FedEx Corporation (FDX) Earnings Call Transcript & Summary

Good day, and welcome to the FedEx Third Quarter Calendar Year 2026 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jeni Hollander, Vice President of Investor Relations. Please go ahead.

Good afternoon, and welcome to FedEx Corporation's Calendar 2026 Third Quarter Earnings Conference Call. Our first earnings call that aligns our results with calendar year-end fiscal year. The third quarter earnings release, stat book and Form 10-Q, which also includes June 2026 results are on our website at investors.fedex.com. Additionally, this afternoon, we released an 8-K filing with our recasted and resegmented financials for Q1 and Q2 of this calendar year. This call and the accompanying slides are being streamed from our website. During our Q&A session, callers will be limited to one question to allow us to accommodate all those who would like to participate. Certain statements during this conference call may be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information on these factors, please refer to our press releases and filings with the SEC. Today's presentation also includes certain non-GAAP financial measures. Please refer to investors.fedex.com for a reconciliation of the non-GAAP financial measures discussed during this call to the most directly comparable GAAP measures. Joining us for prepared remarks on the call today are Raj Subramaniam, President and CEO; Brie Carere, Executive Vice President and Chief Customer Officer; and Claude Russ, Enterprise Vice President and Interim CFO. Now I will turn the call over to Raj.

