FedEx Q3 2025 Earnings Report

Thank you, Jenny. I want to start by expressing my heartfelt gratitude to our team members. They delivered a strong peak within a compressed timeline and managed weather events ranging from unprecedented wildfires to severe winter storms. They accomplished this with a focus on safety and customer service, and I'm very appreciative of their dedication and success. Now turning to our Q3 results.

Revenue was up 2% growing on a year over year basis for the first time this fiscal year. Our DRIVE savings continue to build sequentially and we achieved $600,000,000 of savings in the quarter. Taken together, these two factors enabled us to achieve 12% adjusted operating income growth compared to last year. At Federal Express Corporation, we delivered strong year over year results with adjusted operating income up 17% despite significant headwinds from the expiration of the United States Postal Service contract and severe weather events. Weakness in the industrial economy continued to pressure our higher margin B2B volumes.

Similar to last quarter, this dynamic was most pronounced at freight where fewer shipments and lower rates continue to negatively affect our results, albeit to a lesser extent than last quarter. Considering our B2B mix, we are well positioned to capture strong incremental flow through when the industrial economy recovers. The current environment, however, is adding uncertainty to demand. We continue to work closely with our customers to help them adapt to this evolving market. Our flexible and unmatched global network, digital tools and data ecosystem enable us to quickly support our customers' needs.

With our vast data on cross border trade, we are uniquely positioned to create more value for our customers as they navigate change. This includes providing a streamlined clearance experience for customers while helping them comply with regulatory requirements. And through our automated processes, we can clear packages more quickly, better address improperly filed paperwork and reduce manual work to respond rapidly to our customers' needs while improving our operating efficiency. As a reminder, in terms of our revenue split by geography, we serve an extremely diversified customer base across the more than two twenty countries and territories. To put some numbers around this, taking our FY '20 '20 '5 revenue through the third quarter, nearly 75% comes from our U.

S. Domestic services. Another approximately 10% of our revenue comes from non U. S. Intra country or intra regional services.

And from a bilateral U. S. Trade perspective, our biggest single country exposure represents only about 2.5% of total revenue. Against this backdrop, we remain focused on what we can control. First, Q3 DRIVE savings continue to ramp and were in line with our expectations.

We expect to achieve our incremental target of $2,200,000,000 for FY 2025 and our total of $4,000,000,000 of our FY 2023 baseline. Second, we are creating a more flexible, efficient and intelligent network. As planned, we resumed Network two point zero conversions following peak. We have optimized five U. S.

Stations since the beginning of the calendar year and expect to optimize 45 more in Q4. We are on track to complete the rollout in Canada by the April. By the end of FY twenty twenty five, about 12% of our average daily global volume will flow through network two point zero optimized facilities. Third, Tricolor is driving better asset utilization as we improve aircraft density and better leverage our surface network. We have a broad range of KPIs that we are tracking to measure our progress.

We're especially pleased that on a year over year basis, payloads across our air network are up 9% with a 5% improvement in density. This is a key objective of our Tricolor operating model. Importantly, our progress is leading to positive flow through on revenue growth from international export freight. Fourth, our planned transition away from the U. S.

Postal Service contract is going well and we are continuing to remove costs associated with the expired contract. Fifth, our freight separation work is underway. John will share more details shortly. And lastly, we are providing our customers with the best value proposition in the industry. FedEx Ground and FedEx Home Delivery are faster to more locations than UPS Ground.

As we look to the fourth quarter, in light of the uncertain demand environment and higher than previously expected inflationary pressures on our cost base, we are lowering our FY '20 '20 '5 adjusted EPS outlook to $18 to $18.6 John will provide more color on the underlying assumptions. I'm excited about our transformation progress as we continue to integrate our networks, reduce our cost to serve and enable better performance. Technology remains a key facilitator of our transformation. Last quarter, I shared details on the encouraging improvement we are seeing in Europe. That trend continued in Q3 with our simplified technology platform driving both operational efficiency and a better experience for our customers.

This is also leading to the best European service levels we have seen in years, which is driving profitable share growth. We remain on track to achieve the $600,000,000 in total DRIVE savings from Europe by the end of this fiscal year. In support of our network transformation, last month, we acquired RouteSmart Technologies, a global leader in route optimization solutions. This acquisition allows us to bring in house a dynamic route mapping solution with the best in class algorithm. Our legacy ground business has used this technology with great success and we are now rolling it out globally.

