FedEx Q2 2025 Earnings Report

FedEx EPS Results

• Actual EPS: $4.05
• Consensus EPS: $3.88
• Beat/Miss: Beat by +$0.17
• One Year Ago EPS: $3.99

FedEx Revenue Results

• Actual Revenue: $22.00 billion
• Expected Revenue: $22.14 billion
• Beat/Miss: Missed by -$140.41 million
• YoY Revenue Growth: -0.70%

FedEx Announcement Details

• Quarter: Q2 2025
• Date: 12/19/2024
• Time: After Market Closes
• Conference Call Date: Thursday, December 19, 2024
• Conference Call Time: 5:30PM ET

FedEx (NYSE:FDX) provides transportation, e-commerce, and business services in the United States and internationally. It operates through FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services segments. The FedEx Express segment offers express transportation, small-package ground delivery, and freight transportation services; and time-critical transportation services. The FedEx Ground segment provides small-package ground delivery services. The FedEx Freight segment offers less-than-truckload freight transportation services. The FedEx Services segment provides sales, marketing, information technology, communications, customer service, technical support, billing and collection, and back-office support services. In addition, the company offers supply chain management solutions; and air and ocean cargo transportation, specialty transportation, customs brokerage, and trade management tools and data. The company was founded in 1971 and is headquartered in Memphis, Tennessee.

FedEx Q2 2025 Earnings Call Transcript

Key Takeaways

• FedEx Freight Separation: FedEx will fully separate its freight business into two industry-leading public companies within 18 months, aiming to unlock shareholder value while retaining commercial, operational and technology partnerships.
• Transformation Savings: The company achieved $540 million in DRiV savings in Q2 and remains on track to deliver $4 billion by FY 2025 and $2 billion from Network 2.0 by FY 2027, bolstering its cost structure and margins.
• FY 25 Guidance Trimmed: Management cut its adjusted EPS outlook to $19–$20 from $20–$21, citing a softer industrial economy, competitive pricing and the U.S. Postal Service contract expiration.
• Q2 Profit Growth: Despite a 1% decline in revenue, FedEx Express grew adjusted operating profit by 13% year-over-year, reflecting strong yield management and disciplined cost controls.
• Volume Trends: U.S. domestic package and LTL volumes fell about 1% due to industrial weakness, while international export package volumes rose 9%, driven by growth in economy services and the Tricolor strategy.

Presentation

[Operator]

Please note this event is being recorded. I would now like to turn the conference over to Ms. Jenny Hollander, Vice President of Investor Relations. Please go ahead.

[Jenifer Hollander, Head of Investor Realtions at FedEx]

Good afternoon, and welcome to FedEx Corporation's 2nd quarter earnings conference call. The 2nd quarter earnings release, freight assessment results 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 and A session, callers will be limited to one question to allow us to accommodate all those who would like to participate.

[Jenifer Hollander, Head of Investor Realtions at FedEx]

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.

[Jenifer Hollander, Head of Investor Realtions at FedEx]

Joining us on the call today are Raj Subramaniam, President and CEO Brie Khareri, Executive Vice President and Chief Customer Officer and John Dietrich, Executive Vice President and CFO. Now I will turn the call over to Raj.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Thanks, Jenny. We are in the home stretch of peak, and I want to begin by thanking our team members for their hard work and dedication as we deliver an outstanding holiday season for our customers. Today marks an important step in our transformation. Following our assessment of FedEx Freight, which we announced and commenced back in June, we have decided to pursue a full separation of this business, which will result in 2 industry leading public companies. Through the separation, we believe we will unlock significant value for stockholders while allowing for continued commercial, operational and technological cooperation between both businesses.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

The separation will also enable both companies to benefit from enhanced focus and competitiveness. For FedEx, this will ensure strong execution of our near and longer term strategic priorities while preserving the benefits freight and FedEx enjoy from their long standing connectivity. Each independent company will be well capitalized with flexibility to invest in profitable growth while continuing to return capital to shareholders. I would like to provide a brief overview on the compelling value proposition of both businesses starting with FedEx Freight. We're excited to create a leading LTL pure play, the largest carrier by revenue with the broadest network and the fastest transit times.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

FedEx Freight has deep relationships with customers who turn to us for our liability, simplicity and choice of services. Freight has maintained its leading market share position for a long time and increased operating profit nearly 25% on average per year over the last 5 years, expanding operating margin by approximately 1100 basis points. The team's focus on safety, facility utilization, revenue quality and operational efficiency has driven this performance and these factors will continue to guide Freight's go forward strategy supported by a strong balance sheet. As a separate company, Freight will be better positioned to unlock its full value potential. Areas where we see the greatest opportunity include: 1st, an expanded dedicated LTL sales force led by Tom Connolly, our new VP of LTL Sales, with nearly 30 years of experience.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

We've already begun to build out this team and we expect to add more than 300 LTL specialists by the time of separation. 2nd, an enhanced LTL specific pricing and invoicing system that drives faster speed to market, more intuitive contracts and is more tailored to this particular market. 3rd, improved freight and FedEx network efficiencies focused on accelerating speed, improving coverage, optimizing touches and lowering our cost to serve. And 4, an LTL focused automation, which will drive efficiency and reduce outside vendor spend. FedEx Freight's portfolio of solutions, which includes both priority and economy services, is also well positioned to benefit from the long term market dynamics shaping the LTL industry.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

As we pursue this separation, we will remain focused on customer experience by sustaining or improving service to our customers. To ensure the focus and seamless transition, Lance Small will continue to serve as President of FedEx Freight as we execute on our separation. The long standing cooperation between FedEx and FedEx Freight will continue through commercial, operational and data and technology agreements to enable seamless continuity of service and capture existing benefits from the relationship. We have an unmatched customer value proposition. With 2 separate companies, we will ensure commercial collaboration that creates a seamless transition for our customers, especially those that turn to FedEx for all three services.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

From an operational perspective, in addition to the network efficiencies I mentioned earlier, freight will continue to provide line haul for FedEx strategically including tricolor, peak season and dry aged support. This requires minimal change as freight already receives a direct financial benefit from supporting Federal Express via intercompany agreements. Additionally, we will implement shared technology and service agreements to facilitate the transition and beyond. Through these agreements, FedEx will provide freight with tech platforms that effectively connect the 2 businesses as needed and ensure business community. Given the strong reputation and familiarity of our brand, we plan for the new company to continue to operate under the FedEx Freight name.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Putting all of this together, customers will continue to enjoy the superior service, speed and coverage they have come to expect from FedEx Freight, while also maintaining access to the unparalleled global ecosystem of FedEx services. Now turning to FedEx. We pioneered the express transportation industry over 50 years ago and remain the industry leader today. Customers choose us for our advantaged value proposition enabled by our service, speed and breadth of coverage. We deliver nearly 17,000,000 packages each business day to over 220 countries and territories.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

