Raj Subramaniam
President, Chief Executive Officer and Director at FedEx
Thank you, Jeni, and good afternoon. Our results reflect a challenging Q1 demand environment which was weaker than we expected, particularly in the US domestic package market.
Looking at our performance on a year-over-year basis, there are several factors at play. Weakness in the industrial economy pressured our B2B volumes, particularly in the US. We saw increasing demand for our lower-yielding services and some of this demand increase was driven by a shift in customer preference worldwide from priority to deferred services. And we continued to execute on structural cost reductions via DRIVE, which partially offset revenue and expense pressure. That said, we now expect the cadence of DRIVE-related savings throughout the year to increase sequentially by quarter. And we had one fewer operating day in the quarter.
Notwithstanding this difficult quarter, with the actions we are taking, we remain confident in the trajectory ahead. We are on track to deliver the $4 billion of savings through DRIVE in FY '25 compared to the FY '23 baseline. We have recently implemented significant new pricing actions relating to both demand and fuel surcharges, which will benefit us in the coming quarters.
We're making significant progress on our network transformation. We're prepared for the expiration of the US Postal Service contract and we are continuing to roll out Network 2.0. The implementation of Tricolor, which is the redesign of our global air network, is well underway.
The demand changes we're seeing in the market make Tricolor an even more instrumental element of our longer-term strategy to increase flexibility of our network, lower our cost-to-serve and grow in new, profitable markets.
Taken together, our network transformation actions will drive improved profitability by unlocking efficiencies, improving density, and creating a more flexible network. This will strengthen our competitive position while simultaneously supporting our objectives for improved profitability and returns.
Our innovative data-driven solutions are also supporting our transformation and enabling a better experience for our customers. Additionally, our seamless transition to One FedEx at the start of Q1 allows us to operate more efficiently and effectively as we implement our strategies.
Accounting for these factors, our updated expectations for the remainder of the fiscal year and our Q1 performance, we are narrowing our FY '25 adjusted EPS outlook range to $20 to $21. John will provide more color on the underlying assumptions shortly.
DRIVE has evolved from a targeted transformation effort to being the foundation for how we work across the enterprise. In the first quarter, we achieved $390 million of DRIVE-related savings. Breaking this down by category, approximately $90 million came from our Surface Network, $160 million from our Air Network and International and $140 million from G&A.
Our Surface operations focused on efficiency in line haul planning. In Air and International, we maintained focus on transforming our network while maximizing staff efficiency at hubs and ramps. In Europe, we further optimized in-station processes. Within G&A, we continued to improve the efficiency of our IT function. We also continued our transition from a regional-based procurement support model to one that's centralized and organized by spend category. We are collaborating across sourcing, finance, and the businesses to drive cost out.
Looking ahead, we expect our quarterly DRIVE cost reductions to build quarter-over-quarter throughout the year. Within our Surface operations, we'll keep focusing on the end-to-end efficiency initiatives, including optimizing our rental fleet and maximizing rail usage. In the Air Network and International category, a majority of our savings in the remainder of the year will come from Europe. While we realized some Europe savings in the quarter, most of our Europe-related DRIVE savings will skew towards the second half of FY '25 as we achieve efficiency and productivity improvements across the region.
I'm encouraged by the progress we're making in Europe, improving service levels, reducing churn, and winning new business despite difficult market conditions. We continue to expect $600 million of cumulative DRIVE-related savings from Europe, which will help us exit the year with a better-performing European business. Across the Air Network more broadly, we'll maintain our focus on managing our fleet and broader air operation efficiently. And within G&A, we'll continue to optimize functions globally to focus on IT and outside vendor spend.
In the first quarter, we continued to introduce Network 2.0 in select markets. Canada, which is our biggest network optimization yet, is well underway. On completion of Canada's rollout in early calendar year of 2025, nearly 200 facilities across the US and Canada will be handling consolidated and integrated Ground and Express volume. Optimizations will resume post-peak and continue to ramp into FY '26.
As we have shared before, we're taking a coordinated and deliberate approach to maintain and enhance customer service while also applying learnings from each rollout to later integrations. For example, we're optimizing pickup and delivery operations to best leverage existing assets and resources, including facilities, equipment, and team members. We're also now looking at geographic markets more holistically rather than by location. This enables us to consider volume and customer mix across an entire market. Our strategy is working.
We continue to see roughly a 10% reduction in pickup and delivery costs in markets where we have fully rolled out Network 2.0. Service levels in these markets are meeting or exceeding our network average. We're also leveraging new technologies to facilitate high-quality service. For example, we recently launched what we call the Shipment Eligibility Orchestrator. This is an innovative internal decision-making engine that leverages machine learning to dynamically route packages in real-time. For Network 2.0, one application of this tool ensures that we direct high-priority health care and time-sensitive shipments to designated couriers trained to handle them. Shipment Eligibility Orchestrator is an evolving learning platform where we're adding new use cases by the day.
In the first quarter, we also successfully piloted our new Hold-to-Match solution, which optimizes last-mile delivery costs. It does this by holding early ground stops when another package is designed for the same stop the following day. We will do this while ensuring an on-time delivery for all packages.
Hold-to-Match is increasing stop density and will help lower our cost per package. We look forward to expanding the capability throughout the year. And this month, aligned with our mission to make supply chain smarter for everyone, we announced a strategic alliance investment with Nimble. Nimble is an AI robotics and autonomous e-commerce fulfillment technology company. FedEx supply chain will use Nimble's cutting-edge fulfillment systems to streamline our operations, further penetrate the global e-commerce market and unlock new opportunities for customers.
As we shared last quarter, we're conducting an assessment of the role of FedEx Freight in our portfolio structure. The assessment is well underway and on track to be completed by the end of the calendar year, all while we continue to deliver safe and reliable service to our customers.
Before I close, I would like to congratulate Mark Allen, our General Counsel and Secretary, on his upcoming retirement. During his distinguished 42-year career with FedEx, Mark has served as an instrumental counselor and a business partner. FedEx has benefited from his strong business acumen, unassuming leadership, and vast international experience. We thank him for his service.
I'm excited to welcome Gina Adams into her new role as General Counsel and Secretary of FedEx, effective September 24. Gina joined the Company in 1992. Since 2001, she has led government and regulatory affairs. Gina brings extensive experience addressing many of the most important issues facing our Company and advocating for policies that support our customers and our industry. I know her expertise and insights will be invaluable as we continue to transform FedEx.
I also want to take this opportunity to thank the entire FedEx team for their hard work and dedication as we transform our network, prepare for peak, and deliver for our customers. I remain confident in the value creation opportunities ahead as we focus on growing revenue profitably, reducing our structural cost, and leveraging the insights from our vast collection of data.
Now, let me turn the call over to Brie.