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.

Good afternoon, and welcome to FedEx Corporation's Second Quarter Earnings Conference Call. The second quarter earnings release, Form 10-Q, and Stat Book are on our website at investors.fedex.com. This call and the accompanying slides are being streamed from our website, where the replay and slides will be available for about one year. Joining us on the call today are members of the media. During our Q&A session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate. Certain statements in this conference call, such as projections regarding future performance, may be considered forward-looking statements. 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 CEO; Brie Carere, Executive Vice President, Chief Customer Officer; and John Dietrich, Executive Vice President and CFO. I'll now turn it over to Raj, who will share his views on the quarter.

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.

Thank you, Raj, and good afternoon, everyone. Revenue quality and industry-leading service remained top priorities for us in the quarter. Our ability to retain the majority of the business we won from both UPS and Yellow is a testament to the team's hard work and our value proposition, which is the best service offering in the industry. And as a result, we are gaining parcel share here in the United States and around the world. Looking at the US, market conditions remained soft, with Q2 demand lower than we anticipated. The industry has now experienced 10 consecutive quarters of decline in US domestic average daily volume. Additionally, International market pressure continued. Despite this pressure, our Europe and EMEA teams did a great job of growing parcel volume. Let's now look at each segment. At FedEx Ground, second quarter revenue was up 3% year-over-year, driven by higher yield and volume. We remained focused on growing our business with the right customer and service mix to improve profitability and maintain our position as the price leader in every domestic market segment. At FedEx Freight, new customers that came over as a result of the Yellow shutdown, are enjoying a better value proposition, and we have retained a majority of this volume. Freight results showcase our disciplined focus on revenue quality as we gained share amid the industry disruptions. The market was down and revenue declined 4% as lower shipments offset an increase in yield. But on a sequential basis, our revenue decline moderated significantly as the volume pressure lessened and revenue per shipment impacted positively. Revenue at FedEx Express was down 6% year-over-year, driven by market contraction and lower fuel and demand surcharges. Global freight pounds were down 18% year-over-year, driven by lower Postal Service volume as well as the weakness in industrial production. Despite these headwinds, we are encouraged by the progress in areas we can control. For example, the improvement in European service levels enabled profitable share gains. With less than one week to Christmas, our focus remains on delivering outstanding service. Our networks are running extremely well and we are receiving very positive customer feedback this peak. We are delivering this excellent service while creating new value for customers and driving customer acquisition. This holiday season, we estimate over 365 million packages will be delivered with a picture showing proof of delivery, PPOD as we call it. It's a great new feature that has helped us win new customers. PPOD and other digital tools such as estimated delivery time window and FedEx Delivery Manager, provide customers with peace of mind when it comes to holiday shipments. Overall, this year's peak season has been relatively similar to last year and it's in line with our expectations. But looking ahead, we're ready to support our customers for post-holiday returns. Our robust returns portfolio is well-positioned to handle the returns that inevitably follow peak. Our portfolio includes both a pre-labeled and a no-label, no-box solution that creates convenient, seamless experiences for retailers and for consumers. Now, taking a step back to look at monthly volumes during the quarter. Importantly, as I mentioned earlier, we gained parcel share in both the United States and in International markets. This is a clear indication of our winning value proposition in a contracting market. Volumes have continued to improve sequentially with Ground and International export volumes maintaining last quarter's trend of growth on a year-over-year basis. Turning to Slide 14. Overall, the market is competitive but rational, and we are committed to delivering on our revenue quality strategy. During the quarter, yield trends improved slightly, but the dynamics were mixed across the segments. At FedEx Ground, yield increased 1% driven by Home Delivery and Commercial Ground, offset by Ground Economy. Higher weight per package and favorable customer segment mix, offset a lower fuel surcharge, relative to the prior year. At FedEx Freight, revenue per shipment increased 1%, with base rates strong despite lower fuel surcharges and weights. At FedEx Express, yield was pressured due to lower fuel and demand surcharges. Shifts towards e-commerce and the reopening of our International Economy Service in EMEA also pressured yield. We continue to focus on our revenue quality strategy. Earlier this month, we raised US Express and Ground fuel surcharges by 1%, and international Express fuel surcharges by 1.5%. Looking ahead, we expect a high capture rate from our 5.9% general rate increase. We will reset our delivery area surcharges consistent with our usual practice. As we've shared previously, we are also resetting our approach to dimensional pricing for International shipments. This is moving from a shipment to a per piece dimensional pricing, which is the global market practice. We are confident in our strategy and we are balancing both volume and yield growth. Moving now to Slide 15. Raj mentioned our focus on digital and efforts to identify new revenue streams. I am particularly excited about our new Tracking API that we will launch in early 2024. Our Tracking API is for both e-commerce shippers and platforms, providing them with best-in-class visibility for their customers, including a picture proof of delivery. This new for-a-fee offering is a significant enhancement for our retail customers as well as for those third-party e-commerce platforms that rely on our data as an integral part of their value proposition. This is just one example of how we're thinking about our digital capabilities to better serve our customers and generate profitable incremental revenue for FedEx. In closing, I want to thank our entire global team for how they are executing around the world to deliver an absolutely positively outstanding peak season. And with that, I'll turn it over to John to discuss the financials.