Thank you, Jenny, and welcome to Team FedEx for delivering another strong quarter. We are serving our customers while driving significant free cash flow and sustaining momentum toward our 2029 financial commitments. The third quarter, we grew revenue across key B2B verticals and premium B2C, which supported double-digit growth in consolidated adjusted operating income. From Network 2.0 to the optimization of our European network, to our global airfreight strategy, we continue to transform FedEx, driving greater density, flexibility and efficiency. Building on our data and technology advantage, we announced new collaborations to provide value-added services for existing and new customers. We've also taken meaningful strategic actions to become a more focused company while deliberately allocating capital to create stockholder value. On June 1, we successfully spun off FedEx Freight. And earlier this month, we closed the sale of FedEx Supply Chain to CMA CGM Group. And we are nearing completion of the InPost transaction. This investment and subsequent commercial agreements will provide FedEx with access to InPost expansive European B2C network while enabling us to deploy our assets more effectively across the European B2B space. Our earnings performance. Solid execution from these portfolio shaping actions and CapEx discipline are driving strong adjusted free cash flow. With this cash generation, we are focused on rewarding our stockholders. Since June, we have repurchased $2 billion worth of FedEx stock. Our June through September repurchases were greater than our original plan, and a reflection of our conviction in the substantial value that exists in our shares. Turning to our Q3 consolidated results. On a year-over-year basis, we grew revenue by 12%, supported by strong base yields across both our Express U.S. Domestic and International segments. We more than offset cost headwinds from purchase transportation rates, the new pilot agreement and variable compensation, growing adjusted operating income by 16%. With Express U.S. Domestic, we grew revenue by 10% and adjusted operating income by 7%. Within Express International, we grew revenue by 17% and adjusted operating income by 52%. We are focusing our commentary today on calendar Q3, covering the July through September period. However, given it has been 4 months since we last reported earnings, it's also important to acknowledge the strength as expected in our June results. Based on our performance over the 4-month transition period and increased visibility into the remainder of the calendar year, we are raising and tightening our CY 26 outlook to $18 to $18.60. The midpoint of this range implies 23% adjusted earnings per share growth year-over-year for the full year. Additionally, we expect to generate approximately $4 billion in adjusted free cash flow this calendar year. Consistent with our strategy, B2B service drove the majority of our quarterly revenue growth, reflecting strong execution by our commercial and operations teams. Our expanding capabilities across key verticals are enabling us to address more of our customers' logistic needs, unlocking airfreight demand from traditionally parcel-centric customers. For example, we draw a 15-fold increase in aircraft engine moves and one new airfreight business with an AI data center customer after more than 40-year largely parcel-centric relationship. Differentiation is increasingly centered on deep customer relationships and tailored service experiences positioning us to capture more freight volume as we address customers' needs beyond parcel. Our network transformation initiatives remain on track. We now have nearly 65% of eligible volume flowing through about 630 Network 2.0 optimized stations. Additionally, we have closed more than 260 stations. Combined with our effective commercial strategy, this network optimization is leading to tighter capacity utilization across our surface network. We continue to expect Network 2.0 progress to translate to nearly $1 billion of Network 2.0 and associated One FedEx savings by the end of this calendar year and a cumulative $2 billion by the end of 2027. In Europe, we are replacing a fragmented domestic structure with a lean digitally enabled network built for high-margin cross-border flow and long-term European market competitiveness. This includes simplifying the service we provide our customers and operating as one integrated modernized network. In January, we announced the transformation program for our domestic French operations, and we recently finished our social consultation process there. As of this month, we closed 17 French stations. We also modernized 2 hubs and 16 key stations with advanced sorting automation and equipped 32 facilities with new tracking and visibility technology. In Italy, similar to France, we are fundamentally simplifying our operating model to prioritize higher value international B2B and export services. As part of this process, we are transitioning from an 8-hub footprint to a highly streamlined 3-hub model and actively reducing our station count. In June, we reached an important milestone when we consolidated 2 Milan area stations into a newly upgraded facility that allows us to optimize our pickup and delivery within one of the most densely populated areas of the country. Taking these examples together, we are reengineering the region for service and profitability at the right scale. While the transformation of this size takes time, we are on track to achieve our target of $650 million Europe revenue improvement in International, adjusted operating income by end of 2029. The size and scope of our global end-to-end network, combined with the vast amount of data we generate, allows us to provide customers with actionable insights and visibility tools to better manage their own supply chains. These interactions in turn present us with incremental revenue opportunities, creating an unrivaled virtuous cycle. Demonstrating the unique power of our physical and digital networks, we recently announced a collaboration with the U.S. Army. Our team of logistics and technology experts is supporting a sweeping modernization of the Army's U.S. nontactical logistics networks, supply chain procedures and organic industrial-based sites. This is just one example of our leadership role in logistics orchestration, which we view as a new market opportunity that complements our traditional shipping business. When it comes to physical AI, our network is already one of the most automated in the world. We are making notable strides in automating our load and unload operations to help create a safer and more efficient environment for our team members. For example, in collaboration with Dexterity, we are deploying robotic loaders at our Hagerstown, Maryland hub to support peak and post-peak operations. allowing us to prove this technology in the coming months. As we head into peak, I want to thank Team FedEx for the continued hard work. I remain very excited about the momentum in our business as we serve our customers with excellence, generate significant free cash flow and create value for our stockholders. Before I turn the call over to Brie, I want to welcome Jamere Jackson, whom we announced on Monday as our next Chief Financial Officer, effective November 30. Jamere brings a wealth of experience, having served as CFO at several public companies. Most recently, he served as CFO of AutoZone where his responsibilities also included leadership of store development, providing a valuable combination of financial and operational experience. I look forward to working with Jamere as we continue to execute on the strategic priorities we outlined at our Investor Day in February. I also want to offer my sincere thanks to Claude Russ, for his extraordinary leadership as Interim Chief Financial Officer. Over the past 5 months, his commitment to FedEx, our team members and our stockholders has helped ensure a seamless transition while continuing to move our strategic priorities forward. Claude, thank you for your partnership during this important period. I'm deeply appreciative. Now over to Brie.

