FedEx Freight Q1 2027 Earnings Results & Report

FedEx Freight EPS Results

• Actual EPS: $1.49
• Consensus EPS: $1.38
• Beat/Miss: Beat by +$0.11
• One Year Ago EPS: N/A

FedEx Freight Revenue Results

• Actual Revenue: $2.46 billion
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

FedEx Freight (NYSE:FDXF) is a less-than-truckload (LTL) freight transportation company that provides pickup, consolidation, transportation and delivery services for shipments that do not require a full truck. Its customers include businesses across manufacturing, retail, wholesale, healthcare, technology and other industries.

The company offers a range of LTL solutions, including time-definite and day-definite services, standard and economy freight transportation, expedited shipping, volume and multiweight services, and specialized delivery options. FedEx Freight also provides shipment visibility, online shipment management and other logistics support through its digital tools.

FedEx Freight primarily serves the United States and has transportation connections supporting cross-border freight movements involving Canada and Mexico. The business has operated as part of the FedEx family since FedEx acquired American Freightways in 2001 and subsequently combined it with other freight operations under the FedEx Freight name.

FedEx Freight Q1 2027 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Strong initial standalone results: FedEx Freight generated $3.3 billion in revenue, up 9% year over year, and $510 million in adjusted operating income, up 16%, for the four-month transition period. Adjusted operating margin was 15.5%, with $239 million in free cash flow.
• Positive Sentiment: Outlook raised for the fourth quarter: The company expects revenue of $2.3 billion to $2.37 billion and adjusted operating income of $185 million to $205 million, above its prior expectations. Higher fuel-related yield, improving pricing, and modest volume growth are expected to drive results.
• Positive Sentiment: Pricing and commercial momentum are building: FedEx Freight has renewed approximately 25% of its contractual portfolio with its strongest renewal pricing performance in recent years, while a 6.9% general rate increase takes effect January 8. Management is also targeting higher-value verticals and underpenetrated small and medium-sized customers.
• Positive Sentiment: Cash generation and technology investments support the long-term plan: The company reduced debt by $100 million, lowered gross leverage to 2.8 times, and remains on track for approximately 2.5 times leverage within 12 months of separation. A new Palantir alliance is intended to accelerate AI-driven productivity and network efficiency improvements.
• Negative Sentiment: Near-term cost pressures remain: Adjusted results benefited from strong revenue and fuel trends but were offset by roughly $50 million of performance-based compensation and nearly $30 million of transition-service costs. TSA expenses are expected to remain around $7 million per month into the first half of 2027, while additional standalone and IT costs are weighing on GAAP results.

Presentation

[Operator]

Hello, everyone, and welcome to the FedEx Freight conference call. My name is Ryan, and I will be coordinating the call today. If you'd like to ask a question at the end of the presentation, please use the following method based on how you are joining us today. If you are attending via the webinar, please click the raise hand icon at the bottom of your screen to be added to the question queue. If you are dialing in by phone, please press star followed by five on your telephone keypad. I will now hand the call over to Mari Rose, Head of Investor Relations, to begin. Mari, please go ahead.

[Mari Rose, Head of Investor Relations at FedEx Freight]

Good afternoon, and welcome to FedEx Freight's earnings conference call to discuss our results for the four-month transition period ended September 30th, 2026. The accompanying earnings release and investor presentation are on our website at ir.fedexfreight.com, and this call is also being streamed from our website. Joining us today are John Smith, President and Chief Executive Officer of FedEx Freight, and Marshall Witt, our Executive Vice President and Chief Financial Officer. Following prepared remarks, John and Marshall will both be available to answer questions. To allow time for as many participants as possible, we ask that you limit yourself to one question. Afterward, you are welcome to rejoin the queue if you have any additional questions.

[Mari Rose, Head of Investor Relations at FedEx Freight]

During the call, certain statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995, and are subject to factors that could cause actual results to differ materially from those expressed or implied. For additional information, as well as reconciliations of the non-GAAP measures discussed today to the most directly comparable GAAP measures, please visit our website and refer to our press release and SEC filings. With that, I'd like to turn the call over to John for opening remarks.

[John Smith, President and CEO at FedEx Freight]

Thanks, Mari, and good afternoon, everyone. Today marks an important milestone for FedEx Freight as we report our first operating and financial results as a standalone company. Leveraging the strength of North America's largest LTL network and the dedication of our talented team, we delivered a solid quarter marked by disciplined execution across the organization and early progress against the strategic priorities we outlined at Investor Day. While we remain in the preliminary stages of our journey as an independent company, our first four months reinforce our confidence that the actions we're taking are strengthening the business and laying the foundation for long-term profitable growth as well as cash generation. Beyond our operational and financial performance, we continue to make steady progress on what remains our most important priority, and that is safety above all.

[John Smith, President and CEO at FedEx Freight]

So far this calendar year, we have delivered positive trends across all key safety metrics, including countable injuries, lost time injuries, preventable accidents, and DOT preventable accidents. These improvements are a reflection of the commitment and accountability of our team and highlight our focus on operating a safer, stronger business. We have a lot of ground to cover today, and in addition to discussing our quarterly results, we will provide an update on the progress we've made since the separation. We will highlight key accomplishments across our operational, commercial, and technology initiatives and share our expectations for the upcoming quarter. And as we look forward, we remain laser-focused on executing our clear and consistent strategy, strengthening our business, and creating long-term value for all our stakeholders.

