FedEx Aktie

Good day, and welcome to the FedEx Fourth Quarter and Fiscal 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to FedEx Vice President of Investor Relations, Jenny Hollander.

Good afternoon, and welcome to FedEx Corporation's Fourth Quarter Earnings Conference Call. The fourth quarter earnings release and stat book are on our website at investors.fedex.com. This call and the accompanying slides are being streamed from our website. Today's earnings release includes segment results for FedEx Freight given the separation occurred on June 1, and after Q4 FY '26 ended. Additionally, as a result of the spin-off, we will not cover FedEx Freight results in detail in our prepared remarks or Q&A session. FedEx Freight will host a separate earnings call on June 25.

During our Q&A session, callers will be limited to 1 question to allow us to accommodate all those who would like to participate. 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 investors.fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us for prepared remarks on the call today are Raj Subramaniam, President and CEO; Brie Carere, Executive Vice President and Chief Customer Officer; and Claude Russ, Enterprise Vice President and Interim CFO.

Now I will turn the call over to Raj.

Thank you, Jeni, and a heartfelt thank you to Team FedEx for a very strong finish to FY '26. And a year of tremendous value creation. Each quarter of this fiscal year, we delivered on our financial commitments while supporting our customers with excellence. Our results demonstrate that we are growing revenue in the most premium segments of the global economy. As trade patterns evolve, we flex our network to keep supply chains moving.

Our network transformation via Network 2, Tricolor and opportunities in Europe is driving better density and efficiency. This progress, combined with a sharp focus on structural cost reduction enabled us to exceed the $1 billion transformation-related savings target that we shared at the start of the fiscal year. And our data and technology advantage is helping us win new business, improve the customer experience and create new value.

The momentum you're seeing across our business is proof that our strategy is working. It's translating to favorable financial outcomes, including very strong free cash flow and FY '26 results that far exceeded our initial FY '26 outlook. Our results also surpassed the high end of the revised outlook range we provided in March.

Additionally, we completed the spin-off of FedEx Freight on June 1, positioning both companies for success as separate focused industry leaders. I want to thank the teams that executed the spin-related work to achieve this milestone, especially given how well we also maintained focus on our day-to-day core operations. I'm confident FedEx Freight is extremely well positioned as an independent company, and I wish John Smith and the freight team the very best.

Now turning to our full year consolidated results on a year-over-year basis. We grew both revenue and adjusted operating income by 8%, with significant adjusted operating income growth at Federal Express Corporation, or FEC, partially offset by a decline at FedEx Freight. At FEC, we grew full year revenue by 9% and adjusted operating income by 17%. With 60 basis points of year-over-year adjusted margin expansion, we delivered a 7.7% adjusted operating margin, the highest margin rate in 4 years, reflecting the structural improvements we have made to the business.

What also stands out is that we achieved these results despite several significant headwinds on particularly global trade policy changes and the grounding of our MD-11 aircraft fleet. We began safely returning the MD-11s to service last month. working in lockstep with Boeing, the FAA and the NTSB. I appreciate the efforts of our flight operations, technical operations and airline safety teams whose work enabled 4 MD-11s to resume flight to date. We expect to have the full fleet back in service for peak.

In Q4, on a consolidated basis, we grew revenue 13% and adjusted operating income 3% led by FEC and partially offset as expected by a decline in adjusted operating income at Freight. At FEC, revenue increased 14%, driven by yield and volume strength across almost all of our services. This demonstrates our deliberate strategy to grow in the higher-yielding segments of the market. Q4 adjusted operating income at FEC increased 13%. The revenue strength I just mentioned offset the impact of higher fuel costs and variable compensation.

Against this backdrop, today, we are initiating an outlook for calendar year 2026 as we transition to a December 31 fiscal year-end. Based on our current assumptions, we expect calendar year 2026 adjusted earnings from continuing operations to be $16.90 to $18.10 per diluted share. This range implies 20% adjusted EPS growth in the June through December transition year, highlighting the momentum in our business.

We remain firmly on track to achieve our Investor Day commitments for 2029 with clear proof points in the quarter. B2B services drove the majority of our quarterly revenue growth supporting high profit flow-through. I'm especially encouraged by our progress and pipelines in the key health care, automotive, aerospace and data center verticals. Brie will share highlights shortly.

We successfully advanced Network 2.0 in Q4. By the end of this month, about 45% of eligible volume will flow through nearly 490 network to optimize stations, rising to 65% before peak. At that point, as we have done in the past 2 years, we will pause implementation until early 2027, helping us set up for a very strong end of this calendar year and the full $2 billion by the end of CY '27.

In Europe, we achieved our 12th consecutive quarter of international revenue share gains, driven by our strong value proposition and improving service levels. Leveraging our U.S. surface playbook in Europe, we recently announced a strategic investment to expand our technologically advanced and strategically located road hub in Duiven, Netherlands, supporting continued growth in the premium international parcel and freight markets. We believe Europe remains our largest international profit improvement opportunity. and our transformation plans remain on track.

Across the globe, supported by our Tricolor strategy, we continue to see strong international air freight growth as we further increased our share in this $90 billion global market. You've heard me speak about the strength of our data on transporting more than $2 trillion worth of goods each year. and delivering nearly 18 million packages each business day. We have embedded AI into our drive process, enhancing the rigor with which we work.

Our data and how we deploy it is helping to drive significant innovation across the company, driving differentiation and improving the customer experience. Our ability to leverage this data has earned us a distinction of being named to Fast Company's most innovative companies list for 2026 or our efforts to reshape global trade simplify the cross-border experience and strengthen economic resilience for businesses and consumers worldwide.

Before I close, I want to acknowledge the agreement we recently agreed with our pilots on a new contract. This agreement marks a pivotal step forward, uniting our team behind a shared strategy for success as we continue to modernize our global operations and transform the business. Overall, our FY '26 results demonstrate the power of our unique global industrial network strong value proposition and an outstanding execution of our profitable growth strategy, which is translating to strong free cash flow and value creation. I have never been more confident on our path ahead, and I'm excited to build on this momentum in the weeks and months ahead.

Now over to Brie.

Thank you, Raj. I want to commend Team FedEx for a year of outstanding execution on our commercial strategy, including a very strong finish to fiscal year '26. With a focus on premium B2B vertical and high-value B2C, we grew volume and yield every quarter of fiscal year '26. As a result, profitably increased revenue by nearly $7 million compared to last year, a truly impressive achievement.

We have continued to help our customers navigate a very dynamic and complex environment. the implementation of global trade policy changes, geopolitical rest in the Middle East and the IEEPA refund process. In April, we began to file claims with CBP on behalf of our customers. And beginning in August, we will be part of these refunds through to our customers.

Turning to our Q4 results. FEC revenue was up 14% and supported by yield strength across all services and volume growth aligned with our commercial strategy. This growth includes a 5 percentage point benefit from fuel price-driven surcharge revenue. As a reminder, fuel was not a material driver of our adjusted operating income given the higher expense.

In Q4, we grew U.S. domestic volume by 3% year-over-year. led by ground commercial and home delivery strength. Aligned with our deliberate strategy to focus on parts of the market that value our competitive differentiation, ground economy volume declined about 5% a trend we expect to continue for the remainder of CY '26. As anticipated, U.S. priority volume continued to grow, with a sequential deceleration in the growth rate as we lap the onboarding of new health care business in Q4 of fiscal year '25.

International export package volumes were up for the second consecutive quarter, growing 5% year-over-year. We supported changing trade patterns by flexing our network enabling double-digit international export revenue growth on the Asia-Europe plane, within Asia and U.S. Outbound line in Q4. Strength in Asia was a key driver of our international priority volume. A 9% decline in international domestic volume is part of our European improvement strategy where we are intentionally focused on growing higher-yielding cross-border volume. We continue to win share in the international export freight market enabled by Tricolor with average daily pounds up 12% year-over-year.

FEC package yield increased 11% in Q4. While fuel was a meaningful driver base supported by our value proposition and service remain very healthy. In fact, the significant majority of our incremental profit from yield was due to base price increases, demonstrating our disciplined approach to revenue quality. Within our U.S. domestic services, we grew yield 10%, driven by fuel surcharges, higher base rates and favorable service mix. International export package yield increased 10% and driven by fuel surcharges, higher weight per shipment due to mix shift and favorable currency movements.

We are very encouraged by our progress and retention rates across key high-value B2B and specialized B2C vertical. With our fall and medium business customers, fiscal year '26 was a year of remarkable strength. Our seamless digitally enabled experiences complement our loyalty program and physical network well. About 40% of our U.S. micro and small business volume is tendered at retail, providing a frictionless touch point. And the vast majority of our small and medium revenue comes from direct shipper relationship on FedEx contracts, not through digital resellers so we can truly demonstrate our differentiation. This approach supports both revenue quality and customer retention.

As part of our continued focus on the $80 billion plus health care transportation market, earlier this month, we launched FedEx Life Sciences, a dedicated organization supporting the increasingly complex movement of health care shipments and strengthening our end-to-end pharma solutions. While the formal launch of this organization is new, our capabilities are backed by years of strategic investment in health care and life sciences.

This includes specialized life science centers across Europe and APAC, dedicated quality resources, and the development of global health care corridors connecting key markets. Our value proposition continues to expand, anchored by the recent launch of a temperature-controlled corridor connecting Ireland to our U.S. network. Exiting fiscal year '26 with nearly $10 billion in health care transportation revenue, I am confident our new suite of life sciences services will further strengthen our ability to complex time-critical and highly regulated health care supply chain.

The AI and data center space is an emerging and rapidly scaling growth engine for us, delivering double-digit revenue growth. Rather than a narrow vertical, this space represents a horizontal ecosystem. We are capturing demand across the entire value chain from traditional hyperscalers to the industrial and power infrastructure that support these massive build-out. What differentiates FedEx here is our unmatched responsiveness in our premium capabilities, leveraging network priority, near real-time motoring and white love handling.

We are getting very positive feedback from our customers on our agility. As a recent example, a major global technology customer had a last minute critical need to move multiple pallets of tech infrastructure to the United States. Through seamless cross-regional collaboration, we executed flawlessly. This example is not a one-off we are seeing these initial time-critical shipments convert quickly into larger repeatable revenue stream. Looking ahead, we believe continued enhancements to our value proposition and our global air freight portfolio will strengthen our competitive positioning across all our high-value B2B-centric vertical.

Let's now turn to our revenue outlook for 26 and using a CY '25 revenue baseline of approximately $82 billion. We assume current volume and yield trends continue, supporting revenue growth of approximately 11%, including approximately 3 percentage points for assumed fuel price-driven surcharge benefit. This equates to revenue growth of 10% in the June through December transition year. During that period, we expect broad-based growth across services with deceleration in the U.S. domestic growth rate as we lap last year's strength from new business onboarding.

We also expect a low single-digit volume decline within ground economy and high single-digit declines within international domestic services given our focus on higher-yielding parts of the market where customers deeply value the solutions that FedEx can deliver. We expect trends across our international export services to largely be in line with Q4.

Our fiscal year 2016 results demonstrate the strength and durability of our commercial strategy. Congratulations again to our team for delivering outstanding results across the entire globe, supporting our customers with innovation and reliability, growing in key high-value verticals and delivering profitable revenue growth. We believe our value proposition is industry-leading, and it will enable us to sustain this momentum as we continue supporting critical supply chains globally.

And now over to Claude.

Thanks, Brie. Our Q4 results reflect the consistent execution we have demonstrated all year. We took bold actions to manage capital spending, we executed our business plan to deliver strong adjusted operating income growth, and as a result, we delivered historic levels of adjusted free cash flow. These results demonstrate our momentum toward our calendar year '29 targets as we continue to unlock significant stockholder value.

On a consolidated basis in FY '26, we delivered $20.24 in adjusted earnings per share, growing adjusted earnings for 7 consecutive quarters. We achieved this while successfully navigating significant headwinds from the global trade environment, variable compensation, the rounding of our MD-11 fleet and lower FedEx Freight results. Consolidated adjusted operating income improved $491 million or 8% for the full year despite a nearly $400 million headwind from FedEx Freight results.

FEC posted higher FY '26 results year-over-year with adjusted operating income up $940 million on almost $7 billion in revenue growth. The strong flow-through to the bottom line demonstrates the powerful operating leverage in our business. In Q4, on a consolidated basis, we delivered $6.31 in adjusted EPS, above the high end of our outlook range, driven by FEC and strong commercial execution premium verticals that Brie mentioned paired with transformation-related savings enabled these results.

At FEC in Q4, adjusted operating income increased by $214 million or 13%. Our adjusted operating income performance was driven by base yield momentum across most services, increased U.S. and international export volume and continued structural cost reductions. These drivers were partially offset by operating expense increases, which included increased variable incentive compensation accruals and direct trade-related costs.

Our base yield growth was robust which, combined with sustained volume growth shows the underlying health of our financial results. While a price-driven increase in fuel surcharges drove higher revenue, it was not a material driver of our adjusted operating income for the quarter. FedEx Freight, Q4 adjusted operating income fell by $114 million, and adjusted operating margin declined 570 basis points. As we mentioned earlier, due to the June 1 spin-off, the FedEx Freight leadership team will provide additional commentary around their Q4 results during their earnings call on June 25.

Our fourth quarter results include a noncash impairment charge of $23 million related to our decision to permanently retire an additional 10 jet aircraft, including 5 MD-11s. Over the last 4 years, we have removed a net 34 jet aircraft from our fleet, which is an 8% reduction versus FY '22. These actions are aligned with our Tricolor and Network 2.0 strategies to drive improved efficiency and density across both our global air network and North American surface operations.

Moving to capital allocation. In FY '26, CapEx was $3.8 billion, $300 million below the outlook we provided in March. CapEx as a percentage of revenue was 4%, the lowest level since FedEx Corporation was formed. As a reminder, we target CY '29 capital intensity to remain at approximately 4% of revenue. This is a durable trend as we anticipate continuing to leverage our modernized network. Additionally, FY '26 was only the third fiscal year in our history, with OpEx was lower than depreciation and amortization, a result of our continued capital discipline and network optimization.

In FY '26, we achieved $4.7 billion in adjusted free cash flow. This Is up $800 million versus FY '25. This year's free cash flow represents nearly 100% conversion from adjusted net income, another monumental achievement. We are laser-focused on unlocking stockholder value through strong free cash flow generation. Our free cash flow growth supports our capital returns framework. We recently increased our dividend by 5% after adjusting for the FedEx Freight spin-off, making this the sixth consecutive annual dividend increase.

During the remainder of CY '26, we plan to repurchase up to $1 billion worth of shares opportunistically as we leverage continued balance sheet flexibility and free cash flow generation offset dilution from equity compensation as discussed at our Investor Day. As a reminder, we are now transitioning to a calendar year reporting cycle. Today, we will orient our forward-looking commentary to align with this new framework.

In CY '26, we expect CapEx to be approximately $3.9 billion. We anticipate contributing $475 million to our pension plan, which was 105% funded as of May 31. We expect robust levels of free cash flow for CY '26 and are fully committed to realizing our targeted $6 billion in adjusted free cash flow in CY '29. Going forward, we will continue a balanced approach to capital allocation across dividends, share repurchases, pension contributions and strategic growth investments.

Now I'll walk you through our expectations for CY '26, which includes the 5 months we've already reported as well as the June to December transition year. As Brie shared, we are currently planning consolidated CY '26 revenue growth to be approximately 11%, including about 3 percentage points assumed fuel price-driven surcharge benefit. We expect this outlook to be supported by continued momentum within base pricing and increased demand for premium B2B and high-value B2C services.

This translates to an adjusted EPS range of $16.90 to $18.10 with a midpoint of $17.50. We will finalize CY '25 adjusted EPS baseline by mid-August when we released an 8-K filing with our recasted and resegmented financials for CY '24 and CY '25. For preliminary comparison purposes, we assume a $15 CY '25 adjusted EPS baseline, which excludes FedEx Freight results. Our recasted financials, including the CY '25 baseline reflect continuing operations only. are burdened with stranded costs recently allocated from FEC to FedEx Freight for intercompany charges.

Our CY '26 adjusted operating income bridge shows the key year-over-year element embedded in our outlook for continuing operations. This bridge reflects adjusted operating income of $5.8 billion equivalent to $17.50 of adjusted EPS at the midpoint of our range. Our assumed CY '25 adjusted operating income starting point was $5 billion, which includes approximately $350 million of stranded costs. In this scenario, FEC volume-related revenue net of variable costs is expected to be a $600 million tailwind in CY '26. This is driven by a continuation of strong trends we have seen in the first 5 months of the year as our commercial team continues to capture in demand from the most premium verticals of the global economy.

With respect to FEC yield, we expect a $3.7 billion tailwind. This demonstrates our ongoing commitment to revenue quality and improved base pricing. Consistent with prior practice, the yield bar does not factor in revenue from the fuel price-driven surcharge benefit which we assume will be neutral to full year adjusted operating income results. It also does not factor in revenue and currency exchange rate expense.

Moving to anticipated headwinds. The base expenses, we assumed $2.6 billion to higher costs year-over-year related to higher wage and purchase transportation rates and other inflationary factors. This also incorporates ongoing structural cost reduction efforts, including savings for Network 2.0 transformation. Additionally, we expect variable compensation to be an $800 million headwind, reflecting our commitment to rewarding employees for their outstanding performance. In context, we have already incurred most of this expected CY '26 headwind in the first 5 months of the year. Only $100 million of this headwind is incremental in the remaining 7 months of CY '26.

We are also assuming a $200 million headwind from the ratification of our new pilot agreement and a $100 million benefit from the removal of stranded costs related to the spin-off of FedEx Freight. Against the $600 million base of costs that we previously allocated to Freight, we have conveyed approximately $250 million directly to FedEx Freight. As noted on the CY '26 bridge slide, we expect to remove about 30% of the remaining stranded costs this calendar year through transition services agreements and cost management.

Regarding the near term, we expect the revenue trends we saw in Q4 FY '26 and continue into the first 4 months of our June through December transition year, with U.S. domestic growth rate decelerating as we continue to lap last year's strong trends. Given the reporting calendar change, our next earnings release on October 28, will cover our June to September 2026 results.

In addition to shifting to a calendar year reporting cycle, we are also resegmenting our results to cover Express U.S. domestic, Express International and Corporate and Others. At the midpoint of our CY '26 outlook range, we expect our 7-month transition year consolidated adjusted operating income to be $3.8 billion, up 19% year-over-year. We expect the majority of this adjusted operating income fall in Q4, in line with our recent higher peak profitability trends.

We also anticipate strong performance in June based on current trends and note that June 29 effective date of the new pilot contract. We expect both U.S. domestic and international profit to improve year-over-year in the transition period. Transition year assumptions translate to an estimated $11.30 of adjusted EPS for the June through December '26 period, representing 20% year-over-year growth. We forecast our CY '26 average share count to approximate our Q4 FY '26 average share count.

In closing, our FY '26 results indicate that our strategy is working. We are on track to achieve our CY '29 targets. We plan to continue driving profitable growth through our superior value proposition while simultaneously lowering our cost to serve. With that, let's open it up for questions.

[Operator Instructions] Our first question today comes from Chris Wetherbee with Wells Fargo.

And appreciate that outlook for EPS so we can level set the numbers on a calendar basis. But I guess maybe the question is around the relative profitability. So obviously expecting a pretty decent acceleration in the sub 7-month period for the rest of the calendar year. Can you talk a little bit about sort of the cost that maybe were lingering in the last year, I guess, fiscal fourth quarter? And maybe how you see those sort of working their way out as we see that growth reaccelerate over the course of the next several months? Kind of just getting a sense of why the relative growth in fiscal fourth quarter was a little bit lower than what we're expecting to see over the coming several months.

Thanks, Chris, for that question. As we think about -- there are 2 things to think about here, and it's really the -- from a overall perspective, the variable compensation headwind we see in the fourth quarter of FY '26, that really dissipates. That becomes only a headwind of $100 million in the transition year, but you also have to really rethink about the seasonality. So overall, going forward, from a calendar year basis, that Q4 will be our strongest seasonal quarter.

And then in addition to that, just from an overall headwind perspective, we'll have fewer headwinds in that transition year. And you remember here is the ongoing base business, the momentum we have in that base business, both from a revenue growth and our ongoing cost management, we feel strong about that, and that's reflected in our 19% at the midpoint of the range of profit growth and 20% EPS growth.

The next question is from Tom Wadewitz with UBS.

I wanted to, I guess, get a sense of kind of how much FEC margin improvement are you looking at? And in kind of calendar year '26, kind of what's the base like, what's the improvement look like? And then I don't know if you have a thought on stranded costs, you said that's coming out partially in the calendar '26. Does that come out fully in '27? Or how do we think about kind of the remaining piece of the $600 million. So appreciate any thoughts on those, two.

Yes. I appreciate the question. First, from a margin perspective, we are confident that the margin in the transition period, both the calendar year and the transition period will improve year-over-year. will improve a little bit more year-over-year in the transition year than it does in the calendar year because of the variable comp headwinds in the first 5 months of the year, but we're confident in margin improvement during that period.

And then on the stranded cost piece, yes, we're confident that we will go in from that starting point of $600 million, we've already conveyed $250 million of that in the form of employees and vendor costs from a starting point perspective. And so the $350 million starting point in that CY '25 starting point, we're confident we'll get $100 million of that out during CY '26. And then I don't expect to be talking about stranded costs as CY '27. From an exit rate perspective of CY '27 is when we're confident we'll mitigate the remaining stranded costs.

The next question is from David Vernon with Bernstein.

So Claude, I just wanted to come back and make sure I understood the cadence here. So 11:30 from June to December. And as we think about that exit rate accelerating, is that just a function of the timing of the variable incentive comp? Or are we seeing an actual acceleration in the underlying results of the business? That's kind of the first part of the question. The second part of the question around a balanced approach to capital allocation, just given the outsized size of the cash balance right now, are you in the Board or is the management of the board having any conversations with the Board about maybe doing something a little bit less balance to kind of work some of that cash off?

I appreciate the question. I'll go first back to the question about the underlying momentum of the business is strong. And we're confident both on the revenue side and the expense side. Like I said originally on a seasonality perspective, we've got some nuances here. We're actually, if you think about it, June, when we report our results in October, it will include the month of June, which is the last month of the second quarter, it's very strong. It's got 22 operating days, 5 Mondays, the pilot contract will not have started yet. We expect very strong absolute performance in June.

Q3 will just traditionally will be our weakest quarter from an absolute basis just from a seasonality perspective. But from an underlying year-over-year growth perspective, we're confident in the momentum of the business driven by both the continued revenue momentum as well as the expense management.

To your question on capital allocation, it's a nice issue to have. We are committed to a balanced approach on capital allocation. This strong cash position does give us flexibility. As I said in my prepared remarks, we increased our dividend by 5% post spin, and we do plan to repurchase up to 1 billion shares in the remainder of CY '26. A reminder, we will also use a portion of this cash to fund our investment in InPost, which we expect to close during CY '26. And as we've said previously, we're committed to using the dividend from the freight spinoff in a manner consistent with preserving the tax-free nature of the transaction and maintaining a leverage-neutral balance sheet position.

So I'm not going to give you kind of the detailed playbook beyond CY '26, but I am excited about the balanced approach as well as bringing the same level of discipline and rigor to the balance sheet and shareholder returns that we've been delivering operationally and on our P&L. Our goal will be to deploy cash to enhance shareholder returns.

The next question is from Jordan Alliger with Goldman Sachs.

A question for you, the commercial B2B business picked up quite a bit. I think it was up 3.5%. I'm just curious if -- how much of that was sort of tied to macro stuff versus the verticals you're targeting? And I know you touched on AI was some portion of it sort of AI-driven CapEx spending having an impact in that segment. .

Jordan, it's Brie. Thank you for the question. You broke up a bit, but I think I got the gist of it, which is essentially what is driving the B2B momentum in the business. I think, first and foremost, it's profitable market share. This has been several years in the making where we've been repivoting our commercial team to focus on the core B2B and really getting back to our roots as the industrial heartbeat of frankly, the global economy. In the quarter, B2B was the majority of our revenue growth. And actually, it was the brightest quarter within the fiscal year from a B2B perspective.

We actually saw improvement across all 4 of our key vertical B2B perspective. Yes, we did like to see some of the wins from an AI and a data center perspective, especially coming out of Asia. Our APAC team is just incredibly responsive and really building momentum there. But it was equally distributed across the base. of those verticals. And I will say that we did see some momentum outside of the 4Q verticals. I do think that there's a little bit of inventory buildup on restocking going on, but a phenomenal successful quarter. We're really proud of the team.

The next question is from Brandon Oglenski with Barclays.

I don't mean to be near-term focus here but just given all the changes in reporting structure, can you guys maybe help us understand how fuel impacted the quarter as well? And how you think about the fuel dynamic going forward, especially if there's any lead or lag in the surcharge? I know that's maybe reset every other week, but maybe you could speak to that. I appreciate it.

I appreciate the question. Like as you said, we feel very confident in kind of the structure of the fuel surcharge. It actually resets every week, not every other week. And so it's been a very effective tool as prices have gone up during fiscal -- the third and fourth quarter of fiscal '26 is acted exactly the way it was designed to act. And so overall, it did not have a material impact on our profit.

The increased revenue from that -- those higher prices was able to materially offset the increased expense that shows up both in our fuel expense line item as well as our purchased transportation line item also is higher because of the fuel from our purchased transportation provider. So overall, net-net, feel good about the overall impact and our ability to negate that impact, maybe turn it over to Brie from a demand perspective, but from an expense perspective, we're covered.

Yes. I think Claude, you covered it from a demand perspective, I was concerned a quarter ago that we maybe would see some demand destruction. That has not at all been the case. We're growing around the world, and we have seen no impact to demand because of the elevated fuel prices.

Let me just add one thing just on this fuel issue. If you've taken the fuel surcharge out, our margin would have been up year-over-year rather than down year-over-year.

The next question is from Jonathan Chappell with Evercore ISI.

Brie, you mentioned the exit rate from health care-related revenue being nearly $10 billion at this point. I understand that that's probably the most identifiable TAM and an area of focus for several years. To go back to that AI data center, is there any way to kind of replicate at least some broad-based number on what that market looks like today? And is that kind of a higher growth rate type business or vertical as you think about the coming years?

Yes. Great question. So a couple of things. Yes, we have started to size the total market, but I will tell you what we have found, and that's why I mentioned in my prepared remarks, is more of an ecosystem. You cannot identify customers -- well, you can, you've got the hyperscaler. But in addition to that, what we are seeing is broad-based industrial growth in support of the build-out of these data centers. I walked into what I thought was an automotive sales call and ended up being in data centers because this customer had actually pivoted an entire line to power generation for data centers.

And so it is a little bit hard to categorize and define what I can tell you is across both our industrial base and the AI based, it is growing. The growth rates are the highest in the all 4 of the verticals, I don't think entirely surprising. And we also see that from a commercial response perspective, our team is moving incredibly quickly. This is a market that is changing at a pace I've certainly never experienced, and I really do think this is the moment for FedEx to forge relationships that will benefit us certainly in the short term, but in many years to come.

The next question is from Scott Group with Wolfe Research.

Can you just give color on timing to sell the FedEx Freight stock? And just clarity, does the -- in the interim, does the guidance assume include equity earnings from FedEx Freight? And then just, Claude, on the bridge that you gave that was helpful, that $3.7 billion of yield, the $2.6 billion of costs, so call it $1.1 billion of net like price cost, what's been realized in the first 5 months of the year? I just want to understand if price/cost is getting better or worse, similar just as the year is progressing?

I appreciate the question. As we've said in our previous filings, we plan to monetize our stake in freight in a tax-efficient manner within 24 months of the spend as required by the IRS. So we continue to be on track for that, and that's all I can say on that right now.

To your question on the bridge, it really -- from an overall perspective, not a significant shift in the core business from a minimum perspective. In terms of the 5 months we've seen in the remaining 7 months pretty consistent, both on the revenue side and the expense side. Obviously, the timing of the headwinds is where there's a lot of noise, whether it be the pilot contract, even the variable comp. But from a core those first bars on that bridge of the volume, the yield and the base expense, pretty consistent trend across both the first 5 months and what we expect for the next 7 months.

The next question is from Brian Ossenbeck with JPMorgan.

Brie, maybe you can give us an update on utilization across the network? I know in the past, you said it's pretty tight, especially in the U.S., but the ground economy volumes actually to come down international domestic also down assuming that's in Europe. Are things still growing pretty tight as you go through Network 2.0? And then just maybe some broader comments on the competition as we expect some of those contracts you guys won during the disruption of the labor market a few years ago. I expect those will come back up a bit. So maybe some few thoughts on what you're seeing and expecting there as well.

Sure. Of course. Thanks, Brian. So I think here in the U.S. market, our network continues to run at very high utilization levels. I think it's really important, and I intentionally put the comments in FedEx on Economy in my prepared remarks because there was a perception that we were not focused. We are incredibly focused on B2B and high-value B2C. And so even with the decline, the small decline in FedEx ground economy will not the total volume is up and we will continue to optimize the network. So I feel really good about the position of the network here in the United States.

Again, in Europe, we have a very disciplined growth strategy. We continue to make market share 12 quarters in a row. We really like the momentum we have intra-Europe. And so we are trading domestic volume for intra-Europe volume, which moved yield and profitability, and we think it's the right strategy, and we are going to continue to optimize the network waters made significant changes in France with more to come. So we feel good about that.

From a competition perspective, as you all know, and actually, I think some of you asked me previously, if our renewal rate was too high. we run in the mid-90s from a renewal rate. I feel really confident about the partnerships we've built about our value proposition. And so when customers come to FedEx, they stay. They stay because they get to experience that value proposition. The speed helps their cart conversion, that your proof of delivery reduces their customer service calls. And I do believe that we have the best commercial support organization. So I am quite confident in our renewal rates.

And then I guess, finally, it's important to remember that it wasn't like 1 week that all these accounts came over. It was over a long period of time, and they do renew at different periods. And I guess, finally, we won't be that far off from the next contract period as well.

And I'll just jump in real quick. I forgot on Scott's question, you asked about the freight, how we're accounting for that. That is not included in our guidance. So on an ongoing basis, we will be required each quarter to mark that investment to fair value, and we don't have any assumptions built into our outlook for that.

The next question is from Richa Harnain with Deutsche Bank.

So I know this question has been asked a couple of times, but just to get some clarity. Pricing was very robust on a headline basis, up 11%. But you talked about how 5 percentage points of that was fuel to the implied ex fuel rate kept pace with last quarter's robust results. Maybe talk to us more about how much of that fuel dynamic weighed on margins.

Raj, you just said if it wasn't for fuel margins would be up year-over-year. I'd love to understand and get more details on how much more expansion we would have seen. Specifically, just trying to square incremental margins of only 8% on very robust mid-teens revenue growth. I know incremental comp was an issue -- incentive comp with an issue year-over-year, but FedEx had that last quarter, too, and incrementals were a bit higher.

Yes, I'll take that, and then Raj or Brie can add on. But start with variable comp is the biggest impact of that. But when you think about fuel, the higher fuel revenue does show up in the denominator, and so it has an impact. It was maybe 20 or so basis points in a huge impact, but it would have flipped to positive versus the negative it was. But from an absolute basis, variable comp was a bigger impact. But like I said, the key here is from a TY perspective, both the CY and a TY will be improving our margin and improving the margin at higher rates going forward in our TY is the momentum we're seeing in the business.

The next question is from Ken Hoexter with Bank of America.

Claude, getting a lot of air time here. So congrats. Can you dig into maybe free dig into international. You noted trends are in line in the balance of the year versus seeing acceleration. Can you talk opportunity there in terms of share gains? And maybe talk about margins on international versus domestic?

Ken, yes, happy to talk about international. I'll talk about the top line and then turn it over to Claude, who loves the airtime, to talk about margin. First and foremost, I got to give a huge shout out to our APAC team. As you can imagine, last year was a very tough year from them. They faced the largest headwind from the tariff environment and the de minimis. And we've now had 2 consecutive quarters of international volume growth, thanks to their determination. They have built incredible momentum, as I mentioned, in the data center and AI space, but also leaning into their industrial base out of APAC. It's been really nice to see.

That being said, we're growing around the world. We saw strong momentum from Asia to Europe. As I've mentioned, Europe is now in a run of 12 consecutive quarters of international market share growth. We also saw some really strong results from our U.S. export team. We've been really focused on push-pull and even saw some bright spots from Asia into Mexico. As the world has sort of diversified trade, our team has been incredibly responsive. I expect those trends to continue right through the TY. I don't see any slowing down from an international volume. And then, of course, the same is true from an airfreight perspective. It's a very large market, about $80 billion. We're still a relatively small player, but we've had tremendous response to our Tricolor strategy. And so I think that, that momentum will continue.

I'll let Claude talk about margins.

No, I appreciate it. As we think about the overall guidance that we've given you with both op profit and margin improving for the transition year pretty evenly split between international and domestic. And we'll obviously give you those details when we file our 8-K in mid-August, you'll have the recast financials and be able to build out the models from a comparison purpose. But if we think about it right now, I see both the international and the domestic margins improving is important from a seasonality perspective, the absolute number for -- will be lower in Q3, particularly for international Europe slows down in the summer, late summer months. But overall, from an overall perspective, excited about the momentum and see both international and domestic having absolute profit improvement as well as margin improvement in the transition in the calendar year.

The next question is from Ari Rosa with Citigroup.

So it seems like FEC is executing well, all the credit in the world you guys on that. But is there anything that's enabled from an operating standpoint without the Freight segment? How are you thinking strategically about managing the business going forward? And then are there incremental costs that can come out from here? And maybe in that context, could you help us understand why June, in particular was so strong? And then why do we see a little bit of a deterioration, I guess, in that cadence? Or it sounds like there's a deterioration in that cadence as we think about the rest of third quarter?

I'll start off and then turn it over to Raj as well. But when we talk about June, the one difference about June, it's strong from both a seasonal perspective, from an absolute basis and then has the operating days, the amount of Mondays, but it really is also the pilot contract that we've talked about and show on the bridge, that does not hit until July, and so that weighs on the third quarter. In addition, we told you in that bridge that the $100 million of variable comp remains for the transition year, all of that $100 million will show up in the third quarter just from a timing perspective. So the overall transition year is on the bridge, but from a timing of that variable comp, maybe turn it over to Raj from a strategy without a freight perspective.

Yes. And I would just say that the fundamentals of our business remain strong even through the Q3. It's just these one-offs. But even with that, it's just a normal seasonality. But your question about overarching strategy is very consistent with what you heard at the Investor Day. We are very much focused on being the hotbed of the industrial economy focused on premium B2B and high-value B2C. And that's exactly what we have done in executing in the last few months, and you can see the results already.

We're obviously in the middle of a huge transformation that is driven by our network transformation, our organizational transformation and digital transformation. Those are well underway, and that's our target that we set for CY '29 is a 14% CAGR on the bottom line, and that's what we will accomplish. We also have noted that free cash flow is a very important metric for FedEx. And our target of $6 billion free cash flow for FEC by CY '29, and we remain on target for that.

So it's a very exciting time. We have a lot of upside in our business. We are focused on the core and key fundamentals and the quarter Q4 results are very, very strong, and I'm just excited about it. And again, I also want to take one more opportunity to thank Team FedEx for delivering such a strong quarter.

The next question is from Stephanie Moore with Jefferies.

Great. I know that building your SMB portfolio is a key strategy as you think over the next couple of years, as outlined as outlined at your Analyst Day. But maybe you just talk a little bit about your SMB strategy here. It does seem like there's a large competitor, Amazon that continues to talk about expanding their third-party logistics, SMB fulfillment and the like. So a lot of headlines there. Would love to get your thoughts and your ability to compete in the -- what is very competitive SMB market?

Sure. Thanks, Stephanie. First and foremost, I was incredibly proud of our SMB performance all fiscal year, but the team just had a stellar solid momentum in Q4 with double-digit growth. We have the best loyalty program which even though our overall renewal rates are in the mid-90s, it's even higher in our SMB base. So these are really sticky loyal customers. And one of the things that they tell us often that they really appreciate both the digital experience complemented by our sales team and that those relationships are sometimes decades long. So we really do have a lot of great relationships in small and medium business.

To your question about Amazon entering the market, I think first and foremost, we don't see this as a new portfolio or a new value offering. And what we're doing is we're very focused on our strategy. As we've talked about, we are, first and foremost, focused on the B2B. We have a global network from pickup and delivery around the world, including a parcel and air freight portfolio, the momentum that we have right now is market leading and the response continues to be really strong. We also, as I mentioned, have the best visibility portfolio, which really matters to our B2B customers, their advanced notification of what is moving through our supply chain. If something does go wrong that we intervene and that they have an action plan is simply best in market. So we feel incredibly strong in B2B.

From a B2C perspective, we have the best value proposition in the United States from a B2C perspective. We go everywhere, every day. We have the fastest network. We've got Saturday and Sunday delivery coverage and then again, picture proof of delivery and estimated delivery time windows. It's fun to sell both B2B and B2C.

And then I think finally, going back to that relationship, we have complete goal congruency with our customers. We may grow profitably, we grow profitably. We want to support their business growth. For example, at peak, -- we just had our most profitable peak ever because we built the right infrastructure to help our customers grow what it matters to their P&L while still improving our own profitability. So great relationships goal congruency and the very best value proposition in the market. So I feel really good about our momentum.

This concludes our question-and-answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks.

Thank you, operator. Once again, congratulations to Team FedEx for the hard work and outstanding execution to FY '26. Our strong Q4 and FY '26 results demonstrate that we are gaining profitable market share in the most premium verticals of the global economy. I'm proud of our momentum as we enter the transition year, and I'm confident in this continued value creation that's ahead of us. Thank you very much.

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

Welcome, and thank you for joining us for FedEx Freight Investor Day. Please welcome to the stage, Marianna Rose, Managing Director, Investor Relations.

Good morning, and welcome to FedEx Freight's First Investor Day. I'm Marianna Rose, Head of Investor Relations, and we are thrilled to have you with us as we outline the exciting path forward for FedEx Freight. A strong safety culture is one of the clearest indicators of a well-run business. And nowhere is that more evident than at FedEx Freight, where safety is more than a value, it's at the fundamental backbone of this company.

As such, we begin every meeting with a safety message. And today's message hits close to home for all of us, distracted driving. Every year, thousands of lives are lost because a driver looked away for just a few seconds. The good news is, according to preliminary estimates, automobile fatalities have declined by 12% in 2025. And we can all do our part to keep this positive trend going.

Prevention starts before the wheels ever turn, set your mirrors, adjust your GPS, silence your phone, eliminate multitasking and let passengers help when they can. But most importantly, manage your mental load because just like our drivers at FedEx Freight, when you are behind the wheel, your job is to arrive safely at your destination.

Before we dive into today's program, please note that certain statements may be considered forward-looking as defined in the federal securities laws 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 releases and SEC filings.

We are joined today by key members of the FedEx Freight executive leadership team. And whether you are here with us in person or joining via webcast, we have an exciting morning ahead. We'll start with 3 presentations and a Q&A session, followed by a short break. We'll then reconvene for additional presentations and conclude with the final Q&A, ending the formal program around 11:30 Eastern Time.

Today's presentation will be available through our live webcast, which can be found on our IR website. And for those here in the room with us, we invite you to join us for lunch afterwards.

With that, let's kick off with a short video, and then welcome to the stage, FedEx Freight's Incoming President and CEO, John Smith.

[Presentation]

Good morning, everyone, and welcome. I'm John Smith, Incoming President and CEO of FedEx Freight. Thank you for joining us here at the New York Stock Exchange, and thank you to those joining us on the webcast. Today is an important moment for our company. While it's just me on this stage right now, what stands behind me in the company are 40,000 FedEx Freight team members that day in and day out make sure that the FedEx Freight promises we deliver. Without them, I wouldn't have this opportunity to introduce you to the new FedEx Freight. So thank you to our team members who have gotten us to this point.

Now depending on where you're joining us from, you might know a lot or maybe just a little about FedEx Freight, whether you're part of our team, invest in, cover our industry or transact with us, what I hope you leave with today is an understanding of the pride that we have in our network, our service and our team and how we position to profitably grow as the leader in the North American LTL freight industry and what we mean by our commitment to our customers and our shareholders.

Before we get into the reason why we are here, I want to thank Mary for starting this meeting the same way we start every meeting at FedEx Freight, and that's with a safety message. Safety above all is not just a phrase to us. It is deeply ingrained in our culture, and that starts at the top. We can't take care of our people without making sure that they're safe.

So with that, let's dive in. The new FedEx Freight is built to serve our 3 stakeholder groups. Our people, our customers and our shareholders. So first, our people. As you just heard, we place safety above all in everything we do. Our safety culture has been in place for many years and is a daily focus for our team across every level of the operation. In addition to safety, we have a culture of collective responsibility at FedEx Freight. What does that mean? That means everyone owns our results, and we help each other in any way we can. We recognize that each of us, no matter our role, impacts the customer experience, and how they engage, that customer engages with FedEx Freight. And we invest accordingly in our people, and we will continue to do so to make sure that FedEx Freight is the best place to work in our industry.

Second, our customers. Our customers choose FedEx Freight because they depend on our industry to make sure that we deliver. And when you think about from a customer perspective, when there is a break in service, that causes a ripple effect in the economy. We don't let that happen. You will hear more about how we plan to improve the customer experience and leverage our network from the team later this morning.

And third, our shareholders. We've always delivered for shareholders through FedEx. But now as an independent company, we are charting our own path, executing on our freight-focused strategy to convert our strengths into high-quality growth, enhanced profitability and expanded free cash flow. We believe the spend will enable us to create significant value for our shareholders. Everything we do operationally and commercially supports these outcomes.

Now the strength of our business didn't happen overnight. FedEx Freight has been built over decades through disciplined, well-timed acquisitions, each guided by the vision of our founder, Fred Smith, and integrated into a broader long-term strategy. Now we entered the LTL market back in 1998 with Viking Freight. That gave us a strong foothold out in the Western United States. And in 2001, acquisition of American Freightways expanded our regional network across the U.S. And then in 2006, Watkins Motor Lines expanded our long-haul capabilities and strengthened our position in key markets.

In 2011, we merged FedEx Freight National, the former Watkins, and FedEx Freight Regional, the former Viking and American Freightways companies and created our priority and economy services running through one network. And since then, we've continued to invest in and expand our network and rationalize it to make sure we're in the right places where the freight is located. The footprint gives us the best locations, the best door capacity and the best transit times. What you see today is the result of years of investment in scale, service and operational discipline.

Now the foundation is a major reason we believe that FedEx Freight is positioned to continue to lead the industry going forward. Building on this foundation, this year, we expect to generate $8.7 billion in revenue, and approximately $1.1 billion in adjusted operating income, which translates into an operating margin of around 12%. Taken together, these metrics demonstrate the high-quality profitable nature of our business.

We operate from a position of strength. FedEx Freight is an established leader in the attractive LTL industry, firmly positioned to win today and into the future. We connect supply chains across North America, transporting goods for companies of all sizes, industries and specialties. For manufacturers, distributors, industrials, retailers, e-commerce and beyond, our customers rely on us to move their goods quickly, efficiently and with superior service.

The LTL industry has high barriers to entry. To do what we do, infrastructure at scale matters. We not only have the largest and densest network with more doors than any other peers, but we provide a best-in-class service. And the result, a significant advantage in cost efficiency, transit times and customer retention. Our speed and level of service is incredibly valuable to our customers, and it creates deep, long-term relationships. In fact, with our top customers, nearly 90% of our revenue comes from those who have worked with us for more than a decade.

The bottom line is FedEx Freight is the gold standard in this market. We have a scaled network-driven business with durable competitive advantages. And we're just getting started.

Of course, none of this works without the people who operate the network every day. FedEx Freight operates with the best team in the industry that is focused on safety above all, as I mentioned, has collective responsibility for our results, and they take care of each other and our customers. Our drivers are among the most skilled professionals on the road, and this is reflected in industry awards and competitions, like a National Truck Driving Championship, where FedEx Freight drivers represented more than 50% of all award winners, more than 50% of all award winners in 2025.

So behind the wheel, on the dock, in our service centers and across the field, our operations team worked with precision, managing a highly complex logistics system with incredible discipline. And our growing commercial teams, which you'll hear more later from Mike Lyons in terms of our investment in a dedicated LTL sales force, they are relentlessly focused on enhancing the customer experience and expanding our reach.

Our executive leadership team brings over a century of collective industry experience, and they have exceptional teams in place to help us execute our strategy moving forward. And you'll meet several of these leaders this morning.

So leading up to day 1 as a public company. The team has been focused on running the business, taking care of our customers and improving the customer experience while delivering a tax-free spend, and they have done an outstanding job balancing all of these very important priorities.

So when we step back, and look at the opportunity ahead, our strategy comes down to 4 principles that reinforce each other. The first is optimizing our network, which Clint McCoy will discuss later. The second priority is delivering a leading commercial offering, which Mike Lyons will cover. The third priority is advancing our technology capabilities. This enables everything we do. And Mike Rodgers will discuss where we're investing and how we're making it easier to do business with FedEx Freight. And all of this will drive value to our shareholders, which Marshall will cover later.

Now taken as a whole, we're positioned to deliver strong financial performance over time. Top line, we will deliver sustainable revenue growth driven by yield management and higher quality mix. Marshall will give more detail on the financial targets this morning, and I am confident that we will drive operating leverage as we unlock FedEx Freight's full capabilities. As a team, we talk about this internally as we evaluate business opportunities. And I tell them all the time, we're not hauling freight for practice. We're here to make money and grow profitably.

So let me close by bringing all this together. We have structural advantages that few can try to replicate. We have the biggest and most reliable network with the fastest transit times, and we operate with a world-class team. We're taking this opportunity as we spin to build an even stronger company. This is the new FedEx Freight.

So with that, let me hand it over to my Chief Operating Officer, Clint McCoy, to talk more about our network. Thank you.

Good morning. I'm Clint McCoy, Chief Operating Officer, and I've been fortunate to call FedEx Freight home for nearly 30 years now. I started out as a frontline supervisor in Little Rock, Arkansas in 1997. And over the course of my career, I've held several leadership roles across our operations, engineering, safety and fleet maintenance teams. FedEx Freight operates the largest, fastest and most reliable freight network in the industry. And that network is the backbone of our value proposition.

Over the past several years, we have fundamentally reshaped and strengthened this network by rationalizing our service center footprint, modernizing our fleet, reengineering lanes and network flows, and driving tighter, more disciplined execution on our docs. These actions have reinforced our scale advantage, improved service consistency and reduced our structural cost to serve. As these changes take root, their benefits compound, creating a smarter, more efficient network that continues to lower costs while elevating the customer experience.

Today, I'll walk you through what we've already accomplished and where we see the next upside at FedEx Freight. To appreciate the power of what we built, it helps to start with where we sit today. We are the largest pure-play LTL network in North America, and we are uniquely positioned to win. Our physical infrastructure today includes more than 365 locations, approximately 26,000 doors, 30,000 motorized vehicles, including more than almost nearly 17,000 tractors and coverage across all 50 states, Mexico and Canada. We are the only carrier to offer 2 distinct service products, priority and economy.

Our priority product is industry-leading, serving 90% of the LTL market in 3 days or less from any of our locations, which is 40% faster than our nearest competitor. When speed isn't a priority, our economy service gives customers a more cost-effective option while still delivering the same reliable FedEx Freight service that they depend on. Our doors are concentrated in key volume areas, giving us the right capacity in the right markets with the right proximity to our customers, ensuring we are best positioned to service our customers efficiently and effectively.

This strategic positioning didn't happen by accident. It's the product of decades of disciplined network building. FedEx Freight was built through the strategic acquisitions of Viking Freight in 1998 and American Freightways in 2001, which established our regional network across the U.S. And with the acquisition of Watkins Motor Lines in 2006, we expanded our long-haul freight capabilities. As we integrated each of these companies, we ensured that we maintain the scale of their networks, while at the same time, evaluating service center concentration.

From our peak footprint, we've rationalized service centers to boost efficiency and improve cost to serve. Since 2023, we have consolidated 39 service centers, removing 1,000 doors, while at the same time, adding 9 new locations in 600 doors in strategic locations to expand our capabilities in the densest freight markets. The result is a network that is positioned where the freight is with unrivaled scale and proximity in a business where scale and proximity matter. We are positioned to absorb incremental volume with minimal additional capital investment, creating meaningful operating leverage through cycles.

When you overlay where freight volumes are concentrated across North America, the strategic value of our network becomes clear. Our facilities and door capacity are located where the volumes are concentrated, allowing us to flex capacity efficiently, maintain consistent service performance and capture profitable share as demand grows. For example, let's take a look at the Chicago metro market, which is the largest market in the LTL industry, generating over 6% of the total outbound LTL volume each day. Within our Chicago footprint, we have 11 service centers, and almost 1,500 doors. That is over 50% more capacity than our closest competitor in that market.

So now let's watch a short video to show the speed and the flexibility of our network. In this example, you'll see a coast-to-coast shipment moving from Raleigh, North Carolina to Gardena, California, just outside Los Angeles.

[Presentation]

As you can see, the strength of our network creates a powerful foundation. But we're not standing still. To advance our leadership position, we are executing against 3 key operational initiatives. First, line-haul network optimization, where we are leveraging our advanced modeling capabilities to improve the flow of volume through our network, protecting our speed and service superiority, while structurally reducing our cost to serve. Next, dock optimization. With focus on increasing trailer utilization, reducing freight touches across the network and deploying technology that enhances shipment visibility. And finally, fleet modernization, reducing the average age of our fleet to improve fuel efficiency and lower maintenance expenses.

The collective benefit of these initiatives will continue to lower our cost to serve and improve our service performance. Importantly, these initiatives are fully within our control. They do not depend on macro recovery or volume uplift to generate meaningful benefit. As demand returns, our streamlined network and more efficient cost structure position us for greater operating leverage and margin expansion.

So let's dig into the first of the initiatives, lane optimization. We've implemented a highly engineered, data-driven process that adapts how freight flows through our network and optimizes outcomes at least 3 times per year. First, we forecast volume by origin destination pair and simulate those flows through our hub-and-spoke network. We then determine the optimal mode based on service speed required, which brings in our mode flexibility across truck and rail. This allows us to better align our service commitments with cost, driving greater leverage through our rail advantage. Our newly revised planning schedule then allows us to align drivers, schedules and routes to expected demand. This process is repeatable and built into our operating plan. That dynamic management removes unnecessary miles, improves asset utilization and controls line-haul costs more effectively, all with service performance as a top priority.

Next, we turn to optimizing what happens on our docks, which is the core of any LTL network. Traditionally, LTL carriers plan line-haul based on shipments and weight. At FedEx Freight, we've taken a different path. We shifted from weight-based planning to cube-based dimensional planning, unlocking a far more accurate and actionable view of our freight. We can do this because our DIM and Motion technology now captures over 90% of shipments in real time. This gives us a precise understanding of freight characteristics, driving better planning, higher productivity and lowering operating costs across the network. It's been a true game changer, contributing to a 12% increase in cube utilization in our line-haul operation over the past year.

To further reduce handles in the network, we've deployed machine learning tools that provide our frontline leaders the real-time insights into direct load and head load opportunities based on both actual and forecasted volumes. This has enabled a 10% reduction in planned versus actual handles.

