FDX - NYSE

Good afternoon, and welcome to the FedEx Corporation Third Quarter Fiscal 2023 Earnings Call. Currently all callers have being placed in a listen-only mode. And following management’s prepared remarks the call will be opened up for your questions. [Operator Instructions] 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 10-Q 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 maybe considered forward-looking statements within the meaning of the act. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Please refer to the investor relations portion of our website at fedex.com. For a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. 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 Subramaniam, President and CEO; Mike Lenz, Executive Vice President and CFO; and Brie Carere, 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 will 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 6 for a snapshot of the quarter. Volumes declined by a low double digit percentage across all segments partially offset by higher yields at Ground, U.S. 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 DRIVE. 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 transfers -- transportation costs. Combined, these expenses were down 8% year-over-year. Despite the dynamic environment, Ground continued to deliver for its customers during peak with an average time in transit of approximately 2 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 and 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 cost of 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 to right size the 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 7. 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 plan. Last month, we announced a streamlined reporting structure that will reduce the size of our officer 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, where Express network is vast and complex and requires time to adjust to changing demand conditions. Therefore, 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, downgauged 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 the 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’re 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 8, 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 improvement in the coming years. We’re excited to share more about the strategy at our DRIVE program update on April 5th. There, we will focus on the actions we are 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 Carere, who will discuss market trends and our commercial strategy in more detail. Brie?

Thank you, Raj, and good afternoon, everyone. As expected, the operating environment in the third quarter remains challenging. The trends we saw through the first half of the year persisted, but we started to see some moderation, and importantly, our team delivered excellence for our customers. At FedEx Ground, revenue was down 2%. The volume decline was significantly offset by a double-digit percentage yield increase driven by better product mix, fuel and large package and peak surcharges. We are very pleased with the results from the implementation of our global rate increase this past January, which has maintained a very high capture rate. At FedEx Freight, revenue was down 3%. The team’s continued execution on revenue quality actions and profitable share enabled us to offset 12% volume decline throughout the quarter. Importantly, pricing discipline across the LTL industry is strong, and we expect the market to remain rational. Revenue at FedEx Express was down 8% year-over-year, primarily due to lower volumes globally and yield softness in Asia and Europe. In Europe, we’re seeing improved operational execution with service at the best levels they have been since fiscal year ‘21. There’s more work to do but the momentum is building as our team has improved service levels while maintaining a healthy sales pipeline. Our pipeline and signed contracts are at their highest levels this fiscal year and our closes per week are at a double-digit percentage higher than they were in Q1. Additionally, having a freight and parcel bundle for our customers in Europe differentiates us from the rest of the market. In Asia, market demand is rebalancing, resulting in lower yields and softer demand for priority services. The reopening of our international economy service this May will help stabilize our volumes out of Asia, given the market’s increased shift to deferred services. Moving now to slide 11. As expected, yield growth has been increasingly pressured across segments as year-over-year fuel surcharge comparisons normalize and customer demand shift. FedEx Express international turned negative, driven primarily by Asia, with Europe also softening. U.S. Domestic Express, Ground and Freight yield growth also decelerated. Despite market headwinds, we’re pleased with the team’s ability to manage volume, share and margin at both FedEx Ground and FedEx Freight. Looking ahead, we remain prudent in our expectations for yield in the fourth quarter. Turning to slide 12. Service is always top of mind for us at FedEx. Our team delivered another busy peak season highlighted by FedEx Ground achieving pre-pandemic service levels. In fact, across the board, FedEx Ground delivers to more locations in one or two days than our nearest competitor’s ground service. I would also like to share progress we’re making at Express, where service levels improved significantly over fiscal ‘22 peak and are quickly approaching pre-pandemic service levels. While this is great progress, we know we have more to do, and we’re making -- taking meaningful action to continuously enhance our service. For example, in Europe, with the reopening of our Duiven, Netherlands road hub this past October, we have expanded capacity, enabled a more efficient routing, and we have improved our service. These improvements are a testament to our team’s ability to deliver outstanding service while we change our business. Coming out of peak, service improvement has translated into good momentum for our sales team. Jill and I are also very pleased with the market’s response to several new or enhanced offerings that further improve customer experience. First, the online FedEx Ship Manager has been fully modernized to make shipping more efficient, highly personal and easier to use for all of our customers. Our customers can cater the interface to the way of working they prefer and that fits their business. Customer feedback has been very positive, and we’re finding that the more customers engage with Ship Manager, the more they appreciate it. FedEx Ship Manager is the primary tool for small business customers, and we plan to migrate 98% of all parcel shippers to this new experience before next peak. Next, we launched picture proof of delivery ahead of peak season, making us the first to market with this great capability. It has fulfilled a key customer need, driving confidence around successful package deliveries. Benefits from this launch include fewer delivery disputes and fewer customer service calls post proof of delivery. We are winning new business because of this unique feature. We have also continued to build out our dynamic pricing infrastructure with our Dataworks team. In peak, our dynamic pricing capability enabled holiday peak residential surcharges to adjust dynamically based on individual customers’ weekly peaking factor, delivering $150 million in profit. In the coming fiscal year, our predictive anomaly detection will improve revenue quality. We have already built infrastructure that helps us identify instances when we have overbilled our customers. Now, we will use those same capabilities to better manage customer performance and contract compliance. Finally, in January, we rolled out new visibility insights in 13 countries, providing customers with a four-hour time window for their package delivery. By delivering these innovative solutions, our teams are creating great value enhancing the overall customer experience. Now, I will turn it over to Mike to discuss the financials in more detail.