[John Smith, President and CEO at FedEx Freight]

To achieve this, our objective is straightforward for each and every quarter: deliver for our team, deliver for our customers, and in doing so, deliver profit for our shareholders. Starting with our team, FedEx Freight once again earned top honors at the transportation industry's premier driver and technician competitions, reinforcing our culture of operational excellence. In total, our drivers and technicians captured 10 podium finishes. This includes two national championships and seven top three finishes at the National Truck Driving Championships, while our technicians earned the TMCSuperTech Grand Champion title and swept all the top three overall spots. Also, during the quarter, two FedEx Freight drivers were selected to the Women In Trucking Image Team, further recognizing the best-in-class team members we have at FedEx Freight. These achievements are about more than awards. They're about recognizing the exceptional people who help differentiate FedEx Freight each and every day.

[John Smith, President and CEO at FedEx Freight]

Also, during the quarter, we launched our Employee Stock Purchase Plan in August, designed to drive collective ownership and responsibility across our organization. Participation has already exceeded our expectations, with nearly 14,000 eligible employees electing to become owners of this company. And finally, we further aligned our organization by bringing our technology and commercial teams together under Mike Rodgers. His focus will be on creating an integrated, customer-focused organization while maintaining our commercial momentum. Turning now to our customers. We delivered for our customers with 98% pickup reliability and on-time service during the quarter. In addition to improving dependability, we continued to deliver better service quality with our claims ratio improving to just 0.43% during the quarter, and our claims filing frequency declining to 0.27%, both record lows.

[John Smith, President and CEO at FedEx Freight]

Customer feedback remains one of the most important measures of our progress, and the annual Mastio survey, which was released earlier this month, provides important perspective into how customers view our service. While our net promoter score improved 150 basis points YoY, we recognize there is still substantial work to do. Despite significant transformation across the organization, this year's Mastio results demonstrate that we maintained a strong and reliable network and continued to make progress with customers. However, the survey also supports our belief that our greatest opportunity lies in further improving the customer experience. Building customer confidence and preference is a multi-year journey for us, not a four-month effort, and we remain committed to making steady progress in the areas that matter most to our customers.

[John Smith, President and CEO at FedEx Freight]

Now, the momentum we are seeing across our customer, service, and operational metrics is important because these are the leading indicators of long-term financial performance and profit for our shareholders. During the four-month period, volume and base yield trends continued to stabilize, reflecting a significant moderation from prior year declines earlier in 2026. While broader freight conditions have shown signs of improvement, we are also encouraged that our commercial, service, and customer experience initiatives are also beginning to contribute positively to underlying performance. Additionally, the pricing actions we are taking should support future performance. Since June 1, we have successfully renewed approximately 25% of our contractual portfolio and achieved our strongest renewal pricing performance in recent years. Given that approximately 2/3 of our revenue is generated under negotiated customer pricing agreements, we believe our contractual renewal performance provides meaningful support for future yield improvement.

[John Smith, President and CEO at FedEx Freight]

Separately, in September, we announced a 6.9% general rate increase, or GRI, that will become effective January 8th and apply to approximately 1/3 of our revenue base, and it is intended to appropriately align our pricing with the value of the service we provide, all while supporting continued investment in the business and our long-term growth objectives. Taken together, we generated $3.3 billion in revenue, up 9% YoY, and $510 million in adjusted operating income, which is an increase of 16% versus the prior year. This translated into an adjusted operating margin of 15.5% for the four-month period ending September 30. We also delivered adjusted earnings per share of $2.15 and generated approximately $239 million of free cash flow during this period.

[John Smith, President and CEO at FedEx Freight]

Now, before Marshall walks through our operational and financial results, I would like to share an update on our progress and discuss several early indicators that demonstrate the impact of our strategic initiatives. At our April Investor Day, we outlined a roadmap to enhance the customer experience, improve profitability, and unlock significant opportunities we see across the business. As a reminder, our strategy is centered on four key priorities: optimizing our network, strengthening our commercial offering, advancing our technology capabilities, and driving financial value creation. Collectively, these initiatives are intended to strengthen our market position, improve long-term profitability, and create durable value for all stakeholders. So, beginning with the first pillar of our framework, our network. While our status as a standalone public company is new, the strengths that underpin our business are not.

[John Smith, President and CEO at FedEx Freight]

We enter this next chapter as the largest LTL carrier in North America, supported by the industry's fastest published transit times and most dense network. We also have a highly experienced workforce and a proven operating model built over decades. Since becoming an independent company, our operations teams have been executing with a renewed focus on high-quality, efficient, and profitable service. One area where the focus is particularly evident is claims performance. As I noted earlier, we have made strong progress on improving our claims ratio. Since 2022, our claims ratio and claims filing frequency have each improved by approximately 20 basis points, reaching record performance levels of 0.43% and 0.27% respectively. These improvements reflect continued gains in freight handling and operational execution, particularly when you consider the high value and mission-critical freight our customers entrust to us every day.

[John Smith, President and CEO at FedEx Freight]

Importantly, our claims metrics are not adjusted, providing a transparent view of the quality, consistency and reliability of our service offering. Additionally, we continue to deliver strong service performance, achieving 98% pickup reliability and on-time service. These results reflect disciplined operational execution across the network and reinforce our commitment to delivering the dependable experience that our customers expect from us. While we're pleased with these outcomes, we recognize there is more work to be done and see additional opportunity to further strengthen our performance over time. Another area of focus has been driving network efficiency. During the quarter, cube utilization improved more than 3% YoY, reflecting our continued progress with improving asset productivity. A key enabler of this effort is our Dimension in Motion technology, which captures dimensional data for more than 90% of the freight moving through our network.