Thank you, Raj. My sincere thanks to the team for their outstanding work serving our customers in Q3, and their tremendous efforts as we prepare for peak. As our results indicate, we are deepening partnerships with customers who value speed, precision and the capabilities we offer at FedEx, allowing us to profitably grow Q3 revenue by $2.4 billion year-over-year in a very dynamic market. With rapidly evolving global trade policies and geopolitical developments, customers require a trusted partner to help them navigate changing requirements, manage cross-border costs and maintain resilient supply chains. Our end-to-end network, customs and trade expertise, and integrated technology capabilities uniquely position us to help customers respond with speed, flexibility and confidence. Turning to our Q3 results. Revenue was up 12%, which includes a 4 percentage point boost from fuel price-driven surcharge revenue. Underlying revenue growth was supported by base yield expansion across both segments, along with U.S. Domestic and International export volume growth. We were particularly encouraged by the strength from our B2B customers, including the fast-growing data center vertical which supported 28% year-over-year growth in International freight revenue. Volume trends were broadly aligned with last quarter. U.S. domestic ADV increased 2% year-over-year, driven by 4% growth in U.S. priority volume and 3% growth in ground commercial. Consistent with our strategy to focus on differentiated premium services, ground economy volume declined 4%. For the third consecutive quarter, International export volume increased, growing 8% year-over-year. International Domestic volume declined 11%, part of our deliberate strategy to focus on higher-yielding cross-border volumes. Within global airfreight, we are solving customers' most complex challenges through specialized premium capabilities. This approach is resonating with customers and driving growth in the highest-value segments. For example, with International airfreight, we saw average daily freight pounds up 15% year-over-year. As our market-leading yields indicate, we remain focused on pricing services for the value we provide to our customers. While fuel was a meaningful driver of yield improvement, base yields remain strong. This highlights our continued pricing discipline in a competitive but rational environment. U.S. domestic package yield was up 7%, driven by mid- to high single-digit yield growth across all services. International package yield increased 17%, driven by a 16% increase in international priority yield, along with the mix benefit from reducing lower-yielding international domestic volume. We do expect international yield growth to moderate in 2027 as we lap this mix shift. Additionally, we are winning share in the global airfreight market based on service and our unique end-to-end solutions while growing yield. U.S. domestic freight revenue per pound was up 6% and, international freight revenue per pound was up 11% in Q3. We continue to take a disciplined pricing action to support profitable growth. This summer, we announced our peak season demand surcharges which enable us to provide outstanding customer service throughout the peak season, while, of course, protecting profitability. We also implemented our first ever European domestic demand surcharge tied to peak. And last month, we announced a general rate increase of 5.9%, effective January 4. We expect strong capture from these pricing actions. I am very excited about our outstanding Q3 results and continued momentum driven by our strategic focus on B2B and premium B2C verticals. Take automotive as one example. 12 months ago, we began our journey to unlock a larger share of the automotive production market and build out our end-to-end capabilities to better serve this sector. We quickly assembled a dedicated automotive team and created a specialized model that combines 24/7 support, flexible global pickup capabilities, enhanced visibility and integrated logistics solutions tailored to the customers' needs in automotive. This team has since onboarded 13 major automotive customers to these value-added services, delivering long-term profitable revenue growth within this vertical. Within our FedEx Life Sciences organization, we have now achieved 30 IATA CEIV Pharma certifications across our global air hub and cargo handling facilities. This is a major milestone and supports our strong position in the health care transportation market. We are also solving broader customer challenges using our expertise in global trade and digital intelligence. Last month, we launched Global Trade Navigator, a great example of how we are making supply chain smarter for everyone. By surfacing duties, taxes, documentation requirements and potential clearance issues earlier in the shipping journey, Global Trade Navigator reduces complexity, improves cost transparency and helps businesses expand across borders with confidence. Early adoption has been strong. Thousands of customers use this new suite of capabilities through fedex.com and our API suite. We also expect this enhanced customer experience to help reduce our clearance costs by improving data quality and reducing manual intervention. Additionally, we continue to support customers through IEEPA refund process, and we remain committed to distributing these 3 funds as quickly as possible. For customers seeking greater security and control over deliveries, we recently introduced FedEx Authenticated Delivery. It's a new paid delivery upgrade for customers in the United States and Canada. This solution expands our proof-of-delivery portfolio with a secure digital verification process using a QR code to help ensure packages are released only to an authorized recipient. This is providing an additional layer of protection for high-value and sensitive shipments. These examples are strengthening our competitive positioning and set us up to deliver outstanding service throughout the upcoming peak season and, of course, well beyond. Turning to our revenue outlook for CY '26. We now expect 12% full year revenue growth, including approximately 4 percentage points for fuel price-driven surcharge revenue. And we expect current volume and yield trends to remain directionally similar to Q3 with some moderation in year-over-year U.S. Domestic volume growth given tough comps. This outlook implies a 10% revenue growth in Q4, with U.S. domestic revenue up high single digits, including 3 points from fuel price-driven surcharge revenue and international up high teens, including 7 points from fuel price-driven surcharge revenue. We will remain very disciplined on pricing. We expect a sustained mid-single-digit decline in ground economy and double-digit decline in international domestic volume in Q4 as we continue our efforts to improve our service mix. With a significant majority of our Network 2.0 conversion work complete heading into peak, I know that the team at FedEx is ready to deliver superior service for our customers and continued strong financial results for our investors. And with that, I'll now turn it over to Claude.

