Fedex Corp (FDX) — Q3 2022 Earnings Call Transcript

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 fedex.com. This call is being streamed from our website where the replay will be available for about 1 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 our Safe Harbor provisions of the Private Securities Litigation Reform Act. Certain statements in this conference call, such as projections regarding future performance, may be 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 COO; Mike Lenz, Executive Vice President and CFO; and Brie Carere, Executive VP, Chief Marketing and Communications Officer. And now Raj will share his views on the quarter.

Thank you, Mickey, and good afternoon, everybody. First and foremost, our thoughts are with those affected by the ongoing violence in Ukraine. The safety of our team members in Ukraine is our utmost priority, and we are providing them with financial assistance and various resources for support. We have suspended all services in Ukraine, Russia, and Belarus. Additionally, we are helping to move relief to Ukraine, and we have provided more than $1.5 million in humanitarian aid. Turning to Q3. Execution of our strategies resulted in substantially higher operating income for the quarter as Team FedEx delivered yet another outstanding peak season. December 2021 was our most profitable December in FedEx history. Our ability to handle the influx of packages was years in the making as we've taken deliberate steps to enhance our unparalleled network in support of customers large and small. We have fundamentally changed our performance as we handled increased e-commerce volume during peak and set a new precedent for peak seasons moving forward. Having said that, we are laser-focused on improving our margins. You'll hear us talk more about this today and then more specifically at our upcoming Investor Day. Even with the successful execution of peak, the new year brought new challenges, mostly driven by Omicron. This affected our business in 2 ways: first, we experienced staffing shortages particularly in our air operations. In January alone, the absentee rate of our crew due to Omicron was over 15%, which caused significant flight disruptions. Second, our customers experienced Omicron-driven staffing shortages, which reduced demand for our services, especially in U.S. domestic and European markets. Both of those factors resulted in softer-than-expected volume levels, especially in January. We estimate the effect of Omicron-driven volume softness in our Q3 results was approximately $350 million. While it was significant, it was also temporary, and we have seen volume rebound from January levels. Even with these challenges, FedEx Express delivered strong adjusted operating income growth of 27% year-over-year. Speaking of the Express team, we announced that after nearly 40 years of distinguished service, Don Colleran, President and CEO of FedEx Express will retire later this year and named Richard Smith, current Executive Vice President of Global Support and Regional President of Americas at FedEx Express, as his successor. We'll have much more to say about Don and his countless contributions to the business during our call in June. FedEx Freight once again delivered strong results with third quarter operating income nearly tripling year-over-year, driven by a continued focus on revenue quality. Turning to FedEx Ground. Operating costs continue to be challenged by the competitive labor environment now primarily manifesting in increased labor rates. We estimate the total impact of approximately $210 million at Ground in the third quarter, which is significantly lower than what we saw in Q1 and Q2 as we have seen substantial improvement in labor availability post peak. With the stabilization in the labor environment, I'm pleased to share that we have successfully unwound network adjustments that were necessary to provide service but cost inefficiencies. Staffing levels and the rapid acceleration in labor costs have stabilized and our network is operating at normal levels. Despite improvement in the labor headwind, volume levels in Q3 were softer than we had previously forecasted in part due to Omicron surge slowing customer demand. As such, we expect our second half Ground margins will be lower than our previous expectations and not reach double digits. Over the years, FedEx Ground has built a strong foundation to serve B2B and small and medium customers with an unmatched value proposition. As a result, we have grown market share in these segments and they remain strong priorities for the future. And then more than 3 years ago, we built upon this foundation and embarked on a strategy that positioned FedEx squarely in the center of the fast-growing e-commerce market with a differentiated portfolio and a diversified customer base. This included a period of strategically investing in our network to meet growing market demand. Let me note here that this strategy is different than what our primary competitor has pursued. By building on our current base of business and making those prior investments in our network to facilitate growth, we are in a position to generate improved operating profit and margins. We saw this potential in our financial results for December prior to the surge of Omicron. And moving forward, our financial performance will be further enhanced by maximizing existing assets, improving capital utilization and leveraging technologies that facilitate optimization of our existing physical capacity and staffing. As we prepare to close fiscal year '22, permit me a moment to share what's on the horizon for FedEx as we continue to focus on margin expansion and shareholder return. In addition to the opportunity to enhance performance at Ground that I just discussed, we have other levers for profitable growth, which include: number one, driving improved results in Europe; number two, increasing collaboration and efficiency to optimize our networks, lower our cost to serve and enhance return on capital; and number three, unlocking new value through digital innovation. Of course, we'll do this in an environment of strong revenue quality management. Our International business, particularly Europe, remains a big profit opportunity. Air network integration remains on track for the end of the month to complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks, both in the air and on the road. Paris CDG airport will serve as the main hub for all European and intercontinental flights. Liege will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth. Our expanded collaboration across operating companies will utilize our air and ground networks in a smarter and more calculated manner. For example, FedEx Freight trucks have traveled more than 7 million miles while operating on behalf of FedEx Ground this fiscal year. FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched more than 36,000 times. We'll continue to comprehensively look at all our assets in our network to put the right package in the right network and the right cost to serve. Additionally, we are unlocking value through digital innovation, our accelerated integration of data-driven technologies that will drive increased productivity in our linehaul and dock operations as well as in the last mile. Enhanced sortation technology will be operational at FedEx Ground in hundreds of facilities as we speak. It will increase upstream efficiencies, enabling managers to better balance planned sortation operations thereby unlocking key capacity. For example, during Cyber Week, this technology helped keep 1.9 million Ground economy packages out of constrained sorts. We're also modernizing the planning and staffing of our dock operations as well as the systems, training and technology that maximizes productivity on every sort. One such example is a recently rolled out package handler scheduling technology that will help ensure the right staffing levels for every sort and every facility across the Ground network. This will improve dock productivity. And when combined with a focus on employee retention, it will enable us to significantly reduce the cost of turnover and strategically target recruiting spend when and where necessary. For last mile, we continue to improve upon the optimization technology already implemented to enable service providers to make real-time decisions that enhance their business' daily efficiency. These ongoing investments in automation and technology have helped FedEx build the most flexible and responsive network in the industry and will enable us to improve our margins. In closing, we have the networks, the strategy and the right team in place as we deliver financial returns and drive shareholder value for years to come. With that, let me turn it over to Brie.

