Good day, everyone, and welcome to the FedEx Corporation’s Third Quarter Fiscal Year 2022 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.

Good afternoon, and welcome to FedEx Corporation's third quarter earnings conference call. The third quarter earnings release, Form 10-Q and stat book are on our website at fedex.com. This call is being streamed from our website where the replay will be available for about 1 year. Joining us on the call today are members of the media. During our question-and-answer session callers will be limited to one question in order to allow us to accommodate all those who would like to participate. I want to remind all listeners that FedEx Corporation desires to take advantage of our Safe Harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance, may be considered forward-looking statements within the meaning of the Act. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Please refer to the Investor Relations portion of our website at fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us on the call today are Raj Subramaniam, President and COO; Mike Lenz, Executive Vice President and CFO; and Brie Carere, Executive VP, Chief Marketing and Communications Officer. And now Raj will share his views on the quarter.

Thank you, Mickey, and good afternoon, everybody. First and foremost, our thoughts are with those affected by the ongoing violence in Ukraine. The safety of our team members in Ukraine is our utmost priority, and we are providing them with financial assistance and various resources for support. We have suspended all services in Ukraine, Russia, and Belarus. Additionally, we are helping to move relief to Ukraine, and we have provided more than $1.5 million in humanitarian aid. Turning to Q3. Execution of our strategies resulted in substantially higher operating income for the quarter as Team FedEx delivered yet another outstanding peak season. December 2021 was our most profitable December in FedEx history. Our ability to handle the influx of packages was years in the making as we've taken deliberate steps to enhance our unparalleled network in support of customers large and small. We have fundamentally changed our performance as we handled increased e-commerce volume during peak and set a new precedent for peak seasons moving forward. Having said that, we are laser focused on improving our margins. You'll hear us talk more about this today and then more specifically at our upcoming Investor Day. Even with the successful execution of peak, the new year brought new challenges, mostly driven by Omicron. This affected our business in 2 ways: first, we experienced staffing shortages particularly in our air operations. In January alone, the absentee rate of our crew due to Omicron was over 15%, which caused significant flight disruptions. Second, our customers experienced Omicron-driven staffing shortages, which reduced demand for our services, especially in U.S. domestic and European markets. Both of those factors resulted in softer-than-expected volume levels, especially in January. We estimate the effect of Omicron-driven volume softness in our Q3 results was approximately $350 million. While it was significant, it was also temporary, and we have seen volume rebound from January levels. Even with these challenges, FedEx Express delivered strong adjusted operating income growth of 27% year-over-year. Speaking of the Express team, we announced that after nearly 40 years of distinguished service, Don Colleran, President and CEO of FedEx Express will retire later this year and named Richard Smith, current Executive Vice President of Global Support and Regional President of Americas at FedEx Express, as his successor. We'll have much more to say about Don and his countless contributions to the business during our call in June. FedEx Freight once again delivered strong results with third quarter operating income nearly tripling year-over-year, driven by a continued focus on revenue quality. Turning to FedEx Ground. Operating costs continue to be challenged by the competitive labor environment now primarily manifesting in increased labor rates. We estimate the total impact of approximately $210 million at Ground in the third quarter, which is significantly lower than what we saw in Q1 and Q2 as we have seen substantial improvement in labor availability post peak. With the stabilization in the labor environment, I'm pleased to share that we have successfully unwound network adjustments that were necessary to provide service but cost inefficiencies. Staffing levels and the rapid acceleration in labor costs have stabilized and our network is operating at normal levels. Despite improvement in the labor headwind, volume levels in Q3 were softer than we had previously forecasted in part due to Omicron surge slowing customer demand. As such, we expect our second half Ground margins will be lower than our previous expectations and not reach double digits. Over the years, FedEx Ground has built a strong foundation to serve B2B and small and medium customers with an unmatched value proposition. As a result, we have grown market share in these segments and they remain strong priorities for the future. And then more than 3 years ago, we built upon this foundation and embarked on a strategy that positioned FedEx squarely in the center of the fast-growing, e-commerce market with a differentiated portfolio and a diversified customer base. This included a period of strategically investing in our network to meet growing market demand. Let me note here that this strategy is different than what our primary competitor has pursued. By building on our current base of business and making those prior investments in our network to facilitate growth, we are in a position to generate improved operating profit and margins. We saw this potential in our financial results for December prior to the surge of Omicron. And moving forward, our financial performance will be further enhanced by maximizing existing assets, improving capital utilization and leveraging technologies that facilitate optimization of our existing physical capacity and staffing. As we prepare to close fiscal year '22, permit me a moment to share what's on the horizon for FedEx as we continue to focus on margin expansion and shareholder return. In addition to the opportunity to enhance performance at Ground that I just discussed, we have other levers for profitable growth, which include: number one driving improved results in Europe; number two, increasing collaboration and efficiency to optimize our networks, lower our cost to serve and enhance return on capital; and number three, unlocking new value through digital innovation. Of course, we'll do this in an environment of strong revenue quality management. Our International business, particularly Europe, remains a big profit opportunity. Air network integration remains on track for the end of the month to complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks, both in the air and on the road. Paris CDG airport will serve as the main hub for all European and intercontinental flights. Liege will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth. Our expanded collaboration across operating companies will utilize our air and ground networks in a smarter and more calculated manner. For example, FedEx Freight trucks have traveled more than 7 million miles while operating on behalf of FedEx Ground this fiscal year. FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched more than 36,000 times. We'll continue to comprehensively look at all our assets in our network to put the right package in the right network and the right cost to serve. Additionally, we are unlocking value through digital innovation, our accelerated integration of data-driven technologies that will drive increased productivity in our linehaul and dock operations as well as in the last mile. Enhanced sortation technology will be operational at FedEx Ground in hundreds of facilities fired as we speak. It will increase upstream efficiencies, enabling managers to do better balance and planned sortation operations thereby unlocking key capacity. For example, during Cyber Week, this technology helped keep 1.9 million Ground economy packages out of constrained sorts. We're also modernizing the planning and staffing of our dock operations as well as the systems, training and technology that maximizes productivity on every sort. One such example is a recently rolled out package handler scheduling technology that will help ensure the right staffing levels for every sort and every facility across the Ground network. This will improve dock productivity. And when combined with a focus on employee retention, it will enable us to significantly reduce the cost of turnover and strategically target recruiting spend when and where necessary. For last mile, we continue to improve upon the optimization technology already implemented to enable service providers to make real-time decisions that enhance their business' daily efficiency. These ongoing investments in automation and technology have helped FedEx build the most flexible and responsive network in the industry and will enable us to improve our margins. In closing, we have the networks, the strategy and the right team in place as we deliver financial returns and drive shareholder value for years to come. With that, let me turn it over to Brie.