Thank you, Brie. Starting with our performance in the third quarter. We delivered earnings ahead of our expectations as our team moved with urgency to align our costs with lower revenue as global volumes remain under pressure. Turning to the transportation segments. At Ground, operating income increased 32% and operating margin expanded 240 basis points to 9.7%. Margin expansion was supported by both, yield growth of 11% and cost reduction actions. These factors were partially offset by lower package volume, higher infrastructure costs related to previously committed projects and increased other operating expenses. And at Freight, the team’s focus on revenue quality and managing costs drove better profitability as operating income increased 15% and margins expanded 270 basis points. This was driven by revenue per shipment, up 11%, as well as a gain on a facility sale and partially offset by decreased shipments. At Express, our results continue to be pressured, and our team is acutely focused on driving improved profitability. Adjusted operating income declined 81% due to 10% lower package volumes as cost reductions lagged volume declines. Volume pressures were partially offset by improved yields. Revenue per package grew 3% year-over-year, primarily driven by higher fuel surcharges and base rates, partially offset by exchange rate impacts. Yield growth decelerated and inflected negatively in international export, increasing pressure on profitability. Despite our performance in the third quarter, due to the actions we are taking in Express, we expect to see sequential operating profit and margin improvement in the fourth quarter. To provide additional color on recent demand trends and what we are planning for in our outlook, slide 17 shows trailing monthly volume trends for our major product categories. Volume declines continued throughout the quarter. While still negative, U.S. Domestic Express, International Priority and Ground Package trends improved somewhat into February on a sequential basis. As we look to the fourth quarter, we expect volume declines to continue moderating at Express and Ground as we lap the onset of softer volumes. Yield growth will be pressured as year-over-year fuel surcharge comparisons normalize and customer demand shifts, most prominently in Asia. Moving to slide 18. Our focus on efficient and responsible capital allocation has not wavered. We are in an era of lower capital intensity at FedEx. Last fiscal year, CapEx was 7.2% of revenue, down from our historical levels of roughly 8%. By fiscal year ‘25, our commitment is to be at 6.5% or lower. As I mentioned in December, we reduced our fiscal year ‘23 capital spend forecast to $5.9 billion, which is approximately a $900 million reduction from initial plans for the year to account for the lower demand environment. We are prudently deferring and slowing the pace of projects, improving our capacity utilization and planning for moderated aircraft fleet investment to drive ROIC improvements. In line with this approach, we expect capital spend to be roughly flat in fiscal 2024 versus fiscal 2023 and be down as a percentage of revenue. Turning to liquidity. Our cash position remains a source of strength. We ended the quarter with $5.4 billion in cash and continue to generate solid cash flows, which supports our capital return strategy. We remain committed to rewarding our stockholders as we transform our business and execute on our long-term strategy. In fiscal year ‘23, we will return $2.7 billion to our stockholders. In summary, our capital allocation strategy reflects our commitment to reducing capital intensity and creating value for stockholders while continuing to reinvest in FedEx for today and tomorrow. Turning to slide 19. In the fourth quarter of 2023, we expect market conditions to continue to negatively impact revenue and operating profit. However, on a sequential basis, we expect FedEx’s fourth quarter results to follow our historical seasonal pattern, representing the high watermark on the year. We will continue to execute on the previously identified cost actions and identify additional opportunities to reduce costs in order to mitigate the impact of volume declines on our operating results. As part of these reductions, we will manage capacity to lower demand levels, including further reducing flight hours at Express and reducing Sunday operations, closing certain sort operations and taking other line-haul expense actions at Ground. We are executing targeted actions to reduce shared and allocated overhead expenses, reducing vendor utilization, deferring certain technology projects and discontinuing same-day city operations at FedEx Office. In addition, we expect to achieve savings related to further headcount attrition and the elimination of certain global officer and director positions, which we announced in February. Putting these factors together, our updated expectation for full year adjusted earnings is $14.60 to $15.20 per diluted share. And with that, let’s open it up for questions.