We've also enhanced shipment visibility through our RFID technology. RFID allows us to track shipments at the handling unit level, improving how we measure efficiency and freight movement, while giving customers more precise, real-time tracking for their goods.

Our third initiative focuses on modernizing the FedEx Freight fleet. Over the past few years, we've taken a targeted data-driven approach to reduce the average age of our equipment and ensure we're matching the right asset to the right route. Using performance insights from our fleet maintenance platform, we identified the most fuel efficient and reliable units and assigned them to our longest mileage runs where efficiency gains deliver the greatest return.

We also use that same platform to pinpoint underperforming assets, units with higher maintenance events, lower fuel efficiency or recurring reliability issues and systematically remove them from the fleet. This has further improved overall fleet performance and contributed to reducing average age. Through these efforts, we've reduced the average age of our line-haul fleet from 5.6 years to 4.5 years since 2023, improving miles per gallon by 3%.

And as John noted, we are deeply committed to safety. In support of that commitment, we've deployed advanced safety technologies across the fleet. These investments, combined with our strong safety-above-all culture have contributed to a 30% reduction in DOT preventable accidents over the past 5 years.

And we're not just focused on optimizing our network. We're also focused on optimizing the customer experience. Our scale, speed and reliability allow us to meet customers where and how they need us. Everything that we do has the customer squarely in focus from on-time service, pickup reliability and quality. Our customers count on us to get it right every time. You'll hear from Mike Lyons in a moment on how everything we do within our network translates into customer service and value.

And behind every on-time pickup and on-time delivery is the real engine of our success, our people. We have the best people in the industry, and a culture of collective responsibility. Our drivers are some of the safest in the industry, with 40% of our drivers exceeding the 1 million-mile safe driving mark. Our team is consistently represented and recognized at industry events, including the National Truck Driving Championships where we were the grand champion again in 2025 and had more than 150 professional drivers compete. And most recently, the American Trucking Associations named 4 FedEx Freight drivers to the 2026 America's Road Team, a tremendous honor for professional truck drivers.

So let's take a moment to hear from our team directly on the FedEx Freight difference.

[Presentation]

Before I turn it over to Mike Lyons, let me reiterate a few points. We have the network, the scale and the service advantage to win today. Our targeted operational initiatives are driving structural efficiency gains that do not depend on the market to deliver value. As demand returns, we are poised to capture profitable share and deliver meaningful operating leverage. That is how we unlock the full potential of FedEx Freight and accelerate value creation for years to come.

Now let me pass it off to our Chief Commercial Officer, Mike Lyons, to talk more about our commercial offering. Thank you.

Thanks, Clint. Good morning. It's great to be here with you. I'm Mike Lyons, Chief Specialized Services and Commercial Officer. I've spent nearly 20 years at FedEx Freight, starting on the front lines of operations and holding leadership positions in finance, operations and specialized services. Over my career, I've had the opportunity to see FedEx Freight evolve, and I'm most excited about the dilution happening today.

My team is responsible for making sure our best-in-class network not only meets customer needs, but consistently exceeds them. As a stand-alone company, we're strengthening and modernizing the customer experience, while addressing new markets with high growth potential.

Let me start with what we offer today. FedEx Freight is the only national LTL carrier with a true dual service offering across priority and economy. Priority makes up more than 60% of our shipments and it is a service that can't be beat. It's complemented by our economy service when customers value savings over speed. The remaining mix comes from Custom Critical, Freight Direct and other specialty services. This structure provides customers with choice without leaving our network. That flexibility creates resiliency.

We have built targeted value-added capabilities around our core services to solve specific customer challenges. Volume Services offers additional discounted rates for less time-sensitive shipments by filling available network capacity on a day-to-day basis.

With Retail Flex, we deliver to major retailers benefits that go beyond your standard LTL services. We ensure on-time deliveries to avoid late fees and provide accountability for handling units to reduce incomplete shipments and chargebacks. For our B2C customers, Freight Direct delivers large and bulky items, not just to the front door, but directly into the home or business with a uniformed driver. Freight Direct reaches more than 99% of all U.S. ZIP codes. Priority Plus is our fastest delivery option with early morning, after hours, shave a day and weekend deliveries available.

And finally, our dimension-based pricing model simplifies freight classification and improves pricing accuracy and reduces disputes. These capabilities solves customers' challenges that enables their long-term success and unlocks better commercial outcomes, which brings me to our current customer base.

Our nearly 140,000 active customers are diverse across size, product, end market and tenure. They stick with us. As John mentioned, the majority of our revenue comes from customers that have been with us for over a decade. When you exclude single shippers, those customers represent nearly 90% of our revenue. In fact, I still directly engage with many customers that I supported on the docs nearly 20 years ago.

Beneath the service, our revenue is fortified by long-standing customers and diversified by industry. Our top 25 customers represent 17% of our total revenue. We are trusted by some of the world's largest operators as well as small to midsized businesses, showcasing the scale and flexibility of our offerings. We're also well positioned to serve growing end markets, which I will speak to in a moment. This solid base reduces volatility and reinforces how we will continue to drive revenue durability.

Our next chapter growth will focus on 3 things: one, strengthening our go-to-market strategy; two, enhancing the customer experience; and three, generating durable, high-quality revenue growth. We don't do one without the other. Customers need to know that when they come to FedEx Freight, they have the right people, tools and support to serve their own customers. At the top of the funnel, we are sharpening our approach by investing in a dedicated LTL sales force. For the customer, we're getting back to the basics, simplifying our offering and back-end processes, making it easier to do business with us. And how we're taking this to market will continue to be differentiated, focused on profitable revenue growth.

Over the last year, we have made strategic investments in building a dedicated LTL sales force. I am pleased and proud to announce that we have reached our hiring target and now have a team of 500 talented sellers across North America. They are already engaging existing and prospective customers with greater credibility, precision and care. This team is best-in-class. They all bring dedicated LTL experience, whether they transition from Federal Express or joined from outside the organization. Not only will they have an immediate impact to the customer experience, but they will also support the development of the next generation of LTL sellers.

We have a more direct sales strategy that allows us to go to market in a targeted, personalized way. We are equipping our team with new CRM tools to execute with greater visibility and accuracy, which you'll hear more about from Mike Rodgers later this morning. And we have reengineered our sales team incentives to more closely align with our freight strategy. This is already enhancing employee satisfaction and will drive retention.

The future of FedEx Freight is committed to maintaining a rational pricing strategy. To echo John's words from earlier, we aren't hauling freight for practice. Our goal and focus is on generating high-quality revenue growth with an emphasis on yield. Yield improvement is not a byproduct. It is a core objective. We are building a leading engine with a disciplined pricing and transparency that our customers expect. Previously, our contracts were structured for general industry use and to be candid, were complicated.

As an LTL-focused company with a streamlined offering, our contracts are now structured more simply and clearly. Additionally, our pricing platform was designed for complex global shipping services. As we modernize our technology stack, we're adopting a pricing platform that is fit for LTL. It includes common industry practices and features like dimensional pricing to simplify the customer shipping experience. Longer sales cycles and slow resolution speed were driven by back-office complexity and standardization under the broader industry pricing platform and contract structure. As we simplify and focus on the LTL industry, we expect our sales cycles to shorten as we better address our customer needs.

Finally, our investment in technology will provide us with greater cost visibility from quoting through invoicing, which will significantly reduce quote ambiguity and the frequency of billing questions. While it may sound straightforward, improving billing and invoicing at our scale requires significant coordination. With our 2 core services, we're able to streamline the billing and invoicing process which will considerably improve our cost and customer service. Historically, the majority of our bills and invoices required a manual touch, leaving ample opportunity for error and even frustration. As we modernize the technology that supports these processes, we are on track to reduce manual touch points by up to 60%.

Additionally, given the previous structure, the majority of our billing documents and invoices were handled by offshore vendors with limited industry experience. Going forward, we are strategically shifting these resources in-house and nearshore, leveraging FedEx Freight's deep industry expertise to structurally resolve issues faster. We're moving away from systems that were built for the FedEx Enterprise's global shipping demands to simplified fit-for-purpose systems that meet our LTL customer needs and reach best-in-class industry standards for accuracy and timeliness.

We know where it makes sense to automate, billing, rating and invoicing to reduce errors upfront. But we also recognize how critical effective issue resolution is to the customer and are devoting the necessary resources in this area. To make this all happen, we're elevating the digital experience. Now when our customers engage with FedEx Freight, it's simpler, faster and more intuitive. We are launching a dedicated FedEx Freight website designed specifically for our LTL customers with enhanced tracking capabilities that provide real-time shipment visibility and greater peace of mind. It will include a streamlined customer service portal, along with virtual assistance and live chat functionality, making it easier for the customer to get answers quickly.

Our customers expect transparency, immediacy and control. By delivering on these expectations, we are strengthening loyalty, improving satisfaction and reducing cost to serve. These investments will fundamentally remove friction from our operations. We are laser-focused on making sure every interaction a customer has with FedEx Freight is a positive one. For example, we're strategically scaling our premier customer support, starting with our highest-value enterprise customers, where responsiveness and expertise matter most.

Additionally, we're reducing the number of clicks required for customers to reach a customer service specialist either online or over the phone. Our goal is to improve first contact resolution. When we make it easier to do business with FedEx Freight, when satisfaction improves, retention strengthens. With higher retention, lifetime customer value expands, all powering the customer life cycle.

With more resources dedicated to our go-to-market strategy and initiatives to improve customer experience well underway, we are targeting higher growth, attractive end markets that align with our offerings. Here are 4 key markets where we see sizable opportunity from a freight perspective. First, small- and medium-sized businesses, where service consistency, timeliness and digital convenience matter. We can provide end-to-end shipping visibility that integrates with the customer system, ensuring that they know when, where and how their freight is being delivered. And now with our built-out sales force, we not only have the capabilities to reliably help these SMBs do business, we have the best team in place to sell.

Second is health care, which has a total addressable market measured at around $6 billion. Here, reliability and time-definitive solutions are mission critical. These customers are often regulated by the FDA or have a cold chain documentation requirement, which mandate shipment integrity and visibility. We are uniquely positioned, particularly given our Custom Critical business and our speed of service to meet health care customer needs.

Third is grocery. We're well suited to address this $1 billion market with our temperature-controlled and liftgate capabilities, which enables us to flex to serve these customers seamlessly and within our existing network. Expanding our presence in the food and grocery space will not only be a growth driver, it will improve our weight per shipment and further enhance our overall profile mix.

And finally, with the rise of automation and AI, data centers and energy is a large and growing $2 billion total addressable market that demands flexibility, urgency and security. We are primed to be the provider of choice for secure, compliant and time-critical deliveries. We expect to optimize our mix, strengthen yield and deliver sustainable profitable growth as we execute this targeted commercial strategy.

Let me close with a few key takeaways. We are deepening our leadership in the North American LTL market, delivering a differentiated value proposition centered on speed, choice and reliability. We're strengthening our commercial foundation, thoughtfully elevating the customer experience and doing all of this while maintaining a disciplined focus on yield. We're firing on all cylinders, and we're just getting started.

Let's hear from some of our customers about how we are delivering for them today. Thank you.

[Presentation]

I'm pleased to be joined on stage by John Smith, Clint McCoy and Mike Lyons for our first Q&A session for the day. As we have upcoming sessions with Mike Rodgers and Marshall Witt, we kindly ask that you focus your questions on the topics just presented. [Operator Instructions]

And with that, let's get started. Let's go here in the front.

Ken Hoexter from BofA. I guess I'd start with Mike, just looking at kind of the strategy now in terms of adding these SMBs, health care, grocery, going for premium business, how different is that what FedEx Freight was going now? Are you -- how do you target these markets? Are you entering new markets? Are you already doing it? I just want to understand the strategy. And then what are you doing differently as you do that? Are you using price or service improvement? How do you get those quality revenues that if you haven't been doing that?

Yes. Great question. Appreciate it. So I think first and foremost for us is the build-out of the LTL sales force that we needed, being specifically aligned to LTL-only activities. That gives us then the engine to go out and go after addressable markets. The kind of the 3 key that we talked about and that you referenced there is roughly about a $9 billion market opportunity that we really have very little penetration in today.

And so when you think about what FedEx Freight does and does well when it focuses and concentrates on something, it generally will go out and we'll win. And so we feel confident about our strategy of using the new sales force that's up and running, stepping into these markets that are high profitable and a high-growth opportunity for us and winning business, whether the market is where it sits today or is an upswing in the market either way.

I think to add to that, Ken, when you think about not only the dedicated LTL sales force, but really the focus, we're doing very little business, as you mentioned, in these verticals. And we've moved Custom Critical over to freight about 18 months ago, and that really truly gives us an opportunity, especially in the health care and the cold chain piece that we really have never tied in with the LTL company. So going forward, we feel really good about the health care vertical because Custom Critical is coming with FedEx Freight.

Chris Wetherbee from Wells Fargo. Maybe two questions. I guess on the revenue numbers that you guys have talked about, I guess, how do you think about volume versus yield in the context of the 4% to 6%? And then I guess, there's a number of initiatives that you guys have talked about in terms of network optimization. Where are we in that process? How long do you think that plays out? And I guess, how to sort of -- if you can unpack some of those initiatives and what it means to your margin growth going forward?

Well, I won't steal -- great question. I won't steal the thunder from Marshall. We'll kick that revenue question and let him present, and then we'll have another Q&A and we'll answer that. I think we've got a really good strategy on that going forward, and I think you'll like our answer. But with that, I'll just turn it over to you, Clint.

Yes. From a network optimization perspective, we're continually looking at volumes as volumes shift or move around. We've got advanced network modeling capabilities that we'll assess the flow from an OD perspective, origin-destination pair perspective, and then make the necessary adjustments. And one of the things, the scale of our network and the node density that we have allows us to adjust flows very easily without impacting our service products. So if we see a lane that is underperforming, we can prune that lane and flow that volume through another hub and not impact our value proposition from a service perspective.

It's Scott Group from Wolfe. So over time, we've talked about bundling, I'm sure some degree of cross-selling. Do we have to go through a period of unbundling to some extent? And what does that mean for sort of that volume inverse yield equation? And then maybe just separately, talk about where you guys are from a capacity standpoint and if there's any plans for terminal or door count growth? I know it's been a long time since you've added any terminals. I don't know if you need to.

Do you want to address the bundling?

Yes, I'll start with the bundle. Thanks, Scott. When you look at historically, the way that we've bundled pricing from a Federal Express standpoint, you've got LTL with the parcel side. There's a 2-step process that has to occur to unbundle that. One is the contractual piece and then two is the actual discounting and earned discount piece that a customer gets. And so good news is we're about 99% done with that unbundling piece. And the focus for us right now is, one, making sure that the customer understands, here's the business rules that we need to engage and the way things are going to work. And then two, ensuring that when we separate the bundling discount that the customer still gets the exact same discount that they have from a parcel standpoint and the exact same discount of FedEx Freight. So the customer doesn't feel an impact in terms of their price and what they get for us in moving the volume in our lane.

And so we've got teams that we've stood up to ensure that, that occurs and occurs correctly. And so the desire for us is that there's no impact to the customer as we separate and unbundle those things. And then we will give them a net neutral conversion on that piece from a pricing standpoint through the end of their contract and then enter into your normal standard negotiations at that point.

From a capacity perspective, we're sitting very well from a facility perspective with about 30% available capacity in our network today. So we feel good that we've got the right capacity and we've got it in the right markets. The other elements of capacity when you think about fleet capacity, we're also in really good shape there. We've done a lot of work over the last 3 years to rightsize our fleet and modernize it, but we've got ample headroom to be able to absorb any demand. And then the third component of capacity is staffing. And we feel really good about that position. We have a highly engineered process that we go through every single month at every location to make sure we got the right staffing in place to meet whatever demand we have in the forecast.

I will add to that. One of the hidden powers that we have is our driver training program. And we have well over 200 driver trainers spread out throughout our network, and that allows us to get ahead of the curve when we see that uptick coming in order to make sure that we have drivers ready and available. And what we do, it's a great program because we promote within internally and take part-time dockworkers, dockworkers that want to become drivers and we put them through our extensive CDL training program, and it allows us to have driver-ready employees working the docks. So when we ramp up we're never short on drivers. So we feel really good about that. That is a critical part of being ready for a capacity change.

Let's go down in front.

Stephanie Moore with Jefferies. I really appreciate the additional color from a service standpoint and appreciate that you're the only LTL carrier offering 2 distinct service products. But I think the leading industry service -- survey provider, Mastio, consistently ranks FedEx Freight kind of outside those top positions. So maybe talk about where service has been lacking and then what is being done to address those aspects going forward?

I'll start it out and then pass it over. What we've recognized where we have the biggest opportunity is in the customer-facing technology. And we knew that before we even announced a spin. But we've been working on that technology, and you'll hear a lot from Mike Rodgers in the second session on how we're attacking that. But we feel really good about what we've built already, what we will have in place 6/1 that is going to help us eliminate several of those categories where we are not scoring very well. And that's why you keep seeing that we're attacking the customer experience for FedEx Freight. That is one of the main reasons that we've started early on building the new technology and focusing as much as we can on the customer-facing technology.

So when you think about that, that's the other piece. But we also do have, from an operational perspective, and I'll let Clint talk about that, where we have opportunity to improve in certain categories on Mastio and we're attacking those as well. So we're not waiting until 6/1 to attack that. We're already seeing progress in a lot of those areas. And it's really, really important on that customer technology to give that dedicated LTL sales force, those tools to go out and resell, especially the small and medium group. So we understand that. We're attacking it, and we know that's a good opportunity for us to improve.

Do you want to add anything?

No. You hit it great from a customer perspective, but if Clint wants something from a...

Yes. From an operations perspective, when you look at the Mastio and you look at the elements and how they're ranked in importance from a customer perspective, at the top is claims. And we are very focused on that from an operations perspective and driving meaningful improvements inside of our network there. And then the other 2 pieces, of course, on-time service and picking up on time, and we've made some really good strides there as well.

Yes. Tom Wadewitz with UBS. I wanted to see if you could add a bit more on how you think the hiring of the salespeople translates to a ramp in business. And you mentioned that it sounded like a large portion, maybe I don't know if all of the salespeople you hired were experienced or some of those are kind of newer and don't have experience in transportation. So maybe a bit more on the mix and then how long does it take them to really have an impact where we'd say, "Hey, you're outperforming the market on volume," or there's just, I don't know, some way in the focus segments that it would be visible?

Yes, that's a great question. I appreciate it. And I'd say, one, from a sales perspective, everyone that we conveyed over to FedEx Freight from Federal Express and everyone that we hired, we were going out and trying to find specific LTL talent and there is a requirement for us that if we were going to hire them and bring them over that LTL experience was required and necessary because when you get into the selling of LTL, it's different than the selling of parcel. And we want to leverage and use that expertise when we get back out to our customers and we're face-to-face with them. And so you think about turning these 500 sellers out into the market and meeting with our small- and medium-sized customers, and customers that we don't have today, potential customers and giving them the opportunity to talk to their needs, understand what they're looking for, the issues that they face.

And then one, when you pivot from that and go, here's how we can provide service for you, here's how we can solve those issues, and here's how we can differentiate ourselves in the marketplace. What I'm most excited about is that whatever that customer asks us to do or what they require or they need, we have a branded solution available to them because of the size and the scale of the network that we have, the dual priority and economy that we have and then custom critical gives us a lot of flexibility in some other areas that some customers have potential needs for. And so we've got a unique offering to be able to go to the customer with and say, "Here's how we can do business better for you and with you, how can we partner together to make that work?" So I'm excited about the future of that.

And I think just to add to that, Tom, I think something other critical for us is in order for us to grow in the small and medium business, we felt like that the frontline sales team needed to be geographically based where they're selling. And what we've done is we put these frontline sales teams out in the centers where they're going to be selling. And the reason I say that is important is because one of the mantras that we have here is everybody at FedEx Freight sells, everybody. And what that does is it ties that operational leadership team and with that sales team as well as what I feel like is our #1 sales team, and that's our drivers. And I can tell you that doing this has really generated a lot of enthusiasm for our frontline as well as our driver team on really truly having a geographically frontline-based sales team. So we're really excited about that as well.

Jordan Alliger, Goldman Sachs. I wonder if you could talk a little bit more about your -- the priority versus economy offering. I think it's sort of alluded that no one else has really bifurcates it like that and breaks it out like that. So I guess I'm curious, is this something that the customer demands? How come no one else is seemingly doing it? And is there a way that you could maybe benchmark a little bit more like how many days does it save or price premium type of situation as well?

All right. I'll start it out and let them pile on. But when you think about the key word in that is not a priority or economy, the keyword is one network. So when you think about one network, that is what makes this work. So think about what's going on at FEC right now. Everybody's heard about Network 2.0, right? So if you think about the legacy ground products and you think about the legacy express products, freight was doing the same thing. Before we merged back in 2011, we were going to freight docks, 2 drivers, 2 tractors and 2 trailers and picking up a product for regional and a product for long haul, which is FedEx National LTL. And guess what happened on the other end? We were waiting in line together to deliver to the same dock.

So when you think about putting those together, and why one network is so important, you go back and you think about Fred Smith, as I said earlier, putting these 3 LTL companies together, we were basically the guinea pig for one network. And since it works so well, we had talked about this and when the timing become right, that's when we kicked off Network 2.0 to eliminate that duplication and become one network, but that doesn't mean we're just going to run one product at FEC. So think about it as the ability to engineer a network with more than one product, but the key word that is one network. And that's why we're excited about this, and it's hard to duplicate this.

The other piece, and then I'll turn it over to Mike Lyons is we have the ability and Clint hit into this, we have the ability to mode shift the economy product, and that's what mostly runs on the rail, which gives us a distinct advantage in line-haul cost so that we really don't care whether our customer ships at priority or economy from a profit perspective. Okay.

With that, anything to add?

I think the only thing that I would add is what I really like about having the dual service offering is it gives optionality and choice to the customer. And so when you think about a down market like we've been in over the last several years, customers begin to look for cost savings and look for ways to pivot and position out. They don't have to leave the freight network or leave the freight service or do something different than staying with where they are today because we have the dual option of being able to go back and forth. And it's not something that takes months to change. It's a click of the button in terms of I need this to go priority and this to go economy. So it really gives the customer optionality in how they want to move their freight and get it to where it needs to go.

So Ari Rosa from Citi. So two questions, if I could. I'm curious just if you could speak to how much volume is in the network that perhaps is there because of the cross-sell opportunity with Express that maybe needs to get rationalized out to the extent that you've done that already or if there's still room to go on that? And then also to the earlier question, if you could just speak to kind of where cargo claims are right now? What is on-time service performance? And how much room for improvement do you see there?

You'll take the bundle?

I would say from a bundle perspective because of the intense focus that we have on ensuring that, that customer separation piece goes well, Marshall can cover more what's baked into the algorithm in terms of the financial piece, but that has already been accounted for. When you think about separation of those 2 pricing programs, we've done -- like I said earlier, we've got 99% of that unbundling done, and we're not seeing material impact right now. And so our focus is on the customer experience and ensuring that they're getting the service levels that they need. And if any issue does pop up as we work our way through that, we're swarming to ensure that the customer has what they need moving forward.

And we're keeping the customer whole until the next contract comes up. So they will keep the same if it was a bundled together pricing and through both revenue groups, they hit a certain level, they will still get that until the contracts come up either for freight or FEC. So basically, we're going to keep them whole through this transition.

From a claims perspective, everybody measures that a little bit differently. So we're not going to disclose an absolute number on that, but we've made meaningful progress in the area as it relates to claims. Same thing with an on-time service perspective. We're in a really good spot there and continue to focus on that.

Brian Ossenbeck from JPMorgan. Probably two for Mike, maybe you can talk a little bit about 3PLs and how they fit into the sales strategy, sort of where it was before, where it's going after and if that changes with the sales force they're hiring internally?

And then secondly, we've all seen the truck market get quite a bit tighter here. Maybe you can give us some history in terms of how that affects the economy product or just the shippers you have in the network. And so what we should expect if we do see this continue to improve here?

Good question. So we'll start with the 3PL side of the house. 3PLs is a mix of our overall revenue. I don't foresee that changing up or down significantly as we separate. It's a part of our overall strategy. We have customers that are in some of the smaller segments that prefer to go through a 3PL piece. We've got good relationships in the 3PL arena, and we will continue to service those customers in that way. I don't foresee major changes as we step out into June and begin to work our way through from that standpoint.

And then one more time on the second part of your question, sorry.

So when you think about the truckload market, do you want to start?

Yes, I'll take that. But just to add on that, from the 3PL perspective, we knew that we needed some better technology to make sure that when we plug in that we're protected, and I think that's one of the big opportunities still that we have. We've gotten better, but I still think we've got some good opportunity with 3PL from a technology perspective.

When you think about the truckload market, we've always watched it. And if you go back historically, usually when capacity tightens in the truckload market, it takes about 6 months or so to where it falls over to the LTL. So we always watch it really close. But this has been really unusual over the last 3 to 4 to 5 months. And we've seen the capacity come out both from a physical perspective on some of the truckload carriers that came into business during COVID and basically have gone -- been started -- a lot of them have been going out of business, but there's been some other dynamics that we're watching close. And one of those is, of course, the domicile CDL requirements that have come on, plus the -- some of the CDL schools that have been closed recently that probably wasn't going through the proper channels to get drivers per the regulations.

The other key one is they're really starting to crack down on cabotage out of Mexico. And basically, what that is, through the NAFTA agreement, a Mexico qualified driver can come into the U.S., but they're supposed to turn back very quickly to go back across the border. And what's been happening is they're coming across the border and then staying and running for some of these 3PLs 14, 21 days, 28 days before going back. With the crackdown on that, that takes a ton of capacity out of the truckload market. So I think there's more dynamics going on than normal. So we're watching it really close.

Dan Moore with Baird. Just curious, you guys have clearly added some costs with the spin at a lot of tools as well, presumably to allow yourselves to compete even more effectively and grow more effectively than you have. Curious if you could maybe add a little color around the incentive structure for the growth in the sales force. And what the opportunity is as you see it on the go forward -- on a go-forward basis to meet or exceed historical levels of profitability, kind of how you get there, whether it's price, whether it's growth, whether it's a combination of volume and price.

You'll cover sales?

Let me do. So from a sales incentive standpoint, really what we're trying to focus on is making sure that we get sales incentive aligned to the overall company strategy. So when you think about profitable growth, how do we drive profitable growth. And so we're trying to ensure that, one, we're meeting the current customer base that we have needs and we're selling into them, and we're enhancing and deepening our share of wallet with them. But then, two, how do we go out find new business, new organizations and incentive sales to go out and grow into net neutral or net new logos for us. And so it's a combination of both, right? It's not -- we're not just incentivizing based off revenue, we're trying to drive profitable growth. That's going to be the focus for us as we step out into June and even now as we lead up to it.

And I think that also pertains to leadership as well as hourly incentives. We're revamping that, and we'll have our first Board meeting on 6/1 and we're looking forward to. We've got some great packages, proposals, and we're looking forward to the Board putting those through, and then we'll be able to share a lot more for you after that or with you after that.

Richa Harnain with Deutsche Bank. So John, I think you did a great job kind of setting up how you guys have been investing to set up for improving in service and getting the tech tools and people together. Just curious, on June 1, do you think that we're going to be at the completion of that journey? Or do you think there could be more costs or investments needed to kind of get you to where you need to be?

And then just Mike, I wanted to ask about the accessorials piece, this Retail Flex, Freight Direct and your concept of improving your share of wallet with your customers, where do you think you are in that process and incorporating more of those accessorials into the fare structure? And how far do you think -- how much of a journey do you think there is left there?

I think from a cost going forward, both Marshall, he's going to close up with it, but Mike is also going to talk about the technology. Again, we focus strictly on the customer-facing technology from a new perspective. But we are all going to go to platform-based technology, which means that back office, everything that we're going to do is going to be platform based. And the system that we have that Clint and his team runs is not a platform-based system, which we will have to do that as well.

So going forward, we still have technology, but Marshall is going to go over how we're going to allocate our capital by category, and we'll talk about that. But as we move forward, and we talk about TSAs in the next session. So there are several things that will impact that cost going forward. But we feel really good about our medium and long-term strategy as we come out of it. So more to come on that.

Then I think from an accessorial surcharge standpoint, when you look at giving the customer optionality and letting them then pick and choose what they need from a service standpoint or with the requirements that they have, right? If you won price correctly from the beginning, as John talks about, there's no bad freight, just bad pricing, right? If we price appropriately to begin with and then we layer in additional differentiated services on top of that, that the customer has the optionality to pick and choose and say, I need this or I don't need that, then the surcharge revenue or accessorial revenue is just a byproduct that comes along with that.

And so as you get a customer to want to step into a higher service level offering, there will be unnecessary compensation that ties to that piece from a -- come back to for a FedEx Freight piece. But for us, it's more focused on, one, what is the customer need and then how do we build a pricing program that they want to understand; two, is simplified; and three, delivers for us what it is that we're looking to do and ultimately satisfies the customers' needs.

We'll take one more question. Let's go over here.

Jeff Kauffman from Vertical Research Partners. I just wanted to clarify, Mike, the 3PL and then just a quick question for John. On the slide where you showed share by industry, transport and logistics was your second largest. Is that a good way to think about the size of 3PL relative to your shipment count?

And then for John, you ran this business once you went to Express to help with the network integration. Is there anything you learned in that process that you thought, "Hey, I'm going to go back to freight. I want to do this a little differently. We can make it better."

I'll start and be quick and then turn it over to you. I think you're looking at it appropriately when you look at the pie there and the size of the revenue.

Well, I spent most of my time in the LTL industry going up through here. And then when I went up to ground, the first thing all the freight folks were telling me, you don't know anything about tiny boxes. So I caught a lot of c*** over that. But I'd tell you, when you think about the fundamentals of the business and the ground and what we call surface now because it's a combination as we rolled out Network 2.0, I learned a ton from that team. And I don't think there's a better operating surface team out there than that surface team. And Scott Ray, who replaced me, I'm excited about the momentum that he and his team have.

But when you think about starting from LTL and then really truly learning in the package and air business, it's been really, really good for me because it's hard when you just focus on one silo piece of the enterprise. What it does for you is it really truly elevates you up to the point to where you can see everything. And then some of the things that you used to question, why are we doing this? You understand now. Or you find things and you really have a different idea and the solution to help improve that.

So it was really, really good for me personally and professionally. And -- but I'm excited to be back to FedEx Freight and being able to take a company and separate it and become a stand-alone company. You don't get to do that often in your career. So I'm really, really excited to be back.

Great. Well, thank you for the questions, and thank you, John, Clint and Mike, for the answers. We're going to take a 15-minute break, and we'll be back shortly.

[Break]

And now please welcome to the stage Mike Rodgers, Chief Technology Officer, to begin the second half of our program.

Good morning. I'm Mike Rodgers, Chief Technology Officer for FedEx Freight. Prior to joining the company, I spent over 30 years leading technology and technology transformations across logistics, retail and banking. In fact, I had so much experience that I actually retired. But I chose to come out of retirement and I am fired up to help transform and launch the new FedEx Freight.

Our technology team is building modern tools that integrate the freight value chain from sales to operations and throughout the entire customer journey. We'll be leveraging new tools like Agentic AI, machine learning and native capabilities within critical platforms like Salesforce. And we're doing this in lockstep with our business partners to deploy a truly business-led technology strategy. This approach allows us to build stronger, more effective capabilities for our business partners.

So before I get too far, I think it's important to talk about what technology brings to the freight business. As Fred Smith, our founder, once said, the information about the package is just as important as the package itself. And the same holds true for FedEx Freight. The information about the shipment is just as important as the physical movement of the freight itself. How we use this data impacts how we support our customers today, and it also positions us for a future where we can leverage rapidly evolving technology. Customers no longer want their shipments simply picked up and delivered. They want timely, accurate information at their fingertips so they can track their shipments dynamically and plan their business. They need digital capabilities to seamlessly integrate into their operations. In other words, they want a smarter, faster supply chain.

As my colleague, Clint, mentioned, our network provides the most doors across North America and the fastest delivery times of any national LTL carrier. When you combine that solid foundation with the digital tools we're building, FedEx has a significant head start and a clear competitive advantage. We're connecting shipment data, network operations and customer-facing platforms in a way few, if any, can replicate.

By continuing to invest in these trends, we're not only providing operational efficiency, we're elevating the customer experience. Simply put, we're building technology solutions that are fit for LTL and purpose built for FedEx Freight.

Our newly formed talented and growing technology team is focused on being business-led and platform-enabled. We've intentionally designed this organization to deliver the right capabilities for our stakeholders, and we live by 3 guiding principles. The first principle is to simplify. As we prepare for the spin, we retain the best of the LTL-specific technology that powers our industry-leading capabilities today, but we've also taken the opportunity to reduce our technology footprint by over 20%. And by eliminating more than 300 applications, we've reduced the complexity, lowered the cost to operate and decreased the attack surface from cyber threats.

The second principle is to enhance. As my partner, Mike, discussed, we have a significant opportunity to improve post-delivery service by modernizing our approach to pricing, rating and invoicing. Since our North American-focused LTL systems don't have the same complexities as the global parcel business, the separation will have an immediate and positive impact on our customers as we focus solely on LTL.

And our third principle is to enable. We're enabling FedEx Freight's strategy by delivering capabilities like Agentic AI, machine learning and dynamic platforms. For example, our native Salesforce platform has AI capabilities out of the box. We can deploy those capabilities quickly after separation to drive immediate improvements in customer experience.

After June 1, we have even more opportunities to modernize the tech stack. As I've discussed, we narrowed the application footprint by 20% and the streamlined, uncluttered, fit-for-LTL tactical backbone will allow us to rapidly shift the competitive landscape and a shifting demand dynamic.

We've also been laser-focused on achieving the tax-free spin, making it seamless for our 140,000-plus customers. Over the next 18 months, we have 2 primary objectives. One, we're going to exit the transition service agreements or TSAs as expeditiously as possible to reduce risk and rationalize cost. We expect to reduce IT-specific operating costs over the next 3 years, allowing for investment into strategic capabilities that enable profitable growth.

Two, we'll modernize legacy applications by leveraging best-of-breed platforms and rapidly updating existing software with advanced AI capabilities. This is an important point because we see AI as a critical enabling technology. Here's how we intend to put this technology to work.

First, we'll take advantage of native AI capabilities already present in the modern platforms. Second, we're going to strategically deploy custom AI solutions to improve our logistics capabilities. And third, we'll employ AI agents to refactor legacy applications as we continue to monetize the estate. And lastly, AI will allow us to rapidly develop differentiated capabilities.

The freight spin-off has allowed us to take a fresh approach in shedding technical debt, modernizing enterprise platforms and building new capabilities that are critical to our future. There's been a lot of benefits from the spin process. It's helped us generate valuable well-architected data that we can use to continually improve the customer experience. It's improved clarity and enhances insights for our business partners and it informs the foundation for the deployment of AI across the organization.

The AI capability is put in place now and into the future will allow us to continue to drive efficiency. We're going to leverage AI to drive down overall cost in certain areas like customer service, operations, finance and human resources. And capitalizing on the experience and capabilities of our partners will further accelerate our digital transformation, specifically, partnerships like Salesforce driving our CRM, Microsoft enabling our cloud migration, Oracle powering our ERP systems and Accenture driving the integration across the landscape will help us scale both quickly and strategically.

And let's not forget, safety. Safety and security are at the forefront of everything we do. Our product teams use a secure-by-design strategy from the start of the development process through deployment. We've embedded enterprise-grade security capabilities into every aspect of our tech stack, and we will continue to make these investments. And again, we're not just cloning existing capabilities, which were significantly intangible with a complex global business. We've evolved our commercial applications to improve how we see, interact and engage with our customers.

The launch of our fit-for-LTL CRM will ensure all sales, service, marketing and pricing touch points are aggregated on one platform. As a result, lead prioritization and wallet share opportunities are front and center, easily accessible by our sales team, driving improved selling performance.

We're also modernizing our pricing and rating methodology in a way that is fit to the unique needs of the LTL customer. This will significantly improve pricing transparency and invoice accuracy, which, as Mike Lyons indicated, are major, major pain points for our customers.

Today, pricing requires manual intervention and reconciliation across quoting and invoicing, largely stemming from the entanglement with our global parcel business. The new pricing platform will operate with a simplified structure, streamlined to conform to LTL pricing norms.

Our new rating platform provides the functionality for dimension-based pricing, which is the first for our industry. It will simplify the complex class-based rating that often results in customer confusion and disputes.

We've also simplified account management. This has reduced the number of duplicate accounts, which have historically been a fundamental driver of invoicing problems. Instead of managing the symptoms by manually correcting the invoices, we've diagnosed and solved the root cause, and as a result, we expect a 60% reduction in manual invoice touch points. And we're not only making it easier to transact with freight, we're making the overall customer experience better. On day 1, our service centers and customer service team will have a unified view of all customer interactions, resulting in improved first contact resolution.

With respect to transitioning freight to a stand-alone company, one of our biggest concerns was making sure we minimize any customer disruption. This presented us a challenge because many of our customer systems are directly integrated into legacy FedEx platforms. To facilitate disentanglement, some of the customers are required to make changes on their end, which, as you can imagine, can be problematic. To make that transition easier, we've implemented an AI solution to simplify the process for them. As you can see, the simple prompts on the right side of the slide show how the AI agent can guide the customer through the process, and they're using this capability as we speak.

Additionally, we've improved our online experience. Currently, Freight and FedEx share a website. This makes it very cumbersome and complicated for freight customers to use. We redesigned and streamlined the user interface with the launch of the new dedicated FedEx Freight website. The new workflow is much simpler to use. For example, on the shared website, it takes 5 clicks just to start a shipment. On the fit-for-LTL site, it takes 1. Enhancements like this drive significant customer improvement.

Let's take a look at the new site.

[Presentation]

Now let's shift from the customer focus to an operations focus. As Clint said, we also are making vast strides in technology to improve our operations productivity. Let's see some of that technology in action.

[Presentation]

Now as you've just seen, we already have the foundation to unlock greater value through AI and modern technologies like DIM and Motion. This has further enhanced our access to rich data from every element of the supply chain. Taking all this together, we're lowering the cost to serve, optimizing trailer density and synchronizing dock flow and mitigating risk.

Now let me close with a few key takeaways. The spin has presented us with a unique opportunity to position this new stand-alone company to deliver on its strategic priorities. We're capitalizing on this opportunity by rethinking, reimagining and rebuilding a fit-for-LTL technical foundation that lowers the cost to serve, improves customer experience and enhances profitability. And finally, we're leveraging critical enablers, including data, strategic partnerships and AI to deliver high-quality growth and unlock long-term value.

And now I'll hand it over to Marshall Witt, our CFO, to unpack the financial strategy. Thank you.

Thank you, Mike. Appreciate it. Good morning, everyone. Good to see you all, and thank you for coming. I'm Marshall Witt, Chief Financial Officer of FedEx Freight. And I joined the company last year after spending more than a decade as CFO of TD SYNNEX. Early in my career, I spent about 15 years at FedEx, primarily within the finance division at FedEx Freight. You saw a plot map that was staked out in California as part of the history of the organization that was Viking Freight, and that's where I started. In 1998, I started working with Viking Freight, where I learned so much about the LTL industry and more importantly, about the unique culture of FedEx Freight. So in many ways, it feels like I'm coming home.

The opportunity that brought me back was to be able to work with such an exceptional group of people as we build significant value together through this process of making this company great and independent. So today, I'm going to walk you through how our operational strategies translate into strong financial outcomes and drive long-term value creation.

Our financial strategy is designed to unlock the intrinsic value of FedEx Freight by leveraging our industry-leading scale, transit times and service capabilities. We are aligning commercial excellence, operational efficiency, business-led technology and a disciplined financial strategy into one integrated value creation model. Importantly, our approach is not simply about cost control or margin expansion in isolation, but it's about building a durable financial model that supports profitable growth, consistent cash generation and a disciplined reinvestment in our network that differentiates FedEx Freight in the marketplace.

Our final pillar today is around disciplined financial strategy, and it's built on 4 key elements. The first is accelerating profitable growth. Second is our cash flow durability. Third is a disciplined capital allocation strategy. And fourth, a compelling value for shareholders. My focus today will be showing our conviction in the strategy and in our ability to deliver on our long-term financial plans. FedEx Freight already operates the highest quality LTL network in North America. And the financial strategy we're outlining today is focused on fully capturing the economic potential of our network.

As the business continues to optimize density, pricing and service levels, we believe there's meaningful opportunity to further expand returns while maintaining or improving upon the service standards that our customers depend upon.

High quality and profitable revenue growth are keys to unlocking value at FedEx Freight. While the LTL industry has been under pressure over the last 3 years, our business has shown revenue durability and margin stability through various economic cycles, and we expect this to continue. We are targeting a 4% to 6% revenue CAGR over the medium term, focusing on quality over pure volume growth.

Our adjusted operating income is expected to grow faster than revenue at a 10% to 12% CAGR, demonstrating expanded profitability. And looking beyond the medium term, we will continue our efforts to improve operating income even further. Growing operating income faster than revenue reflects the yield discipline, operating leverage, and effective cost control over the medium term. We're focused on delivering durable, cycle resilient profitability rather than short-term volume expansion.

Our strategy ensures that incremental growth contributes meaningfully to margins and drive shareholder value. We expect to drive this growth trajectory through several ways. First, the LTL industry remains a highly attractive, supported by growing and diversified end markets. And second, as Mike Lyons talked about, we are implementing multifaceted commercial initiatives to improve revenue quality and drive growth. Over time, this more sophisticated commercial approach should enable us to grow revenue while simultaneously improving network efficiency and profitability.

And third, as Mike Rodgers described, our tech-enabled go-to-market strategy is complemented by differentiated products and service offerings and a dedicated LTL sales force. And by leveraging improved analytics and technology, we are able to evaluate freight shipment at a much more granular level than we had in the past, arming our sales team with the tools to provide exceptional service to our customers.

Finally, to supplement the work we are doing to drive high-quality revenue growth, we're also taking steps to manage costs. Said another way, at FedEx Freight, revenue growth comes with margin expansion. And this will be done through maintaining a disciplined approach to pricing, optimizing productivity and reducing the overall cost to serve and support growth. Technology innovation is a critical unlock for efficiency and productivity gains.

LTL-focused investments in capabilities, automation and technology will drive structural operating leverage over time. We anticipate these incremental investments will represent approximate 50 basis point headwind during the transition period in 2026. With increasing volume, we anticipate significant fixed cost leverage across the network.

The foundational components of FedEx Freight operations include our service centers, our line-haul footprint and technology infrastructure. And they're designed for capacity well beyond today's volumes, enabling us to scale efficiently without substantially incremental investments into the network. Yield management initiatives further enhance margin capture on incremental shipments. And we're also focused on numerous efficiency initiatives to sustainably reduce our cost to serve.

Finally, we have the opportunity to exit the majority of our TSAs early, which will allow us to accelerate modernization and automation initiatives. We view these initial investments as necessary. And once internal systems are built and optimized, productivity and efficiency will materially improve.

The illustrate bridge here highlights expansion from approximately 12% to approximately 15% adjusted operating income margin over the medium term. The biggest driver of this is yield expansion, which is expected to contribute to over half the expected growth. Volume growth and cost efficiencies are also expected to drive margins higher. As we previously discussed, near-term profitability is expected to be adversely impacted by investments we are making for the long term. The approximate 300 basis point improvement reflects disciplined execution across revenue growth and cost management.

One of the keys to margin expansion over time is seeing a better flow-through from our cost structure. And essential to this, in our view, was lowering our functional support cost per gross profit dollar. Keep in mind that gross profit is defined as our revenue, less direct transportation costs, which includes sales, pickup and delivery, dock, line-haul and operations management. Functional support costs include all of the other operating costs to manage the enterprise.

So let me pause here and acknowledge that this does represent a different view on evaluating profit. Given our focus on profitable growth, we believe comparing functional support cost to gross profit better aligns how we will manage and motivate the organization. Profitable growth is now our North Star. Let me repeat that. Profitable growth is now our North Star. It aligns our decision-making in our organization around profitability rather than just revenue in isolation.

From December -- from June to December of this year, which we're calling our transition period, we expect this ratio to be about 70%. And as you can see from this page, we expect to generate an improvement to approximately 60% over the medium term. The ability to achieve this level of flow-through is supported by technology and AI-driven investments that will streamline support cost and reduce manual intervention or workarounds.

Importantly, we are also leveraging technology to improve planning, routing and asset utilization, which should further support margin expansion over time. In the near term, organizational simplification with the separation will improve visibility, increase agility and reduce structural overhead. And workflow optimization across functions will improve efficiency and our decision speed. However, over the long term, our goal is even bigger than this. We think this ratio could reach to over 50%. Lower cost to serve is not a onetime initiative. It's a structural and ongoing priority. These initiatives will expand margins over time as we profitably grow revenue without proportionately increasing our operating costs.

Before we move on, I'd like to spend a couple of minutes on the near term. To be clear, we'll be waiting until our fourth quarter earnings announcement to give our thoughts regarding the 4-month period from June to September as we transition from our fiscal year to a calendar year reporting.

That being said, I would like to address 2 near-term dynamics. First, in a tough freight market with macroeconomic volatility, we are focused on executing on our long-term priorities. We are managing near-term profitability through efficiencies and cost management that won't hinder long-term growth.

Building off of that, we have a few considerations for our performance in this transition period, again, defined as June 1st through December 31, 2026. We expect modest top line growth, slightly below our medium-term algorithm given current market conditions. And we will experience some sequential margin pressure relative to fiscal '26 defined as fiscal year ended May '26, due to TSAs and near-term technology investments that will result in high returns to the business.

Now moving to our capital allocation framework. From improved efficiency and margin expansion, we are positioned to generate more than $1 billion per year in free cash flow, which represents more than a 90% net income to free cash flow conversion over the medium term. Our capital allocation framework is designed to deploy our free cash flow responsibly and focus on growing ROIC above our cost of capital. The first priority is investing in high-return organic growth opportunities. We expect to maintain CapEx at about 5% of revenue over the medium term to support this.

Our second priority is reducing outstanding debt and maintaining investment-grade rating. We have a methodical plan in place and expect that we can decrease leverage to under 2.5x within 12 months post spin. Next, we're focused on maximizing the return of capital to shareholders by establishing a framework for solid dividends and share repurchases, which, at a minimum, will offset future dilution.

And finally, as the largest LTL carrier in North America, it's our responsibility to continually evaluate accretive and strategic M&A. And we plan to do this with a set of very stringent criteria, ensuring potential transactions fit well with FedEx Freight return objectives and drive shareholder value.

Our capital expenditures are aligned with high ROI initiatives that strengthen network and technology capabilities. And as I just mentioned, we're planning to maintain CapEx at about 5% of revenue over the medium term, demonstrating not only capital discipline, but also underscoring the strong cash-generative nature of our business. We are prioritizing areas like automation, efficiency and customer-facing enhancements. Each of these investments is evaluated through the lens of improving service, increasing productivity, and strengthening long-term competitive positioning.

Our capital spend will be generally allocated across equipment, facilities and technology. And as it stands today, roughly, we allocate 45% of our CapEx towards equipment, 25% towards facilities and another 25% towards technology. This steady and targeted approach to organic investment supports sustainable growth for the long term, while maintaining capital discipline and maximizing shareholder value.

As mentioned, maintaining an investment-grade balance sheet with the flexibility and resilience to sustain business through the cycles is a -- through all the cycles is a core financial priority. In line with that priority, we're focused on improving our financial position within the first 12 months of the spin and anticipate leverage to decrease to under 2.5x. Our committed capital and evenly distributed debt maturity schedule are structured for long-term stability, allowing us to invest in profitable growth, while maintaining balance sheet resilience.

With about $1.5 billion of expected available liquidity and a conservative leverage profile, we have the solid financial foundation beneath us to operate the business effectively and deliver on our commitment to unlock full value of FedEx Freight for our shareholders.

And now let me bring it all together. Our medium-term outlook is a 4% to 6% revenue CAGR based on growth drivers that were outlined today. A 10% to 12% adjusted operating growth CAGR as margins expand due to yield management, cost controls and efficiency improvements. Approximately 5% CapEx spend as a percentage of revenue to ensure steady growth, technological enhancements and prudent capital discipline. And finally, over 90% free cash flow conversion, which will result in greater than $1 billion in annual free cash flow generation. As those financial outcomes compound over time, they support both reinvestment in the business and consistent returns to shareholders.

And now let me close with a few takeaways. FedEx Freight is building off the base of durable revenues and strong profitability through business cycles. Our core strategies are expected to drive consistent, reliable and profitable growth. We have multiple levers to drive operating leverage, increase free cash flow generation and lower the cost to serve. And we will use the strong cash flow growth to prioritize balance sheet health and invest through a disciplined capital allocation framework. And finally, our medium-term finance outlook is prudent and achievable.

Combined with the operational improvements discussed earlier today, we believe these financial priorities position FedEx Freight to deliver solid earnings growth and attractive returns across economic cycles. Thank you.

I'm pleased to be joined on stage by John Smith, Mike Rodgers and Marshall Witt. [Operator Instructions]

John Chappell, Evercore ISI. Marshall, I kind of asked this last month on the FedEx call, but we've heard a lot about best-in-class service, best-in-class network. If you look at your yields on a dollar basis, they're the best in the industry by a pretty long shot, yet, even if you hit that 15% margin in the medium term, you're still kind of behind some of the top legacy players today. So basically 2-parter. Are there structural reasons why FedEx Freight would be at a disadvantage from a margin perspective with the publicly traded peers? And two, other than those structural functional costs, support costs, what are the methods you can get to kind of get that 15% up to in a good freight environment, something in the 20s?

Sure. Thank you for the question. So if I lay out what we talked about in the medium-term algorithm in terms of growth, that 300 basis point improvement, we still believe coming into the transition period, there's going to be some headwinds, and I called out that 50 basis point kind of net headwind that primarily relates around the TSAs and the transformative investments we're making. There's quite a bit of duplication that is taking place there, serving as that net headwind. That will play through into calendar '27 and then start to dissipate as we see the productivities from those investments play through.

Given where we ultimately want to be, and I mentioned this, we think beyond the medium term, there's significant upside in terms of where we could go in terms of that ceiling and how high it can be raised. Two elements that I would like to think about, and certainly, John can chime in, on the pricing aspect, as Mike Lyons spoke to, quite a bit of focus and discipline on yield management in terms of getting appropriate and the right results from an overall yield performance perspective.

And then on the cost side, and the comments we made there was the scale that we can drive and build in terms of our operations being at 70% support cost today, getting to 60%. And ultimately, as we go forward beyond the medium term, for every dollar of gross profit, our goal is to drop $0.50 down to EBIT. So we think the upside from both pricing discipline and yield and efficient and effective operation management and support costs, we can see growth beyond the medium-term outlook.

Donald Broughton, Broughton Capital. Let's get a little more specific. So the compound annual growth rate and revenue, you're expecting, medium term, 4% to 6%. Is it 50-50 volume yield? Is it 1/3 volume, 2/3 yield? And how do you expect that to develop over the top?