Thank you, Brie. By strategically shifting our revenue mix towards higher-yielding services and lowering our cost to serve, we grew operating income in Q3 and remain firmly on track to achieve our 2029 financial targets. Our strong operating results, coupled with a disciplined approach to capital expenditures, are driving robust free cash flow and enhancing stockholder returns. Turning to our results in more detail. On a consolidated basis in Q3, we delivered $3.74 in adjusted earnings per share, up 28% year-over-year. Continued core yield strength, favorable trends from B2B parcel and airfreight, benefits from transformation initiatives and a lower effective tax rate supported these results. Consolidated adjusted operating income increased $164 million or 16% for Q3, despite a $100 million year-over-year headwind from our recent pilot agreement and a $75 million headwind from variable incentive compensation. While fuel price-driven increases in surcharges drove higher revenue, they were not a material driver of the year-over-year change in our adjusted operating income in the quarter. Now taking a closer look at our segment performance. U.S. Domestic delivered higher Q3 adjusted operating income year-over-year, up $67 million or 7% despite a headwind from higher over-the-road line-haul purchase transportation rates. The unique pressures in U.S. Domestic purchase transportation rates are largely tied to the broader tightening in the labor market for truck drivers from recent regulatory changes. Adjusted operating margin declined 20 basis points, driven by higher fuel price impacts, which represented a 30 basis point headwind to Q3 adjusted operating margin. Turning to our International business. We delivered $101 million year-over-year increase in adjusted operating income, up 52% year-over-year, with 80 basis points of margin expansion. This robust adjusted operating income and margin performance was driven by continued strong base pricing at higher international export volume and airfreight weight primarily out of Asia and the U.S. I'm encouraged that our Tricolor strategy is driving better capacity utilization for B2B airfreight services. The strong international performance demonstrates that our strategy, though still in the early innings, is working and highlights the opportunity ahead to drive greater profitability and ultimately stronger stockholder returns. Moving to capital allocation. Free cash flow growth is the bedrock of our capital returns framework. In deploying this cash, we continue to take a balanced approach across dividends, stock repurchases and strategic growth investments. Since June, we repurchased $2 billion of FedEx stock. We have an additional $4.3 billion in buyback authorization from the Board of Directors and plan to continue to repurchase stock opportunistically. Since FY '13, we have reduced our share count by 25%, with a $6 billion adjusted free cash flow target by the end of 2029, we will allocate capital prudently in support of value creation for our stockholders. We continue to expect $3.9 billion of CapEx for CY '26, of which 90% is maintenance or efficiency related. We remain committed to our 4% CapEx to revenue target by the end of 2029, and for aircraft CapEx to remain at $1 billion or less annually. Our targeted strategy to grow B2B and premium B2C services enables us to utilize our existing capacity to facilitate volume growth, which supports sustained lower CapEx intensity. Our 19.9% retained ownership stake in FedEx Freight also provides meaningful optionality. To preserve the tax-efficient status of the separation, we are required to monetize the stake within 24 months of the spin date. We will deploy this capital to maximize value creation. Overall, our creditworthiness and balance sheet remain resilient, as demonstrated by our $3.5 billion bond offering in the quarter, which was multiple times oversubscribed. Moving to outlook. We are introducing a CY '26 adjusted free cash flow outlook of approximately $4 billion. Free cash flow anchors our decision-making, and we believe should guide any assessment of our company's intrinsic value. Given our transition from a fiscal to calendar year reporting cycle, we have now disclosed our Q1 adjusted EPS was $3.25, up 16% year-over-year, and