Raj Subramaniam
President and Chief Executive Officer at FedEx
Thanks, Jeni. We are in the home stretch of peak, and I want to begin by thanking our team members for their hard work and dedication as we deliver an outstanding holiday season for our customers.
Today marks an important step in our transformation. Following our assessment of FedEx Freight, which we announced and commenced back in June, we have decided to pursue a full separation of this business, which will result in two industry-leading public companies. Through the separation, we believe we will unlock significant value for stockholders while allowing for continued commercial, operational, and technological cooperation between both businesses. The separation will also enable both companies to benefit from enhanced focus and competitiveness. For FedEx, this will ensure strong execution of our near- and longer-term strategic priorities, while preserving the benefits Freight and FedEx enjoy from their long-standing connectivity. Each independent company will be well-capitalized with flexibility to invest in profitable growth while continuing to return capital to shareholders.
I would like to provide a brief overview on the compelling value proposition of both businesses, starting with FedEx Freight. We're excited to create a leading LTL pure play, the largest carrier by revenue with the broadest network and the fastest transit times. FedEx Freight has deep relationships with customers who turn to us for our reliability, simplicity, and choice of services. Freight has maintained its leading market share position for a long time and increased operating profit, nearly 25% on average per year over the last five years, expanding operating margin by approximately 1,100 basis points. The team's focus on safety, facility utilization, revenue quality and operational efficiency has driven this performance, and these factors will continue to guide Freight's go-forward strategy supported by a strong balance sheet.
As a separate company, Freight will be better positioned to unlock its full value potential. Areas where we see the greatest opportunity include: First, an expanded dedicated LTL sales force led by Tom Connolly, our new VP of LTL sales, with nearly 30 years of experience. We've already begun to build out this team and we expect to add more than 300 LTL specialists by the time of separation. Second, an enhanced LTL-specific pricing and invoicing system that drives faster speed-to-market, more intuitive contracts, and is more tailored to this particular market. Third, improved Freight and FedEx network efficiencies focused on accelerating speed, improving coverage, optimizing touches, and lowering our cost to serve. And fourth, an LTL-focused automation, which will drive efficiency and reduce outside vendor spend.
FedEx Freight's portfolio of solutions, which includes both priority and economy services, is also well-positioned to benefit from the long-term market dynamics shaping the LTL industry. As we pursue the separation, we will remain focused on customer experience by sustaining or improving service to our customers. To ensure the focus and seamless transition, Lance Moll will continue to serve as President of FedEx Freight as we execute on our separation. The long-standing cooperation between FedEx and FedEx Freight will continue through commercial, operational, and data and technology agreements to enable seamless continuity of service and capture existing benefits from their relationship. We have an unmatched customer value proposition. With two separate companies, we will ensure commercial collaboration that creates a seamless transition for our customers, especially those that turn to FedEx for all three services.
From an operational perspective, in addition to the network efficiencies I mentioned earlier, Freight will continue to provide line haul for FedEx strategically, including Tricolor, peak season, and drayage support. This requires minimal change as Freight already receives a direct financial benefit from supporting Federal Express via intercompany agreements.
Additionally, we will implement shared technology and service agreements to facilitate the transition and beyond. Through these agreements, FedEx will provide Freight with tech platforms that effectively connect the two businesses as needed and ensure business community. Given the strong reputation and familiarity of our brand, we plan for the new company to continue to operate under the FedEx Freight name.
Putting all of this together, customers will continue to enjoy the superior service, speed, and coverage they have come to expect from FedEx Freight, while also maintaining access to the unparalleled global ecosystem of FedEx services.
Now turning to FedEx. We pioneered the express transportation industry over 50 years ago and remain the industry leader today. Customers choose us for our advantaged value proposition, enabled by our service, speed, and breadth of coverage. We deliver nearly 17 million packages each business day to over 220 countries and territories. We link more than 99% of the world's GDP. We transport approximately $2 trillion worth of goods every year by connecting 3 million shippers to 225 million consumers. In the U.S., our weekend and rural coverage also serve us competitive advantage. And we generate over 1 petabyte of data every single day, which provide insights that drive how we run our company more efficiently, how we serve our customers, and how our customers manage their own supply chains. The ongoing progress at FedEx gives me confidence that this stand-alone business will continue to thrive into the future.
During and post separation, we will continue to focus on delivering significant value to stockholders through our strategic initiatives, which are cementing our leadership position as the world's best transportation and supply chain technology company. This includes DRIVE, which continues to change the way we work. We are on track to deliver $4 billion in savings by the end of FY '25 versus the FY '23 baseline. Network 2.0, which will deliver on the promise of a more efficient network, including one truck, one neighborhood, along with consolidated facilities where we are targeting $2 billion in savings by the end of FY '27. Tricolor, the redesign of our global air network, which positions us for strategic growth while improving the efficiency and asset utilization of the entire FedEx system.
As a separate company, FedEx will strengthen its leading value proposition with an emphasis on delivering outstanding service, continuing to provide a differentiated offering in premium segments, and remaining focused on higher-yielding service and building on our technology ecosystem to create smarter supply chains for all.
Our capital allocation priorities remain unchanged. We will prioritize maintaining a strong balance sheet and investment-grade profile. We will continue to make high-return investments in the business, while reducing capital intensity and increasing stockholder returns through buybacks and dividends. Looking ahead, we expect to execute the separation within approximately 18 months. Claude Russ will lead our separation management office, bringing the drive rigor and accountability that we use to run our operations. Claude has spent nearly 25 years at FedEx. As the former CFO of FedEx Freight, he is well-versed in our freight business and the LTL market dynamics. Claude is currently Enterprise VP of Finance and has been a critical enabler of our DRIVE execution.