Yes. Thanks for the question. So if I think about the components that we laid out on that grid from left to right, the first piece was a volume aspect, a little less than 1/3 of the overall 300 basis point growth. The second part was more than half of the margin growth is coming from yield expansion. So if I think about the volume piece first, there's really 2 pieces. One, there absolutely is kind of economic GDP, ISM, PMI correlations. And so as the market goes, we'll feel that impact.

But the other piece of that volume growth is what Mike Lyons, Clint and John spoke to, which is what we can go after and capture. You think about those untapped markets around the various sectors that Mike Lyons spoke to. That's a substantial growth opportunity in terms of us growing and gaining market share.

And I think the third piece of that on the volume is what we spoke about that dedicated LTL sales force. And again, I want to emphasize -- if you think about the journey of Viking Freight to American Freightways to Watkins, each 3 of those franchises had locally based sales structure teams. And so in essence, now going back to that is in essence kind of returning where we came from.

So we believe there's going to be also good incremental growth as it pretends to that dedicated alignment at the operating level, service center manager level down to the driver level in that contact with our customer. We believe there's a piece that we can own and control there.

It's Ken Hoexter. So just one -- from BofA. Are you seeing signs of the industrial upturn at this point? John, I think you mentioned it usually takes a couple of months. We've been at this for 3 months with ISM over 50. Your thoughts on maybe the near term, what's going on right now? How much revenue do you expect to fall away from those -- the bundles? I think you mentioned, was that in the 50? Was that the basis points? Or is that different? I just want to understand how that falls away versus your sales with the new entrants and targets.

And then if I can ask a tech question. You went 90 miles an hour through some of the slides there. I just want to understand, RFID had said, it's a future on your next up, but the video said it was on every package now. Where are we? And how -- what insight do you have to the trailers now?

It's on every package now. And we're gathering those insights. We use that to basically plan our trailer density and helps -- we feel it's a competitive advantage because we're the ones really doing that. So it's about 90% of our shipments now.

And real quick to add on to that, what we want to do from where we're at right now with RFID, we won't go further upstream. We want to be able to -- when the customer decides to chip that we know that information further upstream, which will feed our planning process is quicker, which allows us to make better decisions, especially on our priority network, where we have tight operational wins, especially on the outbound.

So right now, like we said, every shipment pretty much has an RFID tag and what that allows the customer to do because we ship shipments with multi-skids, they know where every skid is, not just the shipment, which people track, what we call the Pro number, now they know where individual pots are within the trailer and within the network. So that's an advantage.

And the other two questions. Industrial sector relative to the other sectors is showing growth relative to the others, and that's a January, Feb, March commentary. So we are seeing some upside there.

And then on the bundling, just to make sure I captured that correctly, even though we're making great progress on that unbundling, I've been through spins before. So as we think about dyssynergies and ultimately what that looks like, and I'll start with the revenue first, there'll be some dyssynergies. They're immaterial. They're already embedded in the outlook that we gave in terms of our medium term and those headwinds.

If you think out the other elements of those spin-related dyssynergies, there certainly will be, you think about like the contracts we have over self-insurance and how that's a bundled solution. And as we disaggregate that, we'll lose a little bit of leverage on the freight side, just given the power that the FedEx brand had. But over time, we'll build that back up and get efficiencies there. So there'll be some breakage there.

And then as we go through the contracts, I expect there'll be some inefficiencies that come from disaggregating that. Again, as we see and experience that, you guys will hear about that on our quarterly updates. But so far, for what we know, it's built into our current model. And it's generally deemed to be immaterial to the outcome.

Chris Wetherbee from Wells Fargo. So I guess just a clarification on the margin point. So as we enter 2027, we should be 50 basis points worth, so maybe 11.5% margin is sort of what the right starting point is. I guess that's the first question. And then the second is around yields and the opportunity. I think you mentioned half of the margin comes from yield. I guess if there's a way to think about getting into some of these newer or more premium markets, how long that might take and sort of how that progression plays out as you think about that 3-year or 3-plus year journey, how quickly sort of the yield contribution kicks in?

Sure. I'll handle the margin. You might want to handle the upside to the customer profile. You're thinking about that correctly. I spoke to the trailing 12 fiscal year ended May, roughly 12% margin. We expect to see 50 bps head went into the transition period, so you have that correctly done.

I'll start with the customer side and let you certainly finish that. If you think about the capabilities that our team has in place today in terms of that dedicated sales force, and the current value prop that we have in those sectors, our belief is that there'll be good uptake and good momentum in those sectors. And back to the SMB play, as you guys understand, SMB, a little bit less price sensitive just in terms of elasticity to price and volume. And as we continue to increase our overall SMB play, that mix will actually end up driving a higher yield improvement for the organization.

Anything else you want to...?

Just to add on the small and medium, the key is the technology that we're building. That's where we are at a disadvantage in my opinion, but will not be on 6/1. We'll have that built. And that's what really, in my opinion, along with the dedicated sales force geographically based, the technology that Mike Rodgers and team are building is really truly going to allow us to go and get back even some of the small and mediums because of those pain points that we have not fixed over the last previous year. So excited about that, plus the new verticals. Those are high dollar type verticals that need service, especially the health care, and we do very little in that area right now. So we're excited about that as long with the other 2 or 3 that we talked about.

Scott Group from Wolfe, again. So just, John, another sort of version of the margin question. Last time you were running FedEx Freight, it peaked at a 19% margin. What's different now versus then that makes it potentially harder to get back to that 19% if the guidance is 15%?

And then Marshall, I just want to just understand and clarify, are there any other like corporate costs or anything that we need to be thinking about? I'm just trying to like we've got -- you gave us that 12% margin goes to 11.5% initially, but is there anything else as we just think about like the earning -- like the EPS of what FedEx Freight's starting point is going to be?

Yes. In terms of the separation costs as it relates to separate board, right, separate coverages and insurance, et cetera, they're not material to the overall outlook for our organization. So they're in there. And you probably heard us speak in the last quarter that we're pulling in some of those separation costs a little bit earlier than anticipated. And that's some of those upfront costs that we thought we would incur in transition period '26, plus the platform investments from a technology standpoint that Mike spoke to. So it's minimal in terms of its impact on the economic outcome, but it certainly is reflected in the forecast we provided.

I could take the easy way out on that question and say it's because Raj sent me to ground. But I'm not going to do that. I hope Raj wouldn't be watching. He'll get mad at me. When you think about the time difference from when I left to go to ground and where we're at today, the market has changed, of course. But when you look at, especially the last, since we decided to do the spin, and we've got in there, our spin cost, if you just took that cost out, you're going to add 2, 2.5 points to where we're sitting now. So we've got to go through that transition.

And then we get to that 15% or more in 2029. We're not stopping there. We're not stopping there. And in my opinion, all the things that we need to do to truly tack the network, sales team, the commercial offering, the technology and then the financial wherewithal that we bring with Marshall and the opportunity to start after we deleverage to the 2.5 or more to look at tuck-in M&As, we're excited about the future. But right now, that midterm is what we're focusing on.

Marshall, Richa Harnain with Deutsche Bank. So given the far-reaching nature of the FedEx network and the fleet age we learned today has already been reduced by a year over the last 2 years, right? I guess it's no surprise that the capital intensity is lower than what we typically see in the business or in the industry at large. So just maybe talk to us about the capital spend and how it's going to be allocated going forward. Is there opportunity to streamline that 5% down lower? Or do you think there's a still a long wish list of tech items that you want to invest in? And if you do have incremental free cash flow beyond what's in your plan, where is that going to go? Is it -- or buybacks, could they be in the picture more near term versus longer term?

Thanks for the question. I'll bring that into a capital allocation response and then more directly to capital itself. So capital allocation, I'll just say this upfront, the Board is not in place yet. We put together our capital allocation framework. We said very disciplined, covers kind of all the pillars, which I'll speak to briefly, but the Board will obviously have to approve this. So if you think about the shareholder return pieces of dividends and share repurchases. In my prepared remarks, you heard us say that we will maintain a dividend. More likely than not, that will start up as we enter into calendar '27, subject to Board approval. And of course, share repurchases is going to be anti-dilutive to start. But certainly, as we think about cash flow generation and the power that we have in terms of earnings power, there's significant upside as we go forward. I referenced the $1 billion in free cash flow we want to hit medium term.

And then as John briefly mentioned, now investments in the business, M&A and organic. Organic is meaningful. You've heard a lot of the discussion today around significant organic investments needed to grow our organization profitably. But the last piece is M&A. And I think just given the need for us coming out of the gate, we're going to have about $4.3 billion in debt. So we want to properly manage that accordingly. Our goal is to have that get down to 2.5x within a year.

Looking at that all in, we want to be mindful of the best and highest use of those free cash flows and put that back into the business or invest back to shareholders in the highest returns possible.

Specific to capital, as you saw the framework laid out, we do believe that, that allocation between facilities and equipment and IT will probably stay in those same percentage ranges. They'll probably ebb and flow a little bit. The algorithm today on growth does not reflect much in terms of facilities or vehicles. That's to maintain, grow, optimize the network and our vehicle fleet.

On technology, we've got quite a bit of investments in front of us. As we get into and pass the stub period, we'll reassess just ultimately the next things that we need to invest in to ensure that we're properly allocating the capital the right way. But I would expect that 5% probably stay with us for a couple of years. And then if growth ends up being more on the higher end of that range, that could go up.

And on the technology side, doing -- through the spin, we've done a lot of modernization. For example, we have new ERP for Oracle, New Workday. That is done by the time we get to June 1. And we conveyed over where we have the secret sauce, talk about our fastest network. That estate has been conveyed over. We do need to modernize that over time, but we didn't do that as part of the spin. And then we spent significant resources on modernizing where the customer pain points are on the commercial side. That's going to be done by June 1, and we'll turn our attention to like deploying AI on the operations space, so we have lots of opportunity for more optimization and that kind of thing.

I think to add just real quick on the capital piece from our facilities and equipment. You heard that from a facility capacity, we're in really, really good shape. We're 30% ahead. And Clint and his team have done a really good job on modernizing and driving down the age of our equipment, especially our power equipment. However, when you think about our facilities, we're least heavy. And we've got facilities where we have our eyes on where we know we're going to be 30 years from now, and we may start allocating capital, which we will, we'll pick these off and go from lease to buy and utilize that. So long term, we'll continue to strengthen our balance sheet. So just wanted to add that as well.

Brian Ossenbeck from JPMorgan. So Marshall, maybe you can talk about the cost efficiencies in that margin walk because I think maybe I caught it wrong, but I think some of that was the TSA early exits, but how much of that goes back to what I think Clint was talking about in terms of line-haul and dock and the fleet modernization. So some more details there would be helpful.

Also with the SMB mix, clearly, a big driver of yield. Like where are you right now? And I guess, John, what do you -- what's the technology you're looking to fix? Is that the LTL Select platform or perhaps something else?

I want to cover the optimization first in terms of scale. So good question. And I think about that in 2 dimensions. We have what I first teed off about kind of describing this gross margin concept of sales, direct costs. We do put sales into that because they're, of course, accountable for production and growth. There is quite a bit of upside that we believe in Clint's network in regards to further optimization. If you think about the ACOP system, which is the current system in place that we'll carry forward, there are substantial areas that we're going to be able to improve upon. Clint is going to continue to optimize what he has control of today with the systems he has. But as Mike spoke to, there's going to be more enhancements and focus there that will continue to improve that gross margin as a percentage of direct cost or its revenue as a percentage of direct cost.

Then pivoting to the concept that we introduced today around that support cost to gross profit dollars, there's quite a bit of automation and technology already in place today in those support functions. But what it does for us is it transitions gross profit into revenue really -- revenue now that the surrogate is gross profit. So as we think about support functions like mine and thinking about how we want to grow the business, we have to scale it to how GP grows in that revenue. We'll keep revenue in mind, but we think there's quite a bit of runway and opportunity to improve that. So those will -- again, will be incremental dollars that fall to the bottom line.

And I'll finish up on the technology piece, and I'll let Mike clean me up. But when you talk about small and medium where we think where the biggest disadvantage is those things that we're working on today, the new technology and it starts with invoicing. And when you think about a small and medium customer, if you can't invoice correctly and flow it all the way through to delivery without having to manual. I believe Mike talked about how many manual processes we have to correct. They basically -- they don't have the back office to do these things. And that's where we've lost side of that, and we're getting all over it.

The other thing is, when you think about a geographically based sales force, it is critical for small and medium because they require that face-to-face, they know they have a contact. They know who to call instead of going through the 1-800 number and never getting anyone. So we're excited about that. And plus that website is going to really truly help our small and medium. So those 3 things, along with just getting back out and getting in front of these feel like we can make some really good progress and we're excited about that.

LTL Select is a go-forward platform, and customers can compare speed, rates on that with our competitors. And we're comfortable with that because of our speed mostly.

Tom Wadewitz of UBS. I wanted to ask, John, a comparative question and just kind of thinking about like the mix. So you're focused on mix to improve. You identified the verticals. What about the mix in the sense of industrial shipments and weight per shipment? Your weight per shipment is quite a bit lower than if you look at like an OD or Saia. And they'll talk about growing weight per shipment is effectively price and kind of margin accretive. So how do you think about it not so much from the verticals you mentioned, but from a weight per shipment perspective?

And then the second question would be on volume. So I think generally, it's very positive to focus on price over volume, which -- that seems to come through. But at the same time, it does seem like with the additional, I guess, resource for SMB and with the 2 service offerings, you could maybe grow in line with the market, grow better than the market. How do you think about volume relative to some of the capabilities you have? And maybe versus the market, do you grow in line with the market on volume? Or how do you -- just how do you think about volume?

Okay. I'll start with the weight per shipment first. I can't remember who said that one of my favorite sayings is there's no bad freight, there's bad pricing. And one of the things when you think about the verticals that we're in right now, industrial is our largest vertical. However, we do a lot of retail, we do different ones, and the lighter shipments come into our network. So we feel really good, especially the new pricing system that's going to eventually give us dynamic pricing that we're building today, and then we just started testing and we'll have it ready 6/1. It allows us to truly, whether it's a heavy shipment or a lighter shipment, make sure that, again, we sell 2 things, space and pace.

And that's why when we go back to Clint's piece on our DIM and Motion machines are so critical for us because they feed our operating systems. And if we know exactly what the cube for that trailer that is coming down the docks, we know that we've got the ability to load every bit of that shipment and take up all that cube in that trailer versus worrying about how many shipments you have on it, which a lot of LTL carriers, shipments per trailer or they do weight per trailer. And that's why the cube base piece is really critical.

Now the vertical that we are excited about from a weight per shipment or 2 of them. One of them, of course, is food. And again, we play very little in that market, and we're looking forward to getting into that. But then also from the power perspective, we're going to get into that, and that's some pretty heavy dense freight as well. But again, we're going to price that accordingly because weight is just one component of pricing of shipment.

So we feel good about -- we -- the last 3 or 4 months, our weight per shipment has started gradually going up, and it's because we've had that sales team getting out there and getting their feet wet and going after some of these verticals. So we feel pretty good about that.

And I'll touch on volume real quick. So again, that's, I'll call it, a combination of strategy and incentive. And in the last Q&A, there was discussion around that how are we compensating our teams all the way from the service center locations to our employee base, all the way up to the 16B. And there has been interconnectedness from top to bottom in terms of how we're going to be driving that balance between volume and yield and overall margin expansion. So as John said, that has to be approved by the Board, but incentive and the way that gets plumbed up and down the network and the stack of leaders within the organization has to be very clear.

SMB, as we talked about, I think that's going to be a clear differentiator that's going to allow us to grow market share. That should be an increment to our volume portion of that growth story.

Let's take one last question.

David Vernon with Bernstein. Two for you real quick. How do we reconcile the 30% excess capacity that Clint had mentioned earlier with the expectation that you're going to grow volume 1% to 2%? Why wouldn't it make sense for you to trim the network a little bit to drive more operating leverage out of the business as opposed to maintain the size and scope of the network, if it is, if the growth aspirations are low?

And then the second question is around the 5% of sales for CapEx. Obviously, you guys are in a position where you need to invest in service to close the gap to your peers. Why is 5% the right number and the focus on sort of high earnings quality right now when you need to kind of put more emphasis into improving the business? And I guess the real question is, if you spend more, could you close that service gap and be able to maybe get a better right to grow, I think, going forward?

All right. When you think about -- I'll start with the service piece. We feel really good. We can always improve. But when you're 40% faster in your priority service than any other carrier, we feel really good with the service that we're providing today. Now we're going to continue to attack it. We're going to continue to go after that. But when you look at the speed of our priority network and look at the service that Clint and his team are providing right now, it's top in class. It's top in class. So I'm really -- feel really good about that.

And when you think about capacity, you got to remember the conversation about making sure that you have facilities and doors where the freight is. And when you think about that 30% capacity, it's not like that we've got a facility sitting around and is empty. But we've built that to grow. And what we're able to do is not add any nodes, but fill the buildings up that we have. And so it's not like that we've got 30% of our facilities dark and they're not open. We've got capacity within these big markets to where we can truly expand in a really, really good market and keep up with it and keep that service up. So that's the way that I look at it from a facilities perspective. And I think that's key going forward because we are going to grow, but we're going to grow profitably, and we're prepared for that, both from that position, and we talked about our equipment as well as our ability to ramp up from a labor perspective. So we're excited about that.

Great. Well, thank you, John, Mike and Marshall, and thank you to all of our participants as well. We appreciate you joining us for our first Investor Day, and I will turn it to John now to close out our program.

All right. I want to thank you again for joining us for the FedEx Freight Investor Day. Before we end, I want to leave you with where we started. We have the largest and most reliable network in the LTL market with the fastest transit times. Our differentiated offering, combined with our world-class people enables us to meet broad and evolving needs of our customers today, tomorrow and well into the future.

As we become an independent company, we are building an even stronger foundation. As Clint said, we're further improving operational efficiencies. As Mike Lyons discussed, we're building a leading commercial offering. And as Mike Rodgers just walked you through, we're enhancing the network through advanced technology. Now pulling all this together, we will create long-term value marked by high-quality growth, improved profitability and a very strong balance sheet. So what you've seen today is the new FedEx Freight. Thank you.

Good day, and welcome to the FedEx Third Quarter Fiscal 2026 Earnings Call. [Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Jeni Hollander, Vice President, Investor Relations. Please...

Good afternoon, and welcome to FedEx Corporation's Third Quarter Earnings Conference Call. The third quarter earnings release, Form 10-Q and stat book are on our website at investors.fedex.com. This call and the accompanying slides are being streamed from our website. [Operator Instructions]

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 investors.fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures. Joining us for prepared remarks on the call today are Rajesh Subramaniam, President and CEO; Brie Carere, Executive Vice President and Chief Customer Officer; and John Dietrich, Executive Vice President and CFO. Now I'll turn the call over to Raj.

Thank you, Jeni. First, I want to extend a sincere thank you to Team FedEx for delivering very strong results this quarter, supported by an exceptional peak, our most profitable yet. The team's commitment to make every FedEx experience outstanding and their consistent execution drove our strong Q3 financial performance. I also want to express my gratitude to our team members in the Middle East. The safety and security is our top priority. We are closely monitoring the situation, have implemented contingencies and are operating in alignment with local authorities as we continue delivering the best possible service to our customers.

Our strong Q3 results were largely driven by Federal Express Corporation, or FEC, demonstrating the power and resilience of our global industrial network. As we recently outlined at our Investor Day, the entire FEC organization is aligned in making progress across our 4 strategic priorities: growing in high-margin verticals, transforming our network, and building on our data and technology advantage while delivering ongoing efficiency gains. Our strategy enabled us to deliver sequential and year-over-year adjusted EPS growth for FedEx Corp, ahead of our expectations coming into the quarter. This operational performance, combined with our CapEx discipline is translating to strong adjusted free cash flow. Additionally, our plan is to spin off FedEx Freight on June 1 remain on track. We are confident that the separation will unlock meaningful long-term value for our stockholders.

Turning to our consolidated Q3 results. Revenue was up 8% year-over-year, driven by yield and volume strength across nearly all our packaged services and we delivered a 7% increase in adjusted operating income year-over-year as we successfully managed headwinds tied to changing global trade policies, a challenging LTL demand environment and the grounding of our MD-11 fleet. We also effectively overcame significant weather-related service constraints.

At FEC, we grew revenue 10% and expanded adjusted operating margin by 50 basis points. This marked our sixth consecutive quarter of margin expansion, allowing us to grow adjusted operating income 18%. This is a clear proof point that our commercial strategy to move up the value chain is working. At the same time, we are executing on our transformation and cost reduction priorities. As anticipated, freight results remain pressured as a result of ongoing LTL industry trends along with increased separation-related expenses. Importantly, we are laser-focused on revenue quality. As a result, higher weights and revenue per shipment at FedEx Freight helped mitigate lower shipment volumes.

Given the strength of our consolidated Q3 results and updated assumptions for Q4, we are raising our FY '26 adjusted earnings outlook to $19.30 to $20.10 per diluted share. Brie and John will detail the outlook assumptions shortly. Revenue share gains in our priority B2B verticals were an important driver of our Q3 performance. Similar to Q2, nearly half our revenue growth were driven by B2B services an important enabler of increased profitability. Our transformation to 1 integrated intelligent network is well underway. By the end of this month, about 35% of eligible volume will flow through nearly 400 Network 2.0 optimized facilities.

We remain on track for about 65% of our eligible volume to be going through Network 2.0 facilities by [ NXP ]. And we continue to expect $2 billion in cumulative savings from Network 2.0 and associated One FedEx initiatives by end of 2027. This was our first peak with meaningful volume flowing through Network 2.0 facilities and the results speak for themselves. Data-driven solutions continue to support the Network 2.0 rollout and played a crucial role in enhancing service during peak. We recently introduced our unload trailer prioritization tool, which uses real-time data to intelligently sequence yard operations based on trailer content. As Network 2.0 facilities scale, this capability becomes increasingly important, enabling us to better understand a trailer service mix, especially during morning source. This tool supports strong service levels by helping prioritize our most time-critical packages even more efficiently. Internationally, we continue to flex our air network in response to global trade policy changes. We reduced transpacific outbound purple and white tail capacity by approximately 15% and 25%, respectively, during the quarter. Asia to Europe and intra-Asia where we are reallocating some of our purple tail capacity continue to drive strong revenue growth.

In a quarter with significant package volume growth, we reduced net capacity, jet fuel usage and vehicle fuel usage, signaling our success in densifying this network. The team continues to focus on transformation in Europe, where we achieved our 11th consecutive quarter of international revenue share gains. In January, we shared plans to transform our ground operations in France with the goal of improving the experience for our employees, contractors and customers.

As part of this effort, we plan to simplify our domestic footprint, optimize our road network, streamline our value proposition and leverage digital capabilities to enhance France's competitiveness. More specifically, we are optimizing the hub and spoke network with fewer, better placed hubs and reducing our overall station count by over 40%. Last month, we also announced our participation in a consortium, making an offer for all shares of impulse. As I discussed at our recent Investor Day, high-value B2B verticals are a core priority within our profitable growth strategy.

At the same time, our commitment to provide excellent service to consumers around the world remains unchanged. InPost's strong presence and highly profitable track record in Europe's out-of-home delivery segment complements our strategy, allowing us to focus on our core strengths. This transaction is expected to be accretive to our earnings in year 1 upper close, which is targeted for the second half of calendar year 2026. Upon completion of the transaction, we will enter into commercial agreements that are expected to yield benefits to both parties. Importantly, FedEx and InPost will not integrate operations, and we will remain competitors each operating in their respective markets and segments.

At our Investor Day, we highlighted the role of FedEx Digital Intelligence as our force multiplier reshaping how we plan, operate, serve customers and create new services. A great example of new value creation for our digital intelligence to a strategic collaboration with Dun & Bradstreet. Together, we will be launching the Dun & Bradstreet and FedEx DataWorks, retail Momentum Index, an early warning system designed to detect crucial inflection points in U.S. retail supply and demand, combining vast amounts of shipping intelligence and business data insights, we can provide a near real-time aggregated view of U.S. retail supply and demand.

This intelligence can help business leaders detect inflection points before they appear in traditional economic reports like monthly retail sales or inventory data. We plan to release this index monthly beginning this spring, marking the start of growing collaboration to develop additional joint insights for the market. Physical AI is another critical element of our longer-term strategy, which will complement and strengthen our extensive and indispensable industrial network. Unloading trailers is one of the most practically demanding tasks in our package operations.

Last month, we announced the implementation of a new autonomous robotic system from Berkshire Gray, the SCOOP, robotic package unloader. This collaboration nicely complements our partnership with dexterity, which provides robots for trailer loading. Both collaborations are in the pilot phase and expected to be further deployed later this calendar year. This work signals our commitment to both the safety of our team members and innovation that improves the efficiency and profitability of our operations.

In closing, we delivered a strong quarter while successfully navigating a dynamic environment. We grew in high-margin verticals. We continued to transform our network. We leveraged our data and technology capabilities to enhance execution and value creation. Then FedEx performed exceptionally well, delivering great service for our customers during the critical peak season and beyond. I'm truly grateful for their performance. Now over to you, Brie.

Thank you, Raj. I would like to add my thanks to our team members for delivering another incredible peak season. On a year-over-year basis, we increased volume and improved service during the quarter, all while delivering faster to more locations than the competition. In December, we delivered the best monthly revenue performance in our company history, which of course, supported strong Q3 earnings growth. We served our customers with excellence during this critical period and delivered on our targeted growth strategy while of course, remaining disciplined on pricing. With our team's focus and outstanding execution, we grew FEC revenue 10%, driven by 10% U.S. domestic package revenue growth.

This marked our highest quarterly U.S. domestic revenue since fiscal year '22. International export package revenue also grew a strong 8%. Europe and the Asia-to-Europe lane stood out as key drivers. We continue to win profitable share in the global airfreight market, delivering 14% growth in international priority and economy freight revenue supported by our Tricolor strategy. At FedEx Freight, revenue declined 5%, pressured by lower shipments. We are encouraged by our sequential increases in both revenue per shipment and in the attainment of contractual price increases as FedEx Freight prioritizes revenue quality in a challenged LTL mark.

At FEC, we grew average daily U.S. domestic volume by 5%. Our strategic focus on B2B vertical supported 7% volume growth in U.S. priority and deferred Express services. International export volumes inflected positively for the first time in fiscal year '26, up 2% year-over-year. This is an impressive achievement given the sustained declines on the Transpacific lane due to the dynamic global trade environment. This international growth is a direct result of our targeted strategy to reroute capacity to our Asia Europe and intra-Asia lane, both of which delivered significant revenue growth, along with continued growth in U.S. international outbound and our European region. At FedEx Freight, in line with continued challenging LTL industry trends, shipments declined 6%. With nearly all of the planned dedicated LTL sales force now hired, we are confident Freight is well positioned to grow as the market recovers. Our pricing strategy is driving yield growth. These trends are a direct result of our focus on high-value shipments and industry-leading service supported by an improving pricing environment. We have seen strong capture rate on the 5.9% general rate increase we implemented in January. We also enhanced our dimensional pricing models, both in package and express freight supported by machine learning tools that improve accuracy.

Additionally, the adjustment of fuel surcharge we put in place in December supported our Q3 results. At FEC, U.S. domestic package yield increased 5% and driven by strength across all services. International export package yield grew 6%, driven by higher weight per shipment tied to the de minimis change, favorable currency and revenue quality actions. At FedEx Freight, revenue per shipment increased primarily due to the increased rate per shipment. Regarding fuel, at both FEC and FedEx Freight, we update our fuel surcharges weekly based on the current fuel price. Our U.S. domestic and U.S. export package and freight fuel surcharges are indexed to fuel prices published by the U.S. Department of Energy, allowing us to detect profitability during periods of energy price volatility. At our Investor Day, we detailed our plan to drive disciplined growth in the segments where our differentiation matters the most to our customers, specifically high-value B2B and specialized B2C. We are encouraged by our Q3 wins and growing sales pipeline across key B2B verticals.

Our sales team has done a phenomenal job selling bundled FEC services to our customers, supporting higher win rates and a stronger customer loyalty. Within health care, we continue to grow our core transportation revenue along with value-added services. To attract new business in pharma, where we are currently underpenetrated, we are enhancing our offering to serve the specialized unique needs of our customers with an extreme emphasis on quality. Just last week, we onboard a health care-focused Vice President of Quality, who brings deep external experience in global health care logistics. This newly created position will help strengthen our global quality governance and harmonized standards across our network. I am excited about the pace at which our team is introducing new innovations at FedEx. Last month, we announced FedEx Returns, a market-leading AI-powered digital tracking and returns offering for our customers. Our new capabilities enable shippers to simplify the customer experience after checkout, embedding more visibility, communication and efficiency into the shippers own digital channels with direct connectivity to our near real-time data.

The early market reaction for this U.S. launch has been very positive, and we're excited to expand the offering to Europe this coming April. Shifting now to our revenue outlook for fiscal year '26 and for the fourth quarter. Factoring in Q3 FEC strength and our expectation that these trends will persist, we now expect a 6% to 6.5% consolidated revenue growth this fiscal year compared to our prior 5% to 6% growth forecast. This implies a 6% to 7.5% revenue growth in Q4 on a consolidated basis. At FEC, the midpoint of our full year range now implies approximately 8% revenue growth year-over-year. Q4, we forecast approximately 8% FEC revenue growth at the midpoint, driven by strong U.S. domestic and international yields. As we lean further into our strategy to grow in high-margin verticals, we expect sustained yield growth. We expect U.S. domestic volume growth to continue in Q4. As a reminder, we will be lapping the onboarding of significant health care revenue, which creates a difficult comp for our U.S. priority service in Q4. At FedEx Freight, we now expect fiscal year '26 revenue to be down low single digits year-over-year, with revenue flat to down slightly in Q4 due to the continued LTL industry demand weakness. We continue to expect Q4 yield growth to provide an offset to a mid-single-digit percentage decline in shipments.

In closing, we have a winning commercial strategy, and you are seeing the direct results of this strategy. Our team executed exceptionally well this peak season delivering for our customers and positioning us for a very strong finish to the fiscal year. Thank you, Team FedEx, for your outstanding work. And now I'll turn it over to John.

Thanks, Brie. Our Q3 results highlight our team's commercial execution and delivering premium revenue growth while aggressively managing our costs in a very dynamic environment. And we achieved these strong results while also continuing to advance our longer-term transformational and strategic initiatives. On a year-over-year basis, we grew Q3 adjusted operating income by 7% and delivered strong adjusted EPS growth of 16%. I should note that our Q3 adjusted EPS includes a onetime benefit of $0.41 due to a favorable effective tax rate impact of $99 million related to our business restructuring in Brazil. And we delivered these results while navigating the impact of global trade policy changes demand pressures at FedEx Freight and the grounding of our MD-11 fleet. This is a true testament to the tireless focus of our team and the resilience of our premier global industrial network.

Now providing more segment detail for Q3 on a year-over-year basis. At FEC, we grew adjusted operating income by $252 million or 18%. This was driven by both base yield and volume improvement as well as execution on our cost reduction priorities. Growth in premium revenue in our international export range particularly U.S. outbound and our Asia to Europe lane contributed to adjusted operating income improvement in the quarter. Yield trended better than expected, which reflects the improving pricing environment, both in U.S. domestic and international, and we'll be focused on continuing this momentum in the fourth quarter. With respect to our fleet, Q3 marked the first full quarter with our MD11 fleet grounded. My sincere thanks go out to our world-class team, including our pilots, network planning and flight operations teams who did an outstanding job adjusting the network under very difficult circumstances to mitigate the operational and financial impacts of the grounding during the peak season. In total, the MD11 grounding led to a headwind of $120 million of adjusted operating income in the quarter due to higher operating costs and lost revenue. And we expect an additional year-over-year headwind in Q4 of up to $55 million as we plan to begin returning these aircraft to service late in the quarter.

At FedEx Freight, adjusted operating income declined $127 million year-over-year as industry market softness and demand pressure continued, along with added separation costs related to the freight spend. Specifically, we incurred approximately $60 million in separation-related costs that were not adjusted out of our results. These costs were primarily related to hiring and other necessary stand-alone public company costs that will drive long-term stockholder value creation. However, base yield improvement partially offset the spin and demand headwinds.

Turning to our outlook and given our better-than-expected Q3 performance, along with expected and sustained positive trends at FEC, we're increasing our FY '26 adjusted diluted earnings per share forecast to $19.30 to $20.10. This compares to our prior range of $17.80 to $19. The midpoint of our outlook range implies Q4 adjusted EPS of approximately $5.80, which would be our highest quarterly earnings of the year and is directionally consistent with typical trend. However, due to the strength of our peak profitability in Q3, we do not expect as large of a sequential increase in third to fourth quarter earnings as we've seen in recent years.

Additionally, the onetime tax benefit in this year's Q3 and freight's $33 million gain on sale of the facility in last year's Q4 skews sequential comparisons. I'll also note that our revised outlook does not include any incremental share repurchases in Q4. As a result, we expect an EPS headwind from share dilution and based on a Q4 common share equivalent assumption of approximately 242 million shares, bringing our FY '26 expected average to 239 million shares. In addition, and due to FedEx Freight's recent debt issuance, we also anticipate a headwind in the quarter due to the resulting higher interest cost. And in total, this combined impact from higher share count and interest cost represents an approximate $0.10 sequential and year-over-year headwinds that we've embedded in our Q4 outlook. In Q4, we'll continue to strategically prioritize high-value revenue growth while continuing to reduce our structural costs, all while advancing our other strategic priorities, such as Tricolor and Network 2.0 and this will support our expectation for sequential growth in adjusted operating income in Q4.

At FEC, we anticipate both sequential and year-over-year growth in adjusted operating income despite year-over-year headwinds from higher variable incentive compensation, global trade policy changes, lapping the onboarding of several high-margin health care customers and continued MD11 impacts. We also expect FedEx Freight Q4 revenue to be flat to down slightly and adjusted operating income to be down on a year-over-year basis. And this, again, is due to the LTL market softness conditions and higher separation costs that I referenced. The lapping of the gain on sale, I mentioned earlier also results in a tougher Q4 comparison.

Turning now to our updated FY '26 full year adjusted operating income bridge. This bridge shows the year-over-year element embedded in our full year outlook in on midpoint scenario, resulting in adjusted operating income of $6.5 billion. In this scenario, FEC volume-related revenue net of variable cost is now expected to be a $600 million tailwind. This is a $100 million improvement compared to what we shared with you in December. This is driven largely by better U.S. domestic package and international export demand trends. With respect to FEC yield, we now expect a $3.2 billion tailwind. This marks a $200 million improvement compared to what we shared in December and demonstrates our ongoing commitment to revenue quality and improved pricing. For base expense increase, we now assume $1.6 billion in year-over-year general expense increases related to higher wage and purchase transportation rates and other inflationary factors.

This is a $500 million improvement versus our December assumption, and we're pleased with our year-to-date cost reduction progress and now expect to exceed this year's $1 billion savings target. Our bridge also includes partial offset [indiscernible] items. Most remain unchanged from what we shared in December, except for the FedEx Freight and variable incentive compensation headwinds. We now expect $400 million decline in adjusted operating income at FedEx Freight compared to the $300 million expectation we shared in December.

Additionally, we now expect variable incentive compensation to be an $800 million headwind, reflecting our commitment to rewarding our employees. With regard to the Middle East, our outlook assumes a modest headwind tied to business impact in the region, and we'll continue to monitor the situation. As a reminder, also embedded in our assumptions is continued revenue and profit headwinds from global trade policy changes, which are more than offset by transformation-related savings.

Turning to capital allocation. We're maintaining our disciplined approach to capital and our prioritizing capital toward reinvesting in the business, including Network 2.0 and returning cash to stockholders. Consistent with this approach, we're now anticipating FY '26 CapEx to be no more than $4.1 billion, down at least $400 million from the $4.5 billion forecast we provided in December. We also remain committed to bringing aircraft CapEx to $1 billion or below this fiscal year and through 2029. Our CapEx discipline, coupled with the higher adjusted operating income expectation supports further upside to the FY '26 adjusted free cash flow assumption of $3.8 billion we previously shared. The adjusted free cash flow potential of our business holds significant value, and we're well on our way and committed to achieving our $6 billion adjusted free cash flow target in 2029 for FedEx Corp. excluding Freight.

As we shared at Investor Day, we'll continue to evaluate share repurchases on an opportunistic basis. We also plan to use share repurchases to offset dilution beyond FY '26 and maintain our share count to the FY '26 average count level in support of our 2029 adjusted EPS target of $25, excluding FedEx Freight. Before turning to Q&A, a quick update on our FedEx Freight separation plan. As Raj mentioned, our planned June 1, 2026 spin-off of FedEx Freight remains on track. FedEx Freight successfully completed a $3.7 billion debt offering in January, and this was an important milestone as freight intends to dividend the net proceeds to FedEx Corp in connection with the spin-off. And given that this is our last earnings call before the spin-off, we've invited Freight CEO, John Smith; and CFO, Marshall Witt, to join us today to participate in the Q&A. As a reminder, they'll be holding their FedEx Freight Investor Day on April 8 in New York City. With that, let's open the call up for questions.

[Operator Instructions]

The first question today is from Ari Rosa with Citigroup.

Congrats on a strong results here. Raj, I was hoping you could speak about the impact of the Iran conflict. I understand, obviously, we're only a few weeks in here, but just talk to us about how you're adjusting the network and to what extent it's maybe disrupting flows and to what extent it would have a bit of a profit headwind in fiscal fourth quarter.

Thank you, Ari. First and foremost, our thoughts and prayers go out to the team members in the region and all those impacted by the conflicts. While the situation remains fluid, the safety of our team members always comes first. I have to tell you that our team has done just an absolutely remarkable job of managing our network in a very quick fashion to accommodate the conflicts of zone and moving the traffic around that. And at this point, we are assuming that the broader global demand from Q3 continues into Q4. And our first 2 weeks of March essentially are in line with that trend. The Middle East itself is a relatively small part of our total revenue. And so we'll obviously monitor these trends as we go forward.

I'll just add on to this. I know there's a comment maybe people are thinking about fuel as well. I would just say that fuel is part of our pricing strategy and our net fuel impact, especially at FEC is expected to be relatively muted for FEC for the fourth quarter. Hopefully, that answers your question, Ari.

The next question is from Stephanie Moore with Jefferies.

Echo that congrats on the quarter. Since we do have John and team on the line, I wanted to touch on the LTL business a little bit. You clearly called out, John, some investments that we saw during the quarter having an impact on year-over-year profitability but also noted some pressure in underlying volumes. As you think about your outlook for the fourth quarter and then maybe even a 12-month outlook, can you talk a bit about those magnitude of investments we should expect to see is this fiscal a level, something that we'd expect going forward? Should we expect to see a step up? And then maybe any commentary on just the overall volume environment as well.

Thank you, Stephanie. Let me have Marshall with our CFO for FedEx Freight to answer that question.

Stephanie, thanks for the question. So let me first just talk about the quarter 3 results, and then I'll touch on Q4. So as you saw in the prepared remarks, our volume and revenue were down mid-single digits. That's not unique to Freight, it's a broader reflection of the LTL industry itself. As we look at the actual investments that we saw that we're defining or showing a separation costs. We did see some increased separation costs in Q3 and anticipate that to continue in Q4. We look at those as good cost incurrences primarily because they're related to building out our IT infrastructure, which we will need as part of our spin, which is projected to be at [ 6.1 ] and also building out our talent, and that represents both folks that are coming onboard externally and folks that are transitioning over from FedEx Corporation. Having those folks and those platforms are being built now and being ready to address the spin-off and the stand-alone FedEx rate is a positive outcome for us. And then as regards to your question about the outlook over the next, call it, 12, 12 months or 4 quarters and beyond, we plan to speak to that further at Investor Day.

The next question is from Richa Harnain with Deutsche Bank.

Perfect. So John, I think you did a really great job like comprehensively running down of what's embedded in the outlook. But just big picture. On one hand, given the strong base and kudos to you on a very good Q3 outcome. You're assuming less of a sequential step-up. I think that's clear. But on a year-over-year basis, the incremental margin in SEC sort of does come in. And as Raj, you just reminded us, you are assuming sort of demand hangs in Q4. So just wanted to better understand the headwinds on Q4. And I know it's very early, but looking on fiscal Network 2.0 starts to ramp and you have a ton of momentum in underlying your business. Do you think that we could look forward to EPS growth? I know it's early, but I wanted to give that one a shot.

Yes. Well, Richa, let me try to address that, and then of course, John can add to it. Strategically, one of the things that's very important from a sequential perspective that we need to be aware of is that our team has done just an absolutely outstanding job this peak season. It is the most profitable peak in our FedEx history. Now let me help me understand why this was the case. First, we did a fantastic job of forecasting, we're much more disciplined than data-driven than we forecasted and operated. And that better modeling and close customer collaboration led to a much more effective resourcing for peak. And this resourcing on both sides, scaling up and also scaling down post peak. Second, we have -- the commercial team did a really nice job managing through the strategies in place, especially driving revenue quality in the peak season. And finally, the efficiency with which we operated, and we have some early wins from Network 2.0 as we got into this.

So -- and the new technology tools that we talked about also helped a lot. So between our improved forecasting and efficiencies thereof between our commercial strategies and our overall efficiency, we had a really, really good peak. The reason I bring this out here today is that these are permanent changes in how we operate and really making a structural shift how we think about profitability. And sequently, the traditional seasonalities of our business is now fundamentally altered as our Q3 strength because of new standard. So that's one thing you got to keep in mind as we look on a quarter-over-quarter basis, on a year-over-year basis, pretty straightforward. We have a $500 million headwind in the year-over-year basis, $275 million is because of variable comp -- for variable comp. There's $135 million because of the LTL business and the $15 million they're off from MD11s. They explain your year-over-year impact on on the call. So hopefully, that puts it in [indiscernible] gives you a context and understanding of how we guided you for the full fiscal year.

Next question is from Scott Group with Wolfe Research.

So if I take a step back, we've got domestic volume up mid-single digit plus domestic yield up mid-single digits, international volumes just are positive, international yields are up a lot. And I asked this in the context of like I don't think we're seeing this anywhere else in freight world? Like I guess, I don't really understand why we're seeing this mix of volume and yield growth. And ultimately, I guess my question is like how sustainable is this going forward? Or do we need to start thinking about something like impossible like revenue comp for next year? Just any thoughts about why is this happening and how sustainable?

Thank you, Scott. I give you Brie.

Thank you for the question, Scott. I think first of all, this has been a couple of years in the making, right? We have been incredibly focused. We shared a lot of this at Investor Day that we really needed to retrench the team, and we have done so to be equally disciplined on B2B and B2C. We have a world-class value proposition in B2C and have had that for many years, as you know, that enabled us a 20-year run rate of market profitable market share growth. And we had to retrench on B2B. And we've done that, and we've got the commercial team really, really focused on that. So we feel great about this quarter.

We do acknowledge that this is an anomaly in the market. We have taken profitable market share, 11 consecutive quarters in Europe. Here in the United States, this is the strongest profitable market share growth we have seen in more than 20 years. So it was a remarkable quarter. We feel good about these trends continuing in Q4. A couple of things to note that near the end of Q4, we will lap the momentum that we are seeing on the international priority volume domestically here. We acknowledge we took on some very large health care customers late last year, and we will lap that. That being said, from a total volume perspective, we've got some momentum that will make sure that we sustain that. As we come out of this year into next year, the goal that we expressed at Investor Day is still our goal.

We're focusing on 4% revenue growth. We want to stay incredibly disciplined. That 4% target allows us to make sure we maintain revenue quality, but we feel like we've got great momentum as we exit the year and feel good about next year.

Well said, Brie, let me make a couple of points. One, what Brie meant was domestic priority volume on international. So that just make sure they get that. But secondly, let me take this opportunity to give a huge congrats to Brie and her commercial team. The execution has been just absolutely stellar, so [indiscernible] to all team.

The next question is from David Vernon with Bernstein.

So maybe just drilling in on that a little bit brief. If you look at the priority in deferred, that 6% and 9% sort of ADV growth, I'm assuming that's where the health care is and then the ground and home delivery piece is really where the Amazon sort of big and heavy is, can you confirm that? And then if you think about the impact that the Amazon onboarding is having with the big and heavy stuff, like how much is that driving -- like what percentage of the growth is being driven by that in the ground part of the business?

Got it. Great question. So yes, the answer is from a domestic priority perspective, that is where you will see the majority of the health care there is a little bit in the deferred, but actually, the deferred volume is actually coming from the momentum that we have in our small and medium customer segment. And so it's actually more spread between B2B and B2C that's actually not just health care. So I anticipate that deferred momentum will actually continue into next year. From a home delivery, yes, that is where you will see the majority of the Amazon volume. It is still ramping and it is not material in this quarter, and we don't anticipate it will be material. We feel really good about the partnership.

Just a huge shout out to the operators as they're bringing this volume on. We've been really disciplined and it will be accretive. They will not be our top customer, and it was not material in the quarter, but it absolutely is in there.

The next question is from Ken Hoexter with Bank of America.

Great job. Great to see the share gains Network 2.0 rollout gains and the Europe rebound for so many quarters. But I want to hit on the high end and low end of your outlook. It seems like salaries and benefits up 13% year-over-year at FEC. John, you mentioned some of the incentive comp, purchase trends cost scaling, but I guess given the combination, I would have guessed that cost would have come down a bit as you eliminate overlapping costs. Maybe walk us through how the math works there and what we should expect on that going forward.

Thanks, Ken. I think in large part, the impact that you're talking about relates to volume. And so it's really that's the factor that's in play here. We feel really good about our cost containment and all the initiatives that we have in place to manage our cost. There's been some harmonization with regard to our benefits and another big piece of this, too, is the variable pump piece that we've been talking about. So I think those 3 factors are all in play.

The next question is from Tom Wadewitz with UBS.

Yes. And congratulations on the strong results in execution. So I wanted to get your thoughts about the kind of potentially tighter air freight market. I think the [indiscernible] in the Middle East. And just how would you potentially see some benefit come through in your international. Would that be -- assuming there's a benefit from a tighter air freight market? Would that be on price? Would that be in the kind of IP freight or IP package? Or how do we think about the kind of maybe is that something you would expect? And where would that benefit come through in international?

Tom, it's Brie. So I think first and foremost is that we have -- if we think about the midrange or the midpoint of the range as we head into Q4, we are not material impact because of the conflict in the Middle East. So I think that's the most important. From a fuel perspective, the fuel index is doing its job. It's adjusted weekly. It will cover and ensure that we maintain profitability. At the beginning of March, obviously, significant capacity came out of the market. Actually, I think at the peak, it was close to 20% of air cargo capacity came out. That has now leveled off and it is closer to 10%. We have adjusted our pricing accordingly. We do have demand surcharges in place today. And so the team, as Raj mentioned, is just doing an outstanding job of keeping an eye on capacity pricing, a huge shout out to our air ops and our engineering team who are working tirelessly to manage this. But right now, we do not expect any material impact in Q4, and the team is just executing policy.

Next question is from Conor Cunningham with Melius Research.

Maybe just I mean I realize that the spike in energy has been -- is relatively new. But I was hoping you could give some perspective on historical, how like demand has trended after a sustained elevated energy environment, whether it's on your B2B partners or your B2C partners. I'm just curious if you could just help talk about a little bit about demand shock, like when would you expect that to happen? I realize you're not seeing it now, but if it were, like what are you looking for? How are you talking to customers today? What are they saying to you currently about their outlook right now?

Thank you, Conor, for the question. Obviously, this is not -- there are so many factors that go into demand. As we look into the fourth quarter, our current expectation is that the demand trends fundamentally remain unchanged. And our first 2 weeks in March have essentially been in line with our expectation. Obviously, we will monitor this extremely carefully. One thing that you hopefully will now recognize is that you're focused on the things that we can control and the resilience that now we have built into our system to manage through these kind of changes. So that's what we're doing. We expect the demand trends to be reasonably to continue into the Q4 as we have laid out, and we'll again monitor in just as we need.

The next question is from Jonathan Chappell with Evercore ISI.

John, Smith and Marshall, I know you'll probably touch on this on April 8, but I want to take the opportunity here as well. If you look at the margin at FedEx Freight, it's like at a 5-year low. I understand that the macro is not great. you're obviously hiring a bunch of people trying to get ready for the spin and to be a stand-alone company. But if we look at some of the other metrics like shipment rate of change is decelerating, weight is moving up a little but not much, yields moving up a little but not much, it feels like this is more top line driven than maybe we're seeing in other parts of the LTL segment, especially over the last quarter or 2.

So what kind of stems the tide on those revenue drivers, those top line drivers, is that something that's strictly macro? Or is there something that's going on as you're unbundling maybe from FEC to FedEx Freight that can kind of, I don't know, maybe flip a switch in the right macro backdrop as you start as a stand-alone entity.

Jonathan, this is Marshall. I'll start and then pitch it over to John Smith if he has any follow-up questions. So good observation. Generally, at the highest level, I do think it's a broader LTO market that we're in, and there's nothing necessarily unique about our volumes and what we're seeing in the various attributes of revenue, but with that said, we certainly recognize that we do and need to continue to improve our yield growth. If I think about where I believe those will come from -- we will expect to continue to improve our customer experience.

As Brie mentioned -- had mentioned, we expect to continue to be disciplined in our pricing, contract renewal. We also believe that the continued momentum will continue with the dedicated sales team, which John may speak to in a little bit. And then we'll continue to enhance our priority economy product offerings.

Yes. Jonathan, just to add to that, Marshall, mentioned our sales team, I wanted to expound on that. We have been hiring since February, a dedicated LTL sales team, and we're basically complete with that, and it's a mix of both great internal candidates and external liners. And our goal is to provide an outstanding sales experience, and it would be data-driven with personalized service for our customers. So the sales team also is strategically positioned across our network to align closely with our customers and our operations as well as our best asset, our drivers. So we're really excited about getting that team up and running and feel really good about the future going forward.

The next question is from Chris Wetherbee with Wells Fargo.

I guess I wanted to ask on the cost side. So it looks like this year is trending better than expected, you sort of reduced the cost dynamic in the bridge. It sounds like you'll be above the $1 billion of savings. And so Raj, I think you mentioned $2 billion cumulative by the end of next year is still the way to think about it. I guess where are there further opportunities on the cost side? And maybe if we can take a peak a little early at the bridge for next fiscal year, I know you're changing in the calendar, so it's a little bit confusing there. But what are the big pieces we should be thinking about? I know trade costs drop away, but what are the other factors that are sort of in your control?

Right. Thanks, Chris. And really, it's across the board is where we're focusing on our cost. We're delighted, as we said in our remarks that we're going to be actually exceeding the $1 billion in transformation-related savings. And the improvement has been based on the favorable execution on our structural cost-out initiatives to drive and through SG&A. Our maintenance costs are down. And as I've said before in this category, we view that as kind of a journey, not a destination. It's part of our culture. And so as we continue to migrate down on FedEx, Network 2.0, we're going to be continuing to find and discover more and more savings opportunities and efficiencies, and we're starting to see the leverage of that as you saw in Q3, which was a large part of the benefit that we saw, particularly in our base expense numbers. So we're excited about the future and where it's going to take us. And we're going to be relentless in going after our costs.

The next question is from Jordan Alliger with Goldman Sachs.