[John Smith, President and CEO at FedEx Freight]

This capability allows us to manage operations not only based on weight, but also on capacity within our trailers. And as I'll touch on shortly, our technology modernization journey is embedding a more data-driven approach to all aspects of our operations, helping us make smarter productivity and capacity decisions across the business, and ultimately unlock even greater network efficiency. The second pillar of our framework is delivering a leading commercial offering, and this is an area where we're increasingly encouraged by the opportunities ahead now that we have a full control of our strategy. One of the most meaningful indicators of progress in this area is customer retention. During our first four months as a standalone company, we improved monthly net revenue churn compared to 2025, both with and without fuel. That's a significant accomplishment, particularly given the scale and complexity of the separation.

[John Smith, President and CEO at FedEx Freight]

Our customers not only stayed with us through a complex transition, but did so at a higher rate, reflecting the strength of our service, network, and the actions we've taken to better serve their needs. While we saw pockets of early commercial momentum during the quarter, our priority was retaining customers, maintaining service levels, and successfully guiding customers through the separation. We view that effort as a necessary step and one that positions us well to pursue deeper penetration of attractive verticals and customer segments in the periods ahead. With the regional deployment of our sales organization now in place and greater control over our commercial strategy as a standalone company, we are increasingly focused on expanding in higher value customer segments where our network capabilities and unique offerings are especially differentiated. Another valuable marker for progress comes from the annual Mastio survey released earlier this month.

[John Smith, President and CEO at FedEx Freight]

While we still have work ahead of us, we are encouraged to see year-over-year improvement in 17 of the 28 attributes measured. In particular, we saw improvement in areas such as transit time consistency and competitiveness, billing accuracy, and trustworthiness. These results provide early external validation that our customer experience initiatives are gaining traction, and that the investments we're making are beginning to be recognized by our customers. What we find especially promising is that these improvements occurred during a period of significant change for our organization. The ability to maintain service levels, execute a successful separation, and make measurable progress in key customer metrics simultaneously speaks to the dedication of our nearly 40,000 team members. At the same time, we're approaching these results with an appropriate sense of urgency. So, I want to be clear: we view this year's Mastio results as an important benchmark, not a destination.

[John Smith, President and CEO at FedEx Freight]

The third pillar of our framework is advancing our technology capabilities. Our focus is deploying tools and solutions that improve the customer experience, enhance productivity, and generate measurable returns on investments. One example of that progress is invoice accuracy. Looking at the most recent complete and comparable period, we delivered a roughly 200-basis-point improvement in our first-time invoice accuracy over the prior-year period, driven primarily by process and structural simplification. Better invoice accuracy reduces friction, improves confidence in doing business with us, and lowers administrative cost and rework across the organization. We're also seeing encouraging results across our customer support function. First-call resolution significantly improved to 92%, meaning more customers having their issues resolved on the first interaction. This improvement has been driven by several actions, including enhanced agent readiness, simplified call routing, streamlined processes, improved tools, and our transition to a dedicated nearshore support model.

[John Smith, President and CEO at FedEx Freight]

As a standalone company, our teams are now focused on a much more targeted customer base across three countries rather than supporting a global network. This focus allows us to provide LTL-specific support, better align with our customers' operating schedules, and ultimately deliver a simpler and more responsive service experience. Looking ahead, we're equally excited about the opportunities technology creates across our operations. This month, we entered into a strategic alliance with Palantir, a leading provider of artificial intelligence and advanced analytics. This relationship is expected to expand our ability to leverage data and AI across our operations. Our goal is straightforward: significantly improve customer experience, make even better-informed decisions, further improve productivity, and enhance network efficiency. Importantly, working with proven technology leaders allows us to accelerate deployment while reducing development risk.

[John Smith, President and CEO at FedEx Freight]

Rather than building every capability internally, we're leveraging best-in-class platforms to speed up our modernization efforts and position FedEx Freight to capitalize on the rapid advancements occurring in AI and analytics. While we are still in the early stages of these initiatives, we believe these investments give us an opportunity not only to further modernize our technology stack, but to take meaningful steps forward in how we operate the business, serve our customers, and drive long-term productivity improvements. Our fourth pillar is financial value creation, where the benefits of our operational, commercial, and technology initiatives ultimately come together. To cover this, I'll turn the call over to Marshall, our Chief Financial Officer. He will discuss how these efforts are shaping our financial profile, review our quarterly performance in greater detail, and provide our outlook for the fourth quarter and beyond. So, Marshall, over to you.

[Marshall Witt, EVP and CFO at FedEx Freight]

Thank you, John, and good afternoon, everyone. The operational, commercial, and technology progress that John discussed today is not occurring in isolation. Our objective is to translate those initiatives into stronger financial performance, and ultimately greater long-term value for our shareholders. During the period, we generated $239 million of free cash flow, demonstrating the strong cash-generating capabilities of the business in our first four months as an independent company. This cash generation provides us with flexibility and a strong financial position and puts us on a path to begin deleveraging sooner than originally anticipated. And with cash generated by the business, we reduced debt by $100 million during the quarter, bringing our gross leverage ratio to 2.8x. This action reflects our disciplined approach to capital allocation and demonstrates our commitment to maintaining a strong balance sheet and investment-grade financial profile.