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.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Ken Hoexter with Bank of America. Please go ahead.

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.

Yes. Thank you, Ken. Let me start and then John can add as he wishes here then. So, this has been a particularly difficult year for Express. Several headwinds this year, and many of them are transitory, but we're dealing with this as we speak. So, firstly, the demand surcharges out of Asia are significantly lower year-over-year. We've also seen the product mix-shift from -- shift from priority to economy traffic. And then, our fuel surcharges also have been lower. Finally, as part of the strategy from USPS, they have shifted more volume from air to ground, and so that's been also a headwind for FedEx this year. On top of all this, we have seen now the market demand weaken primarily because of slowdown of industrial production across the world, which has impacted our International Express Freight business as well. So, this is the background we are dealing with. I would say, that despite this, the team has done a really good job on execution on DRIVE, and flexing down variable cost to the tune of $1.5 billion in year-over-year expense reduction year-to-date. Clearly, Express is an opportunity for us as we look ahead. The redesign that I just talked about is very profound and what we call Tricolor, because recognizing the fact that we now have a significant mixture of Freight traffic, as well as deferred traffic, to change a portion of the existing flight schedule to a different clock, so to speak, allowing ability to drive more, ability to fill up the traffic and improve density, and again, most importantly, allowing us to feed into not only our International Road Network, but also into our FedEx Ground and FedEx Freight Network for the first time. And so this is a significant change, probably one of the biggest changes we've seen in decades. I think that's got the opportunity here to improve our asset utilization, improve density, improve return on invested capital in a significant manner. So, I just want to also just use this opportunity to say, at the enterprise level, we are -- we have improved our operating profit 17% and 110 basis points in operating margins despite a 3% revenue decline. Let me turn it over to John to see if what he wants to add.

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.

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

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?

So, as you pointed out, there's a whole host of factors that went into the Express performance, and as Raj mentioned, we see that there will be continuing opportunities at Express. The cost in terms of the relationship with the demand will definitely be a primary focus of mine, and as we go forward, I know Brie and the team are really focused on revenue quality. And we're confident we're going to be able to manage that outcome and look forward to keeping you posted as we go forward.

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

Thanks very much, operator. Hi, everybody. I appreciate the time. One of the things that you talked about more on the last call than you did on this, although Brie, you did mention that you saw a shift in Postal Service business to Ground from Air, and I know the contract is up in at the end of the current government fiscal year. So, how are you thinking about incorporating the rest of the business into the network versus renewing the contract or maybe it doesn't make sense to renew the contract going forward?

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.

The next question will come from Scott Group with Wolfe Research. Please go ahead.

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.

Sure, Scott. Thank you. Yes. Looking at Ground, we're really excited about the results we're seeing at Ground, and through DRIVE and all our other initiatives, we are focused on maintaining those margins. I think we have tremendous flexibility to continue to leverage the surface modes, including rail, and Raj touched on some of those other things. In talking with the team, we also have some additional opportunities to leverage our LTL network as well. So, we certainly are looking favorably on the ground at margins going forward. With respect to Q3, and while I'm not going to give quarterly guidance, historically, it has been our lowest profitable quarter and we expect seasonal trends to continue, but a lighter third quarter and more moderate margin improvement in Q3.

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

Hey, good afternoon, everyone, and thanks for taking my question. So, Raj or John, maybe can you guys comment on your non-fuel expenses at Express? Because I've seen them at about $8.9 billion now for the last three quarters and I think what has gotten investors really excited around DRIVE is the idea that structural cost reductions are coming. So, can you talk about that $1.8 billion that you wanted to achieve this year, how much you've already seen at Express? And is there more to come sequentially on that cost structure? And for that Tricolor fleet initiative that you've talked about, Raj, is that a signal that you're just reallocating capacity or should we be thinking that's a structural reduction in air capacity going forward?