Thank you, Raj. Good afternoon, everyone. Several macroeconomic forces, including the tragic conflict in Ukraine, uncertainty around the pandemic, a tight labor market, supply chain disruptions, high energy prices and inflationary pressure have dampened the current GDP outlook globally and for the United States. Last week, we lowered our economic outlook. U.S. GDP is now expected to increase 3.4% in calendar year 2022, revised down from 3.7%, and our outlook is 2.3% in calendar year 2023, with consumer spending tilting towards services and B2B growth supported by inventory rebuilding. Global GDP growth is expected to be 3.5% in calendar year 2022, previously 4. 1% and it will be 3.1% in calendar year 2023. Growth will be driven by the release of pent-up demand for services while investment demand and inventory restocking support global manufacturing and trade. Given the tremendous fluidity of the macroeconomic environment, we will continue to update our outlook. Our teams are ready to adjust plans, as required, to drive margin improvement despite the dynamic environment in which we operate. With fuel prices increasing around the world, today, we announced a fuel surcharge increase effective April 4 for FedEx Express, Ground and Freight. Additional details can be found on fedex.com. The change in economic outlook does not change our confidence that e-commerce will continue to drive strong parcel market growth. We believe the e-commerce growth rate in the United States will be in the mid- to high single digits for the next 3 to 4 years. We will continue to build differentiated value propositions to achieve market-leading pricing in all our customer segments, including e-commerce, our small and medium customers and our commercial B2B business. We are very pleased with the results of our revenue quality strategy and know we have a great opportunity to increase the flow-through to margin expansion. In the third quarter, revenue growth was 10% year-over-year, with double-digit yield improvement for FedEx Express and FedEx Freight, close behind with FedEx Ground at 9% year-over-year yield improvement. In the United States, our package revenue grew 9% in Q3 on strong yield improvement of 10%. We executed on our peak pricing strategy in the month of December, delivering more than $250 million in peak surcharge revenue. Softness in parcel volumes came predominantly from constraining FedEx Ground economy and the effects of Omicron on both our network and on our customers. The focus on revenue quality and profitable share growth drove outstanding results for FedEx Freight this quarter. For the quarter, revenue increased 23% year-over-year, driven by a 19% increase in revenue per shipment. Additionally, FedEx Freight Direct continues to gain great momentum as an e-commerce solution for heavy bulky items with phenomenal growth in Q3 year-over-year. Our international businesses are navigating a dynamic environment. Capacity constraints continue to be a reality. At this point, valet capacity on Trans-Atlantic passenger airlines is expected to recover faster than Trans-Pacific. Passenger airline capacity is not expected to fully recover to pre-COVID levels until 2024 or even later across our largest global trade lanes. Scarce capacity on international lanes and strong demand out of Asia is resulting in a continued favorable pricing environment. With the completion of our integrated air network at the end of this month, we have 1 European air network and 1 road network in and out of Europe. Our international portfolio of services contains the best European road network, the broadest U.S. next-day coverage and a combined parcel and freight offering that no one else in the market has. As a result of the integration, we will be able to offer improved transit times, earlier delivery and later pickup services to more customers in more locations. Seven new countries will now be connected on a next-day basis within Europe, while 14 countries will be expanding our new delivery coverage. In several countries, this will be the first time we have introduced next-day service to the rest of Europe. We will leverage the expanded European portfolio to improve international profitability, drive revenue growth and gain market share. In addition to the improvements in our European value proposition, we have made significant strides to enhance our digital solutions as well. In January, we enhanced our tracking service based on an advanced machine learning and artificial intelligence model developed by FedEx DataWorks. This new experience delivers greater estimated delivery date accuracy, including updates for early or delayed shipments through all tracking channels. This improves both the shipper and the recipient experience, and it will reduce calls to customer service. Additionally, our new modernized FedEx Ship Manager, which is our online shipping application, has now been rolled out in more than 153 countries. In January, we began introducing customers to it in the United States and Canada. FedEx Ship Manager is the primary shipping application for our small and medium customer segment. We believe a market-leading digital portfolio will enable FedEx to continue to take market share in this very profitable segment. In summary, we remain optimistic about Q4 and beyond, and we'll continue to deliver on our market-leading value proposition. And with that, I'll turn it over to Mike for his remarks.