[Marshall Witt, EVP and CFO at FedEx Freight]

As a result, we remain firmly on track to achieve our goal of approximately 2.5x gross leverage within 12 months of the separation, as outlined at Investor Day in April. In addition, we continue to invest thoughtfully in our network and expect to complete the conversion of three service centers from leased to owned facilities in the coming days. These transactions will increase our ownership of strategic assets in important markets, which provides greater control over our network, and enhance our long-term operating flexibility, all while maintaining a disciplined approach to capital deployment. Looking ahead, we continue to build toward the introduction of a dividend and broader capital return framework in 2027, subject to board approval. We look forward to sharing more about our capital return priorities over time and how we intend to return cash to shareholders.

[Marshall Witt, EVP and CFO at FedEx Freight]

Now, before diving into the quarterly results, I'd like to make a few comments on the way we're presenting our performance. As you know, this is a unique period as we transition to a calendar year reporting cycle. The results we're discussing today include the month of June, plus the quarter ended September 30th, creating a one-time four-month transition period. To make comparisons easier, we've published both an 8-K and a stat book on our website that provide calendarized historical results, giving you a consistent view of our quarterly performance across 2024, 2025, and now 2026. We believe this provides a clear basis for evaluating the business going forward. Now, turning to the results. During our first four months as an independent company, and excluding the impact of fuel, our operating and financial performance was largely in line with the guidance and seasonality expectations we provided in June.

[Marshall Witt, EVP and CFO at FedEx Freight]

From a revenue perspective, we were encouraged by several underlying trends. Average daily shipments were down only 1% from the prior year, reflecting continued improvement in demand trends and keeping us on the trajectory we previously outlined. In addition, revenue per shipment increased more than 10% YoY, benefiting from sustained higher fuel prices and modest improvements in both weight per shipment and base yield, providing further evidence of a stabilizing pricing and operating environment. As a reminder, changes in diesel prices can have a meaningful impact on our reported financial results. In periods of rising fuel prices, our fuel surcharge mechanisms generally provide a benefit to earnings and revenue. Now, turning to adjusted operating income. Strong revenue growth was partially offset by two key factors. First, approximately $50 million related to performance-based compensation for our people, and second, nearly $30 million from ongoing transition services agreements.

[Marshall Witt, EVP and CFO at FedEx Freight]

Turning to our outlook for the rest of the year. Our view of the underlying business remains broadly consistent with the framework and expectations we established following the separation. That said, we are raising our expectations relative to the adjusted outlook issued on June 25th, reflecting solid performance over the last four months and a handful of tailwinds that I'll touch on next. For the fourth quarter, we expect revenue in the range of $2.3 billion-$2.37 billion, reflecting a year-over-year growth rate of 13% at the midpoint, and modestly above the expectations we provided in June due to the dynamic fuel environment and slightly higher volume. The majority of anticipated revenue growth is expected to come from yield, supported by sustained higher fuel prices, stronger pricing strategies, and focused sales efforts as a standalone company.

[Marshall Witt, EVP and CFO at FedEx Freight]

Taking this revenue outlook into account, we expect to generate between $185 million and $205 million of adjusted operating income during the fourth quarter of the calendar year, implying an adjusted operating margin of approximately 8.4% at the midpoint, both significantly above our expectations provided in June. Higher yield is expected to contribute approximately 425 basis points, driven largely by fuel and, to a lesser extent, early benefits from pricing improvements. We also anticipate a modest volume-related tailwind of approximately 25 basis points relative to prior year, keeping us on track to finish the year slightly higher. These gains are expected to be partially offset by several factors. First, we expect an approximate 270-basis-point headwind related to performance-based compensation for our people. And second, we anticipate an approximately 85-basis-point headwind from ongoing transition services agreements.

[Marshall Witt, EVP and CFO at FedEx Freight]

As we think about the trajectory of the business for calendar year 2027, it is important to recognize that we continue to work through several moving pieces associated with becoming an independent company during a dynamic period for the LTL industry. These include the fuel price and related demand environment, our exits of TSAs, the productivity and efficiency initiatives that John spoke about, and offset by acceleration of standalone costs to support the business after TSA exits. Taking these factors together, we currently expect both revenue growth and adjusted operating margins in 2027 to remain broadly consistent with the medium-term framework we outlined at Investor Day. That means that our 2027 results would contribute positively to our 4%-6% revenue CAGR and our 10%-12% adjusted operating income CAGR while remaining on track to achieve greater than $1 billion of free cash flow by 2029.

[Marshall Witt, EVP and CFO at FedEx Freight]

We are finishing the review of our 2027 business plan and intend to quantify in greater detail when we discuss our thoughts regarding 2027 in January. Now, let me turn it back to John for closing remarks, and then we will be happy to take your questions.

[John Smith, President and CEO at FedEx Freight]

Thanks, Marshall. As we conclude our first earnings call reporting our results as an independent company, I would like to take a moment to reflect on how far we have come in a relatively short period of time. Our strategy is not complicated. We are focused on delivering a superior customer experience, leveraging the scale and density of the industry's largest LTL network, and translating those advantages into stronger growth, enhanced margins, and attractive returns for shareholders. Since outlining that strategy, we have made modest but meaningful progress across our operational, commercial, and technology initiatives, and we believe the foundation we are building today positions us well for the future. At the same time, we recognize there is significant opportunity still ahead of us, and we are focused on building momentum and executing with speed and discipline. So, thank you to the employees of FedEx Freight for your continued dedication and hard work.