Q2 adjusted EPS was $4.98, up 56% year-over-year. Q2 included $2.3 of adjusted EPS for the month of June, supported by one extra operating day and healthy U.S. Domestic demand helped in part by a timing shift from July in sales by retailers. Given this year-to-date performance and factoring in updated tax rate and share count assumptions, we are raising and tightening our CY '26 adjusted EPS outlook range to $18 to $18.60. As Brie shared, we expect consolidated CY '26 revenue growth to be approximately 12%, including about 4 percentage points of assumed fuel price-driven surcharge benefit. For the full year, we expect adjusted operating margin to be up slightly year-over-year despite the fuel-related impact. Additionally, we expect our CY '26 effective tax rate to be approximately 22.5%, down 50 basis points from our prior assumption. Our revised CY '26 adjusted operating income bridge shows the key year-over-year elements embedded in our outlook. This bridge reflects adjusted operating income of $5.9 billion, equivalent to $18.30 of adjusted EPS, the midpoint of our range. In this scenario, volume-related revenue, net of variable cost, is now expected to be an $800 million tailwind in CY '26, up $200 million compared to the estimate we shared in June. This change is driven by the strong year-to-date trends as our commercial team captured increased demand from the most premium B2B verticals of the global economy. With respect to yield, we continue to expect a $3.7 billion tailwind. This benefit demonstrates our ongoing commitment to improve our service mix and base pricing capture. Consistent with prior practice, our base yields do not factor in revenue from the fuel price-driven surcharge benefit, which we assume will be neutral to full year adjusted operating income results. It also does not factor in revenue from currency exchange rate effects. For base expenses, we now assume $2.7 billion in higher costs year-over-year compared to the $2.6 billion headwind we shared on our June bridge. This change primarily relates to higher purchased transportation rates. As a reminder, this bar continues to embed higher wage rates and other inflationary factors as well as the ongoing structural cost reduction efforts, including savings from our Network 2.0 transformation. I will note that our yield versus base expense increase assumptions represent a 100 basis point spread, which signals our focus on revenue quality and rigorous cost management. We continue to expect variable incentive compensation to be an $800 million headwind, reflecting our commitment to rewarding employees for their outstanding performance. We are still anticipating a $200 million headwind from our new pilot agreement. Additionally, we are pleased with our progress towards removing stranded costs related to the FedEx Freight spin-off and continue to forecast a $100 million benefit by the end of CY '26. Our embedded Q4 adjusted EPS range is $6.3 to $6.63. Results will depend upon yield, service mix and continued traction on cost reduction initiatives, which are highly correlated with peak season demand. While we expect consolidated adjusted operating income to be up year-over-year, we anticipate several transitory headwinds that will pressure our results, including $130 million tied to higher over-the-road line-haul rates, which shows up in purchase transportation, $100 million due to our recently ratified pilot agreement and $80 million in aircraft maintenance expense. For International, we forecast Q4 adjusted operating margin expansion year-over-year. We expect Q4 adjusted U.S. Domestic operating margin to be down moderately year-over-year due to higher purchase transportation rates I just mentioned and the continued fuel impact. Importantly, we believe this pressure is transitory. And as we look to 2027, we forecast full year adjusted U.S. Domestic operating margin to be up year-over-year. We expect our CY '26 Q4 average share count to be approximately 238 million shares. In closing, our business results and decisive actions to drive stockholder value in the quarter signal our confidence in the value creation opportunity ahead. Our strategy is sound, and I'm confident in our continued execution. With that, operator, let's open it up for questions.

