FedEx Corp

NYSE:FDX

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the FedEx Fiscal Year 2023 Fourth Quarter Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mickey Foster, Vice President of Investor Relations. Please go ahead, sir.

[Mickey Foster, Vice President, Investor Relations]

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 fedex.com. This call and the accompanying slides are being streamed from our website, where the replay and slides will be available for about one year.

Joining us on the call today are members of the media. During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate.

I want to remind all listeners that FedEx Corporation desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call such as projections regarding future performance maybe considered forward-looking statements within the meaning of the act. Such forward-looking statements are subject to risks, uncertainties, and other factors, which 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. 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; Mike Lenz, Executive Vice President, and CFO; and Brie Carere, Executive Vice President, Chief Customer Officer.

And now over to Raj.

[Raj Subramaniam, President and Chief Executive Officer]

Good afternoon, everyone. Before I start my remarks, I first want to acknowledge the upcoming retirement of Mike and his terrific contributions and accomplishments at FedEx over the last 18-years. Mike was named CFO in March of 2020, and I'm grateful for his leadership over the three years since then as we navigated a global pandemic and significant change. Due to his tireless work, FedEx is on solid footing as we execute the next phase of our strategy. Above all, Mike has been a good friend and a colleague of mine, and I wish him all the very best.

Now let me turn to my remarks for the quarter. Thanks to the hard work of the FedEx team, we have demonstrated continued progress on our journey to transform into the world's most flexible, efficient, and intelligent network. In the fourth quarter, we introduced and began preparing for one FedEx. At the same time, we continued to bend the cost curve through our DRIVE initiatives. This supported our fiscal year 2023 earnings, which came in above the midpoint of our March outlook, despite continued soft demand and an unplanned year-end tax expense, which negatively impacted our earnings by $0.18 for the quarter.

Our operating performance remains solid. We're entering fiscal 2024 with a continued focus on areas within our control and a commitment to execute swiftly on our priorities. This focus will support sustained profit improvement in FY ‘24 through an environment that we expect to remain marked by demand challenges, particularly in the first-half.

Turning to slide six, I will start with a snapshot of the quarter. Total revenue in the fourth quarter was down 10% year-over-year as volumes declined with demand remaining soft across the market. With this said, the rate of volume decline in Ground and Express improved sequentially. As expected, yield trends have been pressured in international markets where the supply demand balances have changed. We continue to maintain our focus on revenue quality and are committed to our disciplined pricing approach focused on the long-term.

While we expect these pressures to persist, we do expect moderation throughout the fiscal year. With our execution, on a number of cost actions, we delivered adjusted operating profit of $1.8 billion. Our fourth quarter performance enabled us to close out the year with an adjusted operating margin of 6% and adjusted earnings per share of $14.96. While our revenue declines were in line with the industry, I'm pleased to note that our flow through performance continues to improve, and we believe is the best in the industry in the first quarter of calendar year.

Beyond the headline numbers, our results this quarter embed continued progress on our transformation. I'm pleased to see our cost out efforts take hold, but I'm also equally excited about the operational improvements we are driving as we build the smartest logistics network in the world. For example, our market leading picture proof of delivery is now available to 90% of global residential deliveries, having launched in Europe earlier this month. Picture proof of delivery gives our customers visibility to their delivered shipment at the click of a button and it has led to a 14% reduction in disputed delivery cases and contributed to a 17% reduction in call volume in the United States.

Our four hour estimated delivery time window which we have rolled out to 47 countries is also improving the customer experience. And at Ground, our dock modernization efforts are enhancing productivity, helping us run our dock smarter with new technology and key data insights. This includes a new network operating plan that uses machine learning to develop more detailed and accurate volume forecast. Ground remained a standout in this quarter as the team delivered operating income of over $1 billion. For the first time in company history, the Ground team expanded margins despite lower volumes in the second-half. This is a clear indication our drive transformation is working and gives us confidence as we push forward.

And amid continued volume pressure, cost per package this quarter increased only 1.9%. This was supported by a total reduction in operating expenses of $350 million as the company continued to manage staffing levels effectively, benefited from stock closures and consolidations and reduced Sunday operations. These actions help bring Ground's fourth quarter operating margin to 12.1%.

At Express, we have made significant progress aligning costs with underlying demand. Our initiatives continue to ramp and we expect accelerating benefits in the upcoming fiscal year. Demand dynamics combined with yield pressure drove a 13% decline in revenue at Express. This performance was generally in line with our expectations coming into the quarter. In the phase of these headwinds, the Express team was able to accelerate cost and productivity efforts driven by a combination of structural and volume-related initiatives. The Express team reduced total flight hours by 12% year-over-year and permanently retired 18 aircraft, including 12 MD-11s this quarter. The team is also planning to take another 29 aircraft out of schedule flying in fiscal 2024.

In addition, we made excellent progress implementing structural cost savings initiatives beyond flights, including certain domestic efficiency initiatives. This includes the shift to a single daily dispatch of couriers, which achieved its target of [$15] (ph) million in fourth quarter savings, as well as accelerated hub productivity measures. In Europe, we continue to improve operational execution across the region. Notably, we announced the official opening of two of our hubs this quarter.

In April, we reopened our international road hub in Duiven, Netherlands and this month, we opened our new state-of-the-art road hub in Novara, Italy. These two facilities have enhanced their capabilities, enabled more efficient routing, and improved our service on the continent. In aggregate, total operating expenses at Express were down $1.1 billion in the quarter. The magnitude of the operating margin decline has continued to narrow sequentially as our initiatives take hold.