We link more than 99% of the world's GDP. We transport approximately $2,000,000,000,000 worth of goods every year by connecting 3,000,000 shippers to 225,000,000 consumers. In the U. S, our weekend and rural coverage also serve as competitive advantage. And we generate over 1 petabyte of data every single day, which provide insights that drive how we run our company more efficiently, how we serve our customers and how our customers manage their own supply chains.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

The ongoing progress at FedEx gives me confidence that this standalone business will continue to thrive into the future. During and post separation, we will continue to focus on delivering significant value to stockholders through our strategic initiatives which are cementing our leadership position as the world's best transportation and supply chain technology company. This includes DRiV, which continues to change the way we work. We are on track to deliver $4,000,000,000 in savings by the end of FY 2025 versus the FY2023 baseline. Network 2.0, which will deliver on the promise of a more efficient network, including 1 truck, 1 neighborhood, along with consolidated facilities, where we are targeting $2,000,000,000 in savings by the end of FY2027.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Tricolor, the redesign of our global air network, which positions us for strategic growth while improving the efficiency and asset utilization of the entire FedEx system. As a separate company, FedEx will strengthen its leading value proposition with an emphasis on delivering outstanding service, continuing to provide a differentiated offering in premium segments and remaining focused on higher yielding service and building on our technology ecosystem to create smarter supply chains for all. Our capital allocation priorities remain unchanged. We will prioritize maintaining a strong balance sheet and investment grade profile. We will continue to make high return investments in the business, while reducing capital intensity and increasing stockholder returns through buybacks and dividends.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Looking ahead, we expect to execute the separation within approximately 18 months. Claude Russ will lead our separation management office, bringing the dry rigor and accountability that we use to run our operations. Claude has spent nearly 25 years at FedEx. As the former CFO of FedEx Freight, is well versed in our freight business and the LTL market dynamics. Claude is currently Enterprise VP of Finance and has been a critical enabler of our DRiV execution.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Today, we have shared the outcome of the assessment and our initial plans. As we have new details and separation milestones to share, we will keep you updated. Upon completion, this full separation will result in 2 strong well capitalized industry leaders FedEx Freight, which will benefit from continued strategic and operational competitiveness and more flexible capital allocation And FedEx well positioned to continue executing on our strategic initiatives in pursuit of sustainable profitable growth. We are confident the separation is the right strategic decision for FedEx and FedEx Freight at this point in our evolution with a clear path ahead to create significant long term stockholder value. Importantly, for our employees and our customers, it's business as usual as we look forward to a seamless transition.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

We are used to navigating change and we will do it while continuing to deliver on the Purple promise every single day. Now turning to our Q2 results. Looking across the enterprise, we delivered sequential improvement both in drive savings and adjusted operating profit. At Federal Express Corporation, we achieved strong results on a year over year basis and greater flow through to the bottom line with adjusted operating profit up 13% on essentially flat revenue. We did this despite the challenging demand environment as well as headwinds we have previously identified, including the U.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

S. Postal Service contract expiration and the timing shift of Cyber Week. This is evidence that our transformation is clearly working. Similar to last quarter, we experienced weakness in the industrial economy, which negatively affected our B2B volumes, particularly in the U. S.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Domestic package and the LTL markets. Continued market pressure coupled with difficult year over year comparisons weighed on our Freight segment in the Q2. With B2B revenues comprising nearly 60% of our package business and 90% of our LTL business, we are well positioned for profitable growth when the industrial economy recovers. Against this backdrop and in support of evolving market dynamics, we continue to create a more flexible, efficient and intelligent FedEx as we deliver for our customers. We achieved drive savings of $540,000,000 in Q2.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

We remain confident that we will deliver our targeted $2,200,000,000 in incremental savings in FY 2025. Our Network 2.0 rollout continued and the Canadian market integration will be largely complete in early calendar year 2025. With the expiration of the U. S. Postal Service contract, we are strategically matching capacity with demand and flexing the network as needed to transport packages more efficiently.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

At the end of September, we reduced our U. S. Domestic daytime flight hours by nearly 60% and swiftly began to reduce other associated costs. And we delivered solid service for our customers. This is always our priority and especially important during peak.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

I'm very pleased with how our teams are navigating a condensed period between Thanksgiving and Christmas. So far during peak, they are delivering more packages per day on average, while maintaining the high quality shipping experience that our customers expect with the ground average time in transit at 2 days in the U. S. This peak. As we look to the second half of the fiscal year, we remain focused on what is within our control, executing against our transformation initiatives to reduce our cost to serve and drive improved performance.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

However, amid continued uncertainty around the demand environment, we are updating our expectations for FY 2025. We now expect an adjusted EPS outlook range of $19 to $20 John will provide more color on the underlying assumptions shortly. Turning to Drive. On past earnings calls, I've talked about Drive as our structural cost optimization program. The reality is that within FedEx, Drive has evolved to be so much more.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

It's a new data and technology driven business architecture that has changed how we work across our entire enterprise, introducing more rigor and accountability to every decision we make, leading to a continuous cycle of efficiency and optimization. Take Europe, where we expect to achieve $600,000,000 in total DRiV savings by the end of the fiscal year. Our European business is predominantly a ground based business. We introduced new European leadership over the summer, including a senior operator from our U. S.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Surface team. In the spirit of One FedEx, we are bringing hub and sort best practices from U. S. To Europe and we have achieved many recent wins. Our progress includes revenue growth, which combined with the DRiV benefits lead to improved performance this quarter.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

This gives us confidence in Europe's near and longer term trajectory. Our ability to enhance the financial performance of our European business starts with technology. Having implemented a common data platform, we now have a better view of our European network, assets and costs to serve. We're using these insights to increase efficiency in the region. For example, with our improved routing in Europe via the enhanced data flow, we reduced the number of touches on intra European packages.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

This is not only improving productivity, but also expediting clearance, leading to better service. We also introduced dimensional pricing at our Charles de Gaulle hub in Paris. This enhancement enabled by new and updated technology seamlessly captures package dimensions and weight and then applies and integrates applicable surcharges via standardized processes. As a result, we are now better and more accurately compensated for the goods we transport, especially for the higher margin packages with unique dimensions. We'll continue to roll out this capability to other European facilities over the next year.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Together with non stackable shipment surcharges, we expect this initiative to deliver an operating income benefit of over $50,000,000 in FY 2025. This is a prime example of our new business architecture translating into improved financial and operational outcomes. Looking ahead across Europe, the team remains focused on deploying the right value proposition and network design, the digital tools that enhance the customer experience and the right processes to deliver this experience efficiently and effectively. Improving our financial performance in Europe is a top priority for our entire leadership team. I'm very encouraged by our recent progress and confident in the opportunity ahead.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