This will be an important enabler for both Network two point zero and our global network transformation, helping our team members to work safer and smarter. In closing, I'm proud of the team for their continued success. We navigated many headwinds in this third quarter, including a volatile demand environment, the Postal Service contract expiration, severe weather events and inflation. Yet, we still delivered 60 basis points of adjusted operating margin expansion and a 12% improvement in adjusted operating income. Looking ahead, I'm confident that our transformation initiatives such as DRIVE, Network two point zero and Tricolor will create long term value for our stakeholders.

Now let me turn the call over to Brie.

Thanks, Brie, and good afternoon. Our Q3 performance demonstrates our team's strong commercial execution and our rigor in reducing structural costs to drive. On a year over year basis, we grew adjusted operating profit in Q3 by nearly $160,000,000 or 12% despite headwinds from the Postal Service contract expiration, pressures at FedEx Freight and the severe weather events Raj mentioned. As a result, we delivered adjusted EPS growth of 17%. Now walking through the dynamics of the quarter.

Commercial execution at Federal Express focused on the key priorities Brie mentioned and drove a $5.00 $9,000,000 increase in revenue, which resulted in strong flow through to the bottom line. Drive benefits of $600,000,000 continued to reduce our structural costs and supported our earnings growth. With respect to headwinds, Q3 was the first full quarter following the Postal Service contract expiration and as expected, this resulted in $180,000,000 headwind to adjusted operating income. This headwind will ease in Q4 as we continue to reduce costs associated with the contract. We also experienced severe weather headwinds of approximately $70,000,000 relative to last year.

And finally, soft U. S. Industrial economy continued to weigh on B2B demand and FedEx freight's weight per shipment. Now to providing more segment detail for Q3 on a year over year basis. At Federal Express, we grew adjusted operating income by $2.00 $6,000,000 driven by DRIVE savings, base yield improvement and increased U.

S. And international export demand. Our progress in Europe also contributed to adjusted operating income improvement in the quarter and I'm confident we'll continue this positive momentum in Q4 and FY 2026. At FedEx Freight, operating profit declined $80,000,000 year over year as lower fuel surcharges and the soft U. S.

Industrial economy continued to challenge the business. Base yield improvement as well as effective cost and headcount management partially offset these headwinds at freight. Moving to drive, as we committed, we continued to sequentially improve our drive savings and we expect even further savings in Q4. We delivered $600,000,000 of savings in Q3 compared to $390,000,000 in Q1 and May in Q2. Air and international savings of $245,000,000 benefited the quarter as we continue to optimize commercial line haul against aircraft capacity in our network.

Additionally, we optimized route productivity and pickup and delivery operations in our European network. We achieved G and A savings of $220,000,000 as we continue to rationalize vendor spend and increase back office efficiency. And at Surface, we achieved drive savings of $135,000,000 and all of these elements contributed to the total drive savings of $600,000,000 in the quarter. Turning to our outlook, I'm encouraged by both our sequential earnings momentum and year over year growth. That said, given the ongoing challenges in the global industrial economy, inflationary pressures and the uncertainty surrounding global trade policies, we now project FY 'twenty five adjusted earnings per share to be in the range of $18 to $18.6 compared to our $19 to $20 prior range.

For Q4, we expect continued execution of our revenue quality strategy and further acceleration in drive savings to support sequential and year over year growth in adjusted operating income. We'll exit the fourth quarter by achieving our FY 2025 goal at an annualized dry run rate north of $2,200,000,000 We expect headwinds from FedEx Freight to continue in Q4, but forecast some moderation on a year over year basis. Turning now to our latest full year adjusted operating income bridge. This shows the year over year operating profit elements embedded in our revised outlook. This bridge now reflects adjusted operating profit of $6,200,000,000 equivalent to $18.3 of adjusted EPS.

For revenue net of cost, we now expect a $1,100,000,000 headwind, which is $400,000,000 above our prior forecast. This is a result of revised second half assumptions for revenue and inflation. We now project a $400,000,000 headwind from international export yield pressure. The 100,000,000 increase is a result of base yield pressure, particularly in international economy and greater than previously expected demand for our lower yielding deferred service offerings. We still expect a $300,000,000 headwind from two fewer operating days in Q1 and Q4.