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.

Sure. Thanks, Raj. So, the majority of our adjusted operating expense decline in the first half was the result of lower volume-related expenses as we've continued to align our costs across the enterprise with reduced volumes. In addition, as you pointed out, we're making strong progress on our DRIVE and we are on track to achieve the $1.8 billion in structural savings in fiscal year 2024 that we talked about. It's fairly evenly spread throughout the year, with slightly more heavily weighted in the second half as some of these initiatives take hold. In Q2, Raj touched on some of the points in his presentation, of structural cost reductions, included approximately $115 million in the Air and International permanent savings category, $200 million in Surface savings and over $100 million in G&A. So, we're on track for that $1.8 billion as well.

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

Okay. Great. Thank you for taking my question. I just wanted to go back to the Air Network redesign commentary for a moment. Just to be clear, was that contemplated within your initial DRIVE program? And then I guess, were there costs associated with that in the second quarter? And if so, could you break that out? And then finally, as you sort of think about when you're going to start seeing a benefit from this network redesign, is that something we could see show up in the second half of this fiscal year or is that more of an FY 2025 event? Thank you.

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.

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

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?

Hi, Tom. Thank you for your question. Its Brie. I think the most important thing is that the market is quite rational. Yes, the yields have reset since the height of the pandemic, but I think everybody in this room fully anticipated that. As we mentioned, we continue to get a higher yield per package per segment in the US domestic market than our primary competitor, and we're very proud of that. We've been able to maintain that yield leadership and take market share. So, yes, it's a competitive market, but it's overall very rational and we feel really good about the team's performance. From an overall demand or performance in the quarter, we're actually quite pleased where yield was in totality. As Raj talked about, we do have some pressures from a mix perspective but that was more of an Express story. We feel really good about Ground and actually when you double-click and we look at the market share we gained, we actually took more share in the B2B segment. So, from a mix perspective, that's helping.

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

Hey, good afternoon. So, Raj, I want to kind of come back to the struggles at the Express segment here, obviously, popping around between the sort of 2% and 4% on the margin side. If you think about this in a three-year view, obviously, we have a lot of plans that are in place to pull cost out and we've got a lot of initiatives to work on this. At what point do you say, like, we haven't gotten to where we want to go and we need to think about something else deeper or more structural around the business? I'm just trying to like address some investor concerns that I've certainly been hearing about. Is the margin profile here fixable? And if it's not, then what -- what's going to happen next?

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.

The next question will come from Conor Cunningham with Melius Research.

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.

So, I'll touch on the pilot piece, if I understood your question. Look, part -- most of what we're doing here is to increase the utilization of our assets and leverage the Purple network. So, the pilot contract allows for flex up and flex down, but where we are now is looking to take full advantage of the assets that we have. So, there, we'll work within the agreement constraints. But we have a fair amount of flexibility to execute Tricolor and our other initiatives here. I'm sorry, I'm not sure I caught the full part of the second part of your question. On Network 2.0, if that's your question. I think this fits in quite well. There is no constraints. We're talking about on the pilot side on Network 2.0. In fact, it's complementary from my perspective.

Your next question will come from Allison Poliniak with Wells Fargo. Please go ahead. Allison Poliniak-Cusic: Looking at Purple today, just how much of that volume that's going on a Purple Tails today that could go on White, as an example? And if there is any context that you can provide in terms of the relative cost savings there? Thanks.

Hey, Allison, we didn't hear the first part of your questions. Could you please repeat it? Allison Poliniak-Cusic: Sure. Just trying to understand in terms of the volume impact from Tricolor, how much that's going on, say, a Purple Tail today that could eventually go on White, and sort of what the cost impact would be to FedEx by doing that.

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.

Your next question will come from Amit Mehrotra with Deutsche Bank. Please go ahead.

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.

So, I'll start with the discussion on Q3 or not going to be giving Q3 guidance. But as I said, I think it's reasonable to expect that typical seasonality will apply, I will say for Q3 in particular, due to FedEx Ground's very strong performance in last year's third quarter. With Ground operating margin inflecting positive by 240 basis points versus the prior year, we'll have a more difficult comparison. But I think it's fair to say, seasonality will play a role. Now with regard to the Express margins and the profits, we're going to continue to be laser-focused on that. As I said, our cost structure did not anticipate the higher demand. You cannot underestimate the impacts of all the things that Raj and Brie talked about. If you look to the year-over-year decline in the US Postal Service volume, combined with some of the minimum service requirements that are required, that really has a drag on your cost. And what I will say too is, we're really well-positioned when volumes return in light of all the initiatives we're taking right now.