In October, just in time for peak, we celebrated the grand opening of a new state of the art sorting facility at our Memphis World Hub. This new sorting facility marks an important milestone in our modernization efforts, improving the work experience for our employees and service for our customers, while increasing the efficiency of our hub. We also continue to roll out Network 2.0 in select markets in the first half of Q2 and we have now optimized 200 stations to date. And we are continuing to execute on tricolor, our international air network design strategy, which is improving density and asset utilization across the enterprise while targeting profitable growth. Before I close, I want to thank the FedEx team once again as we approach the end of our peak season.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

They make every FedEx experience outstanding, positioning us well through peak and beyond. Now let me turn the call over to Brie.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Thank you, Raj. Market conditions remain soft, but our solid service levels, unique value proposition and innovative offerings supported our Q2 performance and have positioned us well for a successful peak season. Consolidated revenue declined 1% in the quarter, driven by the weak industrial economy. U. S.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Manufacturing PMI has indicated a contraction for 24 out of the past 25 months, representing the 2nd longest downturn in U. S. History. Reviewing each segment on a year over year basis now. At Federal Express, revenue was essentially flat.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Higher yields across our services were partially offset by volumes, which declined year over year. We again saw increased demand for our lower yielding services. Some of this demand increase was driven by a shift in customer preferences, particularly with the shift from home delivery to ground economy. But the majority was due to organic demand and not related to trade down between services. At FedEx Freight, lower volumes, fuel surcharges and weight per shipment drove the top line decline.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Year over year comparisons were challenging as some customers won last year from the yellow bankruptcy have since left in search of lower prices. That being said, we are ready to capture additional profitable volume when the market returns. Turning now to volume trends by service during the quarter. Volumes were pressured, led by weakness in the U. S.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Domestic market, partially offset by strong international growth. Across U. S. Domestic express services, volumes declined 1%, primarily due to weakness in the industrial economy. Ground volumes were down 1% as well, with the soft B2B environment weighing on ground commercial growth.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

While we recognize that e commerce will continue to outpace B2B growth in the years ahead, we know that the priority customer base is stable with low rates of churn and the current priority volume weakness reflects the state of the broader global macroeconomic environment. Ground residential volumes were adversely affected by a difficult comparison due to Cyber Week, which occurred in Q2 last year and is in Q3 this year. International export package volumes increased 9% in the quarter, driven by international economy, which is largely consistent with recent quarterly trends. Within FEC, average daily pounds were up 10% for international priority freight and 5% for international economy freight. This signals early progress from our tricolor strategy to drive profitable growth in the global airfreight market.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

At FedEx Freight, the soft industrial economy led to weakness in both weight per shipment down 3% and average daily shipments down 8%. The pricing environment is competitive, but I am encouraged that revenue quality actions are gaining traction. Revenue quality remains our highest priority as we ensure that revenue growth is benefiting the bottom line. At Federal Express, composite package yield increased 1%, driven by international priority, U. S.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Priority, home delivery and ground commercial. Overall yield for ground services was flat with yield growth at home delivery and ground commercial offset by ground economy. As expected, international economy parcel yield declined due to mix and lower weight per shipment. Moving to Federal Express Freight. Composite freight yield was up 4% driven by lower postal service volumes tied to the contract expiration and also successful commercial execution in the international export freight market.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

At FedEx Freight, revenue per shipment was down 4%, driven by decreased fuel surcharge revenue due to lower fuel prices and lower weight per shipment. We are through a significant part of peak and project the demand surcharge revenue over this season will be up year over year. I am confident that this pricing strategy is supporting the revenue and profit expectations for the Q3. Looking at the second half of fiscal year twenty twenty five, we anticipate consolidated revenue to be up slightly on a year over year basis in both Q3 and Q4. While we still have 5 days to go, I'm very pleased with December volumes, which are ahead of our forecast.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

We expect our general rate increase of 5.9%, which goes live in January to have a very strong capture. Federal Express revenue growth in the back half will be supported by ground residential and international economy volume growth, driven in Asia and also through European market share acquisition. We continue to see strong commercial traction, particularly in Europe. At FedEx Freight, we anticipate revenue to decline slightly in the second half due to continued softness in average daily shipments and modest yield improvement. As Raj mentioned, in January, we began hiring 300 incremental LTL specialists.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

We believe this increased focus will provide better support for our customers and enable us to accelerate profitable growth. As we wrap up the calendar year, it's a great time to remind you of our commercial strategy. I am proud to lead the best team in the industry and I am confident that the commercial strategy we have in place will drive significant value in the years ahead. Our strategy is in service of our vision to make supply chain smarter for everyone. For our customers, our mission is to be their unrivaled partner in moving their business forward.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

To deliver on this mission, we will provide a superior digital portfolio and customer experience. It's essentially the Purple Promise 2.0 powered by the FDX platform. In fiscal year 2026, we will begin the transition of our fedex.com customer base to the FDX platform. This will improve our speed to market and allow us to expose new capabilities like advanced visibility for the millions of FedEx small and medium customers. We are designing new experiences for high value segments and planning for above market growth where we already have a differentiated portfolio.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Our target segments are B2B for both Healthcare and Automotive, domestic e Commerce, Global Airfreight and of course Europe. 1st, B2B. We have experienced tremendous success in Healthcare, which has been our priority B2B vertical. Federal Express already has a double digit percentage of our revenue in the fast growing $70,000,000,000 Healthcare segment. And this segment is an important contributor to FedEx profit today.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

This fiscal year, we expect to gain market share in the U. S. By leveraging our unique portfolio, including cold chain support, our new quality management program and FedEx surround monitoring and intervention. While most of our health care revenue is U. S.-based, the international health care market represents significant opportunity.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

We will globalize our portfolio and accelerate revenue growth outside of the United States. Automotive is also a massive market, and we are focused on what we estimate to be a $10,000,000,000 market within this industry that requires premium services critical to automotive supply chains. We have created an automotive vertical and expect to provide new benefit in early fiscal year 2020 6. Our second priority is the U. S.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Domestic e commerce market. E commerce will continue to drive 90% of the market's incremental parcel growth in the years ahead. Within our U. S. Ground services, our superior speed and coverage give FedEx a competitive advantage, not to mention picture proof of delivery, which continues to help us close new business.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