At Freight, the team is focused on maintaining pricing discipline, while flexing costs to protect profitability. The Freight team was able to reduce operating expenses by over $330 million in the fourth quarter. This will be further supported by our announced plan to close and consolidate 29 locations, which will be completed by August. Consolidation will improve service levels, while lowering our cost to serve. Further, we have conducted another round of furloughs to match staffing with volume levels and are limiting, hiring of salaried employees.

Turning to slide seven. We continue to make significant progress in taking cost out of our network, delivering a $2 billion year-over-year reduction in operating cost in the fourth quarter of FY ’23. This included more effectively matching flying with demand, marking the first quarter of this year where our flight hours declined more than the underlying volumes.

Additionally, we continue to aggressively manage headcount, including attrition to align our teams with the network changes underway. We exceeded our target with U.S. headcount down by about 29,000 in FY ‘23. Also included in these cost reductions are ramping benefits from the numerous initiatives we have identified across the 14 DRIVE domains. Given our progress, we are confident that we can deliver on our previous goal for about $1.8 billion in cost reduction benefits from DRIVE this fiscal year and $4 billion of permanent cost reductions in fiscal year 2025.

As we introduced in April, between now and June of 2024, we will be consolidating our operating companies into one unified organization. One FedEx is the next step of this journey to realize our full value potential. It aligns our organization to one corporate structure that will facilitate the execution of our DRIVE transformation and will further enable the work that's underway in Network 2.0.

Our work towards this goal is already taking shape. We have taken a significant step forward in the implementation of Network 2.0 with today's announcement of the transformation of our Canadian operations. In April of 2024, we will begin to transition all FedEx Ground operations and personnel in Canada to FedEx Express, creating a truly integrated and unified Canadian network. This unification is enabled by the nature of the Canadian market where the population is heavily concentrated in a few key geographies currently serviced by both OpCos.

Consolidation will create significant efficiencies throughout the business from first to last mile and across our support teams. We expect this change in Canada to generate an annualized benefit of over $100 million upon completion in FY ‘25. We've announced transitions in 20 markets and Canada marks the first large scale implementation of Network 2.0, which builds up the learnings from our completed transitions in other geographies. To be clear, we're not taking a one size fits all approach to our Network 2.0 strategy. Success depends on a mix of models including employees, and contracting with service providers as all are important pieces of how FedEx moves packages.

Looking ahead to FY ’24, we're entering the year with a clear focus on what is within our control in an underlying environment that remains dynamic across geographies. This backdrop is likely to pressure revenue growth particularly in the near-term. As a result we're taking a prudent approach to our full-year outlook that builds upon our solid finish to FY ‘23. We'll also make progress on reducing capital intensity by continuing to focus on the highest return opportunities in an efficient manner. After FY ‘25, we have no additional firm commitments on Jet Aircraft CapEx.

As such, we expect our aircraft related CapEx to decrease after FY ‘24 and be approximately $1 billion in FY ’26. This capital allocation strategy represents our approach to a more efficient and nimble network. We will continue to look for additional opportunities as we proceed with our aircraft modernization strategy. We'll bring this discipline along with our improved flexibility and agility to ensure that we are successful given the uncertain external environment.

In closing, I'm confident that the progress we are making on our transformation will translate into improved margins, returns and cash flow throughout the year. At the same time, our commitment to driving operational improvement will further enhance the customer experience.

Now let me turn it over to our Chief Customer Officer, Brie Carere, who will discuss market trends and our commercial strategy in more detail.

[Brie Carere, Executive Vice President, Chief Customer Officer]

Thank you, Raj, and good afternoon, everyone. As expected, the fourth quarter operating environment remained pressured with year-over-year volume declines in sequential moderation in yields across all transportation segments. We remain focused on revenue quality and creating meaningful differentiation while managing through these dynamics.

Let's take each segment in turn now. At FedEx Ground fourth quarter revenue was down 2% year-over-year, driven by a 6% decline in volume, partially offset by a 5% increase in yield due to surcharges and product mix. We once again delivered strong service levels and best-in-class market transits.

Revenue at FedEx Express was down 13% year-over-year. Parcel volume declines were most pronounced in the United States. And in addition, U.S. freight pounds were down over 25% due to a change in strategy from a very large customer. International export volumes were about 4% lower year-over-year. At FedEx Freight revenue was down 18%, driven by an 18% decline in volumes with revenue per shipment flat. This decline was driven primarily the slowdown in the market and high inventory levels. Although the pricing environment is moderating, our pricing discipline remains strong.

Let's move now to slide 11. As expected, yield was pressured as year-over-year fuel surcharge comparisons normalized. Customer demand rebalanced between priority and economy services with capacity availability. This is most notable on the Asian markets. In response, we remain focused on revenue quality, while managing our mix. At Ground and U.S. Domestic Express, yield improved year-over-year, but at a moderating rate versus the previous three quarters. And as I mentioned a moment ago, freight at yield -- freight yield was flat.

Turning now to slide 12. Our efforts to make the network the most flexible, efficient, and intelligent network in the world are taking hold. We are delivering better service and outcomes for our customers, creating deep relationships and, of course, incremental revenue for FedEx. These efforts are supported by a fantastic portfolio of services. Raj spoke earlier about the benefits we and our customers are seeing from the expanded rollout of picture proof of delivery and continued enhancements to the estimated time delivery window.