Thank you, Raj. Good afternoon, everyone. Several macroeconomic forces, including the tragic conflict in Ukraine, uncertainty around the pandemic, a tight labor market, supply chain disruptions, high energy prices and inflationary pressure have dampened the current GDP outlook globally and for the United States. Last week, we lowered our economic outlook. U.S. GDP is now expected to increase 3.4% in calendar year 2022, revised down from 3.7%, and our outlook is 2.3% in calendar year 2023, with consumer spending tilting towards services and B2B growth supported by inventory rebuilding. Global GDP growth is expected to be 3.5% in calendar year 2022, previously 4.1%, and it will be 3.1% in calendar year 2023. Growth will be driven by the release of pent-up demand for services while investment demand and inventory restocking support global manufacturing and trade. Given the tremendous fluidity of the macroeconomic environment, we will continue to update our outlook. Our teams are ready to adjust plans, as required, to drive margin improvement despite the dynamic environment in which we operate. With fuel prices increasing around the world, today, we announced a fuel surcharge increase effective April 4 for FedEx Express, Ground and Freight. Additional details can be found on fedex.com. The change in economic outlook does not change our confidence that e-commerce will continue to drive strong parcel market growth. We believe the e-commerce growth rate in the United States will be in the mid- to high single digits for the next 3 to 4 years. We will continue to build differentiated value propositions to achieve market-leading pricing in all our customer segments, including e-commerce, our small and medium customers and our commercial B2B business. We are very pleased with the results of our revenue quality strategy and know we have a great opportunity to increase the flow-through to margin expansion. In the third quarter, revenue growth was 10% year-over-year, with double-digit yield improvement for FedEx Express and FedEx Freight, close behind with FedEx Ground at 9% year-over-year yield improvement. In the United States, our package revenue grew 9% in Q3 on strong yield improvement of 10%. We executed on our peak pricing strategy in the month of December, delivering more than $250 million in peak surcharge revenue. Softness in parcel volumes came predominantly from constraining FedEx Ground economy and the effects of Omicron on both our network and on our customers. The focus on revenue quality and profitable share growth drove outstanding results for FedEx Freight this quarter. For the quarter, revenue increased 23% year-over-year, driven by a 19% increase in revenue per shipment. Additionally, FedEx Freight Direct continues to gain great momentum as an e-commerce solution for heavy bulky items with phenomenal growth in Q3 year-over-year. Our international businesses are navigating a dynamic environment. Capacity constraints continue to be a reality. At this point, valet capacity on Trans-Atlantic passenger airlines is expected to recover faster than Trans-Pacific. Passenger airline capacity is not expected to fully recover to pre-COVID levels until 2024 or even later across our largest global trade lanes. Scarce capacity on international lanes and strong demand out of Asia is resulting in a continued favorable pricing environment. With the completion of our integrated air network at the end of this month, we have 1 European air network and 1 road network in and out of Europe. Our international portfolio of services contains the best European road network, the broadest U.S. next-day coverage and a combined parcel and freight offering that no one else in the market has. As a result of the integration, we will be able to offer improved transit times, earlier delivery and later pickup services to more customers in more locations. Seven new countries will now be connected on a next-day basis within Europe, while 14 countries will be expanding our new delivery coverage. In several countries, this will be the first time we have introduced next-day service to the rest of Europe. We will leverage the expanded European portfolio to improve international profitability, drive revenue growth and gain market share. In addition to the improvements in our European value proposition, we have made significant strides to enhance our digital solutions as well. In January, we enhanced our tracking service based on an advanced machine learning and artificial intelligence model developed by FedEx DataWorks. This new experience delivers greater estimated delivery date accuracy, including updates for early or delayed shipments through all tracking channels. This improves both the shipper and the recipient experience and it will reduce calls to customer service. Additionally, our new modernized FedEx Ship Manager, which is our online shipping application, has now been rolled out in more than 153 countries. In January, we began introducing customers to it in the United States and Canada. FedEx Ship Manager is the primary shipping application for our small and medium customer segment. We believe a market-leading digital portfolio will enable FedEx to continue to take market share in this very profitable segment. In summary, we remain optimistic about Q4 and beyond, and we'll continue to deliver on our market-leading value proposition.