Thank you, Brie, and good afternoon, everyone. After a strong start to the third quarter with the most profitable December in company history, January was significantly influenced by the rapid spread of the Omicron variant and its negative effect on our operations and the macro environment. These challenges subsided during February, resulting in third quarter adjusted operating income of $1.5 billion, up 37% year-over-year on an adjusted basis. There are a number of factors influencing our third quarter results for both this year and last year that I will cover. As Raj explained the effects on our operations, I will give further context for the financial implications. First, labor market conditions, although much improved, once again had a significant effect on our results at an estimated $350 million year-over-year, which was primarily experienced at Ground. For the third quarter, that was primarily due to higher rates for both purchase transportation and wages. Labor availability-driven network inefficiencies were significantly less of a factor in the third quarter compared to earlier in the year. The implications from the Omicron variant surge reduced third quarter operating income by an estimated $350 million, predominantly at Express, as it influenced customer demand and pressured our operations, resulting in constrained capacity, network disruptions and lower volumes and revenue. The third quarter had favorable year-over-year comparisons for variable compensation of approximately $380 million, including the onetime Express hourly bonus last year and significantly less impactful winter weather that netted to $310 million. With that overview of the consolidated results of the third quarter, I'll turn to the highlights for each of our transportation segments. Ground reported a 10% increase in revenue year-over-year, with operating income down approximately $60 million and an operating margin at 7.3%. While pressures from constrained labor markets began subsiding, the effect was still significant at an estimated $210 million year-over-year, predominantly due to the higher purchase transportation and wage rates. In addition, our volume was softer than expected due to the Omicron variant surge slowing customer demand. A 9% yield improvement partially offset these headwinds, and our teams remain very focused on improving Ground performance, as Raj outlined earlier. Express adjusted operating income increased by 27% year-over-year, driven by higher yields and a net fuel benefit, with adjusted operating margin increasing by 100 basis points to 5.8%. Express results also benefited in the third quarter from $285 million of lower variable compensation as well as much less severe winter weather. The strong results were partially offset by the headwinds I mentioned earlier, with the Omicron surge having the largest effect, especially during January, of an estimated $240 million. Team member absences primarily among our pilot severely disrupted operations, requiring many flight cancellations and further constraining capacity. Additionally, during this time, the Omicron surge reduced customer demand in many parts of the world. Freight had another outstanding quarter, delivering an operating margin of 15%, 850 basis points higher year-over-year and revenue for the third quarter increased 23% with operating income up over 180% despite the pressures from higher purchase transportation rates and wages. And for the first time in Freight's history, they realized sequential operating income and operating margin improvement from the second quarter to the third quarter. This is all thanks to Freight's continued focus on revenue quality and profitable share growth. Turning to the balance sheet. We ended our quarter with $6.1 billion in cash and are targeting over $3 billion in adjusted free cash flow for fiscal 2022. As I emphasized last quarter, our stronger cash flow provides extensive flexibility as we continue to focus on balanced capital allocation. As such, I'm pleased to share the accelerated share repurchase program announced last quarter was completed during Q3 with 6.1 million shares delivered under the ASR agreement. Total repurchases during fiscal '22 are nearly 9 million shares or 3% of the shares outstanding at the beginning of the year. The decrease in outstanding shares resulting from the ASR benefited third quarter results by $0.06 per diluted share. Also during the quarter, we made a $250 million voluntary contribution to our U.S. pension plan and have funded $500 million year-to-date. Now turning to what's ahead. We are affirming our full year adjusted EPS range at $20.50 to $21.50. The operating and business environment uncertainty I mentioned in December did materialize to a greater degree than anticipated during Q3, but we have navigated those challenges and project a solid finish to our fiscal year. Labor-related network and efficiency effects have diminished and the wage rate component should become less of a headwind as we lap the onset of labor rate increases in the fourth quarter. Lastly, variable compensation expense will be a tailwind as it was in Q3. Turning to capital spending. We have lowered our FY '22 capital spending forecast from $7.2 billion to $7 billion. Much of the change is driven by extended time lines resulting from supply chain considerations. While we are still developing our FY '23 plans, our focus remains on lowering our capital intensity while investing in strategic initiatives to drive returns. We are highly focused on ensuring our capital investments generate returns to drive further growth in earnings and cash flows. Lastly, our projection for the full year effective tax rate is now 22% to 23%, prior to the mark-to-market retirement plan adjustments. While we are confident in our ability to deliver a strong fourth quarter, uncertainty remains across many fronts, including additional pandemic developments, the labor market, inflation, high energy prices and further geopolitical risk and the potential effects on the pace and timing of global economic activity. We continue to monitor these trends and adjust accordingly. With that, we are all very much looking forward to sharing additional background in our upcoming investor meeting on June 28 and 29 in Memphis. Mickey and the Investor Relations team will soon provide specifics on logistics, and now we will be happy to address your questions.

