FEDEX CORP Q2 FY2025 earnings call

• Separation of FedEx Freight: Decided to pursue full separation of FedEx Freight to unlock value for stockholders, with two independent public companies. The separation will enable enhanced focus and competitiveness. Key initiatives for FedEx Freight include expanding LTL sales force, enhancing pricing/invoicing system, improving network efficiencies, and LTL-focused automation.
• DRIVE Savings: Achieved $540 million in Q2 DRIVE savings, with sequential improvement. Progress in Europe includes revenue growth, implementation of common data platform, improved routing, and dimensional pricing, expected to deliver over $50 million operating income benefit in FY '25.
• Network 2.0 and Tricolor: Rollout of Network 2.0 continued, with 200 stations optimized to date, and plan to complete Canadian market integration early 2025. Tricolor strategy is improving international air network density and asset utilization for profitable growth.
• Memphis World Hub: New state-of-the-art sorting facility opened, improving employee experience, customer service, and hub efficiency.

FedEx Express Corporation: Achieved strong year-over-year results with adjusted operating profit up 13% on essentially flat revenue despite challenging demand and headwinds like U.S. Postal Service contract expiration and Cyber Week timing shift. FedEx Freight: Experienced weakness due to soft industrial economy, B2B volumes, and year-over-year comparisons. Consolidated revenue declined, and operating profit was down, with ~$30 million of the decline due to lapping gains from prior year sales of multiple facilities. Revenue contribution: FedEx Express is a key driver with its adjusted operating profit growth, while FedEx Freight faced pressure from market conditions.

• Revised FY '25 adjusted diluted EPS outlook to $19 to $20 from prior $20 to $21, due to revised revenue expectations and constraints from the global industrial economy.
• Anticipate sequential build in DRIVE savings in the second half of FY '25.
• Q3 expected to benefit from ramping DRIVE savings, improved top-line flow-through from Cyber Week timing, and revenue quality actions, but USPS headwind expected to increase in Q3 and lessen in Q4.
• Fourth quarter traditionally strongest earnings quarter, expected to continue despite one fewer operating day.

• Soft Industrial Economy: Affects B2B volumes, particularly impacting FedEx Freight and certain segments of FedEx Express.
• Competitive Pricing Environment: Pressures yields and margins, especially in the freight segment.
• U.S. Postal Service Contract Expiration: Impacted two months of the quarter, with continued headwinds expected, though cost removal efforts are underway.
• Customer Attrition During Separation: Potential for customers to be confused or see risk in the separation of FedEx and FedEx Freight businesses.

Q: Chris Wetherbee from Wells Fargo asked about guidance breakdown and cadence.

A: John Dietrich responded that the revised EPS outlook reflects revised revenue expectations, Q3 to benefit from ramping DRIVE savings and Cyber Week timing, USPS headwind to increase in Q3 but lessen in Q4, and DRIVE savings to build incrementally in Q3 and Q4.

Q: Ken Hoexter from Bank of America inquired about peak season and volume flow-through.

A: Brie Carere said December volumes are running ahead of forecast, peak surcharge capture up year-over-year, but back half top line outlook expects improvement in domestic volumes, with Q2 as trough for FedEx Freight and slight softening in Asia for international.

Q: Ari Rosa from Citigroup asked about separation transition and customer attrition.

A: Raj Subramaniam stated a separation management office led by Claude Russ is in place, 300 LTL specialists to be added, and commercial, operational, and technological agreements will ensure seamless transition and customer continuity.

Q: Jordan Alliger from Goldman Sachs asked about Network 2.0 progression.

A: Raj Subramaniam said Network 2.0 has optimized 200 stations, including 130 in Canada, plans to complete Canada integration early 2025, and expects to integrate 250 stations by end of FY '25.

Q: Daniel Imbro from Stephens Inc. asked about capital allocation and balance sheet.

A: John Dietrich said capital allocation remains focused on optimizing existing business, returning adjusted free cash flow to shareholders, with $1 billion share repurchases in Q2 and $500 million planned for second half, and post-separation capital allocation to be reviewed in coming months.

Q: Jason Seidl from TD Cowen asked about commercial agreements.

A: Brie Carere and John Dietrich responded that existing contracts will be honored, FedEx Freight benefits from association with FedEx, 75 sales reps for large accounts, and small customer strategy will be nuanced but commercial strategy is confident.

Q: Conor Cunningham from Melius Research asked about EPS guidance change and business dynamics.

A: John Dietrich explained revised outlook due to revenue expectations and industrial economy, Raj Subramaniam added that 60% of FEC revenue is B2B and 90% of LTL is B2B, showing impact of industrial production on earnings.

Q: Brian Ossenbeck from JPMorgan asked about price competition and revenue management.

A: Brie Carere said market is competitive, yields pressured due to economy and mix change, but team is disciplined on surcharges like peak and dimensional capabilities, contributing to revenue despite base rate pressure.

Q: Brandon Oglenski from Barclays asked about DRIVE and portfolio changes.

A: Raj Subramaniam stated DRIVE has evolved into how the company works, data-driven and rigorous, with $1.8 billion of DRIVE savings from new technologies, guiding execution and future performance.

Q: Bruce Chan from Stifel asked about USPS privatization impact.

A: Raj Subramaniam said will monitor developments closely, emphasizing package delivery business should not be subsidized by U.S. taxpayer.

Q: Jon Chappell from Evercore ISI asked about tariffs and network management.

A: Brie Carere said possible pull forward in December, team agile to respond, Raj Subramaniam added network's global reach and customer relationships enable quick adaptation.

Q: Scott Group from Wolfe Research asked about USPS headwind and LTL separation timeline.

A: John Dietrich said 18-month separation timeline is reasonable, USPS contract expiration impact on flight hours, Q3 to be impacted by full USPS headwind, with cost removal efforts ongoing.

Q: Tom Wadewitz from UBS asked about LTL volume focus and salespeople.

A: Brie Carere responded that they plan to play offense, invest in new salespeople, see opportunity in industrial mix and 3PL market, with FedEx Freight network having capacity to fill, indicating more volume-focused approach.

Q: David Vernon from Bernstein asked about Network 2.0 volume touch and timeline.

A: Raj Subramaniam said 250 stations integrated by end of FY '25, with big lift in FY '26 and FY '27 for Network 2.0 integration in major metros.