As we execute on Network 2.0, we will continue to lower our cost to serve, which will lead to improved incremental flow through from these volumes. Our 3rd target segment is the global airfreight market. This is a market with significant potential. We currently have a low single digit market share in the $80,000,000,000 airfreight market. International priority freight already serves as a profit driver for us.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Our tricolor strategy is a necessary condition to competing and winning in this market. Commercially, we've also made numerous changes to improve our performance. We have created a dedicated sales organization, a new customer service model and are investing in the digital experience. The airfreight market is fragmented and the shipping processes are antiquated. It's a market ripe for disruption.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

4th is Europe. The European parcel market is roughly $130,000,000,000 and will continue to grow in the years ahead. Our mix of revenue in Europe is already favorable with the majority coming from B2B. As Raj mentioned, Q2 revenue in Europe grew nicely with strong execution. DRiV continues to transform our cost to serve and improve service on the continent while enabling us to lean into the most attractive parts of the market.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Regardless of the target segment, revenue quality and capacity management are critical to growing profitably. We have made tremendous progress in yield capture in the last several years. A great example, total non standard surcharges are generating a significant year over year benefit of over $180,000,000 annualized. This is the result of a new AI image capture process. In calendar year 2025, we will accelerate our work on an end to end capacity management system.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Within FDX, there is a digital twin of the network. We now have real time view of the network capacity globally. We will use AI and our digital quote platform to profitably sell voids at a scale and pace that was previously not feasible. I am very confident about the future as we lean into these commercial priorities. I am proud to be part of the best team in the industry and extend my sincere thank you to the team members as they deliver for our customers this peak season. And with that, I'll turn it over to John.

[John Dietrich, Executive VP & CFO at FedEx]

Thank you, Brie. Despite soft market conditions, our Q2 performance demonstrates the team's strong commercial execution and actions to lower our costs served. We sequentially grew adjusted operating profit by approximately $170,000,000 and increased our adjusted earnings per share year over year with the growth driven primarily by our Federal Express segment. And we achieved these results despite revenue declining 1%. Walking through the dynamics of the quarter, the soft global industrial economy coupled with the competitive pricing environment constrained our results.

[John Dietrich, Executive VP & CFO at FedEx]

The Postal Service contract expiration negatively affected 2 months of the quarter, resulting in additional operating profit headwind. However, our plans to remove costs associated with this contract expiration are on track. DRiV benefits of $540,000,000 offset these headwinds and supported our consolidated year over year adjusted earnings growth. Providing more detail by segment, at Federal Express, we grew adjusted operating income by $146,000,000 year over year as a result of drive savings, base yield improvement and increased international export demand. We achieved this result despite inflationary pressures and several significant headwinds, including the Postal Service contract expiration, a $90,000,000 headwind from the Cyber Week timing shift and a $20,000,000 headwind from the hurricanes in the Southeast U.

[John Dietrich, Executive VP & CFO at FedEx]

S. As Raj and Brie mentioned, we're pleased that in Europe, our continued network optimization initiatives and strong execution contributed to the profit improvement at Federal Express. And the ramping of our Tri Color strategy drove higher average daily pounds and yields year over year for Federal Express International Freight. In Q2, we decreased total U. S.

[John Dietrich, Executive VP & CFO at FedEx]

Domestic flight hours 24%, largely due to the 60% reduction in daytime flight hours that Raj mentioned due to the expiration of the Postal Service contract. At FedEx Freight, while operating profit was down $179,000,000 approximately $30,000,000 of this decline was due to our lapping the gain on sales of multiple facilities in Q2 of FY 'twenty four. Consistent with the broader LTL market, lower average daily shipments, fuel surcharges and weight per shipment continued to be a headwind largely due to the soft industrial backdrop. These pressures were partially offset by cost management and continued base yield growth. Moving to DRiV, and as planned, we delivered a sequential improvement in savings in Q2 versus Q1.

[John Dietrich, Executive VP & CFO at FedEx]

G and A savings of $210,000,000 in Q2 were a significant lever in the quarter as we continue to optimize our IT and back office functions and reduce outside vendor spend. Surface savings of $150,000,000 benefited the quarter as we continued to maximize third party rail usage, which lowers our cost to serve on our deferred service offerings. And adding the $180,000,000 from Air Network and International, we achieved $540,000,000 total savings in the quarter. As we look to the back half of fiscal twenty twenty five, we continue to expect a sequential build in DRiV savings and we're encouraged by the trends we're seeing in base yields. However, the global industrial economy continues to constrain demand on our most profitable priority in commercial services.

[John Dietrich, Executive VP & CFO at FedEx]

As a result, we are revising our FY 'twenty five adjusted diluted EPS outlook to $19 to $20 compared to the prior range of $20 to $21 At the top end of our range, we assume revenue is up a low single digit percentage driven by a modest improvement in industrial production leading to higher flow through from B2B demand. At the low end of the range, we're assuming a low single digit decline in revenue due to incremental softness in the industrial economy and the pricing environment. Regarding our expected earnings cadence for the second half of the fiscal year, at Federal Express, we anticipate Q3 will benefit from ramping drive savings, improved top line flow through due to the timing of Cyber Week, continued revenue quality actions and the encouraging peak demand that Brie talked about. However, as a reminder, the Postal Service headwind is expected to increase in Q3 and will lessen in Q4 as we exit the fiscal year, and the Q3 Postal Service headwind will more than offset the benefit of the Cyber Week timing shift. We continue to anticipate DRiV savings to build incrementally in Q3 and Q4 with a full year total of $2,200,000,000 At FedEx Freight, we expect a continued softness in the U.

[John Dietrich, Executive VP & CFO at FedEx]

S. Industrial economy and lower fuel prices to pressure op profit for the remainder of FY 'twenty five. Finally, our Q4 is typically our strongest earnings quarter of the year. We expect this dynamic to continue despite having one fewer operating day in Q4. I'd now like to turn to our latest full year adjusted operating income bridge, which shows the year over year operating profit elements embedded in our revised outlook.

[John Dietrich, Executive VP & CFO at FedEx]

This bridge now reflects adjusted operating profit of $6,600,000,000 equivalent to $19.50 of adjusted EPS. For revenue, net of cost, we now expect a $700,000,000 headwind compared to the $100,000,000 FY 'twenty five headwind assumption we shared last quarter. This reflects both our lower revenue assumptions and continued inflationary pressures. At the same time, we now forecast a $300,000,000 headwind from international export yield pressure, which is an improvement compared to the prior $500,000,000 estimate. This is a result of execution on our revenue quality initiatives internationally.

[John Dietrich, Executive VP & CFO at FedEx]

We still expect about a $300,000,000 headwind from 2 fewer operating days, one that was in Q1 and one that will be in Q4. And lastly, we anticipate a $500,000,000 headwind from the U. S. Postal Service contract expiration. We remain confident in our ability to offset these headwinds with the $2,200,000,000 from incremental DRiV savings.

