FedEx Corporation

Good day and welcome to the FedEx fiscal year 2024 third quarter earnings call. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jenny 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 10Q 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. 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, Bri Carreri, 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, Jenny, and welcome to your first earnings call at FedEx. We are happy to have you on board leading the investor relations team. Before we discuss the quarter, I would like to congratulate Rob Carter on his upcoming retirement, which we announced last week. He has served as CIO for the last 24 years, leading FedEx in modernizing our IT infrastructure. I'm immensely grateful to Rob for his numerous contributions in establishing FedEx as an innovative, data-driven, and a people-focused company. We thank him for his dedication and service to FedEx over the years and wish him well in his upcoming retirement. Thank you also to the FedEx team for their exceptional work in Q3 by providing superior service for customers and delivering strong results, all while advancing our transformation initiatives. For the third consecutive quarter, we delivered operating income growth and margin expansion in a declining revenue environment. This is a very positive dynamic and a unique one in our industry. It demonstrates clear progress on our transformation and ability to manage what's within our control through drive. We're strengthening our value proposition, improving the customer experience, and increasing profitability. This progress supports our long-term goals for sustainable margin expansion improvements in roic and value creation for our stockholders now turning to the details our transformation is driving continued improvements in adjusted operating income margins and earnings per share at the enterprise level we delivered a 16 improvement in adjusted operating income and adjusted margin expansion of 90 basis points compared to the prior year even as revenue declined 2%. Adjusted operating income growth was driven by continued strength at ground and improvement at express. At the segment level, I'm particularly pleased with the results at ground, where adjusted operating income increased 14% on 1% revenue growth and adjusted operating margin improved to over 11% in the quarter. This reflects continued progress, controlling expenses and effective yield management, including the ramping benefits from drive. At Freight, the team's continued focus on profitable growth and cost management delivered strong margins and mitigated year over year volume challenges. Service levels remain exceptionally high, demonstrating our differentiated execution capabilities. We're also making progress at Express where adjusted operating income increase enabled by our ability to remove structural costs. Looking ahead, we are reaffirming the midpoint of our fiscal 24 district EPS range while narrowing the range to $17.25 to $18.25. In fact, We now expect to deliver adjusted earnings above the midpoint of the range we shared last June, despite full year revenue expectations that have deteriorated significantly over the past nine months. This is clear evidence of our ability to execute. Turning to the express business, it is my top priority to continue to make the changes necessary to align our air network with an evolving demand environment and unlock the full profit opportunity. While we have made progress at Express this quarter, there are several areas we are aggressively working to address in order to accelerate profit improvement. Service makes network utilization, continued inflation and other cost headwinds. First, with respect to service mix, we're seeing a clear international market shift towards deferred services. This is tied in part to the rapid growth of many of our e-commerce customers, where we are a critical enabler of global trade, offering unique solutions for our customers. More on how we are addressing this mixed shift shortly. second weakness in global trade continues to constrain demand in an international business which has remained challenged for longer than expected as such we're continuing to proactively realign our air network to match capacity to demand and third this quarter express experienced over 200 million dollars of inflationary pressure on a year-over-year basis We offset this with benefits from drive as well as responsible headcount management. The dynamics I just outlined create significant opportunities for us to improve our network utilization. Last quarter, we introduced our tricolor strategy. Ultimately, this network design will enable us to improve the efficiency and asset utilization of the entire FedEx system. Put the right product in the right network, taking advantage of our continental surface networks in Europe and our market leading FedEx freight LTL network in the United States. And profitably penetrate new market segments at the right cost structure, including the premium air freight market. As we move forward, we are managing the execution of tricolor with the rigor and discipline of drive, and this will be a key element to our success. Moving to another area of opportunity. In Europe, we continue to improve our service levels and focus on commercial execution. However, the B2B environment remains challenged. And in this context, we are making progress on drive on track to generate $600 million of savings in fiscal year 25 and seeking further profit optimization opportunities. As we have mentioned in previous calls, we are also experiencing a continued headwind for the United States Postal Service, which has reduced volume. Despite this volume and revenue drawdown, our service obligations to the USPS remain fixed. At Express and across the business, Drive remains a key enabler of improved profitability both in the near and the long term as we change the way we work and identify areas for structural cost reduction. In Q3, we delivered $550 million of benefits from DRIVE, offsetting the impact of revenue declines and cost pressures. I am encouraged by the progress across all three categories. This includes $290 million in our surface network, $110 million of savings in air network and international operations, and $150 million of GNA. given the progress we have made year to date we will deliver on our goal of 1.8 billion dollars in permanent cost reduction benefits from drive this fiscal year and are highly confident on the additional 2.2 billion dollars in fiscal year 25. the work we are doing with drive is also helping advance planning for network 2.0 This quarter, we rolled out our new surface operations leadership structure. Under this new structure, leaders and their teams will be responsible for all express and ground package operations and facilities in their respective divisions, regions and districts. This will enhance operational execution and offer greater insights into the package business overall with accountability at all levels. More broadly, we have now implemented Network 2.0 in over 50 locations with dozens more to follow in calendar 2024, all while maintaining outstanding service. And as a reminder, we will begin the rollout of Canada in April and expect to complete this transition by October of 2024. And as part of our transformation, we are on track to complete the consolidation of FedEx operating companies into one streamlined and simplified organization, creating efficiencies as we build a stronger, more profitable enterprise. In June 2024, FedEx Express, FedEx Ground, and FedEx Services will consolidate into Federal Express Corporation. The work we're doing to create a more flexible, efficient and intelligent network is translating into direct improvements in our customer offering and profitability. When severe weather hits, it can cause a domino effect of delays and reduce service levels across our network. while we have always used data analytics to assess the effect of weather events our new weather contingency playbook developed by our planning engineering and data works teams enhances the process by leveraging predictive capabilities to proactively divert stormbound volumes across our networks by combining the power of digital insights and predictive analytics with our physical networks We effectively mitigated the impact of the January winter storms that hit our express hub in Memphis by shifting Memphis bound express volume to ground or freight at the origin location. Despite this year's event having a longer impact to Memphis operations when compared to the weather event in February 2023, our network recovery was twice as fast. This quarter, we also announced a significant initiative, FDX, the fully integrated data-driven commerce platform that connects the entire customer journey from demand to returns. It'll provide real-time visibility to help our customers optimize and grow their business, leveraging our analytical capabilities and data from the 15 million packages we deliver every day. I'm excited to have Sriram Krishnasamy serving as Chief Digital and Information Officer effective July the 1st. His proven track record of driving optimization and innovation for our business through data and insights, combined with his deep knowledge of the network, will be critical to moving FedEx forward as we become a data-driven, digital-first company. As I look across the business and these financial results, there are clear signs of progress on our transformation. Our strategy is generating results and we are well-placed to maintain our leadership position while delivering improving financial outcomes. Together, we remain focused and committed to our long-term goals, supporting the creation of significant long-term value for our stockholders. With that, let me turn the call over to Bree.