Thank you, Brie, and good afternoon, everyone. After a strong start to the third quarter with the most profitable December in company history, January was significantly influenced by the rapid spread of the Omicron variant and its negative effect on our operations and the macro environment. These challenges subsided during February, resulting in third quarter adjusted operating income of $1.5 billion, up 37% year-over-year on an adjusted basis. There are a number of factors influencing our third quarter results for both this year and last year that I will cover. As Raj explained the effects on our operations, I will give further context for the financial implications. First, labor market conditions, although much improved, once again had a significant effect on our results at an estimated $350 million year-over-year, which was primarily experienced at Ground. For the third quarter, that was primarily due to higher rates for both purchase transportation and wages. Labor availability-driven network inefficiencies were significantly less of a factor in the third quarter compared to earlier in the year. The implications from the Omicron variant surge reduced third quarter operating income by an estimated $350 million, predominantly at Express, as it influenced customer demand and pressured our operations, resulting in constrained capacity, network disruptions and lower volumes and revenue. The third quarter had favorable year-over-year comparisons for variable compensation of approximately $380 million, including the one-time Express hourly bonus last year and significantly less impactful winter weather that netted to $310 million. With that overview of the consolidated results of the third quarter, I'll turn to the highlights for each of our transportation segments. Ground reported a 10% increase in revenue year-over-year, with operating income down approximately $60 million and an operating margin at 7.3%. While pressures from constrained labor markets began subsiding, the effect was still significant at an estimated $210 million year-over-year, predominantly due to the higher purchase transportation and wage rates. In addition, our volume was softer than expected due to the Omicron variant surge slowing customer demand. A 9% yield improvement partially offset these headwinds, and our teams remain very focused on improving Ground performance, as Raj outlined earlier. Express adjusted operating income increased by 27% year-over-year, driven by higher yields and a net fuel benefit, with adjusted operating margin increasing by 100 basis points to 5.8%. Express results also benefited in the third quarter from $285 million of lower variable compensation as well as much less severe winter weather. The strong results were partially offset by the headwinds I mentioned earlier, with the Omicron surge having the largest effect, especially during January, of an estimated $240 million. Team member absences primarily among our pilots severely disrupted operations, requiring many flight cancellations and further constraining capacity. Additionally, during this time, the Omicron surge reduced customer demand in many parts of the world. Freight had another outstanding quarter, delivering an operating margin of 15%, 850 basis points higher year-over-year and revenue for the third quarter increased 23% with operating income up over 180% despite the pressures from higher purchase transportation rates and wages. And for the first time in Freight's history, they realized sequential operating income and operating margin improvement from the second quarter to the third quarter. This is all thanks to Freight's continued focus on revenue quality and profitable share growth. Turning to the balance sheet. We ended our quarter with $6.1 billion in cash and are targeting over $3 billion in adjusted free cash flow for fiscal 2022. As I emphasized last quarter, our stronger cash flow provides extensive flexibility as we continue to focus on balanced capital allocation. As such, I'm pleased to share the accelerated share repurchase program announced last quarter was completed during Q3 with 6.1 million shares delivered under the ASR agreement. Total repurchases during fiscal '22 are nearly 9 million shares or 3% of the shares outstanding at the beginning of the year. The decrease in outstanding shares resulting from the ASR benefited third quarter results by $0.06 per diluted share. Also during the quarter, we made a $250 million voluntary contribution to our U.S. pension plan and have funded $500 million year-to-date. Now turning to what's ahead. We are affirming our full year adjusted EPS range at $20.50 to $21.50. The operating and business environment uncertainty I mentioned in December did materialize to a greater degree than anticipated during Q3, but we have navigated those challenges and project a solid finish to our fiscal year. Labor-related network and efficiency effects have diminished and the wage rate component should become less of a headwind as we lap the onset of labor rate increases in the fourth quarter. Lastly, variable compensation expense will be a tailwind as it was in Q3. Turning to capital spending. We have lowered our FY '22 capital spending forecast from $7.2 billion to $7 billion. Much of the change is driven by extended timelines resulting from supply chain considerations. While we are still developing our FY '23 plans, our focus remains on lowering our capital intensity while investing in strategic initiatives to drive returns. We are highly focused on ensuring our capital investments generate returns to drive further growth in earnings and cash flows. Lastly, our projection for the full year effective tax rate is now 22% to 23%, prior to the mark-to-market retirement plan adjustments. While we are confident in our ability to deliver a strong fourth quarter, uncertainty remains across many fronts, including additional pandemic developments, the labor market, inflation, high energy prices and further geopolitical risk and the potential effects on the pace and timing of global economic activity. We continue to monitor these trends and adjust accordingly. With that, we are all very much looking forward to sharing additional background in our upcoming investor meeting on June 28 and 29 in Memphis. Mickey and the Investor Relations team will soon provide specifics on logistics, and now we will be happy to address your questions.