Just sort of curious, the ground commercial business, which I think has been up 1% or so for the last couple of quarters. Presumably there is business to business, so I'm just sort of wondering what B2B side of the equation will ultimately drive that growth right up?

Jordan, thanks for the question. So yes, ground commercial is B2B. That is sort of the backbone of the ground product portfolio. From a focus perspective, we think actually 3 of the 4 big health care -- or 3 of the 4 vertical focuses are targeted in that area. So we know automotive has opportunity in ground commercial, and we're very focused on that. As I mentioned, we've been looking at some of the opportunity to expand our weekend even further and use our weekend coverage for commercial purposes versus just e-commerce purposes, and we see some opportunity there. We know that as data centers expand that yes, there will be some LTL business for my friends over at Freight. But in addition, there is going to be some parcel business going to drive commercial app. And then also, I still have small business market share opportunity in this segment. This is an opportunity. The team has done an outstanding job from an SMB perspective. It has really been a great win this year for us as well and really getting our field sales team focused on the ground commercial products. So those are some of the focus areas there and the opportunity.

The next question is from Eric Morgan with Barclays.

I just wanted to follow up on the fuel comments. Raj, I know you mentioned the net surcharge impact will be relatively muted in FEC in 4Q. Can you just clarify what level of fuel prices you're assuming there? And then maybe just any help with the math, I think, would be helpful because I know you don't report surcharge dollars, but you have taken a lot of action on the surcharge curve moving it up over the last few years. So just curious how we should be thinking of the net fuel effect at different levels of fuel.

Yes. So it's a fair question. From a fuel surcharge perspective, the price of fuel, it's not that relevant. The index takes care of it. And so from a Q4 perspective, I think the implications are updated every week. There is a lag. So at the beginning of this quarter, obviously, we have some catch-up to do because of how quickly prices rose. I think most important is as they come down, we will also benefit because obviously, we benefit for the lag on the way down.

In Q4, we are not anticipating material upside from the fuel, so it's really not relevant from a this quarter perspective.

The next question is from Brian Ossenbeck with JPMorgan.

Maybe just to come back to Marshall for a second here. You're talking about the impact of some of the, I guess, spin-off costs or separation costs from the business, and it sounds like it's people and some hiring and investments and some of those are being held within -- they're not being adjusted out. But then on the walk to adjusted EPS, there's an additional $100 million of separation costs that are -- actually are adjusted out. So I just want to make sure I understand what's in and what's out and what's increasing here. And then maybe just following up on fuel to wrap it all up, if you can just give us a sense in terms of how this fuel price spike will impact the freight business here in the fourth quarter.

Brian, I'll take it first in terms of the -- what's in and what's out. So for both the GAAP and non-GAAP on the GAAP side, those investments that I spoke to that you just confirmed are the key drivers for why we saw those accelerate from the beginning of the year to the end. If you think about H1 versus H2, the majority of those costs within separation, I'll call it, GAAP separation costs. And again, they don't qualify as non-GAAP, so they are in included in GAAP expenses are driven by that. From a non-GAAP, the $700 million, John Dietrich, I'll probably mean on you. I think part of that increase is probably for the same reason, it's the cost of investments in technology platforms and other professional fees that are related to building out those platforms. I just wanted to check with you on that.

Yes. Thanks, Marshall, and that's exactly right. I think another important note is that incremental $100 million we're talking about is not incremental to the total project. It's just acceleration of investment that will benefit freight in the post-spin environment. So I want to make that point clear.

And do you want to take the fuel? John Smith.

Yes, I'll take the fuel. When you think about it from a FedEx Freight perspective, our field surcharge, just like Brie said, the index updates weekly and it's designed to protect our profitability. Our fuel surcharge is never truly a pure pass-through, but it's typically a net positive for FedEx Freight above our cost of fuel. The fuel surcharge can be a year-over-year headwind or a tailwind in any given year, and it's really remember only 1 element of our pricing strategy to truly drive improved revenue quality.

The next question is from Jason Seidl with TD Cowen.

Congratulations on the good quarter. I want to go back to the LTL front and I think we all realize it's been a challenging demand environment for all the LTL carriers. But we've just had 2 good industrial index numbers for the first time in forever. And I'm assuming that as you come to the end of hiring all the new salespeople, there's going to be a ramp time until they start producing some fruits for their labor. And should we look at this as going forward that you could see some -- maybe some sequential tailwinds on the LTL side?

Well, Jason, I hope you tuned into our Investor Day on April 8. That's where we're going to share a lot of detail about our go-forward strategy. And with that said, anyone who knows me from my FedEx tenure knows that I always prioritize safety above all with a total focus on our people, but also an extreme focus on revenue quality as well as strong execution. So I look forward to introducing you to our senior leadership team and laying out our strategy over for the next several years going forward for Freight. Now we put together a very strong team of internal and external talent on our leadership team, and we're excited to share what we believe is an extremely compelling story of freight as a stand-alone public company. And again, we will share long-term targets covering revenue, profit, other operational and financial metrics.

This concludes our question-and-answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks.

Thank you, operator. In closing, this quarter's results are a direct reflection of disciplined execution of our strategic priorities. I'm incredibly optimistic about our path forward and extend my sincere thanks to Team FedEx for their relentless focus and dedication. We will continue to build on this momentum as we deliver significant value for our customers and stockholders. Thank you very much.

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

Welcome, everyone, both here in Memphis and online. I'm Jeni Hollander, VP of Investor Relations, and we are delighted that you could join us today. Just a few reminders before we start. First, certain statements may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act and are subject to factors that could cause actual results to differ materially from those expressed or implied.

For additional information, please refer to our press releases and our filings with the SEC. The focus of today's event will be FedEx Corporation. We ask that you save any FedEx Freight-specific inquiries for our FedEx Freight Investor Day, which is coming up in New York City on April 8. Today, we are joined by FedEx Corp.'s CEO, Raj Subramaniam, and many of our business leaders across the company. As you can see from the agenda, we'll start with 3 presentations and a Q&A session, followed by a short break. Then we will reconvene for additional presentations and conclude with a final Q&A with all of our speakers ending around noon Central Time. For those here in Memphis, we will serve lunch following this session. Thank you again so much for joining us.

In just a moment, we will welcome Raj to the stage. But first, let's kick off the day with a short video.

[Presentation]

Good morning, and welcome to our 2026 Investor Day. Thank you very much for joining us, and we are very excited to be here with you today. Here at FedEx, our vision is simple: to make supply chains smarter for everyone. That vision defines who we are, the industrial network that powers the global economy. Day in and day out, our unparalleled network moves the goods that matter most with the speed, precision, visibility and reliability that modern commerce demands. This is an incredible responsibility and one that we don't take lightly. Across today's presentations, you will hear how every part of FedEx is sharpening its focus and strengthening the value of this industrial network through a better customer experience, a modern technology stack and a structurally lower cost to serve. Now let me start by grounding us in what makes FedEx indispensable and why we are so confident in our path ahead. For over 5 decades, FedEx has been transforming the world by connecting people and possibilities. From day 1, we changed the world with express overnight delivery. And today, we are transforming again, building the most flexible, efficient and intelligent network in our history. That work is rooted in the legacy that built this company. Freshman's vision created the foundation on which generations of FedEx team members have innovated, executed and earned customer trust.

We honor that legacy by carrying forward the people service profit principles that always define FedEx, innovation, integrity and a deep commitment to our people and our customers. Today, FedEx operates one of the world's most valuable industrial networks, the backbone of global supply chains. We move high-value, time-sensitive and highly regulated goods that power essential industries like health care, automotive, aerospace, technology and manufacturing. These are markets that reward the capabilities of an industrial network built for time-critical high-value shipments, and they create meaningful opportunity for high-quality, profitable growth.

Few companies can match the physical infrastructure and the capabilities that we offer. FedEx connects more than 99% of global GDP, transports approximately $2 trillion of goods every year and delivers more than 17 million packages each business day. We have thousands of sophisticated facilities, a modern and flexible air fleet, hundreds of thousands of vehicles and extensive regulatory and customs expertise that support global commerce. This infrastructure plus the deep expertise that runs it is what enables reliability at scale. It's also what allows us to take on the most complex time-critical shipments in the world day after day. And behind this network is our global team, more than 500,000 employees whose commitment to safety, service and excellence is at the core of the trust our customers place in us. Let's now take a moment to bring that to life.

[Presentation]

As you can see, our FedEx people are our superpower. And supported by their efforts, our advantage starts with something our customers cannot compromise on, and that is reliability. In the most complex supply chains, reliability and resilience are the difference between uptime and downtime between on-time production and inexpensive disruption. That's why customers increasingly choose FedEx, especially when reliability matters.

As Brie will discuss, that reliability creates a massive competitive moat. It's reinforced by our scale, our expertise and the operating discipline we have built across the enterprise, and it shows up in repeatable execution for our customers. FedEx is winning in some of the most attractive, fastest-growing and most profitable segments of the global economy. We are fast approaching the FedEx Freight spin in June, which will create significant value for both companies and establish 2 respected independent industry leaders. As a result of that spin-off, FedEx Corp. will have 2 primary businesses, U.S. domestic and international.

Today, you will hear us speak to each of these businesses as they are industry leaders within their respective markets. Both our U.S. and international markets are expanding and which provides a solid foundation for growth. Our portfolio is diversified with about 70% of revenue in U.S. domestic and 30% international, which gives us resilience across economic cycles and shifting trade flows. Historically, we have delivered strong growth with our core business growing revenue at a 6% CAGR since the turn of the century. We did this as we gained share through business cycles, navigated economic turbulence and scaled our business to establish ourselves as the leading industrial network in the world today.

The breadth and balance of this portfolio create a powerful and differentiated network, one supported by our customer-centric approach, world-class physical infrastructure and increasingly elevated by digital and artificial intelligence. It is this digital intelligence layered on top of the network that drives differentiated outcomes, not only for FedEx but for our customers. FedEx generates and processes 2 petabytes of data every day across our network. That data, combined with the right tools, powers our network and creates an increasingly predictive view of global trade flows. AI and data analytics are already informing network planning, forecasting, routing and customer visibility, and we are seeing a strong return on these technology investments. These tools give us real-time visibility into capacity and trade patterns. They improve service, reliability, reduce unnecessary cost.

The strengthen customer supply chains and unlock new revenue opportunities. Physical scale combined with our digital insight. Now that is the foundation of our industrial network that powers the global economy. Now let me describe the transformation that's shaping the next chapter of FedEx. It's a shift from a collection of separate but powerful operations to one integrated intelligent industrial network, one that delivers better service, runs on a modern technology stack and has a structurally lower cost to serve. This transformation has 3 tightly connected elements. First is network transformation, how we physically redesign the way packages move through our integrated air and surface network. Second is our digital transformation, which is underpinned by our digital backbone and AI capabilities. We are shifting human coordinated workflows to intelligent orchestration, standardized, digitized and AI-enabled, driving faster response, fewer exceptions and lower cost to serve, which will drive strong financial outcomes. And third is organizational transformation, how we are coming together as a united company with a world-class workforce and culture with One FedEx at the center, -- these 3 elements reinforce each other. And together, they unlock a superior experience for our customers and drive better financial results. That's how we will succeed and make supply chains smarter for everyone. This is not theoretical. We have already made real structural changes to how FedEx operates. Over the last several years, we have built a new way of working with DRIVE, unified key elements of our air and surface operations under Network 2.0 and strengthened the digital infrastructure that gives us visibility and control across the enterprise.

From FY '23 through FY '25, we delivered $4 billion in structural savings across air, surface and G&A. Network 2.0 and associated One FedEx initiatives are expected to deliver another $2 billion in savings by end of 2027. Through FY '25, we optimized hundreds of locations as we integrated U.S. and Canada Express and Ground surface operations, and we completed the Network 2.0 implementation in Canada. DRIVE, which started as a structural cost reduction effort, now defines our planning, our decision-making and our performance cadence. And even as we navigate volatility, including meaningful headwinds tied to global trade policy changes, this operating model has helped us enhance profitability and service. Earlier, I described the transformation triangle, network, digital and organizational with One FedEx at the center. Our strategic priorities through 2029 are the bridge from architecture to action. The 4 strategic priorities are how we activate that transformation, turning the elements of our transformation into an execution plan with clear accountability and measurable progress.

First, we are prioritizing growth in high-margin verticals, targeting high-value B2B and specialized B2C as well as premium global airfreight. We will concentrate our commercial energy where customers value speed, precision, visibility and reliability over the lowest price. That includes health care, where compliance and cold chain capabilities matter deeply. Automotive, where time-definite cross-border moments keep production lines operating. Aerospace and data center customers where uptime depends on precision. Second, we will build on our data and technology-led advantage, scaling our digital backbone, AI and automation to enhance customer value and strengthen operational leverage as we move up the value chain. Technology and data are fundamental differentiators that elevate the performance and value of our entire industrial network and allow us to reach our full potential.

We're operating in a world where the pace of change is increasing, and our data-driven solutions enable us to better support our customers irrespective of the operating environment. Third, we will continue to transform our operations, modernizing and optimizing our leading industrial networks. So we better serve our customers at a structurally lower cost to serve. In the air network, we are evolving Tricolor to align aircraft type operating model and demand, driving improved density, cost efficiency and flow-through. In the surface network, we are modernizing facilities, consolidating where appropriate, integrating station footprints and advancing Network 2.0. Internationally, the transformation is centered on Europe, which is our largest long-term value unlock. We are reengineering the network.

We're streamlining operations, driving end-to-end process efficiency, rightsizing our infrastructure and improving our service mix. And fourth, we will deliver ongoing efficiency gains, continuing to embed the Drive way of working and the One FedEx operating model as permanent disciplines that support durable value creation across the enterprise. Together, these priorities reinforce one another. They focus our commercial strategy. They power the network with intelligence. They keep driving structural cost to serve improvement.

As our strategy takes hold, it enables us to move up the value chain and exert greater control over the physical and digital journey and capture value at every point along the way. And this will translate our transformation into profitable growth, higher margins, stronger cash generation and increased returns. Now I'm certain that many of you have seen the announcement of our participation in a consortium that's making an offer for all shares of InPost. InPost is a high-growth, very profitable European out-of-home delivery enabler, specializing in automated parcel lockers. It offers a broad network of lockers, pickup and drop-off locations and doorstep delivery options, providing an innovative platform for profitable B2C growth.

While high-value B2B verticals are a core priority within our profitable growth strategy, our commitment to providing excellent service to consumers around the world remains unchanged. InPost has a strong presence and highly profitable track record in Europe's out-of-home delivery segment, complementing our strategy well. Together with InPost leadership and our fellow consortium members, we see a clear path to improving the efficiency of B2C last mile operations, enhancing returns and better serving our global customers across Europe. This transaction is expected to be accretive to our earnings in year 1 after completion, which is targeted for the second half of calendar year 2026. Importantly, FedEx and InPost will not integrate operations and will remain competitors each operating in their markets and segments.

Bigger picture, investing in InPost is a direct lever to help improve the financial performance of our European operations. It will allow us to participate strategically in the rapid growth of out-of-home parcel delivery across key European markets, taking a specialized approach to B2C growth on top of our ongoing focus on growing B2B high-value verticals. Walter Roos, the President of our European operations, will discuss the commercial and financial dynamics of this transaction in more detail later this morning. Now taken together, our 4 strategic priorities our participation in the consortium offers another lever to drive improved financial performance. Anchored on our solid performance in FY '25 and a strong start in FY '26, today, we're introducing our financial plan through 2029 for FedEx Corp., excluding FedEx Freight. Our strategy, structural advantages and strong operational execution give us the confidence in the financial performance we can continue to deliver over the long term.

We expect revenue to grow at a compound annual growth rate of 4% over this period. This reflects continued growth across both our U.S. domestic and our international segments with ramping contributions from higher-margin B2B and premium B2C. Importantly, we expect to deliver this growth with expenses growing below the revenue growth, driving 200 basis points of adjusted operating margin expansion during this time frame. This supports compound annual adjusted operating income growth from fiscal '26 to 2029 of approximately 14%, once again, excluding FedEx Freight. This higher profitability as well as our continued focus on optimizing capital investments is expected to generate $6 billion in adjusted free cash flow in 2029. So let me close with a few important takeaways. First, FedEx is an indispensable industrial network with unmatched global reach, reliability and expertise. Second, our network, digital and organizational transformations are well underway. These initiatives are redefining our intelligent industrial network with better service, a modern technology stack and a structurally lower cost to serve. Third, we are executing a clear strategic agenda, grow in high-margin verticals, build on our data and technology-led advantages, transform the network and deliver ongoing efficiency gains. But what truly sets this moment apart and what amplifies these efforts is the role of digital intelligence. This is the force multiplier. It is reshaping how we plan, how we operate, how we serve customers and increasingly how we create new services. That's what make today fundamentally different from any previous phase of transformation. These advancements will translate to a better customer experience and improved financial outcomes. We expect to deliver consistent high-quality growth. The structural improvements we're making will support stronger flow-through and higher profitability. And by driving greater capital efficiency and better asset utilization, we will generate increased cash flow to support stockholder returns.

Thank you all for being here today. Now you will hear directly from the leaders executing this transformation across our network, starting with Brie. Thank you very much.

Good morning. I'm excited to be here with you today to share our commercial growth strategy. Our growth strategy is fundamentally built on the trust that customers place in us every day around the world. The FedEx brand is synonymous with excellence. Every day, we connect 3 million shippers with 225 million recipients around the globe. Our value proposition is grounded in what matters most to our customers, trust, reliability and unparalleled reach. Across the United States, our domestic portfolio delivers speed and consistency. Beyond delivery, we bring visibility, data-driven optimization and deep operational expertise. Internationally, we differentiate through global trade expertise, digital innovation and industry-leading clearance capabilities. It sets us apart in every single market we serve.

We simplify international commerce for our customers by managing regulatory complexity, reducing transit variability and providing real-time insight from origin to destination. Our world-class logistics solutions help our customers run smarter, more resilient supply chains. Looking ahead, we are driving disciplined growth by focusing on the segments where our differentiation matters the most to our customers, particularly high-value B2B, specialized B2C, all supported by a disciplined and focused revenue quality strategy. Here in the U.S., our U.S. domestic revenue represents approximately 70% of our nearly $81 billion FEC revenue base. It has grown at a strong pace of approximately 6% CAGR since the turn of the century.

This growth represents more than 2 decades of disciplined execution and a very strong value proposition. B2B shipments represent about 45% of our U.S. domestic revenue base and are a key driver of revenue quality and market-leading yields. I know you like market-leading yields. International revenue accounts for roughly 30% of our consolidated FEC revenue with 75% coming from B2B. As global trade evolves, we will be well positioned to serve changing demand patterns. We, of course, are prioritizing intercontinental and cross-border revenue growth.

Our commercial strategy is centered around the transportation of high-value goods. For more than 50 years, FedEx has built an unmatched global infrastructure. As we have mentioned, we are the heartbeat of the industrial economy. We focus where our reliability and scale truly matter, the world's most essential and high-value industries. We are now at an inflection point in our history. Decades of capital investment have secured our market-leading position, and we have built meaningful capacity. Now we have the opportunity to optimize the full power of our network.

Our surface capacity is currently -- and our utilization is currently at levels that we have not seen since the pandemic. We will go with customers who value the speed, flexibility and reach that our network provides them. This will provide strong yield performance, and we will continue to deliver superior value in the market. We are very, very focused on B2B growth, especially 4 key verticals: health care, automotive, aerospace and the booming data centers market. Our target verticals represent a combined $130 billion of market opportunity, and these markets are growing faster than GDP.

While each B2B market does have its own unique needs, what we see is that they share similar requirements for high-value, time-sensitive requirements, and they all require digital visibility, clearance expertise and the ability to move large and complex items. We are targeting $6.5 billion of incremental B2B growth with $3 billion of that growth coming from new B2B volume. By capitalizing on this growth, we will expand our B2B share and drive significant operating leverage through to the bottom line. Embedded in our B2B strategy is the growth in global airfreight.

Global airfreight is nearly $90 billion, and we are especially focused on the premium segment of this market, which is $22 billion. We currently hold a 12% share. Our Tricolor strategy is enabling growth, and it's helping us maximize load factors and improving our asset utilization across our networks. Our airfreight strategy is still in the early innings, but I can absolutely tell you that it's working. Fiscal year-to-date, we have seen high single-digit revenue growth, and we've seen continued strong flow-through to the bottom line.

Let's now take a closer look at our verticals. FedEx, as I have mentioned a couple of times, is now the world's leading transportation provider in the health care industry with over $9 billion of revenue. Our next major focus within this market is the pharmaceutical industry. This segment accounts for nearly half of the $80 billion addressable health care market, and we are currently making some great inroads. Our year-to-date revenue for pharma is $1.6 billion, and it's up 9% year-over-year, again, with great profit flow-through. To compete in pharma, it requires a comprehensive parcel, airfreight and digital solution set, and we now have these 3 capabilities globally at scale. Pharmaceutical companies also need extreme accuracy and reliability to deliver the life-saving outcomes they need for their patients. The market response for FedEx focusing on pharma has been incredible. FedEx is the first integrator to achieve [indiscernible] level corporate certification. We received this certification across our network ramp and hub operations with 22 locations certified across the network. This confirms we meet the most rigorous global standards for handling time and temperature-sensitive shipments. Another key differentiator, our quality program.

Over the last 18 months, we have strengthened our quality capabilities to meet the most rigorous requirements of pharmaceutical transportation bids, and this has enabled us to spur that growth that I talked about earlier. Our digital capabilities further accelerate our advantage. With our AI-powered surround platform, we can anticipate when a reroute is required, whether that's for weather, hub congestion or even traffic. The benefit of this solution is building much deeper customer relationships and retention. Health care logistics is really precision in motion, and FedEx sets that standard for safety, compliance and reliability. For industry leaders like Bristol-Myers Squibb, FedEx sits at the heart of delivering for their patients. The automotive vertical is a great example of our critical role in the industrial economy. It's a $25 billion addressable market, spanning OEM manufacturing all the way through aftermarket parts. It's also highly complex. Auto parts cross the border 6 or more times, making visibility and clearance expertise essential.

This is where FedEx wins. Our global automotive revenue is $4.4 billion. As production returns to North America, our surface network gives us a clear advantage. We've expanded our Detroit facility. We're moving even closer to our customers and to their manufacturing footprint. While the business remains largely U.S.-based, we are scaling our international capabilities with a very keen focus in Europe. Recently, a leading manufacturer needed a finished vehicle moves from Southeast Asia to Europe on a holiday weekend. They called FedEx, while the vehicle was still on the production line, and we had just days before a very large, very public international industry event. We have a fantastic special services division. This team assembled a cross-border, cross-functional team. And of course, that vehicle was delivered on time. This is the expertise is why we are a trusted leader for folks like Cummins, Michelin and GM. And a great example of that is also that GM has named FedEx the Supplier of the Year for the last 6 of 7 years. We know automotive. We will continue to bring new innovation to this market, including the expansion of our Saturday delivery offerings. We're going to move into aftermarket dealerships across the United States. Data centers. FedEx is enabling the AI revolution from the ground up. We are moving everything from high-value semiconductor chips all the way to very large servers. We are extremely well positioned to benefit from the wave of capital investment that we've heard about across the world. Some estimates are between $500 billion and $525 billion of capital investment in this space in 2026 alone. So we can conservatively estimate a $7 billion addressable transportation market, which is focused on data center and IT service equipment. These shipments are bulky. They are very high value and they require the specialized expertise that we have had for decades. A large amount of these components are produced in Asia and shipped into North America. We are the market leader on the transpacific lane, and so we are poised to outpace market growth given our leading position on this lane. We've launched a new specialized data center sales team to establish FedEx as a leader. I saw it firsthand in Taiwan in January. This team is amazing. We are very excited about this opportunity. Aerospace. Our aerospace revenue is nearly $1 billion, and we are gaining momentum in this $11 billion addressable market. We support the entire value chain from OEM airframes all the way to critical component suppliers. Moving an airplane engine requires care, and we offer white glove solutions that are not readily available in the market. For example, our international priority freight has the fastest transit times in the market. And for just-in-time needs, we have a service called FedEx Custom Freight, which has the highest boarding priority. It has the latest cutoffs and it has custom delivery windows. We can move globally faster than just about anyone. The movement of high-value goods is in our DNA. Let's now take a look at this in action. -- in the United States, our unmatched surface network delivers a clear speed advantage. We have 7-day delivery and industry-leading rural coverage.

We pair this with best-in-class return solutions, transparent pricing and digital tools that simplify shipping. They also provide real-time visibility, and all of this is integrated seamlessly within our customers' workflows. It is important to note that our commercial model is different for small and medium businesses. We support them directly with our commercial team. Our loyalty program is the only in the industry, and it rewards customers for their shipping, which, of course, they love. This feature has helped support our growth. This fiscal year-to-date, we have grown 13% year-over-year. Shifting now to B2C. We are focused on profitably growing our share of the $95 billion global market, where we currently have approximately a 30% market share.

Our strategy is to prioritize the high-value segments where our network provides a distinct advantage, long haul, heavyweight and cross-border e-commerce. Unlike those focused on the last mile, our strength is end-to-end solutions. 70% of our ground service revenue comes from shipments traveling over 300 miles. Half travel more than 600 miles. This focus on higher-yielding goods where quality and reliability command a premium has made us the market share leader in this segment, and we still see room to grow. We are also building new capabilities to help retail customers grow. A best-in-class returns experience is critical for retailers. It helps them increase card conversion and build customer loyalty. To that end, we recently launched a new post-purchase digital platform in collaboration with [indiscernible].

This platform helps retailers simplify the entire post-purchase journey and addresses a U.S. market of approximately $500 million. When combined with our vast retail network and labelless return options, this creates seamless experience for consumers. For us, it's also a smart investment. We love a return as it shows up in our network as a profitable B2B move. We expect to deliver low single-digit growth in B2C volume through 2029 and are ensuring the growth is both sustainable and profitable.

We are confident this focus on key B2B verticals, SMBs and high-value B2C is the right strategy, a strategy that will deliver strong financial outcomes. We are targeting a 4% revenue CAGR through 2029 or $13 billion in top line growth, and that is versus an assumed fiscal year '26 baseline of approximately $85 billion for FedEx Corp., excluding FedEx Freight. We expect our U.S. Domestic segment to generate $8 billion of revenue growth, up 4% and our International segment will deliver $4 billion, also up 4%. We expect an additional $1 billion will come from FedEx Office, logistics, supply chain and DataWorks. Importantly, for FVC, we expect incremental revenue to be split evenly between yield and volume, each contributing $6 billion through 2029. Through a disciplined and differentiated strategy, we will generate premium revenue and drive sustained strong bottom line flow-through. For the last 20 years, we have taken market share while maintaining market-leading yields. Our customers feel the FedEx difference. They see the consistency of our service, the reach of our network and the strength of the technology behind it. They choose FedEx because we help them compete and win. That trust drives deep demand, strong customer loyalty and scalable long-term value creation. The FedEx of tomorrow will build on these strengths, powered, of course, by our incredible team around the world who every day work to deliver the Purple promise. The purple promise, of course, is to make every FedEx experience outstanding. From vaccines to high-value auto parts to GPUs, FedEx moves what matters most.

Thank you for your time, and I will now turn it over to my partner, Vishal. Thank you.

Good morning, everyone, and thank you for being here. At FedEx, our ambition is simple and bold to make supply chains smarter for everyone. As Raj highlighted earlier, our scale is tremendous, which is a distinct competitive advantage. Our next era will not be defined by the scale of our physical assets alone, but by how we combine unmatched real-world network with the power of intelligence at scale. We are creating an industrial network that can sense, decide and adapt more rapidly than ever. We are activating our physical network, data and customer relationships, not just to power FedEx, but to build and bring to market a new generation of intelligent supply chain solutions.

We're going beyond simply moving goods to orchestrating commerce itself. where every touch, every decision are a value driver for a more reliable, efficient and effective logistics. We recognize that AI has the potential to be one of the greatest force multipliers in FedEx's history. Our ambition has 2 tightly connected elements. One element is inside our core operations. We're building a more efficient digital supply chain, lowering our cost to serve, improving reliability and making it more valuable for our customers to do business with us.

The other element is beyond FedEx. We are taking capabilities we have proven inside our own operations and extending them outward, while simultaneously creating a new suite of solutions to solve for global supply chain inefficiencies. The ultimate goal is to put our intelligence to work, helping our customers and our partners and helping them build smarter supply chains of the future. These elements reinforce each other. As we improve decisioning and execution internally, we create reusable capabilities that can be productized externally. This creates a powerful virtuous cycle as we work with our customers, we learn faster, which in turn allows us to improve how we run our own operations. To understand where we are going, it helps to be candid about where we are coming from. Under the company's former operate independently philosophy, FedEx accumulated significant complexity, including 7,500 applications across the enterprise and duplication across the workflows. In a world where conditions change daily and customers expect precision and transparency, that complexity is the opportunity our transformation is designed to capture. A key aspect of our ongoing digital transformation is moving from human coordinated workflows to a more seamless and digitally facilitated orchestration.

We are standardizing the work, digitizing the workflow and embedding AI into the decision loop so we can respond faster with fewer exceptions and lower cost. Big picture, we are taking a fresh look at all the opportunities across the organization. We are digging into the cuts of our operations to tackle the biggest challenges and constraints to build a more resilient network and drive greater productivity and efficiency across FedEx. Our goal is practical, simplify to automate, modernize to accelerate and use AI to execute at scale. Let me outline in detail the areas of opportunity for value creation. First, efficiency, taking structural cost out and freeing capacity across enterprise and operational workflows. Second, differentiation, improving service, reliability and enhancing the customer experience by applying intelligence to the core FedEx network. Third, new value creation. FedEx DataWorks. Through FedEx DataWorks, we are extending proven FedEx intelligence to move up the value chain with customers, helping them coordinate their supply chains and creating new high-margin digital revenue streams.

Efficiency starts with the basic premise. You can't automate or you can't scale automation or AI on top of fragmented processes. Process simplification under One FedEx is what makes speed to value possible. It reduces handoffs, minimizes variation and creates clear, repeatable workflows that technology can automate. For example, one way we are navigating global trade volatility is by transforming our demand and capacity management. We are shifting from static workflows to connected workflows that integrate dynamic real-time market insights. This powers our teams to respond faster to market changes and adjust plans with more precision, increasing supply chain resilience. As our forecasting AI models become more sophisticated, this workflow will further increase our competitive advantage and enhance the customer experience. This is the pattern across the enterprise. Simplify first, digitize the workflow next and then embed AI so decisions improve continuously. We are transforming our core operations by embedding predictive AI directly into our physical asset base from aircraft and vehicles to our facilities. This approach maximizes our return through intelligent dynamic orchestration. As a result, our physical network has become a strategic advantage customers cannot easily replicate, and it has also improved customer experience and loyalty. For example, we have transformed our maintenance from a fixed schedule to a predictive science.

By combining rich sensory data with proprietary AI models, we can anticipate equipment failures in our sorting systems before they occur. This shift is already saving us $10 million annually, and our goal is to scale it significantly across our network and set a new standard of service. The success of this AI-driven intelligence was also proven during this year's peak. We experienced no significant technology disruptions, enabling our operations team to execute flawlessly amid surging volumes and deliver strong service during our most critical period. Turning to differentiation. This encompasses better execution and integration of the core FedEx network, premium solutions, more consistent service and faster recovery. We are now deeply embedded in our customers' operations. When their ERP system processes an order, it routes through us. When their warehouse management system releases inventory, it routes through us. When their procurement agents makes logistics decisions, they're accessing our intelligence. This deep integration built over years creates a powerful and sticky customer relationship that's not easily replicated. We are already seeing tangible proof points of this. For example, because of the work that we've done in our data and technology capabilities, we have fundamentally modernized the shipment clearance process. In clearance, we've historically operated with massive fragmentation with more than 470 different clearance applications. This meant we had digital initiatives we could not scale without addressing the root issue of duplication.

By leveraging a streamlined powerful suite of tools, including Express Clear, broker Butler and FedEx import tool, we sustained high performance through a massive surge in brokerage filings after the U.S. de minimis rule ended. Our technology, combined with our experience in regulatory compliance, enabled us to ensure consistent compliant processing at scale while improving the quality of customer data. As a result, despite the surge, we were able to maintain operations, make faster and more accurate decisions and deliver for our customers. This is exactly the kind of capability we focus on scaling, measurable, repeatable and tied directly to superior customer service. Now let's talk new value creation through FedEx Dataworks. FedEx Dataworks generates 2 petabytes of data daily, capturing every scan, movement and customer interaction. The opportunity is not only the data volume, it's converting that information advantage into predictive signals and coordination capabilities that create value for customers. Dataworks, as I mentioned, is designed to move up the value chain. This is a fundamental shift for FedEx. We are combining our physical network and our expertise with our unique data and customer trust to create a new class of higher-value, higher-margin services.

As a result, we are moving beyond delivery to becoming a true partner in orchestrating our customers' entire supply chains. In today's dynamic world, customers expect faster, smarter, more resilient supply chains. which creates a significant opportunity for us. And the opportunity is massive because global supply chains remain fragmented. Most participants still optimize locally, lacking the shared visibility for effective end-to-end coordination. The result is a coordination gap that traps capital and causes systemic delays. Based on one estimate, the cost is staggering. An estimated $1.8 trillion is lost annually to inventory distortions like out of stocks and overstocks. FedEx has a differentiated right to win here because we uniquely combine first-party operational data with the physical network required to execute actions, not just recommend them. Entering this market will not only allow us to provide better solutions for our existing transportation customers, but it will also significantly expand our customer base into new segments. We expect value creation associated with DataWorks to evolve over time.

We are focusing on data intelligence and insights, turning FedEx operational signals into predictive insights and benchmarks embedded into customer workflows, including through partners and existing systems of record. Our recently announced partnership with ServiceNow and Dun & Bradstreet marked the beginning of this journey. Next, productized capabilities. We are extending proven internal tools like route planning, risk or customers -- customs intelligence capabilities as modular offerings. And finally, orchestration. We are coordinating action across multiple parties. This is a longer arc, and we will be selective, prioritizing use cases where we can demonstrate measurable customer outcomes and attractive economics. Now let's shift to how we are executing the changes needed to deliver on our full potential. Our digital transformation execution engine is powered by 4 pillars designed to improve FedEx for team members and customers worldwide while also strengthening supply chains globally. These include: one, reinventing business process to shape a unified One FedEx future state, modernizing technology to integrate AI, data and engineering, embedding and scaling AI through a strong data and responsible AI foundation; and lastly, building the talent and governance to sustain it. Those are our strategic priorities for data and technology. They're also the execution engine that turns opportunities into measurable outcomes.

Strategic priority one is to reinvent the business process. We know complexity is the enemy of scale. You simply can't automate processes that vary widely and you can't embed AI to get consistent results. Business process reinvention reduces fragmentation and complexity by creating digital-first road maps and a unified business architecture for One FedEx. It leads all transformation efforts by defining the preferred future state for processes and systems across the enterprise. As an example, we have consolidated 9 Sought processes into a single streamlined workflow and have simplified clearance processes by using digital self-service and AI to replace hundreds of legacy applications. And we are well on a path to streamlining 100% of our enterprise workflows with scale adoption across all regions. Strategic priority 2 is technology modernization, simplifying the estate, retiring legacy technology so we can move faster and operate more reliably. Simplifying our processes enables us to modernize our technology and eliminate complexity. We are actively replacing hundreds of redundant legacy systems with a more agile cloud-first platform. This has already reduced our application footprint by 30% with a plan to get to 50% by 2029 with near 0 redundancy.

This is how we reduce run cost, improve resiliency and increase speed to deliver new capabilities. Strategic priority 3, is to embed and scale AI. And our AI journey is well underway. For years, we have invested in predictive and prescriptive analytics, robotics and automated systems to strengthen our operations. But the real shift began when we built Atlas, our enterprise data platform, which today houses a substantial portion of FedEx's data and supports more than 200 AI use cases across our business. By the end of 2027, we plan to consolidate 100% of our data into Atlas. This data foundation enables us to responsibly provide real-time predictive insights for every decisions across the enterprise. Now as AI technology matures, we are moving beyond isolated projects to a single unified AI foundation. This platform combines our trusted data and govern models with autonomous agents, all guided by our responsible AI framework.

This is how we scale these powerful capabilities across the business safely and without increasing risk. Our system-level approach to trust is also why we have joined the Hidera Council. Alongside other industry leaders, we are helping govern a shared digital network where data is verified and trusted at a global scale. But our strategy is just not about building foundational technology. It's about applying it where it matters most. We are applying AI to the toughest, most complex parts of our business from customs clearance to air and surface operations. By 2028, we will have AI integrated into more than 50% of our core operational workflows.

This is where AI directly improves service, drives down cost and creates a lasting competitive advantage. Strategic priority 4 is our future-ready talent and accountability. We firmly believe that technology is only half the story and unlocking its potential starts with our people. This is why we have invested in a persona-based AI fluency program for 300,000 employees, complemented by advanced training for 100% of our technology specialists. We are also building accountability into the operating model through scorecards and governance that track adoption, performance impact and risk controls. So this transformation scales responsibly and delivers measurable outcomes. Let me close with 3 key takeaways for you to remember. First, -- our moat comes from a powerful combination, our physical network, which is incredibly difficult to replicate and the massive stream of proprietary data that only this network can generate. We are embedding AI into this system, creating a defensible advantage competitors cannot replicate. Second, we have 2 powerful growth engines. We are driving structural cost out of our core operations while simultaneously building new high-margin digital revenue streams through FedEx Dataworks. And third, we are delivering now. Our disciplined execution is already producing measurable results from tens of millions in savings to outstanding peak performance. And this is just the beginning.

Thank you all for being here. We'll pause now for a moment to set up Q&A, where I'll be joined by both Raj and Brie, and thank you again.

I'm pleased to be joined on stage by Raj, Brie and Vishal for our first Q&A session of the day. This morning in our press release, we shared an update on our expectations for the third quarter. But given the longer-term strategic nature of today's discussion, we request that you refrain from asking questions about our near-term outlook and save those questions for our March 19 Q3 earnings call.

Additionally, we plan to host a larger Q&A panel with all of the speakers later this morning. So for now, please focus your questions on the topics that we have just covered. [Operator Instructions]. And with that, let's start Q&A. Start with John.

John Chappell, Evercore ISI. Vishal, very interesting presentation, 2-parter. The new revenue stream, so I understand that your customers are very interested in using your data to help with their supply chains and there's a potential for you to sell your services to kind of help them. So can you maybe explain how that's going to look? Is that going to be like a SaaS system? Is it just a fee? Is there going to be a percentage of productivity that you're getting for your customers that will flow then through the DataWorks revenue stream?

And then secondly, it seems like with this Circuitus flow that you mentioned before, there's even more potential benefit to FedEx specifically from using your customers' data as well. So is there any way to kind of quantify how that helps you once you have your customers' data, whether that's through efficiency or also through new customer wins?

John, thank you for the question. And you're exactly right. I mean the ways in which our customers are actually engaging with us and the potential that we see is across multiple spectrums. So when we look at DataWorks, we actually look at it from 3 separate lines of businesses. Our first line of business, the way we look at it is insights. We are creating a data graph that allows our customers and partners to subscribe to it to -- for predictive signals and insights that they need for their business. And when you look at Dun & Bradstreet and what we have done with the Retail Momentum Index, that's a good example of it. As that index gets subscribed, Dun & Bradstreet and us have the revenue share. So that's one element through which we will see revenue flowing into us. The second thing is you mentioned about SaaS and software products. So when we talk about productizing our internal capabilities and extending them outward, RoutesSmart, which we use for last mile planning is a good example of it, which is a software solution. It's a SaaS-based that our customers can use. There's a lot of companies out there with private fleet who are extremely interested and don't have the scale to build this capability from scratch, and that will be more like a product revenue in -- through RoutesSmart. And there are other examples of that, that we will do with clearance. We will do the same thing I spoke about Mobius, which is our internal predictive maintenance tool. There's a lot of manufacturing and companies out there that, again, don't have these capabilities and they want to leverage these. So that model will be more in the -- how you would see our software solutions being productized. When you get to our third line of business, which is the orchestration business, it will be a combination of all of these. What we're finding increasingly interesting for our customers is, one, our deep expertise in supply chain domain. It's less about just the data that we bring in that third line of business, but we are building a platform that will help them coordinate their supply chain end-to-end from inbound to outbound through warehouse management, through transportation management, through inventory management.

And that is where the massive opportunity in supply chains inside our customers' environment is because they do not have the end-to-end visibility. And there, we haven't yet locked in on what is going to be our exact pricing model, but that's what we are working on. It could be SaaS-based. It could be outcome-based. It could be fee-based, but those are the things that we are working through. And right now, what we realize is the customers are actually open to all of them because there's just so much value in that space.

Chris Wetherbee from Wells Fargo. Brie, I was wondering if you could break down the revenue opportunity that you see over the next few years, particularly on the volume side. So the 2% seems reasonable. Kind of what's the underlying macro assumptions behind that? And then maybe where you see sort of the most interesting opportunities? And maybe a specific one on the data centers, kind of what's in the number now? What is the growth opportunity going forward? I don't think there's much in the number now, but kind of curious how you think about that.

So from an underlying momentum perspective, we planned quite prudently from an outlook perspective. So we did not change really any macro assumptions. We've got pretty conservative assumptions, I think, actually for U.S. consumer. Obviously, we did anticipate the improvement in PMI that we saw earlier this month, but we have not included any further improvements in our macro assumptions. So from a B2B perspective, I think we're planning very prudently. From an e-commerce perspective, you will see that we did plan to grow slower than the total e-commerce market. That is intentional. It allows us to be really specific about where and when we want to play. It will allow us to take market share in the heavier weight intercontinental and long-distance e-commerce.

But right now, what we see in e-commerce is actually the sub pound and deferred market is the fastest-growing segment, and that's not really a priority for us. So we're very focused on those 2 things. From a data center perspective, we actually -- in the front half of this year, it is not material. I got asked that question a couple of times last night at dinner is we are starting to see a lot of customer demand. What is really excited about this market is that it's booming, and there are very few kind of norms set.

I was in Taiwan in the first week of January, and it was really interesting because I went in to do a bigger, longer-term conversation with a potential customer, and they wanted to ship a server that week. That's how quickly things are moving. When I asked about their clearance, how they wanted, who was the importer of record, who was going to be the payer, none of that was established. It was like what's easiest. And so we really are excited about this space. We have this incredible team out of our Asia organization who has deep expertise incredible relationships, and I really think this is a very significant opportunity for us to take a leadership position because you say the name FedEx and it opens every door in this space. They trust our reliability and our capabilities. So not material to date. And then when you look at the distribution from our B2B growth of that revenue, we really see it's pretty evenly distributed, but I will say health care is the largest proportion.

Richard's Harney with Deutsche Bank. So another one for Brie. Brie, you said that utilization levels today in the network sort of rival what you saw during the pandemic. I found that really interesting. And that, in my mind, supports the 2% yield assumption that you have for your outlook over the next 3 to 4 years. Maybe can you speak to if you think that condition kind of exists across the industry? And then obviously, that helps from a mix perspective.

You can be choosy like you just spoke about, about the volumes that you're bringing on and lean into higher-yielding business. But maybe talk about other tailwinds to the pricing story, ancillary pricing opportunities you see to enhance yields and how you can shift capacity in case the environment gets more competitive to sort of ensure that tightness is more durable?

Sure. Okay. Good question. Keep me honest if I miss any of the pieces. So fundamentally, how is -- what's the capacity like in the market? And do we anticipate? What do we anticipate moving forward? So as I mentioned, right now in the U.S. domestic market, our network utilization is at a very, very good place. We have not seen this utilization since the pandemic. We do anticipate with the continued improvement in Network 2.0, and Scott is going to come up here and talk about Network 2.0, excuse me, in a minute that it will continue to improve. We're actually seeing right across the market. I think you've all seen the competitive headlines. We do anticipate that capacity will actually further tighten here in the United States. Rest assured, we have room for B2B. There's a lot we can do within our existing networks to flex. We can certainly move e-commerce on to a later sort. We have the ability to continue to grow and take market share from a B2B.

So I like what we're seeing. We think it's going to get better. the pricing fundamentals, I think Richard was the second half of your question. So right now, and I think I shared this last quarter that the fundamentals in the market are good. Year-over-year, we have absolutely seen a better pricing environment, it's always competitive, but it is certainly better than it has been, and we feel really good about it.

I think what's really important is that you are seeing structural changes to pricing. My favorite example is the peak surcharge. I don't think it gets enough airtime. To make money in e-commerce, you have to account for the incremental cost. And to serve these customers well, you have to say yes at peak, right? You can imagine this is the most important time for our retail customers. So to say that we're not going to surge with them is just not a sustainable business model. Peak surcharges are a win-win. It lets them sell at Christmas and it allows us to bring on the resources profitably to do that. So from a pricing perspective, you are seeing structural changes. We've made significant improvements in peak. We've made significant improvement in what we call large heavy hard to handle over 50 pounds. We are by far the market leader there. And these are very profitable packages.

They're hard to move. Scott Ray, my friend, who's back stage will tell you they are very, very difficult, and nobody else can do it like we do. So we charge for that. So I think that is really the most important structural change is that we are really adjusting our pricing strategy to cover all costs to make sure that we're getting paid for our differentiation. And what's exciting is what we've learned here in the United States. We're taking to Europe. We've taken to Asia. We no longer constrain ourselves to just peak surcharges at Christmas. We have to adjust when we've got capacity. So I like the environment. It is competitive, rational, better than last year, and we've made a lot of structural changes.

So let me take one moment to brag on Brie here. I think revenue management is a very tricky business, especially in a network business like ours. And we have always done a very good job of that, and we kept our yields higher than the industry average for a long, long time. She's taking it to another level. We have got the best process in the business, and there's just a huge kudos to Brie and her leadership in making that happen.

Jordan Alliger, Goldman Sachs. Just to follow up a little bit more on that specialized B2C or high-value B2C that you've been alluding to. Can you maybe help me understand a little bit more what that is? Is that the heavier weight stuff that you were talking about? And the TAM for B2C is very big. Like how big of a chunk is this opportunity?

Yes. So great question. So when we think about specialized B2C, there's a couple of things. There's 2 distinct ones, small and medium customers who generally don't have multiple fulfillment locations. And so they do tend to longer zones, which, again, as we just talked about, is the vast majority. The second is anything. And when we say heavy weight, like we are the dominant market share leader for over 50 pounds. We are also incredibly competitive, 2 pounds and up.

And so we do look at sort of everything from a weight perspective is definitely a consideration. And then the third factor is what's the value of the good. right? If you're shipping T-shirts, FedEx might not be for you. But if you were shipping or rings, FedEx is for you. I know my friends at Aura would be okay with that one. So those are really the 3 components. And then you layer on the international element because, again, we're very well positioned in luxury goods, which is a very nice segment in that. So the -- within the $95 billion, we've got 30% market share. And I see a good trajectory to take another couple of points of the period that we're talking about.

David Vernon with Bernstein. Thanks for hosting us over the investor event here. So as you think about the improvement in the international margins from 3.6% to 8%, can you talk a little bit about which regions are driving that? Is that an Asia Pacific sort of maybe moderating because of trade flows and Europe getting a lot better? And can you talk a little bit more specifically about how the commercial relationship that you envision with InPost is going to affect sort of margins, profitability, productivity inside of Europe?

So let me start and then Brie can add on here. I think of the $1.4 billion of improvement in international, $600 million comes from Europe. So that's the centerpiece of the strategy. Having said that, every part of the world is now an opportunity for FedEx, and we're going to grow everywhere. However, the trade patterns are very different and -- but it doesn't matter because of the scale network that FedEx already has. We are covering the globe.

And so you're going to see later on in the presentations how we're talking about the rest of the world, and Richard is going to have a presentation about that. But we see significant growth in all parts of the world, but centered heavily on Europe, which is the majority of the profit improvement. What was the second question, sorry?

So yes, I think this InPost deal that we just announced allows us to focus our efforts on B2B, the heartbeat of the industrial economy in Europe. This is a complementary skill set, so to speak. And when after close, we expect it to be accretive year 1. Anything you want to add?

No, I think that's well covered.

Terrific presentation. I guess I want to ask a question about what's not being discussed. If you're saying we're going to be more selective about which pitches we swing out on the B2C, you have this big network of contractors, and you got to feed that network. So maybe a little later on, we talk about how we're going to change that B2C light value delivery model. But if you're being more selective about your B2C pitches, what does that mean for how that network is going to operate and be more profitable than it was?

Well, I think first and foremost, like we just talked about, the network is full. So we are feeding our contractors, and they are very happy. We also think that we have the very best delivery model in the market. It is well positioned. And Scott will share from a Network 2.0 perspective, we've got the best of both worlds. We've got this fabulous contractor model that supports small business. These are entrepreneurial businesses. They show up for our customers. It's just -- I just had a very large -- we had a very large top to top with a retail customer on Monday, and it was their first peak with FedEx, and they were blown away that each of these business owners went into their stores, introduced themselves, made sure that they were well service.

Capacity is a good place. We are going to grow volume. We've got a very competitive contract with them. We feel really good about that relationship. I don't anticipate any concerns, and we are, of course, planning to grow.

Tom Wadewitz from UBS. So I guess I wanted to ask a little bit about the kind of sensitivities like if things don't develop quite as you anticipate, the 2% volume versus 2% price or revenue per piece, which are you going to kind of favor if the market doesn't grow as much for share gain? Like if that volume is weaker, will we get the -- will you say we really need a 2% price? And then maybe for Raj, so that's for you, Brie. And for Raj, 200 basis points of margin improvement, that's pretty powerful for earnings. What if the 4% revenue growth is 2%, right, because the volume is not quite there. Are there levers to still get that 200 basis points of margin?

We're going to have a balanced growth strategy. I think we have planned very prudently. I am confident that we can deliver both your yield and your volume. As I mentioned, we are going to go slower than market in B2C. So I'm comfortable with this. I think we can do the [indiscernible].

And I think the quality of our revenue management practices is so high now that we can manage this mix very effectively. And the whole point of the transformation that I talked about is to build resiliency. And we have demonstrated that amply in fiscal year '26. And this has been a most challenging set of circumstances that I have encountered in recent past. in terms of the changing dynamics of trade. And yet, here we are delivering. This would be a very different scenario a few years ago, but it is only because of the transformations that are underway. And these transformations are only gathering strength as we move forward. We are in early innings on multiple levels of trans. So I'm confident that we can adjust to the market dynamics. And by CY '29, these outcomes look well within reach.

Do you think you can offset the [indiscernible]

We can manage through it. And -- but I think we can get to the place with the targets that we talked to you for end of CY 29.

This will be our final question for this Q&A session. Ken?

Thank you for the last question. Ken Hoexter from Bank of America. So maybe I'll take Tom's question to maybe the other side is the operating leverage, right? Just if you see maybe an acceleration of cost cuts, is it just operating leverage that you're using to get the 200 basis points? Can you talk about the split to get the operating leverage and maybe what the potential is for higher? I remember being at a FedEx Analyst Day 25 years or 20 whatever years ago, where FedEx targeted double-digit margins. So is that just getting leverage to get there? Or are there cost cuts that can get you maybe to the upside?