[John Dietrich, Executive VP & CFO at FedEx]

Further supporting this revised outlook is our continued commitment to revenue quality as evidenced by our calendar year 'twenty five general rate increase, peak surcharges and fuel table price changes announced in recent months. For the full year, we continue to expect year over year adjusted operating margin expansion at Federal Express and operating margin contraction at FedEx Freight given the challenging industrial production environment. At the midpoint of our revised FY 'twenty five outlook, we are assuming 9.6 percent adjusted EPS growth on approximately flat revenue. This expectation further highlights how DRiV is fundamentally changing the way we do business. We're improving our cost structure to enable us to profitably grow with e commerce and are well positioned to see significant incremental margins on our priority services once global industrial production improves.

[John Dietrich, Executive VP & CFO at FedEx]

It remains my highest priority to ensure that we continue to unlock the value that I know exists in our business. Moving to capital allocation, we remain committed to reducing our capital intensity while increasing our capital returns. In Q2, capital expenditures were approximately $820,000,000 Our planned FY 'twenty five CapEx remains $5,200,000,000 which is flat on a year over year basis and this will translate into continued strong levels of adjusted free cash flow. We completed an additional $1,000,000,000 in share repurchases in Q2, bringing the year to date total to $2,000,000,000 with an additional $500,000,000 of repurchases planned for the fiscal second half. I remain confident in our near and long term ability to grow earnings while continuing to deliver strong levels of adjusted free cash flow, which will support increased shareholder returns in the years ahead. And with that, let's open it up for questions.

[Operator]

Thank you. We will now begin the question and answer session. And the first question will come from Chris Wetherbee with Wells Fargo. Please go ahead.

[Christian Wetherbee, Senior Analyst at Wells Fargo]

Hey, great. Thanks. Good afternoon. Maybe I could just hit on the guidance for a moment. So I think the Q2 results were generally in line with at least what you guys talked about on the last call.

[Christian Wetherbee, Senior Analyst at Wells Fargo]

So as we think about the dollar cut coming from the back half of the year, I know John you talked about sort of the industrial production outlook and maybe how that's a bit more tempered. I guess I also wanted to kind of think about LTL or the freight business within that context. It was obviously under some pressure here. I guess maybe if you could help break down the moving pieces of the dollar in a little bit more detail and then also talk about the cadence of how that plays out? Is it a little bit more 3Q weighted or is it a little bit more 4Q weighted?

[Christian Wetherbee, Senior Analyst at Wells Fargo]

Do you think things get better by the time we get to the end of the fiscal year? Just kind of curious how to think about that.

[John Dietrich, Executive VP & CFO at FedEx]

So thanks, Chris. I appreciate the question. So as you know, our prior guidance factored in drive savings as well as the pricing actions that we implemented. However, the expected volumes and related revenue just didn't materialize. Our updated adjusted EPS range, which is in the $19 to $20 reflects our revised revenue expectations.

[John Dietrich, Executive VP & CFO at FedEx]

And from a timing standpoint, and while we're not giving quarterly guidance, I can tell you that Q3 will benefit from ramping drive savings, improved top line flow through due to the timing of Cyber Week that we talked about and continued revenue quality actions. And as Brie talked about, we're seeing encouraging signs from our peak demand. It's important to remember for Q3 though that the USPS headwind is expected to increase in Q3 and then somewhat less than in Q4. But that headwind will more than offset the benefit of the Cyber Week I just mentioned. We continue to anticipate DRiV savings to build incrementally in Q3 and Q4.

[John Dietrich, Executive VP & CFO at FedEx]

And from a Q4 standpoint, that is traditionally our strongest earnings quarter of the year and we expect this dynamic to hold. So and that's true despite even having one fewer operating day. So hopefully that gives you some more perspective.

[Christian Wetherbee, Senior Analyst at Wells Fargo]

And just

[Operator]

Your next question will come from Ken Hoexter with Bank of America. Please go ahead.

[Ken Hoexter, Managing Director at Bank of America]

Hey, great. And congrats on the freight spin, obviously long anticipated and a great move to see in value creation. But my question is, Brie, you talked a little bit about peak season here and how it's shifting into Q3. Maybe can you give a little bit more color on kind of you mentioned peak was strong. Is there anything we can read into that in terms of volumes, ability to get price to flow through?

[Ken Hoexter, Managing Director at Bank of America]

I guess, I'm more focused on the volumes both at Ground and Express. Thanks.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Yes. Hey, Ken.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Great question. So from a December perspective, we are pleased. I will say it picked up right after Cyber Monday. It was a very strong week and we are, from a December perspective, pleased volumes are running ahead of forecast. And as I mentioned, our peak surcharge capture from a ahead of forecast. And as I mentioned, our peak surcharge capture from an absolute dollar amount will be up year over year. So we do think that December is going to be a very strong month. That being said, I do want to talk about our top line outlook for the back half of the year because we do not necessarily believe that the December performance is going to carry through in the back half. So as we're thinking about the back half top line outlook, we're looking at some improvement.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

I think you're going to see that improvement come in the form of domestic volumes, in particular at Ground. We think that that will improve in the back half. We do anticipate that Q2 was the trough for FedEx Freight, from a revenue perspective. And that from an international, actually what we think we'll see in the back half is that total volume will look a lot like the first half with actually some slight softening in Asia. So we're very pleased with December.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

The execution is going to be great. The capture is going to be great, but we're not yet thinking that this is a signal of more to come in the back half.

[Operator]

The next question will come from Ori Rosa with Citigroup. Please go ahead.

[Ariel Rosa, Senior Analyst at Citigroup Global Markets Inc.]

Hey, good afternoon and congratulations on the strategic move here. Raj, I'm just curious to hear you talk a little bit about kind of how you see the separation playing out. Just if you could talk about what are the things that kind of need to be done to ensure a smooth transition? And then also what are your thoughts on kind of the risk of customer attrition as you separate out the 2 businesses and just kind of ensuring that customers aren't confused by the separation or maybe see it as a risk to their operations, you guys separating out the 2 businesses? Thanks.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Yes. Thank you, Ari. I think we decided to separate because of the potential to increase shareholder value for both FedEx and FedEx Freight. As far as we have put in place the separation management office with Claude Russ as the head to make sure that we are going to get from here to day 1. To the points that you made, as Brie talked about, we have appointed a VP of LTL sales and we are going to add 300 sales folks by in the next year to make sure that we pay more directly deal with the issue that you talked about.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

We're also going to continue to improve our customer experience. It's very important for you to note also that the FedEx Freight Company benefits a lot from the association with FedEx. And that association, whether it's commercial, whether it's operational or whether it's technological, we will have those arrangements in place as we proceed through the separation. So So I think we'll be able to handle this transition quite well.