[Operator Instructions] Our first question comes from Richa Harnain with Deutsche Bank.

So maybe we could start with one for Brie. Brie, you discussed competitive but still strong pricing environment I'm not sure if you can unpack that some more. How much was the fuel tailwind to headline yields? How much is [indiscernible]. I know you said 12% revenue outlook for the year assumes a 4 percentage point boost from fuel, but curious what it was in Q3. And then on the year-over-year improvement, very impressive EPS growth, but margins in the domestic market did stall a bit in the quarter. Claude, it sounds like there was some headwinds from linehaul rate in PT that are creeping into Q4 as well. But talk about how much those were, and you made a comment that 2027 margins could be still up year-over-year. We can look forward to that in the domestic market, just like how should we expect them to roll off? And what are some offsets we can look forward to in 2027?

Richa, thank you for the question. I'll cover pricing, and then I'll turn it over to Claude to answer the second part of your question. I think from a headline perspective, we continue to see that calendar year '26 has an improved pricing environment over calendar year '25 is competitive but rational. From a yield perspective here in the United States, we were very pleased with the base yield growth, which was about half of our year-over-year yield growth in the domestic mix. Of that half, the vast majority of it was actually base yield. We did benefit a little bit from some self-help in the mix. And what do I mean by that? We have consciously focused on premium e-commerce. So when you look at the home delivery and ground economy volume mix, it is really important to understand that the ground economy volume was down 4%, and that was intentional as we really lean into the premium. So we feel really good about the domestic pricing environment. When you look at the international export yield increase, it was also really strong. About half of that was fuel. Of the other half, you've got 2 primary factors. One, was we saw a great mix shift both incremental volume coming out of Asia. And then again, a focus away from international domestic towards intra-Europe and international Europe volumes. So we think the market is competitive. It's improved over 2025, and we feel really good about the overall performance from the team. Claude?

Thanks, Brie, and thanks for the question. I mean, overall, as Brie said, very pleased with our Q3 results that if you think about year-to-date, both our overall margin, our domestic margin and international margin were all up September year-to-date. I did call out a few things in my prepared remarks about the transitory nature of a couple of headwinds. First and foremost, for Q3, the domestic margin would have been up, except for the fuel surcharge. And then in addition, we had the $100 million headwind from our pilot agreement. We had $75 million from variable compensation, and we started to see the higher purchase transportation rates that I've talked about. Those will accelerate into Q4. I think it's important to note that about 70% of our over-the-road line-haul miles are provided by either FedEx employees or contracted service providers. The remaining 30% is split between rail, and then a little over 10% is over the road. That's really the miles that we're talking about here. So while not a huge portion of the overall miles due to the labor market conditions we talked about, those rates really started going higher as we got into Q3, and we expect that to have a bigger impact during peak in Q4, but we have both operational and commercial levers as we get into CY '27 to address that. We're confident both in our overall margin expansion as well as our U.S. domestic margin expansion plans for CY '27.

The next question is from Brian Ossenbeck with JPMorgan.

Maybe this is for Raj. I know new CFO won't quite be there for another month or so. But clearly, there's a good amount of dry powder on the balance sheet from all the strategic and tough decisions you guys have been executing on the last couple of years. So maybe you can walk us through some of the options you have for monetizing the stake in FedEx Freight? And then also, how do we consider the leverage profile of the business going forward? Would you consider ramping up some of the -- taking out some additional debt to potentially further fund the buyback?