[Operator Instructions] We’ll take our first question from Ken Hoexter of Bank of America.

Hey. Great. Good afternoon. And great job on pulling some of the costs forward. Maybe Mike or Raj, maybe talk a little bit about that sequential improvement. You’re talking about a seasonal improvement, but I mean, you normally have that. And Mike, you mentioned you’d normally have that seasonal improvement in the fourth quarter. So, I’m trying to understand, are you muting that expectation, or are you ramping that expectation into the fourth quarter given the additional cost pull forward than what we would normally see between a fiscal third and fourth quarter? If you can kind of walk through maybe some of those detailed cost pullouts and the impact for the quarter.

Sure. Thanks, Ken. So, as Brie highlighted, for the fourth quarter, we continue to project a lower level of demand, and that just heightens the emphasis of further traction on the cost initiatives. So Express, in particular, we’ll realize greater savings from the initiatives that we’ve highlighted, and that will drive to the mid-single-digit margin projection there. At Ground, we also expect -- we expect margin improvement at Ground, but not the same magnitude that we realized in the third quarter. And then, lastly, at Freight, we had an exceptional fourth quarter last year, and we’re projecting strong performance in the fourth quarter this year as well, but we’re not anticipating building upon that near term given the volume declines there. So hopefully, that puts it in context further for you there thinking ahead.

We’ll take our next question from Chris Wetherbee of Citigroup.

Maybe just picking back up on the Express commentary for fiscal 4Q. So, I think mid- to high single-digit year-over-year decline in total expenses for Express would probably put us kind of flattish sequentially. So, maybe you could just sort of help us a little bit with the revenue dynamic. I think, Mike, you talked about volume declines moderating as you went through the third quarter. Any thoughts on maybe how to think about the fourth quarter? I know it’s still a challenging environment, but trying to triangulate a little bit with some of the numbers you’ve given us to -- on the revenue side there.

Sure. Happy to help, Chris. It’s Brie. From a volume decline perspective, what we anticipate seeing in Q4 is that the decline will get less. So sequentially, the volumes will improve from Q3 to Q4. And actually, when we’re thinking about Express, we think that trend will continue into Q1 as well. That is here in the U.S., but also from an international perspective, as we talked about, we’re going to open up international economy. So, we do think that the volume decline will moderate Q4 over Q3 as well as Q1 over Q4. And again, I am talking about that decline year-over-year. I hope that helps, Chris.