[Operator]

Your next question will come from Jordan Allinger with Goldman Sachs. Please go ahead.

[Jordan Alliger, VP & Equity Research Analyst at Goldman Sachs]

Yes, hi. Just curious if you could give a little more color around the Network 2.0 rollout, the progression that's planned from here. And given the experience with Canada or any other areas, what do you think has gone particularly well? And what has been the more challenging aspect of it all? Thank you.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Yes. And thank you very much, John. I think, yes, we may continue to make significant progress on Network 2.0. We're taking a deliberate approach to rollout and we're prioritizing service policy.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

We have optimized 200 stations so far and including 130 in Canada. And we will complete the rest of the Canada integration early in 2025 with the last major market being Montreal. As a feature of how we roll this out, every time we roll out something, we take lessons learned and when we keep applying into the next one, and that's working quite well. We are continuing to see 10% P and D cost reduction, where we have fully rolled out 2.0. So at the end of FY 2025, we expect to have approximately 250 stations integrated. So hopefully that answers your question, Jordan.

[Operator]

Your next question will come from Daniel Imbro with Stephens Inc. Please go ahead.

[Daniel Imbro, Managing Director at Stephens Inc]

Hey, good evening everybody. Thanks for taking the questions. John and Raj, maybe one on capital allocation and the balance sheet. So first, I guess, how do you envision maybe debt being divvied up or how should we think about target leverage for each business? And then John, you've worked hard to reduce the capital intensity of both businesses.

[Daniel Imbro, Managing Director at Stephens Inc]

I guess, how do you envision capital allocation changing at all? Will this spend enable certain investments you previously weren't making? Or how did that change?

[John Dietrich, Executive VP & CFO at FedEx]

Sure. Thanks, Daniel. Yes, no, we're not anticipating any changes in capital allocation. We're continuing to be focused on optimizing our existing business, ensuring the significant adjusted free cash flow is returned to stockholders. That's going to be true both before and after the separation.

[John Dietrich, Executive VP & CFO at FedEx]

We continue to have the programs in place. We're going to we've already accomplished $1,000,000,000 of share repurchases in Q2 for a total of $2,000,000,000 for the full year with remaining $500,000,000 for the remainder of the year. So that's all going to remain in place. Now in terms of capital allocation, in kind of the post separation environment, that's all going to be something we're going to be reviewing over the coming months and look forward to keeping you updated on the progress of that.

[Operator]

The next question will come from Jason Seidl with TD Cowen. Please go ahead.

[Jason Seidl, Managing Director at TD Cowen]

Thank you, operator. Everyone evening and thanks for taking my question. Congrats on the spin. It's always nice to see some value creation out there. I wanted to focus a little bit on the commercial agreements you spoke about.

[Jason Seidl, Managing Director at TD Cowen]

You mentioned the ones that were with Peak Help and Drayage. How long are these agreements for? And also what about anything on the bundle side between the two companies? I'm assuming existing contracts that are offered will be honored. And how should we look at the bundle going forward? I'm assuming they'll just go away.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

That's a great question. So I think we just need to take a step back and just clarify what the customer base of FedEx Freight looks like today. So first and foremost, obviously, FedEx Freight would not be the powerhouse that it is today without the incredible strategy to take these three networks together, put them together, put the FedEx brand on them and then to build off just the incredible relationships that FedEx has with customers. That is one of our commercial strengths is deep solutioning and partnerships with our customer and that has really created a lot of momentum. That being said, if you look at the majority of the FedEx Freight revenue base today, while the majority of small customers are bundled, the majority of the actual volume at FedEx Freight is negotiated on an independent contract today.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

We really made a pivot, I guess, about 4 or 5 years ago and recognizing that when we were competing in a fragmented market, we had to negotiate the freight business separately. So those contracts will be honored. As you know, the vast, vast majority of FedEx freight contracts are renegotiated every year. So of course, they will be honored as we go through this process. And that's why we are very confident in the incremental focus from a dedicated sales team.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

It's important to note we have about 75 sales reps today that are dedicated to large accounts at freight. So this will be additive to them. As we go through the process, we will look at the small customer strategy and I anticipate that that will be slightly nuanced because that's where we really have leveraged the benefit of the earned discount program at FedEx. There is a common myth that FedEx freight revenue is diluted because of that bundle and that is not true. Actually, the way the earned discount program works is that as they ship more FedEx freight or more LTL, you actually get incremental benefit on your parcel side.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

So there is some potential benefit from small customer improvement too. But we're very comfortable on our commercial strategy and we can execute it.

[John Dietrich, Executive VP & CFO at FedEx]

I think what I would add to that from a kind of intra company standpoint, it's important to recognize that through the separate operating companies previously and as Raj mentioned in his comments, freight has benefited from providing services to Federal Express. So a lot of agreements already exist that will just be enhanced as we go forward with the separation. So we're not going to have to reinvent the wheel on this.

[Operator]

The next question will come from Connor Cunningham with Melius Research. Please go ahead.

[Conor Cunningham, Director - Travel & Transports Analyst at Melius Research LLC]

Hi, everyone. Thank you. Maybe going back to the first question just on EPS, the change in the guidance. So Frank was clearly pressured in the quarter. Is the entirety of the change in the guidance associated with the freight business? It just seems like the underlying core trends in Express are actually improving. I don't know, if you could just talk a little bit about the dynamic between the two businesses and the changes overall? Thank you.

[John Dietrich, Executive VP & CFO at FedEx]

Sure. Thank you, Connor. So, look, there's a number of considerations. The pricing actions that we've implemented are supporting our FY 'twenty five earnings growth assumptions for sure. However, revenue expectations remain constrained due to the demand environment that largely resulting from the continued weakness in the U.

[John Dietrich, Executive VP & CFO at FedEx]

S. Industrial economy that Raj talked about. So, U. S. Premium services, even though there's some we talked a little bit about peak, but U.

[John Dietrich, Executive VP & CFO at FedEx]

S. Premium services are expected to remain muted for a while, thereby putting pressure on op income and margin. We do expect continued growth from our deferred services, which are contributing, but with lower margin and lower flow through to the bottom line. So really the top end of our range assumes a modest improvement in global industrial production and slight revenue excuse me, slight growth in revenue. The low end of the range assumes revenues declined slightly year over year, driven incremental by incrementally softer industrial production pricing and the midpoint just assumes flattish revenue year over year.