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

Thank you. Good afternoon. John, just keeping with that, you mentioned a few times now that the costs were kind of above and beyond what you'd expect -- what you would normally have for this type of demand environment and you're laser-focused on it. Are those costs that I would imagine variable that you would look to pull out pretty quickly over the course of the next couple of months, especially with the seasonal slowdown in Express? Or do you have to kind of manage keeping some of those costs on, as you noted, for when volumes come back? Just trying to think again about the pace of the margin improvement potential at Express, can it happen very quickly or do you kind of have to keep a little bit more cost on just in case the demand comes back sooner than expected?

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.

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

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.

Yes. It's a fair question. One of the things that we have been pretty candid about is that we are planning actively for both scenarios, that we are working in completely good faith to maintain this relationship and improve the profitability and deliver the service that USPS would like and we think quite frankly that FedEx is uniquely positioned to deliver. And parallel, through our DRIVE initiatives, we already are working our plan if that is not the case so that we can continue to grow Express margin and deliver on our DRIVE commitments, as we have previously stated.

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

Thanks. Good afternoon. So, as mentioned a few times that fuel was a headwind for yields, surcharges were coming down. Can you maybe give some context around that? Did that have the timing effect? So, did that have any negative impact on operating income? And certainly, what do you think for the rest of this year? And then, Brie, maybe you can talk a little bit about, in Freight with the auction that went on a couple weeks ago. There is another one going on right now. You've closed a few facilities. Do you still think that market stays disciplined now that some of the capacity has changed stance? Thank you.

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.

Thank you. So, yes, fuel was a headwind, obviously, at the top-line and the bottom-line in the quarter. Moving forward, we do anticipate that fuel overall will be a headwind for the year.

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

Yes, hi. I just had a question more on the macro. Is it your expectation that there is not going to be any macro improvement for the balance of this fiscal year or maybe even for all of calendar 2024? I mean, there has been a lot of destocking, online sales weren't too bad, and some would say, consumer spend might be pretty good next year. So, just sort of curious, your thoughts or color on the macro expectations that you've thought through in terms of your numbers. Thanks.

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.

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

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.

Okay, Scott. Let me try to unpack that. I think, first of all, from a peak perspective, our peak volumes are very much in line with what we anticipated for the month of December. And from a structural pricing perspective in peak, as you know, peak surcharges are a significant contribution to the month of December and we are very pleased. They continue to be something that we are enforcing and customers really understand that. They are there to cover the incremental costs from our largest peaking customers. So, from a peak perspective, we feel really good. As I mentioned, there is no question I get asked more around here, is that, are we holding on to all of the share that we took from UPS? And the answer I can give you is confidently, yes. We gave you last quarter, the 400,000 average daily packages. That's a slightly conservative number. We are tracking all accounts that won -- we won, specifically because of their concerns on the labor negotiations. The vast majority of those had an early termination clause. And to my knowledge, we have not lost a single one of those accounts. Now, of course, we do trade accounts with UPS and we have accounted for the trades between the two of us over the last quarter. And we're still up more than 400,000 average daily packages in the United States. In addition, we looked at their Q3 numbers, we've gained share. And also, I think it's important to note, we gained share here in the United States, but globally, we outperformed the market. So, it's a confident yes, and we have the better value proposition. I believe we have the better commercial team. I'm confident we'll hold on.

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

Hi, thank you. I appreciate the question. Maybe touching on the prior one, talking about the demand environment. Well, first, I'm kind of curious what you are seeing on the International side of your business and just the reports of tighter air cargo markets from kind of the lower-cost e-commerce exports out of Asia, if that's had any impact as of late on your business? And then, more of a broader view, what's your view on when you think the slowing environment might finally turn the corner here, just based on what you're seeing today? Thanks.

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.

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

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?

Okay. Bruce, let me take the first part and then I'll turn it over to John. As we have -- we are on track to our Network 2.0 for in implementation, as we've told you by fiscal year 2027. We have announced and/or implemented optimization changes in Alaska, Hawaii, Canada, as well as several locations in the lower 48, and we have learned a lot in this process. And in January, we'll announce the next wave of rollout once we get past the peak season. So, overall, we are on track. We're learning a lot in this process here. We're building the right technology solutions and the facilities required to move forward. And I'm quite pleased with the progress.

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.

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

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.

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