Thank you for the question. I wanted to discuss Ground margins and your expectations for fiscal '22. Henry, this may be a longer-term inquiry for you. Since 2013, Ground revenues have increased by $17 billion, but profits have only risen by $400 million, resulting in a contribution margin of just 2.5%. Could you explain the plan to change this long-term trend? It appears that for the first time in a while, you are prepared to present a long-term strategy to enhance Ground margins. Can you provide more details on how you plan to achieve this? What specific actions will you take to reverse this trend? Additionally, could you set some targets related to the upcoming fiscal year?

Thank you for the question. I'll address it broadly and then Mike will discuss specifics. We are highly focused on enhancing our financial performance at FedEx Ground. To start, the CEO of FedEx Ground is John Smith, who previously excelled at FedEx Freight, and we are already noticing the benefits of his leadership. We anticipate that John and his team will continue to drive performance going forward. Regarding FedEx Ground, we manage it as part of a larger portfolio of operating companies, and three years ago, we made a determined decision to invest in capacity and e-commerce. We anticipated market trends and adjusted our strategies accordingly. If we look back at the history of FedEx Ground, it dates back to the acquisition of RPS, where we initiated home delivery and have since intensified our focus on e-commerce. There have been periods where we needed to invest while collaborating with our customers and retailers to foster success in e-commerce, strengthening our strategic relationships. That investment phase is largely in the past; we are now focusing on improving revenue quality, ensuring the right packages are in the right network, and driving margins and growth moving forward. We will provide more details during our meeting in June, but this is our current focus.