And lastly, we now anticipate a $400,000,000 impact from the expiration of the U. S. Postal Service contract, which is an improvement of $100,000,000 from our prior guidance due to our ability to swiftly eliminate contract related costs. As I mentioned, we also expect to see our 2,200,000,000 in expected drive savings for FY 'twenty five, which is offsetting these headwinds. At the midpoint of our revised FY 'twenty five outlook, we're now assuming 3% adjusted EPS growth on flat to slightly down revenue year over year.

Overall, our revenue in Q3 and expectation for Q4 are softer than previously anticipated with weakness coming primarily from B2B and priority service. This further pressures our bottom line. In addition, inflationary pressures on our cost base are expected to be higher than planned, further reducing our full year outlook. Moving to capital allocation, we continue to significantly reduce capital intensity while returning capital to shareholders. We completed approximately $500,000,000 in share repurchases in Q3, bringing the year to date number to $2,500,000,000 our target for the full year.

And including our dividend, we're on track to return 3,800,000,000 to shareholders in FY 'twenty five. In Q3, capital expenditures were $997,000,000 and our planned FY 'twenty five CapEx is now down to $4,900,000,000 a $300,000,000 decline compared to last year's $5,200,000,000 supporting strong free cash flow and shareholder returns. From a fleet standpoint, we recently reached agreements to purchase eight new Boeing seven seventy seven freighter aircraft and two used seven seventy seven freighters, which will be phased in during calendar years 'twenty six and 'twenty seven. These modern and fuel efficient aircraft were purchased at attractive prices and will help us manage our fleet for the long term while still upholding our FY 'twenty six commitment to approximately $1,000,000,000 of aircraft CapEx. Given that these new planes are highly efficient and will retire our older more maintenance intensive fleet over time, I'm confident that aircraft CapEx in the immediate years beyond FY 'twenty six will remain in the area of $1,000,000,000 We've continued to manage and rationalize the size of our jet fleet, including retiring some of our older aircraft over the last several years.

This is consistent with our go forward strategy to prioritize revenue quality and grow in the premium segments of the market. We've retired 20 MB-11s over the past three years and now expect to retire the remainder of the MB-eleven fleet by the end of FY32 versus our prior FY28 target. This extension of some of these aircraft will help us ensure network flexibility while minimizing aircraft CapEx. In December, we shared our plans to fully separate FedEx Freight. Since our December announcement, we've set up a separation management office and established a cross functional team to ensure a smooth transition, and we're making progress on all fronts.

In anticipation of the separation, last month, we completed a very successful $16,000,000,000 debt exchange offer and consent solicitation. This will create more flexibility for both companies' capital structures as we prepare for the separation, which will come in the form of a tax efficient spin off. As our separation management office continues to advance our spin related work, it's business as usual for our other team members and all our customers. At Freight, this includes the same unwavering focus on safety and disciplined approach on revenue quality, network utilization and operational efficiency that has driven the business's success in recent years. In conclusion, I remain confident in our long term ability to continue increasing shareholder returns, and I'm committed to ensuring that we unlock the value that I know is embedded in our business.

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

Hi, Risha. Welcome to the call. From a de minimis perspective, I think the most important thing to note is that we are very ready from an operational capability perspective. Our clearance teams around the world have made the necessary changes. We are working with customers.

Obviously, this is probably the largest impact would be customers coming out of the Asia market. And so from an operational perspective, we feel very ready to execute the necessary change. In addition to that, I think it's really important to remember that we have insight around the world into clearance data. And so we're working very closely with our customers to be able to prepare themselves for any change, whether it's de minimis or change in market due to tariff. And so we're working very closely with this from a Q4 perspective and an outlook on revenue and volume.

You know, our focus really is that the majority of the volumes in the back half of this year will look a lot like Q3. There's a couple of exceptions that I want to note is that we look at those volume trends. December obviously was a very strong month for us. So really January through May look similar. In Q4, as we head into Q4 and we think about revenue and volume outlook, it's also important to remember that Q4 has one less operating day year over year.

And so that's really how I'm thinking about the back half of the year, but from a de minimis perspective, we're ready to help our customers through any change.