Thank you, Brian, and we appreciate the question. Firstly, as I mentioned in my remarks and you heard throughout that we are focused significantly on our free cash flow, and we are targeting about $4 billion of free cash flow this calendar year. And as you know, our goals for CY '29 have a $6 billion free cash flow, and this is being driven by our performance on our core business. That's what's driving it. And so we are excited about that because it now gives us a lot more optionality for us, and we have an opportunity to now significantly focus our efforts on our capital allocation. And we're going to have North Star of making sure that we create a lot of value for our stockholders, even -- as evidenced by our $2 billion buyback in this quarter, which is higher than we originally had communicated. So we have a lot of opportunities as you look ahead, and this is going to be an important consideration. And I'm going to let Claude just weigh in on freight monetization and other things, but the principle is clearly that we now have the optionality now to make sure that we award our stockholders.

I appreciate it, Raj. As we said before, to preserve the tax-efficient status of the separation, we're required to monetize the stake within 24 months of the spin date. And we're, as Raj said, we're going to deploy that capital to maximize shareholder value. As I said last quarter, really that Raj's leadership, we're bringing the same level of discipline and rigor to the balance sheet and shareholder returns that we've been delivering operationally and on the P&L, and we'll continue to deploy cash to enhance shareholder returns.

The next question is from Scott Group with Wolfe Research.

So I want to just dig into the fourth quarter guide a little bit more. So over 20% earnings growth for the year, I guess, fourth quarter implies close to like high single-digit growth. I know you're talking about some transitory headwinds in Q4. Can you just like help us understand why pilot costs and purchase transportation are transitory? So like hopefully, what I'm trying to figure out is, like, is this high single-digit exit run rate? Is that the right way to think about '27 or do you think like the earnings growth rate reaccelerates more like what we saw for the full year? And then if I can just, Raj, just want like a separate just bigger picture question, like now that we can do more of like an apples-to-apples comp versus UPS, like their international margins were 15% in Q3. They're talking about 20% in Q4. You guys were at 4%? Like what are we doing like meaningfully close this gap over time if we can?

Thanks for the question. I'll start and then on the fourth quarter and then turn it over to Raj. I mean, first and foremost, we're assuming continued strong international margin expansion. The headwinds we talked about are primarily on the U.S. side, and I talked about the purchase transportation, that being $130 million, which is significantly higher than the Q3 impact, and we believe that we have levers to minimize that over time in CY '27. So we would expect a higher growth rate in '27 and more flow through. We also have the $100 million pilot agreement. We're also, from a timing perspective, we've recognized aircraft maintenance expense as we induct the engines and do that aircraft maintenance, and we have a big hit of $80 million in Q4. So the combination of those things gets us -- if you were to exclude those, our base expense increases are up about 4% with yield growth, excluding fuel and FX to be about 4.6%, so a positive spread of 60 basis points. And then from further from a range perspective, I think it's important to note that we're talking at the midpoint of the range. One other piece of information I want to give you is that the midpoint of the range aligns with our transition year '26 business plan. And so as we exceed the midpoint of the range, that will -- we will incur additional variable compensation expense. And so it could be up to $100 million of additional variable compensation expense at the top of the range. And obviously, that headwind in CY '26 will abate and not be a headwind in CY '27. So that's just a little more color on why some of these Q4 or even Q3 will not repeat in CY '27 from a headwind perspective.