Later this year, we plan to narrow our four hour delivery window in many locations and provide new enhanced mapping capabilities to help customers track their package movements. Return is also an area where we're underpenetrated, and so we're focusing on growth. Returns move through our network similarly to B2B shipments and are highly efficient in our network.

In the fourth quarter, we introduced our new returns program, FedEx consolidated returns, which is available at FedEx office location. For merchants, it's a low cost e-commerce solution for lightweight apparel returns with end-to-end visibility. And for shoppers, it's a convenient, no label, no box drop off experience using a QR code. We have received excellent feedback and look forward to continuing to scale this solution very quickly.

Finally, last month, we launched FedEx Sustainability Insights, a cloud-based tool that enables customers to view estimated carbon emissions for both individual tracking numbers and all their FedEx accounts. This platform marks the foundation of a new suite of tools for our customers. It enables customers to transfer their carbon data to their own internal systems via an API. The insights are also available online for our small customers. Leveraging the vast shipment data that we have and using our AI machine learning capabilities, we are able to provide information to our customers in a meaningful and actionable manner. I am very excited about these portfolio expansions and firmly believe that a supply chain powered by FedEx is a competitive advantage for our customers. I'm proud of the team for their unwavering commitment to service and for delivering these innovative solutions.

Now, I will turn it over to Mike to discuss the financials in more detail.

[Mike Lenz]

Thanks, Brie. I'll start on slide 14. The FedEx team demonstrated strong operational execution to close out fiscal 2023. Looking at our transportation segment performance for the fourth quarter, starting with Ground, which continues to deliver strong results. Operating income increased 18% and operating margin expanded 210 basis points to 12.1% even with volumes down 6%. Margin expansion was supported by yield growth of 5% and strong cost controls driven by lower line haul expense.

At Express, we're seeing sequential operating margin improvement as our team continues to move with urgency to drive structural and volume related cost improvements. Adjusted operating income declined 47% and adjusted margin contracted 320 basis points to 5% as package volumes were down 7% and yields declined 3%, due to international package yield pressure.

At Freight, the team continues to navigate a softening volume environment. Operating income decreased 26% and operating margin declined 210 basis points as shipments declined 18% and yield moderated. Our fourth quarter results include several non-cash items. We recorded an impairment charge of $70 million related to the decision to permanently retire from service 18 aircraft and 34 related engines. The results also include $47 million of goodwill and other asset impairment charges related to the ShopRunner acquisition. In addition, we incurred an unplanned tax expense of $46 million from a revaluation of certain foreign tax assets.

To provide additional color on recent demand trends and what we are planning for in our outlook, slide 15 shows trailing monthly volume trends over the last six months for our major service categories. Volume declines continued in the quarter, while still negative, Ground in U.S. Domestic Express year-over-year package volume trends improved into May on a sequential basis. As we look to the first quarter of FY ‘24, we expect volume declines to continue to moderate at Express and Ground as we lap the onset of softer volumes, while freight will continue to experience pressure.

This brings me to our FY ‘24 earnings outlook on slide 16. We remain acutely focused on maintaining our strong commercial position, prioritizing revenue quality, and driving profitability improvement through our efficiency initiatives supported by DRIVE. These efforts are more effectively aligning our cost base with demand, reducing our permanent costs, and increasing the flexibility of our network. We do expect external business conditions to remain challenging near-term and they remains significant uncertainty with respect to the timing of demand recovery, particularly in the back half of our fiscal year.

As a result, we are preparing for several potential outcomes as we think about the year ahead. This led us to establish an adjusted earnings per share outlook range of $16.50 to $18.50 for fiscal 2024. In a demand environment, it remains consistent with what we are currently experiencing, we anticipate flattish revenue for the full-year and full-year adjusted earnings per share toward the low-end of the range. Should macroeconomic conditions support an improving demand environment in the back half of the year? We expect to see modest volume improvement for the year. In this scenario, we expect revenue to be up low-single-digit percentage for the full-year.

This would also translate into greater operating leverage from our more efficient network on a higher revenue base, driving an outlook for full-year adjusted earnings per share closer to the high-end of our range. The key external factors that we’ll determine the FY ’24 outcome are broader economic activity in North America, Europe and in Transpacific trade, inventory restocking, and the development of e-commerce activity as we continue to differentiate our offering. At Express and Ground, we expect to build on fourth quarter cost momentum and see adjusted margin improvement in FY ‘24. Freight margins will remain strong in FY ‘24, but lower than FY ‘23 given significant volume reductions and yield pressure.

Turning to other aspects of our outlook. First, we expect a $230 million net non-cash pension headwind with a $330 million headwind below the line, offset by a $100 million lower pension service costs. Partially offsetting this below the line impact, we expect higher interest income on our cash balances. Our projection for the full-year effects of tax rate is approximately 25% prior to the mark-to-market retirement plan adjustment.

We are projecting $500 million of business optimization cost at FY ‘24 associated with our transformation. We still expect a total pretax spend of $2 billion through FY ‘25 and the timing and amount of these business optimization expenses may change as we revise and implement our plans.

