FedEx Corporation (FDX) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Thank you for joining us for the 10:00 Central fireside session. We've got a very special presentation today. We're very fortunate to have the management team from FedEx Corporation with us here today in Nashville. Really looking forward to the discussion. I'd like to introduce the company for some introductory remarks, then we'll go into Q&A. So From FedEx, we've got FedEx's President and CEO, Raj Subramaniam, and the company's Chief Financial Officer, John Dietrich. So gentlemen, thank you for joining us here today. Steve Hughes, I want to turn the mic over to you for some opening statements here, and then we'll go into the presentation.

Thanks, Jack. Appreciate being here. It's always a pleasure to be at Stephen's, especially since you moved into Nashville, which is just up the road from our headquarters in Memphis. I'm here to do my best lawyer impression before Raj speaks. Certain statements made today such as projections regarding future performance may be considered forward-looking statements, 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, and refer to the Investor Relations portion of our website at fedex.com for a reconciliation of the non-GAAP financial measures discussed today. The guidance discussed today was effective as of September 20, 2023, the date of our Q1 earnings call. Nothing discussed today should be construed as reaffirming or disaffirming such guidance. With that, I will turn it over to the floor, Raj Subramaniam, our President and CEO.

Thank you, Steve, and thank you, Jack, for having us here and help skip a jump from Memphis to be here. So happy to be here in person and see some familiar and some new faces as we talked about the FedEx story. John and I have a few short remarks to open up today's conversation. And of course, and then we will open the floor to any questions that you may have. Let me just start with where we are today. We entered fiscal year '24 with strength and momentum. We delivered results ahead of expectations in a very dynamic environment. Amidst significant demand disruption, we delivered 200 basis points of adjusted margin improvement in Q1. This is a testament to the power of our transformation program we call DRIVE, and the FedEx team working collaboratively to implement structural cost reductions throughout the enterprise. We are now well on our way to transforming into the most efficient, flexible and intelligent global network. Despite market disruptions, we continued our focus on providing outstanding service for our customers. That's what FedEx is all about. We do this with innovative and data-driven solutions that further enhance the customer experience. And as such, we are well positioned as we enter this year's peak season with the fastest ground service in the industry. Now turning to Slide 4. DRIVE is fundamentally changing the way we work. Our approach to transforming the business and reducing costs is unlike anything that we have undertaken before. It does require us to work differently, through a more technology-enabled and data-driven approach. We, of course, start with the customer. We've always put at the center of everything we do. We've made significant investments in our surface network to build out our infrastructure and services to meet increased e-commerce demand over the last decade, and especially during the pandemic. Now, we are optimizing these assets, and enhancing our capabilities to make our surface network even more efficient in Q1. And in Q1, we reduced costs by $130 million in our Ground business. This is driven by lower third-party ground transportation rates, optimized rail usage, continued benefit from reduced Sunday coverage and consolidation of source. Our air network is one of the most complex and differentiated assets in the world. Through DRIVE, we are optimizing that network to be more flexible and better -- to be better able to adjust to market conditions. We're doing this through structural flight takedowns, more efficient capacity on certain flight paths and efficiencies at our hubs and sorts as you rightsize the capacity across the network. And finally, in G&A, we're making significant changes in how we approach procurement and functional excellence as well as how we deploy technology so that we are efficient, digitally led organization. Our digital DNA underpins our entire organization and allows our team members to serve customers even better at lower cost. Here, we expect cost savings to begin to ramp up in the second half of this fiscal year. Overall, for DRIVE, we have identified roughly $4 billion in value and savings from fiscal 2025, and we are well on our way to deliver our targeted $1.8 billion in structural cost benefits from DRIVE this fiscal year. Before handing it over to John, I want to share where we are focused as we move into the next phase of our transformation. In June 2024, FedEx Express, FedEx Ground and FedEx Services will consolidate into one company, Federal Express Corporation. The reorganization will reduce and optimize overhead streamline our go-to-market capabilities and improve our customer experience. The future of our company is digitally enabled Network 2.0. To date, we have implemented or announced Network 2.0 in several markets, including Alaska, Hawaii and Canada. As each market is different, we are continuously learning and tailoring the network to adapt to the characteristics unique to each region. These changes have been very thoughtfully executed as we work towards full implementation in 2027. Our unmatched physical network enables us to transport millions of packages a day around the world. These generate terabytes of data that contain invaluable insights about the global supply chain. We are focused on harnessing the power of this rich data to make supply chain smarter for everyone. As we go to the next phase of our transformation, I've given the team 3 specific challenges: to use data, to make our network grown efficient; make our customer experience better; and drive new profitable revenue streams through digital. I'm very confident we have the right strategy and the right team in place to create significant value in the future. With that, let me turn it over to John for his remarks. John?