Well, I think I'm going to point to the same answer I just gave you that what gives us confidence is really the transformation that's underway at FedEx and underpinned by the changes that we have in the network transformation and the digital transformation and organization. These are idiosyncratic advantages for FedEx because we are in the middle, and these are obviously significant upside yet to come. So the simple formula of 4% CAGR on revenue growth and 2% CAGR on expense gives you the 200 basis points improvement.

And I think we can do that. And it's just -- we have a lot of confidence we can get this done. Again, it's all -- the revenue assumptions here are very prudent, and we can be targeted. The capacity environment allows us to do so. The pricing environment allows us to do so. But the market environment, especially focused on those industry verticals that Brie talked about, I'm confident on the execution on our part on the things we control. We put it together, that's what happens. And we're very confident of generating the $6 billion of free cash flow as well.

Great. Well, thank you, everybody, for the Questions. Thank you, Raj, Brie and Vishal as well for the answers. We're now going to take a 20-minute break, and then we will see you back here shortly.

[Break]

And now please welcome Kawal Preet, Executive Vice President, Planning, Engineering and Transformation to the stage to begin the second half of our program.

Good morning, and welcome back. I am Kanwal Preet, and I lead Global Planning, engineering and Transformation at FedEx. I moved into this role in October. I've spent close to 3 decades in Asia with FedEx serving in engineering and operations and more recently, as the Regional President of Asia Pacific. This is a new role at FedEx. And let me tell you why it was created. It's about designing and building the FedEx of tomorrow.

FedEx has long been the heartbeat of the industrial economy. We move what powers factories, data centers, hospitals, AI and supply chains around the world. In a world focused on want it now, people forget the close to 10,000 or so miles of commerce where goods move across the globe. That's what we do best. We connect every point to every other point physically and digitally at global scale. And that infrastructure built over decades is more critical to the global economy than ever. FedEx has one of the world's most advanced transportation and logistics network.

And my team's mission is to transform and unlock its full potential. As the world reglobalizes, we are moving beyond managing the pieces of the system to designing, building and orchestrating the entire system for constant agility, ensuring we stay ahead of the world in motion. What we are doing at FedEx is a fundamental shift in how FedEx is creating value, resulting in a stronger enterprise and enabling resilient supply chains. My organization is responsible for designing the global network and driving the strategic transformation that is reshaping how FedEx operates worldwide.

We built the architecture that enables FedEx to move smarter, faster and with even greater precision. As Raj outlined, we are moving from strong but largely independent operations to one unified technology-powered industrial network, a network defined by best-in-class service, a modern technology stack and a structurally lower cost to serve. The world we operate in, defined by trade volatility, geopolitical shifts, labor constraints, inflationary pressures and supply chain reconfiguration demands a different architecture. That is why transformation is essential and an enterprise priority at FedEx. And it's anchored around 3 interconnected elements. First is our network transformation.

Through disciplined planning and execution, we are optimizing how parcels and freight flow through our global air and surface network, enabling greater efficiency, agility and profitable growth at scale. Second is our digital transformation. Data, AI and technology power greater speed, increased visibility and more agile real-time decision-making across the business. And third is our organizational transformation, aligning as one FedEx team unified by our people, service profit philosophy and guided by our culture values.

DRIVE is foundational to our execution. DRIVE creates the operating discipline for our transformation and is a core responsibility of my role as Chief Transformation Officer. DRIVE creates the rigor on prioritization, sharpens value delivery and ensures accountability across the enterprise. The outcome, we delivered $4 billion reduction in structural costs between FY '23 and FY '25. This is a new era for our network because historically, capacity was added independently across our networks.

Each operating company solved for its own needs, creating overlap, complexity and a structure that was never designed as an integrated system. We are fundamentally reimagining and redesigning the FedEx network for the future. one that delivers in any environment with the hallmarks of best-in-class customer experience that is simple, differentiated and seamless across services and geographies, no matter what or where. AI is embedded end-to-end, physical and digital AI integrated across processes, operations and systems, strengthening decision-making and network performance.

And finally, a structurally lower cost to serve, achieved through integrated end-to-end design, capacity rationalization, improved density and relentless execution excellence. We are already seeing early results. For example, pickup and delivery cost is down by about 10% in our integrated U.S. markets. And hub productivity in Europe is up by approximately 20%. These are tangible proof points that an integrated end-to-end network design drives real and measurable performance gains. This is the first time FedEx has taken a truly centralized approach to how our network is designed, built and operated.

Let me start with how we are reimagining our air network. Tricolor is our global redesign of the intercontinental air network across 3 distinct systems. First, our Purple system, which is designed to serve the priority parcel service with our fastest delivery commitments with premium yields. With our purple network, we move our highest value shipments on FedEx owned aircraft through our premium night source. This is what the network was originally designed to do. Second is our Orange system, which focuses on priority freight, a 2- to 3-day network or a truck fly truck system where we fly into our day source. And white is our partner network, mostly a point-to-point system moving deferred parcels and freight. The Tricolor network allows us to deploy our aircraft to the highest return lanes and services with a focus on growth in premium parcel and freight. Our priority freight and deferred traffic flows become way more efficient, often connecting into the vast networks that we have on U.S. surface and Europe.

So that's our truck fly truck system. This brings the added benefit of fewer handles, fewer miles flown, sweating our assets during the daytime and processing the volume off cycle. And as we scale Tricolor, we are pulling volumes out of our network onto our surface network where it makes sense. And we are backfilling the air system with more accretive international airfreight as well as U.S. domestic B2B volumes. This improves the payload utilization on the flights we operate and drives down unit costs. By differentiating flows by cost and speed, we are aligning premium Express, priority freight and deferred services to the right aircraft and capacity type in the right lanes at the right cost. It also positions us for growth. With advanced technology and planning tools that dynamically plan and optimize capacity against the demand forecast, we are transforming how our air network is designed and executed. Now you all will agree that density is destiny for network operations.

Engineering the right product flows into the right network with fewer miles traveled and fewer touches, all enabled by technology increases density, enhances our flexibility and fuels profitable growth. Between FY '26 and 2029, Tricolor is expected to generate meaningful incremental revenue and operating income growth. And you will hear later from Richard on how Tricolor is driving higher revenue and improved profitability for our international business. Next, we are transforming our surface network. Network 2.0 is creating an integrated parcel network across the U.S. and Canada. One truck, one neighborhood, unifying and streamlining legacy Express and ground operations. We are consolidating stations, upgrading hubs and modernizing our tech stack. These changes fundamentally alter how the surface network operates. Network 2.0 creates one integrated air and ground line haul system that is foundational for global growth with streamlined enterprise capabilities. Post Network 2.0, with an integrated air and surface network, we will be able to move more volume from air on to surface while preserving our customer commitments.

Scott will provide a closer look at this transformation in action. Similarly, across Europe, we are simplifying a complex legacy footprint into a more productive, integrated network. This network includes fewer hubs, which are more strategically located, rightsized stations and a sharper focus on higher-value international shipments. Walter will discuss our Europe strategy in more detail. Now automation has always been integral to our operations. My portfolio also includes the global assets and infrastructure function, responsible for setting the strategy and global standard for our operating facilities and ground fleet. This is the first time we are taking an enterprise view across our physical operating assets on the ground, which creates synergies for us. As some of you saw yesterday at our Memphis hub, we are working on our plans to scale physical AI solutions across the network, starting with automated trailer unloading and loading operations. Over the next few years, we will deploy this technology across thousands of dog doors in more than 20 hubs in the U.S. We're also testing autonomous trucking technology in the middle mile line haul where it is safe and practical.

These are the types of solutions that mark a step change in how we move and process volume. We are building the digital backbone that powers the enterprise. Our FedEx route optimization technology is a prime example. Originally deployed in our legacy ground network, it has now been enhanced and deployed across our surface network in the U.S. and Canada. The rollout has been so successful that we recently expanded this technology in Europe, where it is already improving route efficiency. We're doing the same across our sort and linehaul technology as well, thus creating a global intelligent and connected ecosystem powered by AI, enabled by harmonized processes and unified data.

This is digital innovation scaling globally. These changes are driving smarter network and linehaul design, denser routes and prioritization of high-value shipments. The financial benefits are strong. Tricolor delivers performance and density improvements and enables growth opportunities that benefit the bottom line. Network 2.0 is designed to unlock $2 billion in savings by the end of 2027, driven by significant efficiency gains across pickup and delivery, line haul, facility optimization and consolidation and one FedEx organization. And Europe's transformation drives significant improvement to the adjusted operating income over the coming years. The redesigned network is built to win. It's a smarter, more capable and more profitable FedEx network, engineered for the realities of today and the opportunities of tomorrow. Raj earlier described our transformation as a triangle, the convergence of network, digital and organizational change. These are not parallel work streams.

They reinforce each other. They accelerate each other and they scale together. DRIVE is how we turn strategy into measurable outcomes. It enables us to collaborate seamlessly across regions, across functions. It accelerates outcomes with disciplined prioritization, optimizes investments for the greatest enterprise value and delivers results with transparency and accountability.

We have a consistent and systematic approach using cross-functional transformation metrics and change management across the enterprise. DRIVE is our enterprise engine for execution, an end-to-end strategic accountability framework that governs our flagship initiatives, including Tricolor, Network 2.0 and Europe. In closing, what energizes me in this role is not just the ambition of our goals, but the incredible power of our network. Our network, which is a living equation of possibilities. Every hub, every station, every route and every digital link amplifies value. And with integrated end-to-end design, consistent global processes and disciplined execution at scale, the economics compound. What gives me the greatest confidence, however, is the team behind this work. This new planning, engineering and transformation organization brings together some of the brightest minds, engineers, planners and technologists in the industry. People who understand the network at the most granular level and who also see the system as a whole. These are leaders who know how to simplify complexity and turn strategy into results. They are unlocking the full value of our network and creating a structurally stronger enterprise for the long term.

And now Scott will walk you through how we are scaling Network 2.0 across the U.S. and Canada and how this enterprise strategy is translating into daily operational excellence on the ground. Thank you all.

Well, thanks, Kanwal, and good morning to all. I'm Scott Ray, Chief Operating Officer and President of U.S. and Canada Surface Operations. I'm responsible for our surface network, including the execution of Network 2.0. I've been with FedEx for nearly 40 years, most of that in operations, including serving as COO at FedEx Ground. I've experienced firsthand what happens when you redesign a network the right way. You get a safer, more efficient operation that delivers better service at a lower cost. Now you've heard Raj frame the transformation triangle. You've heard Vishal on the digital backbone. And you've just heard Kanwal describe the architecture of the redesigned network.

My role is to execute this network redesign, one station, one route and one neighborhood at a time. Now Network 2.0 is our multiyear effort to transform how we pick up, transport and deliver packages by integrating our legacy Express and ground operations into one unified surface network. The concept is pretty straightforward. Our customers don't need both an Express and a ground truck in the same neighborhood on the same day. And they don't need to separate their express and ground packages for 2 separate pickups. They need simplified interactions and outstanding experiences. And Network 2.0 is providing just that. Here's our execution progress and results to date. We now have about 25% of our eligible U.S. and Canadian average daily volume flowing through hundreds of Network 2.0 optimized facilities. We've optimized over 360 stations while closing over 200. And in the markets we've completed, we're seeing about a 10% reduction in pickup and delivery cost, higher stop density and fewer duplicate routes.

Canada is our largest geography that we fully integrated to date. And although U.S. integration started in smaller markets, our ongoing optimizations of large U.S. metros like San Francisco have been very successful. We are proud that we have maintained industry-leading service levels through these Network 2.0 optimizations. We have done this by prioritizing service, establishing dedicated routes for high-priority services and customers and leveraging our local market knowledge to determine optimal fit based on location, local nuances and timing. One size certainly does not fit all markets. This type of agility has been key during both planning and implementation, given the high operational complexity of an integration of this magnitude. And the result is clear. One truck, one neighborhood equates to measurable cost reductions, fewer miles and consistent service at scale. Now we started Network 2.0 with careful proof of concepts and early integrations. Now the objective is to safely scale the integration over the next 1.5 years while continuing to deliver the strong service that our customers expect. The program has progressed as planned. During the first phase in FY '24, we proved a modeling process in smaller markets and developed a planning and governance structure. During the second phase in FY '25, we scaled to more markets and redefined the playbook, adjusting based on lessons learned. And finally, entering -- we were entering the final phase in FY '26 and in calendar year 2027. We are focusing on the larger metros and geographic areas to scale the rollout to completion. As we scale Network 2.0, we expect that around 65% of the average daily volume will be flowing through optimized facilities during our 2026 peak season. By the end of 2027, we will optimize more than 900 stations, and we will close a little over 475, which represents about approximately 30% reduction in our facility footprint. Now I want to level set on where we are today with our cost reductions and the cadence of those savings as we move ahead through the integration. As we think about our $2 billion savings target by the end of 2027, there are several drivers. Pickup and delivery optimization is the primary driver, which represents the majority of our savings. The remaining savings will split about equally between the reduced facility footprint and the One FedEx savings as we reduce SG&A expenses that were necessary to facilitate duplicative networks. Our progress on these savings is underway. And by the end of the calendar year 2026, we expect to achieve nearly $1 billion in savings. We expect to achieve the full $2 billion benefit by the end of calendar year 2027. Now as the network scales, single, simplified global technology solutions are enabling cutting-edge efficiency and effectiveness. We've invested and successfully implemented new technologies to advance our capabilities, improve customer service and capture additional operational efficiencies. There are 2 areas where tech is critically important to Network 2.0. First, let's talk about the last mile efficiencies. Now Kaal mentioned FedEx Route Optimization, or FRO, which actually optimizes much more than just the route that a driver takes. It enables better service area planning and denser, more efficient vehicle load and route planning. And we're enhancing these route optimization tools to recognize and prioritize high-value traffic such as health care and critical B2B shipments, which Bri discussed earlier. Second, there are unified real-time network tools as we work across air and surface operations to share data and models to act as a single North America transport network. Tools like network monitor, which provides real-time visibility of packages flowing through our network are now available to all field management, empowering better forecasting and planning on the ground. With the help of technology and automation improvements, our operations leaders, dispatch teams, linehaul planners can now see real-time load factors by lane and facility. They can see weather impacts and congestion and performance by lane, route and station. And predictive analytics flag potential issues and our tools suggest reroutes before delays become customer problems. For example, when severe weather hits -- when severe weather hits or there's an unplanned disruption, we can increasingly rebalance volume across routes and assets. rather than reacting after the fact, we can shift volume between air and surface between lanes and between facilities to protect service and reduce cost. The result is better asset utilization, faster recovery from disruptions and lower contingency costs due to less ad hoc purchase transportation. Now consolidating these operations means significant changes for our employees and service providers alike. And we have been very thoughtful and intentional in how we ensure that they are informed, prepared and engaged in driving the changes forward.

This means communicating frequently and celebrating the many ways that optimized network benefits them. For example, the tools I just discussed help operators all the way to the front lines. whether that's through the routing, load balancing or real-time visibility to answer customer questions or address concerns. Routes are more efficient and more predictable. And over time, automation and physical AI will help produce the most repetitive, physically demanding tasks. Furthermore, our leadership teams are finding immense value in the consistency that comes with a unified playbook, consistent KPIs and a standard process across what used to be 2 separate networks. Tens of thousands of our team members have been trained on the integrated model with support from the DRIVE governance that Raj and Kaal described.

And when we meet with frontline teams in the integrated markets, they talk about how Network 2.0 has resulted in consistent metrics, more predictable outcomes and a better service. Now that's exactly what we want, technology and network design that empower our people to deliver better outcomes for our customers. To close, we are transforming the FedEx Surface Network into the smartest, the most efficient and most flexible integrated network in the industry. It is predictive using data and AI to anticipate issues and maximize efficiencies. It's automated where it matters in planning, routing and most repetitive physical tasks and continuously improving as DRIVE, our planning suite and frontline feedback push the network to get better every single day. The outcomes are clear: better service quality, consistent profitability and fewer miles with a smaller footprint as we densify and consolidate routes. This is how we turn FedEx's unmatched network into a flexible profit engine. And with that, I'll hand it over to Richard to talk about how we're applying the same principles to our international and air network. Thank you.

Thanks, Scott. Good morning. I'm Richard Smith, Chief Operating Officer for International and CEO of the FedEx Airline. It's great to be here with all of you today. Our international network moves trillions of dollars of goods, as you've heard, across some of the world's most critical industrial supply chains. As Raj, Vishal and Kanwal have outlined, we're transforming our network, which gives us unmatched scale with greater precision and better profitability. My role is to make that shift real across our international and air networks by using our global reach more strategically, supporting the industrial verticals Brie described and delivering the structural profitability improvements embedded in our long-term plans. What differentiates FedEx internationally comes down to scale, flexibility and technology.

By scale, I mean our unmatched physical scale, paired with differentiated customs and brokerage capabilities increasingly enabled by AI and digital tools, as you heard a lot about from Vishal earlier. We're one of the largest entry filers in the entire world with deep brokerage expertise and an incredibly rich data set around commodities being both exported and imported. This is allowing us to assist our customers in new and differentiated ways as they navigate increased complexity and friction in the global trade environment. We're reducing that complexity and friction for them rapidly. When it comes to physical network flexibility, Tricolor and Network 2.0 give us more levers than ever to align cost with value on a lane-by-lane basis. Regarding technology, predictive routing, AI forecasting and visibility capabilities like FedEx Surround and our planning suite enable us to run the network better and help customers manage their supply chains more intelligently.

Every mile we fly, every sort we run, every shipment we move can be smarter and more profitable because of this combination. If you look at the history of FedEx internationally, we can break it down across 3 phases. First, expansion, the building out of our network to every major economy, establishing gateways, routes and capabilities, so we could say yes to customers almost anywhere. Five decades of investment created unmatched global scale, a durable competitive moat. Second, integration, most notably through the TNT acquisition, which gave us a powerful European surface infrastructure. Over recent years, we focused heavily on integrating those assets and operating as One FedEx. We are now in the third and exciting chapter of transformation. On the network side, we have Tricolor, the Europe network transformation and the linkage to Network 2.0 in the U.S. and Canada.

On the digital side, we're using advanced planning and data-driven solutions to better match capacity and demand. And on the organizational side, we're moving towards one operating model worldwide, underpinned by DRIVE, our accountability framework, which will simplify our processes and strengthen set accountability. We're turning global reach into financial returns, evolving to deliver consistent, profitable, high-value international growth. We have a clear road map to strengthen our international performance while maintaining outstanding service for our customers. We're focused not only on what's within our control, but on flexing our network to match the evolving global trade landscape. Our strategy is centered on 3 priorities.

First, we're executing a focused Europe transformation, shifting to a higher value mix, optimizing the regional network and driving process efficiencies to structurally improve financial returns. Second, through Tricolor, we are improving the economics of our international service portfolio by driving growth through premium airfreight, lowering the cost to serve and redesigning the global air network to emphasize speed, flexibility and density. This enables improved profitability while maintaining service quality.

Third, we are diversifying lanes in line with shifting trade patterns, selectively growing revenue and market share on new and emerging lanes where we can compete profitably and deploy capacity more efficiently, largely now, thanks to that tricolor flexible system. These results are driven by execution through better mix, efficiency and utilization of our aircraft. Executing this strategy requires a clear view of how global trade is evolving because those shifts determine how we deploy capacity and capital. Manufacturers are diversifying supply chains from single country models to distributed networks as near and fringe shoring reshapes global trade flows. As our customers are global, we are everywhere they want us to be. This is where FedEx's redesigned network is a real differentiator.

Tricolor allows us to participate in the freight recovery selectively and profitably and improve density across lanes, as you heard about from Kaal. And this is without adding disproportionate new capacity. It makes us much more nimble and flexible. As you can see on the slide, in Q2, we've reduced our Transpacific outbound purple and white tail capacity by about 25% and nearly 35%, respectively, to mitigate the impact of global trade policy changes. We're dynamically reallocating capacity toward faster-growing trade lanes such as Asia to Europe and intra-Asia. In fact, -- we partially offset the transpacific capacity reduction I mentioned by increasing our Asia to Europe purple tail capacity by 20% year-over-year, providing faster service for premium growth on that lane while reducing, flexing down white tail capacity by nearly 30%. Because we control both the air network and the surface infrastructure and because we're building an AI-enabled planning layer on top of it, we can reallocate capacity to new corridors faster than our competition.

Broadly speaking, we're seeing strong growth out of Southeast Asia, particularly Vietnam, along with markets like India and Mexico as customers reposition supply chains. We are also seeing significant momentum in markets in the Middle East, such as Saudi Arabia and the United Arab Emirates, strong inbound markets. And we are continuing to take profitable share in Europe. Our actions have already delivered improved outcomes, particularly as global trade has evolved quickly this year. Trade is moving, and our network is being adapted in real time to maximize utilization, improve densities and enhance profitability. As trade patterns shift, how we manage the portfolio across regions matters more than ever.

All of these regions and the countries within them are in differing phases of development with different growth opportunities for FedEx. They are not monolithic, and our strategies are tailored to the realities of each market. Our international portfolio is much more diversified than it used to be with a more targeted approach by region. LAC, Latin America and the Caribbean benefits from near-shoring into Mexico and broader Latin American B2B trade, leveraging Network 2.0 on the ground in the United States and Canada. Here's our LAC President, Luis Vasquilos, to share more.

LAC is a diverse and dynamic region made up of 50 countries and territories across 4 subregions: Mexico, the Caribbean and Central America, the in South Cone and Brazil. We are the nearshoring bridge between North America, Europe and Asia. Across the region, we serve a wide range of industries from automotive and high-tech in Mexico to pharmaceuticals and medical devices in Caribbean and Central America.

We also support e-commerce, perishables, especially flowers and advanced manufacturing across South Cone and Brazil. We continue to invest in connectivity, including new routes through Miami. At the same time, our extensive physical network and digital capabilities allow us to support large B2B customers while also enabling small and medium-sized businesses to participate in global trade.

Thank you, Louise. In MISA, Middle East, Indian subcontinent and Africa. We offer expanding B2B opportunities, including increasing manufacturing exports from India as well as emerging premium cross-border e-commerce. Let's hear from MISA President, Tommy Viswanathan now.

The MISA region is one of the most dynamic in the world today and the key strategic market for FedEx with massive growth opportunities particularly, in India and the Middle East. Global supply chain shifts are leading to increased manufacturing and export growth from India in high value B2B verticals. Saudi Arabia and the UAE are diversifying away from oil and gas and focused on industrial and trade growth and rising consumer demand makes these markets attractive for high-end e-commerce. We launched a [indiscernible] connecting the U.S. and EU directly to Riyadh and onward to Asia, connecting the GCC markets via our Middle East road network. We established a strong position in Indian in FY '25 with 40% of revenue growth, taking 8% market share. India is our fastest growing market and building on the great traction we've had. We have tailored strategies in place to accelerate growth across segments. We're seeing growth in high value sectors like automotive and industrial parts where customers rely on FedEx's concession, reliability and global connectivity to navigate complex cross border [indiscernible]. Medical devices and clinical trials is another high growth area for the region. The MISA region grew at 25% in our bond revenues last year. What really excited me about the MISA region is that we have a long runway to grow and take share profitably. And we are well positioned to expand markets, develop capabilities and achieve transformative growth.

Thank you, [indiscernible]. Asia Pacific remains the world's manufacturing hub and a key growth engine. In fact, around 60% of global GDP will come out of this region, especially in high-value parcel and freight. Our APAC President, [indiscernible], provides a great overview in this video.

Accounts for roughly 1/3 of global GDP and account for nearly 2/3 of the global middle class by 2030. Asia makes up about 60% of global manufacturing. And an air cargo APAC represents 47% of the global outbound market and grew 15% in 2024 china, of course, is a critical market, but it is only 30% of APAC round trip revenue, meaning majority of our revenue is coming from outside China.

We've built a deep 40-year foundation across the region with an extensive air and ground network serving 44 countries and territories supported by 2,500 months regional hubs. [indiscernible] in fact, approximately 75% of our revenues come from B2B. That's why we are doubling down on B2B, leveraging our vertical expertise, customized solutions and One FedEx collaboration. Other priority verticals include aerospace, automotive and industrial and health care. We also target high-value B2C where speed and reliability is important, and this segment commands strong yields.

Looking ahead to FY '29, our growth plan is powered by 3 to capture China and Asia's high-value e-commerce export growth while penetrating additional emerging markets like Southeast Asia, scaling higher-value capabilities through investing in vertical-led differentiated offerings. And lastly, multimodal solutions and clear solutions to win in the airfreight market and monetize our global clearance capabilities. What excites me is the vast potential of Asia Pacific. The fact we're not just the world's growth hub, but a leader in transform technologies, including AI. And with 18 of the world's 20 fastest-growing trade corridors in Asia Pacific, we're boldly, decisively ready to lead the future of global commerce.

Thanks, [indiscernible]. So Louise, Kami and [indiscernible] are here. I hope some of you got to meet these amazing leaders last night. I'm so proud and honored to be on their team. Now let's talk Europe. Europe is both a major end market and a critical connector as the world's largest trading market. You'll hear from Europe President, Watter Rules next, who's also here, and I know some of you got to meet him last night. By balancing growth and profit across all of these regions, we're creating resilience.

When one trade lane is under pressure, others can offset it. The goal is not just higher earnings, but more predictable earnings across cycles. Among our core regions, Europe deserves special attention because it's such an important part of our story and one of the largest profit improvement opportunities. Over the past 2 years, under [indiscernible] leadership, the team has strengthened the network, leveraging key parts of our integrated network footprints and restoring service levels. They've delivered substantial cost savings and achieved the best service levels in years.

That service improvement has supported 10, count them, 10 straight quarters of profitable share gains in the high-value segments we care most about, especially international export and cross-border e-commerce. The next phase, though, is where the real transformation happens, rebalancing the mix away from low-yield domestic towards higher-value cross-border, reengineering the surface network and modernizing hubs and stations and simplifying service offerings, so Europe runs on a single modern tech stack. Walter will show how this leads to a multiyear structural profit improvement in Europe. Bottom line, we're playing the entire board, ladies and gentlemen. Everywhere trade is happening, and there are no gaps in our global game. Now I want to spend a moment on our air fleet, which is, of course, a critical component of our unmatched infrastructure and an important enabler of our enterprise success. A key element of this in the near term is our MB-11 strategy. Safety comes first, always. And we maintain these aircraft to that standard of safety above all. We continue to work closely with Boeing and the FAA and the NTSB, the regulators, and I am confident that we are on a path to returning these aircraft safely to service over the course of this fiscal year.

As Network 2.0 Tricolor and our hub modernization change how volume flows through the system, we are taking a centralized approach to ensure that our air fleet remains aligned with our needs. Looking ahead over the next 10 years, our direction is clear. We are prioritizing international routes with high-capacity, high-efficiency modern aircraft like the Boeing 777 freighters, the types that give us better economics per trip, increased fuel efficiency and structurally lower maintenance costs over the long run. Importantly, we will do this while staying disciplined in our capital. Our commitment is to keep annual aircraft and related CapEx at or under $1 billion annually. This evolution will also create opportunities to optimize total hours flown and the size of the U.S. domestic jet fleet needed to support our long-term goals. Pulling this all together, we expect improved financial outcomes marked by sustained and profitable growth. We expect to grow international revenue at a 4% compounded annual growth rate through 2029, with international package volume growing a low single-digit percentage annually and with higher yield. At the same time, we expect international air freight volume will grow faster as Tricolor drives share gains by improving the competitiveness and economics of our service portfolio.

And across regions, Asia Pacific remains the growth leader, supported by favorable demand trends and strong execution. We expect that revenue growth to translate into meaningful adjusted operating profit growth with a CAGR of 30% through 2029 and about 440 basis points of adjusted margin expansion over that period. I just took you through the how of it. So just know that we remain committed to continuous improvement in the International and Airline segment, doing our part for the enterprise with a sustained focus on improved mix, increased efficiency and better asset utilization across our network. FedEx has always connected the world. Now we're transforming the network behind that promise to be smarter, more efficient and more profitable. We're leveraging unmatched global reach, strengthening local capabilities and using data and technology to drive sustainable profitability. Europe's transformation, of course, is one of the most important pieces of that story. It turns what was once a complex underearning region into a key contributor to the international portfolio, lifting the entire segment. The next era of FedEx global growth won't be defined by just scale. We built the scale. It will be defined by leveraging that scale to create greater value for our customers, our shareholders and our team members or as I consider them, all of my bosses.

With that, let me hand it over to Walter to take you inside the European transformation. Thank you for your attention this morning.

Thank you, Richard, and good morning.

My name is Val Rulz. I'm the Regional President for FedEx in Europe. I have the privilege of leading a dedicated and resilient group of team members who are eager to drive increased success in Europe. Europe is one of the most important and diverse logistics markets in the world. With a population of over 740 million, Europe accounts for approximately 30% of global imports and exports, making it the largest single market importer and exporter in the world and therefore, an essential part of the FedEx global network. It is also FedEx's largest lever for international operating income improvement. The transformation triangle that Raj described and introduced with One FedEx at the center and powered by DRIVE absolutely captures the journey we're on in Europe.

And my message today is simple. We are reengineering this region for performance and profitability at the right scale. And the results are already visible. Now to understand the opportunity, you have to start with the footprint and business mix we have in Europe. Having the right scale, particularly in large economies, is key to being able to provide customers with the right service at the right cost. Our service network consists of 27 road hubs and more than 500 stations, many built for a specific country rather than what a pan-European network needs. This scale includes significant domestic footprints in key markets such as the U.K., France and Italy, which also enable our international service coverage. Now historically, our European volumes have been strongly weighted toward domestic shipments. Our future success is centered on shifting that balance towards more profitable cross-border and intercontinental shipments while reducing capacity and maximizing utilization.

These cross-border shipments come with yields that are multiple times higher than domestic. Furthermore, by modernizing the network footprint, and the processes, we will continue to drive down unit cost. So in short, the opportunity is both large and clear. We will integrate and modernize the footprint, simplifying hubs and stations. We will rebalance the business mix towards higher-value cross-border and B2B shipments, and we will drive end-to-end process efficiency that lowers our cost to serve. Since FY '23, we've been on a very deliberate and sequenced path because turning around the business of this scale and complexity requires getting the fundamentals right before pushing for growth. We're now well into the 3-phase transformation.

Phase 1 was the turnaround. DRIVE as a program, came at the absolute right time for Europe and as a way of working. We evolved from managing and focusing on integration to rigor in value creation. Under DRIVE, we delivered on our $600 million cost reduction commitment through FY '25 through tech simplification, station process optimization, dimensional pricing capture and overhead reductions. This work was difficult, but it was essential to drive improvements and create a stronger foundation. Nevertheless, we were still faced with a fragmented business landscape across countries and even within a country. This led us to our next phase of the evolution, reorganization, which has really been underway since FY '25. We had to bring a network approach to Europe across organizational structure, processes and how we manage business performance day-to-day.

We revamped our leadership team and started managing Europe as a network rather than as a collection of local businesses. We introduced common productivity tools, processes and automation, largely drawn from the best practice at FedEx Surface to manage the business daily to consistent metrics. As part of One FedEx and thanks to excellent collaboration with the surface team, we were able to leverage their tools and bring them to Europe as best practices at pace. We streamlined our back office, taking control of our overheads and have continued to stringently control our costs. In effect, we have simplified the organizational structure.

We've improved data visibility so that now performance is easier to see, plan and manage. As our frontline team members now tell us, we all wake up to the same FedEx newspaper every morning that shows us our performance of the previous night. We're capturing the benefits of these actions. On the back of better physical service, we've had 10 consecutive quarters of accretive international revenue share gains. Customers are drawn to our differentiated value proposition and improved service. And in addition to solid growth, a simple organizational structure enabled by data insights and operational discipline, it's allowed us to significantly improve productivity. As an example, in our hubs, we've improved productivity by approximately 20 percentage points year-over-year. Now with a stable foundation, we're now in our third phase, transformation and well positioned to unlock greater structural value. We are scaling to a higher-value international mix. We are reengineering the network, and we're driving process efficiencies through digitization so we can operate Europe as one business running on the best of FedEx data and technology.

This turnaround is not theoretical. It's visible in the numbers and in daily operations, and now we're accelerating. We're framing our Europe strategy around 3 pillars enabled by the modernization that Raj and Vishal have described. Number one, scaling to a higher-value international mix. We want to grow in the shipments where FedEx is strategically well positioned, B2B, high-value cross-border e-commerce and Intercontinental Express Freight. Number two, we're reengineering the network itself. We're redesigning road hubs, stations and the flows, and we're powering them with the latest in FedEx data and technology so that we can drive productivity as we move shipments end-to-end from pickup through delivery. And number three, we're driving end-to-end process efficiencies. We're simplifying the operations through standardized best practices, making it easier for our team members to consistently deliver excellent service and an outstanding customer experience.

As a result, we expect Europe to be the key driver of adjusted international operating margin through 2029, contributing about $650 million over that time period. We've already started to deliver on our mix strategy by executing a focused set of commercial and growth programs. Our mix shift is driven by multiple levers, expanding in regulated time-critical verticals like health care, as Brie spoke about, supported by consistent high service performance. We're targeting high-value cross-border e-commerce flows where network reach and reliability matter most. We're simplifying and digitizing the customer experience from onboarding to collection and the support journey customers receive throughout. And by improving data insights, surcharge processes and driving a mix shift, we are driving higher yield quality, growing the right volume, not just more volume. To date, this fiscal year, we've shifted the mix by 4 percentage points.

Now to fully capture this value, we also need a network that is optimized for these flows. This brings me to our second pillar, reengineering the network for performance. We are fundamentally redesigning how the European network is structured and operated every day. Basically, we're reducing the legacy in-country domestic networks, and we're redeploying that capacity to support higher profit international business. We started by redesigning the backbone of this road network. We enhanced our international road hub in the Benelux. We built a new road hub in Northern Italy, and we've announced plans for a hub in the U.K. But subsequently, we've reduced capacity in these domestic businesses. In the U.K., we reduced capacity by 30%. In Italy, we closed our primary domestic hub, and we reduced capacity by 20%. Most recently, we've announced our plans to optimize the French network. So our network reengineering focuses on 3 core actions. footprint optimization. We're moving to fewer, more automated road hubs and a rightsized station network footprint.

Flow redesign, we're simplifying linehaul patterns, and we're creating more direct, efficient routings that reduce hub touches. And we're doing in-station process redesign, again, reducing touches, improving the layouts and increasing sort productivity. As a result of these actions, service performance has significantly improved already and will continue to benefit as we give our team members better tools and processes to deliver service excellence every day. Hub productivity will be further improved with improvement in packages handled per labor hour. Connectivity in the road network will be improving as flows become more direct. And with all of this, the network will be better aligned to growing high-value cross-border and B2B volumes. Reengineering this network creates the physical foundation for performance. To fully unlock the potential, we also need simpler, more integrated processes, which brings me to the third pillar, end-to-end process efficiency. As we are redesigning the network, we're deploying the FedEx global pickup and delivery ecosystem across Europe. We're fundamentally changing how we plan, load, route and execute on our ground or surface operations.

By moving to simplify technology, we enable smarter route design, intelligent load sequencing inside our PUD vehicles, making execution easier for our couriers while structurally improving service reliability and cost performance. This is a redesign of how ground operations runs day-to-day. By removing friction from execution, we improve the customer experience while also enabling our frontline team members to operate with greater consistency and confidence. Capabilities like FRO or FedEx route optimization, as have been mentioned, are currently being deployed in France, and we've got a broader rollout plan to take into the rest of our European business, making our network more predictable and executable.

In parallel, we're also transforming how we manage the reliability of our physical infrastructure. AI now continuously monitors the most critical operational signals and translating that into actionable insights. The next step is the deployment of smart sensors, allowing us to enable predictive maintenance and shifting the network from reactive recovery to proactive prevention. Together, these capabilities increase uptime, stabilize execution and create the right scalable foundation for sustained growth across Europe.

As all these changes take hold, our teams are working with more modern and reliable tools. End-to-end process visibility across the operation is improving. Processes are standardized across countries and decision-making is faster and more data-driven. The organization is better positioned to scale while continuing to enforce strong cost controls. This all makes Europe simpler to run and easier to grow profitably. Now we've already proven the success of this approach in one of our largest international domestic markets, the United Kingdom, which is an instructive case study to demonstrate how the strategy works.

The U.K. was one of the most challenging markets with 4 business units arising from multiple acquisitions, resulting in high complexity, high cost and a duplicative footprint. Over the past few years, we've successfully rightsized the network, consolidating hubs and simplifying the operating model. We closed 40% of our total stations and 1 hub, while at the same time, growing revenue over the last 3 years. We moved to one operating model, one technology stack, one value proposition, creating a common way of working and retiring legacy systems.

As a result, we've already delivered substantial annual operating income improvement of over $100 million from our baseline in FY '23 through to FY '25. So the U.K. has proven that we can redesign a domestic network to be leaner, more connected and more digital and yet at the same time, improving service and profitability. The next big step of our transformation is France. We've recently announced our plans to transform our ground operations, which will improve the experience for our team members, contractors and customers. We're designing a future footprint around an optimized hub-and-spoke model. We will have a fully integrated single value proposition for our domestic and cross-border network. And as we're investing to upgrade our core stations to improve throughput and productivity, we're also optimizing our station footprint. And we expect to reduce the overall count by 17 stations on top of the 48 stations we closed in 2024.

This is an overall net reduction in station footprint of 43%. And we're simplifying line haul, standardizing our operations and moving to one unified tech stack, driving other benefits. As an example, by enabling loose loading in our stations, we've set an ambitious goal of reducing line haul miles driven by 30% -- by up to 30% by 2029. So across the 3 markets, U.K., Italy and France, we're following the same principles: simplify, modernize and align the network with the product segments where we can grow profitably and win profitably.

Now let me talk in a little more detail as well about how InPost fits into our European strategy. InPost is a leading European e-commerce solutions enabler, specialized in out-of-home delivery and automated parcel lockers, built around the skilled automated parcel machine network and the digital proposition that goes with it. Building on its innovative strength, IPost has expanded into Western Europe, quadrupling volumes between 2020 and 2025, supported by strong tailwinds, including rising customer demand for speed and convenience, attractive pricing for merchants and the shift towards more sustainable delivery solutions. InPost's performance reflects the strength of the model.

In 2025, Inpost delivered 1.4 billion parcels, representing a 25% year-over-year growth. And they're doing this very profitably, delivering adjusted EBITDA margins of 29% through the first 9 months of the year. In short, this is a scaled, high-performing last mile platform in a market with strong tailwinds for convenience and out-of-home delivery. This minority investment will have significant strategic benefits for FedEx. It strengthens our access to leading to a leading customer-centric set of last mile solution capabilities, an area where out-of-home delivery is increasingly the preferred option for many consumers. There is a clear runway to expand the model and reach more customers across Europe, including markets that remain underpenetrated today.

The model is scalable. More density drives higher utilization, and that supports stronger economics over time. Most importantly, for FedEx, this investment opens doors. Upon completion of the transaction, we will enter into commercial agreements in accordance with applicable antitrust laws that are expected to yield benefits on both sides. InPost gains access from our broad network and customer reach. And we will benefit from InPost's out-of-home skill and last mile B2C capability. This is one of the ways we plan to ensure we can deliver on Europe's improvement potential. Now financially, we also like this opportunity. Given the timing of regulatory approvals for the transaction, contributions from IPO have not been embedded in the 2029 targets that we're sharing today.

That said, we expect the investment to be accretive to earnings 1 year after completion with attractive return characteristics supported by strong cash generation and a clear growth runway. And the longer-term cash flow characteristics and growth trajectory enhance the opportunity. The operating model is also clear. InPost will remain independently run by its currently CEO and leadership team. There will be no integration and commercial agreements will be done on an arm's length basis. InPost will continue to be a competitor and stand-alone business with its own customer segments, operations and our financial investment will be reported below the line in other income. So the key point is this, InPost is a strong, profitable and growing business, and the partnership is structured to create value on both sides.

In closing, let me leave you with 3 thoughts. Europe is FedEx's largest lever for international profit improvement, and it's already delivering tangible performance gains. We are building a leaner, more connected and more digital network that is fully aligned with the global strategy that prior speakers have laid out. The momentum is clear. The foundation is strong and the plan is clear. The early results give us confidence in the path to substantially improve performance.

Thank you for your time today. And with that, I'll hand it over to John.

Thank you, Walter, and good morning, everybody. It's great to be with you today. As we've been talking about throughout the morning, FedEx is at a pivotal point in its history. Over the past 3.5 years, we've grown adjusted operating income, significantly lowered our CapEx to revenue intensity and generated over $12 billion in shareholder returns, all despite numerous and unprecedented demand shocks and unique challenges. And what stands out is the resilience of our business over this period of time. We've spent the last 50-plus years investing in and building the world's largest and most efficient global industrial network, a network that is the foundation of a flourishing global industrial economy and a facilitator for the most efficient transportation of high-value goods. Now with our assets and capacity firmly established, we're entering a new era, an era of value creation that is squarely focused on 3 foundational principles. The first begins with expanding operating margins and growing operating income.

This is centered on a balance of driving our premium revenue with a competitive cost structure, and leveraging technology to support steady growth and margin improvement. Second is to continue to lower our capital intensity and improve ROIC. This will involve a disciplined approach to capacity management and deploying our capital on the highest return areas of our business, such as with Network 2.0 and our U.S. domestic surface network.

These initiatives will drive increased flow-through to the bottom line and boost ROIC. As I'll talk further about in a minute, we've already made significant progress in lowering our capital intensity, and we plan to maintain this lower ratio in the years ahead compared to our history. And as a result of these efforts, our third principle is to significantly and sustainably increase free cash flow. This will ensure we continue to return value to shareholders and invest in the business, all while maintaining a healthy investment-grade balance sheet.

Before we dive into our earnings and cash flow targets, I want to start with our top line assumptions, which support our financial forecast. As Brie mentioned, we're assuming a 4% revenue CAGR growth through 2029. This translates into $98 billion in consolidated revenue versus our $85 billion FY '26 baseline, excluding FedEx Freight. This top line growth will be driven by a combination of disciplined and prudent yield growth of 2%, coupled with 2% volume growth. This will result in $6 billion from yield growth and $6 billion from volume growth for our new U.S. domestic and international segments, with half of that incremental volume-related revenue coming from higher-margin B2B services. We're also assuming $1 billion in revenue growth from our Corporate and Other segment, which includes FedEx Office, FedEx Logistics, FedEx Supply Chain and FedEx Dataworks.

Now turning to our specific 2029 targets. I'll start by noting that all these targets refer to FedEx Corporation only and exclude FedEx Freight, and that's in anticipation of the spin-off of our freight business on June 1. I'll also note that for our FY '26 baseline, we are assuming that the midpoint of the FY '26 outlook range that we provided to you in December. With that in mind, in 2029, we expect FedEx Corporation to achieve $8 billion in operating income and an operating margin of 8%.

We expect to expand operating margins by 200 basis points when compared to our midpoint FY '26 estimate of $5 billion in adjusted operating income and a 6% adjusted operating margin. Now this margin expansion will be driven by our focus on premium revenue growth, along with disciplined management of our expenses. And taken together with our expectations for balanced revenue growth, this supports our outlook for a 14% adjusted operating income CAGR, allowing us to deliver $3 billion of incremental adjusted operating income in 2029.

Now we're also introducing a 2029 GAAP earnings per share target of $25, excluding FedEx Freight. This compares to $15, which is our FY '26 adjusted EPS estimate for FedEx Corporation, excluding freight, based on the midpoint of our current FY '26 outlook range. This 2029 EPS target is supported by anticipated improvement in operating income, along with share repurchases that are designed to offset dilution.

I should also note that this outlook does not anticipate any further changes, material changes to the global trade policy environment. So let me now break down these consolidated targets for you into our 2 new reporting segments that primarily drive our financial performance. Starting with our U.S. Domestic segment. Our U.S. Domestic segment currently has $56 billion of revenue base that we expect to grow at a 4% CAGR or $8 billion to reach $64 billion in 2029. This expected revenue growth will translate into $6.4 billion in operating income and an increased operating margin of 10% versus our expected FY '26 baseline of $5 billion in adjusted operating income at an 8.9% adjusted operating margin.

And we'll achieve this by continuing to execute on our Network 2.0 and associated One FedEx initiatives, which represent a cumulative $2 billion in annualized cost savings as Kanwal and Scott detailed. In addition, and as you've heard throughout the morning, we'll rigorously focus our top line growth on expanding yields and continuing to win share in the B2B market. which comes with very strong incremental margins. Our U.S. Domestic segment will also benefit from our targeted longer haul and heavier weight B2C shipments that Brie talked about and which will support both improved top and bottom line performance.

And also, as Brie discussed and based on our high current capacity utilization, we're prioritizing volume that best fits our network and that we're able to price at margin-accretive rates. Our strong surface capacity utilization in the U.S. and Canada demonstrates that our network is rightsized, allowing us to leverage our assets for greater profitability. And simply put, we'll be strategically positioning our existing assets toward the market segments we want to compete in and which are best suited for our cost structure.

As a further point of clarification and to reflect the digital transformation strategy that Vishal covered, we'll be reclassifying approximately $200 million of data and technology-related costs from FedEx Dataworks business into our U.S. Domestic segment. Now this will represent a roughly 40 basis point headwind to the U.S. Domestic segment, while at the same time, creating a $200 million operating income tailwind to our Corporate and Other segment. All of this is factored into our 2029 targets.

Now as Richard and Walter discussed, our biggest area of opportunity for continued improvement is in our International segment. Our International segment has current revenue base of $25 billion, which we expect to grow at a 4% CAGR or $4 billion to reach $29 billion by 2029. We expect our international strategies to result in segment operating income of $2.3 billion and operating margin of 8% in 2029. Now this compares to $900 million of adjusted operating income and 3.6% margin in FY '26.

There are several drivers of this improvement that we've talked about and Walter discussed. And first, as you heard from Walter, over the past 2 years, we've improved our service offering and structurally lowered our cost to serve in Europe. This has steadily improved our top line performance and improved financial outcomes. And we'll continue leveraging this momentum, and we'll do this with a focus on continued growth in the premium cross-border and intercontinental segments of the European market. And we'll also be growing our international air freight business through Tricolor, which is already translating into very strong incremental profit flow-through.

Now in total, we expect to achieve approximately $650 million in operating income improvement by the end of 2029 from Europe. And this is an idiosyncratic lever for FedEx given our further transformation opportunities on the continent. Other regions as well will continue to meaningfully support international profitability, including APAC through the Transpacific and intra-Asia revenue growth as well as our Americas regions, especially as these emerging markets are seeing the benefits from the current reglobalization of trade. Now I'd now like to turn to our 2029 operating income bridge.

And I'll start from our baseline of $5 billion of adjusted operating income for FY '26. We're assuming that volume-related revenue growth contributes $2 billion of adjusted operating income flow-through. This reflects our commitment to driving strong incremental margins based on a modest 2% volume revenue growth assumption. Next, we anticipate $6 billion of yield benefit from improved pricing, including through base rate improvements and higher surcharge capture.

The value we deliver in the marketplace is really second to none, and we view our expectations here to be prudent and reflective of our disciplined approach to revenue quality management that Brie discussed. And finally, taking into account Network 2.0, One FedEx, Europe and other structural cost reductions, including the benefits from our continued deployment of technology to reduce our cost to serve, we anticipate overall net cost inflation of under 2% -- this translates to increased expenses of approximately $5 billion between FY '26 and 2029. Now importantly, and as reflected on the bridge, we expect yield to outpace this net cost inflation and reflecting our approach to disciplined yield growth and execution on our cost strategy programs. All these factors ultimately translate into a consolidated adjusted operating income CAGR of 14% and a consolidated operating income target of $8 billion in 2029.

So I'd now like to talk about our continuing focus and prioritization on lower capital intensity and higher ROIC. As many of you are already aware, we've significantly reduced our CapEx over the past several years, and we'll continue to focus on reducing our capital intensity in the years ahead. By 2029, we expect our CapEx to revenue ratio to be approximately 4%, which is well below historical levels. And just for context on that point, excluding FedEx Freight, this ratio was approximately 8.6% in FY '20, 7% in FY '23 and 4.6% in FY '25. With respect to aircraft, we'll achieve our commitment of bringing aircraft CapEx to $1 billion or below this fiscal year.

And as Richard discussed, we expect aircraft CapEx to remain at or below $1 billion through 2029, which will further support free cash flow expansion. Moreover, our 2029 CapEx plan assumes 90% of our capital investments will be for maintaining our network, modernizing our equipment and facilities and other efficiency-related needs of the business, and this is versus further capacity expansion. In other words, our existing capacity is adequate to handle the volume growth embedded in our assumptions between now and 2029. We'll be further prioritizing our capacity towards B2B volumes and higher-value B2C goods, which contrast FedEx from other parcel delivery providers that operate in the lowest value segments in the market.

Now ensuring that our business generates significant shareholder returns is also a top priority, and we'll be leveraging the scale and scope of our business to drive unprecedented shareholder value in the years to come. With that in mind, we expect to drive 200 basis points of ROIC expansion versus FY '26 pre-spin consolidated ROIC of about 9%, and we expect this to be driven primarily by improved adjusted operating income. Now finally and most importantly, we'll leverage our improved operating income and lower CapEx to drive $6 billion in adjusted free cash flow in 2029. This compares to our expectation of $3.8 billion for FedEx Corp., which includes FedEx Freight in FY '26. And embedded as a bit of an update, embedded in the FY '26 baseline is our updated expectation for FY '26 CapEx of $4.3 billion, which is a $200 million reduction from our prior $4.5 billion expectation that we shared with you last quarter. I'll also note that in FY '25, we achieved a 90% adjusted free cash flow conversion from net income and our 2029 target assumes $6 billion in adjusted free cash flow with 100% plus conversion.

So in total, we expect to generate a cumulative $16 billion of adjusted free cash flow from FY '26 through 2029. This anticipated strong free cash flow should signal our concentrated effort in shifting from the necessary era of network expansion to a new era focused on financial returns on over half a century of investments. Our balance sheet remains strong with our current investment-grade credit ratings of BBB and Baa2, which we expect to maintain both before and after the spin of FedEx Freight. In addition, and as we mentioned in December, FedEx Corporation will retain up to a 19.9% stake in FedEx Freight, which we plan to monetize within 12 months following the separation.

And we'll use these proceeds to pay down debt and ensure the spin-off is a tax-efficient and leverage-neutral event for FedEx Corporation. So with our expected free cash flow improvement, we'll also continue to take a prudent approach to cash deployment.

And consistent with our strategy in recent years, we plan to continue increasing our dividend, evaluating further stock repurchases and maintaining our strong balance sheet, all while continuing to invest in the business and exploring accretive M&A opportunities that add value to the strategic priorities we've laid out today. The FedEx Freight team will be sharing more details on their business outlook at the FedEx Freight Investor Day on April 8 in New York City. I hope you can all join. But in conclusion, and as I hope you can sense from our presentations today, the entire leadership team is extremely excited about the future of FedEx. Looking forward to 2029, we're sharply focused on the principles I've shared with you today, namely improving profitability as reflected in our operating income and margin targets, lowering capital intensity and improving ROIC with a disciplined approach to capacity utilization and significantly and sustainably expanding adjusted free cash flow. And taken together, these priorities will ensure value creation for all our shareholders.

