Good day, and welcome to the FedEx Third Quarter Fiscal 2025 Earnings Call. All participants are in a listen-only mode. After today's presentation, there will be an opportunity for questions. Please note this event is being recorded. I would now like to turn the conference over to Jeni Hollander, Vice President of Investor Relations. Please go ahead.

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 investors.fedex.com. This call and the accompanying slides are being streamed from our website. During our Q&A session, callers will be limited to one question to allow us to accommodate all those who would like to participate. Certain statements in this conference call may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Today's presentation also includes certain non-GAAP financial measures. Please refer to the Investor Relations portion of our website at fedex.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 and Chief Customer Officer; and John Dietrich, Executive Vice President and CFO. Now, I will turn the call over to Raj.

Thank you, Jeni. I want to start by expressing my heartfelt gratitude to our team members. They delivered a strong peak within a compressed timeline and managed weather events ranging from unprecedented wildfires to severe winter storms. They accomplished this with a focus on safety and customer service, and I am very appreciative of their dedication and success. Now turning to our Q3 results. Revenue was up 2%, growing on a year-over-year basis for the first time this fiscal year. Our DRIVE savings continue to build sequentially and we achieved $600 million of savings in the quarter. Taken together, these two factors enabled us to achieve 12% adjusted operating income growth compared to last year. At Federal Express Corporation, we delivered strong year-over-year results with adjusted operating income up 17% despite significant headwinds from the expiration of the United States Postal Service contract and severe weather events. Weakness in the industrial economy continued to pressure our higher-margin B2B volumes. Similar to last quarter, this dynamic was most pronounced at freight, where fewer shipments and lower weights continue to negatively affect our results, albeit to a lesser extent than last quarter. Considering our B2B mix, we are well-positioned to capture strong incremental flow-through when the industrial economy recovers. The current environment, however, is adding uncertainty to demand. We continue to work closely with our customers to help them adapt to this evolving market. Our flexible and unmatched global network, digital tools and data ecosystem enable us to quickly support our customers' needs. With our vast data on cross-border trade, we are uniquely positioned to create more value for our customers as they navigate change. This includes providing a streamlined clearance experience for customers while helping them comply with regulatory requirements. And through our automated processes, we can clear packages more quickly, better address improperly filed paperwork, and reduce manual work to respond rapidly to our customers' needs while improving our operating efficiency. As a reminder, in terms of our revenues split by geography, we serve an extremely diversified customer base across the more than 220 countries and territories. To put some numbers around this, taking our FY ‘25 revenue through the third quarter, nearly 75% comes from our U.S. domestic services. Another approximately 10% of our revenue comes from non-U.S. intra-country or intra-regional services. And from a bilateral U.S. trade perspective, our biggest single-country exposure represents only about 2.5% of total revenue. Against this backdrop, we remain focused on what we can control. First, Q3 drive savings continued to ramp and were in line with our expectations. We expect to achieve our incremental target of $2.2 billion for FY ‘25 and our total of $4 billion from our FY ‘23 baseline. Second, we are creating a more flexible, efficient and intelligent network. As planned, we resumed network 2.0 conversions following peak. We have optimized five U.S. stations since the beginning of the calendar year and expect to optimize 45 more in Q4. We are on track to complete the rollout in Canada by the end of April. By the end of FY ‘25, about 12% of our average daily global volume will flow through network 2.0 optimized facilities. Third, Tricolor is driving better asset utilization as we improve aircraft density and better leverage our surface network. We have a broad range of KPIs that we are tracking to measure our progress. We're especially pleased that on a year-over-year basis, payloads across our air network are up 9% with a 5% improvement in density. This is a key objective of our Tricolor operating model. Importantly, our progress is leading to positive flow-through on revenue growth from international export freight. Fourth, our planned transition away from the U.S. Postal Service contract is going well and we are continuing to remove costs associated with the expired contract. Fifth, our freight separation work is underway. John will share more details shortly. And lastly, we are providing our customers with the best-value proposition in the industry. FedEx Ground and FedEx Home Delivery are faster to more locations than UPS Ground. As we look to the fourth quarter, in light of the uncertain demand environment and higher than previously expected inflationary pressures on our cost base, we are lowering our FY ‘25 adjusted EPS outlook to $18 to $18.60. John will provide more color on the underlying assumptions. I'm excited about our transformation progress as we continue to integrate our networks, reduce our cost-to-serve, and enable better performance. Technology remains a key facilitator of our transformation. Last quarter, I shared details on the encouraging improvement we are seeing in Europe. That trend continued in Q3 with our simplified technology platform driving both operational efficiency and a better experience for our customers. This is also leading to the best European service levels we have seen in years, which is driving profitable share growth. We remain on track to achieve the $600 million in total DRIVE savings from Europe by the end of this fiscal year. In support of our network transformation, last month, we acquired RouteSmart Technologies, a global leader in route optimization solutions. This acquisition allows us to bring in-house a dynamic route mapping solution with a best-in-class algorithm. Our legacy ground business has used this technology with great success, and we are now rolling it out globally. This will be an important enabler for both Network 2.0 and our global network transformation, helping our team members to work safer and smarter. In closing, I'm proud of the team for their continued success. We navigated many headwinds in this third quarter, including a volatile demand environment, the Postal Service contract expiration, severe weather events and inflation. Yet, we still delivered 60 basis points of adjusted operating margin expansion and a 12% improvement in adjusted operating income. Looking ahead, I'm confident that our transformation initiatives such as DRIVE, Network 2.0, and Tricolor will create long-term value for our stakeholders. Now let me turn the call over to Brie.