Thank you, Raj, and thank you, Jack, for this opportunity. Good morning, everybody. I'm really excited to be here and to see so many of you in person. While I've only been in my new role a little over 3 months, I've done his with FedEx through my entire career. During that time, I've always admired what FedEx has built and the extraordinary culture it is established. It's really an honor for me to be part of this great team. I want to take this opportunity to share some thoughts on the priorities that will guide me and the finance organization as we move forward. First, we're committed to setting financial goals that reflect the significant opportunities before us to improve margins and financial returns. This will be enabled by the strategic initiatives that Raj discussed, including our DRIVE transformation, our migration to a unified organization and ultimately, the integration of Network 2.0. With respect to our capital priorities, we'll focus on maintaining a healthy balance sheet, returning cash to stockholders and reinvesting in the business with a focus on the highest returns. And finally, a guiding principle for me will be to have open and transparent communication with all key stakeholders, including our investors. I'll be working with our finance organization and the rest of the team to ensure we consistent progress towards the goals that Raj has outlined, and there will be greater accountability and visibility into our progress. Now turning to our fiscal year outlook on Slide 9. As an organization, we're focused on driving improved profitability, supported by our DRIVE initiatives and improved revenue quality. Based on our first quarter performance and our view of the rest of the year, we were pleased to have raised the low end of our full year adjusted earnings per share outlook by $0.50. In Q1, we exceeded expectations despite an uncertain demand environment. This was made possible by the activities we've talked about today and the we are executing in our DRIVE program, and we remain on track to deliver $1.8 billion in DRIVE savings in fiscal year 2024. While earnings are expected to improve in FY '24, we continue to see demand pressure across geographies as business conditions remain uncertain. Finally, before we open it up to Q&A, I wanted to reiterate our steadfast commitment to prudent capital allocation and stockholder returns. We're committed to lowering our capital spend through FY '25 and are planning for lower annual aircraft CapEx over time, which we expect to be approximately $1 billion in fiscal year'26. We continue to expect to achieve our target of less than 6.5% CapEx to revenue for fiscal year '25. And as we've previously communicated, we're standing behind our commitment to capital discipline by tying executive compensation to ROIC. Given our improved earnings, we're generating significant and improved cash flow. This is supporting our ability to enhance stockholder returns demonstrated by our completion of $500 million of accelerated share repurchase programs in Q1 and Q2 FY '24, respectively. Looking ahead, we expect to repurchase an additional $1 billion in common stock this fiscal year while we're also paying our dividend. So with that, Jack, I'll turn it over to you.

Okay. Great. Raj, John, thank you so much for that. And in terms of format here, what we're going to do is I've got some questions that I'm going to go through with Raj and John, and then we're going to have about 10 minutes or so at the end to open it up to the floor for some Q&A. So I'll be thinking about questions you'd like to ask. So maybe if we could pick up at the end with -- pick up with my first question with John, where you left it at the end, but I would love to get both of your perspective on this. In terms of just where we are with the macro. Obviously, it's an uncertain demand backdrop out there right now. No one really knows where we're headed from a demand perspective as we look forward over the next 12 months. But I would love to get your thoughts on what you're seeing currently across your various business lines and various geographies.