[John Smith, President and CEO at FedEx Freight]

We are excited about the opportunities ahead and remain confident that the best of FedEx Freight is yet to come. I want to thank you all for joining us today. Operator, please open the line for questions.

[Operator]

We will now begin the question-and-answer session. As a reminder, to ask a question, please click the raise hand icon at the bottom of your screen if attending via the webinar, or press star followed by five if dialing in by phone. Please also ensure your phone is unmuted locally when preparing to ask your question. We please ask you to limit yourselves to one question. We will wait one moment to allow the queue to form. Our first question will come from Brian Ossenbeck with JPMorgan. Your line is now unmuted.

[Brian Ossenbeck, Analyst at JPMorgan]

Hey, good evening. Thanks for taking the question. Maybe, just to touch on price and yield to start, I have a two-parter. Just to make sure Marshall understood we were talking about net yields going up 425 basis points in the fourth quarter. That sounded like it was mostly fuel. Wanted to make sure that was a net impact and not just top line. It seems like it is. Then, maybe, John, just the big picture on how you are pricing to the value of the service, which looks like it is improving now that we have got the historical data here. But if we look at slide six, it looks like yields have been on a downward trajectory and under pressure, ex-fuel, for a little while, and I do not think that is related to the weight per shipment.

[Brian Ossenbeck, Analyst at JPMorgan]

So, maybe give a little bit more context around that and why it should start to inflect more positively here. Thanks, guys.

[Marshall Witt, EVP and CFO at FedEx Freight]

Thanks, Brian. I will take the first part there. Brian, when you look at the chart that we put in the investor deck on the yield improvement, the majority of that is fuel related. We also have expectations that our weight per shipment will contribute to that, as well as base revenue, [inaudible], and weight growth. But the vast majority of that improvement is fuel related.

[John Smith, President and CEO at FedEx Freight]

And Brian, when you think about why we feel good about the trajectory and how we are going up from a yield perspective, it goes back to the LTL dedicated sales force. I want to remind everybody, as we were going through and coming up to the spin, a lot of the time and effort was based on cultivating and making sure that we kept the business that we did have. And now, we have transitioned into a hunting phase. The other piece, and we can talk more about it, is the verticals that we are going after that we have never really focused on from a sales perspective from an LTL freight company. We are excited about the opportunity that we have in those verticals.

[John Smith, President and CEO at FedEx Freight]

So, we feel like that now that we have repriced about 25% or so of our contracted business, we are already starting to see the progress from a yield perspective.

[Operator]

Our next question will come from Scott Group with Wolfe Research. Your line is now unmuted.

[Scott Group, Analyst at Wolfe Research]

Hey. Hey, thanks. Good evening. So, a couple things for you, Marshall. You raised the adjusted operating income and margin guidance but lowered the GAAP margin and EBIT guidance. What is going on there? Is there any sort of shifting of costs between GAAP and adjusted? And then, I just want to understand your comments about 2027 being sort of in line with the long-term framework of double-digit sort of operating income growth. I know that is not like a hard guide but just, like, what exactly you are trying to sort of say about that point? And can you just maybe, just so we are all on the same page, like, give us like a baseline based on the Q4 guide? Like what is the base operating income for calendar 2026, just so we can all work off that?

[Marshall Witt, EVP and CFO at FedEx Freight]

Sure.

[Scott Group, Analyst at Wolfe Research]

Thank you.

[Marshall Witt, EVP and CFO at FedEx Freight]

No problem. I will try my best to address those. In terms of the first question on adjusted OI to GAAP, the primary difference there is that we saw more IT-related expense that was not forecasted. So, there is a forecast precision piece to that that widened that gap. Also, we had some additional acceleration of IT costs to accelerate our exiting of the TSAs. The combination of those leads to that difference and that widening of margin or op income between non-GAAP and GAAP. In regards to the question you have on 2027 and my prepared remarks there, let me just give you a little bit of color on what we were thinking there. Currently, as I said, we do expect revenue growth and adjusted op margins in 2027 to remain broadly consistent with our medium-term framework that we did lay out at Investor Day.

[Marshall Witt, EVP and CFO at FedEx Freight]

So, what does that mean? It means that we think 2027 will positively contribute towards reaching our medium-term guide that we gave, which is that 2029 perspective. We think there is going to be stronger operating leverage supported by continued pricing discipline and business mix. I think that is important with the leaning in of our highly efficient, dedicated local sales teams. We think that business mix of expanding the small medium space, which currently we are under-indexed on, will continue to yield good results in terms of yield improvement and also operating margin improvement. Quite a bit of productivity assumptions are in place, touching on some of the things John mentioned around the investments we are making there. And then, the overall improvement in growing and leveraging the improved customer experience and enhancements with that and the stickiness and benefits that will come from that.

[Marshall Witt, EVP and CFO at FedEx Freight]

So, one of the things we did say as we were giving our medium-term guide that you probably remember me saying, is that we have an assumption of a fall-through rate of roughly 30%. We expect right now that we're going to be at or slightly better than that in 2027. So, hopefully, that gives you a little bit of sense of where we're at there. And finally, just baseline, you think about Q4 guide, and it's difficult to remove fuel from the equation because it just has so much interplay with the entire P&L that it's really difficult to isolate that and look at overall performance. But what we can say is that the momentum that we experienced in quarter three, we expect to actually see that expand in quarter four, which means continued growth in volume, continued profitable growth in volume, and an expansion of revenue per hundredweight without fuel.