[Operator Instructions]. Our first question comes from Amit Mehrotra with Deutsche Bank.

Appreciate the question. I wanted to ask about Ground margins, if you can just talk about where you expect Ground margins to be in fiscal '22? And Henry, this is maybe a longer-term question for you. I mean, if I look at the Ground number since 2013, Ground revenues are up $17 billion since 2013 but the profits in Ground are up only $400 million, which implies a contribution margin of only 2.5%. So, can you just talk about the plan to reverse this long-term trend? It seems like for the first time in a while, you guys are ready to present a long-term plan to improve the cadence in the Ground margins. Wondering if you could give a little bit more meat around that. Where -- what the levers are going to be to reverse this long-term trend? And maybe give us some goalposts around that way as it relates to fiscal -- the next fiscal year, which is coming up pretty soon.

Amit, thank you for the question. Let me address it broadly and then Mike can talk about specifics on this. Firstly, we are laser focused on improving our financial performance at FedEx Ground. Let me start with firstly, the CEO of FedEx Ground is John Smith, and he was at the stage for tremendous performance at FedEx Freight before he left and we're seeing the benefit of that. That's the reason that he's there. So we expect that John and his team will drive this performance going forward. But let me also give you just a context of where we are on Ground. We, first of all, manage FedEx Enterprise as a portfolio of different operating companies, and we made a specific decision to invest in capacity and double down on e-commerce three years ago. We saw -- we were skating to where the puck was going to be and seeing where the market was going. If you look at the history of FedEx Ground, from the very beginning, starting of the acquisition of RPS, when we launched home delivery and now we doubled down in e-commerce, there are periods of time we had to invest, and we were working with our customers and retailers for them to succeed in e-commerce and it is a strategic relationship that we're building. So that period of investment, in many ways, is behind us. That pace is behind us. Now we are focused on getting revenue quality making sure we put the right package in the right network and making sure that we generate margins and growth going forward. We'll talk about this in more detail when we see you all in June, but that's -- clearly, that's what we're focused on right now, Mike.

No, Amit, the only thing I would add is you -- I think there was a question in there about FY '22. I would say certainly for the guidance that we have, our consolidated operating margins will increase in Q4. I'm not going to get into specific segment projections, but it is certainly the case that sequentially, Ground margins are typically higher in Q4 than in Q3, and we would have that expectation this year as well.

We'll take our next question from Jack Atkins with Stephens.

Okay, great. So just another one on Ground. I think we've had 3 quarters in a row where cost inflation at Ground has pretty significantly outstripped your ability to -- has outstripped your revenue per package and yield growth. How confident are you that you're in a position to drive cost per package ahead -- excuse me, revenue per package ahead of cost per package as we look forward, especially with rising inflationary pressures that we're seeing across the economy, and I'm sure you're seeing it in your business as well?