Well, Jack, let me give you a little bit of perspective here because I've been saying this for few months now and the trends that is underway actually reflects what we thought was going to happen. So first was that the industrial economy around the world was going to be slow and with different regions at different speeds. But nonetheless, the B2B stage was going to be slow. The second thing we talked about was that the consumer spending was going to shift more towards services than goods. And that's pretty much exactly what happened. Even though I have to say now that the balance between services and goods just seems to be stabilizing. And if we actually didn't know there was a pandemic and you brought 2019 and where we are in 2023 is roughly where we think it have been. So I think it's starting to stabilize. But having said that, consumer spending itself is probably going to sudden to weaken and they're spending more on services. And the third one was also an e-commerce resets. That means doing the pandemic e-commerce as a percentage of retail surge and then came right back to earth post the pandemic. And I think that's also started to stabilize now. And again, if you draw the picture between pre-pandemic and post-pandemic, you would just kind of where we would have been. So that's three. And then the inventory levels, I think the destocking phase is over, but we are at a place where the restocking phase is not begin yet. And so that's kind of -- we saw this coming and we said this -- talk about this for a few quarters now. And from our perspective, as the demand environment is going to remain uncertain, we focus on the things that we can control. So since we saw this early, we got going early and with structural cost reductions and drive and everything else. And that's the reason why we are able to turn in, despite revenue declines improved operating profit and margin performance year-over-year.

To that point, Raj, with your guidance that you updated recently, you took down your revenue forecast, but you're able to take up the bottom end of your EPS range as you are executing on what you can control. Can you talk a little bit about what made you more concerned about the macro due to lower your revenue outlook? And are you putting additional caution in there by what might come around the corner? Because I know, again, it's still very uncertain.

So let me make a couple of points here. And John, feel free to add to what to say here. Well, I think in the June quarter is what I gave a simple formula 1, 2, 3. 1%...

I think, that was to my question, actually.

Yes, that was your question. 1, 2, 3 is the lower end of the range at 1% revenue, 2% and 3%. And then in September, I updated it to minus 1, 0, 1, that is we were able to achieve the same kind of results with even lower expectations of revenue, which means that I had better confidence in the fact that how we are executing on our DRIVE initiative. So I feel very good about where we are with DRIVE and how far we're going. The demand environment, of course, remains uncertain. It's very difficult at this point to predict what the next week, month, year, quarter is going to be. So that's why for me, you got to think through like what are the structural things that we are doing that's going to help us come what may. And that's what -- with the moving forward on DRIVE, with the ability for us to now the things that we are working in Europe and turning that around launching of Network 2.0 and our digital initiatives, they are idiosyncratic to FedEx, and we will keep moving forward. The demand environment on a particular month or a quarter, we lesser have to deal with that.

Right.

Yes. Thank you, Raj. I agree with everything that you said. I think a couple of additional points as the main theme in the organization is control those things that are controllable. And that's been filtered through the entire organization. And one of the things that I found very attractive about this opportunity coming into this new role was the rigor behind DRIVE. A lot of detailed work project plans have been put in place with a tremendous amount of rigor to monitor and achieve our goals. And that ties in with some of the remarks in my opening statement about accountability. We have a number of different domains in each area of the business that report to management every other week. And we celebrate the successes. We keep a positive momentum on that. And it's one of the things that was exciting for me to become part of this organization is where they are in the evolution and execution of DRIVE and ultimately bringing the OpCos together.

Okay. That makes a lot of sense. And you guys are controlling what you can control, which is great. And it's been great to see that change.

And we just saw it a little bit earlier than other people...

That's right. You did. Absolutely. Maybe kind of thinking a little bit more closer in here with peak season. Thanksgiving next week. What are your expectations for peak season this year? We're hearing mixed things from different companies.

Well, I think, first of all, we are ready for peak. And the service is extraordinary any good. We have the fastest network in the Ground network in the industry, and our service levels are superb. And the -- we expect a moderate peak like we said in the last earnings call, the peaking -- regular peaking from the levels we are seeing pre-peak is what we should think about. I would say year-over-year, we'll be flat to moderate is what we're expecting, and we are ready for it.