No, Amit, the only thing I would add is that there was a question regarding fiscal year '22. I can say that for our current guidance, we expect our consolidated operating margins to increase in the fourth quarter. I won't provide specific segment projections, but generally, Ground margins are usually higher in the fourth quarter compared to the third quarter, and we anticipate the same this year.

Okay, great. I have another question about Ground. We've seen three consecutive quarters where cost inflation in Ground has significantly exceeded your revenue per package and yield growth. How confident are you that you can increase revenue per package ahead of cost per package moving forward, especially considering the rising inflationary pressures affecting the economy, which I'm sure impact your business too?

Thank you, Jack. We faced two specific issues related to labor. What we experienced last year was unexpected. The first issue was a lack of labor availability, which made it difficult to move some packages efficiently. The second issue was the increase in labor costs. We have resolved the inefficiencies, and our network has returned to normal. However, our current numbers reflect year-over-year growth in labor rates. We have addressed these challenges directly, and I believe they will provide us with a competitive advantage moving forward. Revenue quality management remains a key priority for us. The peak we experienced in December has given us insight into our potential financial performance. We are confident in our ability to manage this going forward. We had an unusual spike in fiscal year '22, but we believe we have laid the groundwork for future earnings growth, both in revenue and on both the top and bottom lines. Brie, would you like to add anything regarding revenue quality?

No, we have done a tremendous job. We talked about the 9% yield improvement from FedEx Ground this past quarter. As I've mentioned, we have repriced about 50% of our large customer contracts, which means we still have opportunities to continue that repricing. We are aware of the inflationary environment we are operating in, and we know we need to stay ahead of it. So, you can expect that as we approach next year's business plan and engage with our customers, you will see continued high yield improvement across all segments because it will be necessary to stay ahead of the current environment.

Jack, if I can say one other thing, we have a revenue management committee that meets every week. It is even more important now because of the inflationary environment. And the operations teams and the commercial teams are locked in, and we make decisions very, very dynamically and very, very quickly to deal with this.

Could you share your insights on the consumer? Brie, Raj, or Mike, have you noticed any signs of consumer weakness recently in the U.S., particularly considering the impact of Omicron? How do you view the role of consumer purchasing and goods buying in relation to the Ground business? If we experience a weaker consumer, will that complicate the process of improving Ground margins? I'm interested in hearing your thoughts on the consumer outlook in the near term.

Tom, thank you for that question, especially with the increase in inflation and the slight decline in consumer spending in February. Forecasting in this environment is challenging, but I want to express that the significant growth phase of e-commerce is behind us. Despite that, we remain confident in generating positive returns in the future, even with the expected mid-single-digit to mid- to high single-digit growth in e-commerce that Brie mentioned. Therefore, we are not relying on large consumer spending in our projections. Brie?

Yes, I would agree with that completely. As we talked about, we already have modified our economic outlook from a market forecast perspective. A couple of things: one, for this calendar year, we do expect B2B parcel market growth to be actually relatively healthy at 3%. Normally, it's around 2% in our market and that's for this year, we still see a lot of inventory replenishment. We also see strong requirements coming in from Asia, as I mentioned earlier. There's still just a backlog there, quite frankly. So the B2B is still going to be healthy for the year. From a B2C perspective, we have modified our long-term outlook. We're now projecting about 8.3% CAGR in an e-commerce market, that's to calendar year 2026. So historically, over the last couple of years, we had actually projected above 10%. So yes, we think consumer demand will be down. It is already, quite frankly, in our outlook for Q4. And as we look forward for next year, we think we can continue to take market share and have some profitable growth despite sort of a softer economic outlook.

I'm curious, you mentioned that the staffing and labor-related costs for the company were $350 million in the most recent quarter. How does that look for the fiscal fourth quarter? Also, regarding Ground, I believe you indicated it was $210 million as part of the $350 million. How do you see that progressing as we move into the fourth fiscal quarter?

Jordan, this is Mike. Look, so we went from like roughly $470 million in Q2, $350 million this quarter. I mean, I would put it in order of magnitude around $100 million or so based on what we are seeing here today. That's, again, principally the wage rate element of it, which really began to manifest in the May timeframe essentially, April, May timeframe.

