The operator welcomes participants to the FedEx Fiscal Year 2024 Second Quarter Earnings Call, where they will have the opportunity to ask questions after the presentation. The call is being recorded and the conference materials are available on the company's website. Raj Subramaniam, Brie Carere, and John Dietrich will be speaking on the call. Raj Subramaniam expresses his views on the quarter. The call may include forward-looking statements and a reconciliation of non-GAAP financial measures will be provided on the company's website.

In the second paragraph, the speaker thanks the FedEx team for their commitment to delivering a strong holiday season. They mention the company's superior service offerings, including a global network and fast US ground service. Despite a difficult demand environment, the company's transformation is showing signs of progress, as seen in their improved profitability and earnings outlook. The speaker also highlights the success of their DRIVE initiative and the retention of high-quality volume from competitors. The Ground segment in particular has seen outstanding results with increased operating income and margin expansion.

The company's freight division had a strong performance, leading to double-digit profit improvement and margin expansion. However, the express division faced challenges due to volume and yield pressures, resulting in a decline in margins. The company is working on restructuring the express network to improve speed and density. The implementation of the DRIVE initiative has helped reduce costs and improve profitability, as seen in the chart on the left. In the second quarter, the company saw cost reductions in its surface, air, and international networks, as well as in G&A through changes in procurement and functional excellence.

Despite ongoing challenges, FedEx is confident in their progress towards achieving $1.8 billion in cost reduction benefits from DRIVE this fiscal year. However, profitability at FedEx Express has been impacted by a shift in volume mix and yield headwinds. To address this, FedEx is undergoing a fundamental network redesign called Tricolor design, which includes deploying a Purple Tail fleet for high-priority volumes and re-timing flights to build density and feed into their Surface Networks. This will allow FedEx to drive profitable growth in the global deferred parcel and airfreight markets.

The company plans to continue utilizing its Global Partner Network to improve asset utilization and increase margins. This is part of their overall DRIVE strategy, which aims to save $4 billion by 2025. They are also combining their physical transportation network with digital solutions to enhance customer experience and generate new revenue streams. The CEO expresses confidence in the company's strategy and thanks their team for their dedication. They are well-positioned for the upcoming peak season and to offer the best services in the industry.

In the second quarter, FedEx focused on revenue quality and providing top-notch service. Despite a decline in demand in the US and pressure in the international market, the company gained parcel share and grew volume in Europe and EMEA. FedEx Ground saw a 3% increase in revenue, while FedEx Freight gained new customers from the Yellow shutdown and maintained a majority of the volume. Revenue at FedEx Express was down 6% due to market contraction and lower fuel and demand surcharges, with a significant decline in global freight pounds.

Despite facing challenges, the company has made progress in areas under their control. They have seen improvement in European service levels and have gained profitable market share. The company is focused on delivering exceptional service during the holiday season and has implemented new digital tools to provide customers with peace of mind. The peak season has been similar to last year and the company is prepared to handle post-holiday returns. They have gained parcel share in both the US and international markets, indicating a strong value proposition. The market is competitive but the company remains committed to their revenue quality strategy and has seen slight improvements in yield trends.

FedEx saw a 1% increase in yield at FedEx Ground due to growth in Home Delivery and Commercial Ground, offset by a decline in Ground Economy. Revenue per shipment at FedEx Freight also increased by 1%, driven by strong base rates despite lower fuel surcharges and weights. However, yield at FedEx Express was pressured by lower fuel and demand surcharges, as well as shifts towards e-commerce and the reopening of International Economy Service in EMEA. The company is focused on its revenue quality strategy and recently raised fuel surcharges for US Express, Ground, and international Express services. They are also implementing a new Tracking API in 2024 to enhance visibility for customers and generate additional revenue. Overall, FedEx is balancing both volume and yield growth in its strategy.