Thank you, Jack. I think we have had 2 particular issues regarding labor. I actually embarked on this journey. Obviously, that was -- what we saw in the last year was surprising in that sense and we had 2 things. One was because of lack of labor availability, we were inefficient in moving some of the packages; and secondly, just the cost of labor going up. We have unwound the inefficiencies. The network is back to normal. But obviously, we have, now in our numbers, we have the year-over-year growth on labor rates. And so we are -- we have dealt with it head on. It's now in our numbers, and I think it gives us a competitive advantage as we look in the future. Revenue quality management is a big area of focus for us. Our peak in December gave us a flavor of what we can expect in terms of our financial performance going forward. And we are confident that we can -- we are able to manage this going forward. We have a certain spike in fiscal year '22 that was unnatural, but it's just -- we set the stage for future earnings growth both revenue and top and bottom line. I don't know, Brie, you want to add anything more on revenue quality?

No, we're -- obviously, we have done a tremendous job. We talked about the 9% yield improvement from FedEx Ground this past quarter. As I've mentioned, we have repriced about 50% of our large customer, meaning customer contracts so we still have some opportunity that we have to continue that repricing. And so we are clear-eyed about the inflationary environment that we are operating in, and we know that we need to stay ahead of it. So, you can anticipate that as we head into next year's business plan and all of our discussions with customers, that you will continue to see a high yield improvement across all segments because it will be required to stay ahead of the environment we're operating in right now.

Jack, if I can say one other thing,we have a revenue management committee that meets every week. It is even more important now because of inflationary environment. And the operations teams and the commercial teams are locked in, and we make decisions very, very dynamically and very, very quickly to deal with this.

And we'll take our next question from Tom Wadewitz with UBS.

Wanted to see if you could offer some thoughts on the consumer. I think, Brie, maybe you had, Raj, you had some comments about risks or Mike. But have you seen any signs that the consumer is -- I know Omicron caused noise but just the consumer weakening, have you seen that recently in the U.S.? And how do you think about the importance of consumer and goods buying when you look at the Ground business? If you have a weaker consumer, does that just make it tougher to make that algorithm on Ground margin improvement work? So really just wanted to get your thoughts on consumer and near term and also outlook.

Tom, thank you for that question, especially as the inflation has picked up and there's obviously consumer spending in February is already down. It's difficult to forecast as an environment, but I'm going to tell you that the big period of growth of e-commerce is now behind us, and we are planning -- in that perspective, we are confident, even with the mid-single-digit growth to -- mid- to high single-digit growth that Brie was talking about on e-commerce, that we are able to generate positive returns going forward. So we are not counting on huge consumer spend in our numbers. Brie?

Yes, I would agree with that completely. As we talked about, we already have modified our economic outlook from a market forecast perspective. A couple of things: one, for this calendar year, we do expect B2B parcel market growth to be actually relatively healthy at 3%. Normally, it's in around 2% in our market and that's for this year, we still see a lot of inventory replenishment. We also see strong requirements coming in from Asia, as I mentioned earlier. There's still just a backlog there, quite frankly. So the B2B is still going to be healthy for the year. . From a B2C perspective, we have modified our long-term outlook. We're now projecting about 8.3% CAGR in an e-commerce market, that's to calendar year 2026. So historically, over the last couple of years, we had actually projected above 10%. So yes, we think consumer demand will be down. It is already, quite frankly, in our outlook for Q4. And as we look forward for next year, we think we can continue to take market share and have some profitable growth despite sort of a softer economic outlook.

We'll take our next question from Jordan Alliger with Goldman Sachs.

Just curious, you mentioned, I think, that the staffing and labor-related costs for the company was $350 million in the most recent quarter. How does that look in the fiscal fourth quarter direction-wise? And then same thing, Ground, I think, you said was $210 million as the $350 million. How do you think that sits as we get to fiscal -- through fiscal fourth quarter?

Jordan, this is Mike. Look, so we went from like roughly $470 million in Q2, $350 million this quarter. I mean, I would put it in order of magnitude around $100 million or so based on what we are seeing here today. That's, again, principally the wage rate element of it, which really began to manifest in the May time frame essentially, April, May time frame.

And our next question comes from Chris Wetherbee with Citi.

Quick clarification then another question on Ground. Just making sure I understand, Raj, I think you said you wouldn't hit double digits on Ground margins for Maxar. I heard that the average for the back half of the year, so I guess, we won't see expansion in the fourth quarter. And then maybe taking a step back in terms of the ISP model on the Ground side. Just kind of curious, in this type of inflationary environment, do you see pressure? Does it kind of go back and maybe you open up contracts and do things differently with that piece of the business? Is that something that we need to think about beyond this year out into next year and beyond if inflationary pressures keep up? Or it's the kind of thing that would just sort of be normal course as we move forward.