Yes. Thank you, David. Firstly, our we are pleased with our how this Network two point zero rollout is going on and is doing it at thoughtful and a calculated pace. As they said, we have integrated under the Network two point zero model. We have maintained solid service levels, while still achieving our goal of a 10% reduction in our our P and D costs.

By the end of fiscal twenty five, as we talked about, 12% of the total volume flowing through network to auto will be flowing through these network to auto facilities. And by the end of FY twenty six, we expect that number to be about 40%. And then also, Network two point zero represents a significant reduction in our surface capacity over the years to come. So yes, we are, you know, quite pleased with how this is going. We have a terrific team, that, you know, for every rollout, we take the learnings and apply it to the next one and the next one and so once we get better going forward, the team has done a really remarkable job and I think more to come as we in FY 'twenty six.

Thank you.

Hi, Chris. I'll start and then turn it over to John if he has any additional color. I think to John's point is that right now we are being very prudent in our growth strategy as we see the market come back from a B2B demand perspective, we are very well positioned to capture that growth. The flow through, and the team's ability to capture incremental profit on that volume, we feel very confident. We do anticipate from a margin perspective that Q4 will be strong for us.

We will see sequential improvement, in revenue at the freight division. It will still be down year over year from a revenue perspective, but I'm anticipating quite a good margin in Q4 and that will then, be similar in FY 'twenty '6.

Thanks for the question, Brandon. From an outlook perspective, we think that we have given you a very prudent forecast for the fourth quarter and that this incorporates the feedback that we've had from our customers around the world. I would say that from a feedback perspective, I think first the number one thing that we keep getting asked is, has there been a pull forward? We did not see any significant pull forward in Q3. We did see a little volatility in APAC kind of at the February, early March, but for the most part a pull forward is really hard.

So we have not seen that actually in all the sales calls that I've done over the last ninety days. I've actually only met one customer who attempted it and they regretted it because they ended up storing some excess inventory. As far as kind of how customers are planning, we're having a lot of conversation about being able to move the network as they require. And of course, we are able to do that. We are looking at making sure all of our pricing tools are very dynamic.

We've been very pleased with that. So from our ability to respond to customers, most customers have not made any major changes to date because it's really quite difficult to be able to set up additional inventory in another country or move manufacturing. These are things that happen over months and years, not over weeks. I would say to the point on inflation that we are talking to a lot of customers who are anticipating that they will increase prices or already have. So systematically, that is one conversation that we've heard a lot from.

I don't know, Raj, John, if you want to add anything.

Thanks for the question, Daniel. So I think a couple of things. First, from, a market and a pricing environment perspective, it's always competitive, but it's been rational. And honestly, I think if anything, we've seen improvement in the environment throughout the fiscal year. I was really pleased with our demand surcharge capture in December.

I've also been very pleased out of the gate with our GRI capture, which was 5.9%. So from a pricing perspective, I feel pretty good. You said something about trade down. I really want to correct that a bit. When we looked at, first of all, all of our yields, and I think it's really important to look at this.

When you look at the individual products, I'm quite pleased with the yield growth overall. Domestic priority yield is up. IP yield is up. When you look at the ground segment, both ground commercial, as well as ground home delivery are up. What we are simply seeing is that the demand for deferred volume is outpacing the growth for priority.

In addition to that, the team has done an outstanding job of capturing that deferred growth, both internationally as well as domestically. I think the best proof point that I can give you is the 17% improvement in margin in the quarter at SEC that really does show that not only did we capture the deferred domestically, we captured it internationally. So we're doing a job of managing each product. And then when there is a deferred demand, it's important that we capture it in the right product because as we optimize our network and implement our transformation, whether it's Network two point zero, whether it's Europe, whether it's Tricolor, we are building the right cost structure with the right transit for those deferred products. So it's not been a shift.

It really is just about the deferred growth growing faster.

Okay. I'll take the first two and, I'll let my boss take the third one. From a deferred growth from our ground portfolio in the past quarter and actually throughout the year, our FedEx ground economy product has been driving that residential growth. Actually it's been a really good news story for FedEx. First of all, our ground economy product is incredibly competitive.