Okay. As a transportation analyst, I spend a lot of time thinking about seasonality and how things are falling relative to normal seasonal patterns. And the last -- really, the last 4 years have been anything but normal from a CECL perspective. And then when you think about FedEx's story, in particular, you all have a lot of company-specific things that are going on here. When investors think about the normal seasonal cadence for FedEx in terms of earnings or profitability, are there any sort of unique puts and takes that we should be considering for this fiscal year?

Well, I think the seasonality should be -- were historically here, the only two things I will point out, and then John, you may want to jump in here, too, is that, one, the way Christmas Day falls on day of the week is different. So this -- I think we're going to have, I think, a couple of days of less operating days in environments, we have to deal with that. Secondly, about 4 years ago, I would say, we went into a different posture on revenue quality for peak. And I think that's working. And so that's going to stay consistent. It was very -- it was different from what we had done before that. So I think that for the hard work that we do during peak, we want to make sure that we deliver value to all our stakeholders. And so we're going to continue to do that. So, I don't know, John...

Yes. No. I guess what I would add is we're expecting seasonal trends to continue and Q3 perhaps being a little bit lighter. And I guess the other thing I would say is, as we look forward to the future and to the extent that volumes improve, we are well equipped to absorb and to react. And we saw some of that in Q1 when there were additional volumes that came our way on both Express, Ground and Freight. So we were able to adjust and deliver really exceptional service for our customers in light of that increased demand.

Okay. That's helpful. Raj, you mentioned revenue quality. That's a key topic that I get from investors -- pretty frequently here when we're thinking about the parcel space. Obviously, it's difficult, especially in a more challenging demand backdrop to maintain the revenue quality that you would like. There have been a number of reports here recently that the parcel market is becoming increasingly competitive. Could you maybe talk about what you're seeing in terms of the ability to maintain the revenue quality that you're targeting within your business?

Well, the foundation to the answer begins with our value proposition. Yes, so as I mentioned quickly before, we have the fastest Grounds network. And our service, actually, if you start by day of the week, towards the end of the week, it becomes substantially superior because you're the only company with 98% Saturday service and 50% Sunday delivery. So for e-commerce customers. It's just -- I think we're significantly superior as it gets to the end of the week. So we are shooting at higher rim basket versus our competition. And by the way, our service -- so as the service standards are better and the service levels are comparable or better. So it starts there. Then our digital solutions are starting to get really, really powerful. And as I said, we have built this digital twin. We're becoming much, much, much more proactive in our solutions versus of being reactive. And we are in more of a solutioning mode versus a transactional model with our customers. So that's happening. And the -- if you look at our revenue quality efforts and just the fact the way we deal with our revenue management committee, our pricing systems and so on and so forth. We have done an incredible amount of work over the years to be very sophisticated in this area. All of this has resulted in the fact that we have that premium overall competition in revenue quality quarter-over-quarter-over-quarter. And we expect that to continue. That's our focus. We do a very, very good job for our customers, and we expect to get value for that.

There's been a lot of disruption in the market this year across a couple of your different business lines that's benefited for FedEx. First in FedEx Freight with the bankruptcy of Yellow and then with the labor negotiations at your largest competitor. You were able to capture market share. Your competitor within the parcel market is looking to win that share back. How do you balance your desire to maintain that market share with also the focus on revenue quality.

Yes, sure. So I think, honestly, when we were preparing for this, we were very clear. We did not want to be opportunistic at all. We wanted to be strategic about this. And our first and most important priority was to protect our existing customers. That was by far the important priority. Then we were only interested in signing up customers who wanted to come over with a longer-term horizon. And so that's exactly what we did. So if you had been opportunistic perhaps you'd got more. But no, we were very disciplined in what we did. And so we had some share that we gained, which we reported back in Q1. And I was talking to our Chief Commercial Officer, Brie Carere last night and said we're holding on to most of them. And so -- and managing through our revenue quality despite some of the pressures that we are seeing in the marketplace. So I think so far, so good. John?

If I could just add to that, and I mentioned this a little bit earlier. And during the period where those volumes increased, we were able to sustain, if not improve our U.S. service levels, so really delivering strong service for our customers, which certainly always plays a role in retaining our great customers.