Our next question is from Jack Atkins of Stephens.

So I guess, as we think about the DRIVE initiatives here, is there any way you can help us maybe frame up how much of that -- of the $4 billion in savings have been implemented so far in terms of those actions. And then, I guess, as you sort of think forward, obviously, there’s a lot of uncertainty out there from a macro perspective. Are you prepared to pull more levers to be able to take costs out of the business if we start to see a further deterioration in the demand environment?

Okay. Jack, this is Mike. So, think about DRIVE as the framework of how we approach the business and running a more flexible and efficient operation across the board. So within that that has enabled us to move quicker here than we anticipated coming into the quarter in terms of our cost initiatives, and is also foundational to the $4 billion of structural cost reductions that we’ve identified. So, if you think about the structural cost reductions, that’s operative irrespective of the demand environment. So think of that as moving the same traffic with less assets and resources. So, we look forward to giving further updates on the progress and details of the various domains within DRIVE on April 5th.

Our next question is from Jordan Alliger of Goldman Sachs.

I was wondering if you could give a little more color on the cost takeout sort of for the balance of the year. I think the slides had it at around $2.4 billion. I think the total is something like $3.7 billion, with $1 billion being permanent. Can you maybe give some update around that? And is there a way to get a sense for how much so far can be attributable to the Express business in terms of cost takeout, maybe the permanent -- at least the permanent side? Thanks.

So okay, Jordan, the -- yes, we will -- the $1 billion of permanent that Raj alluded to, we will realize that this year. The bulk of that is at Express, and we will see more traction on that, particularly in Q4 here. We’ve highlighted the flight frequencies that we’ve been reducing. We have -- we had -- as Raj said, we had nine more aircraft parked during the third quarter, and we’re projecting to park six more during the fourth quarter. So, that is illustrative of the takedowns and reductions underway there. And then also another component of the $1 billion, was taking out investments in that and initiatives and projects that we don’t anticipate picking up.

Our next question is from Tom Wadewitz of UBS.

Yes. And also strong execution on the cost side, right? It’s good to see it coming through the numbers. On the Ground side, I know you’ve given us good information on the call, but just wondered if you could dig into things a bit further of -- within the quarter, what was the most important drivers of improvement. It seems like purchase -- both purchase transportation and your comp and benefits were down quite a bit. And then -- so what were the biggest levers in those? And then, I think it was a year ago or a while back, we were talking about labor shortages and the sorts really being a factor. Presumably, you had adequate labor. How much of that was a factor in the Ground improvement as well? Thank you.

Yes, Tom, you hit it very directly there because it indeed was the case that last year was very challenging in terms of the circumstances with the labor market in that. So, I certainly would highlight in the third quarter that Ground did an extraordinary job of flexing down resources following peak there. So, that was definitely a key element of the improvement there in the third quarter. That won’t be as big of a tailwind in the fourth quarter, given the dynamic that you highlighted there. But again, multiple dimensions within the ground operation of efficiency across the network within the docks and the facilities, line haul as well as pickup and delivery. So again, good progress there, and more to come.

Our next question is from Jon Chappell of Evercore ISI.

Brie, there’s a lot of focus on the cost for obvious reasons, but to have the service levels back to pre-pandemic levels, to have the transit time down to two days amid all these cost cuts is a bit surprising. Is that just lack of density on the network because of some of the volume issues? And how do you think about hitting a macro tailwind, getting some volume back in this new cost structure, the ability to maintain these service levels going forward?

Yes. Thanks for the question, Jon. I actually don’t think it’s surprising. This is getting back to what we do best. We have been known historically for our customer experience and for our service. And we know when the network is running, it’s most productive. Service actually moves with productivity. So, I feel really good about it. I absolutely think that it is sustainable. And in fact, we’re going to continue to do better from a service perspective. So, this is what we said we would do. This is what we knew we would do. We’ve got a little bit more work to do, but it feels really good. And I think the sales team is really loving the momentum that it’s giving them. So, I hope that helps clarify.