Thank you, Chris. I'll let Mike answer the first question in a minute. But on the entrepreneurial business model with our contractors is a win-win scenario. It provides us the flexibility. As the market dynamics change, we remain committed to collaborating with those service providers and enable that when the lines of communication are open. So yes, we will work closely hand in hand to make sure that we are successful for FedEx and our contractors going forward.

Chris, nothing from what I said prior where we have consolidated operating margins. Will be up in Q4 and the Ground Q4 margin sequentially would be higher than Q3. But not going to go past in terms of the specific segment quarterly margin projections.

We'll take our next question from Duane Pfennigwerth with Evercore ISI.

I wonder if you could comment on -- you gave us the impact to EBIT. I wonder if you could comment qualitatively on the impact to volume growth from Omicron in Express and Ground. And to what extent you've seen those volumes and ADVs accelerate and pick back up?

Sure, happy to. Great question. When we look at the volume in Q3, we really have to break it down by month. So from a December perspective, we actually saw softer than anticipated volume for a couple of reasons. The first was FedEx Ground economy. We have been constraining that product to make sure we get the revenue quality that we require for the network. The second was we were absolutely focused on service and make sure that we had volume in the right places within the network. And then third was that we also saw a huge pull forward in early in November. Both retailers and, of course, the carriers were really pushing to get volume moving earlier in the peak season and actually it was quite successful. So overall, December was softer than anticipated for those 3 reasons. And when we got into January, we obviously saw a significant impact in volume in the Express network here in the United States but also in Europe. And then we did see some impact in January at FedEx Ground, but also we did have the FedEx Ground economy constrained growth impacts January because as you can imagine, the Ground economy product is heavily used for returns as well. So that was what was going on in December. In January, you saw Omicron but you also saw those other impacts in December and January. And then we got to February, we actually saw a rebound. So as Raj mentioned in his opening remarks, we actually saw quite a dramatic recovery from a volume perspective relative to January. And so that's sort of where we're at from a volume perspective.

Our next question comes from Scott Group with Wolfe Research.

So Mike, you've got a big range of earnings guidance for the year, 1 quarter left. Any thoughts on directionally where you think we should be shaking out well to that range? And then I'll ask another on Ground margins. You guys operating, give or take, at an 8% margin. UPS is on its way to 12%. You guys used to be better. Is this structural? Is there a reason you can't get to those kinds of levels? And then any thoughts on this Ground contractor lawsuit?

All right, Scott. This is Mike. Talking about the range, look, certainly, it is the case that relative to where we were 3 months ago in a little different place in the range as the uncertainties manifested in a greater magnitude than we had anticipated. But I think we're quite proud of the fact that our guidance remains where we started the year at. And look, if you had told me at that time, we would have the most dramatic labor market shift in generations as well as another phase of the pandemic that resulted in case counts in the U. S. and Europe higher than any previous waves, we undoubtedly would have had a significantly wider range. So we feel that it is a great accomplishment of the team to be where we are with this. Lots of moving pieces and things change along the way within the scope and scale of what this enterprise is. And so we're looking forward to a strong finish to the fiscal year.

Well, let me just say big kudos to our CFO on setting the range in the beginning of the fiscal year and all the things that have happened in the middle and we're still the same range. So I mean, that's terrific. I don't -- I've already talked to you about what our dealings with our contractors and it's a win-win situation. And we will continue to work that. The lines of communication are open. I've spoken to John several times, and he's directly in touch and his team. And as far as our upside for FedEx Ground, yes, we have upside. We know that and we are laser focused on that. And again, John is the right person to lead that team to get there as well.

Our next question comes from Allison Poliniak with Wells Fargo. Allison Poliniak-Cusic: I just want to go to the levers of growth. You talked about collaboration, increasing that collaboration to optimize the network, understanding it's early innings there. Just any color on the productivity you're seeing from some of those efforts? And then maybe as well as the potential chokepoints that you're seeing that might need to be addressed before that could accelerate further. Just any color.

Yes, Allison, thank you for that question. Clearly, as we -- the e-commerce market has grown. And in both our networks, there is now opportunity to optimize the very definite traffic between the 2 networks. And so we're clearly doing that. But we are, as you call it, in the early innings. We have -- there's a lot of work to be done, and we'll share that with you when you're all here in person in June. But the opportunity also is quite big. We're already moving in this direction and we will continue to make strides here. Now in this context, please don't forget what FedEx Freight is doing in this regard and especially working with both Ground and Express and over time with International. And so we will clearly focus on trying to -- making sure that they put the right package in the right network at the right price. And again, we'll share more details with you in June.

Our next question comes from Brandon Oglenski with Barclays.

Raj, since the rest of the management team has announced call, maybe you can give us some insight into the appointment of Richard at Express. What was the process there for electing the next leader? And then what do you hope to get out of the leadership change in that large division?