That's great. So it's great to hear you guys are maintaining a lot of the share that you captured. And if I remember correctly from most recent earnings call, you said that you expected to keep a majority of the share that you took over the summer. That's still the expectation?

Yes.

Okay. That's great. Maybe shifting gears, inflation is still top of mind for a lot of folks. It's -- maybe we're through the worst of it from a year-over-year perspective, but there's still a lot of inflationary pressures in the broader economy. You guys are obviously addressing costs within your own business through your DRIVE program. But -- just be curious to get your sense for how you all are thinking about inflationary pressures looking forward within the business and especially within the context of labor inflation at your largest competitor?

Well, I have to say this one here is that way back in summer of 2021 is when we actually said -- talked about inflation. I guess when -- people should listen a little better when we talk about stuff. I think when we said that in September 2021 in that quarter, and that year, fiscal year, we took $1 billion of increase in our labor costs because we were facing it real time. And I have spoken about this at that time and other times saying that we're going to see this real time while our competition is going to see a step change in 2023. Once again, that's exactly what happens. So of course, we will continue to manage and monitor this for sure. We just -- in October, we had wage increases, and we're able to manage to that, of course. And that's -- and so we'll be very competitive, and our employee value proposition in FedEx is unique and differentiated as well. And also, we have launched technology. We have a labor insights platform that we have launched that helps us manage the supply/demand by geography very, very carefully. So net-net, we have set for peak, and we are managing this as carefully as we possibly can.

Yes. If I could just add something to that. And as I did my due diligence on the company. One of the things that became clear is the culture and the P-S-P, People-Service-Profit mentality is alive and well at FedEx. And that translates into what Raj talked about. We didn't wait back in 2022. We made some adjustments to our compensation. That has also been followed by merit increases for our employees, including the most recent one in October. And the value proposition, the brand and how we care for our employees. There is always competition for talent out there, but we feel good about the value proposition that FedEx brings to the table, and we're going to continue to work with our employees.

Okay. That's great. Well, if we can maybe kind of pivot the conversation here a moment and talk about DRIVE. And beyond that, Network 2.0 and One FedEx. But if we think about DRIVE. It's been very successful, helping you all really change the trajectory of your earnings stream despite a very challenging underlying macro condition. We've really seen the impact of DRIVE pretty clearly so far within the Ground segment, but it's been slower. I mean, at least from the outside looking into the P&L, see it materializing within Express. Can you talk about the pace of improvement within Express from DRIVE, and when will we maybe start seeing a clear picture of that show up within margins, or however you want to think about the profit impact.

Sure, absolutely. So firstly, on DRIVE, so let me just say this much related -- I know this is near and dear to my heart. Back in -- when last September, a year ago, when we saw that the market conditions were dramatically changing. We made two determinations. One, that we're going to come out of this stronger than we went in. And two, that we're going to use this the old cliche, to uses crisis as an opportunity. We launched DRIVE October 3rd of last year. And I knew one thing for sure. When the goal is clear, the FedEx culture is one where we execute against that goal. And we moved very, very quickly. To John's point earlier, the difference was to make sure that the level of accountability will increase to make sure that these initiatives are measured and monitored at very grand level, I can pull up every one of them every single day, and I can see where things are. We talk about it very regularly in my meeting to make decisions very quickly so that we don't hold on anything and things move fast. And the other thing that was important was that we don't -- we have projects that are not these long lead times of big hockey sticks, but they are much more quick to implement. So there are several things that have happened, and then I just saw the team just move. So for the first time in the history of FedEx, I think, that despite the volumes being down so significantly, our operating income went up. I don't think that's happened before. So this is DRIVE, really working. I would contrast to what you just said that DRIVE is working across the enterprise. And it's really working really well. The problem on Express, let me address it directly, there are significant headwinds this fiscal year for us. And I may not hit all of them, but I tell you, I mean we have, first of all, with the pandemic demand surge over significant -- we had a premium coming out of Asia that one way. Second, with the stated strategy for the post office to put more of the traffic on the ground, so that went away. We have just fuel and exchange surcharges, that's down year-over-year. We have the incremental compensation is a good thing, that impacts. So these are all significant headwinds that impact Express much more disproportionately. And again, despite all that and a demand slowdown in the first quarter, we improved our year-over-year performance. That's only because of DRIVE. So it is working. I think some of these things will take a little bit of time to play out, but it will turn at some point. And by that time, you'll see this double barrel gun, so to speak, but Ground, of course, is working just brilliantly at this point. And John?