Today, we have shared the outcome of the assessment and our initial plans. As we have new details and separation milestones to share, we will keep you updated. Upon completion, this full separation will result in two strong well-capitalized industry leaders: FedEx Freight, which will benefit from continued strategic and operational competitiveness and more flexible capital allocation; and FedEx, well-positioned to continue executing on our strategic initiatives in pursuit of sustainable profitable growth. We are confident the separation is the right strategic decision for FedEx and FedEx Freight at this point in our evolution, with a clear path ahead to create significant long-term stockholder value. Importantly, for our employees and our customers, it's business as usual as we look forward to a seamless transition. We are used to navigating change and we will do it while continuing to deliver on the purple promise every single day.
Now turning to our Q2 results. Looking across the enterprise, we delivered sequential improvement, both in DRIVE savings and adjusted operating profit. At Federal Express Corporation, we achieved strong results on a year-over-year basis and greater flow-through to the bottom-line with adjusted operating profit up 13% on essentially flat revenue. We did this despite the challenging demand environment as well as headwinds we have previously identified, including the U.S. Postal Service contract expiration and the timing shift of Cyber Week. This is evidence that our transformation is clearly working.
Similar to last quarter, we experienced weakness in the industrial economy, which negatively affected our B2B volumes, particularly in the U.S. domestic package and the LTL markets. Continued market pressure, coupled with difficult year-over-year comparisons weighed on our freight segment in the second quarter. With B2B revenues comprising nearly 60% of our package business and 90% of our LTL business, we are well-positioned for profitable growth when the industrial economy recovers.
Against this backdrop and in support of evolving market dynamics, we continue to create a more flexible, efficient, and intelligent FedEx as we deliver for our customers. We achieved DRIVE savings of $540 million in Q2. We remain confident that we will deliver our targeted $2.2 billion in incremental savings in FY '25. Our Network 2.0 rollout continued and the Canadian market integration will be largely complete in early calendar year '25.
With the expiration of the U.S. Postal Service contract, we are strategically matching capacity with demand and flexing the network as needed to transport packages more efficiently. At the end of September, we had reduced our U.S. domestic daytime flight hours by nearly 60% and swiftly began to reduce other associated costs. And we delivered solid service for our customers. This is always our priority and especially important during peak. I'm very pleased with how our teams are navigating a condensed period between Thanksgiving and Christmas. So far during peak, they are delivering more packages per day on average while maintaining the high-quality shipping experience that our customers expect with the ground average time in transit at two days in the U.S. this peak.
As we look to the second half of the fiscal year, we remain focused on what is within our control, executing against our transformation initiatives to reduce our cost to serve and drive improved performance. However, amid continued uncertainty around the demand environment, we are updating our expectations for FY '25. We now expect an adjusted EPS outlook range of $19 to $20. John will provide more color on the underlying assumptions shortly.
Turning to DRIVE. On past earnings calls, I've talked about DRIVE as our structural cost optimization program. The reality is that within FedEx, DRIVE has evolved to be so much more. It's a new data and technology-driven business architecture that has changed how we work across our entire enterprise, introducing more rigor and accountability to every decision we make, leading to a continuous cycle of efficiency and optimization. Take Europe, where we expect to achieve $600 million in total DRIVE savings by the end of the fiscal year. Our European business is predominantly a ground-based business. We introduced new European leadership over the summer, including a senior operator from our U.S. surface team. In the spirit of One FedEx, we are bringing hub and sort best practices from U.S. to Europe and we have achieved many recent wins. Our progress includes revenue growth, which combined with the DRIVE benefits, lead to improved performance this quarter. This gives us confidence in Europe's near- and longer-term trajectory.
Our ability to enhance the financial performance of our European business starts with technology. Having implemented a common data platform, we now have a better view of our European network, assets and cost to serve. We're using these insights to increase efficiency in the region. For example, with our improved routing in Europe via the enhanced data flow, we reduced the number of touches on intra-European packages. This is not only improving productivity, but also expediting clearance, leading to better service.
We also introduced dimensional pricing at our Charles de Gaulle hub in Paris. This enhancement, enabled by new and updated technology, seamlessly captures package dimensions and weight and then applies and integrates applicable surcharges via standardized processes. As a result, we are now better and more accurately compensated for the goods we transport, especially for the higher-margin packages with unique dimensions. We will continue to roll out this capability to other European facilities over the next year. Together with non-stackable shipment surcharges, we expect this initiative to deliver an operating income benefit of over $50 million in FY '25. This is a prime example of our new business architecture translating into improved financial and operational outcomes.
Looking ahead across Europe, the team remains focused on deploying the right value proposition and network design, the digital tools that enhance the customer experience, and the right processes to deliver this experience efficiently and effectively. Improving our financial performance in Europe is a top priority for our entire leadership team. I'm very encouraged by our recent progress and I'm confident in the opportunity ahead.
In October, just in time for peak, we celebrated the grand opening of a new state-of-the-art sorting facility at our Memphis World Hub. This new sorting facility marks an important milestone in our modernization efforts, improving the work experience for our employees and service for our customers, while increasing the efficiency of our hub. We also continue to roll out Network 2.0 in select markets in the first half of Q2, and we have now optimized 200 stations to date. And we are continuing to execute on Tricolor, our international air network design strategy, which is improving density and asset utilization across the enterprise while targeting profitable growth.
Before I close, I want to thank the FedEx team once again as we approach the end of our peak season. They make every FedEx experience outstanding, positioning us well through peak and beyond.
Now let me turn the call over to Brie.