Thank you, Raj. First, I also want to thank our team for a very successful peak. On Cyber Monday, we picked up nearly 24 million packages in the United States. That's nearly 70% more than we pick up in the U.S. on an average day. And given the compressed timeline, we handled more packages per day year-over-year this peak season while, of course, continuing to deliver the Purple Promise for all our customers. While demand during peak exceeded our expectations, post-peak trends were largely consistent with the market weakness of recent quarters. Consolidated revenue increased 2%, driven by higher volume at Federal Express, partially offset by freight. The weak industrial economy continued to weigh on our global priority volumes in our LTL business. Against this backdrop, we continued to focus on profitable share growth. As we closed out calendar year '24, we took a profitable share in the U.S. domestic and in international parcel, and also because of our Tricolor strategy, we grew a profitable global air-freight share. Looking at each segment on a year-over-year basis, at Federal Express, revenue increased 3%, driven by increased volume in our deferred services. At freight, lower volumes, fuel surcharges, and weight per shipment pressured our top line performance. This led to a 5% revenue decline. Overall volume trends improved in the quarter to our highest year-over-year average daily volume growth since Q4 of fiscal year '21, led by 5% growth in Federal Express package volume. Our volume growth was driven by deferred services and the timing benefit of Cyber Week. And while LTL volumes were pressured, the rate of decline in average daily shipments improved compared to Q2. Across U.S. domestic express services, volumes increased slightly with growth in deferred services partially offset by a decline in priority volume. Ground volumes increased 7%, supported both by B2B and B2C growth. International export package volumes increased 8% in the quarter due to continued growth in the international economy. With air freight, average daily pounds increased 3% for international priority freight. As we shared last quarter, the growth here is tied directly to our Tricolor strategy to grow profitably in the global air freight market. As expected, total U.S. domestic express freight pounds declined significantly, largely due to the Postal Service contract expiration. And at FedEx Freight, the soft industrial economy led to a 5% decline in average daily shipments and a 3% decline in weight per shipment. We remain focused on quality growth amid a competitive but rational pricing environment. I am encouraged by recent pricing trends. Holiday demand surcharges supported our results, and consistent with historical trends, we are seeing a strong capture rate on the 5.9% GRI implemented this past January. At Federal Express, U.S. domestic package yield was flat year-over-year as higher U.S. Express overnight package, ground commercial, and home delivery yields were offset by lower ground economy yield. Similar to last quarter and in line with our expectations, international export package yield declined, driven by the international economy, partially offset by an 8% yield increase for international priority. At FedEx Freight, revenue per shipment declined 1% due to lower fuel surcharge revenue and lower weight per shipment. However, revenue per hundredweight increased 2%, a testament to our focus on revenue quality, and the industry's continued pricing discipline. As we look ahead, we expect FY ‘25 revenue to be flat-to-down slightly versus last year. For the fourth quarter, this implies essentially flat revenue at Federal Express, driven primarily by continued volume growth in deferred service offerings, partially offset by one fewer operating day. At freight, we expect continued revenue decline on a year-over-year basis in Q4 but also expect the Q4 decline to moderate sequentially. Last quarter, I shared with you the framework for our commercial priorities. B2B growth, including healthcare and automotive, a focus on U.S. domestic e-commerce, profitable growth in global air freight segment, and of course, we want to accelerate profitable growth in Europe. I am very pleased to report that we've had progress across all of our priorities. A few highlights from the quarter. We continue to build unique capabilities for our high-margin healthcare vertical. For example, we are taking our established returns platform and using that technology for customers that require recurring collaborative shipments with their business partners or vendors. This has varied use cases across industries, including lab shipments between medical providers. This process enables a simpler shipping process with more visibility, allowing shipment recipients to staff more appropriately and efficiently. Due to the hard work of our team and our compelling healthcare value proposition, we are onboarding nearly $400 million in new annualized healthcare revenue over the next 90 days. Our advanced capabilities helped to track this new business with three-quarters of this business tied to bundled customers who are using the FedEx around suite. As a result of these wins, we will exit FY ‘25 with approximately $9 billion in healthcare revenue. Additionally, we further expanded FedEx around monitoring and intervention, and now we offer this solution in over 40 countries. Surround's real-time AI-powered dashboard gives customers enhanced visibility and control over their shipments, which is especially helpful for customers transporting high-value or sensitive goods. With 90% of the market's incremental parcel growth expected to come from e-commerce, we continue to refine how we profitably serve this market. Based on demand from our largest customers, we have expanded our Sunday residential coverage to nearly two-thirds of the U.S. population, up from 50% previously. We have already received incremental commitments of more than 0.5 million packages per week from existing customers tied to our Sunday delivery capabilities. This change is enabling us to better utilize our existing assets without adding capacity while meeting the needs of our customers. As a result, we expect this incremental coverage to be profit-accretive in Q1 of fiscal year '26. We will continue to lean into these key strategies as we target profitable growth in the quarters and years ahead. And with that, I will turn it over to John.