No, I would just add that the rigor behind the programs and everything is being looked at as we continue to evolve and go forward, I think it just creates tremendous opportunity.

Well, let's talk a little bit about -- and this is kind of maybe bringing a lot together for the first half of our discussion here. But when I went to your DRIVE Analyst Day, one of the things that really struck me sitting there in the audience was, you can almost feel a cultural change happening under the hood here at FedEx. And it really is clear that accountability, transparency are, first and foremost, here with the company as we look forward. I guess, as you kind of think about the changes that may be -- the DNA of the company is not changing, but at the same time, there's a much more focus on culture within the culture around profitability and cash flow, but you're still a growth-oriented company at your core. How do you balance those things two things, Raj?

Well, this is a big question. So permit me to take a little bit of time to answer this question. Firstly, the core of FedEx culture is, as John said, People-Service-Profit. And that is a foundation led by our founder, Fred Smith, and I can categorically say that ain't going to change. And is one of the great things that Fred has done, and I keep -- I'm quoting somebody much more famous than I want to say, I can see far because I'm standing on the shoulder of a giant. And so we have put in place this culture and it's -- when you go around the world and go into FedEx anywhere in the world. The great thing about it is the language of the country may be different but the language of FedEx is same. So let's put that upfront. The second part of it is that there are several foundational pillars of that culture. And one of those pillars was the accountability pillar, and which we called DRIVE business results. So we have strengthening that pillar, and that's what you're seeing. And that's, in fact, where the word DRIVE came from. So that's what you're seeing in DRIVE Day and others is that we are really, really focused in on the accountable and you've seen across the organization. So yes, we are definitely focused on financial returns for the company. We talk about improved operating margins, improved capital utilization, improved shareholder return and that we are focused on those things. But make no mistake, at the end of the day, we are also about our customers and growth. If you think about the growth that this company has seen from the turn of the century to now, it's about roughly 6% CAGR. If you actually look at the growth from -- before pre-pandemic to now, it's still roughly 6% CAGR. The supply chain bullwhip notwithstanding. So at some point, when the inventory restocking of is, the global economy stabilizes a little bit, there is -- we're going to start to see growth. And of course, we are focused on differentiation. And our differentiation is getting increasingly on the digital space. So yes, we will get back to a growth scenario. I mean the macro headwinds are significant right now, as you can see in every company, but we will continue to grow as well. So then you see the real leverage for FedEx as we get much more efficient and then we started to drive growth, that's on someone said the jaws of the crocodile.

Yes. That will be exciting to see when that happens. Maybe last question for me, and then we'll turn it over to the floor for some Q&A. One of the questions that I've had, and I get this question from investors a lot as well is when we think of this is more about Network 2.0, and really integrating Ground and Express together. That seems like a very complicated merger of two very complicated organizations that are focused on service different business models in some cases with both in terms of how you deliver packages. I know you're being very careful about how you're going about it, testing it in certain markets, you alluded to that today. But could you just talk about how you -- both as you look to execute on this over the next couple of years, how do you maintain service levels and continuity for the customer but also execute on the cost out or just a bit of an opportunity from the network integration.