So thank you for this opportunity to share this additional information with you. And now I'd like to just take a moment for the stage to get reset for our Q&A, and I'll be joined by my colleagues. Thank you.

I'm pleased to be joined on stage by all of today's speakers for our final Q&A session. As a reminder, please raise your hand if you have a question and a mic runner will come to you. And again, please save any questions about our near-term outlook for the March 19 earnings call. So now let's go to our first question. [indiscernible]?

So I wanted to ask about the high-value areas that you're targeting, maybe this is best for Brie. How do you think about competition in those verticals? What has prevented you historically from kind of gaining more share in those verticals that you're now able to achieve? And then as we think about the yield contribution, how much of that is coming from kind of business mix and that shift towards that higher value business?

Great question. I think I'll try to answer all of it. So I think, first and foremost, we have a very strong position in B2B. And obviously, that is our core roots and our foundation is what the company was built on. If you think about sort of the momentum in the market pre-pandemic and the growth of e-commerce, we absolutely had to focus on getting the right model and the right structure in place. It was existential. It was a massive part.

I think I've shared with you that more than 95% of the growth in the market sort of pre-pandemic was e-commerce, and it was coming into the network, and we needed to focus on how to profitably manage that. We now have the market-leading value proposition. We've got our arms around it. We had a very successful peak. I feel very good about how we're going to profitably manage controlled growth in e-commerce. That allows us now to double down on what is our core, which is B2B.

To answer your second question about how are we thinking about taking share? Well, first and foremost, our commercial model is different than our 2 primary competitors. We have a single commercial approach to both parcel and air freight. I mentioned this earlier in my opening remarks, but that tricolor strategy and our expanded airfreight focus really does matter. Customers would prefer a single provider for their parcel and their airfreight when we think about going to market. So that is different. From a visibility perspective, the work that we have learned from Surround, and we talk -- I'm sure it sounds like we talk about visibility a lot. It is a massive part of our value proposition and being able to have the Surround platform and all of our tools across both parcel and air freight -- that's a unique differentiator. And then third, we like our value proposition. There's a lot that we do that our competition can't do. As you've heard, we're going to continue to invest. We've got some incredible work going on with clearance that. We are very excited about. So I feel really good about the position we have, and we're being thoughtful. It's 4% growth. So I think it's controlled. It's prudent. It's disciplined, and we feel good. I think there was a third part yield. Yes, we like yield growth.

How much of the uplift is captured by that [indiscernible]

Okay. So honestly, from a yield growth perspective, we are expecting 2% versus the baseline from both B2C and B2B. You did hear in my opening remarks that we're going to grow slightly faster in B2B. We're going to take $6.5 billion from a B2B perspective. So it absolutely is an influence, but we need both segments to perform, and we're going to put pressure on yield growth in both segments.

Ravi Shanker, Morgan Stanley. John, two for you. Maybe one housekeeping one. Can you confirm if your 2026 and 2029 guidance are June year-ends or December year-end? And also second, can you remind us -- you've got an incremental margin question before, but what is the contribution margin difference between volume and yield? So when you think of a 50-50 split contribution to revenue, $6 billion each, why not turn the dial a little bit more towards yield given that it seems like it's dropping to the bottom line better?

So I'll start with your first question. The first question is FY '26 is based on our current fiscal year and FY -- or excuse me, 2029 is based on the full calendar year. Now with respect to your second question, I'm sorry, can you just take...

So you have a 50-50 contribution of $6 billion of revenue from volume and from price. So the contribution margin difference between the revenue that comes in from volume versus price and why not turn the dial a little more towards price because of the [indiscernible]

I understand. Yes, of course, to Brie's point, yield is desirable, right? We do a great job of having yield flow right to the bottom line. So I think striving for a nice balance of both volume and yield is our goal. But yes, we're always looking to get more yield if we can in the marketplace.

Brian Ossenbeck from JPMorgan. One housekeeping then Europe question. So just on the other revenue growth, is there anything in there for Dataworks or Nova in terms of the higher-margin stuff you're potentially doing with other customers? So just to clarify on that. And then just Europe, [indiscernible], you mentioned it's complex. It's been underearning for a while. What is the path to improvement from here? Is it linear now that you've gone through the transformation and the reorganization? Will it take time where you need to get some of that operational stuff done before you can take market share? And then just thoughts on competitive dynamic because I would expect your competition is not going to sit there and just let you take that from them.

I'll answer the first one. I think there's minimal revenue dial in on Dataworks right now. If we accelerate that, that's obviously an upside to these numbers. Second question was on Europe, right?

Yes.

Okay. Yes. Thanks for the question. I guess maybe first off, let me pick up on some of the comments John made is -- on the back of better service, we've grown the business. We've translated that with higher productivity into improved financial outcomes. And they're incrementally improving and building on each other. So that's already the last 2 years. I think your question also is, is the $650 million back-end loaded? No, it's not. So sequentially, it's being delivered.

Overall, if you look at the European transformation program, as you mentioned, it's quite broad-based. There's a lot of changes happening from an infrastructure point of view, from a value proposition point of view, organizational, but it's not a flick of the switch. We're incrementally bringing capability to market to our team members. We're testing it at the moment. We've got FedEx route optimization piloting in France for the last 2 months.

It's as good to go to be scaled up to the rest of Europe. So we've got a lot of control of this transformation, and we're using DRIVE and the KPIs we have in DRIVE and the KPI framework of DRIVE to kind of manage and monitor the execution. So I feel confident with the momentum we've built. It's not back-end loaded. We're monitoring the top line, the bottom line performance every day. The majority of the benefit is coming from the cost side, and we're making sure that we monitor the productivity that we're seeing at every station, at every hub on a daily, weekly cadence to make sure we're monetizing this. In terms of competition, I think the other thing I'll say is if you look at our market share today in Europe, from an intercontinental perspective versus what we have intra-Europe, our intra-European market share, whether it's parcel or freight, is a fraction of what our intercontinental is. We have a lot of share opportunity to have. Our customers are happy with the quality we're giving and with the uniqueness of our network as well. Our road network spans from Turkey to the Nordics to Portugal with time committed with the same visibility tools that Brie was talking about. We have one face to the customer, which is a unique offer on the European landscape. So we feel confident that we can get that share gain as we've shown in the last 10 quarters, right? There's nothing to drive confidence like building the momentum that our organization has done. And I'm incredibly proud of what the European team members have shown in terms of resilience and commitment to this journey ahead.

I'll just add one thing to that, which is Walter, Brie, Raj, all of us have sat in with large customers in Europe. We have a phenomenal sales team over there that knows that market quite well. And again, as evidenced by the 10 consecutive quarters of taking share, customers are excited that FedEx has arrived in Europe. So that's another thing we hear quite frequently from these customers. They're excited to have us there in the market, playing at the level we're playing at now with service levels and efficiencies.

Stephanie Moore, Jefferies. As you look at your 2029 targets, I think you've been very clear that especially on the top line growth that you're being prudent in your underlying assumptions, especially given your view on the macro. So if you do end up seeing performance a little bit better than you expected, whether it's macro or your own doing, how would you balance that outperformance and additional investments and reinvesting back in the business, especially given your point about capacity being in a pretty good spot?

So let me take that one. And I think, first of all, from a planning perspective, we wanted to be prudent here in terms of how we think about it because we think because of the significant transformation underway, we can generate a lot of operating income growth. If the numbers are higher, obviously, that contributes significantly to the bottom line.

And we will be very, very prudent in how we take capacity in this -- I think we have enough and more capacity to adjust another a few more points of growth because there's opportunity to change the mix even more. That's what our focus is going to be. And also, we have opportunity to leverage the assets that we have in off-cycle as well. So we don't expect in this time frame to have significant additional capacity even if there is some tilt in the volume growth in this time frame. I think that's what you're asking, right?

Jason Seidl with TD Cowen. I want to go to Scott. Scott, you said you've optimized 25% of U.S. and Canada already and 65% by the end of the year, but that you've already seen a 10% reduction in the P&D costs, but those are smaller facilities. Is there any reason to believe that, that number would be different when you push the optimization onto the larger facilities? And then a quick question on sort of InPost. Is sort of the ownership structure at InPost done more to make sure that it clears the European regulatory hurdles?

Yes, I'll start. Thank you, Jason. Great question. Yes, I think on average, that's what we've seen so far through the first 25% of the volume optimization. I do think that there is some upside there, particularly as we get into the larger markets. I know as our team members continue to get more comfortable with the new technology that we've rolled out with FedEx route optimization, particularly in our legacy Express network, and we're seeing good gains in that.

And that -- right now, I think, is really where we're focused at right now is that continuous training, education. And as the network continues to optimize and gets more stabilized, we do believe we're going to continue to see more improvement.

And I'll take the question on InPost and the regulatory considerations. Of course, in a transaction like this, there are regulatory considerations. But really, the deal structure was designed around what's in the best interest of the players that are participating. And from our standpoint, both a prudent investment as well as a commercial agreement that will benefit us. So -- but the regulatory process will take its course.

Yes. If you think about it in the marketplace as we're talking about in the domestic segment, in the out-of-home segment, our market share is 0 or close to 0. So that's where the starting point.

Conor Cunningham at Melius Research. I love the free cash flow conversion commentary. So maybe I'll start with that. So you're talking about a 10-point improvement from where you are today to over 100% in 2029. Again, it makes sense. All the transformation efforts are going to be massive tailwinds. But can you just talk about, one, the ramp of how that looks? Is it a big -- is it back-end weighted as to the previous question? And then are you willing to protect the cash flow number just with CapEx in general? And then -- sorry, just one more. all the investments that you are making right now are outside of the aircraft, it's automation, facility-related, high-return stuff. So it doesn't seem like the 100% is your final destination here. It seems like there's a lot more upside there. So if you could just talk about that high level.

I'll let John answer the question, but we're also happy with the cash. I'll certainly hit the first one. Look, we're providing to you today our long-term outlook through 2029. We look forward to providing you more details on our journey along the way, but we're here to talk about kind of the destination where we are.

So we've laid out our CAGR objectives on how we get there in all the main categories. So I'll just leave that there. If I understood your other question on CapEx, look, we're aggressively managing our CapEx. We're committed to enhancing free cash flow. That's a priority of ours. I think we've done a really good job if you look at some of the history on how we brought CapEx down to where we are today, let alone our targets going forward. We have levers we can pull to manage our CapEx as we move forward in our journey here.

And so I think I covered 2 of those questions. I'm not sure of the third one.

Yes. Yes. So from a CapEx standpoint, really, it's to maintain our network in terms of what we currently have today. 90% of our CapEx is dedicated to maintaining our network, modernizing and updating our equipment and not dedicated to expansion, right? So it's to continue to leverage technology and all the things that we've been talking about through the day. And for the remaining 10%, there may be markets we need to emerge in. And Walter and Richard talked about some of them, remaining 10% is available to us for that.

Well, this is a structural change at FedEx. And as I said, one of the themes is this is a gift that's going to keep on giving even beyond '29.

Eric Morgan from Barclays. I had another one for Scott on Network 2.0. I think you called out pickup and delivery as kind of the biggest opportunity through '29 for that initiative. Can you just speak to maybe the linehaul side? I know there are a couple of references to shifting air to surface where it makes sense. How kind of automated is that? What's the opportunity there? And how -- I guess, what's kind of contemplated in the '29 outlook?

Yes. Great question, Eric. Thank you. Yes. So from a node connection, naturally, we have more nodes that we're connecting with the airline in this new transformed network. But that was baked into our business case that we originally laid out. We do see opportunities as we continue to work on our, I'll say, technology to help us with the integration and flow of our packages. You heard me talk about network monitor as more of a visibility tool, but also looking at the opportunity to help at Origin to be able to put the package not only in the right network but in the right lanes. We see opportunity to continue to drive efficiencies in that space as well.

And I'll just add that it's connected to your question about CapEx as well because $1 of CapEx is not $1 of CapEx. So when you're automating these facilities, particularly your sort facilities in one integrated network now, there are upstream and downstream benefits of those sort locations being much more automated and technologically advanced and efficient.

So that's why we're so focused on that part because there's benefits to the pickup and delivery operations. There's benefits to the aircraft CapEx side. If your facilities can't process the volume as efficiently, if they can't make all the splits, you actually drive up your aircraft CapEx artificially. So that's why we're so focused on that.

And it's also important to note the role [indiscernible] role here. As she so eloquently covered in her presentation, this is -- now we are able to do this optimization end-to-end.

And if I can build on that, Rod. So to Scott's point, we are planning to deliver $2 billion by end of 2027, which includes not just pickup and delivery, but also facility optimization and One FedEx. And I think some of you saw our automation show displayed at our Memphis hub. And a lot of those units like robotics and IBIS play a big role in us being able to deliver those savings.

And if I could, at the risk of piling on just a little bit, We talked about One FedEx and bringing Network 2.0, the 2 companies together. This is another area when we're talking about capital. We've instituted an enterprise-wide capital review board. In the past, it was 2 separate companies that would make their own capital decisions, not knowing what the other company was doing. And now there's a much more consolidated coordinated effort on CapEx discipline.

Donald Broughton, Broughton Capital. Help me with the math here. So I know Raj is going to deliver because he did that in what he said he was going to do in '22, he's done cash flow. So you said you're going to get us to $98 billion in rev and 200 basis points of margin improvement by fiscal -- by calendar '29. Now Scott, you said you're going to get us $2 billion, I'm guessing that's in run rate from Network 2.0 by the end of '27. So that's $2 billion, that's 200 basis points. So there's going to be more than that then if the rest of the savings described is not 200 basis points. It's...

So look, as we've laid out and as we've frankly discussed in the past, not every dollar savings, structural cost savings necessarily flows through to the bottom line. There are other offsets to that, including some of the business expense costs. As I look around with my colleagues here, there's also some DRIVE initiative costs. There's some IT expense that goes into it as well as some inflation as well. So those are some of the offsetting to some of the, I guess, I'd say, lack of flow-through, but we're really excited about the opportunities we have ahead and being able to deliver.

And net-net, we're at 2% CAGR on our cost base. That's where the sauce.

Excluding transformation savings, do you think you can be price/cost positive in the domestic segment moving forward? And then maybe can you help us break out the $650 million of Europe earnings improvement? How much of that is achievable through cost reductions? How much is dependent on mix and other pieces?

[indiscernible] that question?

Yes. That's the goal. Absolutely. You saw on the bridge, that is absolutely our intent.

The majority is cost, but there is a mix component in there as well.

Ken Hoexter again from BofA. Raj, I think last -- maybe a little while ago, we talked about how when you roll out Network 2.0 for each region, there was a cost involved, but that we shouldn't expect to see the cost disappear very quickly because you want to ensure quality. And then as you roll out new markets, there's new costs. Have we hit that peak inflection point? And do we start to see those costs roll off? Like is that something that now that we're halfway -- I guess, we'll be halfway through through the year, does that start to accelerate and we can start to see real flow-through on the gains? And then I'm sorry if I could just get 2 clarifications. John, you mentioned -- I think you said the buyback was just to offset stock issued. Is there no buyback? So the $16 billion, is that upside potential of buyback?

Yes, I'm sorry, the stock buybacks we've included in our 2029 outlook includes stock buybacks to avoid dilution but not more.

Not more, right. And then I'm sorry, just 2 clarifications, if I could. The other one was, Jenny, I know you said keep it long term, but if you're talking about a 3Q beat, does that mean if you keep talking to the midpoint that you're expecting a 4Q miss? Or does that mean the CAGRs that you're talking about are actually lower than you're talking about because you're off a higher base. I just -- I know you want to keep it longer term, but I think that sets the base of '26.

Well, let me -- on the Network 2.0, I think we are going to start seeing benefits. Obviously, we're already seeing benefits now. And there's just -- obviously, new markets, we're rolling. There's some investment, but they're getting the benefits of the ones that we all rolled out. So we see $1 billion of benefit in calendar year 2026. So that will be a good starting point to go into the next year. So that's already -- that's in there. As far as your other question, listen, we have given a number in the last quarter. That's where we base everything off of. we want -- we will just hold on to that, and we will update you when we get to the March earnings call. I think that's more disciplined way of doing this.

David Vernon from Bernstein. So maybe, John, along the lines of the $16 billion of free cash flow, which is kind of more than FedEx did from 2000 to 2020, I think. Can you give us some more helpful guidance on how to think about what you're going to be doing with that? Is there been a payout ratio established for maybe dividends and how to think about growing dividends. Are you expecting the leverage in the business to kind of stay at a certain level and your credit metrics get better? Are you going to be maintaining leverage? Is there going to be a little bit of even more cash? If you could just give us some guideposts for how to think about modeling the cap table in '29, that would be very helpful.

Yes. I think for the dividend, we would expect to continue to grow the dividend in line with what we've done most recently. We're not putting out a particular ratio, but I think it's fair to say we'll continue to grow the dividend in line with what recent past has been. With regard to share repurchases, we're going to continue to evaluate that as the opportunities present themselves. Bolt-on M&A opportunities may be an opportunity as well.

So all those things are factoring in all while ensuring we're maintaining a strong balance sheet. Now with regard to your question on leverage, we're planning to stay leverage neutral, at least for the near term. The FedEx Freight spin is designed to allow us to stay leverage neutral. So I'm not expecting any major challenges there. But we're going to be exploring all options. I think one of the great things about this strong free cash flow position is it gives us a lot of optionality, and we're going to be exploring it on all the fronts I just talked about.

Chris Wetherbee from Wells Fargo. So maybe, Brie, one for you and then one on the aircraft fleet. I guess pricing, I guess I'm coming back to the sort of price cost dynamic. Is there a difference in domestic versus international, in your opinion, the ability to get price here versus there? And then as we think about the aircraft fleet, I know, John, you noted I don't think you need more capacity to handle the volume that you guys are thinking about. But how does that look in fiscal '29 from an aircraft perspective? Do we have the same amount of planes, roughly speaking? Do you draw that down at all? Maybe Richard's perspective would be great.

So from a price perspective, yes, there are going to be different levers that we're going to pull from a pricing perspective. You heard [indiscernible] focus, in particular, from an international perspective, one of the biggest yield levers that we are going to pull is that we are going to shift that mix shift, especially in our European division.

As we talked about, the TNT was a collection of domestic. We now have the strength in intra-Europe. We have tremendous market share potential. And so one of the primary drivers you are going to see is you're going to see actually -- and that's actually why you're not seeing total international grow even faster from a volume perspective because we're going to hold and potentially reduce volume in some of those domestics to make room for the intra-European that also has a pretty significant yield power.

In addition to that, we are looking at our weight in the international market with the change of the de minimis. There is a good balance there, and Richard and I talk about it all the time about having the right mix of freight and parcel. It is something we think about a lot from a density perspective. But in international, we also believe that on the parcel side, I've got some weight opportunity as we really focus on B2B.

So -- and then I guess, third, from an international perspective, the -- as Raj called out, our pricing team is now global. The programs and the learnings that we are executing here in the U.S., we have brought them into one of the things that we did recently is the dim capture in Europe, all of the programs and the technology we've rolled out here in the U.S. to capture all the correct dimensions. We're rolling out in Europe. That's very powerful.

So internationally, you have sort of those 3 things. Domestically, it is a little bit more focused on making sure that we really stay focused on that e-commerce higher value. There's probably some trading or at least some very serious GRI conversations that we're having with new customers. And then the B2B mix shift is, we've seen tremendous momentum as we've talked about this. We've refocused the sales team. They have a new compensation structure. We've put in new hunter models here in the United States. So we've got reps that are dedicated to B2B. So those are some of the levers we're going to use domestically.

So on the fleet side in terms of how I'm thinking about fleet, it's actually very tied to what Brie was talking about in terms of the mix. You heard Coal talk a lot about how Tricolor is densifying the network. So we can absorb that growth. And with a better mix, that healthy mix of bricks pounds of bricks and pounds of feathers as we call it sometimes with freight and parcel, we can easily absorb that growth without having to add a lot of capacity. We also, of course, can lean into variable capacity in what we call the white network like a freight forwarder.

I've taken the same. We can do anything a freight forwarder can do. They can't do anything we can do. So in terms of what that means for the fleet because there are obviously puts and takes there with us needing to retire the MD-11s in the 2032 time frame I've communicated because we are highly confident in the safe return of those aircraft. I'll just add here as an aside, the regulators, the FAA, the NTSB and Boeing as the supplier have just [indiscernible] the diligence of our maintenance operation.

That's out in the public domain. You may have read some of those pieces where they've louded the diligence of our maintenance operation, our crew training on that aircraft as well as the technology we've put into it. So we're confident we can fly that to 2032, but we're obviously retiring it, right? We are going to keep that aircraft and related capital below $1 billion, as I said, that's going to allow us to do that, absorb the growth through better mix and densification. And I'll just point out that since 2022, we've actually reduced the fleet by 6.5%. So we know where we're going. We know how to absorb this growth with our flexible system.

I think I'll use the word John used. We have a lot of optionality in how we flow that growth. And then as we get further along in Network 2.0 and the benefits of what Coal and her team are doing with the true end-to-end planning of the air and surface system as one in a way that we never have, there could be implications for the domestic fleet, but it's a little early innings to say what those are. And that would be different gauge aircraft. You're talking 767s, 757s in that theater largely versus the MD-11s and the more efficient and larger 777s that we operate in the intercontinental theater.

Jason Seidl, TD Cowen. You showed us a lot of good technology last night, especially with the robots on the loading and the unloading side. How much adoption is built into that look out to '29 for this technology, specifically around headcount, right? Because if you look at some of those unloading robots that could really help you out in terms of your productivity.

Yes. I'll just say that our outlook is not dependent on or factoring in any material numbers with regard to that kind of automation. It's a little bit of a longer game. But look, to the extent that technologies are ready for us, we're looking to take advantage of them to complement our employee base, make their -- I'm sorry. It's potential upside. But let me also take a minute here for Kanwal to just actually weigh in on the technology itself.

Absolutely. So we are in the early innings of that technology, but I'm really excited. I'm sure you are as well based on what you saw. And it's about taking those repetitive unpredictable tasks that we have in our operations and automating them, making sure it's very safe for our employees as these technologies are inducted into our operations.

Maybe to ask another one on technology. I mean, along with your good service, you've talked about how your technology also helps you have a competitive edge in the market. So maybe, Vishal, I know we talked about like the what -- the incredible work you guys are doing on clearance. But maybe you can speak to that, what's the technology you're introducing to the market? How is it better than what your peers might have on the market? And how is it allowing you to win share and maybe demystify some of the clearance that I can imagine is very difficult right now for your customers?

Sure. So Richard, thank you for that question. On the topic of clearance, so if you look at clearance and if you followed what's happened in the last 12 months or so, on how we have performed in clearance versus some of the others. You'll see that despite the search and all the volatility that existed, we have absolutely kept our operations going. The reason we were able to do that is because we took a unified approach to looking at the clearance process end-to-end. And while it's technology, it still starts with business and looking at the process end-to-end. We're looking at the front end all the way down to the brokerage end.

We've also started to build out a clearance platform, and we started to infuse AI, both in terms of at the initiation of the process. And when you look at HFS G classification, how do you get and tap into technologies that allow us to get cleaner data into the system so that the flow-through then continues to happen on the back end part of the system as well. So embedding AI into the process flow, integrating the process flow is one way through which we have absolutely been able to deliver consistent and more reliable service through the entire volatility that has happened in the landscape over the last 12 months.

That same mindset is how we are applying to all other areas of opportunity inside the business as well. It would have seen yesterday [indiscernible], which is when you look at what we have built with [indiscernible], where we've combined both the digital and physical side of embedding sensors on top of high-value mission-critical shipments to have a full visibility into the health of the shipment throughout its entire journey and be able to intercept at times when it needs interception. I mean that is capability that does not exist in the market today.

And our goal is to keep finding opportunities like these where we can use technology to differentiate to deliver not just a better customer experience, but also make our operations to be unmatched. And when it comes to the combination of physical and digital, we see tremendous upside and potential over the next few years.

Let me take this opportunity to call it [indiscernible] listen in the back. Hopefully, some of you may remember yesterday. This has been a year where tremendous changes in the trade environment and especially in the clearance in the physical movement of goods through borders, which -- I mean, we have managed it absolutely brilliantly, and thanks to Lisa's leadership.

Jordan Alliger at Goldman Sachs. It seems like for Network 2.0 and maybe for the company, the whole concept of 1 truck per van or 1 truck per neighborhood per day is kind of really important. So I guess my question is how close are you? I know you gave percentages, but maybe said another way, when you do a volume optimization through 2.0, are you at 1 truck per neighborhood? Maybe Canada is a reference point, I don't know.

Yes. So it's not going to be perfectly 1 truck per neighborhood, but that's the aspiration. We want to try and reduce the amount of duplicative routes that we have in a neighborhood or in a service area. We are seeing as with that 10% P&D efficiency improvement that we're seeing, it is a route reduction initiative.

So we are seeing that take place, and we're only 25% right now, but that will continue to build. I think Raj mentioned it earlier, when you see 25% that's optimized now and we're getting ready to ramp up another 40% to the 65%, that 25% will continue to get better and more optimized and more efficient as the 40% is being onboarded. And that's just going to be a flywheel effect as we move forward. So we look to continue to reduce routes in specific areas at the same time, creating the efficiencies and more importantly, improve service and improve customer experience. We talk a lot about the delivery side, but the pickup side is huge.

Getting to a single point pickup where the customers do not have to segregate the volume out is a huge customer experience touch point that we're seeing pretty significant improvement and feedback from our customers.

Well, you mentioned Canada. That's a perfect case study, to be honest with you. We now have some data behind us, history behind us here. The service is improving, the productivity is improving and our operating profit is improving significantly and more to come.

Pickup was the largest gap that we had versus the competition. It was the one feature that our primary competitor had a single pickup for small and medium business. This is a really big deal for small customers. You do not want to have 2 drivers at the end of your shift when you're trying to go home to your family. This is a big deal for our small business customers.

Game changer.

Tom Wadewitz with UBS. So Raj, you had pretty enthusiastic comments about InPost. They're pretty positive, right, and you're spending a couple of billion dollars. So that's obviously good. But how do we think about this? Is this optionality for you in the future and the benefits are kind of incremental? Or is this something that I know you haven't put it in the plan, but if a problem in Europe is too much domestic traffic, maybe too much B2C, it seems theoretically you could have a step change where you shift a portion to InPost and that, that steps up and makes it more like B2B traffic and steps up the profitability. So really, it's just kind of like do you view this as kind of incremental with some optionality? Or is this like, hey, when we get to the commercial agreements, this is kind of step change impact in Europe?

Well, the short answer to your question, I think it's a step change. I view this as a very important move for us in Europe. And we have obviously 2 parallel objectives. One is financial. We think it's a great company with great -- you can see the growth that they have, and they're really changing the face of e-commerce with especially the consumer experience. They have a fantastic NPS score actually. And so it is the end-to-end experience that they provide with lockers being that big -- one big option at the end. So we see this as a good financial investment as well as a good strategic investment.

From a strategic point of view, again, allows us to focus in on the B2B and be the heartbeat of the industrial economy in Europe. While at the same time, the commercial agreements are -- we were able to hand off this as you call it a B2B move for some of these e-commerce parcels. Plus they have an opportunity to move some on our line haul as well. So there's a give and take in these commercial agreements. So we look forward to getting this closed and moving on.

Raj, can I...

Yes, please.

I think you saw Brie show before that 75% of our international business is B2B. Actually, in domestic in Europe, it's more. So we do not have a large domestic B2C component in Europe. As Raj mentioned, the opportunity here really is using our broad road-based network in Europe, but now connecting it for us with a best-in-class final mile cost point and experience. But both for intra-Europe, but also for all the volume coming in from whether it's Asia or the U.S., that's where the opportunity is.

That's a great point.

Ari Rosa with Citi. I'm curious on the bridge to '29 between the volume cost and yield piece. I'm just curious to hear your thoughts on where you see the most upside or where you -- which of those 3 buckets -- if you were to outperform for '29, where do you think it would most likely come from?

I think the short answer is an extra percent in yield is the biggest upside to the numbers, but we're focused on all of the above, but yield is, of course, a focus of ours, our pivot to B2B. But to some of the questions that were asked earlier, well, what if some things don't play out the way we might hope, we're religiously focused on cost and delivering and lowering our cost to serve such that we'll be as well positioned as possible to take advantage of the revenue environment and be adaptable to capture both the upside and manage through any shortcomings.

Brian Ossenbeck from JPMorgan. So 2 quick ones here. One, again, for Brie on yield, maybe to ask about core pricing, though. I don't think we've talked about that. But it seems like utilization is pretty high. Competition is more disciplined. So what are your thoughts on core price, especially as some of these areas are looking to gain more market share and maybe upsell the mix a little bit. So how do you see core price? What's in the numbers and your expectations? And then, Scott, just for you in terms of Network 2.0, I know there was a big lift to get to 65%. But have you thought about beyond that? And maybe you can define what eligible volume is in terms of like the broader network itself, so we can put some context around that.

So as I mentioned, I do think from a year-over-year perspective, we have seen solid improvement in the pricing environment, and that is not only, as I talked about kind of some of the structural changes, and I do think FedEx is leading the way there with that discipline. But we are seeing improvement in the core pricing. The one reason I'm sure you're asking is like, why isn't it 3? Why isn't it 4 then? So the one thing that we do have from a pressure perspective, and this is not a FedEx issue. This is a market issue, is that the biggest customers in the market do get bigger. We have done an outstanding job, a huge shout out to my sales team.

I mentioned SMB, we grew 13%. Sort of the high end of the middle customer and the bottom end of the large customer, that portion of the market over the last 15 years is shrinking. That's not a FedEx thing. You can go and think of how many retailers don't exist that did exist 15 years ago. So that is sort of the one headwind that we see right now from a pressure on yield. But for the customers that we do have, we feel like core pricing is strong. We're just seeing a little bit of that medium customer, for lack of a better term, is as a proportion is a headwind. A great question.

To answer your question about Network 2.0. So yes, the next 40% is a big lift that we're about ready to start encountering here in March as we stand up 5 districts in the month of March in 2 different phases. And we'll continue all the way to peak to get to that extra 40% to the 65%. And then through the first 8 months of next calendar year, we'll complete the 100% integration. Now to get a little bit more specific, there are certain locations in certain geographies that it doesn't make sense, at least with the footprint of the facility. A good example is New York City.

We've got 4 or 5 facilities in downtown Manhattan that has a footprint that really is not conducive to the package characteristics that we would want to blend in our optimize. There are a handful of those in several of the larger metro areas. What the plan is would be to go back later on as we continue to optimize is to address those facilities over time. But that will get us to basically 100% of the network integrated.

And this will be our final question in the middle.

Reid from Stephens. We talked about moving some of the costs from the corporate and other into the domestic parcel and some of that was associated with DataWorks and some of the technology side. Should we expect some of the revenue to also move into the domestic parcel side? And does that have anything to do with the 2026 targets? And what type of role does that play with the profitability targets?

Yes. I think revenue, not necessarily shifting. It's more of an allocation on the D&T side as to where those resources are being dedicated. So to the extent that those resources are generating more efficiency, more customer, better customer experience, that will flow through the revenue and providing the service. And then the other division of the DataWorks expenses will be for corporate and other for the growth that Dataworks will see in the years to come. Yes, it's not a shift of revenue as well. It's, frankly, as I mentioned, a bit of a headwind to the U.S. domestic because it's more cost taking on by FEC. So -- but yes, no, we expect to get significant benefit from those investments.

Yes. This is about externalizing our services from Dataworks, so the cost and revenue will be now nicely. We can just monitor and manage that.

Well, thank you to all of our speakers and to all of our participants. And now I will pass it over to Raj.

Well, thank you again for joining us on our 2026 Investor Day. And I think you heard today about the rigor, about the accountability, the unwavering commitment that our teams have brought to their work. The chart is very simple. And one, our late founder feels deeply to his core. I will make every FedEx experience outstanding. As the industrial network powering the global economy, FedEx is extremely well positioned to make supply chain smarter for everyone. As we all get ready to depart, I hope you're all left feeling the same enthusiasm and conviction that continues to excite all of us here every single day. Thank you all for coming and safe travels. Thank you very much.

Good day, and welcome to the FedEx Second Quarter Fiscal 2026 Earnings Call. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to FedEx Vice President of Investor Relations, Jeni Hollander.

Good afternoon, and welcome to FedEx Corporation's Second Quarter Earnings Conference Call. The second quarter earnings 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&A session, callers will be limited to one question to allow us to accommodate all those who would like to participate. 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 investors.fedex.com for a reconciliation of the non-GAAP financial measures discussed on this call to the most directly comparable GAAP measures.

Joining us on the call today are Raj Subramaniam, President and CEO; Brie Carere, Executive Vice President and Chief Customer Officer; and John Dietrich, Executive Vice President and CFO.

Now I will turn the call over to Raj.

Thank you, Jeni. We have only 1 week left in peak season, and I want to extend my sincere thank you to our frontline workers, pilots and all of Team FedEx as we approach the finish line. These individuals are out there working hard to deliver a successful peak for our customers and making every FedEx experience outstanding.

Before I turn to our Q2 results, I also want to acknowledge that our thoughts and prayers remain with those at UPS, along with the families and community affected by the recent tragedy. We are working closely with Boeing and the FAA to ensure the safety of our own MD-11 fleet, which we will discuss later on the call.

Now let's review our performance in the quarter. In Q2, we provided excellent service to our customers, won new business in high-value verticals and delivered strong results, high single-digit revenue growth, margin expansion and high teens adjusted EPS growth. Quite remarkably, we did this while navigating multiple external headwinds including the unexpected grounding of our MD-11 fleet, nationwide air traffic constraints, weakness in the industrial economy and of course, the impact of global trade policy changes. We're extremely pleased with our Q2 performance, especially in the face of these challenges. It's a direct effect of the rigor we have embedded into our culture over the past several years and the resulting transformation from Network 2.0, Tricolor and structural cost reductions, all enabled by data and technology.

We're demonstrating the resilience and flexibility we have built into our network and our ongoing efforts to reduce structural costs are leading to significant improvements in profitability. We remain on track to spin off FedEx Freight on June 1, 2026, as a separately listed public company with the best value proposition in the industry. We recently appointed Marshall Witt as CFO of FedEx Freight. Marshall brings significant and external public company experience having served as the CFO of TD SYNNEX for the past 12 years. He also has deep industry and company expertise from his 15 years previously working at FedEx Freight, primarily within the finance organization.

FedEx Freight's entire executive leadership team is now in place, and the team is moving quickly to prepare for the separation. Our conviction in the potential value that will be unlocked from this spinoff is stronger than ever.

Turning to our consolidated Q2 results. Revenue was up 7% year-over-year, driven by yield and volume strength across our U.S. domestic package services. We achieved our targeted transformation-related savings and grew adjusted operating income by 17%. Federal Express Corporation, or FEC, delivered another quarter of strong operating leverage.

On an 8% year-over-year increase in FEC revenue, we grew adjusted operating income by 24% and expanded adjusted operating margin by 100 basis points. Nearly half of our revenue growth was driven by B2B services, an important enabler of increased profitability. And this marked our fifth consecutive quarter of year-over-year adjusted operating margin expansion at FEC. In line with ongoing LTL industry trends, freight results remain pressured, driven primarily by lower volumes, partially offset by higher weight and revenue per shipment. This is the result of our sustained focus on maintaining strong revenue quality. Given the strength of our Q2 results and our updated assumptions for the second half, we are raising our adjusted EPS outlook to $17.80 to $19.

Brie and John will detail the underlying assumptions shortly. We are demonstrating our ability to execute well in any environment, reflecting the progress of our network, organizational and digital transformation efforts. This quarter truly showcased the importance of network integration and optimization, along with the power of our resilient industrial network. Both shifting global trade patterns and the unexpected grounding of our MD-11 fleet required significant changes to our network, which we implemented swiftly and successfully. To that end, let me provide a quick update on how we flex our network during the quarter. From a global trade perspective, we reduced our Purple tail trans-Pacific Asia outbound capacity by about 25% year-over-year.

We also decreased our third-party or White tail capacity by nearly 35%. We continue to shift some of our capacity to the Asia to Europe lane and importantly, these flights typically have an attractive B2B mix of over 75% with high load factors. When we grounded our MD-11 fleet, our focus, as always, was on safety above all, making sure our planes would be inspected and as safe as possible. We're also focused on helping our customers and providing technical support to the regulators. Of the 34 MD-11s we own, 25 were in operation at the time of the groundings. Our network planning team immediately implemented contingencies prioritizing protecting our customer commitments and stabilizing the network.

We revised our November schedule quickly, condensing our planning process into 3 days and the actions we took included: trucking more volume in the United States instead of flying, given 18 of our MD-11 flights were U.S. domestic, shifting volume to other types of aircraft within our FedEx owned fleet, adding capacity via third-party lift and adjusting the timing of maintenance for our remaining fleet while staying compliant with regulatory guidelines. As a result, we were able to mitigate the operational and financial impacts of the MD-11 groundings which ultimately pressured our Q2 adjusted operating income by about $25 million.

For the final week of peak, we have additional contingencies in place. We lost about 4% of our global cargo capacity before mitigating actions during our busiest season. As a result, our cross-functional teams are working around the clock to minimize any service disruption. And looking beyond peak, we are extremely focused on maintaining high service levels, the benefit of more time to plan. We'll keep you posted on the expected timing of the MD-11 return to service. Network transformation remains a key priority for us. In support of this ongoing transformation in October, we named Kawal Preet as Executive Vice President of Planning, Engineering and Transformation. Kawal is known for creating high-performance cultures. With nearly 30 years of institutional and industry expertise, her depth of operational and engineering knowledge will support further progress towards our global integrated network.

For the past 5 years, she served as our Asia Pacific Regional President. Kawal has a proven track record of relentlessly unlocking efficiencies and driving improved bottom line results, and I am confident she will thrive in her new role. This global centralized planning and engineering function marks an important shift in how we deploy our assets to reduce inefficiencies and increase profitability. Additionally, it provides enhanced oversight of our ongoing drive, Tricolor and Network 2.0 efforts. We now have about 24% of our eligible average daily volume flowing through 355 Network 2.0 optimized facilities.

Additionally, we have closed more than 150 facilities. We also continue to prioritize improving our operations and performance in Europe, where the team is making good progress with significant opportunity ahead. We remain focused on driving growth in international and B2B segments, which is helping to offset the headwinds created by global trade policy changes. Our European operations teams have done an outstanding job absorbing the growth through improvements in surface hub, station and on-road productivity supported by sustained improvement in net service levels. Data and technology play a foundational role in our transformation, and we are scaling AI adoption across the company to all our 500,000-plus employees.

The reality is that AI is becoming an integral part of all business functions from the back office to the front line, and we want to ensure that every employee is equipped to thrive in this new era. We recently launched a global AI program to help our teams innovate faster, serve customers better and solve challenges more effectively than ever before. Importantly, we are customizing the curriculum to be directly relevant to each team member's specific role, experience level and existing AI fluency. We also continue to explore new approaches that leverage our real-world operational data platform. We are actively pursuing opportunities to bring digital solutions to the market, starting with logistics intelligence insights.

Our recently announced strategic collaboration with ServiceNow marks an important milestone, designed to make life easier for those who manage complex sourcing and procurement operations. Through this collaboration, we are giving businesses a single system that anticipates, adapts and acts before they experience supply chain disruptions. And by integrating into ServiceNow's procurement and supply chain solutions, we are beginning to monetize the proprietary insights that only FedEx can provide. Enterprises need access to real-world logistics intelligence to power their AI systems and workflows and this partnership demonstrates market demand for what we have built.

In closing, I want to recognize our team for delivering another strong quarter while navigating a very difficult operating environment. Our ability to grow adjusted earnings per share 19% year-over-year despite multiple headwinds speaks to the benefits of our transformation and the strength of our industrial network. I look forward to sharing more information on our strategic initiatives and our medium-term financial outlook at our February Investor Day. I hope to see many of you there.

Now over to you, Brie.

Thank you, Raj. First, I want to commend our commercial and operations teams for the outstanding job they are doing to support our customers during peak. Successfully picking up 25 million packages on Cyber Monday requires extensive collaboration and agility. Our Q2 performance is a function of momentum we have been building over the past year, managing key performance indicators to ensure a focus on high-quality revenue growth. The team's hard work and strong execution in Q2 led to a 7% year-over-year revenue growth across the enterprise. Busy, busy, busy. At FEC, revenue was up 8%, driven by 12% U.S. domestic package revenue growth with strength across all services.

FedEx Freight revenue declined 2%, pressured by lower average daily shipments. We grew average daily domestic volume by 6%. Our recent B2B health care wins supported robust growth in the United States priority and deferred Express services. The onboarding of our new Amazon business, which is focused on large and heavyweight shipments is also going well. As expected, international export volumes declined, driven again by lower volumes on the China to U.S. lane. Raj mentioned how we're shifting some capacity to the Asia-Europe lane, which along with strong growth on the intra-Asia lane is providing a partial offset.

Additionally, we continue to grow U.S. international outbound revenue, which further offered another offset. And of course, it has high flow through. At FedEx Freight, weakness in the industrial economy again weighed on our average daily shipments, which were down 4%. This dynamic remains consistent with broader LTL industry trends. Importantly, our growing FedEx Freight team positions us well for the eventual recovery. We now have more than 85% of our planned LTL sales force in place, and we expect to have the full team in place by June. And of course, this is 400 salespeople. We are also very encouraged by our Q2 service quality metrics at Freight with claims and damage performance at some of the best levels in company history and on-time service is at the highest level since Q3 of fiscal year '21.

Across the enterprise, our strong yield performance this quarter demonstrates the benefits of our efforts to prioritize high-value shipments, the strength of our value proposition and the continued improvement in the pricing environment. At FEC, U.S. domestic package yield was up over 5%, driven by the strength across all services. International export package yield grew 3%, driven by revenue quality actions, higher weight per shipment tied to the de minimis change plus favorable currency. At FedEx Freight, revenue per shipment increased 2% driven by higher weight per shipment and revenue per hundredweight, demonstrating our sustained commitment to maintaining industry-leading yields.

Now let me share a few highlights on our commercial priorities. As part of our B2B focus, we have developed vertical strategies, each with dedicated leadership and resources in our targeted growth areas. That B2B contributed to nearly half our revenue growth this quarter demonstrates this strategy is working. It is helping us sustain and win new business in priority areas like health care and automotive. For example, this quarter, we won incremental B2B business from BMW. This win is a result of our global reliability and scale, our strong service for time-critical aftermarket and production deliveries and our collaborative shipping tools.

Further, technology companies are investing extraordinary amounts of CapEx in global data center infrastructure over the next several years. As such, we have formalized our work in creating a data center and infrastructure vertical team. This will better support existing customers and also help us acquire new high-tech customers. I am confident our dedicated sales and solutions team will enable FedEx leadership in this high-value market with significant growth ahead. We are very pleased with how our digital tools are supporting revenue growth while creating better outcomes for our customers and their customers.

Wayfair is a great example of how we're using these tools to help our customers improve their shipment-related communications and support their customer service teams. By using our premium integrated visibility tool, Wayfair is increasing their Net Promoter Score, reducing where is my order calls, otherwise known as WISMO calls and decreasing outages with their tracking data.

Turning to our revenue outlook for fiscal year '26. We now expect 5% to 6% consolidated revenue growth this fiscal year, supported by sustained U.S. domestic yield and volume growth. We expect second half international export ADV to remain pressured due to the global trade environment with a partial offset from yield.

At FEC, the midpoint of our range now implies a 7% revenue growth year-over-year, supported by peak trends and our revenue quality actions. Peak ADV is trending in line with our expectation of a modest year-over-year increase. Peak-related demand surcharges at FEC are achieving strong capture, and we expect a year-over-year increase in the surcharge revenue. In light of the recent MD-11 grounding, we have made targeted adjustments to protect network integrity and service reliability. On December 1, we implemented a fuel surcharge adjustment to partially mitigate the added costs required to maintaining high-quality service for our customers. And we expect strong capture of our general rate increase of 5.9%, which goes into effect next month. At FedEx Freight due to the continued pressure on shipments, we now expect fiscal year '26 revenue to be approximately flat to slightly down on a year-over-year basis. Yield growth will provide an offset to a low single-digit percentage decline in shipments.

In closing, we have a great strategy in place to capture high-value growth with our unmatched industrial network and our Q2 results demonstrate that this strategy is absolutely working. Our team is doing an exceptional job this peak season. Thank you team for delivering the Purple Promise during the holiday season and, of course, all year round.

Now with that, I'll turn it over to John.

Thank you, Brie. I'll start by saying that I'm very proud of the team for executing on our strategies to drive margin expansion and operating income growth in Q2. And we achieved these results despite multiple headwinds. Like Raj and Brie, I'm also very grateful for the dedication of our team members who are delivering on the Purple Promise every day, especially during this peak season.

Turning to our financial results. On a consolidated basis, in the second quarter, we delivered $4.82 in adjusted earnings per share, up 19% year-over-year. Consolidated revenue grew by 7%, which supported 60 basis points of adjusted margin expansion and 17% adjusted operating income growth. As Brie mentioned, our yield management and strong commercial execution resulted in higher revenue growth from U.S. domestic package services, which was the primary driver of our year-over-year adjusted operating income improvement. We grew adjusted operating income by $231 million despite the headwind from global trade policy changes, higher variable incentive compensation accruals, weaker-than-expected LTL results, a $30 million headwind from the expiration of the Postal Service contract and a $25 million impact from the grounding of our MD-11 fleet.

At FEC, we grew adjusted operating income by $306 million, up 24% and expanded adjusted operating margin by 100 basis points. This was driven by higher yields, continued cost reduction efforts and increased U.S. domestic package volume. These drivers were partially offset by higher wage and purchase transportation rates and the headwinds I previously mentioned. At FedEx Freight, we continue to experience a challenging market environment, consistent with trends across the LTL sector. FedEx Freight adjusted operating income declined by $70 million and adjusted operating margin contracted 3 percentage points. Q2 was weaker than we originally anticipated driven by lower average daily shipments.

Additionally, we experienced a $25 million headwind to adjusted operating income as our sales force hiring and other separation expenses accelerated in Q2. That said, I'm encouraged that yields inflected positive in the quarter, demonstrating FedEx Freight's disciplined strategy. We remain confident that FedEx Freight is well positioned to see strong incremental margins when demand returns. We remain committed to prudent capital allocation and maximizing stockholder returns. During the quarter, we opportunistically purchased nearly $300 million worth of stock, which, alongside our increased dividend payout demonstrates our commitment to returning cash to stockholders. We have $1.3 billion remaining under our 2024 stock repurchase authorization and subject to business and market conditions, we'll continue to evaluate repurchasing additional shares during the remainder of FY '26.

CapEx year-to-date is $1.4 billion, driven by continued investments to maintain our fleet of aircraft and vehicles, Network 2.0 related facility enhancements and hub modernization. We continue to target $4.5 billion in annual CapEx for FY '26. Given the healthy status of our pension plan, we are further reducing our expected pension cash contribution. We now anticipate making $275 million in voluntary pension contributions to our U.S. qualified plans in fiscal 2026 compared to our prior forecast of up to $400 million.

Moving to our FY '26 adjusted EPS outlook. I want to note that our outlook is based on information known to us today and our business trends from the first half of the fiscal year. Though the global operating environment remains fluid, our year-to-date results demonstrate our operating leverage and proven ability to successfully drive premium revenue growth. As a result, we now expect to deliver adjusted EPS of $17.80 to $19. This compares to our prior range of $17.20 to $19 and reflects a range of potential scenarios for the back half of the year. At the midpoint of our range, we now anticipate a 7% increase in FEC revenue with adjusted op margin up slightly. Also at the midpoint, we expect revenue for FedEx Freight to be down slightly with margin down year-over-year and our expected FY '26 effective tax rate remains approximately 25%.

I also want to take a moment to walk through what is implied in our second half outlook at the adjusted EPS midpoint of $18.40. We expect continued FEC revenue momentum on a year-over-year basis in the fiscal second half. We also expect to benefit from strong operational execution and ongoing efficiency initiatives. At the same time, we anticipate somewhat more limited flow-through in the second half versus the first half due to several discrete items challenging comparability year-over-year.

First, variable incentive compensation accruals. For context, in FY '25, we paid variable incentive compensation well below target levels. Given strong year-to-date performance, we have embedded a higher accrual for this performance-based pay in our revised outlook. This is important compensation that our people are earning due to their strong execution in a challenged environment. Second, given the sustained weak LTL industry trends, we've lowered our FedEx Freight expectations for the second half of the year. And third, we expect meaningful headwinds in the second half from our MD-11 groundings, primarily in Q3. Taken together, these items represent roughly a $600 million year-over-year headwind to adjusted operating income in the second half. For the full year, they represent nearly a $900 million headwind.

Our revised FY '26 adjusted operating income bridge shows the year-over-year elements embedded in our full year outlook in one midpoint scenario, resulting in adjusted operating income of $6.2 billion, up $200 million versus our prior outlook. Of course, this is just one scenario and the assumptions at the midpoint may vary as the environment changes. In this scenario, for FEC volume-related revenue net of variable costs, we now expect a $500 million tailwind. This marks a $100 million improvement compared to what we shared in September. This is driven largely by U.S. domestic package services, offset by a material headwind from reduced international export demand.

With respect to FEC yield, we now expect a $3 billion tailwind. This marks a $700 million improvement compared to what we shared in September and demonstrates our commitment to revenue quality and pricing traction. Our bridge includes partial offsets to these tailwinds. Most remain unchanged from what we shared in September, except for the FedEx Freight headwind. We now expect a $300 million decline in adjusted operating income at FedEx Freight compared to the $100 million expectation we shared in September. Additionally, we added a bar to reflect the variable incentive compensation headwind I mentioned earlier.

As I mentioned last quarter, embedded in our assumptions is the $1 billion in headwind to adjusted operating profit from the global trade environment, offset by $1 billion in transformation-related savings. We're pleased with our year-to-date cost reduction progress and are on track to achieve $1 billion savings target. With regard to Q3 adjusted EPS, we now anticipate adjusted EPS to be sequentially lower than Q2. For further context, we expect Q3 revenue to be essentially in line with Q2 with slight increases sequentially in operating expense due to increased peak demand and higher cost due to the MD-11 grounding. And as a reminder, we are lapping a third quarter that was unusually strong seasonally. We expect Q4 to be our strongest adjusted EPS quarter of this fiscal year. These directional trends are consistent with the patterns we typically experience.

Before turning to Q&A, I want to provide an update on our spinoff of FedEx Freight, which is on track for June 1, 2026. As previously mentioned, we submitted our confidential Form 10 to the SEC as well as a request for a private letter ruling on the tax treatment of the transaction to the IRS. These were important milestones as we move toward the tax-efficient spin-off. We expect the Form 10 which will provide more details on our go-forward strategy and financials to be available to the public in January.

As a further update, upon the spin-off of FedEx Freight, FedEx Corp. intends to retain up to 19.9% of FedEx Freight's outstanding shares. To preserve the tax-free nature of the spin-off, we expect to monetize these shares within a time frame permitted by the IRS. Additionally, FedEx Freight will be hosting an Investor Day in New York City on April 8. John Smith and his team look forward to unveiling for you FedEx Freight's forward-looking strategy to unlock significant stockholder value in the years ahead. And as Raj noted, we also look forward to seeing you in Memphis at our FedEx Corporation Investor Day in February.