The speaker thanks the global team for their outstanding performance during peak season and hands over to John to discuss the financials. Despite a decline in revenue, the team has delivered improved profitability through a focus on revenue quality and execution of DRIVE initiatives. Ground, Freight, and Express segments all saw increases in operating income, with Express being the only segment to experience a decline due to softening demand. The company reaffirms its outlook for adjusted EPS for the fiscal year and expects a low single-digit decline in revenue.

The company is reaffirming their earnings outlook despite a weaker demand environment, thanks to their transformation. They will continue to monitor demand, inventory, inflation, and e-commerce trends. They expect a lighter quarter sequentially for earnings and a higher comp at Ground. They still expect margin expansion in FY 2024, with improvements at Ground and strong margins at Freight, but lower than FY 2023. They now anticipate a slight margin contraction at Express. They will continue to deliver $1.8 billion in cost savings from their DRIVE initiatives. The composition of the second bar in their operating profit considerations has significantly changed since the first quarter.

The company is facing lower revenue but expects to maintain the same net profit by managing expenses and revenue quality. They are focused on maintaining a strong balance sheet, improving return on invested capital, and providing increased shareholder returns. They have a strong liquidity position and have completed a share repurchase transaction. The CFO is confident in the company's strategy and is grateful to the team for their efforts. The Q&A session will now begin.

The speaker, Raj Subramaniam, responds to a question about the low margins of Express by explaining the various challenges that the company has faced this year, including lower demand surcharges, a shift in product mix, lower fuel surcharges, and a market demand slowdown. He also mentions that USPS has shifted more volume from air to ground, which has further impacted FedEx.

Despite challenges, the team has successfully executed on DRIVE and reduced expenses by $1.5 billion. The redesign of the Express service, called Tricolor, will improve asset utilization and return on invested capital. The company has also improved operating profit and margins despite a decline in revenue. The focus now is on reducing costs to align with demand.

The speaker asks about the sequential performance of Express in the first and second quarter and notes that there has been a deterioration in operating profit. They question if this was due to a mix of factors or a misjudgment of the demand environment. The speaker also asks if the company can increase margin and profit in the back half of the fiscal year. The company's response is that there were various factors that affected Express's performance and they will focus on managing costs and improving revenue quality. The next question is about the Postal Service contract and how the company plans to incorporate it into their network or if they will renew it. The company acknowledges that the contract was a significant headwind this quarter and last quarter.

The company is having collaborative negotiations with the Post Office, but they are clear that significant changes are needed to renew the contract. They value the partnership and are still negotiating. The company is optimistic about improving profits at Express regardless of their relationship with the Post Office. Ground margins were up 1% in the quarter and volumes are now flat. The company expects continued improvement in Ground margins through initiatives like DRIVE and leveraging surface modes and their LTL network. They are also expecting seasonality to impact Q3 but are optimistic about Q4.

The speaker is not giving quarterly guidance but expects Q3 to be the lowest profitable quarter with seasonal trends continuing. The next question is about non-fuel expenses at Express and the potential for structural cost reductions. The speaker mentions a $1.8 billion goal for the year and the potential for more cost reductions at Express. They also mention a Tricolor fleet initiative that will improve service and access lower cost points. The question is whether this is a reallocation of capacity or a permanent reduction. The speaker emphasizes the importance of sizing capacity to demand and mentions previous efforts to reduce flight hours. The question is then passed to John for more information.

The majority of the company's adjusted operating expense decline in the first half was due to lower volume-related expenses and progress on their DRIVE program. They are on track to achieve $1.8 billion in structural savings by fiscal year 2024, with most of the savings expected in the second half of the year. The Air Network redesign was already factored into the company's outlook and there may be some minor costs associated with it, but it is not expected to have a significant impact on expenses.