All right. Permit me to give you a little bit of context here, okay? So at the turn of the century, in the Ground parcel business, FedEx had 10% share while our competition had 80% share. That was a 70-point market share gap, 70 points. I mean -- so when we started going into the space and attacking, we needed to be differentiated. And we differentiated it using our operating model, which was coined as operating independently. What that resulted in was we were simply faster and cheaper. And even I could sell that by the way. And metronomically, every single quarter for 16 years we took share. And that gap of 70 points is now single digits. It's probably the single biggest underwritten story in business. And so what changed? Well, back in 2015, '16, we did see the emergence of e-commerce. And we expected a vast majority of the growth to come from e-commerce. So what does that matter? Before having two trucks arriving at this business, one delivering 10 packages, another delivering 6 packages. No problem, that worked. But -- so 75% of our deliveries were B2B. With the emergence of e-commerce, 75% of the deliveries became B2C, what does that mean? Now we're having two trucks coming to your house, one delivering one package and other delivering the other package and, by the way, you may not be at home, I'm going to come back tomorrow. So that's why we had to make this change. And we move in -- so I just wanted to give you a little bit of perspective here because it's not like the something -- it is a part of an evolution of the business of what's coming up. So we move in this direction. The first step is, as I said, in June 2024, we're going to have one unified organization. And that helps us to do a lot of things from making sure that we have a streamlined back office, a streamlined IT infrastructure all these things that support us for the future. We are going to be extremely careful, extremely deliberate about rolling out Network 2.0 with a single principle that we are going to make our customer experience better. And we've already done some of these rollouts in some of the markets. We have learned a lot. I mean there are -- the gating things are our physical assets are real estate, technology, and those are some of the things that we're working towards and finding the right model for each of the markets. So we work this very carefully. I'm not going to sit here and say, all the answers are already in front of us but we know we can see a line of sight towards these things, but we'll do it very, very carefully. In the meanwhile, we are executing in DRIVE and other things that gives us good runway, while we're executing Network 2.0. So hopefully, that gives you some perspective and some background on why and where we are and what we're doing.

Absolutely, absolutely. Okay. Well, first question from the audience. We have about 10 minutes for questions. So Ted?

I know 20 years ago, you went into China with big plans into China. Guangzhou was the focal point, I see you're expanding it. Can you remind what's your stands on certain China market both macro and the commodity mix that is you're handling there?

Thank you, Ted. We went into China in 1984. And that I lived in Hong Kong from 1996 to 2003. At that point, our Chinese business was miniscule in 1996. And by the time I left in 2003 it was pretty damn big. So we have witnessed the growth of FedEx in China quite significantly. So I was there just recently. And so here is what you need to know is that two parts. One, is that China represents about 28% of global manufacturing. And that's where -- so FedEx moves high-value goods in the economy, and so that's why we have a significant presence in that market with a hub in Guangzhou, and of course, multiple flights a week out of China, and we are the market share leader, China in and out. What's happening is that -- I mean, there's often people say, China plus 1, plus 2, that's a little bit too high level lazy in fact. I would call it the supply chain patterns are now being -- are changing. Before it was a set of traffic intermediate parts that were made and then bought into China, final assembly completed in China and then China send it out to the consumption centers of Europe and the United States. That was the way it worked very efficient supply chain. Now because of whatever you want to call it, people want to be more resilient, they want to diversify and so on and so forth. More and more of the intermediate parts are only being made in China, they're being sent to other parts in the world, whether it's Vietnam or Mexico and then being sent to the final consumption centers of Europe and the United States. And in addition, there are other manufacturing centers that are coming up taking advantage of this some uncertainty here. This is changing as we speak. So supply chain patterns are changing. For us, the good news is, we are a global network. And sometimes people don't totally get it. When we talk about telephones, everyone kind of gets it, that I can pick up the phone and call anybody. When you talk about the physical network, it's the same thing. You can pick it up in any one part of the world and get it to any other part of the world in a couple of days. There are only really two companies, maybe three who can actually do that. And so when the demand centers move for us, usually, we are here, there and everywhere. So we're usually there already. But in the particular place we're not there, all we need to is connect that node to the nearest part of the network and boom that places lid up to the whole network, the world to that point and that point to the world. So that's the power of having a network in place already. And so we -- and the other part of it is we see this bottom up because customers, when they start to move, they are personally -- they are thinking about is how am I going to get the traffic. So we hear that these demands from the bottom up, and we see these patterns emerging, and we are able to move our capacity much faster than the manufacturing capacity can move. So we have now deep insights in the global supply chain, which is valuable in its own right. But yes, it's a more nuanced stands on China than that are those given this is what's going on.

David?