Thanks, Brie, and good afternoon. Our Q3 performance demonstrates our team's strong commercial execution and our rigor in reducing structural costs. On a year-over-year basis, we grew adjusted operating profit in Q3 by nearly $160 million, or 12% despite headwinds from the Postal Service contract expiration, pressures at FedEx Freight, and the severe weather events Raj mentioned. As a result, we delivered adjusted EPS growth of 17%. Now walking through the dynamics of the quarter. Commercial execution at Federal Express focused on the key priorities Brie mentioned and drove a $509 million increase in revenue, which resulted in strong flow-through to the bottom line. DRIVE benefits of $600 million continued to reduce our structural costs and supported our earnings growth. With respect to headwinds, Q3 was the first full quarter following the Postal Service contract expiration and as expected, this resulted in a $180 million headwind to adjusted operating income. This headwind will ease in Q4 as we continue to reduce costs associated with the contract. We also experienced severe weather headwinds of approximately $70 million relative to last year. And finally, the soft U.S. industrial economy continued to weigh on B2B demand and FedEx Freight weight per shipment. Now to providing more segment detail for Q3 on a year-over-year basis. At Federal Express, we grew adjusted operating income by $206 million, driven by DRIVE savings, base yield improvement, and increased U.S. and international export demand. Our progress in Europe also contributed to adjusted operating income improvement in the quarter, and I'm confident we'll continue this positive momentum in Q4 and FY ‘26. At FedEx Freight, operating profit declined $80 million year-over-year as lower fuel surcharges and the soft U.S. industrial economy continued to challenge the business. Base yield improvement as well as effective cost and headcount management partially offset these headwinds at freight. Moving to DRIVE, as we committed, we continued to sequentially improve our DRIVE savings and we expect even further savings in Q4. We delivered $600 million of savings in Q3 compared to $390 million in Q1 and $540 million in Q2. Air and international savings of $245 million benefited the quarter as we continued to optimize commercial linehaul against aircraft capacity in our network. Additionally, we optimized route productivity and pickup and delivery operations in our European network. We achieved G&A savings of $220 million as we continue to rationalize vendor spend and increase back-office efficiency. And at surface, we achieved DRIVE savings of $135 million, and all of these elements contributed to the total DRIVE savings of $600 million in the quarter. Turning to our outlook, I'm encouraged by both our sequential earnings momentum and year-over-year growth. That said, given the ongoing challenges in the global industrial economy, inflationary pressures, and the uncertainty surrounding global trade policies, we now project FY ‘25 adjusted earnings per share to be in the range of $18 to $18.60 compared to our $19 to $20 buyer range. For Q4, we expect continued execution of our revenue quality strategy and further acceleration in DRIVE savings to support sequential and year-over-year growth in adjusted operating income. We will exit the fourth quarter by achieving our FY ‘25 goal at an annualized DRIVE run rate north of $2.2 billion. We expect headwinds from FedEx Freight to continue in Q4, but forecast some moderation on a year-over-year basis. Turning now to our latest full-year adjusted operating income bridge. This shows the year-over-year operating profit elements embedded in our revised outlook. This bridge now reflects adjusted operating profit of $6.2 billion, equivalent to $18.30 of adjusted EPS. For revenue net of cost, we now expect a $1.1 billion headwind, which is $400 million above our prior forecast. This is a result of revised second-half assumptions for revenue and inflation. We now project a $400 million headwind from international export yield pressure. A $100 million increase is a result of base yield pressure, particularly in international economy, and greater than previously expected demand for our lower-yielding deferred service offerings. We still expect a $300 million headwind from two fewer operating days in Q1 and Q4. And lastly, we now anticipate a $400 million impact from the expiration of the U.S. Postal Service contract, which is an improvement of $100 million from our prior guidance due to our ability to swiftly eliminate contract-related costs. As I mentioned, we also expect to see our $2.2 billion in expected DRIVE savings for FY ‘25, which is offsetting these headwinds. At the midpoint of our revised FY ‘25 outlook, we're now assuming 3% adjusted EPS growth on flat to slightly down revenue year-over-year. Overall, our revenue in Q3 and expectation for Q4 are softer than previously anticipated with weakness coming primarily from B2B and priority services. This further pressures our bottom line. In addition, inflationary pressures on our cost base are expected to be higher than planned, further reducing our full-year outlook. Moving to capital allocation. We continue to significantly reduce capital intensity while returning capital to shareholders. We completed approximately $500 million in share repurchases in Q3, bringing the year-to-date number to $2.5 billion, our target for the full year. And including our dividend, we're on track to return $3.8 billion to shareholders in FY ‘25. In Q3, capital expenditures were $997 million and our planned FY ‘25 CapEx is now down to $4.9 billion, a $300 million decline compared to last year's $5.2 billion, supporting strong free cash flow and shareholder returns. From a fleet standpoint, we recently reached agreements to purchase eight new Boeing 777 freighter aircraft and two used 777 freighters, which will be phased in during calendar years '26 and '27. These modern and fuel-efficient aircraft were purchased at attractive prices and will help us manage our fleet for the long term while still upholding our FY ‘26 commitment to approximately $1 billion of aircraft CapEx. Given that these new planes are highly efficient and will retire our older, more maintenance-intensive fleet over time, I'm confident that aircraft CapEx in the immediate years beyond FY ‘26 will remain in the area of $1 billion. We've continued to manage and rationalize the size of our jet fleet, including retiring some of our older aircraft over the last several years. This is consistent with our go-forward strategy to prioritize revenue quality and grow in the premium segments of the market. We've retired 20 MD-11s over the past three years and now expect to retire the remainder of the MD-11 fleet by the end of FY ‘32 versus our prior FY '28 target. This extension of some of these aircraft will help us ensure network flexibility while minimizing aircraft CapEx. In December, we shared our plans to fully separate FedEx Freight. Since our December announcement, we've set up a separation management office and established a cross-functional team to ensure a smooth transition. We're making progress on all. Last month, we completed a very successful $16 billion debt exchange offer and consent solicitation. This will create more flexibility for both companies' capital structures as we prepare for the separation, which will come in the form of a tax-efficient spinoff. As our separation management office continues to advance our spin-related work, it's business as usual for our other team members and all our customers. At freight, this includes the same unwavering focus on safety and disciplined approach to revenue quality, network utilization and operational efficiency that has driven the business's success in recent years. In conclusion, I remain confident in our long-term ability to continue increasing shareholder returns and I'm committed to ensuring that we unlock the value that I know is embedded in our business. And with that, let's open it up for questions.