The team does a really good job from a transit perspective. Every single ground economy, package also has picture proof of delivery, which we've just had a tremendous response from. And of course the product also has some of the weekend advantage, not all of the weekend advantage that home delivery does, but some of the weekend advantage. So it's a very competitive product. What we have seen as we have taken share through FedEx Ground Economy this year is first of all, we're really pleased with the yields that we're getting with that.

In addition to, and what, you know, I'm so proud of the sales team is if you look at the incremental volume that we have taken on this year, every FedEx Ground, package comes with two other packages domestically and the revenue is one to four. So for every dollar we bring in from a FedEx Ground economy, we're getting $4 of domestic revenue. We're really pleased with that. That is very specific to the new customers we've acquired this year, but we're really pleased with that. And then again, I think we're capturing it.

Is it because of some of the changes, in the market? That certainly has helped, but honestly, I think it's about our value proposition being the strongest in the market.

So, Jason, I'll start with the LTL. I think it's all the factors we talked about is why we have confidence in our LTL business, the expanded sales force, the improved service, the back office focus. And it's I think an important note to to mention, even though we've set up the separation management office, that office is charged with really two work streams: one, continue to improve the business today as well as prepare for the future separation tomorrow. So all those reasons factor into why we have confidence in that growth.

Sure. Let me start with the second part. I've got a lot of positivity for Europe. When I look at the ability to grow and I think we've mentioned it before, the European division, when we look at their so from a momentum perspective, I am really pleased. And of course, the economy in Europe is not helping that team and it's much more difficult to take profitable market share in a down economy, but that's exactly what the team is doing.

How are they doing it? Service has been sequentially better quarter after quarter. Huge shout out to Wouter and the team over in Europe. Productivity is also improving and so we're seeing great flow through, which allows that flywheel to continue. So from a Europe perspective, we do have upside opportunities still, some work we have to do in that region.

There's no doubt about it. But we are really pleased with the fiscal year that team is having. And I should also say they've done a great job on intercontinental out of Europe as well as across Europe. And then from a deferred perspective to your point, yes, there has been some trade down, but again, the majority of the deferred parcel volume that we are seeing is incremental customer. That's new customer acquisition, which we're really pleased with.

From a pricing perspective, as I mentioned, when we look at our discipline, we continue to be the market leader. So I look at each one of those products and are we moving them forward? As I just talked about, when you look at the premium segment, we're making sure we're not discounting the premium parcels to capture share. You can see that, that we are getting yield improvement. We're being very disciplined on surcharges.

I talk about that a lot because it's really important. We do the best job in the market on large package. We are the only, versus our primary competitor, we go to all of the rural markets in the country. And so those are helping get a disproportionate margin on some of those harder to handle packages. So surcharges are really important.

And I do think that we are going to start to see as we move into FY '26, some lapping of some of the pressure that we have seen on base. It won't be all the way through in the front half of FY '26, just given the length of our contracts, but we are certainly seeing improvement in the pricing market.

Thank you. Well, I'll just say Ravi that, you know, the majority of our export volumes are linked to B2B volumes and a minority of our revenue base on export lanes are covered under the de minimis exemption. And, the and of course, we are just pleased with the progress we're making in Europe. The $600,000,000 of DRIVE savings are in FY this fiscal year and we expect to see more of that in the next year.

Thank you, Ari. When we spoke about this a couple of years ago, we had obviously had a different expectation on where the revenue is going to be. But our goals, if you remember, were improve operating margin, improve our term invested capital. And we have accomplished those. The fact that we have done it in an environment where the revenues now actually came down is I think is extraordinarily impressive.

Who would have thought that the industrial production would be down 24 over twenty five months in the last twenty five months or even you know it's just it's that was not definitely factored in but the fact that the work that we have done to make sure that our structural costs are reduced and that when we see a turn back and we will, on the industrial environment then there is a significant leverage that exists in our business. At the same time, we have also now transformed our networks And because of it's not easy to do that, but we have, you know, we are in the process of doing that through tricolor network two point zero, the work that we are doing in Europe and other projects that then allows us to reduce the overall cost to serve, for some of the other segments of the market. International air freight is a classic case. So we now have an opportunity not only to you know grow and the industrial economy comes back but now we have an opportunity to profitably grow in new segments of the market. So those combination of it is what gives me a lot of confidence as we go forward.