Moving to the next slide, we want to share how we're thinking about the operating profit considerations embedded in our expectations for the full-year. For illustrative purposes, I use adjusted EPS of $17.50, the midpoint of the outlook range. This scenario is based on modest demand recovery leading to limited coverage of base cost inflationary pressures. In addition, we expect approximately $800 million of international export yield pressure as peak surcharges significantly diminish and product mix continue shifting toward deferred offerings.

We also include a $500 million increase in variable compensation to ensure our compensation package is competitive. This is critical to retain key talent as we execute our DRIVE transformation. Importantly though, these pressures are more than offset by the $1.8 billion in cost savings from DRIVE. Together, these illustrative components lead to FY ‘24 adjusted operating profit of approximately $6.2 billion at the midpoint of our outlook.

Moving to slide 18, we continue our unwavering focus on efficient and responsible capital allocation in our pursuit to drive shareholder returns. For the year, we ended with $6.8 billion in cash in line with where we began the year, despite the challenging business environment. We accomplished this through continued improvement in cash conversion cycles and net working capital along with reduced capital expenditures. Capital expenditures were $6.2 billion which represented 6.8% of revenue, versus 7.2% of revenue in fiscal 2022.

FY ’23 CapEx was slightly higher than our projection due largely to timing, as easing supply chain constraints accelerate the delivery of equipment and other projects. With a slight acceleration of certain spend into FY ‘23, we are now projecting $5.7 billion in CapEx for FY ‘24, which achieves our target of less than 6.5% CapEx as a percentage revenue a year earlier than we projected.

Our fiscal 2023 adjusted free cash flow of $3.5 billion supported the repurchase of approximately $1.5 billion in stock at an average share price of approximately $163 a share and we paid $1.2 billion of dividends. In addition, we funded $800 million in voluntary pension contributions. Looking ahead, we will continue to invest and attractive return improvement initiatives. We're committed to further reducing capital intensity. Capacity investments at Ground will decline in addition to the lower aircraft expenditures expressed Raj mentioned. And we expect to repurchase an addition of $2 billion stock in fiscal 2024.

As previously announced, we are raising our dividend by 10%, which increases our adjusted payout ratio to over 30%. These significant stockholder returns reflect confidence in our continued execution of profitability and return improvement initiatives. Lastly, we are planning for $800 million of voluntary pension contributions to our U.S. plans, which were 94.5% funded at year-end.

In closing, we are making progress on our transformation and remain focused on delivering shareholder value by driving improved profitability, lowering our capital intensity, while continuing to deliver strong return of excess cash to shareholders.

And with that, let's open it up for questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Allison Poliniak-Cusic with Wells Fargo. Please go ahead.

[Allison Poliniak-Cusic, Wells Fargo]

Hi, good evening. Just want to go back to the optimization in Canada. I know you talked a little bit about the uniqueness of the region. Could you maybe talk to how does that impact the deployment of the optimization? And then more importantly, relative to say the U.S., how is the scale different in Canada versus U.S. and how that deployment would go forward? Thank you.

[Raj Subramaniam, President and Chief Executive Officer]

Yes, Allison, thank you for your question. Of course, Canada is a unique market and we're taking a different approach there than the market-by-market approach we take in the U.S. The Canadian population is heavily concentrated in a few key geographies and the volume is split roughly 50-50 between Express and Ground. So we made the decision to consolidate everything under Express and is the right time to take these steps, because will begin in April 2024 and complete by September of 2024. And it's very important that you understand that this is unique to Canada, because we are going to take a market-by-market approach in the United States and we’d have a hybrid in the United States between couriers and package handlers. But it's a very important step for us in Canada, it reduces our cost by about $100 million and importantly improves our portfolio and service differentiation. Thanks for the question, Allison.

[Operator]

The next question will come from Jordan Alliger with Goldman Sachs. Please go ahead.

[Jordan Alliger, Goldman Sachs]

Yes, hi, thanks. You sort of gave some parameters for the EPS range, $16.50 to $18.50, and mentioned in the second-half, what it would mean if the macro, sort of, accelerated in terms of the revenue side, but I'm sort of curious, as you think about the first-half of the fiscal year and the second-half of the year, as a way to give a sense maybe at the midpoint, the proportion of EBIT in both halves, because I suspect that it's more of a second-half acceleration with the costs in the economy? Thanks.

[Mike Lenz]

Sure, Jordan, this is Mike. So let me break that down to a couple of elements. First, the demand projection we're talking about for the second-half of the year would be relative to what we have been currently experiencing, so that's the degree of uncertainty there in terms of how that flows going to the back half of the year. In the front half of the year, keep in mind that the significant inflection that we saw last year was very late in the first quarter, with that most pronounced at Express.

So, we will be lapping that for the first quarter, and in addition, the trail-off in Freight volume accelerate into the mid to upper teens later in the calendar year as well, but largely in the falls when that started, so you got to think about the first quarter considerations there as you put the whole year together and our modeling. But in terms of the outlook overall, we're not projecting any material inflection in the demand environment to get to that point there that you've referenced.

[Operator]

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

[Jon Chappell, Evercore ISI]

Thank you. Good afternoon. Mike, just sticking with you on slide 17, the $300 million of revenue, net of cost increases, is there any way to break down how much of that is volume versus price? And if it is more kind of price-driven, the $2.7 billion of variable cost that you took out this year, how much do you have added back in fiscal '24?