[Operator]

Our next question will come from Ken Hoexter with Bank of America. Your line is now unmuted.

[Ken Hoexter, Analyst at Bank of America]

Bless you. John and Marshall and team, welcome to the public markets. Thanks for taking the questions here at the start of your public life. John, I think in the prepared remarks, you mentioned some headwind on volumes at flat tonnage, slight decline in shipments per day. If you repriced 25% of the business and now there's still more to go, maybe talk about your view on what happens to volumes here. A lot of noise on fuel. I don't know, Marshall, if you want to toss in the thoughts on profitability of fuel and normalized pricing. Thanks.

[John Smith, President and CEO at FedEx Freight]

Well, Ken, I'll start it out. Again, I'll go back to why we feel good about our momentum from an ADS perspective. When we talk about the LTL sales force that we have out there, and when we think about all of the opportunities that we talked about in the verticals that we really haven't sold over the years, and as we get into this, we're already starting to see traction in some of these verticals. We're also seeing new business, and even though we're four months into the hunting phase, we feel really good about the opportunity to continue the momentum that we started building these first four months into the fourth quarter and beyond. With that, I'll turn it over to Marshall.

[Marshall Witt, EVP and CFO at FedEx Freight]

Just one thing before I jump on the response to the last question you had there, Ken. It's important to note that our network is the best and the biggest in North America, and we're seeing quite a bit of traction and interest in what that means and can do for customers that are leveraging their supply chain and utilizing the backbone of our network to improve what they do for their customers. We think that we can actually see not only yield growth, but volume that comes with it. As you've heard us say, we are about generating profitable growth, and right now, that medium-term thought is that's going to be a yield-based growth expectation. The volume's going to come with it. So, we're not banking on significant volume to play in the equation to get where we need to go.

[Marshall Witt, EVP and CFO at FedEx Freight]

But we're starting to see green shoots of customer wins, where they're bringing in a significant amount of their supplier base into our portfolio. And with that does come potential incremental ADS. To your question around fuel and its profitability, again, really difficult to try to separate that. We did call out in our prepared remarks, so you can see in the investor deck, that we're really pleased to be able to pass back to our workers and our hourly workers, about 95% of our variable cost increase, driven primarily by this higher fuel, is being passed and returned back to our employees. We think that's really important because you think about the overall market today, the capacity constraints, the ability to retain and attract and grow our employees, and having this be one reason that allows them to continue to be recognized for the work they're doing.

[Marshall Witt, EVP and CFO at FedEx Freight]

Then, to also piggyback that with what John said, the ESPP program is fantastic. Having over 14,000 employees sign up, that's 40% of our workforce. Having employees that actually are owners of the company, to us, is just a great combination for the organization.

[Operator]

Our next question will come from David Vernon with Bernstein. Your line is now unmuted.

[David Vernon, Analyst at Bernstein]

Hey, good morning. Or hey, good afternoon, guys. Thanks for taking the question. So, John, I appreciate the commentary around the strong pricing renewals, but when we look at the numbers kind of ex-fuel, revenue per hundredweight only increased like 40 basis points or so. When you think about what's going on underlying there, either weight or mix, when do you think the strong renewals you're seeing in the field are going to show up actually in the reported results?

[John Smith, President and CEO at FedEx Freight]

Well, thanks for the question, David. When you think about the timing, and I will go back, we are four months into this thing after the June 1 spin, and again, we are talking about the opportunities that we have in these verticals like retail, technology, industrial, aerospace, automotive, and data center-related businesses, that is where we feel like that we are just getting our toe in the door and starting to penetrate these verticals that we told you we were going to go after. Also, I think what is very important, too, is the small and medium business, which is our most profitable group that we haul. We are under-penetrated there, and we feel like we have got a lot of opportunity there as well.

[John Smith, President and CEO at FedEx Freight]

So, I feel like we have built some momentum in the short amount of time in the third quarter, but we will see that continue to improve as we go through the fourth and into 2027.

[Marshall Witt, EVP and CFO at FedEx Freight]

And David, I would just highlight to you on page six of our investor deck, there is a really good slide on the right-hand side that shows, I will call it the demise of where we had been from a yield perspective from 2024 through 2026. There is this slow decline of yield. So, it took a while for us to lose it. It is going to take a while for us to gain it. We are back into positive ground. It just will take some time to get that back. The other thing that I will just touch on that John mentioned is our GRI that is coming out in January. There is something a little bit different this year, and that is that we have got a sales team that is embedded within the regions.

[Marshall Witt, EVP and CFO at FedEx Freight]

And a lot of times the stickiness of GRI is when you have that interaction with the customer and the sales rep that begins that ability to have a conversation. We understand that the GRI does not completely stick, and kind of you lose traction over the period of months. But having that stickiness and ability to use that sales relationship to allow there to be a conversation to hold some of that yield for longer periods of time, I think is going to be a benefit and does help further aid to our confidence in yield growth in 2027.

[Operator]

Our next question will come from Stephanie Moore with Jefferies. Your line is now unmuted.