[John Dietrich, Executive VP & CFO at FedEx]

So we're going to be focused on controlling those things we can. We remain confident in DRiV and those savings will continue to ramp incrementally during the second half. But those are some of the considerations that went into our outlook.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Yes. And let me just add one other thing, Conor. I think at an overarching level, I mean it's been really surprising to me for me to see that over the last 25 months that we are declining ISM for 24. So it's very difficult to say when that will turn around and the fact that we have produced such the results and especially in the FVC in this environment, I think it says a lot about what we can do and also shows to what it can happen when that market turns. But we are assuming that the industrial production and the manufacturing continues to be similar to what we saw in the first half or the second half.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

And as was stated earlier, 60% of the revenue for the FECs comes from B2B while 90% comes from LTL. So hopefully that will help you with the calculations. Comes from LTL. So hopefully that will help you with the calculations.

[Operator]

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

[Brian Ossenbeck, MD - Senior Analyst, Transportation at JP Morgan]

Hey, evening. Thanks for taking the question. So Brie, just wanted to come back to you on the general trends for price and competition. You mentioned it's still pretty competitive out there. You don't see a trade down necessarily, but it does sound like the deferred side of the business is growing faster.

[Brian Ossenbeck, MD - Senior Analyst, Transportation at JP Morgan]

So just want to see if you can offer a little bit more comment. It sounds like the demand surcharge is sticking, but what about the other ones that you've put into place to help optimize the network and sort of get that revenue management moving in the direction that you would want? How are those sticking? And how would that progress from 2Q into the back half of the year? Thanks.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Hi, Brian. Great question. So the market certainly is competitive. I do feel that it's rational. From a pricing strategy, as we think about, the yields in the back half, they are going to remain pressured.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

That is a function of 2 things: 1, the economy and 2, to your point, there is a mix change. I do want to emphasize that we do have some customers trading down. We're also as we go to acquire new volume and customers because all of our customers are simply trading less. In a downturn, you need new customers to be able to add to the portfolio. And so there is growth in new customers in the deferred portfolio.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

From a pricing strategy perspective, I think the team, despite the economy, is executing really well. The pressure that we're seeing is on the base rate and then weight. We know every time we're in a downturn, weights are pressured really across all the portfolio, but especially in the freight portfolio. And so there's not a lot that the team can do from a weight perspective. What they can do is be really disciplined in getting the surcharges, especially those surcharges that drive a disproportionate amount of cost.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

So peak is a great example. They're executing on peak. From a large package perspective, nobody moves large packages better than we do. And actually, we're seeing that part of what we're seeing in December is a lot of flow through from a ports perspective. As you heard, not only are we being disciplined from a large package capture on surcharge, but the dimensional capabilities that we're putting in to get capture is increasing it.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

And then from a rural perspective, we have the best value proposition here in the United States into the rural markets, and that matters for a lot of our customers. The last 3% or 4% of their volume, they don't want to have to use a different provider. And so we're really being disciplined on getting those surcharges. They are contributing, but the base rate is really pressured because of the economy. I hope that helps.

[Operator]

Your next question will come from Brandon Oglenski with Barclays. Please go ahead.

[Brandon Oglenski, Director & Senior Equity Analyst at Barclays]

Hey, good evening and congratulations on the spin. I know a lot of your shareholders will definitely be happy here too. But I guess, Raj, can you expand on what you're doing differently under DRIVE? You spoke about how it's driving the way you do business today versus what you did yesterday, and especially in the context of revenue quality, which I think Brie has mentioned many times and maybe even reflecting on losing your largest customer, but it looks like your margins have actually come up. So what else in the portfolio potentially can you change looking forward?

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Okay. I'm trying to digest that question, Brandon, but let me just start with Drive firstly. I think Drive has clearly evolved to be how we work in this company. We have established an overarching market leading approach to overall governance that leads to disciplined execution. And we are it's a data driven approach and very rigorous and very timely decision making and ultimately leads to much, much better execution.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

So this is going to stand us in good stead as a foundation for FedEx to execute as we go forward. The second thing is we also adopted a data first digital mindset in solving problems while creating differentiation in our service offerings. The underlying technological innovation and transformation that we have created is quite profound. And that's those are the two things powering our execution. And that's also why as we've changed our vision to making supply chains smarter for everyone, it starts by making our own supply chain smarter.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Of the $4,000,000,000 of DRiV savings, I think roughly $1,800,000,000 would be directly the result of the new technologies that we have put in place. So that's what DRIVE is all about. And as we look at what comes next, whether as we implement Network 2.0 or whether we improve and expand on Tricolor or expand our operations and expand our performance in Europe, all those are going to be guided through DRiV and that's what gives us the confidence of execution. I hope that answers the question that you asked.

[Operator]

The next question will come from Bruce Chan with Stifel. Please go ahead.

[Bruce Chan, Director at Stifel Financial]

Hey, good evening everyone. And echo the sentiments on the spin, great to see. Maybe somewhat of an oblique follow-up here to Brian's question. There's been some suggestion of a USPS privatization. Maybe we could get your thoughts on what that would mean for the competitive environment.

[Bruce Chan, Director at Stifel Financial]

Is that a new bona fide competitor or is that maybe introducing a more material profit mandate and thus making the Postal Service more rational? So any thoughts and color there would be great.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Well, it is very early for us to comment on something like that. We will keep that we'll monitor the developments there very closely, obviously. But one of the principles that I think it's important to state here is that is for our industry, it's important that the package delivery business is not subsidized by the U. S. Taxpayer.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

I think that's a very important consideration set and hopefully that will be what will get adopted here.

[Operator]

The next question will come from Jon Chappell with Evercore ISI. Please go ahead.

[Jonathan Chappell, Senior Managing Director at Evercore ISI]

Thank you. Good afternoon. Bria, I was hoping to ask about tariffs. It's a narrative that seems to be dominating some of the sentiment around the group right now. You're a much different cost structure than you were in the 1st Trump administration.

[Jonathan Chappell, Senior Managing Director at Evercore ISI]

So just as it relates to tariffs, have you heard from your customers about any pull forward? And I guess secondly, how would you manage your network if there were to be a surge in demand and maybe more of like a short term as opposed to a long term secular shift?