[Mike Lenz]

All right. Jon, let me take a swing at that here. So look the way we have framed this is that our expectation is for continued, but moderating underlying inflation. So what we illustrated here in this midpoint scenario is positive contribution beyond inflation amidst a muted demand growth scenario. Then obviously on top of that the DRIVE savings are greater than the nonrecurring headwind. So, again, as Brie mentioned, we'll see moderating volume declines as we move through the year here, but at the same time, the degree of yield increases that we saw last year are not going to continue into this year.

[Operator]

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

[Brian Ossenbeck, JP Morgan]

Hey, good evening. Thanks for taking the question. For Brie, can you just talk about any plans of financial structure trade-down in this uncertain environment? You mentioned one customer making a change, I think it was within U.S. Air freight, I believe it was? And then relatedly, can you just talk about, if you're seeing any diversions from UPS network that might be driving some of those month-on-month incremental gains in terms of Ground and Express. Thank you.

[Brie Carere, Executive Vice President, Chief Customer Officer]

Okay, I think I got all that Brian. I think you got a couple of questions. Let's start with the last part first, so I think the question was, are we seeing any benefit from the UPS labor negotiation, so the short answer is, in Q4 we did not see any material benefit because of those discussions and we have not planned for any benefit moving into fiscal year ‘24. What I can tell you is that this has opened a lot of doors. We're having a lot of great conversations with legacy UPS customers and we feel really strong -- we feel really good about the sales pipeline because of the strong value proposition we have versus our primary competitor.

I think the other question was about the mix and are we seeing any customers make trades within the portfolio where we're seeing that most pronounced and we have plan for it, to Mike's point, it's in our range accounted for is in Asia. Obviously, capacity has come back relative to demand, and we did reopen our IE product in the fourth quarter, that has performed well, and actually I'm really pleased with the performance that I'm seeing from the Asia-Pacific team and their sales pipeline, but that's where we've seen the biggest shift.

[Operator]

The next question will come from Jack Atkins with Stephens. Please go ahead.

[Jack Atkins, Stephens]

Okay, great, thank you for taking my question. So, I guess maybe if I could a two-parter here, the guidance itself, I think the bottom-end, Mike, if the way you described it, if I understood it correctly, contemplates the operating environment remains as it is right now, if we were to see things deteriorate in terms of just underlying customer demand, is the company prepared to maybe pull forward some of the DRIVE savings from FY '25 into FY '24, is that even really possible at this point, if you maybe you could talk about that?

And then for Brie for the second part of the question is the $800 million of International Export yield pressure that you guys are going to be seeing this year, is that going to fully capture sort of getting back to sort of pre-COVID levels there? Again, thanks for the two-parter, but would appreciate the effect.

[Mike Lenz]

Hi, Jack, will give you a special pass then. On the low end there, I characterize that's flattish revenue year-over-year. So that would be the low-end of our expectation, but in terms of how we navigate and manage through that, the flexibility that Raj mentioned too that we are incorporating into the network is allowing us to then react to that and adjust and again point to the tremendous progress we've made and the results you've seen at Ground in the last few quarters of material volume declines, get improved margins and profitability, and you saw in the last quarter here Express is mitigating the flow-through from the reduced demand. So we will move with great urgency should it be below our range of expectations.

[Raj Subramaniam, President and Chief Executive Officer]

And let me just jump in before I turn it on to Brie here, so it's a simple one, two, three formula. At 1%, we are at the low-end of the range; at 2%, we're in the middle; at 3%, we are at the higher-end of the range in terms of revenue growth. Now, to go beyond that, we become non-linear in terms of significant operational leverage, so, yes, DRIVE is working and we have flexibility to pull additional levers as we need to. Brie?

[Brie Carere, Executive Vice President, Chief Customer Officer]

Thanks, Raj. So, Jack, the short answer is yes, that we have planned for the $800 million impact this fiscal year and then as we lap that impact, we will be able to build back from there, so the short answer is yes.

[Operator]

The next question will come from Chris Wetherbee with Citigroup. Please go ahead.

[Chris Wetherbee, Citigroup]

Hi, maybe just on the $1.2 billion cost savings, can we just understand the timing of that as we go through fiscal '24? How much that comes, I guess in 1Q or in the first-half, and how much should be spread out over the rest of the year?

[Mike Lenz]

Sure, Chris, this is Mike. The $1.8 billion, it is a sequential build, as we go through, we continue with the discipline and rigor of the DRIVE framework. So, as certain things are implemented during the year, we won't get the full run-rate of that, because there is a continuous flow of initiatives. So it will be least amount of that $1.8 billion will be in the first quarter and build as we go through the year and then that gives us the run-rate momentum then to get to the $4 billion fully by FY '25.

[Operator]

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

[Brandon Oglenski, Barclays]

Yes, thank you, and good afternoon. Raj, I think in your prepared remarks you said that you've already transitioned something like 20 markets to One FedEx operation, but not every market is the same. Can you elaborate on that a little bit and how this hybrid model going to work in the States, where you do have overlapping contractors and potentially employee drivers? Thank you.

[Raj Subramaniam, President and Chief Executive Officer]

Yes, Brandon, the markets that we have transitioned over are, we're in Alaska, we're working through Hawaii, and certain other markets in Minneapolis, so we have learned a lot in this process from technology, from facilities and people. And the hybrid model is that in some markets, we will have couriers and in some markets, we have a -- we have contractors, so those things will be determined, they will air-driven and they will work-through with our people first -- PPSP philosophy and they will, as I said, because this is going to take a little bit of time as we told you, but glad we're making the progress we're making already. Thank you.