[Stephanie Moore, Analyst at Jefferies]

Hi, good afternoon. Thank you. Maybe, you could talk a little bit about the early success you are seeing from the new sales force and the more targeted vertical strategy. Are there any particular verticals where you are seeing the strongest traction? An update there would be great. Thank you.

[John Smith, President and CEO at FedEx Freight]

Stephanie, I will start and let Marshall clean me up here. When you think about some of the verticals where we see some improvement, one of them is in the aerospace. We have landed a few new accounts as well as grown some of the existing accounts, and we are up through the first four months, about 3%. That is one example. We are seeing movement in the food, we are seeing movement in some of the technology. Probably the one that we have seen the most success in is the retail space, and we continue to grow that. So, we feel pretty good about our plan and how we are going after and attacking these verticals. So, more to come, and I think you will see more progress as we move forward on our next quarter and into 2027.

[Operator]

Our next question will come from Bruce Chan with Stifel. Your line is now unmuted.

[Matt Milask, Analyst at Stifel]

Hey, gentlemen, this is Matt Milask on for Bruce. Congrats and thanks for taking the question. With regards to PT, can you remind us what percent of total miles that represents, maybe specifically rail? And as you look, as a standalone network now, maybe what is the opportunity to sort of improve rail utilization density and continue insourcing, and maybe how that might translate into the 350 basis points of medium-term OR improvement that you have outlined over the next couple of years? Thanks.

[Marshall Witt, EVP and CFO at FedEx Freight]

Thanks, Matt, for the question. Let me cover that a couple of different ways. First, we just filed our Q as well, and in there, you will see a purchased transportation line, about $235 million for the quarter. Let me just break that down for you. The headline is around 25% of that is our classic third-party motor, third-party PT that we are focusing on. But I want to give you the other elements of that, just give an appreciation for the other portions and pieces. As you know, we have a significant rail within our network primarily to complement the economy product. That represents about 35% of that total PT spin. We have a unit called Custom Critical. They are a brokerage-based business in the cold chain and also white glove service. That is about 30% of the total PT.

[Marshall Witt, EVP and CFO at FedEx Freight]

Then, we also have an international business in Mexico and Canada that is about 10%. So, stepping back and looking at our total line haul miles, our line haul cost, and looking at where we have come from over the last five years, third-party PT motor was around 11% five years ago. It is now down to 7%. So, back to your comment about where we are going to see some of this overall improvement, we expect that better balance and less reliance on third-party PT will aid us in that momentum to expand OR or operating margin. The other thing, too, that we have done quite well is we have done a really good job of balancing and being more efficient on our network. Just to remind everyone, you have PT in place to basically complete that lap or complete that return back on an imbalanced lane.

[Marshall Witt, EVP and CFO at FedEx Freight]

The more we can balance our network, the better off we are. That is the purpose for it. I will leave you with, you think about PT for that 25% as a percentage of total revenue, it is 2.2% of revenue. It is a pretty low number if you just think about PT expense third-party motor relative to total revenue.

[Operator]

Our next question will come from Bascome Majors with Stephens. Your line is now unmuted.

[Bascome Majors, Analyst at Stephens]

Thanks for taking my question. Marshall, as we think about the transition off the TSA into sort of your long-term cost structure, you framed the TSAs in absolute terms prior as $9 million, $9.5 million per month. Is there a way we can talk about when that starts to fall more materially and just a worst-case landing of what the net replacement cost would look like just to help people frame that in more precise terms?

[Marshall Witt, EVP and CFO at FedEx Freight]

Sure. Yeah. If we think about where we had started the stub period, we had about $9 million, $9.5 million per month in the assumptions. That has come down to about $7 million per month. It is a combination of some real reduction in TSA costs as we have exited early. Bascome, there is a little bit of a movement between, we will call it GAAP and non-GAAP on some of the pro fees associated with the TSA. Then, we do expect that that $7-ish million per month will play through into the first half of 2027. A lot of the TSAs that are in place, those dollars do not stop in terms of us funding it until the complete service is completed and we are transitioned off of that.

[Marshall Witt, EVP and CFO at FedEx Freight]

Then, just to the broader question you have on, like, where does that leave us in terms of overall expectations of replacement costs, standalone costs? It goes back to the comment I made a little bit ago about just where do we see 2027 playing out. We certainly believe that there is going to be continued scale in our business and our people and our technology and capabilities that will allow us to continue to drive more productivity improvements, enhance the customer experience, and generate efficiency gains. So, even though that is a discrete comment about TSA, the collective outcomes, we are very positive about and think we are going to do quite well in 2027.

[Operator]

Our next question will come from Jeffrey Kauffman with Citizens Bank. Your line is now unmuted.

[Jeffrey Kauffman, Analyst at Citizens Bank]

Thank you very much. Thank you. First of all, congratulations on your first quarter as a standalone. I wanted to dig a little bit deeper into strategic alternatives that you were mentioning earlier. What do you need to see before you believe yourselves or the board are ready to recommend alternative uses of free cash? Then, could you just help us understand priority dividend versus strategic, versus a share repo? You said during 2027 you would consider it. Obviously, that is not a promise, but what do you need to see before you think you are ready to move to that? Then, what would your priorities be once that is on the table?