We will now begin the question-and-answer session. Our first question is from Jonathan Chappell with Evercore ISI. Please go ahead.

Thank you. Good afternoon. John, part of the reasons for the guidance cut, I think, are pretty clear, B2B weakness, priority services, uncertainty, et cetera. The higher inflation element of the cost side seems to be pretty new. Is there any way to quantify exactly how much that's impacting the guide change, kind of how sticky that is and what that may mean for margins going forward.

So, Jonathan, hello. With regard to inflation, I think it's been consistent. It's just when we look at some of the factors that aren't going to go away, when you look at PT, for example, as we increase our volumes, particularly during peak, for example. Inflation has been a constant. And also with regard to our wages for our employee group, it's just something that we're going to continue to keep our eye on. We're going to continue to try and contain that, but it's been a constant throughout this, and it's been a factor that has been one of the several that you flagged as part of our guidance.

The next question is from Richa Harnain with Deutsche Bank. Please go ahead.

Thank you for having me on this call for the first time. I would like to know more about FedEx's exposure to de-minimis shipments in light of the anticipated tax code changes affecting them. Could you clarify how much of FedEx's shipment volume is associated with de minimis? Additionally, how is your team preparing for this change, and how does this factor into your considerations regarding flat revenue for the fourth quarter and beyond?

Hi, Richa, welcome to the call. From a minimal perspective, the key point is that we are well-prepared operationally. Our clearance teams globally have implemented the necessary adjustments, and we are collaborating with customers, especially those emerging from the Asia market. Operationally, we are set to implement any required changes. Additionally, we have valuable insights into clearance data worldwide, which allows us to assist our customers in preparing for any changes, whether related to de minimis or market shifts due to tariffs. Looking at Q4 and our revenue and volume outlook, we anticipate that the majority of the volumes in the latter half of this year will resemble Q3. There are a few exceptions to note, particularly that December was a strong month for us, so January through May is expected to be similar. As we approach Q4, it's important to note that there will be one fewer operating day compared to last year. That summarizes my view on the latter half of the year, but from the minimal perspective, we are ready to support our customers through any changes.

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

Hey, thanks. Afternoon. So, John, I know it's a bit early, but I'm curious if you can share any insights on the factors to consider for fiscal '26, especially regarding company-specific initiatives like DRIVE and Network 2.0. Also, could you provide an update on how we are progressing with the LTL side in relation to that 18-month timeline? Additionally, Brie, could you elaborate on your previous comments about focusing on offense, as I think it caused some concern? Thank you, guys.

Hey, Scott, thanks for those three questions. So look, for '26, I'm not going to be providing outlook. We'll be providing that to you in June. What I can say is that we're going to be focused on profitable growth. I think it's reasonable to assume that the macro environment is not going to significantly improve at least for the first half of FY ‘26, but some other high-level points to help frame our thinking for the year. We'll enjoy the annualization of benefits from our current DRIVE initiatives, which will amount to about $400 million of benefit. Of course, as Raj has talked about, DRIVE is a way of life for us. So we're going to keep feeding that pipeline for further savings and pull those levers at every chance. We're also going to be continuing to advance Network 2.0, Tricolor in our Europe initiatives, all that we're excited about. But we do expect inflationary cost pressures to continue. I can say that. And we'll also have some headwinds with regard to the Postal Service for four of the months of FY ‘26, namely three months in Q1 and one month in Q2. Now I talked about Network 2.0 savings and we will benefit in FY ‘26, but I want to be clear that we expect these savings to have a heavier ramp in FY ‘27, resulting in the significant majority of those savings occurring in FY ‘27. So we're going to continue to focus in FY ‘26 on those things within our control. So that's question number one. Question number two, with regard to the LTL timeline, yes, we're on track. As I mentioned in my prepared remarks, we have set up a separation office. We have project plans in place and we're on track to the separation. And then finally, I know your comment on offense, and I think that was taken really out of context. Our focus is going to be on freight quality revenue. And the comment was just we're going to bolster our sales staffing that are going to have subject matter expertise in this specific LTL space. So we expect the pricing environment to remain rational and that's our focus. We want to maximize revenue quality, not diminish it. So hopefully that covered all three.