[Operator]

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

[Tom Wadewitz, UBS]

Yes, good afternoon. So, Raj, if I take a look at what happened last kind of August-September that outcome was quite a bit different than you expected, I think your international fell off quite a bit, maybe some other things, and I think the way you guided looking forward, if we look at your results in November quarter and February quarter, you set a bar that was achievable, maybe you just executed a little better?

How do you think about the guidance that you're giving us for fiscal '24? You've talked about the different macro assumptions in revenue, but is there some element of having a conservative bar, where you could potentially do better on cost or maybe pricing comes in a bit better, just kind of reflecting what seem to be a pattern of giving yourself a little bit of room to overachieve in the last couple of quarters? Thank you.

[Raj Subramaniam, President and Chief Executive Officer]

Tom, firstly, I may say this much, as I said in my prepared remarks, this is the first time in history of FedEx that's in the FedEx Ground where the volumes declined and our operating margin expanded. So clearly this is beyond just flexing for volume and we have -- this is really DRIVE taking effect as well. So this is -- we're just very, very pleased with how John and his team is performing in Ground, and by the way I'll give kudos to the Express team and Richard's team as well, as we have started to see significant improvement in the fourth quarter.

To your question about the macro. So when we talked in September, we pointed to three things. We said that the industrial economy was slowing down and because of inflation, interest rates, and slowdown in global trade, we said that the consumer spending was shifting to services versus goods. And then thirdly, there was an e-commerce reset coming out of -- coming out of the pandemic. Well, all those three things happened and they were detrimental to volume for the whole industry, so I mean roughly the same revenue performance on the calendar quarter that is comparable across the sector.

If you look ahead here, at this point, the one and two are basically along the same lines we have seen in the last few months. I think on the e-commerce side, we expect to see growth now. I think the reset is probably complete and e-commerce is going to grow into the next calendar -- sorry, the next -- this FY ‘24 timeframe. So, we're watching this very carefully. The visibility, especially in the second-half is very difficult, given the dynamic circumstances we are seeing. We will see how the industrial production goes. We'll see how GDP and trade goes, and we'll follow the inventory stocking and inventory to sales ratio very carefully, and -- but at the end of the day, we are focused on the things we can control. We made a determination that we are going to come out of this stronger than we went in and exactly what we're doing and I'm very, very pleased with the way we are executing DRIVE. So sorry for the long answer, Tom, but I thought I want to give you a full perspective there.

[Mike Lenz]

And Tom, this is Mike, I want to just amplify one aspect there as well to just highlight, we talked about Ground and the progress of the numbers there, but there has been tremendous progress at Express amidst the headwinds here. So you ask about the guidance broadly, but keep in mind all $800 million of that, international headwind is at Express, as a non-recurring headwind, a significant component of the variable compensation is at Express. And the domestic freight headwind that Brie alluded to earlier, that's about $400 million, right there as a headwind in '24, so despite all of that, through the discipline and rigor of DRIVE, and a muted demand environment, we are projecting up margins at Express in '24. So again, just to reiterate, we're looking at this very thoughtfully and are planning to adapt to any further changes in the environment.

[Operator]

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

[Ken Hoexter, Bank of America]

Hey, great, Mike, if I can just follow-up on a couple of thoughts there. Your thoughts on the scale of improvement at Express, can you reach mid-single-digit, is there a kind of a range as you'd put within the target same at Ground? Is that going to reach double-digits, if we're going up and then magnitude at Freight margin if you're looking at declining expectations, and then I guess within that, any thoughts on Europe and TNT integration within that Express category? Thanks.

[Mike Lenz]

That was a lot. Certainly, like I said, we will see margin improvements at Express and at Ground in ‘24. Freight will definitely will see some margin pressure there, so I'm going to leave it at that. The Freight will mitigate, like I said earlier, we will see the largest margin pressure at Freight in Q1 and that will mitigate as we move through the year. Similarly, I would expect the Express margin improvement to improve to a greater degree beyond Q1, as well as we move through the year. So I'll leave it at that.

As it relates to Europe, we are absolutely -- as a component of that Express improvement projecting improved profitability in Europe, keep in mind that within the DRIVE domains, we've identified $600 million of value that we will realize from the Europe initiatives there. So we will absolutely see progress on that in ‘24 and going forward.

[Operator]

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

[Scott Group, Wolfe Research]

Hey, thanks, good afternoon. So, Raj, in one of the earlier answers, you basically said one, two, three, right, for the earnings sensitivity and revenue sensitivity. So that's basically every billion of revenue gets you an extra dollar of earnings, is that the right sensitivity to think about just longer-term beyond just this year as Freight eventually recovers? And then just separately, the $5.7 billion of CapEx this year, how much is included in aircraft? I just want to get a sense of what the CapEx could look like in a couple years when we're spending a lot less on planes. Thank you.

[Mike Lenz]

Okay. Scott, so first on the aircraft CapEx, we came in at about $1.7 billion in ‘23, about $1.5 billion for ‘24, slightly lower than that in ‘25 and then as Raj said approximately below that even into ‘26, so that's the aircraft component of it.

[Raj Subramaniam, President and Chief Executive Officer]

And Scott, on the one, two, three, I just wanted to keep the math straight-forward here, it's simple one, two, three formula, but the point I wanted to make also is that, as it accelerates beyond that, then the curve becomes non-linear. As you know, we have significant operating leverage. I think you are the one who called it, opening the jaws of the crocodile then that's kind of what's going to happen.