Our next question is from Helane Becker of TD Cowen.

So, maybe, Brie, this one is for you. I think you talked a little bit about the costs and the progress that you’re making there on showing some improvement. But can you maybe parse out the difference between what you’re gaining on fuel surcharges? And what you’re gaining in the ability to actually raise price? I think you also said something about your uptake is holding out better than you thought it would or maybe holding out better than expected? Or maybe I put those words in your mouth. So, if you could just kind of talk about fuel surcharges versus price maybe there. Thank you.

Yes, sure. Happy to clarify. So what we saw in Q3 from a yield perspective, obviously, from a yield growth, we were very, very pleased. From a general rate increase, the capture was really strong. In fact, in Europe, it was the highest capture that certainly I have ever seen coming out of Europe. So, I think that the global pricing team and the global sales team are doing just an outstanding job. So, we feel really good about the execution from the GRI. As we look forward into Q4 and beyond, we will see yield growth moderate, but we think the fundamentals are going to stick. The U.S. market right now, from a pricing perspective, is very rational. The team has done an excellent job of aligning price with cost. We’re getting more for peak surcharges. We’re getting large package surcharges as we should. So, we think the market is rational. We did a good job in Q3 from a capture perspective. But, of course, we will see moderation in yield growth next year as we’re just lapping really, really high increases. I hope that helps.

Our next question is from Brandon Oglenski of Barclays.

So, Raj or Mike, I was wondering if you can give us some context around outcomes in Express this quarter. We’re seeing year-on-year margin declines kind of similar to where we had been maybe throughout the year, even though you guys are taking credit for incremental cost out. So, I know Ground and Freight looked a little bit better here, but what, I guess, is holding back Express, especially with similar volume outcomes. I guess, international yields were a little bit softer this quarter, but what else can you attribute that to? Thank you.

Brandon, thanks for the question. The main issue in Express is the demand softness was most pronounced at Express. It had the highest revenue impact. You also know Express has the highest fixed cost structure. But we are making progress on the cost side. In Q1, the cost was up year-over-year, Q2 was flat. Q3, the costs are down $430 million year-over-year, and Q4 is going to get even better from there. We’re making progress on the air, as we’ve talked about before. We have -- the single daily dispatch was launched in the U.S. Domestic Express operation in February. You’ll see the full impact of that for the quarter in Q4. And then, as we look ahead, we are fundamentally going to make this network much more agile and flexible and supported by technology. And when you -- we will talk to you a little bit more about that at the April 5th meeting. Mike, I don’t know if you want anything to add to that, I think…?

No. I think that covered. Thanks.

That covers it. Thank you.

Our next question is from Allison Poliniak of Wells Fargo.

I just want to ask on the Trans-Pacific lane, I know it’s an important lane for you. Just with all the dislocations, are you seeing any sort of structural shift away from that that concerns you? Are you moving? Just any color on what you’re seeing in that market would be great. Thanks.

Yes. Hey. Great question. So we absolutely are having a lot of conversations with customers. They want to diversify their supply chain over the last several years. I think it’s important to remember the primary conversation that we’re having is about Mexico, and we have a fantastic value proposition out of Mexico. So, as customers do want to diversify, we are anywhere they need to be. So, we feel really good about that. But I do want to be clear that it is a future conversation. From a magnitude perspective, we do not see any short-term large shifts that would change the position of China being the world’s manufacturer. So, I don’t think that that’s an immediate issue. I do think it’s a future issue.

Our next question is from Ariel Rosa of Credit Suisse.

Great. Hi. Good afternoon. And again, congrats on some of the progress here on the cost savings initiatives. I wanted to ask about Express margins. So obviously, we saw them a little bit challenged this quarter, and you said that they are likely to improve sequentially going into fourth quarter. But you set this target for 8% to 9% margins by fiscal ‘25. I just wanted to understand. What’s the confidence level in achieving that? And to what extent does that depend on seeing a return in some of the volumes or maybe a stabilization in the volume declines, please?