Yes, that's great, and I appreciate the question, Scott. When we reflect on our achievements over the past couple of years, we have fundamentally transformed our structural costs, which positions us well moving forward. In comparison to our competitors, our top and bottom-line performance has significantly improved, setting a positive foundation for FY '26. Concurrently, we are undertaking several transformational network projects, including Tricolor and Network 2.0, as well as reducing the daytime network that supported the post office, all of which enhance our flexibility. We now also have technology in place that helps us optimize our operations. This progress enables us to extend into new market segments where we can grow profitably. While we are uncertain about how the business environment, particularly in industrial sectors, will unfold, we expect it to eventually shift positively. We are now poised to pursue growth opportunities in profitable market segments due to our cost structure improvements and network transformations. Thus, whether we are looking at business or residential sectors, whether in the U.S. or international markets, in parcels or pallets, regardless of the pace or scale, we have developed a value proposition that supports profitable growth. Thank you.

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

Thanks for taking my question. Can you talk about where you are in the build-out of the dedicated sales force? I think you said 300 with the December update. And just some early thoughts on what those incentives look like and the outcomes you want to drive from that team? Thank you.

Sure. Thanks, Bascome. And to Scott, to your point, I know what words I won't use on future calls, but to John and Raj's point, we do want to continue to focus on profitable growth and that is going to be the focus of the dedicated sales team. To John's point, really that is the focus there is that we're becoming a very large organization. As you've just heard from Raj, we have multiple growth strategies that we need to execute and we're particularly excited about those. This team then allows us to go deep and have deep expertise in LTL. We also think this coverage will allow us to continue to take share in the small and medium-customer segment. We already do a very good job there, but we see that as upside opportunity as we get better coverage for small customers with a focused team. The officer, the Vice President is in place. I think I mentioned that on the last call. He is doing a great job of bringing some hiring on. We want to hire the right expertise that can appropriately represent the brand that can appropriately execute our revenue quality strategy. So it will take several months. We're in good shape right now, but this hiring will continue throughout next fiscal year.

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

Hey, good afternoon, guys. So with the Network 2.0 project in the 200 facilities that you guys have run, I appreciate the data point on 12% of the average daily volume now running through an integrated facility. Can you help us kind of think about what the productivity benefits you're getting out of that sample size, some of the challenges you're seeing, or maybe areas for further kind of refinement as you're working on rolling out the broader network to the other initiatives? Thanks.

Yes, thank you, David. We are pleased with the progress of the Network 2.0 rollout, which is being executed at a careful and considered pace. As previously mentioned, we have successfully integrated our operations under the Network 2.0 model. We have maintained strong service levels while achieving a 10% reduction in our B&D costs. By the end of fiscal 2025, we anticipate that 12% of the total volume will be processed through these facilities, and by the end of fiscal 2026, that figure is expected to reach around 40%. Additionally, Network 2.0 will bring a significant decrease in our surface capacity over the coming years. We are very satisfied with the progress thus far. Our exceptional team continually applies the lessons learned from each rollout to improve future implementations. They have done an outstanding job, and we look forward to more advancements in fiscal 2026. Thank you.

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

Yes. Hi. I know the LTL margins have been under pressure with the industrial economy, but I'm just sort of curious, once things start to get better there, can you maybe talk to where do you want to see, or where do you think what should LTL margins look like sort of more in the medium and long-term? Do we get back to the levels we saw prior to a few quarters ago? Thanks.

We have great confidence in our LTL business and what has been developed there. It's important to note that about 90% of our LTL revenue is tied to B2B. As we've discussed, the B2B sector and industrial production have been weaker, which has created challenges for the industry. However, we believe in our ability to be well-positioned for a rebound in the B2B market. In the meantime, we are focused on continuous improvement in customer service, coverage, and our sales team. Therefore, we are very confident in our potential to expand margins.

The next question is from Chris Wetherbee with Wells Fargo. Please go ahead.

Yes. I would like to follow up on the topic of freight margins and understand what indicators you need to see in order to stabilize and potentially improve them. The pricing environment seems to be quite strong. While I acknowledge that volume and fuel costs are down, given the favorable pricing, do you think there is a possibility for margin expansion as we move into the first quarter of '26? What actions do you need to take to initiate that improvement?

Hi, Chris. I'll start and then turn it over to John if he has any additional color. I think to John's point is that right now, we are being very prudent in our growth strategy as we see the market come back from a B2B demand perspective, we are very well-positioned to capture that growth. The flow-through and the team's ability to capture incremental profit on that volume we feel very confident. We do anticipate from a margin perspective that Q4 will be strong for us. We will see sequential improvement in revenue at the freight division. It will still be down year-over-year from a revenue perspective, but I'm anticipating quite a good margin in Q4 and that will then be similar in FY ‘26.

And I'll just add, you know, we sell a service and continuing to focus on service will allow us to capture more business, and that's all going to be part of it. The more volume we get focusing on density and weight per shipment. So all those things taken together, we think will operate favorably for LTL.

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

Hi. Good afternoon and thanks for taking my question. Brie, I appreciate the commentary on volumes through the fourth quarter. I think that's very helpful. But U.S. investors are increasingly worried about a recession here, just given all the uncertainty around policies, especially trades and tariffs. So can you give us some maybe more qualitative inputs on what your customers are seeing right now, and how they're reacting to this environment, and how future tariff impositions could impact your business? Thank you.