Quick clarification then another question on Ground. Just making sure I understand, Raj, I think you said you wouldn't hit double digits on Ground margins for Maxar. I heard that the average for the back half of the year, so I guess, we won't see expansion in the fourth quarter. And then maybe taking a step back in terms of the ISP model on the Ground side. Just kind of curious, in this type of inflationary environment, do you see pressure? Does it kind of go back and maybe you open up contracts and do things differently with that piece of the business? Is that something that we need to think about beyond this year out into next year and beyond if inflationary pressures keep up? Or it's the kind of thing that would just sort of be normal course as we move forward.

Thank you, Chris. I'll let Mike answer the first question in a minute. But on the entrepreneurial business model with our contractors is a win-win scenario. It provides us the flexibility. As the market dynamics change, we remain committed to collaborating with those service providers and enable that when the lines of communication are open. So yes, we will work closely hand in hand to make sure that we are successful for FedEx and our contractors going forward.

Chris, nothing from what I said prior where we have consolidated operating margins. Will be up in Q4 and the Ground Q4 margin sequentially would be higher than Q3. But not going to go past in terms of the specific segment quarterly margin projections.

Could you provide a qualitative assessment of how the Omicron variant has affected volume growth in Express and Ground, particularly regarding the impact on volumes and average daily volumes?

Sure, happy to. Great question. When we look at the volume in Q3, we really have to break it down by month. So from a December perspective, we actually saw softer than anticipated volume for a couple of reasons. The first was FedEx Ground economy. We have been constraining that product to make sure we get the revenue quality that we require for the network. The second was we were absolutely focused on service and make sure that we had volume in the right places within the network. And then third was that we also saw a huge pull forward in early in November. Both retailers and, of course, the carriers were really pushing to get volume moving earlier in the peak season and actually it was quite successful. So overall, December was softer than anticipated for those 3 reasons. And when we got into January, we obviously saw a significant impact in volume in the Express network here in the United States but also in Europe. And then we did see some impact in January at FedEx Ground, but also we did have the FedEx Ground economy constrained growth impacts January because as you can imagine, the Ground economy product is heavily used for returns as well. So that was what was going on in December. In January, you saw Omicron but you also saw those other impacts in December and January. And then we got to February, we actually saw a rebound. So as Raj mentioned in his opening remarks, we actually saw quite a dramatic recovery from a volume perspective relative to January. And so that's sort of where we're at from a volume perspective.

So Mike, you've got a big range of earnings guidance for the year, 1 quarter left. Any thoughts on directionally where you think we should be shaking out within that range? And then I'll ask another on Ground margins. You guys operating, give or take, at an 8% margin. UPS is on its way to 12%. You guys used to be better. Is this structural? Is there a reason you can't get to those kinds of levels? And then any thoughts on this Ground contractor lawsuit?

All right, Scott. This is Mike. Talking about the range, look, certainly, it is the case that relative to where we were 3 months ago in a little different place in the range as the uncertainties manifested in a greater magnitude than we had anticipated. But I think we're quite proud of the fact that our guidance remains where we started the year at. And look, if you had told me at that time, we would have the most dramatic labor market shift in generations as well as another phase of the pandemic that resulted in case counts in the U. S. and Europe higher than any previous waves, we undoubtedly would have had a significantly wider range. So we feel that it is a great accomplishment of the team to be where we are with this. Lots of moving pieces and things change along the way within the scope and scale of what this enterprise is. And so we're looking forward to a strong finish to the fiscal year.

I want to give a big shoutout to our CFO for establishing the range at the start of the fiscal year despite everything that has happened since, and we are still within that range, which is fantastic. I've mentioned our positive interactions with our contractors, and it truly is a win-win situation that we will continue to develop. Communication lines are open; I've talked with John several times, and he and his team are in close contact. Regarding our potential with FedEx Ground, we certainly see opportunities, and we are focused on achieving those goals. John is the ideal leader to guide that team toward success.

I just want to go to the levers of growth. You talked about collaboration, increasing that collaboration to optimize the network, understanding it's early innings there. Just any color on the productivity you're seeing from some of those efforts? And then maybe as well as the potential chokepoints that you're seeing that might need to be addressed before that could accelerate further. Just any color.

