should be seeing and hearing about big strategic changes next week.

Raj Subramaniam:

And Scott, yes, you're definitely not going to get me to give away the story for next week today, but I'll just tell you this much that, historically, express focus on time definite services, ground focused on day different services, and it's fantastic that we actually gained a lot of share in the U.S. domestic market over the last 20 years. And what has changed in the last three or four years is the emergence of ecommerce and residential delivery. And the emergence of day definite networks. They're different packages and both networks that gives us the opportunity to optimize across and we launched operate collaboratively a few years ago now, and we'll talk more about that next week.

David Vernon:

Hey, good afternoon, guys and thanks for taking the question. Raj, I know you don't want to tell too many of the plans for next year. And this isn't about that. But I want to think it would be helpful. I think if you could talk us through kind of the operational situation. Outside of just labor cost pressure, was there an impact on service levels over the [Technical Difficulty] because of those staffing challenge. And where are we on service kind of today for maybe where we would have been and could expect out of the service levels in ground. These metrics are all opaque and divided public data on this stuff that we continue to hear from contractors and some shippers that service level opinion on exactly where they want to be trucks and taking too much time to go to buildings, that kind of thing. I'd be great if you could just talk a little bit about [Technical Difficulty] and where we are in recovery on the activity side.

Operator:

And our next question comes from Scott Schneeberger with Oppenheimer.

Mike Lenz:

Well, Scott, as I said, we expect margin improvement in all of our transportation segments. Look the freight LTL business has certainly evolved from where it was a number of years ago, you have a much greater discipline in terms of when the environment changes in terms of pricing discipline, when its demand is strong, there is not the degree of capacity adds which then is excess capacity when you go through a little more of a cyclical change. So we're very confident the discipline within both the industry overall, as well as the approach we're taking to it in terms of continuing to drive great margins, from an outstanding year upward from there.

Todd Fowler:

Hi. Great. Thanks and good evening. So Brie. I just wanted to make sure I understand the volume expectations, I guess, number one, the low single digits is that across both Express and Ground, and then number two, it sounds like the shape is slower in the first half was an easier comps in the back half. Want to make sure I got those pieces, right. And then, if you can help us understand on the ground economy side, how much volume is still left to call on that business and the thought around calling that versus the ability to move price up on that business? Thanks.

Operator:

And our next question will come from Bruce Chan with Stifel.