[Marshall Witt, EVP and CFO at FedEx Freight]

Yeah. So good question, appreciate it. For us, first and foremost, what we shared at Investor Day, and it still is what is number one priority, is reinvesting high return, organic growth opportunities, which is back in the business. Jeffrey, we have substantial return opportunities that are embedded within our strategy, which is doing what we are doing today, which is improving that customer experience, building platforms that are scalable, leaning on AI technology, looking at operations and using, call it off-the-shelf software and platforms enable us to quickly accelerate operational initiatives in P&D, line haul, and dock that are going to be important for us to achieve our outcomes. So, that remains number one. We certainly are mindful of our outstanding debt. We started the spin with $4.3 billion of debt. We did have a very good four-month quarter in regards to cash flow generation.

[Marshall Witt, EVP and CFO at FedEx Freight]

Very excited and happy about how the organization has produced such tremendous cash flow so early in our spin-off. So, paying down our debt early was another feather in the cap of the organization and getting that leverage ratio down a little bit lower than what we had anticipated. Then, finally, turning to where we want to be in terms of how do we return our capital back to our shareholders in a thoughtful way. In my prepared remarks, we expect to come out in January to announce, we will call it a formal capitalization or a capital allocation program with the classic four pillars. We will at that point address the dividend and see what that should represent. And initially, our thoughts on share repurchase is that we want it to be anti-dilutive or basically offset the shares that are issued. That is kind of our going-in strategy.

[Marshall Witt, EVP and CFO at FedEx Freight]

Clearly, if we generate incremental free cash flow, we will look at other means and mechanisms, and one of them could be further acceleration of share repurchases. But for the time being, that falls a little bit further down in the priority list.

[Operator]

Our next question will come from Jordan Alliger with Goldman Sachs. Your line is now unmuted.

[Jordan Alliger, Analyst at Goldman Sachs]

Yeah. Hi, afternoon. Hello. So, I just wanted to come back to the technology front again. Can you maybe talk to how smooth the transition has been going now that you have your own sort of tech stack, and maybe sort of share some of what may be coming next from a productivity standpoint? Then, I just wanted to make sure, I might have missed something in terms of when Marshall was talking about 2027 and consistent with the medium-term outlook. Did you say something about 10%-12% EBIT? I do not know if you were referring to EBIT margin direction or anyway, those are the questions. Thanks.

[Marshall Witt, EVP and CFO at FedEx Freight]

Yeah, I will take that one first. That is exactly right. OI is what we are referencing. In our medium-term guide, we said, hey, we expect OI growth to be 10%-12% on a CAGR basis. John?

[John Smith, President and CEO at FedEx Freight]

Thanks for the question. From a technology perspective, we mentioned the relationship with Palantir and what we are doing from a platform-based perspective in order to modernize our legacy operating systems. We believe they will help us improve the speed and quality of the decision-making, increase network efficiency, enhance the customer experience. With Palantir, we will focus on leveraging compute resources and enabling faster decisions across our line haul operations, which ultimately accelerate the realization of the value. We aim to combine our proprietary operational expertise and secret sauce and our business logic with Palantir's leading AI and their analytics platform. The relationship is really exciting for us, and I want to reemphasize that that is going to create speed to value. That is very important for us. That is why we mentioned that we are not going to build everything.

[John Smith, President and CEO at FedEx Freight]

We are going to utilize what is already out there and create that speed to drive that value quicker. So, we feel really good about where we are at from a technology perspective going forward. And always remember, we are still working on getting off the TSAs as well. So, we are balancing taking the TSAs down as well as building new. We are excited about that.

[Operator]

Our next question will come from Ravi Shanker with Morgan Stanley. Your line is now unmuted.

[Ravi Shanker, Analyst at Morgan Stanley]

Great. Thanks, everyone. I know there's been a few questions on the yield improvement and the pricing of the new contracts, but just on the 25% that have been repriced so far, do you have a sense of what that contractual renewal rate looks like for the formerly unbundled accounts versus accounts that were not previously unbundled?

[Marshall Witt, EVP and CFO at FedEx Freight]

I'll take that one. So, not segregating the, we'll call it the bundle and the unbundled, but if you look at that chart I had referenced on page six, which showed where we came from of that 4%-6% yield growth, that's our aspiration, is that when we renew these contracts, that's our ambition, is to get back to what I'll call peer average. So, ultimately, that will take a little bit of time, Ravi, but that is our expectation.

[Ravi Shanker, Analyst at Morgan Stanley]

Very good. Thank you.

[Operator]

This concludes our question-and-answer session. I will now hand the call back to John Smith for any closing comments.

[John Smith, President and CEO at FedEx Freight]

All right. Thank you and appreciate everybody's time today and participation in our first standalone call. I just want to reemphasize that we are gaining momentum, and the progress we're seeing increases our confidence in executing the strategy that we've laid out. Again, I want to thank our 40,000+ teammates that are making this happen, and I want to wish everybody a good day, and stay safe out there, and we'll see you at the next call. Thank you.

Participants

Executives

• Mari Rose, Head of Investor Relations
• John Smith, President and CEO
• Marshall Witt, EVP and CFO

Analysts

• Brian Ossenbeck, Analyst at JPMorgan
• Scott Group, Analyst at Wolfe Research
• Ken Hoexter, Analyst at Bank of America
• David Vernon, Analyst at Bernstein
• Stephanie Moore, Analyst at Jefferies
• Matt Milask, Analyst at Stifel
• Bascome Majors, Analyst at Stephens
• Jeffrey Kauffman, Analyst at Citizens Bank
• Jordan Alliger, Analyst at Goldman Sachs
• Ravi Shanker, Analyst at Morgan Stanley