Thanks for the question, Brandon. From an outlook perspective, we think that we have given you a very prudent forecast for the fourth quarter and that this incorporates the feedback that we've had from our customers around the world. I would say that from a feedback perspective, I think first the number one thing that we keep getting asked is, has there been a pull-forward? We did not see any significant pull forward in Q3. We did see a little volatility in APAC kind of at the end of February, early March, but for the most part, a pull forward is really hard. So we have not seen that. Actually, in all the sales calls that I've done over the last 90 days, I've actually only met one customer who attempted it, and they regretted it because they ended up storing some excess inventory. As far as how customers are planning, we're having a lot of conversation about being able to move the network as they require. And of course, we are able to do that. We are looking at making sure all of our pricing tools are very dynamic. We've been very pleased with that. So from our ability to respond to customers, most customers have not made any major changes to date because it's really quite difficult to be able to set up additional inventory in another country or move manufacturing. These are things that happen over months and years, not over weeks. I would say to the point on inflation that we are talking to a lot of customers who are anticipating that they will increase prices, or already have. So thematically, that is one conversation that we've heard a lot from. I don't know if Raj and John want to add anything.

Let me add my thoughts as well. From a broader perspective, we'll observe how the short-term demand environment unfolds. FedEx has established a network that connects 220 countries and territories. As supply chain patterns evolve, the good news is that our scale will benefit us since we're already present in these markets. I was recently at our headquarters in LAC, and they informed me that numerous countries in the region are experiencing an increase in inbound traffic. We don't need to change anything because our network is already established, and that volume is flowing through it. Additionally, as Brie mentioned regarding operations, we are fully prepared to serve our customers. Another crucial point to consider is the data that is essential for connecting one country to another for every commodity. We possess that data from an operational standpoint, and importantly, we've organized and structured it over the past five years. In these more complex times, we have the capability to offer new value to our customers, utilizing the insights we have on global supply chains and customs clearance. This not only serves as an enabler but also as a differentiator and a creator of value. We are in a very dynamic environment right now.

The next question is from Daniel Imbro with Stephens. Please go ahead.

Yes, thanks. Good evening, everybody. Thanks for taking our questions. Brie, maybe on the Federal Express side, you mentioned the pricing backdrop was stable. I think peak surcharges helped the quarter. But how has that progressed here into fiscal 4Q? The industry seems to be remaining rational, but obviously, you mentioned a trade-down. I guess, how should we think about or net those two things against each other as we think about the pace of pricing moving through the end of this year and into fiscal '26?

Thanks for the question, Daniel. So I think a couple of things. First, from a market and a pricing environment perspective, it's always competitive, but it's been rational. And honestly, I think if anything, we've seen improvement in the environment throughout the fiscal year. I was really pleased with our demand surcharge capture which was 5.9%. So from a pricing perspective, I feel pretty good. You said something about trade-down. I really want to correct that a bit. When we looked at, first of all, all of our yields, and I think it's really important to look at this. When you look at the individual products, I'm quite pleased with the yield growth overall. Domestic priority yield is up. IP yield is up. When you look at the ground segment, both ground commercial as well as ground home delivery are up. What we are simply seeing is that the demand for deferred volume is outpacing the growth for priority. In addition to that, the team has done an outstanding job of capturing that deferred growth, both internationally as well as domestically. I think the best proof point that I can give you is the 17% improvement in margin in the quarter at SEC that really does show that not only did we capture the deferred domestically, we captured it internationally. So we're doing a job of managing each product. And then when there is a deferred demand, it's important that we capture it in the right product because as we optimize our network and implement our transformation, whether it's Network 2.0, whether it's Europe, whether it's Tricolor, we are building the right cost structure with the right transit for those deferred products. So it's not been a shift. It really is just about the deferred growth growing faster.

I want to emphasize the last point Brie mentioned, which relates to what I discussed earlier regarding our networks. We have engineered these networks not based on old operational practices, but across the entire enterprise. This allows us unique combinations of strategies, benefiting from the latest technology. As a result, we can now profitably expand in these deferred markets. This marks a significant change as we develop a cost structure that enables us to effectively meet this increasing demand. Moreover, as we implement Network 2.0, improve operations in Europe, and roll out Tricolor, our capabilities will only continue to improve.

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

Yes. Good afternoon. I wanted to ask you a little bit more. I think you were talking about it a bit just on the deferred volumes in ground. You saw a pretty significant lift in I guess ground residential, right? And I'm wondering if you like have a sense of where that's coming from. Is that a function of the sure post changes at UPS, or something else? And I guess broadly on Parcel Select as Postal Service really changes that dynamic, is that a meaningful impact? Is that positive to pricing in a significant way? And then I guess one last piece, just any thoughts on LTL leadership external or internal? Sorry, I know there's a couple in there. Thank you.

Sure. I'll address the first two questions and my boss will handle the third. In terms of deferred growth from our ground portfolio this past quarter and throughout the year, our FedEx Ground Economy product has been a key driver of residential growth. This has been a positive development for FedEx. Our Ground Economy product is highly competitive, and the team excels in transit efficiency. Every Ground Economy package includes picture proof of delivery, which has received great feedback. Additionally, the product offers some weekend advantages, although not as extensive as home delivery. We're seeing growth in market share with FedEx Ground Economy, and we're very satisfied with the yields generated. I'm particularly proud of our sales team; when looking at the incremental volume we’ve gained this year, it's notable that every FedEx Ground package is accompanied by two other domestic packages, resulting in a revenue ratio of one to four. For each dollar of revenue from FedEx Ground Economy, we earn four dollars domestically, which is a pleasing outcome. This success is particularly evident among the new customers we've gained this year, and while market changes have contributed, I believe our strong value proposition is the primary reason for our success.