My question is about the air network. There's some [ articles ] which are recently encouraging pilots to potentially move over to American [indiscernible]. Can you tell us what percent of Express packages fly on the FedEx aircraft today, and where you think that percent should be when you're done with them.

So let me answer that question more broadly because we don't release those numbers in particular. But I think, by the way, it's a good idea, and you're overstaffed on pilot because of the demand situation and so we're trying to do something innovative, let's see where that goes. But the bigger picture here is this is for us a growth strategy because there are market spaces that are growing that are much more deferred in nature. And so there are opportunities for us to keep some of the premium traffic on our network, and that will grow at industrial production and GDP. But in addition, we're able to attack a growth market, particularly in e-commerce, where we have a little bit more time. And increasingly, that kind of traffic, we are able to then move in other spaces. So this is the overarching strategy mix and those kind of things will depend on how these both markets evolve over the future. But I want to make sure that people get the fact that we are -- we will continue to fly the premium traffic, the high-value goods, the international priority volume and those kind of things on our network. And then we -- as the -- especially the e-commerce traffic grows, then we have an opportunity to diversify our lift as we go forward. John?

No, no, I echo that. I think it just -- it's an evolution and these demand profiles change over time depending on who the customers, what the needs are. And I think the strength is in our network that we can do either or. And there's people constantly watching that, what's the most efficient way to move our customers good. So we're going to continue to do that and optimize it.

And I do want to make one other point I forgot to mention, the fact that we have a very strong established Ground networks around the world. That's what makes it all possible. So that you can disconnect right into the Ground networks. We thought that -- I mean, again, like only a couple of players out there.

Well, other folks are maybe thinking about -- hey David, do you have a follow-up?

Not a follow-up, but it's a different question. Lately, you're talking about excellent high-speed service, your main competitor saying that's a superior service, but we keep seeing the [ various ] reports and the industry reports saying that price is under the pressure. Can you go through what certain market dynamics are right now that are leaving that concerns. How you guys are [ picturing it ].

Well, on the service front, I mean, sometimes there's a report said, what is -- a lot of the reports that measure are our performance against the committed service parameters. But they don't mention the fact that we are -- our service parameters are actually better. So we are shooting at 10-feet high baskets. Our competition is shooting at 8-feet high baskets, and that's what's being compared. And so we have a superior value proposition, simply the fastest Ground network. And again, as I said, as we get closer to the end of the week, it gets even more superior because only we can serve. So that enables us to get to a premium. We stay as disciplined as we possibly can on revenue quality. This is not a new thing. We have done it now for years. And so yes, I mean, we have to compete every single day in the marketplace, that's a given, but it's something that we are confident of executing because our value proposition is superior.

Down to the last couple of minutes here before we close our discussion. Raj, I guess, maybe last one for me. You all have really been very prescient in terms of your predictions here over the last couple of years. And so I would just be curious if you could look into your crystal ball, is there anything that makes you more or less optimistic as you look around the corner here, just about the macro or anything you'd like to -- however you like to take that question, but is there anything that leaves you more encouraged or maybe a little more nervous. I know we're going into the election here, so I...

Good stride, Jack. I've been surprised at my ability to make news about the subject. So listen, I tell you what, the -- if you just look where things were before the pandemic to where things are now. A lot of the things have kind of stabilized back to the levels, except for inflation and interest rates. Obviously, those are the two things. And to the extent that's going to have an impact on the global economy, there are several pundits, and I'll leave it to them to figure it out. And all we can say is that the -- as we have said it in the previous earnings call, the demand environment is going to remain uncertain, and we're just going to have to deal with it. So again, we are focused on the things that we can control, and that's all we can do really. And we have a mechanism through DRIVE to do that. And that's what we do.

But at the end of the day, you're creating a network that's going to be extremely efficient with ample capacity that has a lot of operating leverage once the market begins to that.

100%. Our flexibility, efficiency and intelligence of our networks is what we are focused on. And the market is going to return at some point. I can't tell you when. And when it does, there is a significant opportunity.

Absolutely. Well, we'll leave the discussion there. Gentlemen, thank you so much for your time. Really appreciate it.

Thank you very much. I appreciate it, Jack. Thank you.

Thank you.