Sure, Ariel. So certainly, as the environment has evolved here in the last 6 to 9 months, that’s heightened our emphasis on efficiency and cost initiatives to realize margin improvement and drive improved returns on invested capital. And so, the DRIVE framework is allow -- enabling us to relentlessly pursue these initiatives in a number of fronts. We talked about flexing the labor hours, the air network, the structure of the ground surface transport. So again, a lot of progress, more to go, but we’re very confident that Express can realize the full potential going forward.

Our next question is from Stephanie Moore of Jefferies.

I wanted to touch a bit on, I think, the color provided today and certainly in the Q&A and just what’s going on in the Express segment is very clear and certainly more to come there. I wanted to dig in a little bit about maybe the Ground segment and trying to triangulate what has caused you to raise expectations for the full year? I mean just kind of the Ground is clearly -- you’ve made a lot of progress as noted on salary employee benefits down quite a bit, but also purchase transportation down quite a bit. So, as you look at the Ground and particularly the strong performance in the third quarter, can you kind of pinpoint in a little bit more detail what exceeded your original expectations as you look at the full year? Thanks.

Okay. Sure. Thanks, Stephanie. Well, it was a number of fronts of the efficiency side with, again, flexing down the labor hours following peak. We also had a lower surge premium for this peak relative to prior peak. So, that was a consideration as well. But broadly, the focus on utilizing the assets more efficiently and in a lower demand environment, that means certain facilities in that. We closed sorts or smaller transfer points in that. We’ve shut those down. So again, it’s just about optimizing the network across the board. It’s not -- there’s no single linchpin to that. And look, it’s very much impressive to see the progress we’ve had here when we’re also facing a headwind there from increased infrastructure costs at Ground, so that represents opportunity going forward as well on top of everything.

Our next question is from Scott Group of Wolfe.

A couple of things I just want to clarify and then a bigger picture question. So Mike, the -- how big was the LTL gain? Your comment about less Ground improvement in Q4. Was that a year-over-year or a sequential comment? And then just bigger picture. What I want to trying to understand is how much of this $4 billion of DRIVE savings are we seeing this year, or -- and how much is incremental all starting in fiscal ‘24? And then, how much of the variable reduction should we think come back next year to offset some of that DRIVE?

Okay, Scott. So first, for the gain on the sale was roughly about $30 million at the Freight company for the facility there. And then yes, the reference for Ground was that the year-over-year improvement for the fourth quarter, we wouldn’t anticipate it to be as large as what we realized here in the third quarter. So, that’s the two freebies. On your other question, I mean, look, we are holistically adjusting the cost base on all dimensions, all areas. Every dollar is under scrutiny. So, that entails both, the adjustments for reduced volume levels across the board, and you see progress there in a number of the lines, and then gaining traction as we lean into realizing the structural reductions with DRIVE. So, we will look forward to updating further about how the various initiatives are playing out here when we see you on April 5th.

Our next question is from Brian Ossenbeck of JP Morgan.

So, something similar here, Mike. Can you just quantify the impact of weather, given how Express performed? I don’t know if that was large or worth quantifying. And then just to come back to DRIVE one more time, maybe level set expectations, if you could. I think, Raj, you’ve talked about how we’re going to get a lot more granular details and metrics and the work streams. I don’t think we’ve really gotten that much in the past, or at least not that consistently. So, should we expect to get that updated on a regular basis? Are we going to see benchmarks in terms of where you are now and how that’s going to roll out through the various segments in the different work streams? And how should we be thinking about that coming up here in a couple of weeks? Thank you.

Okay. First, Brian, weather was roughly about a $50 million year-over-year headwind. So, if you want to put some dimensions around that. I think Raj wants to highlight what to expect here at DRIVE Day.