And Tom, to your last question there, we are conducting a very comprehensive search for the CEO of FedEx Freight, and I'm confident that through our thorough process that we will provide FedEx Freight with the right visionary leader who can help chart the course of this new standalone company. And we'll look forward to updating you on that decision as well as the broader leadership team in the near future.

The next question is from Jason Seidl with Cowen. Please go ahead.

Thank you, operator, and thank you for taking my question. I wanted to jump back on the freight side here. You mentioned that your expectations are for the shipments declines to get a little less worse. I was wondering if that is due to sort of maybe shifts in the weather pushing some freight from quarter-to-quarter or do you think things might be getting just a little bit better on the LTL side? And then if I could just throw one other one in there. Any thoughts on some of the proposed changes at the USPS on the cost side?

So, Jason, I'll start with the LTL. I think it's all the factors we talked about is why we have confidence in our LTL business, the expanded sales force, the improved service, the back-office focus. And I think an important note to mention, even though we've set up the separation management office, that office is charged with really two work streams. One, continue to improve the business today as well as prepare for the future separation tomorrow. So all those reasons factor into why we have confidence in that growth.

Thanks, John. I think the second half of the question was about some of the competitive changes that USPS has made in the market. I think the first and the most important thing is, of course, we are very focused on customers that appreciate our value proposition, the quality service, the reliability that we provide. FedEx Ground Economy, as I mentioned earlier, are very well-positioned compared to the USPS's ground advantage product. We are being selective, but I will say that some of the pricing and honestly, some of the service challenges in the market from our competitors are helping us from an acquisition perspective, certainly.

The next question is from Brian Ossenbeck with JPMorgan. Please go ahead.

Thank you for taking my question. I have a follow-up for Brie. Can you discuss how you’re managing to raise prices in this environment? We’ve seen surcharges increase and core prices going up as well. You mentioned that the trade-down has deferred product growth, but I assume some of that is due to customer decisions. Also, could you provide insights on Europe? There hasn’t been much positive news from that region lately, yet it seems like you’re noticing some momentum. I’d like to know how that’s evolving and whether we can expect a bit more acceleration as the economy starts to gain some pace relative to others. Thank you.

Sure. Let me start with the second part. I have a lot of confidence in Europe. When I look at the potential for growth, our European division has been gaining market share in the parcel market for seven consecutive quarters. This shows strong momentum, and while the European economy presents challenges, the team is successfully capturing profitable market share even in tough times. They have improved service quality consistently, and productivity is also on the rise, which contributes to our overall success. There are still opportunities for growth in Europe, and although there is work to be done, we are very pleased with the fiscal performance of that team. They've also excelled in intercontinental shipping out of Europe. Regarding deferred volume, there has been some trade-down, but most of the deferred parcel volume comes from new customer acquisition, which is encouraging. From a pricing standpoint, we remain disciplined and are the market leader. We're focusing on moving our products forward without discounting our premium parcels to gain market share, which is resulting in improved yield. Our surcharges are crucial, especially for large packages, as we serve rural markets that others may not, resulting in better margins on those challenging shipments. I expect that as we approach FY '26, we will start to alleviate some of the pricing pressures we've been experiencing. While the impact won't be fully felt in the first half of FY '26 due to our contract terms, we are certainly noticing improvements in the pricing environment.

The next question is from Conor Cunningham with Melius Research. Please go ahead.

Hi, everyone. Thank you. I'm a little confused on the changes to the air fleet side. With incremental 777s, I would have thought that would have resulted in maybe a retirement of MD-11s, but you actually extended them. So could you just give us some color on what's going on with the fleet strategy? And maybe it's just as simple as you have a bunch of planes that are parked in, or if you could just talk about that relative to where you were last year and where you are now, that would be helpful. Thank you.

Sure. Thank you, Conor. I want to emphasize our commitment to achieving our $1 billion aircraft capital expenditure target for fiscal year 2026. As I mentioned earlier, we plan to maintain this level of investment not only for FY 2026 but also for the subsequent years. Our aircraft acquisitions fall within this framework. It's important to note that we focus our investments on maximizing return on invested capital, which is now part of our executives' long-term incentive compensation. To provide some context, I researched our last 777 orders from 2018, so it's been some time since we ordered new airplanes. The new aircraft we acquired are particularly valuable as they represent the last production of the current model of the 777 freighter by Boeing, and we purchased them at very competitive prices. Those familiar with my previous company know that I acquired the last four 747s ever produced, which proved to be a great financial decision. These aircraft are in high demand, and we did not want to miss out on them. Our decision was influenced by our retirement plans for the MD-11 and our growth forecasts for the international freight market. It's crucial to remember that we haven't ordered 777s in quite some time and that we retired 31 aircraft at the end of FY 2024, which included nine MD-11s and 22 757s. Therefore, we're looking at a combination of new versus replacement capacity. Regarding the MD-11s and the delay in their retirements, this decision was made for business reasons. Given our growth in the international economy, we've chosen to extend their use until FY 2032. These assets have mostly been depreciated but still have some useful life and can support our profitable growth strategy. Should the demand environment change unfavorably, we have the flexibility to accelerate the retirement of MD-11s. However, based on the current demand, particularly in international growth, we decided to prolong the life of those aircraft. All these factors contributed to our decision-making process. I hope this information helps clarify our fleet strategy.