And Scott, on your question on international, clearly, that is our upside opportunity for FedEx. And we are absolutely committed to driving profitable growth in the International segment. As demonstrated by our stellar Q3 performance of 17% revenue growth and 52% operating growth year-over-year. And we are well positioned to achieve our committed target of 8% operating margin in CY '29. Now key to our strategy is winning across a broad base of industry verticals: health care, aerospace, defense, automotive and AI data centers, which is exactly what is happening. And as was pointed out earlier, our execution of our Tricolor network is very strong as we continue to increase flexibility, reliability and density in a very, very dynamic world. Now any path to substantial success for international runs through Europe. And we have made good progress in Europe, driving significant growth over the last 3 years. In a sense, our network utilization in Europe is quite strong, which now gives us leverage. So our strategy in Europe is threefold. Firstly, to reduce structural costs. Our target is to reduce our Italy domestic capacity by 20%. U.K. domestic capacity by 30%, and France by 40%. The second part of our strategy is to improve the mix. Given the network utilization, we are now focusing our commercial teams on driving more intercontinental and intra-European volume and reducing lower-yielding intra-country volume. You will note that the intra-country volume is down 11% in Q3. And further, we will continue to target a more B2B mix in Europe. And then thirdly, we will leverage the InPost commercial relationship, so we can focus our attention on B2B by leveraging a best-in-class partner for B2C. We are early innings in this journey and are on track to achieve the $650 million in operating profit improvement in Europe by CY '29, majority of which will be cost reduction. And one final point. The international margin of 8% in CY '29 is only a way point. We look forward to driving into double-digit margin territory from there.

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

Great. You talked about the kind of full year U.S. domestic margin up year-over-year in '27. Maybe any thoughts on stranded costs from FedEx Freight or supply chain or any additional costs we see coming through from the rest of the Network 2.0? I guess just trying to see the ramp that we can see going forward. I think that's a lot of concern given the state of -- or I guess, the fourth quarter outlook you've provided.

No, I appreciate it. I'll start with that, with the freight stranded costs. As I talked about last quarter, we started the year with the $350 million starting point, and we have done a good job this year and are confident we're going to end this year at that $250 million. As I said last quarter, we will make significant progress in reducing the $250 million during CY '27 from an exit rate perspective. So I wouldn't take that as a complete tailwind in '27. But as I said, last quarter, I would not expect to be talking about the stranded cost past '27 and certainly, it's not -- it's assumed to be not assumed as extra costs in our CY '29 targets. If I look beyond the freight stranded costs, we're confident, as you talked about, we're absolutely on track from a Network 2.0 perspective to get our -- the $2 billion by the end of CY '27. And then overall, we would expect the variable comp and not be a headwind in CY '27. So I'll just reiterate, obviously not here to give an exact number, talk about '27. We're still working through that plan, but we are committed to both overall and segment margin expansion in CY '27.

The next question is from Chris Wetherbee with Wells Fargo.

Maybe if we could think a little bit about the early pieces of the bridge for 2027. Obviously, you guys have talked about Network 2.0, which I think is another $1 billion in '27. Raj, you just mentioned a couple of times, the $650 million for improvement in International Europe, specifically. I don't know how much of that kind of shows up in 2027. And then maybe to round it all out, I guess, Brie, as you think about that longer-term volume target you guys laid out through 2029, is 27% a better year for volume growth? It seems on the international side, there's some decent tailwinds that have started to pick up here. Not exactly sure how you think about the domestic piece. But maybe sort of putting all those together, if you can give us some rough sense of how that might play.

Yes, I'll start and then turn it over to Brie. I've talked about a lot of the items. A couple of additional items that I'll add is -- you got to remember, we'll still have the pilot contract in the first half of CY '27. So that headwind will abate in the second half. Also, if you look all the way to Q4 of next year, we'll have one less operating day, so that will be another $150 million-plus headwind. And then, like I said, variable comp will not be a headwind in CY '27. But with that, I'll turn it over to Brie to talk to the second part.

Sure. Thanks, Claude. So right now, we are committed to our 4% growth beyond CY '26 that we discussed in the February Investor Day. I want to be clear that 4% is excluding any fuel surcharge. So that really is core growth. 4% is 2% volume, 2% yield. We want to do about 50% or more in B2B. And we really want to stick to that right now because it allows our commercial teams to stay disciplined. It allows us to focus on the highest end of the market, which as you just saw, we are doing quite well. We grew commercial ground volume much faster than our primary competitor in the overall market. It allows us to lean into the premium end of gas, the premium end of health care and the AI and data center market. So right now, we're going to stay the course of about 4%, but I am extremely pleased that the team is beating that right now with just incredibly disciplined execution.