Well, let me just say this much. I think I’m just delighted with the sense of urgency and with what the team is working. The DRIVE program is -- creates a lot more rigor, and I’m just thrilled with the progress as the team has applied this rigor and discipline to the work at hand and look forward to showcasing them to you in just a couple of weeks here. During that update, you can expect a deeper dive onto the domains that we have identified, which is shown on this slide. We’ll show you the metrics that we’ve been tracking. And I think that will be -- it will give you a much better way for you to understand our business. And I think it’s fundamental to the transformation underway at FedEx. Thank you, Brian.

Our next question is from Bascome Majors of Susquehanna.

You generated about $1 billion of free cash flow in the first three quarters of the year on a fully burdened GAAP basis. Can you talk a little bit about with the raised EPS outlook in just 2.5 months left in the fiscal year, where do you think you’re going to come out in free cash flow for fiscal ‘23? And maybe qualify that with how much of a drag do you think you’re seeing on a cash basis for some onetime costs related to the initiatives that you’re rolling out to take structural costs out of the business? Thank you.

Okay. Bascome, it’s Mike. So yes, we’ve continued to generate solid free cash flow even amidst the challenged business environment, which heightens our emphasis on capital efficiency. And you’ll see that going forward across the board. Sorry, what was the last part of your question? Oh, sorry, the onetime cost...

On what free cash flow could be. Yes.

Yes. The expenses we had that were $120 million for the third quarter. That’s the business optimization that we identified and about $180 million year-to-date.

Our next question is from Bruce Chan of Stifel.

Hey. Thanks for the time. And congratulations, everyone. Brie, I maybe just wanted to follow up on your comments about the higher capture on the GRI in Europe. I guess, I’m a little surprised by that given the softer demand environment. Can you maybe just give us a sense of what’s driving that GRI capture? Is it just having the fully integrated network now or maybe something else?

Yes. Hey. It’s a very fair question. From a European perspective, I do think it’s important to remind everybody that we have a very unique value proposition in Europe. There are real stickiness with the parcel and the freight bundle. And also, our sales and our customer service team do an incredible job with very personalized and social -- or solution-oriented selling. So, for the customer base that is there, it is sticky. They value the bundle. We’ve got opportunity to take profitable share. But I think the ability to get that GRI capture really emphasizes the loyalty that we do have in that customer base and honestly, an opportunity to go take some more profitable share in Europe.

Our next question is from David Vernon of Bernstein.

Hey. Good afternoon. Look forward to seeing you guys in a couple of weeks. Raj or Mike, I’d like to talk -- I’d like to ask you to talk a little bit more about the fleet strategy going forward. I know you mentioned the intention to park the MD-11s. We’re running 422 trunk aircraft right now. If we were to kind of run this volume in the new fleet design, how big of an aircraft fleet would you guys have? I’m just trying to get a sense for and find some way to answer the question that I often get from investors, which is how do we underwrite lower CapEx going forward? Aren’t they just going to need to replace those 60 aircraft? Thank you.

Thank you, David. Our fleet modernization strategy that we’ve been underway has allowed us to build a more agile and flexible fleet. And so, we come to a fork in the road here, are we going to see a high demand environment or a low demand environment? And the MD-11 was that flex fleet. And as we now look at the demand environment, we don’t see that high demand coming through. So, we look at opportunities to right-size the fleet, and this is the predominant planning cycle as happens over Q4, so we’ll update you on those plans as our entire fleets needs are finalized here.

Our next question is from Amit Mehrotra of Deutsche Bank.

Mike, I just wanted to ask a question on Express margins just coming back to it a little bit because if I look at the range of outcomes over the last couple of years, it’s been as high as 9.2%; it’s been as low as 1.2%, which you just reported. And it’s your biggest business. And I really don’t have any clue what Express margins could be next year. And I was hoping you can kind of help us think about that. If macro kind of stays where it is today and what’s the right way to think about the recovery in Express margins next year? And then kind of related to that, one of the criticisms from the Investor Day was the Q&A wasn’t really -- didn’t have a lot of, how do I say, detail around the bottom-up strategy, the cadence of the pathway to the improvement. So, as you guys think about DRIVE Day, is incorporated in DRIVE Day a cadence of margin improvement by each division so we can -- everybody can be held accountable for the plan as it stands when you present it? Thank you.