Thank you, Brandon. Of course, we have a very set succession planning process where Don was in this role for 3 years. I knew that was going to be a finite time period of time. And so we were already working on the succession planning very carefully as we have done so with John in FedEx Ground, with Lance in FedEx Freight. Similarly, we have a process going on with Express. We've divided it into 3 groups, 3 mega-regions with Americas, Asia and Europe. And Richard is leading the Americas region. He was responsible for the vaccine distribution and also in the planning of our global network in this very interesting time that we've been through. So we are very confident that Richard is going to take the organization to the next level. Don has done a fantastic job of creating a unified culture and getting the right players in place. We have a great bench, and this is going to be terrific. Thank you.

We'll take our next question from Bascome Majors with Susquehanna.

Yes. You took down the midpoint of your multiyear restructuring spend in Europe but didn't change the benefit you expect to get from that. Can you talk a little bit about what drove that update in your expectations, and what the next steps could be in the Europe profit improvement plan as you get right at the point of discussing that with investors maybe next year?

Sure, Bascome. This is Mike. So first, yes, we did narrow the range of the expected cost of that program as we have moved through the process. And as you've noted, the -- we've talked about the charges as we recognize them there. The benefits range is unchanged, and so we felt it was appropriate as we were further down the process just to simply narrow the range of that. So that was it. A lot of things going forward as it relates to TNT beyond that, so I'll have Raj elaborate a bit on some upcoming events, too.

Yes. So Bascome, thank you for the question there. I think it's -- the end of this month is a very important date for us as we complete the physical integration. Europe remains a big profit opportunity for us going forward. Just to put it in perspective, today, we -- FedEx operates 350 flights a week, serving 42 airports and TNT operates 600 flights serving 59 airports. By combining, we're going to reduce the total flights to 825, but we extend our reach to serve 72 airports. So fewer flights, more airports, and oh by the way, because there are jets at the cross-time, so the value proposition gets better. So that happens right away in April. The logic behind our acquisition of TNT remains sound. We are closing a portfolio gap because we do not have an intra-European deferred service and now we do. With this, we can also now serve Europe in and out on a lower cost structure. And we also launched priority timed options. We have noon and end-of-day service and it gives us flexibility. So a lot of things going on as we -- Mike already talked to you about the back-office savings there. The CDG hub, 70,000 pieces per hour. I was there 2, 3 months ago and back there in May again. There was something to behold. And so it's going to be -- we are confident here that this now sets the stage for our improved performance in Europe from here on out. Thank you so much.

Our next question comes from Brian Ossenbeck with JPMorgan. Brian, your line is open, and we are unable to hear you. Please check your mute function. We'll move on to our next question from Helane Becker with Cowen and Company.

I just have 2 questions. One is, when you say that you're taking share, I think Brie mentioned that, can you just be a little more specific about where that share shift is coming either in verticals or geographically? And then my other question is with respect to your facilities. Can you just talk a little bit about the use of robotics and automation that lower -- potentially could lower labor costs?

Sure. Happy to talk about our targeted revenue growth strategy. So from a market share perspective, our goal here is to take share strategically in the segments that value our network. And as we've talked about over the last year or 2, we've made some pretty significant enhancements in our network and our value proposition, some of which I covered earlier. From a small business perspective, we have taken share over the last several years consistently. And this year, we actually have seen our small business segment grew faster than our large customer segment. So we're really pleased with that. When we compare ourselves to our primary competitor, I still have share upside in both B2B as well as in e-commerce. And as I mentioned, we are very disciplined and very focused on our small business acquisition strategy. We're doing some things very differently. We are acquiring them direct. What do I mean? We're not going en masse through platforms. We're being very selective with the platform partners that we are choosing because we want to have that direct relationship with the small customer. We have a fantastic loyalty program that no one else in the market has. We are strategically using earned discount to bundle our parcel in our LTL portfolio, which of course, our primary competitor can no longer do. So from a small business perspective, historically, we've taken share this year. I've seen small business grow faster than large. And I'm talking predominantly here in the United States, although I will tell you that both Europe and EMEA are rolling out a very similar playbook. We're very optimistic about our share opportunity there as well. Additionally, we saw APAC or our EMEA region take share and we're very pleased with that as well. They've been very focused and we see strong momentum out of Asia as well as out of Europe and e-commerce -- intercontinental e-commerce. The premium piece of that market is a share opportunity, those that pay for the value proposition there. From a Europe perspective, we have not been as successful from a share perspective, but we could not be more excited about what Raj just covered. This physical integration allows us to unleash just an incredible value proposition. We've got some brand awareness, work to do still, but I'm very optimistic that you're going to see some real momentum in Europe next year. So I hope that answers your question, but happy to answer any other details you need.

