FedEx Corporation

Good afternoon and welcome to the FedEx Corporation third quarter fiscal 2023 earnings conference call. Currently, all callers have been placed in a listen-only mode and following management's prepared remarks, the call will be opened up for your questions. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you need to remove yourself from the queue, press star 2. To facilitate as many questions as time permits, we ask that you please limit yourself to one question. At any time, if you should need operator assistance, press star zero. Please be advised that today's call is being recorded. I will now turn the call over to Mickey Foster, Vice President of Investor Relations at FedEx. Thank you. Sir, you may begin.

Good afternoon. and welcome to FedEx Corporation's third quarter earnings conference call. The third quarter earnings release form 10Q and stat book are on our website at 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 question and answer session, Callers will be limited to one question in order to allow us to accommodate all those who would like to participate. I want to remind all listeners that FedEx Corporation desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance, may be considered forward-looking statements within the meaning of the act. Such forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Please refer to the investor relations portion of our website at FedEx.com for reconciliation of the non-GAAP financial measures discussed on this call of the most directly comparable GAAP measures. We are hosting a Drive Update meeting in New York City on April 5th. If you have not yet received your invitation, please call or email me or anyone on the investor relations team. For those who are not able to attend the meeting in person, this meeting will also be webcast. Joining us on the call today are Raj Subramanian, President and CEO, Mike Lenz, Executive Vice President and CFO, and Bri Carreri, Executive Vice President, Chief Customer Officer. And now Raj will share his views on the quarter.

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