[Operator]

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

[Conor Cunningham, Melius Research]

Hey, everyone, thank you. Just on the ‘24 revenue assumption, I'm a little confused on how that will work with export yield pressure. It just seems like the other lever is going to be volumes in general. Just to be super clear, are you assuming a year-over-year increase in '24 at the midpoint? Just any help there would be great. Thank you.

[Brie Carere, Executive Vice President, Chief Customer Officer]

So, Conor, yes, so the assumption at the midpoint as Raj just mentioned would be 2% revenue growth. And as you think about the build-back from a revenue perspective, it's important to note, I think Mike mentioned earlier, in the U.S. domestic, as we get late into Q1, early Q2, you will see volumes, Domestic, Express, and Ground parcel get to flat and then we do anticipate they will build-back from there. FedEx Freight will lag that slightly because, as Mike talked about the impact leg, and then when we get into our international business, the 800 is really yield impact. We are anticipating to build back some volume in our international business this year and again that will happen throughout the year. So that's, yes, 2% is the midpoint, volumes will start to build back throughout the year.

[Operator]

The next question will come from Jeff Kauffman with Vertical Research Partners. Please go ahead.

[Jeff Kauffman, Vertical Research Partners]

Thank you very much. Brie, I just want to follow-up on that if I can. You gave your range of outcomes, but we do have higher interest rates, credit cards, I know there's been a lot of chatter about school loans being paid later this year and that may be a negative for holiday season and e-commerce? As you look around the world, let me phrase it differently than you've been answering, where are potential green shoots starting to show up in your network or reasons for optimism, and where are we seeing let's forget the international yields, but more in terms of activity that you're seeing out there incremental red.

[Brie Carere, Executive Vice President, Chief Customer Officer]

Yes, absolutely, it's a fair question. So we planned right now for flattish to single -- low-single revenue growth and that's really basically on the backdrop of the economy that we're experiencing right now. We're all watching the consumer, as Raj talked about, we are still seeing consumer strengths here in the United States, but we are seeing an e-commerce reset. So from a green shoots perspective, one of the things that we're going to be looking at is that e-commerce growth, it's sitting at 7% to 8%, it's important to note our percentage of that is closer to 2% to 3%, because we don't play in grocery and obviously within that 7% to 8% is also, buy online, pickup in-store, so we will be keeping an eye on that consumer strength here in the United States and would love to see, as we head into peak, a little bit of a different shift. We have not seen that yet, but we'll be watching for it.

And then the other thing, from an Asia perspective is we're going to watch closely on Asia reopening. We haven't seen significant uptick there, but if that happens to Roger's point, that will absolutely be a tailwind for us. And then, honestly, our own execution in Europe. I'm really pleased with the service that the European team is delivering. We've got some green shoots in the domestic markets in Europe and we're working that really, really hard from an operations and a sales perspective. So there are definitely some green shoots we're working on.

[Operator]

The next question will come from Helane Becker with TD Cowen. Please go ahead.

[Helane Becker, TD Cowen]

Thanks, operator. Hi, team. So, easy questions. I think the pilots are rolling on a new contract and I'm wondering if the cost increase associated with that is included in the guidance. And the other part of the question is as you reach higher, your older aircraft, are you also retiring pilots or is there an excess of pilots?

[Raj Subramaniam, President and Chief Executive Officer]

Okay. Helane, a couple of questions there. So first, as it relates to the aspects of the pilot tentative agreement there, a component of that is a payment upon implementation. So we've previously accrued for that date of signing payment there. And then within the guidance here, we have the FY '24 scale increases and then within the pension figures I gave earlier, that incorporates the considerations as it relates to that as well. So that's fully incorporated into the outlook there. And as we mentioned earlier, we're expecting to park 29 additional aircraft during the year, nine of which will be permanently retired.

[Operator]

The next question will come from Scott Schneeberger with Oppenheimer. Please go ahead.

[Scott Schneeberger, Oppenheimer]

Thanks very much. Good afternoon. I'm going to keep it on the airplanes. Just curious on freight, if you could kind of frame the answer in where you were a year ago, where you are now, and where you anticipate being in a quarter or two with regard to taking out flights, Trans-Pacific, Trans-Atlantic, Asia, Europe? If we could just get an update on that for what you've done and what may come going forward? Thanks.

[Mike Lenz]

Scott, look, as Raj mentioned, flight hours were down 12% in the fourth quarter, which is greater than the volume decline, so we've taken significant flying out of the network. We've said that that was anticipated once the supply-demand constraints were eased and so that is the decision to then retire these aircrafts because we continue to reduce the Trans-Pacific and Trans-Atlantic flying to match demand, and we'll continue to lean into that as well as utilizing the flexibility of capacity in the market.

[Operator]

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

[David Vernon, Bernstein]

Hey, thanks for fitting me in here. So, Mike, in the scenarios you've outlined for us, is there a scenario where margins on a consolidated basis don't get better on an adjusted basis in 2023 or are we looking for margin expansion? And then, Brie, as you think about the large customer change in behavior, I assume we're talking about the post office, are we expecting more of that priority mail revenue to decline given what [DeJoy] (ph) said publicly around the desire to Ground some of that traffic, and then how do we think about that sort of in connection with that your desire also to kind of reduce the fly network a bit.