With that, let's open it up for questions.

[Operator Instructions] Our first question today is from Brandon Oglenski with Barclays.

John, you just covered a lot in guidance there, and I'm sure will get plenty of questions on it. But I guess, longer term, it looks like you guys are definitely capturing incremental volume share in your domestic U.S. business, the package business that is and seeing quite a bit of pricing upside too. So I wondered if you can talk to some of the dynamics there on both B2C and B2B and maybe if there's more to come on yield gains.

Brandon, it's Brie. I'm happy to answer the question. So from a volume and a market share perspective, yes, are very pleased with the profitable market share. And again, from an FEC perspective, we were really pleased with the flow-through in the quarter. The incremental margin expansion of 100 basis points at FEC is something we're really proud of. And that was driven by a couple of things: one, continued focus on B2B. We've been building this strategy for over a year. We've been very focused on our KPIs and our metrics within the sales organization. We made a pivot to our sales compensation model as well to make sure that, that is balanced from a B2B and a B2C perspective.

And then also, as you heard, we're really pleased with our overall rate discipline and the capture on surcharges. So our goal is to continue to push on this, continue to acquire new B2B market share, and we're really pleased with the underlying momentum.

The next question is from Jonathan Chappell with Evercore ISI.

Brie, I want to stick with that topic. The B2B over half the revenue growth in 2Q. Just wondering if there's any way to break down how much of that is completely new volume business? How much of that is related to kind of yield and some of the surcharges initiatives you're putting in? And should we think about that as being kind of a similar magnitude of overall growth as you think about the guide for the back half of the year?

Jonathan, great question. So overall from a trend perspective and I just want to be clear, it was nearly half, it wasn't over half. Still very pleased with that metric. Let me be clear about that as well. But we expect that to be pretty consistent throughout the year from Q1 through Q4. To your question on acquisition, I will really say that the quarter had multiple things going. From a B2B perspective, yes, we did acquire new B2B. We also did a great job from a share of wallet, and I should not understate that also it was the strongest quarter that we had seen from a small business B2B perspective. So it really was the combination of all 3 combined with our revenue quality strategy. I don't think it was any one of those things.

The next question is from Richa Harnain with Deutsche Bank.

So I wanted to ask about service, more specifically the cost of service. Recently, you shared plans regarding management's annual cash incentive and you added a service component to that, which speaks to the significance you place on service as you work through your Network 2.0 transformation. We would think that comes with additional costs. So how much do you estimate you're carrying today in terms of those additional costs? And what's worked into the outlook? And how should we think about those costs trickling off? I'm sure, for instance, Canada is being run much more efficiently now than when you started your integration efforts. So how long did it take for that to become fully efficient?

Okay, Richa, let me answer that question. In fact, let me answer 2 components of it. One, you started to talk about the annual incentive compensation and to add to the points that was made earlier in our prepared remarks, as last year, our AIC payouts were well below target. This year, we have included the service component. And we anticipated several headwinds. And despite that, the team is doing an absolutely incredible job of performing in this quarter. So while that's a financial headwind for the year, it's absolutely the right thing to do as our team is going above and beyond the call of duty on delivering on that Purple Promise. So that's in the AIC.

Your question was really around the Network 2.0 and the cost. Listen, first of all, we are not going to compromise on our service. Good service is good quality, good quality is actually less waste. And we're very pleased with the progress that we are making there. And obviously, we have made very good progress in Canada as well. You can typically expect in the market roughly 3 to 6 months where we get the efficiency back. And that's all dialed in into our forecast, both for the short and long-term Network 2.0. Thank you again for the question, Richa.

The next question is from Chris Wetherbee with Wells Fargo.

I wanted to ask a little bit about the LTL business, the freight business. As you think about some of the -- I guess maybe we're curious about potential duplicative costs as you guys get prepared for the spin. Is there a sense of how much or maybe the increment on the further decline from $100 million to $300 million on the EBIT decline comes from that? I guess just trying to get a sense if there are some temporary costs associated with the spin, that stuff come out? Or is it really more of a function of what's happening in the broader market? Obviously, shipments are a little bit weaker, yields a little bit under pressure, too.

Yes. Thanks, Chris. I'll take that. As I mentioned in my remarks, we had $25 million in this quarter. We are anticipating of the $300 million, $100 million of that is the result of the separation costs. That is a combination of the acceleration of the sales force hiring, which Brie mentioned is going extremely well as well as IT and other costs, all in the spirit of accelerating, which we're seeing some of the results and the improved performance. So thank you.

The next question is from Brian Ossenbeck with JPMorgan.

Maybe first, John, just to clarify, the costs you're talking about, are those separate from the spin-off costs, which are included -- excluded rather from the EPS guide? And then just wanted to hear a little bit more about MD-11 process, getting them back up to speed, it seems like it will take a little while, but it also seems like there's an incremental step-up in terms of headwind into the third fiscal quarter. Is that more or less because of the peak season? And I think we're expecting that to tail off a little bit, but it seems like it's actually increasing. So additional thoughts around that would be helpful.

Yes. Thanks, Brian. I'll cover the first part. Those are separate costs that I identified in the $600 million. These were included in our reportable earnings. So with regard to the MD-11, yes, our current outlook reflects that those aircraft will return to service in the fourth quarter. We do have some incremental costs in the third quarter, particularly in December. As I noted, $25 million was in November. But in December, we'll have significantly higher costs incurred on the MD-11, that's peak season. And it's an expensive time of year to be getting outsourced lift to begin with, let alone when you have fleet grounded. So I would say of the remaining $150 million substantial part of that $175 million will be in the third quarter.

Let me just add one more point on this thing, Brian. Our first priority and will always be safety above all. And that's the principle which we have built. We are working hand in hand with the authorities on the protocol to get these aircraft back in flight. I was there with the MD-11 hangar just on Tuesday night. We have a phenomenal set of aircraft technicians who are working on it. And we're waiting for the right protocol to get it released in the timing that John talked about.

The next question is from Scott Group with Wolfe Research.

John, I just want to follow up on that $600 million headwind you talked about in the back half of the year. I think you gave -- there's 3 pieces to it. Any way you can sort of break down that $600 million into the 3 buckets you laid out and maybe how much of that is in Q3? And then maybe just along with that, like, I know you said earnings would be lower in Q3, but any sort of magnitude, I don't know, maybe the way to think about it, do you think earnings are flat, higher, lower year-over-year? Maybe that will be helpful if you could give a little bit more color.

Yes. Thanks, Scott. So of the $900 million, we incurred $300 million of that in the first half of the year. To your question for the second half of the year, we've embedded the remaining $600 million in our outlook with about $160 million of that due to expected continued softness in the LTL business. up to a total of about $175 million for the MD-11 grounding and for the majority of which we expect in Q3 and the remainder, about $265 million for increased variable compensation. So with regard to your question on Q3, I'm not going to give Q3 guidance. But what I can tell you is that the Q3 adjusted EPS will be sequentially lower than Q2. We expect revenue sequentially to be essentially in line with Q2. Slight increases as well in operating expense on a sequential basis due to the increased peak demand, some of the increased volumes we're talking about and higher costs due to the MD-11 grounding.

I think an important reminder, too, is we'll be lapping a third quarter that was unusually strong seasonally. We had a lot of drive benefits in the third quarter of last year. We also expect Q4 to be our strongest adjusted EPS quarter for the fiscal year. And directionally, that's consistent with the patterns that we've typically experienced.

The next question is from Tom Wadewitz with UBS.

Yes. So I wanted to get your sense of -- I think what we've seen in the past over time is that FedEx can -- as they're developing momentum a couple of quarters into margin improvement, you do tend to run into this refilling of the incentive comp bucket, and that tends to be a headwind for a period of time. It seems like sometimes that can be like you go a couple of hundred million one year and then there's more to go to next year. So I guess I'm just wondering about do you think this is kind of like you get -- you take the hit over a couple of quarters now and then you're kind of ready to go for fiscal '27 where you see more of the Network 2.0 savings come in? Or I guess, just how do we kind of think about that?

And then relative to just the progress on your FEC margin, which has been good for -- I think you said 5 quarters in a row and it seems like you're maybe pausing admittedly for a couple of reasons. But just kind of how do we think about broader FEC margin improvement? And is this kind of a couple of quarter headwind on refilling the incentive comp? Or is this something that might carry into kind of next year as well?

Well, thank you, Tom, for the question. Let me lead off and if John wants to add to it, he can. As we are looking at FY '26, we are basically catching back up where we should have -- we're comparing it to last year. I think that is not a headwind that we'll have going forward into fiscal '27. So that hopefully answers that question. The second part of it is, we are very, very pleased with the underlying momentum that we have in our business. This is now working the transformation that we have on our network transformation, our organizational transformation, our digital transformation, all are working. Our commercial teams are executing at a high level as you can see the results. So we are pleased with the underlying momentum and the flow through. There are certain things that are happening peculiarly. There are incremental headwinds for this next 3 to 6 months. But on an ongoing basis, we are very pleased with the ongoing momentum here.

The next question is from Jordan Alliger with Goldman Sachs.

Just a question. The bridge to the midpoint is very helpful. I'm just sort of curious, though, the $19 are at the high end, is there a way you could frame up what would push it? Is that mostly tied to volumes looking better, the LTL environment looking better, more acceleration in B2B? Like how do we think about framing to the north of the midpoint?

Yes. Jordan, I guess my quick response is all of the above. We're not going to really speculate as to all the factors that could go into it. Obviously, if revenue is stronger, and our cost environment is better than we're anticipating, you're going to find yourself in the upward end of the range. So there are so many variables in place. And we feel comfortable with the assumptions we've laid out that we're going to be within the range and focused on being as far into the range as we possibly can.

The next question is from Bascome Majors with Susquehanna.

The domestic parcel growth rates have been really solid for several quarters in a row now. And as we get -- the indication from the guidance is that you expect that to continue. As we get further in the next year and UPS potentially gets some competitive advantages back with relationship with the Postal Service and potentially maybe some contractual competition 3 years past the new Teamsters deal and some of the share shift that happened there. Do you think that growth is something that we can maintain at a high level into fiscal '27? Or could those potentially be headwinds that we should consider tapering the rate?

Thanks for the question, Bascome. I do not believe that a relationship between our 2 competitors is a competitive threat. As we've talked about, our focus right now is high value segments, B2B, home delivery, ground commercial, these are not services that could be serviced by the Post Office. And so if that does materialize, I do not see it as a threat to our primary growth strategy. We have the stronger value proposition, and we're very focused on continuing to take profitable market share.

The next question is from Ken Hoexter with Bank of America.

Just on the -- simplify that freight, John, I guess you've mentioned it a few times, but the $300 million impact, if you pull out the $100 million in ongoing costs, is that -- the leftover, $200 million, is that due to weakening demand? And I'm wondering what your view is of the competitive environment there. And then the $152 million in spin costs, is there anything you can maybe detail or break out what's going into that? Is that just continued -- is that ongoing cost? I just want to understand what's onetime, what's -- if any, and what is ongoing?

Yes, Ken, I'll start with the numbers and basically say the $200 million is the result of lower ADV and pressure on the business that's consistent with the LTL industry. Yes. With regard to the $152 million, those are spin-off preparation costs. And so those -- that's why those are in our adjusted and those are onetime costs.

And again, if I just add one more point to it on a broader basis. Obviously, this is -- our performance is in line with our industry at this point, and this is cyclical in nature. It's very difficult to predict when the turn would come. But however, we are beginning to see some level of industry consolidation, especially in the truckload business. And while it takes a while to translate in the LTL, that process seems to have begun.

The next question is from Reed Seay with Stephens.

I want to follow up real quick on that last answer about consolidation. Does that mean consolidation of LTL carriers, you seem to think will be on the horizon? And then also in that $200 million that you talked about, there is definitely some LTL industry softness, but I was wondering if any of that is from an understandable rationalization of volume as you try to maybe take out some less profitable freight before spinning that off on its own, just if any of that is creating some noise in the shipment numbers.

I'll start off and then John can answer the second part. I just want to make sure what I said was consolidation of capacity in the truckload business and we can see a reduction of capacity starting to happen, and that will ultimately translate into benefit for the LTL sector, even though it may take a little time. John?

Yes. And if I could talk, we're actually seeing a bit of positive inflection in the yield, the first increase in yield that we've seen in several quarters. So we're encouraged by that, and it also reflects the discipline on the pricing environment in our LTL business.

The next question is from Bruce Chan with Stifel.

So kudos to your network planning folks, certainly, plenty to keep them busy, including what might be an imminent Supreme Court ruling on the tariffs. I'm wondering if we see a decision against the administration, whether you'd view that as a tailwind to trade activity next calendar year, especially maybe in the context of your $1 billion headwind estimate. And I know that's a big question, but you all are very plugged into Washington. So any perspective there would be very helpful.

Well, Bruce, first of all, thank you for the comments on the network. I mean these teams have done just an absolutely remarkable job and continue to do so. It's very, very early to answer any question regarding what might or might not happen on the tariff front. Any international volume increase, obviously, is beneficial, but we're not counting on any such thing in our outlook. Obviously, we are seeing significant shifts in trade and supply chain patterns and the fact that we have a scaled network in every part of the world stands to our advantage because we are able to get market signals from the bottom up, and we are able to act very quickly and with precision. And that's what's helping us very much as far as how the environment on global trade changes and how that might impact our volumes at this point. It's very early to comment, and we will update you as the months go by here.

The next question is from Stephanie Moore with Jefferies.

I wanted to circle back on peak season. Maybe you could provide a little bit more color on what you've seen thus far. I know you said it's tracked in line, but I think there's been a lot of commentary at a high level that we've seen talking about K-shaped recovery and also some questions just around the strength of peak season. You also commented a little bit about maybe small business or B2B. So any additional color you can provide on peak season would be great.

Stephanie, it's Brie. So I'm really pleased with how we're doing from a peak perspective, both from a planning as well as in execution. Right now, we are basically running right on our forecast for peak what we had predicted was a mid-single-digit year-over-year growth on ADV. That is absolutely the case. We do have an extra operating day. And so in total volume, you're going to see a high single-digit growth from a peak period. From a forecast perspective, as I mentioned, it is basically in line. What we are seeing, however, especially early in peak is actually our base and our small and medium businesses are slightly ahead of forecast. And our larger retailers are slightly below, which obviously, from a revenue quality perspective is a good thing from a results perspective. From a trend throughout peak, what we did see is that right after Black Friday, we had very strong, and the second week was a little bit softer, but we have seen building momentum in the last week.

Time in transit is 2 days. Scott and John are doing a remarkable job of running the network. In addition to that, as you know, we are the market share leader in large package, and the team has done a brilliant job of actually keeping the port cities clear. They've pulled that volume into kind of the middle of the country bypassing some sorts and hubs, which is really important. So right now, we feel really good about peak. I do not want to underestimate that we have still 6 days to go. We have a lot of work to do. The team is ready as Raj just talked about. I cannot say enough about the incredible airline work. But the team does need to execute next week without the MD-11, we're very focused on that, and they have demonstrated that this is definitely going to be a strong peak and could not be more pleased.

The next question is from Ari Rosa with Citigroup.

Nice job on the quarter here. Good to see the progress. I'm curious in the slides, you mentioned that you have 24% of volume flowing through Network 2.0 automated facilities. I think I'm remembering that correctly. I just want to understand what does that mean in terms of the margin profile for the facilities or kind of the cost structure per package on those facilities versus legacy facilities? And how should we think about the time line or the pace for that to continue to ramp? And kind of going to Tom's question, does that just mean we're looking at kind of potentially structurally higher margins going forward?

Yes. Thanks, Ari. And we intend to talk a lot more about this at our upcoming Investor Day. But we also have said previously with regard to Network 2.0 benefits, we expect to see the tangible results of that later in FY '27. So I would say not a material impact financially, but great contribution from an operational efficiency standpoint that Brie was talking about earlier.

The next question is from Conor Cunningham with Melius Research.

I was just curious if you could talk a little bit about the health care and small and medium-sized business markets and just talk about the opportunity set that you have from here. And then Raj, you've talked a little bit in the past around just the tech pipeline or the potential there just given the CapEx that's being spent on that from the AI player. Just curious on how FedEx kind of fits into that puzzle, if at all.

Conor, it's Brie. Sure. I'll start first from a health care and an SMB perspective. As we mentioned several calls ago, we had just a phenomenal build last year from a health care perspective. We have, I think, the best digital portfolio from a health care segment perspective. What do I mean by that? We can give our health care customers customized visibility and they can set their own business rules for intervention and monitoring, which is really important. All customers are important, but patients obviously require that next level of service.

As I just talked about some of the service performance, that means that we can actually intervene, reroute and adjust for health care customers at a level of precision that I just believe is unmatched in the network. So we are continuing to onboard health care with that tool. We also rolled out a new quality program which is really important to the pharma segment. That is sort of early days. That actually requires with each one of our pharma customers for us to work with their quality team, build out a custom SOP, prove we can execute that to be able to win share of wallet, and that is going quite well.

So that will continue, I believe, the ability to take share. And then from there, we're also continuing to expand our cold chain capabilities. Right now, we've got great cold chain in a reactive place. And what do I mean by that? Most of our customers are packing out their shipments. And so we use cold chain predominantly to intervene and ice something or refreeze something if there is a delay in the system. We're moving to end-to-end cold chain. So that's sort of the next wave. Had great momentum here in the United States. We're taking these capabilities to Europe and to Asia. So I think we've got a long runway we've got between $9 billion and $10 billion of health care in our base. The market is $70 billion. So this is a long-term strategy, but the team continues to execute every quarter.

From an SMB perspective, we are, I think, the easiest to do business in the United States. We just had the best quarter in SMB share and performance that I have seen in several years, a huge shout out to both our sales and marketing team. And again, we're going to keep chipping away at this. And I believe with our value proposition, we'll continue to take share. And then finally, on the data center. While it's not as big an opportunity as health care, health care is $70 billion, the data center market is probably between $7 billion and $8 billion, it is rapidly growing. I think global CapEx is predicted to be like $550 billion. In a market that is moving that quickly, there is opportunity. This market expects precision. I don't know anybody who does Precision better than we do. So yes, we're winning now, but I think there's a long road ahead of more opportunity.

The next question is from David Vernon with Bernstein.

So John, coming back to the question on the Network 2.0 stuff, right? I think you guys had mentioned before you were looking at 40% of the volume by the end of FY '26 running in an integrated facility. I'm trying to sort of reconcile that with the idea that margins are just going to be up a little. I thought the idea was that when you get the integration done, you're going to be running at a higher level of productivity, and that would flow through to margin. But I think I heard you maybe say that the financial impact maybe wasn't as great. I'm just trying to kind of get my head around that.

Let me just give you the latest and greatest on what we expect on Network 2.0. As we said we are right now 24% of the volume pre-peak. By the time next peak rolls around, we'll be around 65%. And that's the plan and that's what we're executing against. At the end of the day, when we are finished with it, we're targeting around a 30% footprint reduction by the end of fiscal year '27. And those represent, along with One FedEx, $2 billion in cost savings. And we see the majority of the savings skewed towards FY '27. I don't know, John, if you want to add anything more than that.

No. I would just add with regard to our transformational cost savings targets for this year, there are elements of Network 2.0 included in those and that's what I want to elaborate further on at Investor Day. I don't want to say there's no savings. It's all part and parcel. We'll go into much more detail on our strategic initiatives, including Network 2.0 when we'll see you in February.

The next question is from Jeff Kauffman with Vertical Research Partners.

A lot of my questions have been answered, but let me ask one for John here. John, thank you for explaining the headwinds on the incremental second half outlook. I want to ask about the non-GAAP add-backs. You had a nice chart in the release showing about $720 million net this year, $600 from the spin, $310 million from business optimization. You still have about $450 million of that to go and 2 quarters to do it. Can you give us an idea of kind of how that's going to weigh? Like did you not do as much Network 2.0 integration because of peak season this quarter and you're going to do more in the fiscal third quarter? Kind of how should we think about the flow of those expenses?

Yes, I think the overwhelming majority of them are going to be tied to our freight separation. We also have a much smaller portion with regard to the change in our calendar fiscal year. And also finally, a much smaller portion with the ongoing business optimization that has been in play for the last couple of years. So -- but freight separation is the overwhelming majority.

This concludes our question-and-answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks.

Well, thank you, operator. Before we go, I want to acknowledge how proud and humbled we are by the Memphis-Shelby County Airport Authority's decision today to rename the Memphis International Airport in honor of our founder, Frederick W. Smith. It's a fitting tribute to the man who launched FedEx, a company that revolutionized the airport, the city of Memphis and the way the world works. We look forward to soon operating our largest hub out of Frederick W. Smith International Airport.

And finally, a big thank you to Team FedEx for your outstanding work in Q2 and throughout this peak season with just one more week to go. Happy holidays, everyone. Thank you.

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

Good morning everyone. My name is Dan Moore. I'm the senior transportation analyst here at Baird. I have the good fortune of being joined by the executive leadership team at FedEx this morning. There were some -- there's a prepared script related to disclosures that's going to be read first, and then we're going to jump into some questions. Steve?

Thank you, Dan. Certain statements may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act and are subject to factors that could cause actual results to differ materially from those expressed or implied. For additional information, please refer to our press releases and filings with the SEC.

All right. Gentlemen, thanks for being here.

Good. Thank you.

Thank you.

Yes. Everybody got here in one piece. That's good. It's -- travels these days, not always easy. So...

You can't take it for granted anymore.

No, apparently not.

Raj?

Yes.

You've been leading FedEx since, I think, June of '22, about 3.5 years. Every executive steps into that role with a set of expectations about the company's culture, it's competitive position, its potential. But as time passes, perspectives evolve, looking back to when you first took the helm versus where you sit today, how is your view of FedEx, its strategic strengths, vulnerabilities, long-term opportunities? How has it changed?

Well, thank you, Dan, and it's great to be here. When you think about FedEx and the core strengths of FedEx, we spent more than 50 years building this incredible network and connecting every part of the globe to every other part. And it's -- people take that for granted, but it's impossible to replicate. And so that's a lot of hard work that's been done over the years. And we are really becoming or become a referendum on global supply chains.

We move $2 trillion worth of commerce, and we connect 3 million shippers to 225 million consumers. That's the center of the ecosystem that we have built and we are in the middle of. We're also extraordinarily proud of the culture that we have at FedEx with our team members around the world, which, again, people take for granted, but it's almost impossible to build if you started from scratch at this point. So those are the core strengths of FedEx, and they continue to be the core strengths of FedEx.

But the last 3 years or last 5 years really has been an incredible change in the market situation. Starting with the pandemic. If you think about it, prior to the pandemic, if you heard the word supply chain, not too many people would care. It was probably the realm of the procurement manager. Now it's a boardroom conversation. And we are literally at the heart of the high-value supply chain of the world. We are the heartbeat of the industrial economy.

I think that's what some people miss sometimes that this is -- our core of our business was built from the very get-go in 1973 to move computer parts even in 1973. So -- but if you think about it in the broader sense, we are the heartbeat of the industrial economy. So we had the pandemic, then we had the shadow of the pandemic, and now we have trade and tariffs. So it's been an interesting external environment. The word supply chain and the resilience has now become much, much, much more in the vocabulary.

So we evolved our vision to make supply chain smarter for everyone, not only because of the physical networks that we have, but also the technological expertise and the logistics intelligence that we have. So from -- again, as the market evolved over the last 3 years, we have been through an incredible transformation and are continuing to go through an incredible transformation. And I'm extraordinarily proud of the FedEx team who are in the process of accomplishing it.

Firstly, in a matter of course, we have reduced our structural cost, which is very hard to do. But in an era of inflation, we actually reduced our absolute cost to the point for the first time in our history, even when the revenue is coming down, we made more operating income. That's never happened in the history of FedEx.

But that's important for us to do, but obviously, that's not sufficient. We have fundamentally evolved our networks now within the United States, which we call Network 2.0; or international, which we call Tricolor, to become much more flexible, much more agile and much more intelligent. And that is going to serve us extremely well in the days, weeks and years to come. So that's the second structural cost reduction, a fundamental change in the way we are managing our networks.

Three, the notion of One FedEx. I mean, those who have been following FedEx for a while know that we have operated independently over time and with multiple operating companies, no longer is the case. And now we are operating as One FedEx. And the benefits of this is, again, while already you're seeing it, there's more to come in the future.

And finally, a huge digital revolution. Starting in 2020, we realized that we're sitting on a huge asset, our data, 17 million packages every day, petabytes of data every single day, logistics intelligence of the world. And we have actually started moving and garnering and putting this in a platform starting in 2020. And along comes the AI revolution. And AI is nothing without data. And so now suddenly, we're sitting on this hugely valuable asset and new applications are coming in on top of that. So those 4 aspects of our revolution in the last 2, 3 years have really propelled us.

So what now? I think we are in a very dynamic environment. But listen, a few years -- a few months ago, even in this world, basic calculus would have done -- sorry, basic algebra would have done it. Now we need advanced calculus, and we can do advanced calculus because supply chain patterns are changing dramatically. We are -- our network is already in place. We can see it from the bottom up. We don't have to do much because we're already there. We're connecting the world. And the networks are evolving and being -- being much more flexible and intelligent. We are the heartbeat of the industrial economy. The reindustrialization is happening, and we are there.

So while we are -- there are some short-term changes into the B2C and all those kind of things, the B2B is pretty robust, and it's going to be. So -- when I look ahead, I feel quite optimistic about where we sit. As we are -- the networks that we have in place, the cost structure that we have in place, the logistics intelligence that we have in place, you put it all together, I think I feel pretty good about what we can accomplish in the next 2, 3, 4 years, especially taking care of modernization of FedEx, the network transformation that we are having. So that's -- I know you asked a long question -- a big question, I guess, put it all together there.

For better or for worse, I have a few more of those.

Okay.

Great context. I appreciate that. You talked about it being a dynamic environment. I couldn't agree more. Trade policy being front and center, definitely a pressure theme. Shifts in U.S. trade policy have presented both shippers and carriers with extraordinary challenges in 2025, in particular. Can you talk about how FedEx is adding value to customers in this environment? What do you see as FedEx's distinctive value proposition amid this dynamic and rapidly changing environment? And as you think about markets that many companies have invested in for years or even decades, that may no longer hold the same growth potential that they once did because of these changes. How are you framing FedEx's global strategy for this new era and trade realignment?

Well, let me answer that question on 3 points. Firstly, the global supply chain patterns are changing as we speak. It is a -- it's reality is -- and we see it from the bottom up. We don't need to see any global statistics from market data that's 6 months old. I can tell you what happened yesterday. The 17 million packages that move through our system every single day are, like I said, the referendum on global supply chains.

The fact that we have demand patterns changing and shifting and the fact that we already have this global network in place, which I referred to earlier, gives an advantage for us because we are already there. As traffic moves from transpacific to intra-Asia, where we go from China to Vietnam or Japan to Singapore or even Asian markets to Latin America for that matter, or Asia-Europe, we're already here there and everywhere.

So the -- we don't have to do much different other than -- and we move -- we can move a unit of capacity here or there much faster than manufacturing can move capacity. And we have intelligence ahead of time because we know the customer -- what the customers are wanting to do. So this is a unique advantage to FedEx at this point because there are only very, very, very few networks in place that can do that. So that's one. So demand pattern is changing and us being able to move with it, especially as part of the high-value industrial goods of the economy.

The second part of it is operational in nature. We are the largest broker in America. And that didn't mean much before, I guess, because now it's prime importance. And we are putting our customers first in making sure that their experience is as seamless as possible because it's a very different world out there now because of the complexity, but we know how to do this. This is our -- this is what we do for a living. So operationally, we are managing around the world, helping our customers and uniquely doing so.

Thirdly is technology. Think about it. For every country to every other country, for every commodity, we have the data for classification. Again, this was in the age -- before de minimis, this was not as important. Today, it's very important. Some customers who just file, Googled up some classification code and send it in and got cleared. Today, they're realizing they need 200 different classification codes. We are using our data and Gen AI to be able to predict these classification codes.

So those 3 aspects coming together in this era is unique. And so we are helping our customers from a demand perspective where patterns are shifting from an operational perspective, actually moving it, and from a technology perspective to be able to seamlessly clear customs in a more complex world.

And if I could just add a few points on that. And going back to the evolving changing environment, I mean, it starts with understanding what are those changes, what's coming out of Washington, for example. And I think our legal and compliance group do an amazing job of interpreting and applying that, and that helps our customers. And our exposure to this industry is another value add for our customers.

From a financial impact standpoint, in Q1, we did share that we incurred $150 million operating -- adjusted operating income impact for Q1. And we also identified -- at the midpoint of our guidance range, we're expecting about $1 billion of impact. But that all said, to Raj's point, the adaptability of the network, we're seeing growth in areas. Our U.S. outbound air freight is up 22% or roughly $40 million. And from a geography standpoint, increased volumes out of Singapore, for example. Our Singapore-U.S. lane is a high-value vertical lane that has been contributing as well. So the network is extensive, but it's also very adaptable, and that's a strength of FedEx.

Right, right. The U.S. and China recently announced a new trade deal. You highlighted expectations and mentioned them just a second ago, John. Full year profit impact of roughly $1 billion related to headwinds trade policy, about $700 million of that impact from the profit flow-through of lower international revenue, which was heavily weighted to China, to U.S. and de minimis. Curious, how should we think about this new deal in light of previous guidance? Does it change your near-term assumptions or alter how you're planning the network heading into the next fiscal year?

I think it's really too soon to tell what the impact of the trade agreement is going to have. What I can say it's always helpful when you get some certainty in terms of what's happening and people can manage their businesses accordingly. So from that standpoint, we see value in that. So in terms of adapting the network, not significantly. We're going to keep our head down and continue to focus on those areas of strength for us and continue to manage that $1 billion headwind as we go forward here.

Let me just also add. I'm also the Chairman of the U.S.-China Business Council. And our goal was to get the 2 leaders to meet, to get a floor under the relationship and then also announce a potential meeting, a bilateral in China next year, both happened.

And the point that John made is a very good one about we are going from one equilibrium state to another equilibrium state, but we are in the middle of that process right now. The once we get to a place where there's more clarity and certainty, then this will -- that's what we are aiming for. Some of the immediate impact was primarily in the B2C space and 70% of our international export is B2B. So let's get through this period of time. But I think once we settle, we are -- I think we're extremely well positioned, especially to serve the industrial economy.

Right, right. Good context. Peak season dynamics. Let's shift gears, talk a little bit about the current peak season environment. Are there any updates or changes since your most recent quarterly call, especially in light of the prolonged nature of the government shutdown. We've also seen meaningful shifts in consumer alignment, particularly among Amazon, UPS -- United States Postal Service. And then the recent rollback of de minimis exemption and has that added -- certainly added -- I'm sure it has added another layer of complexity. How should investors think about this peak season period relative to prior years?

Well, let me firstly say that Team FedEx is fully ready for peak. That's just -- I've been just reviewing that with our teams, and the team has done a really remarkable job of getting ready for peak season. Specific things that you asked, let me lead off and then John can help me. So firstly, we expect the modest demand for peak, as we said before. And there is one extra operating day between Thanksgiving and Christmas. So that's -- we have to account for that as well, this go around versus last year.

So the demand from our customers are consistent with what they have been telling us historically. So that's what we are planning for. We also started the ramp-up of Amazon volume. These are heavier weight packages, and we are -- that's a win-win proposition for both companies. And that process is just about kicked off. So we're more or less in line with what we expected. But obviously, the actuals are ahead of us.

Yes. And if I could just add to that, to echo what Raj said, what we said in September was we expected a modestly improved peak year-over-year by way of specific update. Also in September, we said there would be sequential improvement from Q1 to Q2. I can update that not only do we expect that sequential improvement from Q1 to Q2, but also a year-over-year improvement. So from the $4.05 on a year-over-year, that's by way of update.

We also shared in September that we expected to maintain or improve margin at FEC, and we expect that to be on the improvement side for FEC. So on a quarter-over-quarter basis. And our comments with regard to freight are in line. The freight is under pressure. There will be some margin contraction at freight, consistent with what's happening in the industry.

Probably worth asking this question as well. There's been some development around MD-11 capacity. You certainly have some of that capacity. How should we be thinking about the grounding of that aircraft in regards to peak season and the implications for the airfreight market as a whole?

Sure. So first and foremost, I want to say on behalf of FedEx that our thoughts and our prayers go out to the folks at UPS, UPS team, the Louisville community and all the families that were affected. And we're managing that issue, working closely with Boeing and the FAA to take the next step towards getting these aircraft inspected.

I should say FedEx has a mantra of safety above all. We will not compromise safety. And even though the FAA has issued a recent directive on grounding the fleet, even well before that, we had already deliberately and voluntarily taken that step to ground the fleet to make sure that they were inspected and are as safe as possible.

So we have a total of 34 aircraft that we own. 28 of those, though -- 6 are parked, 28 of those are in operation. 3 of those 28 were spare aircraft. So the operating fleet was 25 airplanes, all of which will be positioned for inspection, which we expect to start occurring in the coming days here, working closely again with Boeing and the FAA. And I think it's important to note as well on these inspections that once the aircraft is inspected and released -- if it passes that inspection and released, those aircraft will start to get back into the fleet on a one-off tail-by-tail basis. It's not like we're waiting for the whole fleet to be inspected before concluding whether they can safely go back into service.

So we're also, in the meantime, leveraging all of our capabilities. We have spare aircraft that we can deploy and are deploying. We have some routine maintenance schedules as you'd expect with a fleet the size of FedEx, you have a constant line of routine maintenance, yet there's still yield on those aircraft. So we can adjust those maintenance schedules to continue to use what I hope will be a short period of time to conduct these inspections, commercial airlift. Our Tricolor strategy is designed to address this very thing to maximize commercial airlift. So we have strong relationships with commercial partners, and we're leveraging those relationships.

And then domestically, because of those 25 aircraft, 18 of them are in our domestic network, and we have a superior domestic network on the ground side that we're going to leverage as well to adjust to the volumes in U.S. domestic. So all those things taken together as well as managing some of the reduction in flight schedules based on the ATC issues that are taking place.

These aircraft that are not in service count towards FedEx's contribution to lowering its flights in the U.S. pending the return to air traffic control, also, which we expect to be a near-term issue because of the agreement that was reached with the Senate last night, which we expect to be implemented in the coming days, not weeks here.

So all those things taken together are factoring in. And that all said, none of that detracts from what I said earlier about our expectations for Q2 and having both sequential and year-over-year improvement in Q2.

I'll just add one more thing. I met with the senior executives at Boeing yesterday, and there's a deep sense of cooperation, urgency, working with the regulators to get through this period as quickly as possible, putting safety above all, like John just said.

Good to hear and great context again. Automation and AI. One of the major themes that's emerged over the last couple of years is the rapid evolution of automation. I don't mean that really in a buzzword sense, but in a more practical operational way. It's becoming increasingly clear that automation will play an extraordinary role in the future of the industry, not just in air freight, but across all modes of transportation.

We've got a recent article in New York Times on Amazon's efforts to meaningfully reduce costs, which I think underscores how quickly this landscape could be changing. What is FedEx doing today to embrace automation in a way that creates unique durable advantages in the business?

Well, this is a very important point. So let me address 2 points here. One is AI and one is automation and let's start with automation. FedEx is -- this is not new to FedEx. We are -- we have been in this process for some time. If you go to some of our newer hubs, especially the U.S. ground hubs, it's completely automated. It's like it comes in one side and it comes to the other side, no human being touches it, except 2 spots, truck unloading and truck loading. Those are the 2 most complicated physical AI problems to solve for.

Can you imagine playing Tetris with packages of all different sizes and shapes, weights, everything. And we are solving that, and -- at this point. We are actually testing those as well. So the hub itself, as it comes in through one end, comes on the other end in a matter of minutes, fully automated. 2 pieces, truck unloading, truck loading being worked on.

If we also now -- if you come to our Investor Day in Memphis Hub, you'll see our -- you can see the modernization of our hub that's happening there as well. And so automation is a big part of how we want to go forward, work hand-in-hand with our team members, make their jobs easier and especially work on some of the more difficult problems of AI and physical AI at that. And I think we will have -- we have a good track record of -- on this regard and again, look forward to even more as we go forward.

On the overall AI space, it's critical that people understand that fuel for AI is data and that having data organized and engineered is a necessity. When people think about AI, a lot of people think about back-office efficiencies. That is fine. I mean that's a necessary condition. I'm not even excited -- I mean, we've got to do it. But what I'm excited about is how we're using the data that we already organized and the logistics intelligence that we have to differentiate and offer new value for our customers.

Health care is a classic case in point. We now are the largest provider for the health care industry, and we were #2, 3 years ago. We leapfrogged. The reason we did that is because of our superior data and technology tools. Fully -- 40% of our health care revenue now is supported by this new evolution.

And then thirdly, on this ladder here, there's a value creation opportunity on its own because of logistics intelligence. We just announced a partnership with ServiceNow, for example, where they are a workflow for the enterprise. And so they think of them as horizontal. And one of the parts of the horizontal is supply chain. We are the vertical that plugs right in. So we are working together with them to create new value and provide new services for our combined customers. So there are many aspects of this. We'll talk a lot more about it when we see you in February, but it's quite exciting.

FedEx Freight planned spin-off. As you look ahead, one anticipated development that I think is on the minds of a lot of investors is the planned spin. Can you talk about the strategic rationale for the spin? How you expect it to create value, both operationally and for shareholders?

Let me lead off and then I'll turn it to John. I think ultimately, we are on track, and the goal is to create 2 world-class companies and create value for all our stakeholders. On the freight side of the house, the focus that we're going to have on freight with the right technology platform for freight, that enables freight to provide a better customer experience, the right set of sales force to -- again, draw the small and medium customers into the freight organization is a value creation opportunity. And then we focus FEC on its core as well. And I think there are 2 significantly exciting opportunities going forward. I don't know, John.

No, Raj, I agree completely. I mean the underlying philosophy was value unlock for our shareholders and to allow each company to continue to focus independently on growing in a profitable way and leveraging their strengths. And for freight, I'll start with the management team that we've assembled. We completed the senior management team led by John Smith, who is an experienced leader and helped build the freight LTL business to what it is today. Recently announced Marshall Witt, who is the CFO; Eddie Klank, our HR and General Counsel; Clint McCoy, who's our COO. These are all very seasoned veterans.

And Freight will be able to focus its investment dollars and its equity capital for employees to incent our employees specific to the Freight business independently and FEC allowed to continue to grow and pursue the strategic initiatives that we look forward to sharing more with you about at Investor Day.

This has been great. I think you have 2 Investor Days.

We do. We do.

Reminder. When and where?

February 11 and 12, we will have an investor day for FEC, or FedEx Corp without Freight. That will be in Memphis. And then sometime in the spring, we will have an Investor Day in New York, focused specifically on FedEx Freight.

Gentlemen, this has been great. Really appreciate your time. Thank you so much.

Thank you so much. We appreciate the attention. Thank you everybody.

Thank you.

Good day, and welcome to the FedEx First Quarter Fiscal 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to FedEx Vice President of Investor Relations, Jeni Hollander.

Good afternoon, and welcome to FedEx Corporation's first quarter earnings conference call. The first quarter earnings 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 their website. During our Q&A session, callers will be limited to 1 question to allow us to accommodate all those who would like to participate.

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.

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

Thank you, Jeni. We delivered a solid quarter in line with the Q1 outlook we shared in June, despite significant volatility and uncertainty around the global trade environment. Our results demonstrate the resilience we have built into our network. They also reflect the dedication of our world-class team who have adapted quickly to serve customers with excellence through an evolving demand environment. I'm very appreciative of Team FedEx.

We continue to reduce structural costs while deploying Tricolor, advancing Network 2.0 and improving our European operations. These strategies are enabling us to flex the network faster than ever before and lowering our cost to serve, all while providing our customers with high-quality service. Importantly, we are continuing to win new business in high-value verticals, driven in part by our differentiated digital tools that are enhancing the FedEx value proposition and customer experience.

We also continue to make meaningful progress preparing for the spin-off of FedEx Freight, which remains on track. Following the spin-off, Freight will be a separate public company with the best customer value proposition in the LTL market and a proven track record of strong operational execution.

Turning to our consolidated Q1 results. Revenue was up 3% year-over-year, driven by strength across our U.S. domestic package services. We achieved our targeted $200 million in transformation-related savings and grew adjusted operating income by 7%. Similar to last quarter, the results at Federal Express Corporation, or FEC, demonstrate the operating leverage that we built into our business. On a 4% year-over-year increase in FEC revenue, we grew adjusted operating income by 17% and expanded adjusted operating margin by 70 basis points.

Notably, we achieved this result despite continued headwinds from the trade environment and the U.S. Postal Service contract expiration. Consistent with the industry trends that we have seen in recent quarters, revenue at Freight remained pressure. That said, despite the prolonged weakness in the industrial economy, the LTL market remains rational, and we are well positioned with our disciplined approach to strategic growth.

I'm proud of the results our team is delivering across the enterprise, despite industrial economic weakness. While an industrial recovery is not required for long-term value creation at FedEx, I'm confident that we'll unlock significant upside across the enterprise when the demand environment improves.

Last quarter, I spoke about the degree to which we flexed our networks to better match the demand environment amid global trade shifts. As policies and demand evolved throughout the first quarter, we further adjusted capacity, thanks to our Tricolor strategy. For example, we reduced our purple tail transpacific Asia bond capacity by 25% year-over-year. and nearly 10% versus the prior quarter. We also decreased our third-party or white tail capacity by similar percentages.

At the same time, we shifted capacity to capture profitable revenue on the Asia to Europe lane. With the full removal of the de minimis exemption in the United States late last month, we have been working closely with our customers, helping them maintain effective and efficient access to the vital U.S. market. Given a significant portion of our de minimis volume exposure previously came from China, we were able to use learnings from our experiences in May to help shippers elsewhere navigate the more recent exemption elimination.

This level of connectivity extends to how we're advancing the elements of our transformation that are unique to FedEx. The Network 2.0 rollout is progressing well and customer feedback, especially when it comes to the consolidated pickup experience remains very positive. In the first quarter, as planned, we optimized approximately 70 additional U.S. stations. Our total optimized station count across the U.S. and Canada is now approximately 360, enabling us to exit September with nearly 3 million in average daily volume flowing through Network 2.0 optimized operations.

Looking beyond Network 2.0, improving profitability in Europe remains the top priority, and I am especially pleased with the team's year-over-year improvements in labor and on-road productivity metrics. Q1 also marked our best new business quarter in Europe in the last 2 years. driven by express parcel growth on both the intra-European and Transatlantic lanes. Importantly, this business was well balanced between B2B and B2C customers demonstrating our focus on growing in premium B2B and longer haul export B2C segments. This commercial strategy, combined with our rigorous focus on cost management led to a meaningful contribution to our year-over-year FEC profit improvement.

I talked earlier about how our Tricolor strategy enabled us to flex the network to adapt to changing demand patterns. Tricolor is also driving greater densification and reduced unit costs across our pearl, orange and white networks. The strategy is simultaneously focused on enhancing service quality and mitigating congestion at major sort locations. Our execution on this important initiative is bolstering end-to-end solutions for global customers as we grow profitably in the global airfreight market. This strategy supported an impressive 14% year-over-year Q1 revenue growth in international priority and economy freight with high flow-through.

Data and technology remain foundational to our business, but we are entering a new chapter in how we leverage them. Our founder's vision more than 45 years ago, that information about the package is as important as the package itself has proven precious. Today, FedEx operates an advanced digital twin that goes beyond tracking. It is becoming an intelligent system that anticipates disruptions provides optimized route information in real time and creates predictive customer experiences. We moved 17 million packages through our network daily, generating 2 petabytes of data and 100 billion transactions across software applications.

The real value is in the volume. It is in the unique nature of this data. Our position at the intersection of global commerce gives us an unmatched view of physical supply chain patterns, seasonal demand shifts and emerging trade corridors. This real-world operational data platform cannot be replicated by any competitor or a tech solution. Simply put, FedEx owns one of the richest logistics, intelligent assets in the world.

I'm excited to welcome Vishal Talwar, our new Chief Digital and Information Officer and President of FedEx Dataworks, who joined us last month. As the former Chief Growth Officer at Accenture Technology, Vishal brings deep expertise in enterprise AI and understands how to leverage our unique physical digital assets into next-generation AI-led capabilities. Under Vishal's leadership, we will continue accelerating 2 key priorities: scaling AI across the enterprise from enterprise function to how we operate and sell our customers and exploring new revenue models that leverage our unique assets. We're also strengthening our cybersecurity posture to protect our strategic advantages.

Before I turn the call over to Brie, I'd like to update you on our expectations for the remainder of the fiscal year. Based on our current assumptions, we expect full year adjusted earnings to be $17.20 to $19 per diluted share. This reflects a range of scenarios in what remains a dynamic global operating environment. As it continues to evolve, we will remain focused on executing on our commercial priorities, dynamically matching capacity with demand and delivering on the $1 billion in transformation-related savings we shared previously. Brie and John will provide more details on the key variables and underlying assumptions for this outlook shortly.

We have made tremendous progress on our transformation, and there is much more to come. To that end, we are excited to announce that our next FedEx Corp. Investor Day will be held in Memphis on February 11 and 12, 2026. I look forward to seeing many of you there. where we will provide more detailed updates on our strategic initiatives and our longer-term financial targets.

Now over to you, Brie.

Thank you, Raj. I'm very proud of our entire global team for how they are supporting our customers in the current trade environment. Our strong value proposition, including superior weekend coverage, supported 3% year-over-year revenue growth across the enterprise. This is the highest quarterly rate we have seen since the pandemic. At FEC, revenue was up 4%, driven by U.S. domestic package revenue strength. This was a direct result of profitable share growth in the U.S. domestic market. This strength was partially offset by continued weakness at FedEx Freight due to the continued pressure for the industrial economy.

Our value proposition is helping us deepen our customer relationships and win business. For example, in Q1, Best Buy names FedEx as their primary national parcel carrier. Leveraging our advanced visibility tool, Best Buy will provide real-time tracking data and customer order communication, improving their customers' experiences. By providing customers with more timely and accurate updates, the company also expects to reduce support calls, cancellations and reship costs. We are excited to partner with Best Buy to create a smarter, more reliable supply chain that further strengthens their customer trust.

We were pleased to deliver a 5% increase in U.S. domestic ADV year-over-year, with growth across the majority of our services. In line with our expectations and consistent with the trends we saw in May, international export volumes declined, particularly on the China to U.S. lane. Knowing our strongest international lane would be under pressure. We pivoted the commercial team, and they have done a tremendous job capturing demand out of Southeast Asia and Europe. This provided a partial offset against the headwinds to demand on the China to U.S. export lane. The team has also done a great job maximizing U.S. outbound capacity. We are seeing improving trends in both outbound weight and volume, supported by strong growth in our health care vertical.

At FedEx Freight, along with broader industry trends, average daily shipments declined. Weakness in the industrial economy and excess capacity in the truckload market continue to pressure our results. That said, Freight made excellent progress in the quarter continuing to stand up its dedicated sales team. This team is focused on improving the customer experience and maintaining strong yields. As the industrial economy improves, Freight is poised for growth and margin expansion.

The parcel pricing environment continues to improve. We have achieved strong capture from our pricing changes in the quarter, which included an increase in our fuel surcharge index. At FEC, U.S. domestic package yield was up 3%, driven by strength across all services. International export package yield grew 4%, driven by higher fuel surcharges, favorable exchange rate impacts and the reduction in lightweight e-commerce volume due to the change in the de minimis exemption.

Our Tricolor strategy continued to drive growth in international priority and economy freight, where we delivered a 9% increase in revenue per pound. At FedEx Freight, revenue per shipment declined 1%, and driven by lower revenue per hundredweight and lower fuel surcharges. While weight per shipment was flat year-over-year, we are encouraged by the sequential improvement in weight for shipment over the past few quarters. and FedEx Freight revenue per hundredweight remains amongst the highest in the industry.

We announced our demand surcharges in July, which are needed to offset the incremental cost at peak to deliver outstanding service while protecting profitability. Earlier this month, we announced a 5.9% general rate increase effective in January. We expect strong capture from both.

In Q1, we prepared for the ramping of our new Amazon business, which was minimal in the first quarter as we expected. We believe the onboarding will be complete by the third quarter, which will support continued U.S. domestic revenue growth in the quarters ahead. This profitable business will skew towards larger, heavier weight packages.

We are cautiously optimistic about peak season growth based on what we are hearing from our customers currently. As a reminder, this year's peak season will last 1 day longer than last year. With that in mind, we are expecting a modest increase in peak ADV versus fiscal year '25 and a mid- to high single-digit increase in year-over-year total peak volume, with growth driven by our larger B2C customers.

Regarding the full year outlook, we are currently planning for revenue growth of 4% to 6%. The top of this range assumes that current favorable trends in the U.S. Domestic segment continue, and the lower end assumes incremental pressure on U.S. demand, particularly in the second half of the fiscal year. On the international side, the top of the revenue range assumes the current level of international export revenue pressures continue through the rest of the fiscal year, while the lower end assumes an acceleration in these pressures. At FedEx Freight, we expect revenue to be flat to up modestly year-over-year, depending largely on the market conditions in the second half of the year.

We continue to advance our commercial priorities, sharply focused on B2B, small and medium-sized businesses, Europe and of course, global airfreight. Within B2B, we continue to onboard new health care business in Q1, building on our momentum from prior quarters. This includes strong health care-related growth within our global air freight business. Later this month, we are launching a new flight linking Dublin and Indianapolis. This new flight will move goods 1 day faster, supporting health care and other high-value verticals with shipments between Ireland and the U.S.

We grew our U.S. domestic small business revenue by more than 10% year-over-year in the first quarter. This was fueled by focused and targeted sales execution and a close alignment between our sales and our operations teams. This collaboration is accelerating onboarding, shortening deal cycles and driving meaningful new acquisition. We are also scaling high-impact support to deliver exceptional customer experiences during this complex environment. FedEx Rewards, our loyalty program, which is unique in the industry continues to see significant growth while deepening our SMB customer relationships.

In closing, I am very proud of our team's strong execution in this dynamic environment. We are helping our customers manage through evolving policies and changing demand patterns. We remain disciplined in our approach to revenue quality. We are ready to continue providing outstanding service to our customers before, during and after peak.

And with that, I'll turn it over to John.

Thanks, Brie. Our Q1 results reflect the tenacity and agility of the FedEx team in providing outstanding service while delivering on our strategic initiatives and increasing stockholder returns. We executed very well in Q1, with results above the midpoint of our adjusted EPS outlook range. We also maintained our disciplined approach to capital expenditure, continue to repurchase stock and grew our quarterly dividend.

Turning to our financial results. On a consolidated basis, in the first quarter, we delivered $3.83 in adjusted earnings per share, up 6% year-over-year. And we delivered these positive results despite significant headwinds from reduced international export demand and the expiration of the U.S. Postal Service contract. Overall, we delivered revenue growth of 3%, which supported 20 basis points of adjusted margin expansion and 7% adjusted operating income growth.