During a conference call, an operator introduces Tom Wadewitz from UBS who asks about the yields for Ground and domestic Express, excluding fuel costs. Brie Carere responds by stating that the market is rational and yields have reset since the pandemic. She also mentions that UPS has a higher yield per package than their primary competitor and has been able to maintain this lead while gaining market share. Raj adds that there are some pressures from a mix perspective, but overall, they are pleased with the yield performance in the quarter. They have also gained more market share in the B2B segment, which has helped with the mix. David Vernon from Bernstein then asks a question.

Raj Subramaniam, the CEO of FedEx, addressed concerns about the struggles at the Express segment, which has been seeing margins between 2% and 4%. He stated that the company has plans in place to reduce costs and is confident in the potential for Express. He also mentioned the impact of the pandemic on the global supply chain and expressed confidence that margins will return once demand picks up. A question was asked about the pilot contract and its potential impact on cost reduction, but no clear answer was given.

The speaker discusses the performance of Network 2.0 and the pilot program in certain markets. They mention the flexibility of the agreements and the potential for increased utilization of assets. They also touch on the volume impact of Tricolor and the growth in the international space, particularly in deferred and e-commerce.

John Dietrich, the CEO of FedEx, was asked about the company's future market plans and their network design. He stated that they are designing for the right network for the right kind of traffic to grow profitably in the international space. When asked about the expected profits for the upcoming quarter, Dietrich did not give a specific answer but mentioned that typical seasonality will apply. He also addressed the decrease in Express profits in the second quarter, stating that they will continue to focus on improving margins.

John Dietrich, CEO of a company, discusses the unexpected increase in demand and how it has affected their cost structure. He mentions that factors such as a decline in US Postal Service volume and minimum service requirements have contributed to higher costs. However, he assures that the company is well-positioned for when volumes return, thanks to current initiatives. When asked about the pace of margin improvement, Dietrich explains that they are focused on reducing costs quickly while maintaining high service standards. He also mentions the need to keep some costs on in case demand returns sooner than expected. Another analyst asks about the potential for margin improvement and Dietrich emphasizes the importance of maintaining service quality while also reducing costs. The next question comes from Bascome Majors about the company's strategy for managing costs.

The speaker thanks the questioner for their inquiry about the deferred day network underutilization and its impact on the company's bottom line. They discuss plans for maintaining the relationship with USPS and improving profitability, as well as preparing for the possibility of downsizing the customer. The speaker also addresses the impact of fuel and surcharges on yields and operating income, and discusses the current state of the freight market.

The speaker discusses two main points about the freight market. First, they mention that the market is disciplined and they are leading in this discipline. They also note that they have found high-yielding customers and are delivering great service. The speaker then briefly mentions that fuel was a headwind in the quarter and will continue to be for the year. The next question asks about macro expectations and the speaker responds that they have consistently seen weak industrial production globally, which is affecting their numbers.

The company is seeing a return to pre-pandemic levels in consumer spending, and the inventory destocking phase is over. They are focused on executing their DRIVE strategy and have seen a meaningful improvement in their bottom line despite challenges in the top line. They have taken share from UPS during peak season and are enforcing peak surcharges to cover incremental costs. They anticipate peak volumes to be in line with expectations for December.

The speaker is confident that their company has maintained its share in the market despite concerns about labor negotiations. They have gained share both in the US and globally. They are also monitoring economic indicators to determine when the slowing environment may improve.

The speaker discusses indicators that show some optimism for FedEx, stating that they are planning conservatively and do not expect market demand to change within the fiscal year. They mention momentum in the parcel business due to e-commerce and market share gains, but note that industrial production and restocking have not significantly impacted their numbers yet. They also mention the progress of Network 2.0 and its integration with the market, and turn the question over to John for further details on the impact on the company's model and guidance.

The speaker, Raj Subramaniam, discusses the progress of FedEx's optimization changes in various locations and the upcoming rollout in January. He also mentions the company's two consecutive quarters of operating income growth and margin expansion, as well as their successful peak season. He thanks the FedEx team members and wishes everyone a happy holiday season.

This summary was generated with AI and may contain some inaccuracies.