Let me take this opportunity to give a shout-out to our commercial teams because they've done really a remarkable job of growing share and managing revenue quality and we'll continue to do that. On the robotics front, it's a very important question, Helane. And I think especially in the last year or so, the field of robotics itself has actually changed because -- with AI and ML coming to the picture, there's significant developments in the robotics field. So we think it's a huge opportunity for us. And again, we already -- if you look at some of the facilities that we have in Ground, a lot of facilities are now automated. But we can move further here. We are obviously working on several processes inside the hubs and to involve robotics and also working with partners and on autonomous vehicles. We have FedEx Roxo for same-day delivery on demand, and we have partners like Nuro and also over the road. So a lot of effort in this direction because it's very strategic and could have big implications in the years to come. So again, thanks for the question.

Yes. Helane, this is Mike. It's unquestionably the case to amplify the point Raj made that you're seeing tremendous amount of capital coming into the robotics space as a result of the labor market constraints that have been experienced worldwide. So that's really an opportunity. And certainly, when you are here to visit here in a few months, you'll get the opportunity to see, within our facilities, how that really works because that is where the bulk of the labor is deployed as the loading and unloading of the trailers there, particularly in the Ground facilities, given the investments we've made in automating all the sortation in that. So a very relevant point to raise.

Our next question comes from Jeff Kauffman with Vertical Research Partners.

I'd like to get back to the question on the improvement that you were seeing and marked throughout the network. Obviously, the global supply-demand equation has changed a lot with the recent events in Eastern Europe. So I think earlier, you were giving us a view more of the Omicron impact on domestic Express. Could you talk a little bit about what's going on globally as you move from February into March? I know Omicron impacted Europe, you mentioned. And now we've got a new version of COVID in Asia. What does the step-up look like on the international side? And how have the events in Eastern Europe affected global capacity?

Well, let me start and I'm sure Brie will clean me up here. Firstly, it's kind of almost funny that Omicron is almost a thing in memory even though it was ravaging just a couple of months ago but is now behind us in that sense. And we have other bigger things now to deal with. The conflict in Europe was really tragic. First ground war like that in many, many years. And -- but the impact on the economy is something that we have to see. I think it starts with the cost of fuel. As the fuel cost goes up around the world, inflation goes up and then because of that, the potential economic slowdown. How long this lasts is anybody's guess. I'm not going to project that forward. So we will have to be very flexible and nimble in dealing with that situation. We're watching the China situation carefully. Our operations are close to normal as we speak. And the demand is still very strong. But again, this is a very dynamic situation. And we have more than 10% of our employees in a closed loop system today, working -- I mean, just amazing job by our team in keeping our operations going. So this is something that's very fluid in nature and we got to watch as we go along. I don't know, Brie, if you got anything more?

No, not a whole lot more to add. As I've mentioned, global commercial capacity is still constrained. And as a result, right now, we have not seen an impact despite the high inflationary environment as we talked about some of the risks we see from a consumer perspective. Out of Asia, demand seems pretty high because of the current commercial capacity constraint, but also, as I mentioned, because inventory levels are still so low. So right now, demand looks good coming out of Asia. We're keeping an eye on the United States as well as in Europe. Right now, from a Europe perspective, we believe we still have some opportunities, as I talked about, to take share and that's our intent. So right now, we're feeling pretty good. But as Raj talked about, things can change and we will adapt as required to do so.

Next question comes from Scott Schneeberger with Oppenheimer.

Just a clarification kind of on that last question. You discussed some of the Russian conflict, some indirect collateral issues. Could you please just give us a bit of a size of how much business Russia and Eastern Europe represents to you? And then just switching gears. Could you talk about sustainability of Freight margins? Obviously, you have been very strong for a long time now and look like it continues to have momentum. Should we continue to expect in the mid-teens or is that something that you would expect to change as we move through the rest of the calendar year?

Thank you, Scott. I think if I got the first question right, I think the -- if you're specifically talking about the 3 markets, Ukraine, Russia and Belarus, the profit impact for that is not material. So that -- if you have another question, I'm happy to take it. On the FedEx Freight, I'm just delighted with the progress that we have made there. We have made -- it's been years in the making, so to speak. We are focused heavily on revenue quality management and operational efficiency. And also again, let me make this point, FedEx Freight is doing a remarkable job in stepping up and helping other operating companies as needed. I think this is a winning formula and that we expect that to continue.

And that does conclude today's question-and-answer session. At this time, I will turn the conference back to Mickey Foster for any additional or closing remarks.

Thank you for your participation in FedEx Corporation's Third Quarter Earnings Conference Call. Please feel free to call anyone on the Investor Relations team if you have any additional questions about FedEx. Thank you very much. Bye.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.