As Brie mentioned, our yield management and strong commercial execution resulted in higher revenue growth from U.S. domestic packaged services, which contributed to our year-over-year adjusted operating income improvement. We grew adjusted operating income by approximately $90 million despite the $150 million headwind from the global trade environment, $130 million of headwind from the U.S. Postal Service contract expiration and continued softness at FedEx Freight. As a reminder, will lap the expiration of the Postal Service contract at the end of this month. Additionally, our Q1 results reflect a higher-than-expected Q1 GAAP tax rate of 27.3% and which was unfavorably impacted by a nonrecurring income tax expense related to the examination of prior year tax return filings.

Turning to performance by segment. At FEC, adjusted operating income increased by $168 million, up 17% and adjusted operating margin expanded by 70 basis points. This marks the fourth consecutive quarter of year-over-year adjusted margin expansion for FEC. This was driven by higher yields, continued cost reduction efforts and increased U.S. domestic package volume. These drivers were partially offset by higher wage and purchase transportation rates and the headwinds I mentioned earlier. As expected, due to the evolving trade environment in the quarter, we experienced a material headwind on our Asia to U.S. lane, largely from China outbound, driving most of the $150 million international export headwind to adjusted operating income.

At FedEx Freight, adjusted operating income declined by just over $70 million and adjusted operating margin contracted 250 basis points. Though the current operating environment is challenging for the entire LTL sector, FedEx Freight is uniquely positioned to see strong incremental margins in the eventual market upswing.

Moving on to capital allocation. During the quarter, we opportunistically purchased $500 million worth of stock, which, alongside our increased dividend payout demonstrates our unwavering commitment to increasing stockholder value. We have $1.6 billion remaining under our 2024 stock repurchase authorization and subject to business and market conditions, we expect to continue repurchasing shares during the remainder of FY '26.

FedEx maintains a healthy balance sheet with $6.2 billion of cash on hand exiting Q1 and with investment-grade credit ratings from the major agencies. I'm also very pleased that our recent euro-denominated bond offering was significantly oversubscribed, a testament to the strength of our business, balance sheet and capital allocation strategy.

Q1 CapEx was $623 million, driven by Network 2.0 related facility enhancements of modernization and continued investments to maintain our fleet of aircraft and vehicles. and we continue to target $4.5 billion in annual CapEx for FedEx Corp. in FY '26. With regard to pension contributions, given the well-funded status of our pension plan, we are reducing our expected pension cash contribution. We now anticipate making up to $400 million in voluntary pension contributions to our U.S. qualified plan in fiscal 2026 compared to our prior forecast of up to $600 million.

Moving to our FY '26 adjusted EPS outlook, which is based on the information that is known to us today. Though the global operating environment remains fluid with dynamic economic conditions across geographies, our value proposition remains strong, and we continue to execute effectively. As a result, we expect to deliver adjusted EPS of $17.20 to $19, which reflects a range of potential scenarios for the year.

Factors that will determine where we ultimately fall in the outlook range include the evolution of global trade, the health of the industrial economy, the U.S. domestic demand environment, traction in our higher-margin B2B verticals and inflation. Adjusted EPS of $18.10, which is the midpoint of our range assumes consolidated revenue growth of 5% and $1 billion in transformation-related savings from our structural cost reductions and Network 2.0 and associated One FedEx savings in FY '26.

We expect adjusted operating income offsets to include a $1 billion headwind due to the global trade environment, recognizing this number could flex in either direction as the environment evolves, and a $160 million headwind to adjusted operating income from the expiration of the postal contract. We expect our FY '26 effective tax rate to be approximately 25% and EPS to be supported by our share repurchase program, as I mentioned earlier.

At the midpoint of our range, we anticipate a 6% increase in Federal Express revenue with adjusted operating margin down slightly. Also at the midpoint, we expect low single-digit improvement in FedEx Freight revenue with margin down year-over-year.

Now turning to our FY '26 adjusted operating income bridge. We're introducing a new view of this bridge to provide deeper insights into the expected drivers of profitability this year. The bridge shows the year-over-year elements embedded in our outlook in one of the scenarios at the midpoint, resulting in adjusted operating income of $6 billion. Of course, the assumptions behind the variables at the midpoint may flex as the environment changes.

In this scenario, for FEC volume-related revenue net of variable costs associated with this volume, we expect a $400 million tailwind driven largely by U.S. domestic package services, offset by a material headwind from reduced international export demand. With respect to FEC yield, we expect a $2.3 billion tailwind, demonstrating our commitment to revenue quality and continued pricing discipline.

Offsets to these tailwinds include a $2.1 billion base expense increase across the business, excluding FedEx Freight, a $300 million headwind from direct trade-related expenses, including higher customs clearance costs, the $160 million U.S. Postal Service contract expiration headwind I mentioned earlier, a $100 million decline in adjusted operating profit at Freight and a $100 million headwind from the net impact of foreign exchange fluctuations.

Embedded in our assumptions are the previously mentioned $1 billion in headwind to adjusted operating profit from the global trade environment and $1 billion in transformation-related savings from Drive and Network 2.0. And while Drive began as a cost reduction program, it is now fundamental to how we run our business.

With regard to we anticipate a sequential improvement in adjusted EPS. At FEC, we expect to maintain or improve operating margins sequentially. And at FedEx Freight, we expect the year-over-year decline in adjusted operating margin to begin moderating sequentially in Q2.

Before turning to Q&A, I want to provide an update on our spinoff of FedEx Freight, which is progressing well and on track for the June 2026 separation. In August, we submitted our confidential Form 10 to the FEC and in September, we submitted a request for a private letter ruling on the tax treatment of the transaction to the IRS. These are important milestones as we move toward the tax-efficient spin-off. Freight now has about 200 frontline LTL sales and sales support personnel on board and is well on its way towards our goal of 400 sales specialists prior to the spin-off. I'm confident that both the expanded dedicated sales force and our ramping technology investments will continue to improve the customer experience.

Once separated, FedEx Freight will be a separately traded public company listed on the New York Stock Exchange under the ticker symbol FDX. And we plan to host our FedEx Freight Investor Day in New York City in spring of 2026 prior to the separation. Overall, I remain confident that the FedEx Freight separation and the continued execution of our strategic priorities will unlock significant stockholder value in the years ahead.

And with that, let's open it up for questions.

[Operator Instructions] The first question comes from Jordan Alliger with Goldman Sachs.

Thanks for the color on the midpoint. I'm curious on the low and the high end of your EPS range. Is it simply a function of where it comes out in that revenue range? Or is there other things that could help impact where it winds up sitting?

Yes. Thank you, Jordan. It's John. I'll start by saying it's really important to note that we're basing this outlook on the information available today. We did center on the midpoint of our range and I think it's fair to say that where we ultimately land will be determined by a variety of variables. And I touched on them in some of my prepared remarks, including the evolution of global trade and its impact on demand, the health of the industrial economy, U.S. domestic demand and so forth. So it's not any one factor. It's a variety of factors, and we're going to be monitoring those closely. It's going to be a very dynamic environment that we intend to capitalize on.

The next question is from Ken Hoexter with Bank of America.

And thanks for the details on the cost there. I just want to dig into that a little bit to understand because if I look at the incremental margin growth of 4% to 6%, yet the incremental operating gains are not keeping pace. So is that because of the headwinds that you ran through, maybe, John, maybe you can refine that a little bit on the $1 billion cost, the $300 million headwind on the trade expenses? I just want to maybe parse that out a little bit further.

Sure. Yes, there will be pressure. I mean, what we're talking about here is $1 billion of headwind as a result of some of the environmental impacts. So our full year assumption, it does include the removal of the de minimis exemption for the rest of the world that went to effect in the end of August. But I think it's fair to say that, that $1 billion will be something that we'll be focused on, but something that will be a challenge for us as we go forward.

If I can add to that, Ken, I think that is a big headwind for fiscal year '26. We're doing everything in our power to make sure that we can improve our customer experience and mitigate the costs as we move forward. The underlying business is very strong as we move into '27 and beyond.

The next question is from Bascome Majors with Susquehanna.

Raj, you leaned a little further into the data side of the business post the higher Vishal I know we just started a month ago. I don't know if he's on the call or could talk a little bit high level about strategy, particularly where you're talking about finding new revenue models to monetize that part of the FedEx story? Or if not him, just a little more thought on where you're heading in that and how big a business that might be for FedEx going forward?

Well, thank you, Bascome, for raising that question. One of the things that we are clear about is the value of the data that we have. We move 17 million packages a day, 2 petabytes of data. As I said earlier, it's not just the volume of the data. It's the value of the data, especially in the dynamic world that we live today. The important thing is that we started this work back in 2020, and we started organizing and engineering this data on a platform basis for some time now.

And that's what gives us the edge, especially as AI has now evolved and is moving quickly, the fuel for AI is data. and have engineered data and the high-value data of what we have is now super critical as we move forward. It's already bearing fruit. It's bearing fruit in our operations as deep learning models are enhancing our predictability. We couldn't have done network with without the data platform that we have and the technology we have. is already bearing fruit from a differentiation perspective.

We have premium monitoring and intervention tools for our customers and the health care business that Brie's team is winning, 40% of them or on the around platform, which is essentially based on the data platform and AI tools that we have. We also launched the Commerce Platform FDX, and that essentially is now becoming a workflow tool for our customers or orchestrating their supply chains. And especially in this complex trade environment, those kind of -- it's the added value as we improve our value proposition for moving things across borders and being predictive using gen AI to create value from HS classifications and so on. That area is quite nascent, and we have a long road in runway ahead of us.

So our mission and vision has evolved to make supply chain smarter for everyone. It begins with our data platform and the insights that we have on supply chain and the role of AI and the tools that we have. So I think as you look ahead, we'll talk more about this in February as it becomes an enabler for our operations, a differentiator from our customers' point of view, and new revenue models that we can create based on this. So thank you again for that question.

The next question is from Scott Group with Wolfe Research.

So any color on the magnitude of sequential earnings growth that you'd expect? And then just -- that was for Q2? And then just bigger picture. If I think about the last couple of years, we've heard we're reducing costs and growing earnings despite lower revenue. And then whenever we get the revenue growth the operating leverage is going to be really strong. And now we've got 5% revenue growth and $1 billion of cost reduction and buyback, but earnings are flat. I guess, why aren't we seeing the better operating leverage? I get the global headwind, but you're still -- you're growing revenue 5% even with that $1 billion global headwind.

So Scott, thanks for that. Let me start with the Q2. And we have focused our commentary on the full year guidance and are not giving Q2 guidance. But that said, as Brie mentioned, we're cautiously optimistic about peak season demand. And we do expect consistent with last year's sequential earnings improvement in Q2 and versus Q1 383, but we're not guiding to Q2 being up or down on a year-over-year basis. We expect continued benefits from our transformation-related savings and large trade-related OI headwind than in Q1 of the $150 million.

But just pivoting to your second question on kind of the flow-through. I'll repeat what I said before, we're facing a $1 billion headwind due to the trade environment. In Q1, we experienced $150 million of that to adjusted op income primarily driven by reduced demand out of China on the U.S. lane. And so for the full year, and just to give a little bit more detail, we're assuming a material revenue headwind from the global trade environment. Operating income at the midpoint of the range will require us to execute, but there's going to be pressure. So the flow-through is not as great, given some of the pressures.

The $1 billion is embedded in lost opportunity in our FEC volume net of cost line. The direct trade-related expenses for things like customers clearance and staffing and base expense increases. So there's a fair amount of pressure there from which we intend to deliver on and we'll be focused on staying in the range.

The next question is from Tom Wadewitz with UBS.

John, I guess it's maybe a little more on that same topic that Scott was just asking about. The global trade headwind, I still feel like I don't really understand what it is. If I look at your international export revenue, I think, was up a little bit in 1Q. And then I think on one of your slides you were pointing to some nice reduction in hours in flight hours on Asia, U.S. and both purple tail and white tail. So I guess it's not clear to me what that $150 million in 1Q is. It doesn't seem to be revenue. It doesn't seem to be clear where the cost impact is. So I really just wanted to see if you could just help us understand that a little bit better? And also why that gets meaningfully worse on a full year basis to like $1 billion instead of versus the $150 million in 1Q?

Tom, it's Brie. I'll take the top line question and then certainly let John kind of add in the color on the expense increase. So what we saw in the first quarter is the vast majority of that $150 million was impact from reduction in top line revenue. Specifically, the majority of that is de minimis impacted in coming out of the China lane. We anticipate that, that will continue to flow through the year.

In addition to the $150 million per quarter as we are planning for incremental pressure because of the global de minimis change, which took place at the end of August, we've got $100 million of bottom line pressure throughout the year. And then we have $300 million of incremental expense. So to be really clear that $1 billion of headwind is predominantly an impact of top line revenue reduction because China to the U.S. is a very profitable lane for us. John?

Yes. No, Brie, just to add what I mentioned before, I mean, you touched on the direct trade related expenses of the $300 million for additional custom clears and related capabilities and also running through the base expense increases that coupled with the top line that you mentioned.

The next question is from Jonathan Chappell with Evercore ISI.

I think we're all trying to get to the same place here. So I'll just lay it on top of Tom and Scott. If this is all the top line impact from the global trade $150 million in the first quarter, yes, [ $850 million ] for the rest of the year, which is close to $300 million. So it's almost doubling the impact in fiscal Q3, Q and 4Q. You have to get to the midpoint or even the low end of the full year revenue guide, the rate of change will have to accelerate from the 3% in the first quarter and your year-over-year comps and even 2-year stock comps are more difficult. So can you just help us bridge where the revenue acceleration comes from if this announced headwind is intensifying, potentially doubling? Is it all from price and yield? Are you expecting some significant volume pickup at some point absent the global tariff headwinds in de minimis?

Jonathan, it's Brie. So great question. So yes, we were very pleased with the 3% revenue growth in the first quarter. To get to the midpoint of 5%, first of all, we do expect the majority of trends will continue. So right now, what we're seeing in September looks a lot like August with a continuation of trend with a couple of really important notes. Number one, in the first quarter, we had a $280 million top line headwind because of USPS. That goes away in Q2 and beyond.

Two, we are still onboarding some of the wins from Q1 -- or Q4 of last year and early Q1. And as I mentioned, as an example, Amazon is still onboarding and it had very little impact in Q1. There are several other examples of onboarding. And then in the back half of the year, we do expect FedEx Freight to have modest yield improvement and better than the first quarter or the first quarter and the second quarter from an expectation perspective. So we do think the midpoint is very realistic, and we're clear about how to get from Q1 to the rest of the year's range.

The next question is from Brandon Oglenski with Barclays.

Brie, I appreciate all those details. I was wondering if maybe you could walk through the outlook for domestic volumes on the package side again. And it's no secret that your largest competitor is shrinking here. So can you talk about maybe the competitive landscape? What's presenting for market share opportunities and pricing?

Great question. So from a domestic perspective, we're not -- and I'm speaking specifically to parcel. We're not expecting a massive trend chain. We are expecting, as I mentioned, the onboarding. I think you'll see the mix look very similar from a different package profile. A couple of things, the team has done a really good job from an execution perspective. We've had the best momentum in SMB in the last quarter that I've seen for a while, so that's helping our yield growth.

From a yield -- the other thing to note is, of course, fuel was very helpful in the first quarter, and that will continue through the year. In addition to that, we executed some price changes that came in, in the middle of the quarter. and those will be helpful Q2 and beyond. So net takeaway, I don't see a massive trend change. This is self-help, if you will. This is market share, strategic profitable market share acquisition and we expect it to continue.

To your point on price, we're really focused on winning with the value proposition. We're winning in health care. We're winning in small business. We're winning because of our 7 day. I think you all heard the Best Buy example. Pricing is improving in the market and I think very rational, competitive but rational.

The next question is from Chris Wetherbee with Wells Fargo.

I guess maybe I just wanted to ask about the range. So 4% to 6% on the top line and $17.20 to $19 on the bottom line. Midpoint is 5% of revenue for the midpoint of the EPS. Should we assume that 4% revenue growth lines up with 17.20 and 6%? Is it the $19 side? And then maybe just a quick clarification point. What exactly is the $300 million of direct related expenses on the trade side? Just want to get a sense of what that is?

Yes. Chris, it's John. I would not make that direct connection between the factor you described on the 4% leading to on the low end. As I said before, this is a dynamic environment. There's going to be a lot of puts and takes as we go forward here, and we're going to be aggressively monitoring and managing it. That was just -- we just gave one scenario. As we mentioned when we talked about how we get to the midpoint, there could be a number of others as well.

With regard to your second question, I'm just trying to recall if you could -- the $300 million, yes, I'm sorry. That was customs clearance and related staffing and related administrative expenses as a result of adapting to the current trade environment.

The next question is from Richa Hernan with Deutsche Bank.

Okay. So regarding the top end of your guidance, you said it's predicated on the continuation of strength in domestic. I guess this question are. You saw some of the best conditions you said since like COVID period, your pricing was certainly the best, we believe, volume growth third consecutive quarter of mid-single-digit plus growth in domestic volumes. Broad SMB best momentum you've seen in while. So maybe you can help us understand what's really driving the share gain what do we need to see to make it sustainable? And then regarding the onboarded the business you're onboarding, what does it look like? What's the profitability profile, et cetera?

Thanks for the question, Richa. Honestly, from an execution perspective, we're really focused on strategic segments. SMB, we are selling direct. Our primary competitor sells through more platforms and third parties, and we've really seen some just outstanding execution momentum -- we have a loyalty program that is highly effective and we've been very focused on making sure customers are aware and engaged in loyalty program, and that is working from a health care, that's why you're seeing the premium volume momentum that we have seen over the last 2 quarters essentially. So we're pleased with that.

Health care is very sticky revenue. It is high service expectations very, very custom SOP and who it is profitable, but it's also very sticky. And then, of course, from an e-commerce perspective, you have seen that HD ground economy bundle working. We are growing there. We are faster than our primary competitor. We have rural coverage that they don't have. And of course, we now cover about 65% of GDP on Sunday. So really pleased with the team's focus, equally pleased with their revenue quality.

We've been pulling pricing levers as appropriate and that definitely benefited us in the first quarter, and we anticipate that we'll get a high capture throughout the year. Of course, we're also planning very rigorously for peak surcharges are in place. They are working. The team has got a very, very focused plan for that I'm excited about.

The next question is from Ravi Shanker with Morgan Stanley.

A two-parter, if I may. On the de minimis, kind of what has been the customer reaction to the expiry of the rule? And do you think that is a new normal going forward? And also, does it feel like there's been much pull forward in international volumes that may have benefited you in fiscal 1Q? And kind of what does that kind of normal run rate look like for the next kind of several quarters as well?

Thanks for the question. I'm certainly not going to speculate on the future trade environment. But I will tell you, obviously, from a customer perspective, it has been a very stressful period. I'm really proud of our clearance operations team and our commercial team because they are lockstep customers and has been particularly challenging for small exporters because they do not have the expertise and the staffing, and that's where our teams have come in and really partnered with them to help, as Raj talked about, automate some of their clearance inputs from a digital perspective. So we're very, very focused from a partnership perspective, but it has been -- it has been really tough on small customers and exporters.

As far as the pull forward, I will remain optimistic the American consumer from our numbers has been resilient. We do not see any indication in either air freight for our domestic parcel business that this is all forward. I will absolutely acknowledge July was quite strong for us, especially the Prime Week. We saw a lot of U.S. retailers sales in market, and they were affected. We saw strong volumes in July, but I don't necessarily see that as a pull forward. And like I said, right now, from our forecasting, we both peak in the back half, we're confident in the range we put out from a top line perspective.

Next question is from Brian Ossenbeck with JPMorgan.

Maybe Brie, just to start off by elaborating a bit more on the peak. It sounds like some of its visibility to maybe some of these new contracts that are onboarding, some of it is more of a macro. So maybe you can separate just how much of the peak strength is FedEx related versus what you see in the underlying market? I think that would be helpful. And also maybe a little bit of context on freight. We didn't get too much color on that, but certainly a tough market and tough quarter, but it sounds like you expect things to stabilized to improve pretty significantly from here. So I wanted to get some additional thoughts on what's embedded in that outlook.

Okay. I think I got it all, Brian, but stop me if I don't hit all of it. From a peak perspective, yes, when we look at kind of the number of operating days in the season of peak, we are expecting kind of from an perspective, sort of a low to moderate growth from an ADV, but total volume will be up because we have that extra day. I do think a relatively significant portion of this volume growth is our acquisition that we took in the back half of last year. And so you're going to have that lapping benefit for us from a peak perspective, I anticipate our numbers will be slightly elevated versus market.

Also, from a performance perspective, we do see this driven by large B2C retailers and brands. That's definitely heavy from a peak perspective. Rest assured, we have the revenue quality strategy and the peak surcharges in place. The team has done really good job or lockstep with Scott Ray and the surface team to manage capacity and service. So we feel very good from a peak perspective. But to your point, I don't necessarily think that it is an indicator of overall market performance.

From a FedEx Freight perspective, you've all tracked the pressures on the industrial economy, we are the -- where FedEx is the market share leader in the LTL industry. And so of course, we are feeling that pressure. The team's #1 priority at FedEx Freight and take this responsibility very seriously is revenue quality. We will have the benefit of the lapping in the back half. So we do anticipate that yields will increase in the back half, but we remain very disciplined and very focused.

The next question is from Bruce Chan with Stifel.

Maybe just one on the broader airfreight market. We've been hearing about some potential supply constraints as the global fleet sort of ages here. I guess, first, are you seeing signs of that? And then so how do you think about the flow-through with Tricolor. I imagine you've got some good flexibility to shift volumes sort of between the purple tails and third-party capacity.

Yes. From an air freight perspective, again, we're a relatively small market share participant from a global airfreight perspective. We are being selective and really focused on premium freight I am particularly proud of the airline team this quarter. They shifted capacity and equally proud of the commercial team. We knew because of the trade environment that our China, the U.S. lane, and we are the market share leader there would be pressured. And so we pivoted. We are growing between Asia and Europe, which is a large lane. We're being selective there. And then equally important on the Purple tail that we balance capacity, and the team did a really good job from a U.S. I'll give the health care team a shout out almost 50% of the weight growth from a U.S. expert perspective came from health care, air freight, so our health care strategy is working there, too.

Bruce, if I can jump in on this Tricolor, if you remember the conversations that we have had before, the idea was to decongest the hubs and to have a truck-fly-truck network so that it links all our networks together optimally and densification of our network. All those are being tracked at KPI level very carefully, and I'm happy to report that the team has done a tremendous job and it's working. And that's what enables us to provide the value proposition to our customers to strategically and profitably grow in these segments. So again, we are in early innings on Tricolor, but the implementation has been stellar.

The next question is from Jason Seidl with TD Cowen.

This is [ Elliot Alper ] on for Jason Seidl. So in terms of Network 2.0 and heading into peak season, are you planning for any changes in the process like putting some stations on hold in busier markets as you work through peak. Could that affect any timing in terms of the cadence of the $1 billion in cost savings or anything to think about there?

Well, thank you for the question. We are very encouraged by the progress on Network 2.0. The Canada transition is complete and the service levels there are very strong. We're obviously moving forward in the U.S. market underway as we planned. There is no change to the plans that we have set in place. We have exiting Q1 with 18% of our U.S. ADV running through the Network 2.0 model. We have close to about 140 facilities and integrated 360 stations in the process. And at the end of the day, I want to -- that's pretty much as planned, and that's what we will continue to execute going forward. You had rumor Network 2.0 is an efficiency story, but also a growth story as we improve our customer value and customer experience that this becomes what efficiency part of the equation and also ability for us to grow in this segment.

I think it's important to note, we never plan for a new optimization in the middle of peak. So our rollout schedule is a given that, that just doesn't happen in because service is our top priority for our customers.

The next question is from David Vernon with Bernstein.

So John, I wanted to kind of come back to this question on operating leverage and try to help better understand the bridge that you laid out here. When we think about first quarter, is there anything in the comp on a year-over-year basis that may be added to the leverage, whether it's incentives or anything like that? And then as we think about the remainder of the year, right, obviously, there's a lot of things happening on trade and things happening top line, bottom line. Is the answer here of why we're not getting more leverage just that the mix is shifting to less profitable traffic? I'm just trying to kind of really understand this thing at a high level, like if we've got $1 billion worth of costs taking out that would offset the headwind and then we got 5% of revenue growth, like why isn't there more falling to the bottom line?

Yes. As I mentioned before, there's a variety of factors in play here, including kind of the opportunity cost of the hit to revenue as a result of the change in the trade environment. Mix shift is a factor to lower-yielding mix. But I should say it's profitable, it's profitable mix, I want to be clear on that. But that is certainly a consideration. But there's a whole dynamic environment of factors that are putting pressure on us that run the range that are factored into that $1 billion.

The next question is from Ari Rosa with Citi.

So just on the revenue growth target, maybe you could help us understand how much of that is coming from new business wins because I don't think that's been totally clear. So like is there a way to segment how much of the 4% to 6% is driven -- is organic versus kind of new business wins? Anything you can give us on kind of the margin contribution of that? And then if I can squeeze one other one in the $600 million of freight spin costs, maybe you could just give a little bit of color on what that is?

Well, I'll start with the freight spin costs and then turn it over to that like with any large transaction, there's a significant amount of cost that's incurred it's largely driven by the IT and the systems and enhancing the systems have freight to improve the customer experience. There are some staffing costs, but I would say those are small in the scheme of things. We talked about the sales force and so forth but largely IT-related and systems-related.

Yes. As far as the revenue range, it's a combination of factors, as I talked about. We've got execution from a share gain perspective, we've got execution on getting the right business in and the yield. The one thing that I can emphasize that as we look at the difference between the and Q2 through Q4, the domestic momentum. One of the larger factors there will be continued onboarding, but we'll also be pushing on yields.

This concludes our question-and-answer session. I would like to turn the conference back over to Raj Subramaniam for any closing remarks.

Well, thank you, operator. In closing, our Q1 results demonstrate our ability to support customers through this dynamic environment and I'm incredibly proud of the FedEx team for their outstanding commitment to our customers and for driving such strong performance in this quarter. I'm confident that the momentum we have established positions us well for the peak season ahead. Thank you very much.

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

Hello, everyone. I'm Richa Harnain, DB's lead transportation analyst, and welcome to day 2 of our Transportation Conference. So mainly one-on-ones and small group meetings today, but we have one special fireside, and that's with John Dietrich, CFO of FedEx, a leader in transportation and logistics. So we also have with us today Matt DeBerry and Stephen Hughes from the Investor Relations team.

So maybe to start, I'll kick it off to Stephen to make some introductory comments, and then we'll get right into it.

Great.

Thank you, Richa. Certain statements may be considered forward-looking as defined in the Private Securities Litigation Reform Act and subject to factors that could cause actual results to differ materially from those expressed or implied. For additional information, please refer to our press releases and filings with the SEC.

Great. Well, thank you for that, Stephen. Richa, thanks so much for having us here. We're delighted to be here. I thought I'd open with some remarks before we get into the Q&A, just kind of give you some high-level overview, if that's okay.

Yes, lets do it.

And as I think we all know, we continue to be in an uncertain market environment. That said, from a FedEx standpoint, there's a lot of exciting things happening, and we're focused on executing on those things within our control. And when you look at the global marketplace, we're right in the thick of all of it with 3 million customers carrying roughly $2 trillion of goods every year.

We're closely involved and also closely watch everything that's happening in the marketplace. We also happen to be in the midst of a massive transformation, and I think there's a lot of idiosyncratic benefits we have in the competitive space in which we operate, which we'll talk more about throughout the morning here, including Network 2.0, that's all part of One FedEx, our Tricolor initiatives and other strategic initiatives that we've been working on.

As I reflect on the last couple of years actually, but FY '25, particularly, we're pleased with the results that we've delivered in this environment. We had 2 years of earnings growth. In FY '25 was the second year of earnings growth despite some headwinds, the market environment, of course, but also the termination of the U.S. Postal Service contract that we experienced. And when you factor in 2 fewer operating days, we feel good about that growth.

And then, oh, by the way, throw the tariff environment and the market uncertainty into the equation to have that growth in that environment was pleasing to us, but there's still a lot more to go. DRIVE was a success. We'll talk more about DRIVE and our journey in DRIVE going forward. But we set out on a goal of $4 billion of DRIVE cost, structural cost takeouts and delivered $1.8 billion of that in FY '24, and we said we're going to get $2.2 billion of that in FY '25, and we delivered on that. So we're pleased with that.

We advanced Network 2.0, and we'll talk more about that. That's going to continue to yield results as we go forward. From a capital standpoint, I'm also pleased that we delivered significant value back to our shareholders. The total when you take our share buybacks and dividends, $4.3 billion of returns, all in an environment that's as challenged as we talked about.

So being able to deliver all that in FY '25 was satisfying. That said, we don't rest on our laurels. We still have a lot to go. We've set a marker out for FY '26 of an additional $1 billion, largely made up of DRIVE savings and some Network 2.0. We have as well as that our freight spin, which we'll talk about, which is going to be a significant focus area of ours as we go forward here. And then all the other strategic initiatives we talked about Network 2.0 being a primary one.

Yes. All right. Yes, a lot of exciting things happening at FedEx, and I hope to get into that. But maybe we can kick off with zooming in on the macro outlook, right? You said you serve 3 million customers over 200 countries across the globe. So many tend to look at FedEx as a barometer for the state and the health of the global economy. Therefore, in broad strokes, maybe you can start with telling us how you think the consumer is doing, how our business is feeling based on the trends out there today in FedEx's business and what you're sensing in terms of B2C versus B2B dynamics, SMBs, et cetera.

So I'll start with the B2B environment. We've seen the softness continuing. If you look at the ISM PMI index has been below 50 for roughly 31 of the last 33 months. So that B2B market has been somewhat soft and is continuing. Conversely, on the B2C market, that's been stronger. We saw strength, particularly in June and the first part of July, but that's starting to soften a little bit as well as the latter part of July and August.

On the international front, there's been the impact of the tariffs for sure. As we said, we're facing for Q1 about $170 million of headwinds from the tariffs, largely the result out of China. So it's been a challenged environment, but again, one in which we continue to focus on those things in our control to deliver results.

On the international export front, again, we're starting to feel the impacts of that. But we're monitoring that very closely.

Okay. Okay. So a lot there that I'm going to come back to, but maybe we can go from there into your outlook. You chose to withhold full year guidance. I thought that was pretty prudent in light of all the uncertainty out there that you spoke about in global trade, in particular, which you facilitate. So -- but you did provide an update on the quarter.

And John, before I get into the question, kudos to you, I think since you appointed CFO, our analysis shows that FedEx outperformed the broader transport landscape on earnings revisions in 5 of the past 7 quarters. So your team has been doing a better job than average and always doing what you say you're going to do.

So again, good job there. But just now to the question just on the outlook for Q1, a competitor of yours recently reported and spoke to weakness in China being severe. I know you spoke to this as well. You said it's contemplated in your guidance at $170 million, right? You said that things continue to remain under pressure. I believe you said in July, got potentially.

Starting to soften in the back half of July, yes.

Yes. So any updates to your view on Q1? How are you tracking there?

So I'll start by saying we continue to operate in an uncertain environment. But I think you hit it on the head what we talked about. The B2B softness has continued. We haven't seen any change to that. On the B2C lanes, we have, as I said, we saw strength in through to about the mid-July time period, but that's starting to soften. So we're taking a close look at what we're going to see in August and for the remainder of August and look forward to keeping you posted on that as we go forward.

Okay. But you -- in the domestic market, again, 75% of what you do just on a direct basis is you do domestically, right? You have been -- there's been a nice share growth story there. Your volumes, for instance, in the last quarter domestically were up 6%. And at that point, it sounded like based on the trends then, you're tracking to like the high end of the guide. So just in light of what's happening in the domestic market, maybe more specifically, should we -- like maybe the midpoint of the guide contemplated some sort of weakness, which is kind of what you're speaking to on the B2C side softening, but maybe talk through that a little more?

Yes, I'm not really going to talk about where we expect to fit within the guide. But what I can say is with regard to the B2C volumes, again, we saw strength in the first part of the quarter, I guess, the first half of the quarter. And as we look forward into August, we're going to keep a close watch on that and look forward to keeping you posted when we deliver our earnings in September.

All right. Fair enough. So maybe we can switch gears and talk about de minimis. The exceptions soon to be removed beyond China to Hong Kong. What risk do you think this presents? What were your learnings from the initial round of de minimis exceptions going away? And how have those prepared you for this?

Right. So you hit it correctly. Public data reflects that about 75% of de minimis volumes come out of China. And I think that's a nice proxy for our business as well. And I think it's reasonable to expect once it applies to the rest of the world, we will feel some impact of that. What I can say, though, is I think we are state-of-the-art in terms of a leader in how we're helping our customers manage this environment to minimize the impact of that, leveraging our global network, our clearance capabilities and our technology.

So we feel really good about where that is. But I think it's reasonable to expect there to be some additional pressure beyond just the 75% reflected from the China volumes.

So maybe we can switch gears and talk about the competitive backdrop. Pricing has been a bit of a bright spot in the parcel industry recently, a number of increases. You just announced your peak surcharge that was good. We also now have David Steiner started Post Master General at UPS. He was supposed to come to the conference, by the way, but had a schedule conflict.

But yes, he's one from the business community, did some great things at Waste Management. I know he served on the FedEx Board as well. So you would expect him to maybe lead for USPS as a more rational competitor. UPS has shown a strong commitment towards improving his revenue quality as well. So talk us through maybe what you make of the competitive landscape and if the pricing trends of late that have been more positive are enough for you to feel good about your ability to generate a fair return?

Sure. So I'll first start with David. I'm quite sure he's very busy now. I ran into him at a social event and he was describing the significance of the role in the U.S. Postal Service operation, which is no surprise. And I think it's good for our nation that someone like David with his great experience and business acumen will be serving at the Postal Service.

So I'll start there. From a peak season standpoint and a pricing -- competitive standpoint, you mentioned our peak season surcharge that will compensate us for the additional cost and work in managing our peak volumes. We also have recently and it's reflected in our guidance, there are some fuel table increases as well as some adjustments. So I think it's fair to say it's still a competitive and rational pricing environment that reflects the work that we're doing in the marketplace. Still competitive, still rational. But again, we've been able to pass along some increases along the way.

With regard to the Postal Service, I'll just say one of the things from a competitive standpoint, I think there could be some structural uplift in the pricing environment if they are not subsidized by our taxpayers. It's one of the things, particularly in the parcel business, one of the things we've said consistently, the Postal Service operates at a significant loss and a lot of that loss comes from moving parcels. So to not have that further subsidized by the taxpayer, we think would be favorable to the competitive pricing environment.

Okay. All right. Let's talk about capacity. So you've been rational about capacity. I know more so with the Network 2.0, and we're excited -- I'm excited to talk to you about that. Peers have been as well for the most part. But a common concern out there is that capacity reductions UPS and you are making are perhaps being backfilled by Amazon, the threat of Amazon and some new entrant carriers that we hear about such as LaserShip are quite significant. So maybe you can present your latest thinking there, how you get comfortable on new entrant capacity and things like that.

Well, I'll start by saying we always pay attention when any new capacity comes into the marketplace. But I think it's also important to note the differentiation between what we do and what others are doing. And I'll use Amazon as an example. I mean they're a very good company, no doubt about it. But effectively, they're a retailer that delivers. And from our standpoint, FedEx has built a network over many, many years that is an end-to-end logistics provider. And so that's an important distinction. And I'll use as an example in our ground service on balance, roughly 30 -- or excuse me, 70% of our ground volumes travel 300 miles or more and 30% travel 600 miles or more. I think those numbers are pretty close.

Yes. So half would be from origin the destination for 600 miles.

That's right. And by comparison, for example, Amazon is a retailer who delivers, they're in proximity is about 100 miles, right? So that's a significant difference. So we continue to leverage our strengths. We continue to leverage our global network and deliver our quality service for our customers. And I'll get back to the pricing environment for a moment. I think it's another differentiator for us. We continue to get a yield premium for the great service that we offer, and I think we've earned that. And we'll focus on continuing to leverage our capabilities there.

Okay. Good. All right. So regarding the concept of -- recently, you talked about this prioritization of network utilization, and I think that's led to some of the good results. But I wanted to offer you an opportunity to comment, maybe clarify any potential misconceptions about that. Our understanding is FedEx aims to maximize network fill while maintaining or enhancing overall profitability, right? Like we've observed this in recent quarters. I think last quarter, revenue was up 1%, and it was primarily driven by deferred services, but EBIT was up 9%. So you're seeing that benefit of selling in your network and nooks and crannies, if you will, with those deferred offerings. Does that accurately summarize your perspective on utilization prioritization? Or how would you describe it?

Yes. No, I think that's a fair assessment. That said, our focus is always on revenue quality. And the nooks and crannies are important to fill in a large network like we operate, that's important. But it's also important to focus on the higher-yielding volumes as well. And I think the Amazon volumes is a good example, heavier, more dense, larger packages. That's one of our strengths in being able to carry that and it generally comes with higher yields as well.

So from our standpoint, yes, we want to fill the network. Yes, we want to focus on the B2B, the higher yielding. But while that remains soft, it's important to take advantage of the highest yielding revenue quality in the B2C because not all the B2C is created equal, and we're focused on that, which is the highest yielding.

Yes. So I was going to ask about the Amazon business, that relationship being turned back on. You talked about that being higher-yielding business for you. Do you want to further elaborate there?

Yes. No, that's exactly what we just described. It's generally some of the higher-yielding, larger, heavier packages that we can do, frankly, better than anybody and make money doing it. So we look forward to ramping that up.

Great. So maybe we can pivot there to FedEx Freight. You talked about that large -- we had some of your large public competitors in the industry report and discussed a pretty muted June, offset by better July. Did you see the same dynamics? How is business -- how is this business doing? And how is the addition of salespeople going upward for the spin-off?

Yes. So yes, the LTL business is performing slightly lower than we expected. And that I think it's probably fair to say in line with the industry or what the industry is experiencing. It's important to remember that 90% of our freight volumes are related to B2B. So it feels the effects of when the B2B business is soft. So I would say that we're very well positioned for when the market recovers for sure.

I talked about the freight spin in my introductory remarks. We're moving forward, making a lot of progress there, getting the executive team together. We made some public announcements of the CEO and the Chairman of the Board. We have a CIO, and we're filling all the rest of the management spots. So that all -- that work is progressing and look forward to keeping you all updated. We do plan to effectuate the spin in June of '26, as we talked about. That hasn't changed. So look forward to keeping you posted on that.

Okay. And then just on that note, can you just touch on your decision to delay enforcement on the NMFC updates until, I think, December of this year. Yes, elaborate on the reasoning there?

Yes, that was really kind of a customer-friendly gesture on our part to be able to -- we receive feedback that our customers were looking for a little bit extra time. We certainly subscribe to and support the more simplified density-based classifications, of course, and any customer who can get on board sooner. But based on feedback we received and the willingness to accommodate our customers, that was really what went into that decision.

Okay. All right. Now let's get into the fun stuff. I know it was energized you just talk about the stuff that's within your control, right? Network 2.0 to start. 15% or so, give or take, of your network now is integrated, I believe. But how is that plan progressing?

Yes. So Network 2.0 is progressing. You're spot on. We've got 15%, roughly 15% of our ADVs is being handled now by Network 2.0 stations. We closed about 100 stations and reconfigured about 290 stations as part of this. Canada is effectively completed and now we're working on the lower 50. So yes, the work is progressing. It's really important work. And again, I think as we look towards Investor Day in Q1 of next year, we look forward to giving more comprehensive briefing on that.

Okay. Would you be willing to share like kind of some tangible examples, biggest challenges you've come into as you execute Network 2.0 versus things that maybe went smoother than you thought?

Yes. The way I like to break it down is really 3 major categories, right? You've got your people, facilities and technology. And any time people are involved, of course, it's going to be behavioral change and change that needs to be managed. So I think it's fair to say that's probably the more sensitive item of the big 3 on my radar. I think you got to treat our people fairly throughout this and manage that, all while making sure we're not at all adversely impacting our service. And I think from that standpoint, it's going pretty well.

On the facility side, we keep learning more and more every facility we alter and make into a Network 2.0 facility. We have a team of people dedicating significant resources to doing kind of debriefs and downloads, what went well, what did not go so well. And of course, the technology is an important piece of it, too.

Route efficiency is critically important in a Network 2.0 environment. And as you may recall, we recently purchased a company which we had done business with for many years called RouteSmart. We had done business with them for many years, which was largely a ground route planning tool that we think effectively works in a Network 2.0 environment.

So we've adopted that as our technology going forward, among other technologies. And as you'd imagine, it's a pretty comprehensive list of technologies. But I'd say people on the forefront is top of mind. And using as an example, behavioral change, our couriers who are used to day definite may have some time-definite requirements on them. And so working together with them on how they can best manage and handle our priority products most efficiently and there's opportunities for them to make more money, too. We've been reconciling our compensation programs for our contractors and our couriers and so forth, again, to have the most positive outcome and deliver for our customers.

Okay. So we can talk now maybe about Tricolor. That was one of the stars, I think, of last quarter, right, allowing you to quickly adapt, flex capacity in response to rapidly changing demand, especially on the international side. So talk to us about what exactly this initiative entails. It took me a while to get there on like what exactly you're doing, how it's going, what's left to come?

Sure. And you touched on one piece of it. The Tricolor initiative really allows us the network flexibility to adapt to a changing demand environment, but also to point of phrase, kind of put horses to courses in terms of our assets, right? And with regard to the flexibility, for example, with the decline in volumes out of Asia, we were able to bring our Asia to U.S. flights down by roughly 25% during the kind of the impact of the tariffs and redeploy those assets to other markets where we didn't see demand drop and/or saw demand improve.

And our Tricolor really, we call it Tricolor for 3 colors, Purple, Orange and White. And the Purple is really designed to utilize our assets, our aircraft for that, which it was designed to do for speed of the priority products and to use the aircraft and our hubs most efficiently to maximize our profits on our most highest yielding business. So that's the purple piece of it. And then you have the Orange network that's designed to take advantage of a market. We really haven't tapped as much as we could on the air freight market, the heavy air freight market and to utilize the extra time we have with our Orange, also our aircraft, utilize the extra time we have to maximize density in those aircraft on the heavy freight market, but not bring that freight into the hub to burden hubs like Memphis, for example, but to find alternate points to distribute the airfreight into our expansive ground network.

So it's really a service offering that's unparalleled that we can do in-house that, for example, the freight forwarding community needs to contract multiple services to accommodate what we believe we'll be able to do with our Orange network. And then the last one is the White. And again, built in some opportunity with the White network, which is really belly capacity of commercial carriers that you gauge your demand level, and this is one where we can get at a lower cost. It brings our cost to serve down using the belly networks for some of the higher volume, lower-yielding products. And that you can flex based on your forecasted demand on how much belly capacity and not be burdened by the cost of the asset.

So we're excited about that. I talked about the Orange network on the freight. You mentioned one of the shining stars, contributed an additional $200 million of operating income for us in the fourth quarter. So we feel good about that trajectory and still a lot of markets to tap into the Orange network.

[indiscernible] should continue, right?

Yes.

Okay. So DRIVE savings. It's interesting you said it was a great success. It was, but it seems like there's still some left to do there, right? $1 billion you talked about for 2026, but that's DRIVE+ Network 2.0 after $2.2 billion last year. On DRIVE specifically, what's left to do here that you're most excited about? And if things go right, could that surprise to the upside?

So DRIVE, I don't -- it's worth repeating, we feel really good about the $4 billion, the $1.8 billion in FY '24 and the $2.2 billion in FY '25. And what that did, in addition to achieving our results, it also instilled in the organization a mindset that, hey, this works. We can do this. And so we set our next target, as you said, at the $1 billion. The way we view DRIVE, the way of doing business, it's kind of a, from our perspective, a journey, not a destination. And so a lot of opportunities in some of the things we've already done, route planning, there's some back-office opportunities we have. Europe will be a big focus for us on DRIVE. We're pleased to have delivered the $600 million we set out for in Europe, but there's more to be done there.

Okay. So that leads well into my next question, which is on Europe. A lot of excitement there recently around momentum. You talked about customer wins. Maybe give us like a more fulsome update. Can we look forward to more media metrics maybe at the Investor Day also Q1 next year, right, we're going to have an Investor Day of sort of your business here, profitability improvement stats or anything that allows investors to follow along with some of the good progress that you've shared?

Sure. So we do look forward to Investor Day to elaborating further. What I can say is Europe is a primary focus and an area where we have more runway of opportunity. We feel good about the progress we've made. Our service levels have improved, which has allowed us to gain market share. This is another area that I think can benefit from further back office restructuring, if you will. And we talked about a number of $150 million eventually. It takes sometimes in Europe a little bit longer to adjust your back-office structure under the European rules.

But that $150 million, we expect by FY '27. Route planning, package efficiency, condensing our stations, in-station efficiencies, all these things are being looked at and implemented. We also are focused on more ground capabilities. In fact, you may have heard us say we've redeployed some of our U.S.-based ground expertise and redeployed them to Europe. I think we're second to none in what we do here in the U.S. So we want to leverage that expertise and bring it to Europe. So those are some of the things that are in play in Europe and recognizing that from a competitive standpoint, our competitive juices are flowing here. We want to do better in Europe.

Okay. One quick follow-up. Just like how did it take this long to get here? Is it just now you feel like you've gotten this momentum on the domestic side and so you have that leverage to let them borrow your team in Europe and just yes, like...

So you know, I wasn't here during that period, but what I can say from my perspective, looking back in time, there were a number of things. I think as I reflect on it, we had two major traumas to Europe. We had the cyber event and also a significant damage to one of our 4 facilities in Europe. I also think as you look back, there was, from my perspective, such a customer focus to not change and disrupt that at some point, it was harming us more than helping us in terms of bringing the networks together. So sometimes change is challenging. And when you're bringing two organizations together like we did in Europe with PMT, there were challenges and hindsight is always 2020, but what I can say is we're excited about what lies ahead.

All right. Very good. Okay. So technology now. I know when you and I and Raj on the road, something that was very exciting of a topic for you all to talk about. So this concept of a FedEx digital twin. And so based on our time together on the road, you talked about the value unlock from this. Maybe you can elaborate for the group here, some new things FedEx is doing on the technology side. How are those initiatives yielding results to the bottom line?

Yes. Yes. So this is something that we're passionate about. Our CEO is very passionate about this and really two main categories from my perspective. One is how can we operate more efficiently and leverage technology to do even better than we do today. And SenseAware is one feature. FedEx Surround is another feature where we're leveraging technology to not only create a better value proposition for our customers, but also to be able to get further yield and get paid for that technological investment.

The other piece of this, too, is when you consider the significant amount of data we gather on a daily basis, it's extraordinary. And just to reflect for a moment, we had a memorial service for our founder who passed away just earlier this week and there was a little segment that was featured back from the mid-'90s that talked about FedEx as a technology and an information company, all the information we gather.

So dating back to even the mid-'90s, we're focused on leveraging technology and the information. And now in this current environment, we're just looking to take it to the next level. How can we leverage AI and how can we leverage technology not only to help our operations, but how can we monetize and unlock the value of the significant data that we collect on a daily basis. And we just talked about the 3 million customers, $2 trillion worth of goods, but that translates into 17 million packages a day. And who's shipping? Where are they shipping to? Why are they -- there's just all kinds of data that we have available to us that we're looking to leverage.

Okay. All right. So I guess like putting it all together, when Raj started this transformational plan, I think it was back in 2022, it was built off this premise that FedEx didn't have a revenue problem as much as it had a cost problem that needed to be addressed, right? And the team did a good job addressing it. You talked about DRIVE, Tricolor and now you're doing Network 2.0.

And we thought it was interesting this past quarter, FedEx's overall Express business, you had a margin that was 200 basis points better than UPS' domestic business despite yours as a total apples-to-orange kind of comparison because you have the international built in there, and that's probably being held back by Europe in the most recent quarter, and I know there's some seasonality. But maybe just talk about the next phase of some of the positive changes you're making season. What do you think Blue Sky margins at Express could go and could look like in like a medium, long-term scenario?

Yes. So what I can say is margin expansion is a significant focus of ours, right? It's certainly a significant focus of mine. And I hope you find it's reflective in a lot of the actions we've taken. We talked about some of the network efficiencies of Network 2.0, DRIVE, Tricolor, all that is focused on margin expansion. Our CapEx program and the successes we've had in bringing our CapEx down as well, that's all focused on margin expansion. I'm not going to give any specific numbers other than to say we want to be best-in-class. We want to be the highest margin, most profitable company in our space.

Again, something that we can look forward to for the investor.

We'll be talking more about that at Investor Day.

Yes. Last one, capital allocation. Though you talked about you did a great job last quarter -- sorry, last year, rather. And yes, so as a percentage of market cap, you've had some of the highest capital returns in transportation. So what are the latest priorities on cash flow, balance sheet targets and the like?

Yes, we're going to continue to invest in the business. As we talked about Network 2.0, roughly $700 million of our CapEx budget for next year is attributable to facilities, redesign and/or Network 2.0 new facilities. From an aircraft standpoint, we set out a target to bring our CapEx down from roughly run rate north of $2 billion a year. Our target was to be at $1 billion roughly by FY '26 and for the subsequent years. We're on track to achieve that.

So I think that's a shift in how the company has managed its assets. That's not to say we're not going to order new airplanes at some point in the future. We'll need to keep a modern efficient fleet. But we brought our CapEx down considerably. And you tie that in, as you said, I think our CapEx in FY '25 was the lowest it had been in 10 years or since the company was -- the FedEx Corporation was founded. So a lot of focus on that and bringing our CapEx down.

And then finally, returning to shareholders, right? We're looking to return capital to shareholders kind of in line with and parity with our free cash flow.

Real quick follow-up because you're an airplane guy. So I'm going to give you an opportunity on the -- you talked about the aircraft piece and how it's important that we maintain FedEx maintains this modern fleet. So yes, I think the fact that your CapEx has come down so much over the last 10 years is because meaning that already has one of the best fleets in the industry. So -- can we talk about that more? How you feel about the fleet today? And where can it be optimized?

Yes. Thank you for that. The tension that the aircraft investment received in prior years, I understand. But the 777 is the best airplane out there for what we do. And the company, I think, was very bold and had the foresight to invest in as many as we did. Now I think we're at a point where we were able to take advantage of that investment and kind of harvest those investments. Of course, we'll need to look to the future for the ultimate retirement of our MD-11s. Those are getting older and more expensive to operate. So we'll be doing that.

We'll be looking at our ground -- excuse me, our domestic fleet as well. I think there's opportunity to further compress the size of our fleet when we look at our 757s and our A300s that we operate here domestically. We've done some of that already. I think we've kind of retired roughly 29, 30 airplanes in that neighborhood over the last 2 years, maybe even more. And I'm focused on that as well.

That said, as new equipment opportunities come up, we're going to be closely scrutinizing it, don't necessarily always have to buy new. Although those give great returns, we have a strong balance sheet, so we get them for a reasonable price. We have buying power at FedEx, as you'd expect, one of the largest fleets in the world. So we take advantage of that, but look forward to keeping you posted on the fleet expansion and/or contraction as we go forward.

All right. Well, thank you so much for your time and that great conversation. Everyone found it helpful.

Great. Thank you, Richa. Appreciate it. Thank you all.

Thanks.