Thank you for the question, Allison. The e-commerce market has indeed expanded, and within our networks, we now have the chance to optimize the significant traffic between them. We are actively working on this, but it's still early in the process. There is a considerable amount of work ahead, and we will provide additional insights when we meet in person in June. The opportunity here is substantial, and we are already making progress. It's also important to highlight what FedEx Freight is accomplishing, particularly in collaboration with both Ground and Express, and eventually with International. We will keep our focus on ensuring that the right package is placed in the appropriate network at the correct price. We'll share further details in June.

Raj, since the rest of the management team has announced call, maybe you can give us some insight into the appointment of Richard at Express. What was the process there for electing the next leader? And then what do you hope to get out of the leadership change in that large division?

Thank you, Brandon. Of course, we have a very set succession planning process where Don was in this role for 3 years. I knew that was going to be a finite time period of time. And so we were already working on the succession planning very carefully as we have done so with John in FedEx Ground, with Lance in FedEx Freight. Similarly, we have a process going on with Express. We've divided it into 3 groups, 3 mega-regions with Americas, Asia and Europe. And Richard is leading the Americas region. He was responsible for the vaccine distribution and also in the planning of our global network in this very interesting time that we've been through. So we are very confident that Richard is going to take the organization to the next level. Don has done a fantastic job of creating a unified culture and getting the right players in place. We have a great bench, and this is going to be terrific. Thank you.

Yes. You took down the midpoint of your multiyear restructuring spend in Europe but didn't change the benefit you expect to get from that. Can you talk a little bit about what drove that update in your expectations, and what the next steps could be in the Europe profit improvement plan as you get right at the point of discussing that with investors maybe next year?

Sure, Bascome. This is Mike. First, we did narrow the range of the expected cost of that program as we progressed. As you noted, we've discussed the charges as we recognize them. The benefits range remains unchanged, so we felt it was appropriate to narrow the range further down the process. That’s all on that. There are many things ahead concerning TNT, so I’ll have Raj elaborate on some upcoming events as well.

Yes. Thank you for the question, Bascome. The end of this month is very significant for us as we finalize the physical integration. Europe represents a substantial profit opportunity moving forward. Currently, FedEx operates 350 flights a week, covering 42 airports, while TNT runs 600 flights serving 59 airports. By merging, we will decrease the total flights to 825 but increase our reach to 72 airports. This means fewer flights and more airports, and the value proposition improves due to the availability of jets at the cross-time. This change will take effect in April. Our rationale for acquiring TNT remains strong, as we are addressing a gap in our portfolio by adding an intra-European deferred service. With this, we can provide services in and out of Europe at a lower cost. We've also introduced priority timed options, including noon and end-of-day service, which enhance our flexibility. Additionally, as Mike mentioned, we are achieving savings from back-office efficiencies. The CDG hub operates at 70,000 pieces per hour. I visited there two to three months ago and will return in May; it was impressive. We are confident that these developments will lead to better performance in Europe from this point forward. Thank you very much.

I have two questions. First, when you mention you're taking market share, could you provide more specific details about where that shift is occurring, either in terms of industry verticals or geographic locations? Secondly, can you discuss the role of robotics and automation in your facilities and how they might help reduce labor costs?

Sure. I'm happy to discuss our revenue growth strategy. Our objective is to strategically increase our market share in segments that value our network. Over the past couple of years, we have made significant improvements to our network and value proposition. In the small business sector, we have consistently gained market share over the years, and this year, our small business segment is growing faster than our large customer segment, which is encouraging. Compared to our main competitor, I still see opportunities for growth in both B2B and e-commerce. We're focused on a disciplined small business acquisition approach, acquiring customers directly rather than through mass platforms, and being selective with our partners to establish direct relationships with small customers. Our loyalty program is unique in the market, and we are effectively using earned discounts to bundle our parcel and LTL services, a strategy our primary competitor cannot implement. This year, we have seen small business growth outpace large business growth, mainly in the U.S., with similar strategies being rolled out in Europe and EMEA. We are optimistic about our market share opportunities there as well. Additionally, we have observed market growth in the APAC and EMEA regions, particularly with strong momentum in Asia and intercontinental e-commerce. Although we have not experienced as much success in Europe from a market share perspective, we are excited about the physical integration that will enhance our value proposition. We have some brand awareness efforts to complete, but I am optimistic about seeing significant progress in Europe next year. I hope this answers your question, and I'm happy to provide further details if needed.