The next question is from Ravi Shanker with Morgan Stanley. Please go ahead.

So just a couple of follow-ups here. Just on de minimis, what percentage of your revenues comes from customers who typically use de minimis rule for shipping their products? And second on Europe, you mentioned profitable growth there. Can you confirm if Europe is profitable or not? And if not, kind of when do you think it might get there once you guys put in all DRIVE and other initiatives? Thank you.

The majority of our export volumes are associated with B2B volumes, and only a small portion of our revenue from export lanes falls under the de minimis exemption. We are pleased with the progress we’re making in Europe. The $600 million of DRIVE savings will occur this fiscal year, and we anticipate seeing more of that in the next year.

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

Hey, good afternoon. Just to clarify David Vernon's question earlier on Network 2.0. As you accelerate the number of markets, is there any initial volume loss or added costs such as software rollout that needs to be done, or do you need to slow down just to check how things are progressing? And then, Brie, thanks for the thoughts on the shift to economy. Can you talk about how you adjust the cost structure to meet the significantly lower yield on those products?

On Network 2.0, so far so good. And so we are again in the early stages of it. Like I said, we are doing it very methodically and the objective here is not only to improve our efficiency but make sure that our customer experience gets better and that's what we are focused on.

And if I could also, Ken, on that point, as reflected in our CapEx budget of coming down to $300 million, and we're well underway on Network 2.0. We're staying within budget and looking for opportunities to tighten our CapEx investment along the way too, and that's being reflected in our ability to bring down our CapEx for this year. So I guess that's a long-winded way of saying that we're staying within budget on executing Network 2.0.

To answer the question on how are we getting a lower-cost structure from economy, the answer is there's multiple ways. I think here domestically on the FedEx Ground economy, John and the surface team have done an outstanding job of using surface. We are trying to sort off-cycle. We are looking at different delivery ways from an air freight perspective, as Raj just talked about, we are absolutely increasing our trucking versus flying. In addition to that, the IPFS as well as the IEF product, we will be moving off-cycle, so we're not hitting prime sort, which allows us to sweat our assets. The extra time in transit from an IEF perspective allows us to build far greater dense loads. It allows us to improve our stackability. It allows us to layer on small parcels. When you think about an air-freight container, we are going to load it with air freight and then top it off with your polybags from an e-commerce perspective. So there's multiple levers we are pulling. In addition, as we talk about the DRIVE growth, we are managing SG&A very tightly. And so as we take on deferred volume, we know that we cannot have the same amount of SG&A on the deferred yield. So multiple levers, the team is pulling all of them, and as you saw, it's showing up in the P&L.

The next question is from Ariel Rosa with Citigroup. Please go ahead.

Hi, good afternoon. Thank you for taking my question. I would like to discuss some of the longer-term targets, whether they are the ones mentioned during Investor Day or how you view the long-term potential of the business. You've shared a lot about the savings and progress made with DRIVE, but we've seen several quarters where the outlook has been adjusted downward. Can you explain if the macro environment is significantly weaker than what you anticipated when you set those targets? Furthermore, as we consider the long-term, could you discuss the expected level of operating leverage or the potential contribution to operating earnings as the macro situation improves, given the structural improvements you've implemented? Thank you.

Thank you, Ari. When we discussed this a couple of years ago, we had a different expectation for where the revenue would be. However, our goals were to enhance operating margin and improve our return on invested capital, and we have achieved those. It's quite impressive that we accomplished this in an environment where revenues actually declined. Who would have anticipated that industrial production would decrease significantly over the last 25 months? This was not accounted for. Yet, our efforts to reduce structural costs position us well for when the industrial environment rebounds, allowing for significant leverage in our business. Additionally, we have transformed our networks, which is a challenging task, but we are making progress through initiatives like Tricolor, Network 2.0, and our work in Europe. These efforts enable us to lower the overall cost of service for various market segments, with international air freight being a prime example. We now have the opportunity not only to grow when the industrial economy recovers but also to profitably expand into new market segments. These factors give me great confidence as we move forward.

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

Thank you. I want to reiterate some key points in response to Ari's question, as they are quite significant. First, I would like to express my gratitude to the entire FedEx team for their outstanding performance. We have made substantial progress in reducing our cost structure over the last few years, and I am particularly proud of team FedEx as we aim to cut more than $4 billion in structural costs by the end of FY25 compared to FY23. During this period, we have surpassed the industry averages in both our top and bottom lines. We have established DRIVE as our operational framework, which will be beneficial for us moving forward. Additionally, we have built a robust data infrastructure that acts as an enabler, differentiator, and value creator. Through initiatives like Network 2.0 and Tricolor, we are enhancing our networks, making them more efficient and distinctive with the help of advanced technology. As I look to the future, we have developed a more agile cost structure that presents significant value potential as we profitably expand into new market segments and leverage the recovery of the industrial economy. These factors contribute to my strong confidence in FedEx's future. Thank you.

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