Sure. Matt, let me address the aspects of that. So first, the way we have structured the DRIVE framework is that we have 12 domains with individuals assigned to each of those that are accountable and own the realization of the opportunities that are identified there. Now, of course, there’s multiple teams, and there’s multiple sub initiatives under that to enable those outcomes. But to the question of how do we measure and have accountability, that is definitely the structure and framework that we have in place. To your question about Express margin and profit volatility, that’s precisely what Raj was highlighting is a primary focus is to make the business more agile, more flexible with the various deployment of technology, making our fleet more flexible so that we can react and adjust. So, certainly realize that we need to build from here, and fully anticipate that going forward, and we will be relentlessly focused on that across the board.

Our next question is from Ravi Shanker of Morgan Stanley.

A couple of follow-ups here. Just on the ground actions in the third quarter that kind of helped drive the margin higher than expected. Can you help us understand if these are a permanent change in the way you treat peak season or even a permanent change in the way Ground is run every quarter, or was it just a reaction to, obviously, peak season this time being less robust than it was the last two years? I’m trying to get a sense of whether it was just a tactical move and you guys kind of pivoted very quickly to the market, or if it’s more of a permanent change in the way you deal with peak season?

No. Ravi, this definitely illustrates the discipline, rigor and focus we have around responding, adjusting to changes in the volume environment, running an efficient network and adjusting in short order. Again, I’d highlight last year was -- quite frankly, the last two years, were quite unprecedented in terms of ability to both project and understand demand because our customers themselves were -- had a lot of uncertainty amidst the dynamics of the pandemic. And we sometimes skip over it, but the profundity of the labor availability and the immediate cost increases in terms of higher wage rates that were experienced at Ground can’t be diminished. But this is a rigor and discipline that, as Brie said, it also supports our service levels across the board, too. So, it’s a virtuous cycle there that we’ll build upon going forward.

Our next question is from Jeff Kauffman, Vertical Research Partners.

Question for Brie. Brie, we were out talking to different customers, and some had indicated to us that they were a little concerned about the potential for a labor action at one of your competitors and had begun shipping with you guys, which is something they didn’t normally do. I was just wondering, I guess, a, we could look at this as, oh, it’s a short-term thing; b, we could look at this as it’s an opportunity to bring in some new customers. And I was told that you had to be shipping at certain levels to be available if there was a problem and there was a lack of capacity. Could you talk about how you’re engaging some of these customers that may be coming to you and saying, hey, I’m nervous. Can I get some capacity or can I come over? Are you requiring them to stay on for a year? How do we make this more than just a short-term use of excess capacity in your network?

Hey. Jeff, thanks for the question. So I think first and foremost is that our primary goal is to maintain and improve the service momentum that we’ve created. And so, as we think about any potential exogenous factor in the market that might put stress in the market, our goal is to protect our customers and to make sure that we’re there for them. So absolutely, as customers are inquiring about available capacity at FedEx, we have been really clear that, yes, of course, we would entertain any good business, and we’d love to talk to them. We do need to have that business on board and those contracts signed by the end of March. We are not going to put or staff up like this is a peak factor. We are going to plan for long-term partnerships with customers. And anybody that wants to come and enjoy the FedEx value proposition, we’re happy to talk to them prior to March 31st.

This concludes the question-and-answer portion of today’s call…

Thank you, operator.

Please continue, Mr. Subramaniam.

Well, thank you, operator. In closing, I want to thank our team members as FedEx was once again the only delivery company ranked in the top 20 of the Fortune World’s Most Admired Companies. We also were named earlier this week as one of the world’s most ethical companies by Ethisphere. This recognition would not have been possible without the commitment and dedication of our people around the world. And as we celebrate our 50th anniversary next month, I’m most excited about the ways that this team will continue to innovate and deliver for the next 50 years. Thank you very much.