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Yes. It's a great question. So from a December perspective, there might be a little bit of a pull forward. As we talked about, we are seeing some movement both in the freight network and in the parcel network from the ports. So there might be a little bit.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

It's hard to tell right now because we're in the middle of peak how much of that is inventory as well as how much is just consumer demand. So obviously, it will be much clearer in January. From a reaction perspective, I am really pleased with how quickly the airline team is able to respond right now. To Raja's point, we are doing things differently with Drive. So as far as being able to adapt, I'm very confident.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

As Raj has shared many times, we're everywhere. We have customer relationships everywhere. So as customers prepare to pivot, we're there to pivot with them. So it's very hard at this point to predict what might happen under our future administration, so we're not going to try to, but we are ready to respond with agility.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

And John, let me just say that as you can imagine, we are a referendum on global supply chains every single day and especially of the high value economy and we see this information from the bottom up. And we and the fact that we have a scaled network already in place that connects 99% of global GDP is a significant advantage because we can move our capacity much, much quicker than manufacturing can move. And so it is we are very agile, much different than what we've has been the case before. And that's one other thing I would say is that you can imagine that our as part of our value proposition is an end to end delivery. In international, that includes customs clearance.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

So we have the data, the expertise, the insights about what it takes to move package from one country to any other country and all the commodities they're in. So this becomes a competitive differentiation advantage for us as we make our customer supply chain smarter.

[Operator]

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

[Scott Group, MD & Senior Analyst at Wolfe Research]

Hey, thanks. Good afternoon. John, you said a couple of times that the post office headwind is bigger than the Cyber Week tailwind, but there's a lot more moving parts. And so maybe can you just clarify what you're trying to sort of communicate around Q3 expectations? And then on the LTL spend, I just want to understand a couple of things.

[Scott Group, MD & Senior Analyst at Wolfe Research]

Why is it 18 months seems so long? And then as we do our math, is there any way to just think about if there's much, if any, of the corporate unallocated costs that we should apply to LTL? Thank you.

[John Dietrich, Executive VP & CFO at FedEx]

So thanks, Scott. So let me start with the 18 months. From a timing standpoint, the 18 month period for a transaction of this magnitude is really consistent with what is reasonable to expect. And we do look forward to keeping you posted on our timing and milestones along the way. So we look forward to keeping you posted there.

[John Dietrich, Executive VP & CFO at FedEx]

With regard to the Postal Service, as I mentioned in my remarks, we are on track to take out cost as planned with the U. S. Postal Service contract expiration. We talked about the flight hours taking out roughly 60% of our U. S.

[John Dietrich, Executive VP & CFO at FedEx]

Domestic daytime flight hours have been taken out and that makes up about 24% of our total daytime hours. We're also going after all the other related costs. So as I mentioned in my remarks, Q3 will be impacted because it will be a full 3 months of impact from the Postal Service contract and that will start to wind down in Q4 and we'll start to see as a tailwind into FY 2026. So that just gives you some background and perspective. We're pleased with the work that's been done.

[John Dietrich, Executive VP & CFO at FedEx]

There's more to be doing in taking that cost out. Hopefully that gives you some good color on the Postal Service.

[Operator]

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

[Thomas Wadewitz, Senior Equity Research Analyst at UBS Group]

Yes. Good afternoon. Thanks for getting me on for a question. I appreciate it. Let's see.

[Thomas Wadewitz, Senior Equity Research Analyst at UBS Group]

On the LTL and thanks for all the detail on this spin, it's complex, but it's helpful to hear your thoughts. Raj, would you anticipate that you get somewhat more volume focused with LTL in the future? You talked about the 1100 basis points of improvement in the margin over a period of time. And I think that was driven by some of the change in focus on pricing and a lot of discipline. I'm wondering, would you anticipate that hiring a bunch of salespeople focused on SMB, those things, would you potentially be more volume focused and maybe compete harder for freight in the future?

[Thomas Wadewitz, Senior Equity Research Analyst at UBS Group]

Or is that the wrong way to look at it? Thank you.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

Hi, Tom, it's Bree.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

So I think first in the main, we're really pleased with the discipline that we've got across the team. From a revenue quality perspective, we've made great strides. As we look forward, we do see this as an opportunity to play offense. We are going to invest commercially and new salespeople. We know we've got an opportunity from a different industrial mix.

[Brie Carere, Executive VP & Chief Customer Officer at FedEx]

And as I mentioned earlier, from a weight, while our weight is down right now in our base because of the macro, when we look competitively, we think there is some opportunity using technology to fill up the capacity. We know the FedEx Freight network right now can run very comfortably at $100,000,000 $105,000,000 So we've got some opportunity to be a little bit more strategic also to look at the 3PL market. So the answer is yes, we're going to play more offense and we think there's some great things to come.

[Operator]

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

[David Vernon, MD & Senior Analyst at Bernstein]

Hey, thanks for fitting me in here. So coming back to Network 2.0, I think Raj, you mentioned like 2 25 stations would be consolidated or something like that by the end of, I think it was fiscal 2025. Can you give us a sense for kind of what percentage of volume you might have touched with the Network 2.0 integration to date? And then as you think about the timing of when the more difficult to tackle major metros may start to be coming in play, is this a fiscal 'twenty six, fiscal 'twenty seven sort of timeline? Just trying to get a better sense for when the rubber really starts to meet the road, so to speak, on the physical integration of the Courier operations in the heart of the domestic network? Thanks.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Yes. Thank you, David. The FY 2025 number is 250 stations integrated. I think the big lift is going to be in FY 2026. So we have FY 'twenty six and FY 'twenty seven are the 2 big years, but FY 'twenty six will be the big lift for us for Network2.0.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to Mr. Raj Subramaniam for any closing remarks. Please go ahead, sir.

[Raj Subramaniam, President and Chief Executive Officer at FedEx]

Thank you, operator. In closing, I'd like to thank our team members for delivering this outstanding peak season. We have 5 more days to go, and I really look forward to a very strong finish. Let me wish all of you listening on this call a very happy holiday season. Thank you so much.

[Operator]

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

Participants

Executives

• Jenifer Hollander, Head of Investor Realtions
• Raj Subramaniam, President and Chief Executive Officer
• Brie Carere, Executive VP & Chief Customer Officer
• John Dietrich, Executive VP & CFO

Analysts

• Christian Wetherbee, Senior Analyst at Wells Fargo
• Ken Hoexter, Managing Director at Bank of America
• Ariel Rosa, Senior Analyst at Citigroup Global Markets Inc.
• Jordan Alliger, VP & Equity Research Analyst at Goldman Sachs
• Daniel Imbro, Managing Director at Stephens Inc
• Jason Seidl, Managing Director at TD Cowen
• Conor Cunningham, Director - Travel & Transports Analyst at Melius Research LLC
• Brian Ossenbeck, MD - Senior Analyst, Transportation at JP Morgan
• Brandon Oglenski, Director & Senior Equity Analyst at Barclays
• Bruce Chan, Director at Stifel Financial
• Jonathan Chappell, Senior Managing Director at Evercore ISI
• Scott Group, MD & Senior Analyst at Wolfe Research
• Thomas Wadewitz, Senior Equity Research Analyst at UBS Group
• David Vernon, MD & Senior Analyst at Bernstein