[Raj Subramaniam, President and Chief Executive Officer]

Yes, I mean, David, the short answer is we're projecting margin improvement with the outcomes here that we have highlighted and specific drivers within that.

[Brie Carere, Executive Vice President, Chief Customer Officer]

Yes, the customer we are talking about is the United States Postal Service. Obviously, we've had a long and productive and profitable relationship with the post office, you're correct. Their 10-year strategic plan is to track more volume and fly less, so to Mike's point earlier, we have accounted for that in this year's fiscal range. We are committed to meeting the service obligations in that contract, which does end in September 2024 and so we've accounted for that headwind. At that point, it will become a tailwind as we either renegotiate or we will adjust our network accordingly.

[Operator]

The next question will come from Stephanie Moore with Jefferies. Please go ahead.

[Joseph Hafling, Jefferies]

Great. Good evening. This is actually Joe Hafling on for Stephanie. Thanks for squeezing me at the end. I'll keep it to one. My question is maybe for Mike, it's a bit in the weeds, looking at Ground operating profit expansion, purchased transportation costs are obviously down big year-over-year at 40%, I think it's the lowest percent of revenue in 10-years or something with the softer macro, so how should we think about PT, particularly in the context of a volume rebound and the need to maybe source third-party capacity if the macro improves, especially as more cost are coming out of the network? Thank you.

[Mike Lenz]

Okay, Joe, well, in my remarks I mentioned how one of the drivers of the margin expansion and cost control at Ground was lower linehaul expense. So we moved a lot of high-cost ad hoc external linehaul spend into our scheduled network as we optimize that and lower rates on the plan linehaul purchased transportation, so again, it's all part of the broader optimization of the network holistically, both pickup and delivery, linehaul, as well as the sorting facility operations.

[Operator]

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

[Bruce Chan, Stifel]

Hey, thanks and good evening, and congrats Mike on the retirement. Just wanted to ask about the LTL side, since we haven't talked about it too much. You recently had a large competitor announced some material solvency concerns and I just wanted to see what the playbook here is if we do see a major competitor exit, would you rethink some of the facility closures and furloughs at that point or even just the stronger-than-expected LTL market?

[Mike Lenz]

Sure and thanks for that, Bruce. But yes, on the LTL side, look, you've seen how fast the team reacted to declining volume environment earlier in the year and we still we're expanding margins that accelerated, so that was more challenging. So, look, we will continue to look to optimize the facilities. It's a holistic perspective, so the 29 facilities, were smaller ones that weren't the most efficient, so as we lean into what could be a demand recovery, that volume could be accommodated within the larger facilities and that just has that much more incremental contribution as and when that comes back.

[Operator]

And the final question will come from Amit Mehrotra with Deutsche Bank. Please go ahead.

[Amit Mehrotra, Deutsche Bank]

Thanks. Hi, everyone. Mike, I know there's a lot of questions on the long-term 12-month period, that's hard, I get it, but maybe help us calibrate expectations for the near-term, do you expect Express and Ground profit to be up in the next quarter? I know their seasonality, but the question, there's obviously DRIVE savings?

And then, Raj, the decision to go external for the CEO search that obviously wasn't lost upon me that external criteria, that's a big deal for FedEx, obviously and I'm wondering if you can talk about what your -- what the Board -- what you're trying to achieve there in terms of hiring somebody from the outside, which really hasn't happened before for such a senior position. Thank you.

[Mike Lenz]

All right. This is Mike. So first, I'll reiterate, as I mentioned earlier, freight margins will be down for the year and that will be most pronounced in Q1. And at Express, as we saw the significant inflection in demand very late in the first quarter of last year. so Express will see this smallest year-over-year margin change in Q1 relative to the rest of the year, so I'll leave it at that and go from there.

[Raj Subramaniam, President and Chief Executive Officer]

And Amit, yes, first of all, let me again thank Mike for just incredible work over the last 18-years and particularly in the last three and we have a fantastic finance team and a great organization. From our succession planning, we are looking at somebody who has deep financial expertise, but also strong operational capabilities, and help lead FedEx through our DRIVE transformation program. So again, thank you for your question.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

[Raj Subramaniam, President and Chief Executive Officer]

Thank you, operator. Before we close, I want to give Mike an opportunity to say a few words.

[Mike Lenz]

Thank you, Raj, the last 18-years at FedEx has been a tremendous experience and it was my great honor to serve as CFO for the last three years. Who would have known when I was named at this position in March of 2020, what we in the world we're about to face, but this team rose to the occasion again and again through many obstacles and we are now well-positioned for the future.

I want to express my gratitude to the entire FedEx team and the finance team, in particular, for their dedication throughout all of the change. To Fred and Raj for their vision and leadership, and most importantly, to my wife, Jane, and our sons for their support along the way. I've also valued the engagement with this audience, ensuring the exciting plans and bright future for FedEx. As I start my next chapter, I leave knowing that FedEx is in a strong position. I couldn't ask for any more than that. Thank you.

[Raj Subramaniam, President and Chief Executive Officer]

Thank you, Mike. In closing, I also want to thank our team members for their hard work and dedication as we build the world's smartest logistics network. We made tremendous progress on our transformation efforts in fiscal year '23 and the team is already moving with urgency as we enter fiscal year '24. We know there's significant opportunity ahead and I'm confident in our ability to continue to execute. Thank you very much.

[Operator]

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