I want to take a moment to acknowledge our commercial teams for their exceptional work in increasing market share and managing revenue quality, and we will continue to build on that. Regarding robotics, this is a crucial topic. Over the last year, the robotics field has evolved significantly due to advancements in AI and machine learning, presenting us with enormous opportunities. Many of our facilities are already automated, but there is more we can do. We are actively enhancing processes within our hubs to integrate robotics and collaborating with partners on autonomous vehicles. Our FedEx Roxo service for same-day delivery and partnerships with companies like Nuro exemplify this strategic direction, which could have significant impacts in the future. Thank you for the question.

Yes. Helane, this is Mike. It's unquestionably the case to amplify the point Raj made that you're seeing a tremendous amount of capital coming into the robotics space as a result of the labor market constraints that have been experienced worldwide. So that's really an opportunity. And certainly, when you are here to visit here in a few months, you'll get the opportunity to see, within our facilities, how that really works because that is where the bulk of the labor is deployed as the loading and unloading of the trailers there, particularly in the Ground facilities, given the investments we've made in automating all the sortation in that. So a very relevant point to raise.

I'd like to get back to the question on the improvement that you were seeing and marked throughout the network. Obviously, the global supply-demand equation has changed a lot with the recent events in Eastern Europe. So I think earlier, you were giving us a view more of the Omicron impact on domestic Express. Could you talk a little bit about what's going on globally as you move from February into March? I know Omicron impacted Europe, you mentioned. And now we've got a new version of COVID in Asia. What does the step-up look like on the international side? And how have the events in Eastern Europe affected global capacity?

Let me begin by noting that it's interesting how quickly Omicron has faded from our immediate concerns, even though it was a significant issue just a couple of months ago. Now, we face larger challenges, notably the tragic conflict in Europe which marks the first ground war of this scale in many years. The economic impact of this situation remains to be seen, particularly concerning rising fuel costs worldwide, which lead to increased inflation and potential economic slowdowns. The duration of these effects is unpredictable, and I won't speculate on that. We need to remain adaptable and responsive to these circumstances. We're carefully monitoring the situation in China, and our operations are nearly back to normal while demand remains strong. However, this is a rapidly changing environment. Currently, over 10% of our employees are working within a closed loop system, and I want to commend our team for their remarkable efforts in maintaining our operations. This situation continues to evolve, and we'll keep a close eye on developments. Brie, do you have anything to add?

No, not a whole lot more to add. As I've mentioned, global commercial capacity is still constrained. And as a result, right now, we have not seen an impact despite the high inflationary environment as we talked about some of the risks we see from a consumer perspective. Out of Asia, demand seems pretty high because of the current commercial capacity constraint, but also, as I mentioned, because inventory levels are still so low. So right now, demand looks good coming out of Asia. We're keeping an eye on the United States as well as in Europe. Right now, from a Europe perspective, we believe we still have some opportunities, as I talked about, to take share and that's our intent. So right now, we're feeling pretty good. But as Raj talked about, things can change and we will adapt as required to do so.

Just a clarification kind of on that last question. You discussed some of the Russian conflict, some indirect collateral issues. Could you please just give us a bit of a size of how much business Russia and Eastern Europe represents to you? And then just switching gears. Could you talk about sustainability of Freight margins? Obviously, you have been very strong for a long time now and look like it continues to have momentum. Should we continue to expect in the mid-teens or is that something that you would expect to change as we move through the rest of the calendar year?

Thank you, Scott. If I understood the first question correctly, regarding the three markets of Ukraine, Russia, and Belarus, the profit impact from those regions is not significant. If you have another question, I'm happy to address it. Regarding FedEx Freight, I'm very pleased with the progress we've made there, which has been years in the making. We are heavily focused on managing revenue quality and improving operational efficiency. Additionally, FedEx Freight is doing an excellent job in supporting other operating companies as needed. I believe this is a winning strategy, and we expect it to continue.

Thank you for your participation in FedEx Corporation's Third Quarter Earnings Conference Call. Please feel free to call anyone on the Investor Relations team if you have any additional questions about FedEx. Thank you very much. Bye.